Halo v. Yale, the Second Circuit, Hamilton and Sideways Challenges to the Scope of Discretionary Review
In the musical Hamilton, everyone from Aaron Burr to Hamilton’s wife, Eliza, asks why Hamilton always “writes like he’s running out of time,” and the lyrics assign various pop psychology rationales to his urgency. This morning, though, after listening to the soundtrack again, I realized the real reason – he’s a lawyer! He’s always on deadline and running out of time!
Me too, which is why I haven’t had time to post regularly lately, but, between all the briefing and court hearings, I have been reading everything that has crossed my desk, making note of a number of recent decisions that I wanted to comment on. Interestingly though, the luxury of waiting to write on them – not of my choosing, but nonetheless – has allowed time for a theme to emerge, and it is this: we are seeing a series of cases coming out of major courts that are aggressively pushing back against the unbridled assertion of broad discretion by plan administrators operating under a grant of discretion. For years, commentators have argued that the breadth of discretionary review was excessive, and even many judges, while broadly applying that scope of review, have commented in dicta that the extent of that scope should be revisited by higher tribunals or Congress. I myself have, time and again, while winning cases on behalf of administrators, fiduciaries and sponsors, had the experience of judges ruling in favor of my clients noting at the same time that their figurative hands were figuratively tied by circuit and Supreme Court jurisprudence, and on occasion commenting that the claimant’s complaints in that regard were more properly addressed to Congress than to a district court judge.
But, to continue the Hamilton references, for every action there is an equal and opposite reaction. In Hamilton, Thomas Jefferson uses this law of physics to explain the breaking up into factions of George Washington’s cabinet. Here, though, I think it holds true as well as an explanation for a series of recent decisions that have placed some checks on the freedom of action of plan administrators operating under grants of discretion. Over time, in reaction to the evidentiary and substantive benefits granted to plans and their administrators by discretionary review, and in response to clever arguments made over the course of years by lawyers for participants seeking to undermine discretionary review, courts have begun developing doctrines that reign in, to a certain degree, the advantages granted to administrators by a discretionary grant. For the most part, these are not direct restrictions on the exercise of discretion itself, but instead consist of challenges to the applicability at all of discretion, such as in the form of decisions holding plan administrators to strict compliance with technical requirements of claims handling upon pain of losing the benefits granted them by discretionary review.
An excellent example of this phenomenon is the Second Circuit’s recent decision in Halo v. Yale Health Plan, Dir. of Benefits & Records Yale University, which addressed the impact on discretionary review of an administrator’s failure to strictly comply with the claims handling regulations of the Department of Labor, and which held that non-compliance could forfeit a grant of discretion. The Court held that “when denying a claim for benefits, a plan's failure to comply with the Department of Labor's claims-procedure regulation, 29 C.F.R. § 2560.503–1, will result in that claim being reviewed de novo in federal court, unless the plan has otherwise established procedures in full conformity with the regulation and can show that its failure to comply with the claims-procedure regulation in the processing of a particular claim was inadvertent and harmless. Moreover, the plan ‘bears the burden of proof on this issue since the party claiming deferential review should prove the predicate that justifies it.’”
This theme – of sideways, rather than frontal, attacks on the application of discretionary review – has cropped up in a number of recent decisions. With any luck, if I don’t run out of time, I will comment on those decisions and how they fit in this theme in upcoming posts.
A Brief but Reasonably Thorough Intro to the New Fiduciary Standard Being Issued Today
Crazy busy today, but – like someone on the highway slowing down to look at a wreck in the opposite lane even though it is an unnecessary distraction – I of course can’t help but read all the commentary on the new fiduciary rule due out of the DOL today. So for fun – and to distract me from the work I should be doing – I have compiled my favorite stories on it, along with a brief comment or two on each one, below:
• I was basically clickbaited by the headline of this article in the Washington Post into burning one of my free articles for the month to read it, only to basically be told that the rule means that “brokers selling investments to retirement savers would be required to put the client’s interest ahead of their own.” Ehh – if you read this blog, you probably already knew that. Still, it’s a good and readable thirty thousand foot view of the forest, without much specificity.
• If you want to see more of the trees – to continue my forest analogy – I really liked this story in planadvisor, which details the DOL’s explanation for how the rule has been changed to account for industry concerns.
• If you really want to delve down into the trees, here’s the DOL’s fact sheet explaining how it changed the rule to accommodate concerns raised by the industry. I have two thoughts on this fact sheet. First, my internal (and always close to the surface) cynic immediately thought “me thinks you protest too much,” making this big an argument demonstrating how you met your opponents’ concerns. Second, the good governance doobie in me, who resides only slightly below my internal cynic, thought this is exactly what a government agency and regulator should do: listen to affected parties, account for their concerns, address the problems, and explain what was done in response.
• That said, the DOL’s fact sheet on the new rule itself is excellent, and provides real detail on key issues such as the impact of providing financial information to consumers and the best interest exemption.
• And finally for now, I really like Pensions & Investments’ article on it this morning, “Final fiduciary rule exempts plan sponsor education.” Although the title would lead you to believe it is only about the education part of the rule, and the fact that – happily – it will not trigger fiduciary status under the new rule, its actually a very good overview of the key issues in play with the issuance of the new rule today.
The rule comes out later today, but the stories and fact sheets above should give you a thorough preview.
12th National Forum on ERISA Litigation - View From the Bench
As many of you know, I have spoken at ACI’s ERISA Litigation Conferences over the years on topics as diverse as legal ethics in the context of ERISA litigation, ERISA remedies, discovery issues and fiduciary governance, among other topics. I have always been a fan, though, of the judicial panels at the conferences, where – much as the name suggests – panels of federal judges discuss topics of importance to ERISA litigators. I have never left one of those panels without useful information that I have promptly put to work. I will give you one example. Over the past few years, I have been litigating a case with significant issues concerning spoliation of electronically stored information, a topic which has been discussed extensively at the panels. One question I asked from the audience a couple of years ago on the topic led to further discussions after the panel, in the lobby of the hotel where the conference was staged, with a federal magistrate judge on the topic. All of that insight animated my strategy with regard to my spoliation case over the years.
Because I like those panels so much, I have been agitating with the conference organizers for years to give me the keys to one of the judicial panels, in the guise of being offered the opportunity to moderate the panel at an upcoming conference. My entreaties were finally heard, and I will be moderating the presentation by the judicial panel at ACI’s West Coast installment of its ERISA litigation conference in June.
You can find information on the conference here, but of perhaps even more value in the short run, you can also get a reduced rate for the conference, by calling ACI at 212-352-3220 ex. 5511 or emailing Joe Gallagher at ACI before the close of business on Tuesday March 29th and mentioning my name. Hope to see you there and, by all means, if you are a reader, be sure to say hello and introduce yourself.
Gobeille v. Liberty Mutual Insurance Company: The Interesting Things Are in the Concurrences and the Dissent
So, anyone besides me remember that great scene in 48 Hours where Luther goes to pick up a car at a parking garage where it was left years before, and responds to the cashier’s comment about how long its been by shouting “I’ve been busy!”? I always think of that when I get so busy that my blogging falls behind. You know that Supreme Court decision on preemption, Gobeille v. Liberty Mutual Insurance Company, that has been out for a few weeks but I haven’t written on yet? Well, I’ve been busy!
That said, though, one of the beneficial side effects has been that I have been mulling over the opinion for a couple of weeks now without putting finger to keyboard to discuss it, and I have found that my thoughts about it have become more nuanced than they would have been if I had been able to write about it after first reading it. At that point, my thoughts would have probably run along the lines of everything else that has been written about it, which have tended to be that here’s a case that reaffirms the strength of preemption, which is pretty much what everyone else has said about it (although Professor Secunda, the former workplace prof, did tweet a different response to the opinion, to the effect that the justices are just plain wrong about the scope of preemption).
To a certain extent, that original consensus about the opinion (that it reaffirms and demonstrates the strength of ERISA preemption) is, in fact, correct, but it also created a sort of bored response to the opinion, something perfectly captured by this prominent blogger’s post on the decision, with its “I am so bored, how many times have I seen this before” tone. And the ennui in response to the opinion is not surprising – I think almost everyone believed that ERISA preemption applied here and that the Supreme Court would reach that conclusion, as it did.
But to me there is something more interesting buried in the backdrop and in the cluttered collection of opinions that make up the decision. First off, there is no question that, for present purposes, the decision drives home the power of ERISA preemption and, in fact, reinvigorates it. The majority opinion provides what might best be described as a taxonomy of ERISA preemption doctrines, and every good defense lawyer should be able to find a foundation for a claim of ERISA preemption in that taxonomy for almost any state law claim made against a plan.
But what’s interesting to me is that three justices – Thomas, Ginsburg and Sotomayor – in two different opinions (one concurring and one dissenting) wrote independently to suggest that ERISA preemption has gone off the rails and either may not be (in Thomas’ view) or is not (in the view of the other two justices) as broad as the majority opinion insists, or as broad and sweeping as most ERISA litigators argue. Both opinions, in fact, give guideposts to litigators for arguing in the future against preemption, with Thomas, in fact, seemingly inviting someone, somewhere to attack the very constitutional foundation of applying ERISA preemption to the extent that it has been traditionally applied.
I will be curious to see whether, five years or so down the road, we look back and view Gobeille as some sort of high water mark with regard to the strength and power of claims of ERISA preemption, and come – with the benefit of hindsight – to see the differing but sustained attack by Thomas, Ginsburg and Sotomayor in Gobeille on the scope of ERISA preemption as the beginning salvo in a gradual scaling back of the scope of ERISA preemption.
What Would Alexander Hamilton Say About Excessive Fees in 401(k) Plans?
Oceans rise, empires fall . . . This line from the musical Hamilton has been ringing in my ears for a few days now, since I saw the show on Broadway last week. There is just something about that particular line and the music beneath it that has kept it on constant repeat in my head as I have returned to work.
As it turns out, though, that line is a perfect fit for the topics discussed by Chris Carosa of Fiduciary News in this great article on the increased attention being paid by fiduciaries to the risks posed by excessive fees in 401(k) plans. As Chris explains, with the help of a very astute group of observers who are quoted in the article, the perfect storm of years of excessive fee class actions, the Supreme Court deciding Tibble, media coverage of large settlements of excessive fee claims, and mandated fee disclosure by regulatory fiat, have combined to make plan fiduciaries highly focused on the costs of their plans.
And so what does all this have to do with Hamilton, and the line “Oceans rise, empires fall?” You know those vast empires of wealth that have been built across the retirement industry by taking large fees out of 401(k) plans? That empire’s fallen. Making a lot of money out of servicing 401(k) assets is now going to have to come from doing a better job, not from charging more for the same job. There’s just too much risk in it for plan fiduciaries if they allow people to keep making a lot of money simply by charging a lot of fees to place or hold retirement assets, without providing additional benefit that warrants additional fees.
Although the real point of this post today is to, one, have some fun with the lyrics of Hamilton and, two, pass along an article that you should definitely read if you are interested in the question of fees in 401(k) plans, I also wanted to mention a broader point. If you have been a long time reader of this blog, you have actually seen this issue building up in exactly the way that Chris presents it in his article. Blog posts I have written, articles discussed in this blog and judicial decisions analyzed in this blog have covered this issue from its early days and, if you were to sit down and read them all now, reflect exactly the development that Chris discusses in the article: namely, the slow but eventually dramatic transition of the issue from an outlier about which no one – including often the courts – gave much thought, to a central aspect of ERISA jurisprudence and practice. You can actually see this illustrated in shorthand in just two posts, just by noting how the issue went, over the course of only a few years, from an issue that, as I discussed in this article back in 2011, was roundly rejected by the courts to one that, only four years later, the Supreme Court was discussing in Tibble.
Thoughts on the World's Simplest ERISA Decision: Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan
Interestingly enough, the Supreme Court’s decision last week in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan is about the least complicated ERISA decision any court has issued in years. You know how I know that? The number of posts, tweets and articles published within days by law firms and others addressing it: there were so many, it could not have been a complicated decision to make sense of (for what its worth, I am partial to this post summing up the decision).
And it really isn’t, although partly that is because at this point we all have seen and digested a number of decisions, including out of the Supreme Court, addressing the odd question under ERISA of when a plan administrator can recoup monies from a participant, particularly out of a settlement fund paid to a participant. In Montanile, the plan had paid for the participant’s medical care; the participant thereafter received a settlement in a case he brought over the accident in which he was injured and that gave rise to the need for that medical care; the plan sought reimbursement of the amounts it paid for his medical bills from the settlement; and the participant refused to reimburse the plan and instead went out and spent all the money before the plan could get reimbursed. The Supreme Court, following its prior case law on equitable tracing in this type of a scenario, concluded that the plan was not entitled to reimbursement, because the general assets of the participant were the only funds available from which reimbursement could be obtained and reimbursement could not be obtained out of a dedicated settlement fund traceable to the settlement of the claim.
This outcome must seem silly to lawyers who practice personal injury law and are used to having to pay off workers compensation and other liens out of a settlement, but in the context of ERISA, it’s the natural outcome of the road taken by the Supreme Court in earlier cases in evaluating such claims, where it found that reimbursement constituted equitable relief for purposes of ERISA where the pot of money from which reimbursement was sought was independent of and segregated from the participant’s general assets; the natural corollary to that holding is the holding of Montanile, which is that, in turn, reimbursement isn’t available where there is no such independent fund, because this would mean that reimbursement would have had to come out of other funds and accounts held by the participant, which is not allowed.
I have three points that I want to emphasize about the decision in Montanile. First, as Mike Reilly hinted at in Boom, his blog on ERISA litigation, the practical impact of this decision is simple: if you are a plan administrator, never sit on your hands and instead pursue reimbursement before the participant can squander the settlement fund. This may mean, for instance, bringing an immediate action for reimbursement just as soon as the participant brings suit against a tortfeasor or starts discussing settlement with a tortfeasor, and may require seeking to have a constructive trust placed over the settlement fund -or other equitable relief preventing the dissipation of the settlement fund - until resolution of the plan administrator’s claim for reimbursement. This would maintain the sanctity of the independent settlement fund, from which reimbursement could be enforced, and preclude it from being intermingled with other assets or otherwise dissipated in a manner that would preclude a plan administrator from enforcing a right of reimbursement.
Second, in dissent, Justice Ginsburg pointed out that the decision was correct but, in layman’s terms, silly. (She didn’t actually say it was silly, and instead used fancy legal terminology to make the same point). Justice Ginsburg was driving at the fact that, as noted above, the Court’s ruling is the natural outcome of following prior precedent in this area of the law (namely, concerning equitable relief under ERISA), but that doing so results in the imposition of the wrong rule, one that can only serve to create (unearned) windfalls for participants, increased litigation costs for plan sponsors and administrators who now have to act aggressively through the court system to obtain reimbursement, and increased benefit costs as a result of sticking plans with health care costs that rightly should have been the responsibility of a tortfeasor (and yes, I know that the tortfeasor still ends up paying for them in this scenario when the case is settled, but the fact that those medical costs never get from the tortfeasor to the administrator – and instead get spent by the participant - means that the plan still ends up with health costs it should never have had to bear).
And the third is a personal note, something of which I am very proud but that only true ERISA geeks have understood in the past when I have discussed it. My bio on the firms’ web page, like most experienced lawyers’ web bios, has what I have come to call a humblebrag wall, where a representative sample of cases I have handled is discussed. Like me, you have probably noted over the years that these listings always describe successful outcomes as “representative” examples of the lawyer’s good work over the years, and never seem to include cases that went south on the lawyer. I am no different, and certainly plead guilty to that. But if you look at my representative past ERISA engagements, you will see that one of them is described as “Represented the retired general counsel of a publicly traded financial and insurance company in a dispute concerning claims for reimbursement of excessive pension payments due to company errors in calculation of benefits combined with dispute over interpretation of relevant plan terms.” This was many years ago, and I convinced the plan sponsor to give up on the demand for reimbursement by arguing that the funds had long since been spent or intermingled with other, general assets of the beneficiary, and that the natural outgrowth of the law on reimbursement under ERISA as it existed at that time had to be that there was no legal right on the part of the plan sponsor to enforce reimbursement in the courts under that circumstance. The Court’s opinion in Montanile makes clear, these many years later, that we were always right on this point, and that’s a very satisfying thing.
What Is the Value Added of an Insurance Broker?
What does an insurance broker do, anyway? Many people – even those who run businesses – think of them as simply people who help them place their insurance, and then they forget about them once that annual ritual is finished. But its not quite that simple, and companies who approach risk management from that perspective are both shortchanging themselves and underestimating what their brokers can bring to the table.
I mention this because most think the value added of brokers comes in trying to pin down the nature of a client’s exposures and then proceeding to try to sell that into the marketplace at the lowest price possible. That’s certainly front and center of what a good broker does. But those of us who have worked with insurers, policyholders and brokers for years know that they often bring hidden, more substantial benefits to the table. This article, on Aon’s general counsel, provides a perfect example. While in some ways it’s a personality profile of a prominent in-house lawyer, buried in it is something more important: the story of a reinsurance product that Aon created with Lloyds to bring immediate reinsurance capacity to Aon’s clients. That’s a meaningful value added, and the type of thing that, behind the scenes, a strong broker can bring to a relationship with a policyholder.
Thoughts on Kaplan v. Saint Peter's Healthcare System and the Church Plan Exemption
Remember the Church Lady from Saturday Night Live? I have always wondered if she was covered by an ERISA governed retirement plan, or whether her retirement plan was exempt from ERISA as a church plan. I think the answer probably lies in the question of whether her retirement benefits were established and maintained by NBC, or instead directly by her church. I always thought SNL should do a skit on this topic; Chevy Chase would have been hysterical portraying the head of EBSA.
It’s a silly hypothetical, but its an interesting way to think about the Third Circuit’s recent decision in Kaplan v. Saint Peter’s Healthcare System, which is the first appellate decision addressing the recent wave of lawsuits claiming that a number of pension plans that always considered themselves exempt from ERISA on the grounds that they were church plans are, in fact, not church plans and instead are subject to ERISA. The Third Circuit found that such an exemption can only be claimed when the plan was directly established by a church itself, and not by an organization associated with a church. Although the Third Circuit buttressed its interpretation of the language of the exemption itself with other grounds for its ruling, the central aspect of its decision turned on the actual statutory phrasing of the exemption. This focus on the language used in the statute makes the Court’s decision seem straightforward, but it really isn’t; in fact, as the Third Circuit’s decision reflects, the IRS itself has interpreted that same language quite differently for many years.
The Third Circuit’s opinion is a great read, and very persuasive. And yet in some ways, while very compelling, it reads almost as much as a political document – in the sense of being written to persuade an audience – as it does as an inevitable outcome of sharp legal reasoning (which it clearly is as well). The Court provides a very plausible interpretation of the statutory language itself, but if that analysis stood alone, segregated from the supporting arguments relied on by the Court for its interpretation of the church plan exemption that are based on canons of statutory interpretation, on legislative history and on the public policy behind ERISA, that analysis would not be half as persuasive. The proper interpretation of the language in the exemption itself has been hotly disputed in the courts for a simple reason: the language doesn’t perfectly fit either the findings of the Third Circuit, nor those of the courts and parties who argue that the exemption applies more broadly than the Third Circuit found. But the Third Circuit, by buttressing its interpretation with very persuasive arguments that statements in the legislative record and the purposes of ERISA itself support its reading of the church plan exemption, created a heuristic environment in which the panel’s reading of the exemption seems almost inevitable, and in fact practically preordained (get it?).
And yet every student of the political process or experienced appellate lawyer knows that the only thing more malleable than canons of statutory interpretation is legislative history itself. As a result, despite the beautiful, almost cathedral like construction (hope you are enjoying the sustained metaphor as much as I am) of the Third Circuit’s opinion, I am not sold that it is the final word on the question, and would not be surprised at all if one or more other circuits came to an opposite conclusion. I have little doubt that another appellate panel, confronted by the same unclear statutory language, could find support in both legislative history and the public policy underlying ERISA for an entirely opposite interpretation of the exemption.
Another Case Showing That You Should Not Assume That Your Plan Provider Is a Fiduciary
Okay, so law blogging evangelist and reformed trial lawyer Kevin O’Keefe is advocating for shorter, more frequent blog posts, and I read his short post on that while I was in the middle of writing a long post for this blog, hopefully to go up tomorrow, on the Third Circuit’s recent opinion on the church plan exemption under ERISA. Amusingly, right when I read Kevin’s post, I had just tweeted a quick one liner on this article – “Court Rejects Excessive Fee Claims Against Principal” - from planadviser about an Eighth Circuit decision that illustrates an important point I often make: service providers to plans employ armies of lawyers whose job is to make sure that their contractual relationships with plan sponsors do not turn them into fiduciaries. Time after time, I find that plan sponsors assume their providers are fiduciaries, but we all know that time after time, they are not, and moreover, that plan sponsors often don’t learn this until a court, during a lawsuit, lets the service provider off the hook on the ground that the service provider is not a fiduciary. This article, and the Eighth Circuit decision it discusses, illustrates this phenomenon perfectly. So I am passing it along, as part of a short post written solely for that purpose, just as Kevin suggested.
Bell v. Anthem, Excessive Fee Cases, and the Economics of Settlement
Actuary and blogger John Lowell has a strong post today on the latest high profile excessive fee case filed involving a 401(k) plan, Bell v. Anthem. I will let you read it yourself for the details, but he asks some interesting questions. In one of them, John discusses the borderline nature, at least as it appears at this point, of the claim that the plan could have and should have used lower cost investments. John’s view is that the allegations depict only a minimal difference between the fees actually charged and what, in a perfect world, the fiduciaries might have obtained. John asks if that should be enough to charge the plan’s fiduciaries with a fiduciary breach, asking whether the fiduciaries, even on the allegations, were so close in keeping a lid on fees that they should not be liable for failing to have been, in effect, actually perfect in putting together the investment options for the plan. And the answer to John’s question is that, in fact, the fiduciaries should not be found liable for a fiduciary breach if their process was strong, the plan was well run, the investment options were well investigated, but nonetheless the plan ended up with some investment choices that were marginally more expensive than, in a perfect world, they might have been. As in most things, though, the devil is in the details: to avoid fiduciary liability based on even a relatively small bump up in expense above what was optimal (and remember that, in such a large plan, even a small amount of excess fees, multiplied across the entire plan, add up quickly), the fiduciaries will have to prove those points on the actual record, and we don’t know yet whether they can.
But this in turn leads to another problem for the fiduciaries (or perhaps more realistically, from a realpolitik perspective, for the plan sponsor and/or the plan’s insurers), which is whether the total amount at risk, given the size of the plan, is simply too much for the fiduciaries to ever risk a summary judgment ruling or, even more so, a trial, either one of which could be the final step before an assessment of damages if the plaintiffs are able to demonstrate a fiduciary breach (i.e., that the process had some flaws which resulted in higher than necessary fees) at either the summary judgment stage or a trial. I have discussed elsewhere that some of the large dollar excessive fee settlements that we have seen to date reflect simply defendants buying out the risk of having a large verdict imposed after trial for only a few cents on the dollar, even if those cents add up to millions in settlement. In essence, for a very large plan, the potential exposure if fees are found to be excessive is so large that a settlement that looks large on paper is worth paying to avoid that possible large exposure. And that will be the issue in the Anthem case as well: is the exposure too big to risk a liability finding at some point in the case, requiring that the exposure instead be bought out for tens of millions of dollars, no matter how strong the argument that the fiduciaries did not commit a fiduciary breach?