DOL 1, Critics of the New Fiduciary Regulations 0: Comments on NAFA v. Perez

Posted By Stephen D. Rosenberg In Fiduciaries
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Well now, I wrote a few substantial posts on the multiple lawsuits challenging the Department of Labor’s new regulations governing fiduciary status at the time they were filed, a couple of which you can find here and here. One of my key points was that it is a mistake to get lost in the meta story made in the complaints in those actions, which are effectively – using the term in its broadest form – political documents making the case that the regulatory changes are just plain bad. In a way, the complaints in those actions read almost like old fashioned political pamphlets with regard to the big picture criticisms made in them, while having technical legal arguments buried beneath. That is not a criticism, not to me anyway. Hitting all of those notes in the same complaint is a tough job, and it was done well. But as I suggested in this post, if you looked past the polemics and focused on the administrative law challenges to the promulgation of the rules that are the actual technical heart of the complaints filed against the Department, it was right to be skeptical of the complaints and the claims against the Department seeking to set aside the new regulations. The scope of a challenge to this type of administrative and regulatory action is highly specific and its grounds narrow; skepticism about the various plaintiffs’ abilities to prove their claims was warranted, given the massive effort by the Department in promulgating the regulations and the history of what occurred when they did so.

That skepticism is borne out in the first substantive ruling by one of the courts with a challenge to the Department’s new regulations pending before it. The United States District Court for the District of Columbia has roundly rejected the plaintiff’s arguments in that case, firmly upholding the Department’s actions. The decision is 92 pages long and I doubt that many people spent their weekend reading it, and while I did, I don’t want to spend my whole morning summarizing it. And why should I? Nevin Adams at NAPA has done a great job of that already, right here in this story.

One of the things I like about his summary is that he really drives home the extent to which the court found that the Department acted within its regulatory authority and power. That, as I noted above, is the real central point in all of the lawsuits filed over the new fiduciary regulation, as opposed to the question of whether the financial and insurance industries should be put in the position of having to comply with the accompanying changes to industry practice, which is more properly a question for the political – and not the judicial – process.

Upcoming Webinar on Retirement Plan Risk Management: An Overview

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources , Employee Benefit Plans , Retirement Benefits
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I had fun speaking on ERISA litigation remedies with Eric Serron of Steptoe and Joe Barton of Cohen Milstein this past Thursday at the American Conference Institute’s 13th National Forum on ERISA Litigation. Since Eric’s exclusively a defense lawyer and Joe’s exclusively a plaintiff’s lawyer, Michael Prame of Groom Law Group, when introducing the panel, pointed out that it was up to me to keep them at bay, since I represent both plaintiffs and defendants in ERISA litigation. I felt a little like the moderator of the McLaughlin Group by the time our hour was up (well, really 55 minutes, but I am the son of two psychologists, so I consider that an “hour”), but I thought the structure really drove home how diametrically opposed the views of the defense bar and the plaintiff bar are on many ERISA issues.

On Wednesday, November 2, I will switch gears though, and present a much more collaborative webinar with Susan Mangiero – who knows more about the financial side of retirement plans than most of us have forgotten – on the current risk and operational environment faced by pension plans. The webinar is offered by PRMIA, and the title tells you what its about: “Retirement Plan Risk Management: An Overview.” As the program’s overview explains:

According to estimates, global retirement assets are huge at $500 trillion. Improper decision-making about plan design, investment and risk mitigation could have an adverse impact on millions of individuals to include employees, retirees, taxpayers and shareholders. Service providers such as asset managers, banks and insurance companies are likewise impacted by bad governance and unchecked risk-taking. Everyone has a stake in the financial health of the worldwide retirement system and whether uncertainty is being adequately identified, measured, managed and monitored, especially now. New regulations, a flurry of fiduciary breach lawsuits, low interest rates, the complexity of modeling longevity, increased risk-taking, need for liquidity, cost of capital and worker mobility are just a few of the challenges that keep retirement plan executives, participants and their advisors up at night.

I think that’s a pretty fair view from 30,000 feet of the world of retirement plans, and I am looking forward to discussing it, along with Susan, at the webinar.

You can find registration material for the webinar here.

When Are Defense Counsel's Fees Relevant to an Attorney Fee Claim by a Plaintiff under ERISA?

Posted By Stephen D. Rosenberg In Attorney Fee Awards
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Wow, this is fascinating. The “this” in question is an interesting little twist in litigation over an attorney fee award to plaintiff’s counsel in the long running ERISA litigation, Frommert v. Conkright. Attorney fee awards in ERISA litigation are a fascinating sub-issue in and of itself, for a number of reasons. First, it is one of the few areas of American law in which the American rule – all parties pay their own legal fees – is overridden in favor of a modified system of loser pays. While there are various statutes that allow such an award, few, if any, actually give rise to such awards on the frequency that they are granted in ERISA cases. Second, ERISA provides a great deal of flexibility and discretion to courts in making such awards, and the manner in which courts handle them suggests why tort reform advocates of a loser pays system across the board are likely barking up the wrong tree: 40 years of experience with a modified form of loser pays in ERISA litigation suggests that all sorts of exemptions, exclusions and rules of thumbs arise in such systems that are intended to enforce equity, even in the face of a loser pays regime. For instance, even though a court could theoretically grant attorneys fees to a prevailing plan sponsor that defends a case, when is the last time you saw that happen? And if you have, can you count on the fingers of one hand the number of times you have seen it happen?

Moreover, litigation over attorneys fee awards is often resolved without anyone wanting to look too closely under the hood of fee requests, for fear of what people might find. This article on fee litigation in Frommert is the perfect example. The defendant challenged the rates requested by the prevailing attorneys, claiming that a much lower rate would be reasonable. This is a common argument, and, when made by a losing party in motion practice over fees in an ERISA case, most often just leads to the judge declaring and then applying some particular rate that seems fair to the judge. In my experience, it is usually some discount off of what prevailing counsel wanted to have applied, but nothing like the haircut counsel for the losing party sought. In Frommert though, the Court has apparently responded to that argument by the defendant by ordering disclosure of the rates charged by the defendant’s counsel, on the thesis that it represents the best proxy for determining what a reasonable rate for plaintiff’s counsel should be in the case. I can guarantee you, by the way, that it is much higher than the relatively low rate that defense counsel argued, on the fee request, would be the reasonable rate to use in calculating a fee award (and I am sure the judge knows this as well).

I am sure the defendant has no desire to disclose this information. There is a more important point here, however, which is the lesson that you always have to be careful what you argue for in motion practice over fee awards in ERISA case, because otherwise you risk the court or the opposing party opening doors that you might have preferred stayed closed.

A Tale of Two Cases, or Why Bad Facts Make Bad (Stock Drop) Law

Posted By Stephen D. Rosenberg In 401(k) Plans , Fiduciaries
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I will be sharing a dais with Joe Barton later this month at the 13th National Forum on ERISA Litigation, where we are both part of a panel that is discussing equitable remedies under ERISA. Joe won an interesting case before the Second Circuit recently, Severstal Wheeling Retirement Committee v WPN Corporation, in which the Court held that the fiduciaries had breached their duties by failing to properly diversify the plan holdings. While the decision is interesting in a number of ways, what caught my eye about the Court’s opinion was the focus on very specific and concrete facts demonstrating a close link between the fiduciaries’ specific acts and losses to the plan. The Court drilled down into the conduct at issue, and found a very specific action or series of actions that breached the defendants’ fiduciary duties. This is worth noting because most successful fiduciary litigation – and by that I mean successful in the courtroom, not just at the settlement table – has this type of narrow, concrete linkage in common; think back to the first big breakthrough excessive fee case, Tibble, and the trial court’s focus on one specific fee aspect of the case.

In contrast, fiduciary breach cases that are based on a more generalized complaint about fiduciary conduct tend to fizzle out, and you see this nowhere more clearly than in the stock drop cases. Writing the other day about the Fifth Circuit’s decision rejecting a stock drop claim based on the impact on BP’s stock price of an oil rig explosion, I pointed out that stock drop cases are turning against the plaintiffs’ bar, and suggested that the BP decision was a good example of why that was the case: because the factual linkage between the underlying event giving rise to the stock drop and the fiduciary actions of the plan’s fiduciaries was too attenuated to support a compelling claim. In other words, at the heart of much of the failure of the stock drop claims is the old maxim that bad facts make for bad law. Many of the stock drop claims, and the BP case is the perfect exemplar, are simply based on facts that don’t easily lend themselves to concluding that a plan’s fiduciaries acted improperly. As the Second Circuit’s decision in Severstal Wheeling Retirement Committee v WPN Corporation reflects, although obviously not in the context of a stock drop claim, a close link between plan losses and fiduciary acts is a necessary prerequisite to a compelling claim.

Will stock drop claims eventually come back into fashion, perhaps after the next stock market downturn? Will they ever be successful? I think the answer to both is likely yes, but as to the latter, only if and when they start being tied much more closely to specific and concrete acts of fiduciaries and are no longer based on broad claims that essentially treat fiduciaries as somehow able to protect plan participants against the risk of declines from any and all corporate actions. That last dog simply won’t hunt, to borrow an old saying from my youth spent on the line where Baltimore’s suburbs ended and its remaining farmlands began.

Whitley v. BP, Stock Drops, and the Outer Limits of Fiduciary Responsibility

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , ESOP , Fiduciaries
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There is an old political saying that where you stand depends on where you sit, which, roughly translated, means that people tend to assert positions that are beneficial to their own organizations and employers, rather than based upon a consideration of broader issues. The author of the maxim, Rufus Miles, thinks the idea goes all the way back to Plato.

I often think of this maxim, known as Miles’ law, when ERISA litigators comment on prominent court decisions affecting ERISA claims, particularly breach of fiduciary duty actions. Lawyers from firms who primarily or exclusively represent major financial companies or plan sponsors always speak well of defense oriented decisions, and those who represent participants, particularly class action lawyers, always speak poorly of such decisions. The reverse, of course, tends to occur when a court issues a decision that seems to expand liability under ERISA or to favor participants on even a superficial or procedural level.

For me, probably because I represent the full range of actors in the ERISA universe, from participants to plan sponsors to third party administrators to fiduciaries and back again, I tend to be pretty agnostic about prominent decisions issued by courts on key ERISA issues. Some are good, some are bad, some are just plan poorly reasoned and worthy of criticism no matter which side of the “v” you favor.

One I am not particularly critical of is the clear trend line against participants in the so-called stock drop suits, involving claims of breach of fiduciary duty based upon collapse in the stock price of company stock held in employer plans, at least in cases where plan participants always had the option of diversifying out of those holdings but instead voluntarily kept too much of their retirement holdings in company stock. As I have written before, how many economic cycles does one have to live through to know that keeping a large portion of your retirement assets or other wealth, voluntarily, in the stock of your publicly traded employer might just not be the best idea?

But leaving that caveat aside, it is necessary to maintain some strong bars to such claims, because otherwise they simply become a back door avenue for plaintiffs’ firms to prosecute securities litigation, only in this instance, under ERISA, which – for all its reputation as a defense-oriented statute – is a more flexible basis for pursuing such claims than are the securities laws at this point. Stock drop claims more properly belong under the securities laws and its doctrines, and should be evaluated under them. Now don’t get me wrong: I am not saying there cannot be a fiduciary breach for purposes of ERISA related to employer stock that warrants a claim under ERISA under all circumstances, but only that stock collapse, without more, is really simply securities litigation in ERISA clothing.

I have always believed that the Supreme Court’s decision in Dudenhoeffer was a fine piece of line drawing in this regard, allowing such claims in a narrow class of circumstances but limiting them to a degree sufficient to maintain a firm distinction between securities law and ERISA’s fiduciary standards. I believe the post-Dudenhoeffer decisions out of the district courts and federal courts of appeal have demonstrated that this is an accurate view of that decision, including the most recent high profile decision on this issue, the Fifth Circuit’s decision this week in Whitley v. BP, PLC. Whitley was a stock drop claim arising from one of the more notorious environmental disasters in recent years, with the participants claiming that the loss in the value of their company stock holdings that resulted from it was attributable to fiduciary violations by the plan’s fiduciaries. As the Fifth Circuit explained:

On April 20, 2010, the BP-leased Deepwater Horizon offshore drilling rig exploded, causing a massive oil spill in the Gulf of Mexico and a subsequent decline in BP's stock price. The BP Stock Fund lost significant value, and the affected investors filed suit on June 24, 2010, alleging that the plan fiduciaries: (1) breached their duties of prudence and loyalty by allowing the Plans to acquire and hold overvalued BP stock; (2) breached their duty to provide adequate investment information to plan participants; and (3) breached their duty to monitor those responsible for managing the BP Stock Fund.

After much procedural maneuvering by the plaintiffs to try to plead a viable breach of fiduciary duty theory involving this fact pattern, the Fifth Circuit eventually dismissed the action, finding that the plaintiffs could not satisfy the standards for stock drop claims after Dudenhoeffer. Procedurally and doctrinally, it reads to me as a correct ruling. But there is more to it than that. If you step back and think about this case as a whole – and not just based on where you sit in terms of who should bear the losses from a stock drop, the employees or instead the employer – the decision makes even more sense. There is an awful long distance – both literally and metaphorically - between an offshore drilling rig and the plan fiduciaries sitting in an office somewhere deciding to offer company stock in a retirement plan. To borrow a concept from tort law, there is an almost inconceivable number of breaks in the chain of causation between the decision making of the fiduciaries and a loss stemming from this event. Although I fully understand how one can connect the dots, it is really pushing the outer limits of fiduciary responsibility to do so.

The Centre Barely Holds: ERISA Preemption after Gobeille v. Liberty Mutual Insurance Company

Posted By Stephen D. Rosenberg In Preemption
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There have been an interesting series of federal court decisions concerning ERISA preemption during the past few months, some of which, in my view, cannot be fairly squared with the United States Supreme Court’s preemption decision earlier this year in Gobeille v. Liberty Mutual. I discussed in my recent article in Bloomberg BNA’s Tax Management Compensation Planning Journal, that the Supreme Court’s opinion in Gobeille raised two concerns: first, that it provides little principled guidance on the scope of preemption under ERISA and, second, that, if read literally, it is hard to conceive of a state statutory or regulatory initiative that would not be preempted. The article, which is titled The Centre Barely Holds: ERISA Preemption after Gobeille v. Liberty Mutual Insurance Company, argues that the opinion simultaneously gives great breadth to the scope of ERISA preemption and, at the same time, opens up avenues for disputing whether preemption applies in any particular case. All in all, as I discussed in the article, it is a fascinating but troubling opinion.

You can see that in this blog post from Joe Ronan and Steven Spencer of Morgan Lewis, in which they discuss the efforts the Sixth Circuit had to go this past summer to find that a particular state action was not preempted given the holding of Gobeille. Although slightly dated at this point, I thought of that post again when I was re-reading, and preparing to post, my article. It’s a perfect illustration of the Pandora’s box for litigants and courts that I believe the Supreme Court opened in Gobeille. Now to be fair, and as I reference in the article, ERISA preemption is one of those areas under ERISA where the statutory language makes it difficult to craft a consistent and workable doctrine, so the fault is not all the Court’s in this regard. But, nonetheless, it remains a problem that litigators, as well as state regulators, will continue to have to deal with for the foreseeable future.

Singing the Praises of ESOPs

Posted By Stephen D. Rosenberg In ESOP
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I do a lot of litigation related to ESOPs, sometimes for them, and sometimes against them. One thing I have learned for sure over the years is that the well-run ESOPs, where everything is aboveboard and the fiduciaries are clearly acting – and want to act – in the interest of the employee participants, are spectacular creatures: they create wealth for employees, give rise to significant employee investment in the company’s success, and seem to at least correlate with growth in key company metrics. Many lawyers who represent ESOPs are almost evangelical in their fervor for the form.

For those of you who don’t spend a lot of time with ESOPs, or are just plain unfamiliar with the world of ESOPs, this article from the Atlantic really paints a good picture of why well-run ESOP companies are so valuable, in so many different senses of the word.

The Ninth Circuit Deems the Compensation of Outside Medical Reviewers Relevant in LTD Litigation, in Demer v MetLife

Posted By Stephen D. Rosenberg In Benefit Litigation , Conflicts of Interest , Long Term Disability Benefits
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So the other particularly fascinating item – to me, anyway – that popped up in my twitter feed while I was on vacation was this important decision by the Ninth Circuit, Demer v. IBM and MetLife, addressing whether (and, if so, how) the number of reviews done by, and compensation earned by, outside medical reviewers used by an insurer to evaluate long term disability claims is relevant to arbitrary and capricious review. In short form, the majority of the panel found (at least implicitly) that evidence of this nature is discoverable in a case governed by arbitrary and capricious review, and must be considered by a court in passing on the question of whether a decision to deny benefits was arbitrary and capricious. A dissenter points out this evidence may be superficially appealing, but that if looked at critically, it should not be given any weight.

I have a number of thoughts on this decision. First, LTD insurers routinely use outside medical reviewers in exactly the way they were used in Demer, and there is nothing wrong with doing so. As I have often argued, the sheer complexity of many conditions require administrators to make use of outside medical reviewers, and it is questionable whether a proper review can be done in many cases without one or more such reviews.

Second, this issue has been a hotly debated topic for a number of years. There is a bias against discovery of evidence from outside of the administrative record, for a number of good reasons, including that it expands the scope and cost of LTD benefit litigation beyond the controlled, predictable amount that ERISA, and years of court decisions, instead treat as the norm. This type of discovery also runs contrary to years of decisions imposing a much more limited scope of litigation and discovery in these types of cases. That said, however, many courts have been expanding the scope of discovery and evidence allowed in these types of cases. I believe Demer is the highest profile decision to do so.

Third, I think there is no question that, from here on out, lawyers for participants will seek this information in almost every single LTD case in which outside medical reviewers were used. I don’t see how it would not now be malpractice for a lawyer not to seek such discovery. As a result, it may now be incumbent on all LTD insurers and claim administrators to ensure that structures are in place that will allow this type of information to both be easily compiled but also to be placed in context so that a court can see for itself whether or not the compensation of outside medical reviewers and the frequency of using those particular reviewers actually suggests bias in the benefit determination process. In other words, insurers and administrators should no longer act as though such discovery is unlikely, but instead as though it is likely to occur. This requires establishing IT protocols that make such data readily available. It also, though, means creating a system that puts the data of any given reviewer in context, so that an administrator can argue that a particular number of reviews in a given year or a particular level of compensation of a certain reviewer is meaningless and does not demonstrate or reflect that any bias or conflict of interest contaminated the administrator’s determination.

ACI's Forum on Minimizing Legal Risks in Executive Compensation

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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Another one of the things I fell behind on during vacation was passing along a special offer if you would like to attend the American Conference Institute’s November conference in New York on Executive Compensation, where I will be speaking on “Separations, Severances and Executive Departures.” The faculty as a whole for the two day conference is gold plated, and – which isn't always the case when I speak at conferences – I will probably attend all of the other speakers’ sessions as a result.

Today and tomorrow, you can obtain a special rate on the conference by contacting Joe Gallagher at ACI directly at 212-352-3220 ex 5511 or at, mentioning my name as a speaker, and requesting the discounted rate.

Hope to see you there. And if you do attend, please track me down and say hello.

Thoughts From the Beach on the Excessive Fee Cases Against Prestigious Universities

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Employee Benefit Plans , Fiduciaries , Retirement Benefits
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Back from spending a week in the great state of Maine (you go, Palace Diner!), but even when I am away, “the sun comes up [a]nd the world still spins,” nowhere more, it seems, then in the world of ERISA litigation. So over the next few days, I am going to try to pass on some links and thoughts concerning a few things that caught my eye while I was away.

First off, of course, is the barrage of lawsuits against university retirement plans. I have previously tweeted my cynicism over the fact that all of the defendants are bold faced name universities, asking whether only prestigious universities have retirement plans or whether, instead, only they have ones large enough to attract plaintiffs’ lawyers. Obviously, neither is true and the comment, standing alone, is tongue in cheek. But I have to ask this question. Years ago, I tried, and essentially won (the plaintiff/patent holder gave up mid-trial after its expert spit the bit on the stand), a patent infringement case where the patent holder had embarked on a litigation campaign built around suing smaller fish who couldn’t afford to vigorously defend the suits so as to develop helpful rulings and precedents before taking on bigger fish (the campaign worked until they ran into my emerging company client, for whom we were able to work out a cost efficient defense strategy that allowed us take the case to trial and demonstrate the invalidity of the patent; see my article on that approach here). I am wondering if it works in reverse here, with regard to excessive fee claims against universities. Is the idea to win against large, prestigious and well-lawyered universities and their plans, creating precedents that make it easy to then pick off low hanging fruit in the form of the nation’s numerous non-bold faced name colleges and universities, who may then just settle quick if bigger name and richer universities have already, in years past, had to pay up? Time will tell, but it’s the strategy I would use.

I also wonder, but haven’t had the time to look into it, whether the universities selected for suit reflect a deliberate approach to forum shopping. In past articles, presentations and blog posts discussing the early excessive fee cases, I have argued that certain circuits were simply not the best place for the plaintiffs to have brought the first of those cases, and that it might be fair to say that the plaintiffs’ bar picked the wrong hills on which to fight at the outset of those cases. Here, I wonder if the determination of the universities to sue can be linked, in part, to the circuits in which they sit. I also wonder whether the nearly simultaneous filing of the current round of suits likewise reflects an intentional decision to move the cases along on a parallel track in multiple circuits, with at least two purposes in mind. The first might be thought of as hedging, which is kind of ironic since we are talking about lawsuits that strike at the massive amounts of retirement assets managed by the financial industry, to whom we all owe either debt or blame for the excessive use in modern discourse of the word “hedging.” But if you think about it from that perspective, the multiple suits in multiple circuits makes complete sense: all you have to do is hit in one circuit to make up for losses in other circuits. In other words, the plaintiffs’ lawyers are hedging their bets, assuming that even if the development of the law in one circuit on these theories of liability turns out unfavorable to them, the development of that law in others may not be. The second possible purpose could be seen as typical of a deliberate litigation strategy: to create conflicts among circuits, increasing the possibility of bringing the issues eventually to the Supreme Court if the law does not break in favor of the plaintiffs as these cases develop.

Anyway, that’s enough for a first day back in the office, other than to note why I was thinking about this while lying on the beach, which was Bloomberg BNA’s Jacklyn Wille’s excellent and on-going coverage of these suits, which included this piece that popped up in my twitter feed while I was away.