Public Pensions After Detroit and Stockton
Well, returning briefly to my series on municipal bankruptcies – you really can’t write regularly about pensions in this day and age without addressing, even if unwillingly, that topic – the NY Times has a very interesting article on Stockton, California’s effort to leave bankruptcy, by basically shorting bondholders while leaving the ever rising pension costs that was one of the key drivers of its insolvency untouched. You can hear in the article the skepticism as to whether, having not dealt with that problem, the city can remain solvent for any amount of time, rather than end up back in bankruptcy court again after failing to tame its pension exposures.
The impact of pension promises and debt on municipal finances cannot be understated, particularly after events in Detroit. At the same time, the problems they pose cannot be easily solved, either, because municipal leaders are faced with a highly unpalatable choice with regard to that issue: they can either raise taxes significantly (or substantially cut services, which in the long term is at least as politically dangerous to the political future of the elected officials involved, yet possibly even worse long term for the city than increased taxes) or they can, as one Stockton official put it, look people in the eyes and tell them they are having their benefits cut. Stockton appears to have avoided the latter, for the most part, by seeking a relatively minimal increase in the sales tax, but, as noted above, one wonders whether that will be enough.
At the end of the day, I hate to say it, but the only humane solution to the pension problems in places like Detroit and Stockton is likely to be some version of a bailout in the form of a derisking program, with the pensions turned into private annuities and cities taken out of the pension business once and for all. Its either that or a decision to cut benefits and leave retirees and current workers to bear that cost alone. None of the solutions are good, but the evidence says this is a long run problem that isn’t going away.
Who Is the Proper Defendant In an ERISA Denial of Benefits Claim? The First Circuit Has an Answer
I enjoyed this post on a fundamental question in ERISA denial of benefit litigation, namely which of the many entities involved with a plan – employer, plan sponsor, fiduciary, claim administrator, insurer, and so on – is a proper defendant to such a claim. As the post points out, correctly, there is some ambiguity on the question, and courts in various parts of the country apply different rules. The author focuses on a recent decision out of the federal court in Minnesota, Nystrom v. AmerisourceBergen Drug Corp., holding, in the author's words, that “a third party administrator was a proper defendant in a lawsuit seeking benefits on the grounds that Section 502(a)(1)(B), the section of ERISA under which such claims are brought, does not limit the universe of entities that may be sued, and that liability flows from 'actual control' over benefit claims;” the author further notes that, according to that court, the “First, Fifth, and Ninth Circuits have reached a similar conclusion.”
In fact, this is the approach typically taken by courts in the First Circuit, and in some ways the case law here on this issue is more concrete and definitive than elsewhere with regard to exactly what entities, within that universe, are in fact the proper defendants. In the words of the First Circuit, “[t]he proper party defendant in an action concerning ERISA benefits is the party that controls administration of the plan.” Terry v Bayer Corp., 145 F.3d 28, 35-36 (1st Cir. 1998)(quoting Garren v. John Hancock Mut. Life. Ins. Co., 114 .F3d 186, 187 (11th Cir. 1997)). It is the decision of the “entity with the power to make, and is the entity that actually made, the final decision to terminate [the plaintiff’s] benefits” that is subject to review, not that of other parties. Id.; see also Aponte-Miranda v. Sensormatic Electronics Corp., 2006 WL 468695 (D.PR. 2006).
So in essence, the First Circuit case law does not leave open who the proper defendant is in a denial of benefit claim, in a manner that would allow the targeting of anyone and everyone involved with a plan. Rather, the proper defendant is the party that actually decided the claim for benefits and has the power to order the payment of benefits. This, in turn, is the right rule: it does not make sense to have a defendant to such a claim be anyone other than the party that could have, but declined to, pay the benefits, as any other defendants are, in that circumstance, being sued for an action they did not take and had no control over.
Should the DOL Further Regulate Derisking?
You know, I was just going to tweet about this article, but I realized I had too much to say on this to be limited to 140 characters (I always have too much to say to be limited to 140 characters, but I often cut myself off at that number anyway, or else I could never tweet). The article, “Proposed derisking regs called burdensome,” reports on the ERISA Advisory Council’s recommendations that the DOL regulate derisking and, in particular, declare the decision to do so a fiduciary act. I find it hard to accept the premise that regulating the derisking process is overly burdensome, and, particularly in the realm of pension plans, which are already highly regulated, perhaps it is time to retire the constant complaint that a regulatory initiative is burdensome and should not be pursued for that reason, except in circumstances where someone is actually willing to put forth the effort of explaining how the benefits of the regulatory activity are outweighed by specific, identifiable burdens and costs. Simply complaining about being subject to regulation, which is all that this particular, unspecified complaint boils down to, should not be enough to even warrant the serious consideration of serious people.
Derisking is unquestionably a serious activity being pursued by very serious and big money players, both on the vendor side and on the sponsor side. It likewise has clear and serious risks and benefits to numerous plan participants. It further has a momentum at this point that is approaching, if it hasn’t already exceeded, escape velocity. It is not overly burdensome, nor even unreasonable, to make sure that a reasonable regulatory framework for the activity, intended to ensure that participants come out fine in the process, is in place. And with regard to the question of whether it should be deemed a fiduciary activity, I defer to a very senior in-house lawyer with a major plan sponsor, who, in a talk I attended recently, asserted that fiduciary obligations already require, or if not should require, sponsors to fully consider the risks and benefits to the participants, and not just to the sponsor, before deciding to derisk.
AAA Arbitrations Now Include an Appeal Process for Complex Commercial Disputes
Years of experience litigating in the federal courts on the one hand, and arbitrating before the AAA on the other, have left me skeptical of the idea that arbitration is somehow preferable to the courts for resolving complex business disputes. My own experience is that, for those types of cases, arbitration is often not less expensive, seldom faster, and less likely to result in an accurate result (if you define accurate as a result roughly within the bell curve of possible results that an objective observer might forecast for a case). I discussed these issues in detail here, here and here in the past.
One of the bigger concerns I have discussed in the past is the risk of parties just assuming that arbitration is a better forum for a complex business dispute, rather than carefully considering in advance whether or not it is the better forum for their particular dispute and, even more importantly, for the factual and legal arguments they intend to advance. One of the important points I have discussed in the past is that a company and its counsel should carefully consider whether the strength of their position lies in legal arguments or instead in factual ones before electing arbitration, because it is a mistake to forego appellate review when your best arguments are legal. Arbitration panels themselves too frequently get the law wrong or reach incorrect results in cases where a complex or novel legal issue is outcome determinative, for a number of reasons, including an inherent tendency (for a number of reasons) to be more fact driven in their decision making than law driven. As those of you who practice in this area already know, appellate review of arbitration rulings by the courts is extremely limited and unlikely to overturn an award based simply on a glaring error in legal analysis by the arbitration panel, even though that is exactly the type of situation in which an appeals court would freely overrule a trial judge.
Now, the AAA is offering an appellate stage for complex commercial arbitrations, which will go far, at least on paper, towards addressing this problem. While it may not be preferable to going to court and having full appellate review by a federal circuit bench or state supreme court, it will at least allow the parties the opportunity to brief, address and possibly remedy legal errors by an arbitration panel. The devil, of course, will be in the details, but this is a promising step towards making the promise of arbitration – faster and less expensive but accurate dispute resolution – align with the reality.
Putting Limits on Patent Trolling: An Infringement Litigator's Perspective
The whole question of patent trolling, and the concern over it, is an issue that has gnawed at me for some time, having defended small companies against patent infringement claims by competing manufacturers and having prosecuted licensing disputes on behalf of non-manufacturing, but inventive, patent holders. My latest bugaboo on this topic is the massive patent infringement lawsuit launched by patent holding entity Rockstar against Google, and the continuing effort by state Attorney Generals to crack down on entities deemed by those offices to be trolls. What bothers me, at the end of the day, is the promiscuous use of the term patent troll, and the underlying – and somewhat Orwellian – extent to which the term is clearly thrown into the lexicon to create a negative impression of non-manufacturing patent holders who seek to enforce their rights. Certainly, there are some patent holding entities, and their accompanying lawyers, who are basically in the business of simply suing on patents to collect licensing revenue or damages. This does not, however, mean that it is fair or appropriate to call all patent holders who do not manufacture or sell in the market trolls, or to treat all such entities as somehow entitled to less than the full protection of the patent laws. Many of us have experience with university patent holders, or have worked –as I have– with inventors whose very purpose is to invent and patent a product, to thereafter license it (hopefully); sometimes these types of patent holders are never able to find a market for their product, and thus their invention is never manufactured, but this should not deprive them later of their right to damages if, years down the road, a company sells a product that infringes on one of their patents.
The Rockstar lawsuit is another perfect example. I was not the first (I suspect) and will probably not be the last to refer to IP litigation between two competitors in the marketplace as the continuation of business by other means and, frankly, I am not sure there is anything wrong with that. The big players are big boys, and if they want to invest a fortune in legal fees to attack their marketplace rivals in that way, so be it. It doesn’t change the fact, though, that such a patent infringement dispute is only tangentially about invention, and much more about collecting damages or obtaining a competitive advantage in the marketplace.
So what do you do? Everyone who sues over a patent but doesn’t manufacture or sell a product can’t be – and clearly isn’t – a patent troll, nor deserves to be tarred with that smear, and yet we know that the sole value of some patents, and sole reason for the existence of some of their holders, is to sue those who do manufacture and sell (and who by doing so create a significant number of jobs, something not true of entities that exist solely to prosecute patent infringement claims).
To my mind, the answer is easy, and doesn’t even require any type of extensive change to the patent laws or the patent process. Instead, all that is necessary is to change the damages provisions of the patent laws: create some type of sliding scale of potential recovery that is inverse to the extent of manufacturing activity, selling activity, or effort to do so (even if unsuccessful) by the patent holder. It would be easy enough to create some sort of step in the litigation process – just as there is a Markman hearing, or preliminary injunction hearing, or a summary judgment proceeding – where the evidence on this could be submitted and a court could decide this issue and determine the extent of potential damages if and when the case were to go to trial. Alternatively, one could decide that, instead, this determination should be a jury question to be decided as part of the trial. Either way, though, you could seriously alter the incentives for trolling if you made the damages recoverable by patent holders dependent on the extent to which they themselves had tried to put the patented product or method into the marketplace.
Why Amara's Expansion of Remedies Matters Now, But Not So Much in the Long Term
My small group of dedicated twitter followers know I was live tweeting last week from ACI’s ERISA Litigation conference in New York, at least for the first day of the conference. Tweeting allowed me to pass along ideas from the speakers and my own thoughts on their points in real time, which was, frankly, a lot of fun for me (if you haven’t tried live tweeting from an event, you should; it turns being an attendee watching others speak on a topic into a much more interactive and engaged experience). At the same time, though, its fair to say that many of the topics discussed by the panelists, and many of my own thoughts on those topics, don’t neatly fit within 140 characters, so I thought I would post some more detailed take aways from the conference, starting today.
One of the things that jumped out at me at the conference was the fact that the ERISA defense bar has clearly coalesced around the idea that Amara is a bad thing and that the expansion of equitable remedies set into motion by that opinion is objectionable. Even though I am, at least 80% of the time, a member of that defense bar, I think that’s a bit harsh and an overreaction. It does not strike me that the consensus defense bar view articulates a particularly substantial argument for why the Court was wrong to expand that remedy. At the end of the day, most of that remedial expansion – in the forms of reformation, estoppel and surcharge – is directed at only one phenomenon, which is the circumstance in which there is a disjunct between what a plan actually says and what is communicated to plan participants through summary plan descriptions, human resources employees, or other sources (though I have no illusions that participants and their lawyers won’t find ways to try to extend those remedies to other types of circumstances as well). To the extent that employees can show actual harm to them from that error (and by this I do not mean just being deprived of some legal right under ERISA or some hypothetical opportunity to act in response to learning the correct information, but rather some showing of actual concrete out of pocket loss to them), there is no reason they should be without a remedy, and the expansion of remedies in Amara prevents that otherwise all too common outcome.
As one of the prominent in-house attorneys speaking at the conference noted, the nature of ERISA is that the bar for proper performance by plan sponsors and administrators keeps rising, and that is as it should be: one panelist made the point that what is a best practice today in running a plan, will simply be the standard practice that must be lived up to tomorrow. This is all that Amara’s targeting of communication errors by imposing equitable remedies for them will really do in the end: make accurate participant communications a crucially important part of running a plan. As plan administrators raise their game in this regard (making what is today a best practice the standard in this regard in the future), these remedies and the Amara decision itself will become relatively unimportant, and people will come to wonder why there was so much defense bar hue and cry over Amara in the first place.
Cyber Insurance for Cyber Risks
I have maintained a healthy interest in cybercrimes, cyber risks and related liability exposures, for at least two reasons central to the topics of this blog. The first is that, other than credit card companies, probably no one holds more protected personal information than the entities involved with ERISA plans, from health insurers to mutual fund companies to plan sponsors to record keepers. The second is that, from an insurance coverage perspective, developments in this area echo – more than vaguely even if less than resoundingly – the impact on insureds and on the insurance industry of the expansion of environmental liabilities approximately thirty years ago. Then, as now, you had the sudden creation of new potential liabilities – in that case, environmental exposures – that were not foreseen and taken into account by insurers in setting premiums, followed, in short order, by two developments: first, litigation over whether the exposures should be covered under previously issued policies that were not necessarily underwritten in a manner that would account for those risks and then, second, by the industry altering forms and policy language (such as the wording of pollution exclusions and the increased use of the claims made form) in reaction to those events.
You can see the beginnings of exactly those same events now, with regard to the rise of liability for cyber-crimes and related computer security breaches, as insureds, insurers and their coverage lawyers debate the extent to which standard general liability policy language captures or instead excludes those risks, while at the same time the industry develops products and policy language to respond to those exposures. A colleague and I presented this exact theory, as a lens for understanding the insurance coverage issues raised by cyber liabilities, in a major presentation last year, which is captured in this PowerPoint presentation.
I thought of this today, as I read this article pressing the idea that courts will be expanding the liabilities imposed on corporations for data and similar breaches. If the author is right, both the amount of insurance coverage litigation over coverage for cyber liabilities and the creation of new policy language by the insurance industry to deal with the issue will expand hand in hand with that development, in the same way both moved in tandem with the increase in environmental liabilities thirty years ago.
Thoughts on Oral Argument in Heimeshoff v. Hartford Life & Accident Insurance Co.
Well, the oral argument in Heimeshoff v. Hartford Life & Accident Insurance Co. is fascinating, in that the Court’s questioning and counsels’ argument all focus on practicalities, in the sense of when should the time period run and how, and when, will any particular rule actually impact, in a negative way, either the plan administrator or the participant. Much of the discussion circles around the fact that, no matter how few times it happens, we really cannot have a system that could bar the courthouse door to a participant who is waiting for an administrator to conclude the internal appeal process before suing, by having the statute of limitations expire while waiting. At the same time, as the Justices’ questioning makes clear, there are a number of ways to go after that problem, running from Department of Labor regulatory efforts that would preclude that outcome by means of its detailed claims processing regulations, to courts applying tolling and estoppel doctrines to prevent such an egregious outcome.
I don’t know, but it seems to me it is easier just to have a bright line rule which would effectively preclude that outlier event once and for all, and the Court has the opportunity to put that into place right now. Of course, past experience with Supreme Court opinions on ERISA demonstrate the old adage that “no good deed goes unpunished,” or perhaps instead the adage that “the road to perdition is paved with good intentions,” in that every Supreme Court decision on one particular issue under ERISA seems to open up a Pandora’s box of other issues under ERISA, that then get litigated throughout the lower courts for many years thereafter (this last sentence, by the way, may set a personal record for mixing metaphors and assimilating similes in a single sentence of a blog post). Of course, that is also one of the things that makes this the most interesting of practice areas.
Opening Up the Courthouse Door: The Second Circuit Weighs in on Exhaustion of Administrative Remedies
If one theme has emerged from my numerous blog posts over the last seven years and across the various articles I have written on ERISA litigation during that time span, it is the centrality of operational competence in sponsoring and administering ERISA plans. I have, for instance, often argued that, when it comes to ERISA litigation, the best offense for plan sponsors and company officers is a good defense, in the form of what I have taken to calling defensive plan building; defensive plan building is the idea that taking careful and precise steps in building out, and then running, pensions, 401(k)s, ESOPs, and other plans creates the optimal environment for defending against lawsuits down the road related to those plans. When one can document a careful process for selecting vendors, for picking funds, for the fees attached to plans, for the handling of float income, and for all the other myriad choices that must be made with regard to how a plan will operate, it becomes relatively easy to defend fiduciaries and company officers alleged to be fiduciaries against breach of fiduciary duty actions, because these types of documents and steps demonstrate a prudent process.
Likewise, there has been a clear trend in the case law over those years, directly reflected in my posts and writings, towards the loosening of the procedural and substantive advantages held by plans, sponsors and fiduciaries. These shifts run from the subtle – such as a tendency for courts to now look much more closely at medical evidence in benefit cases, even where arbitrary and capricious review applies – to the bold, such as the Supreme Court’s expansion of equitable remedies in Amara. All of these shifts have this in common: they decrease the likelihood of a fiduciary or sponsor winning early in a case on procedural grounds, and increase the likelihood that a court will eventually reach the merits of a claim. Excessive fee litigation provides a ready example, as we have shifted, in just a few years, from early and relatively easy procedural victories for defendants in those types of cases to substantial settlements and the occasional outright trial victory for participants. What does this have to do with operational competency in operating a plan? It makes competency in running the plan ever more important, because it increases the likelihood that a court will someday consider the merits in a lawsuit targeting those actions, rather than the case ending, as it often would have in the past, at an early point in the litigation on procedural or highly technical grounds.
My latest published article, “Opening Up the Courthouse Door: The Second Circuit
Weighs in on Exhaustion of Administrative Remedies,” addresses this idea in another context, namely the weakening, in a recent Second Circuit opinion, of the requirement of administrative exhaustion as a defense against ERISA actions. As I discussed in the article, for many years, this defense was a solid bulwark against many ERISA claims, one that could often stop a suit long before the parties or the court would get to the merits of an action. Indeed, historically, participants who tried to argue their way around this requirement rarely succeeded. The Second Circuit, however, as I discuss in the article, substantially weakened that defense and opened up a new line of attack for participants faced with the claim that they had not exhausted their administrative remedies before the plan administrator. As I discuss in the article, it is yet another example of courts making it easier for participants to prosecute ERISA claims and, in particular, to leapfrog the type of early procedural defenses that defendants used to be able to use to stop many such claims in their tracks at a very early stage. Anything that makes it easier for participants to get the merits of a lawsuit in front of a court increases the importance of competence in running the plan, because it is the level of operational competence that will be on trial once a court gets to the merits of an action.
A Called Shot: Mangiero Predicted the Public Pension Crisis 6 Years Ago
Last week, Thomas Clark was kind enough to point out in his FRA PlanTools blog that, in a series of posts and an article a few years back, I had guessed right on the future of excessive fee litigation in the courts. At the same time that he was writing that post, I was in the midst of what I have now come to call “public pensions week” on this blog, in which I put up a series of posts on that problem, which is on everyone’s front burner and the cover of media from the NY Times to Rolling Stone.
Now it is my turn to point out some very educated and well-informed prognosticating, this time by Susan Mangiero, who writes the Pension Risk Matters blog. Susan predicted the current spate of public pension problems, and the nature of the on-going debate over them, in a post six years ago. As she explained then, the question to be played out was whether, and how, governments – read taxpayers – would continue to fund public pensions at their prescribed benefit levels, or whether benefits would end up being cut. As she cleverly put it way back in 2006, “Is a modern Boston Tea Party soon to come? Will taxpayers say "enough" to what they perceive as generous municipal pensions while they struggle to save?”
This is, of course, in a nut shell exactly what the public pension crisis is today. The pensions are underfunded, and the question is whether the taxpayers will be forced to make up the difference or whether, instead, the participants will be forced to take a haircut. Susan was right on the money way back then in predicting the problem, so perhaps we should heed her thoughts then on what the outcome of this dilemma might be – as Susan said then about how this may play out, “How will politicians respond? After all, grumpy taxpayers tend to vote.”