The Wall Street Journal on Increased Oversight of ESOP Transactions
The Wall Street Journal ran an interesting, if superficial, story on tougher scrutiny of ESOP transactions and how that is impacting smaller companies with ESOP programs. As the article pointed out, ESOPs in that context are very much a tool for the owner/founder class to cash out their equity developed by building the business – including for the purpose of transforming the business into a retirement nest egg – without having to go out into the open market to sell it, by instead selling it in an essentially captive transaction to the employees. But the interesting thing about that is that the former – selling the company into the open market – comes with the built in valuation discipline of an open market, with the company having the value that informed buyers are willing to put on it relative to other potential investment options open to those buyers. ESOPs, as a tool for the owner/founder class to cash out their equity, don’t come with the protections and tools for valuing the worth of the company that are inherent in selling into an open market; the pricing, and thus the amount of cash out open to the owner/founders, is instead determined artificially, independent of an open market, by an appraisal process that is supposed to be watched over, on behalf of the employees, by the plan fiduciary.
The Journal article discusses the fact that DOL initiatives in this area are driving up the cost and requiring somewhat more disciplined oversight of the process by companies proceeding with ESOPs. The article, however, references that it is simply driving up the cost of appraisals from an average of $10,000 to $11,000, and that certain legal and related fees are higher for companies that want to ensure that there are no perceived or actual conflicts of interest in the transaction. If that is all the additional cost for ESOPs that are caused by enhancing the protections of employees in such a transaction, then that isn’t much cost at all to give the employees at least some of the protections that the marketplace would give to a third party buyer.
Three for Thursday
Well, some of you may recall that when I joined Twitter, I originally did it so that I would have an additional outlet to point out and comment on the various interesting articles and commentaries that cross my desk. Twitter, though, turned out to be a two way street, with it driving interesting articles onto my desk at a faster rate than I could use Twitter to push other interesting articles off my desk and out to a wider audience. Not only that, but in what might reflect more on my personality than it does on Twitter, I have found that I have trouble limiting myself to 140 characters when it comes to talking about many of the articles that catch my eye.
This week was much like others in that respect, with at least three very interesting items landing on my desk (one directly from my Twitter timeline) that I wanted to both pass along and to comment on in more than 140 keystrokes. So I thought I would steal a heading from FM radio (Three for Thursday, no commercial interruptions, somehow keeps running through my head today) and discuss three interesting items that I think are worth your time.
The first is Mark Firman of Canada’s (how’s that for provincialism? He’s actually of Toronto, as we New Englanders recognize that Canada, a near neighbor, is in fact a diverse place) excellent article on whether socially conscious investing can be squared with a fiduciary’s obligation to act in the best interest of plan participants. It’s a well-written and stylish piece, on what in the hands of a less skilled writer court be a dry topic. More than that, though, in this era of tobacco stocks, environmental risks and consumer boycotts, it’s a timely take on an important issue.
The second is Greg Daugherty’s excellent piece on the Employee Benefits Law Report concerning court decisions finding service providers to plans to, in one case, not be a fiduciary under ERISA and, in another case, to be a fiduciary under ERISA. Greg’s post highlights a key issue, which is understanding why the outcome was different in each case, which in this instance, had to do with the fact that one of the service providers could alter its compensation level by decisions that it could make with regard to the plan. The court found this to be enough to render it a fiduciary under ERISA. Plan sponsors and participants often assume that service providers are fiduciaries, but they often are not, and it’s important to understand when they are and when they are not fiduciaries.
The third is George Chimento’s excellent piece on further operational complications of the ACA for employers, particularly small employers. George’s article illustrates an important aspect of the ACA for employers: you can’t go it alone. Operational and compliance issues raised by the ACA are such that employers have to have competent, trusted experts they can rely on when it comes to issues raised by the ACA.
Tetreault, Gabriel, and the First Circuit's Reluctance to Recognize Equitable Estoppel in ERISA Cases
The First Circuit issued an interesting ruling early last month that touched on a number of issues, but one that jumped out at me was its approach to the question of equitable estoppel claims under ERISA. In Tetreault v. Reliance Standard, the Court rejected an estoppel claim, but once again – as it has done a number of times in the past – refused to come out and recognize estoppel as a viable claim under the equitable relief prong of ERISA. Instead, the Court applied the logical structure of first noting that the circuit has not yet recognized estoppel as a viable cause of action, and then stating that, even if it were to be recognized as a viable cause of action, the plaintiff’s claim would still fail because the plaintiff could not show its elements, namely, in that case, reasonable reliance.
When I first read the decision, I chuckled to myself, wondering why the Court couldn’t just come out in one of its rulings and expressly acknowledge the existence of estoppel as a viable remedy under the equitable relief prong of ERISA. As I said to one fellow ERISA litigator, isn’t it time for the Court to just come right out and say equitable estoppel exists as a claim under ERISA in the First Circuit? After all, we are something like three years on now from the Supreme Court’s ruling in Amara, which clearly seemed to tell lower courts that equitable estoppel claims are part of the traditional forms of equitable remedies captured in the statute’s equitable relief prong.
In preparing for a talk on ERISA litigation to the Boston Bar Association last week, however, I think I came up with an answer to that riddle, and it rests in the Ninth Circuit’s decision in Gabriel v. Alaska Electrical Pension Fund, where that Court surveyed the post-Amara forms of equitable relief open under ERISA. That decision has received most of its attention – for good reason – for the Court’s discussion of the surcharge remedy, and whether it only applies where there was loss to the plan itself and not just to an allegedly misled plan participant. However, Gabriel has another interesting element, which is the Ninth Circuit’s discussion of the equitable estoppel remedy, which that circuit does recognize under ERISA. The Ninth Circuit explained that equitable estoppel requires, in that context, the existence of additional elements beyond the traditional two of a misstatement and accompanying harmful reliance on it, namely the existence of extraordinary circumstances, such as repeated misleading statements by a plan sponsor/employer.
As I prepared the part of my talk that concerned Amara remedies, I posed the question of why the Ninth Circuit requires such extraordinary circumstances and, further, what that told us about the First Circuit’s reluctance to fully acknowledge equitable estoppel as a claim under ERISA. The answer, I think, lies in the institutional desire to avoid turning every ERISA denial of benefits dispute into a “participant said/employer said” back and forth dispute, with the courts forced to constantly adjudicate the factual question of whether the participant was misled whenever the participant isn’t actually entitled, under the plan’s terms, to the benefits sought by the participant. By adding on additional factors that must be proven to make out an estoppel claim, such as the Ninth Circuit’s reference to extraordinary circumstances, the courts are able to mitigate this risk and limit equitable estoppel claims to the more egregious or most factually viable circumstances. For instance, in Gabriel, when the Ninth Circuit discussed the need for extraordinary circumstances, the Court gave, as an example, repetitive misleading statements by the employer with regard to the benefits at issue or the benefit plan. As an evidentiary bar, this requirement separates the routine case where there is a random misstatement from a low level HR person upon which a plaintiff’s lawyer tries to fashion an entire estoppel claim (which federal court judges have been seeing, and for the most part rejecting, for years) from a deliberate pattern and practice of self-serving conduct that harms participants (and which federal court judges don’t see all that often). These types of additional requirements for estoppel claims under the equitable relief provision of ERISA, above and beyond the standard requirement of reasonable reliance on a misstatement of fact, allow the courts to limit this type of relief, in the ERISA context, to the more egregious circumstances only.
In many ways, doing so makes complete sense, for at least two reasons. First, it harkens back to ERISA’s grand bargain, whereby employers were to be encouraged to create benefit plans by being protected from excessive (I know, I know, the question of when litigation becomes excessive is in the eye of the beholder) litigation, and limiting estoppel claims to only the egregious ones is of a piece with this. Second, it accomplishes what many of us saw as the real benefit – and perhaps judicial purpose – of the Supreme Court’s seeming expansion of equitable remedies in Amara: the granting of a form of relief that would target ERISA’s long standing problem (again, I know, I know: whether it’s a problem is in the eye of the beholder) of harms without a remedy, which lawyers have always used to refer to the fact that ERISA’s limited bodies of remedies left some harms suffered by participants incapable of being remedied by court action. This type of a limited, restricted expansion of equitable remedies with regard to estoppel claims bars opening the courthouse doors to every unhappy participant while still allowing for the possibility of using estoppel to remediate the worst of the harms suffered by participants in circumstances where the denial of benefit and breach of fiduciary duty prongs of ERISA do not offer access to relief.
So to circle back, how does this tie into the puzzle of the First Circuit’s refusal, lo these many years after Amara, to formally recognize equitable estoppel claims under ERISA’s equitable relief prong, despite the opportunity presented, most recently, in Tetreault? The answer, I think, is that the Court is waiting, as the right vehicle for formally acknowledging the cause of action, for the type of egregious fact pattern in which relief by means of equitable estoppel is warranted. Presented with such a fact pattern, the Court will be able to explain what additional factors are present in the case that raise it above the typical type of claims that, I suspect, the Court does not want to capture within the equitable relief prong of ERISA, thus demonstrating and establishing what additional elements, beyond simply a misstatement of fact and reliance, are necessary to make out an estoppel claim under ERISA. In other words, the First Circuit, I believe, is waiting to recognize estoppel as a cause of action under ERISA for the type of case that will allow it to announce what extraordinary circumstances the First Circuit requires for a misstatement to give rise to estoppel, much as the Ninth Circuit identified in Gabriel the extraordinary circumstances that it requires. When that fact pattern finally gets before the First Circuit is when you will see the First Circuit formally recognize estoppel as a theory of liability under ERISA.
Clearing Out the Attic of My Mind: Notes From ACI's 8th National Forum on ERISA Litigation
With all due apologies to longtime Globe sports columnist Dan Shaugnessy, who would periodically “clean out his desk” by running a column of short bits he had collected, here’s a list, in no particular order, of interesting (to me, anyway) items I took away from ACI’s excellent 8th National Forum on ERISA Litigation in New York City this week, where I spoke on ethical issues in ERISA litigation:
●What a great group of panelists, and thoughtful, educated audience. They reaffirmed my (somewhat narcissistic and self serving) belief that ERISA litigation attracts and holds onto the sharper tools in the bar.
●Day 2 of the conference had an excellent panel on ESOPs, with at least one panelist noting the pervasive problem of conflicted fiduciaries in this area, who may have interests in the outcome of a transaction that are not the same as those of the employee participants in the ESOP. During the course of the day, whether at lunch or by the coffee table outside the meeting room, everyone I spoke to had a horror story about a conflicted ESOP trustee and an ESOP transaction that disserved employees as a result. Isn’t it past time to effectively require the appointment of independent fiduciaries, from outside of the employee owned or soon to be employee owned company, to pass on transactions on behalf of the employee owners?
●I’ve been hearing for years that Broadway is either dead or dying, but you couldn’t tell that from the outdoor advertising at all of the theaters surrounding the conference site. Either all the shows out there right now are the best there’s ever been, or it is truth in advertising, rather than Broadway, that is dead.
●Incidentally, every time I left my hotel I saw a big promo for Bradley Cooper in a new version of Elephant Man on stage. I know everyone’s a critic, but Cooper was the weak link in the American Hustle cast, so I can’t say the promo had me reaching for my wallet.
●Nobody knows nothing, at this point, about what impact Dudenhoeffer will have (I exaggerate slightly, as many panelists and audience members had calculated and well-educated guesses as to the future of stock drop litigation). As I discussed with some members of the audience, one wonders whether the class action bar will go forum shopping with regard to the next round of decision making in this area, looking for the most favorable possible venues for the first of the next round of decisions in this area.
●Speaking of the class action bar, those of its members who were in the audience looked amused when a panelist referenced the class action bar as “sharks.”
●There was an excellent panel on the public pension crisis. It looks to me like the problem will inevitably be left to bankruptcy courts and litigators to sort out, which drives home the extent to which the political will and leadership needed to address the problem is absent.
●One of the most interesting panels to me every year is the insurance industry panel discussing fiduciary liability and other insurance matters related to insuring risks and exposures in the benefit plan industry. It lays the complexity of insurance coverage law (which many lawyers find a very complex area) on top of one of the few areas of the law that exceeds it in complexity, ERISA.
●In the time between the insurance panel’s presentation and getting back to my office, what showed up on my desk but a complicated problem concerning the extent of insurance coverage for an ERISA exposure.
●In the time between my own presentation on ethical issues in litigating ERISA cases and getting back to my office, what showed up on my desk but an ethical conundrum I had never seen nor even thought of before. Grist for the next time I give a presentation on that issue, I suppose.
●The judicial panels on the morning of the second day of the conference are always interesting, and it always catches my attention how many times, and in how many different ways, the judges reference their desire to have the lawyers before them simply act courteously and respectfully to each other in the cases pending before them. One judge commented that, from his seat on the bench, it looks to him that “civil lawyers act criminally to each other and criminal lawyers act civilly to each other.”
●In the time between that judicial panel and my own presentation several hours later, I received at least two emails that documented the judges’ concerns in this regard.
●And I bet so did every other lawyer sitting in the audience.
●There are worse places in the world to watch a World Series game than the West Side Palm in NY.
●I really enjoyed the top hat plan litigation presentation, but that may just be me. There is something I have always found fun about litigating top hat and other executive compensation disputes. Maybe it’s the structure of top hat plan cases, which have a very logical order and composition of issues that can be exploited by a litigator. The presentation matched this, with a focus on the step by step elements of creating top hat status and defending against challenges to it.
●And finally, the panelist who discussed standards of review in ERISA litigation and noted that he may be the only person in the room old enough to remember litigating before Firestone was a treat. Firestone was decided in1989, and, despite nearly 25 years of experience, I never litigated benefit disputes in a pre-Firestone environment, so it was fun to hear, even briefly, how the litigants and the courts addressed the standard of review in the days before Firestone (hint: they typically didn’t).
Church Plan Litigation and My New Article On It
When courts first started tackling the new wave of suits challenging the church plan status of certain health care entities, I thought it an amusing curiosity, at best. I did grasp, however, the impetus from the perspective of the class action bar, which is that, if able to overturn the claimed exemptions of the defendants in court, there were potentially large amounts of money at stake, as well as potentially large fees. What I didn’t quite grasp at the time, because I was looking at the question solely from the point of view of an ERISA litigator, was the substantive impact on plans if the case law, as a result of the filing of those suits, started to put into question the propriety of church plan status for entities, not involved in the suit, who had long relied on the church plan exemption as the framework for structuring their employee benefit plans. For instance, I was having a conversation the other day about a particular plan’s obligations in light of Windsor and same sex marriage issues, and whether the obligations of a plan entitled to the church plan exemption might differ from those of a plan not entitled to that exemption. Multiply that by the many differences between the operations and terms of a plan covered by ERISA and one entitled to the church plan exemption and you realize how significant the exemption can be on the operations of a plan and, in turn, how much it would affect plans currently claiming the exemption if, as a result of new judicial interpretations of the exemption driven by the pending cases, some of those plans lost access to the exemption.
Tibble v Edison, now up before the Supreme Court, and the history of excessive fee class action litigation presents a nice way of looking at this phenomenon. In the early years of those claims, other than with regard to the large risks they posed because of the amount of money involved, people in the industry weren’t all that impressed by those types of claims, as the courts showed an initial reluctance to credit the theories of the class action bar in that regard. With the passage of time, though, those claims started to be taken much more seriously and became more successful. Now, years into the process, we have the Supreme Court, in Tibble, using one of those cases as an opportunity to set forth the rules governing ERISA’s statute of limitations for fiduciary duty claims. Tibble shows the long tail of the institution of new theories of liability in ERISA litigation, and their potential for causing unanticipated change to the jurisprudence. Years after the excessive fee claims began being filed and years after Tibble was tried, that once novel theory of liability is provoking the system to look anew at a fundamental element of ERISA, its statutory provision governing statute of limitations for breach of fiduciary duty claims.
Therein lies the fly in the ointment with regard to giving little weight to the current crop of church plan cases; no matter what becomes of those particular cases, they may well upturn the apple cart and create confusion, where currently little exists, as to when plans can invoke the exemption. One reason that this risk is present is that it really isn’t clear, given the statutory language, which side is really right about the exemption and when it should apply, a point I discussed in detail in my new article in ASPPA’s Plan Consultant magazine. With unclear statutory language, it is hard to predict how the cases that are currently wending their way through the system may come out and whether, as in the excessive fee cases, one of them might substantially impact the jurisprudence years down the road.
An Overview of 401(k) Litigation, Courtesy of Chris Carosa's Excellent Interview with Jerry Schlichter
Chris Carosa of Fiduciary News has a tremendous interview with Jerry Schlichter, who has carved out an important niche litigating class action cases against 401(k) plans. Schlichter has litigated nearly all of the key excessive fee cases of the past few years, and currently has one pending before the Supreme Court. I discussed the case he currently has pending before the Supreme Court, Tibble v. Edison, in an article way back after it was decided by the trial court, where I contrasted the trial court’s analysis of the excessive fee issues to that provided around the same time by the Seventh Circuit. You can find that article here.
Chris’ interview with Schlichter is important and valuable reading. The opposite of a puff piece or personality profile, it contains some real thought provoking comments on 401(k) plans and the risks of fiduciary liability, and I highly recommend reading it.
Interestingly, I am speaking next week at ACI’s ERISA Litigation Conference in New York on conflicts of interest and other ethical issues arising with regard to ERISA litigation. Chris, in his interview with Schlichter, goes right to the heart of the question, when he turns the conversation to the “obvious and serious conflicts-of-interest” that can exist in 401(k) plans given their structure, compensation schemes, and the sometimes contradictory interests of fiduciaries, participants and service providers. In the interview, Schlichter provides a nice window for approaching the issue, when he presents three key rules that he believes fiduciaries should follow, which are:
1) Putting participants’ interests first – this should be the beacon that fiduciaries follow; 2) Developing a fully informed understanding of industry practices and reasonableness of service providers’ fees – in other words becoming a knowledgeable industry expert; and, 3) Avoiding self-dealing – you simply cannot benefit yourself in any way.
A great deal of conflicts of interest in this area of the law can be avoided simply by keeping those three principles first and foremost. Indeed, many of the conflict of interest issues that I will be discussing next week on a granular level are violations, on a macro level, of one or the other of those three ideas.
What Are the Costs and Risks to Administrators When District Courts Remand Benefit Denials Back to Them?
I have been writing a lot recently about big picture items, from Supreme Court cases over ERISA’s statute of limitations to the ability of plan sponsors to legally control litigation against them, and everything in between. It is worth remembering, however, that ERISA is a nuts and bolts statute that is litigated day in and day out, often by plan participants for whom the pension or lump sum or disability benefit at issue is the most important financial vehicle open to them. As a result, the details of litigating under the statute are of supreme importance to them.
One of the technical and less sexy areas of litigating these types of cases concerns the circumstances in which federal District Courts, in deciding benefit disputes, elect not to enter an order granting benefits to a participant because of flaws found in an administrator’s processing of a claim for benefits, but instead order the administrator to revisit the issue, in much the same way that an appeals court would remand a case back to a trial court for further proceedings. Issues arising from this type of a remand have become more and more important over the years, as the district courts have become more inclined to remand benefit denials back to administrators for further review as opposed to overturning a denial outright and awarding benefits. Partly, this has occurred because of years of defense lawyers arguing that this is the appropriate way of proceeding, with the courts eventually coming around. Defense lawyers pressed this point in benefit litigation for years before it really became the standard mode of operating for many trial judges, and the reason was simple. It gave the administrator two bites at the apple, in the sense of they would either win at the district court by having the denial upheld by the court or, worst case, would get to decide the issue again on remand. For administrators and plans, this beat the heck out of having a benefit decision up on summary judgment before a court with one of two possible outcomes, those being the court upholding the denial or instead the court granting the benefits to the participant. The remand argument, at a minimum, meant that a court considering a benefit denial on summary judgment would be invited to make any of three decisions, only one of which was truly and immediately detrimental to the administrator, which are: (1) uphold the denial of benefits; (2) overturn the denial and grant the benefits; or (3) remand the denial to the administrator to redo the whole thing.
My friend, colleague, and sometimes adversary, ERISA lawyer Jonathan Feigenbaum, recently won a pair of significant rulings from the First and Second circuits (he will have to try for the Third and Fourth in short order, so as to hit for the cycle) on two key issues arising out of remands of this nature to an administrator, one being the circumstances in which attorney’s fees can be awarded and the other being whether a plan or its insurer can appeal a district court order remanding the benefit dispute back to the administrator for further analysis. The two decisions, and the two issues, are interconnected in an interesting way. In one, the First Circuit’s ruling in Gross v. Sun Life, the Court held that such a remand order is sufficient success on the merits of the case to support an award of attorney’s fees. In the other, the Second Circuit’s opinion in Mead v. Reliastar Life Insurance Company, the Court held that such a remand order is not appealable, as it is not a final order.
Together, they form an interesting counter to the preference of administrators and their lawyers to seek a remand, rather than an outright reversal, when a district court finds problems with an administrator’s benefit determination. They stand for the proposition that administrators may be able to seek that relief, but if they get it, they will have to pay attorney’s fees to the participant and will not have an opportunity to test the remand order on appeal until the entire benefit dispute has been conclusively resolved once and for all at the district court level. Together, they represent an interesting doctrinal response to the preference of administrators to seek remand when problems are found with a benefit determination. Like all legal doctrines, it needs a catchy name – like the Younger doctrine is for abstention – if it is to get much traction in the legal literature. Let’s call it the “Feigenbaum doctrine.”
Q: Where Can You Sue an ERISA Plan? A: Where the Plan Sponsor Says
So the Sixth Circuit, in Smith v. Aegon, just ruled in favor of the enforceability of forum selection clauses in ERISA governed plans. Combined with the Supreme Court’s approval in Heimeshoff of contractual limitations in ERISA plans on the time period for filing suit, the approach of Smith basically hands control of the basic procedural aspects of litigating ERISA cases – when and where – to plan sponsors. In Smith, the Sixth Circuit provides a legitimate rationale for doing so, which is that the law already provides extensive freedom to plan sponsors with regard to whether, and if so under what terms, to offer benefit plans. This principle, incidentally, flows naturally from the original grand bargain that gave rise to ERISA itself, which was the premise that employers would be granted much leeway and limited potential liability to encourage them to make benefit plans available to employees.
That said, however, the dissent in Smith makes an important point, which is that the venue provisions of ERISA have long been construed by federal courts in the manner that will best allow participants to protect their rights, and not in a manner that will make it more difficult for them to do so. The dissent’s point in this regard is well taken. ERISA expressly provides that a plan participant can sue in any federal district court where the plan is administered, the breach took place, the defendant resides or the defendant may be found. 29 U.S.C. § 1132(e)(2). Federal judges regularly find that this venue provision was intended by Congress to expand, rather than constrict, a participant’s choice of forum, so as to best protect plan participants. As one judge explained in a well-regarded opinion on the subject, Congress intended “to remove jurisdictional procedural obstacles which in the past appear to have hampered effective enforcement of fiduciary responsibilities under state law for recovery of benefits due to participants” and as a result, “ERISA venue provisions should be interpreted so as to give beneficiaries a wide choice of venue.” Cole v. Central States Southeast and Southwest Areas Health and Welfare Fund, 225 F.Supp.2d 96, 98 (D.Mass. 2002) (quoting H.R.Rep. No. 93–533, reprinted in 1974 U.S.C.C.A.N. at 4639, 4655; accord S.Rep. No. 93–127, reprinted in 1974 U.S.C.C.A.N. at 4838, 4871).
Decisions such as Smith run to the opposite of this thinking and essentially say that, while that may be the case, a plan sponsor can opt out of that system of protections in favor of selecting a forum in the first instance, and naming it in the plan.
Tibble v. Edison at the Supreme Court
So, Tibble, Tibble, toil and trouble, to paraphrase (badly) Shakespeare (MacBeth, to be precise). And with that, I am going to launch into what I expect will be a number of posts concerning the Supreme Court’s decision to accept the Ninth Circuit’s decision in Tibble for review, limited to the application of ERISA’s six year statute of limitations. I tweeted, when the Court first accepted the case for review, that while I try to avoid the constant hyperbole about Supreme Court decisions (in which every time the Court does anything, lawyers issue client alerts and every other form of media under the sun, announcing that the sky is falling in the hope of drawing in readers), I did think that Tibble had the capacity to be a game changer.
And why is that? For a few reasons, one of which I will discuss right now. In the first instance, even leaving aside the type of excessive fee and revenue sharing dispute at issue in Tibble itself, the federal courts continue to struggle with the interpretation and application of ERISA’s six year statute of limitations. While written cleanly on its face, the statutory language is almost the walking embodiment of an insurance coverage concept, the latent ambiguity, which has to do with policy language that does not look ambiguous on its face (and thus would not appear to invoke various doctrines by which ambiguous policy language would be construed against the insurance company that issued the policy) but becomes ambiguous when applied to a particular fact pattern because, in application, it becomes unclear how the language should actually be applied. As Tibble itself reflects, the six year statute of limitation is open to varying interpretations when a court or litigant sits down and tries to apply it to a particular fact pattern, even though the language does not, as written, look like it should generate such confusion. The six year statute of limitations talks in terms of ending six years after the last date of breach or six years after the last day on which a breach of fiduciary duty could be remedied, which seems straight forward enough. The problem, though, commences when one tries to apply it to particular fact patterns. Give me a hypothetical, and I can give you two equally plausible arguments (at least on their face) as to when the six year statute of limitation ends under that hypothetical. Indeed, that is a fair description of exactly what occurs with most motions to dismiss filed on statute of limitations grounds in ERISA breach of fiduciary duty cases. Both the moving defendant and the responding participant are almost always able to present plausible sounding arguments over whether the six year statute of limitations period has been triggered, reflecting the lack of clarity and fact specific nature of the analysis under both the statutory language itself and the case law. Greater clarity on the application of the six year limitation period would be a boon to ERISA practitioners across the board.
I have a number of things I want to say about Tibble, a case which has been of interest to me all the way back to its relatively humble beginnings as a bench trial (when it was wrongly overshadowed in the legal media by the Seventh Circuit’s analysis at around the same time of many of the same issues) and I will be returning to it in detail over the next couple of weeks, as time allows. I plan to start with a discussion of the United State’s brief in support of granting cert, which offers an excellent jumping off point for a discussion of the merits of the case.
Santomenno v. John Hancock: Does It Matter That the 401(k) Service Provider Is Not a Fiduciary?
I wanted to comment at least briefly, or more accurately thematically, on the Third Circuit’s decision last week in Santomenno v. John Hancock, in which the Court held that John Hancock’s role as an advisor and service provider for a company 401(k) plan, by which it helped select fund options and administer participant investments, did not render it a functional fiduciary under ERISA for purposes of an excessive fee claim. It’s a well-reasoned and interesting opinion on a number of fronts, but what struck me as important about it relates more to broader issues than to the narrow details on which the decision itself turns. Personally, I think the 30 page decision itself does a wonderful job of laying out the issues and explaining them, something which is not always true of appellate decisions concerning the technicalities and complexities of ERISA class action cases, making the source document here the best place to turn for a full understanding of the details of the decision. This is not always the case, as some decisions of this ilk are simply too dense or otherwise difficult to penetrate to go first to the opinion itself, rather than to secondary sources – such as blogs and client alerts – for a full understanding of the case.
If you want to skip reading the case itself and instead go to commentary on it that sums up the central facts, Thomas Clark, who has staked out a firm position in the blogging world as one of the more scholarly analysts of fiduciary duty litigation, recommends some summaries in his post on the case. His recommendation is good enough for me in that regard, so I would refer you to his post and the summaries about the opinion for which he provides links.
For me, I was struck, as I noted, by some thematic, big picture aspects of the decision, and I wanted to discuss three of them in a post. First, in speeches, articles, presentations and even in small group meetings with clients, I often make the point that service providers to 401(k) plans are very good at structuring their contracts and relationships to avoid incurring fiduciary status. Most recently, in providing an update on ERISA litigation to an ASPPA conference, I discussed this point in the context of explaining why it is such a smart strategy: because it is simply not possible to predict the next theories of ERISA liability that the class action bar will pursue (did anyone foresee the rise of church plan litigation? I didn’t think so), the best strategy open to plan service providers is to avoid assuming fiduciary status at all, thus defanging new theories of liability without even knowing what they will be. The opinion in Santomenno provides a very detailed explanation of the contractual structure by which John Hancock avoids fiduciary status despite its intimate involvement with the plan’s assets and investment options, and as such it does a beautiful job of making my point; the Court demonstrates exactly the subtle, intelligent, thoughtful and carefully planned structure that insulates the service provider from incurring fiduciary status.
Second, I have long been a critic of a habit some courts have of, in a nutshell, jumping the gun and deciding complex ERISA cases prematurely, without first allowing the facts to develop to a sufficient level. I understand the impulse – ERISA litigation, and class action litigation in general, can be very expensive as well as disruptive to plan sponsors, and courts can often be sympathetic to the desire to avoid unnecessary litigation in circumstances where the likely outcome of the case can be anticipated at an early stage. I recently listened to one well-regarded federal judge address a law school class after a motion session, when he commented – in a different context entirely – on the fact that we have created, in the federal court system, a Maserati, a beautiful machine but one that most people can’t afford. Early resolution, such as at the motion to dismiss stage, of lawsuits that are unlikely to end up any differently later on is an antidote to this problem.
That said, however, this mindset can often lead to cases being decided too early, with regard to the question of whether a court has enough information to really get the nuances right. All too often, judicial opinions in ERISA cases issued at the motion to dismiss stage – or on appeal from an order granting a motion to dismiss – end up reading more like a law review article than a judicial decision because, by being decided without much factual development having yet occurred, they end up being based more on hypothesis and assumptions about the world of service providers, investments, fees and the like than on the actual realities of those worlds. This is a problem with a simple solution, which is for courts to avoid making significant doctrinal rulings without first having a well-developed factual record. You can see this, but from the good side, in Santomenno, in which the Court had access to significant factual information, including the relevant contractual documents, and fashioned a ruling around – and dependent upon – those facts. It makes for a far more compelling and weighty decision than would otherwise be the case. It is for me, in any event, an approach that makes me give far more value to the Court’s reasoning and makes me far more likely to be persuaded by the Court’s reasoning.
Third, the case illustrates, and the Court even alludes to briefly, a point that I think is very important and which I often raise in a variety of contexts involving ERISA litigation. This is the question of whether systemically it matters whether John Hancock or a similarly situated service provider is or is not a fiduciary, and the answer is that, generally speaking, it does not matter. Sure, it may matter to the participants and their lawyers who are looking for a deep pocket, and it certainly may matter to the business model of the service provider, but it shouldn’t actually matter to the ERISA regulatory and enforcement regime itself. As I have written many times, including too often to count in this blog, ERISA is essentially a private attorney general regime, in which the idea is that private litigation and even just the threat of it enforces proper behavior within the relevant industry. That occurs here regardless of the fact that John Hancock and other such vendors are not considered, in this context, to be fiduciaries who can be held liable, as a breach of fiduciary duty, if the expenses and fees in a 401(k) plan are too high. And why is that? Because the system outlined in Santomenno is one in which the vendors may not be fiduciaries, but they are obligated to provide sufficient information and control to the actual fiduciaries – those appointed by the plan sponsor to run the plan – to allow the actual fiduciaries to make informed decisions about the investment options and the fees. Importantly, the system as viewed and approved of by the Santomenno court is one in which the actual plan fiduciaries bear financial liability if they don’t use the power granted to them by the vendor to police fees and expenses, thereby resulting in excessively high expenses. In that circumstance, the named fiduciary becomes liable for that problem. As a result, even without the service provider being deemed a fiduciary, the system still captures the risks of excessive fees and requires action – only by the plan sponsor and its appointees rather than by service providers such as John Hancock – to ensure that the problem is either avoided or remedied.