Millions for Defense, Billions for Damages: State Street's Exposure
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Backdating. It’s a scandal. No, not that backdating. I mean when bloggers can’t get to something when it first comes up, and then go back in time to talk about it. That’s what I mean by backdating, and that’s what I am going to do today. Last week, I read, but didn’t have a chance to discuss here, this article from Bloomberg on the State Street Bank subprime losses and potential ERISA related exposure. The article was particularly interesting because it takes a tack someone different than most articles that, like this one, rely on lawyers to evaluate the litigation against State Street arising out of those events; most such articles focus on liability issues, the procedural defenses available to State Street under ERISA, and the defensive position that the company can assert. This article, though, asks and attempts to answer the million dollar - or in this case, more like the billion dollar - question of how much losing these cases will cost State Street. The numbers bandied about by well informed lawyers are staggering, even to the jaded eye.
The article rounds up the usual band of worthies to comment, including the Workplace Prof’s mild mannered alter ego, Paul Secunda, who tacks the eye popping number of “hundreds of millions to the billions” on State Street’s potential liability, and Boston ERISA lawyer Marcia Wagner, who noted that the plan administrators filing suit against State Street may have had no other options but to sue. To quote the article:
Wagner said fund managers hurt by the drop may have an obligation to sue as the existing plaintiffs have. “To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue,'' said the lawyer, who isn't representing the investment manager or plaintiffs. ``It's sue or be sued,'' she said. ``They allowed bad investments, so they should be attempting to make the plans whole.”
This echoes something I said in my last post on the State Street mess, in which I raised concerns about the fact that pension fund managers invested in the State Street products without properly understanding what they were buying. As I suggested in that post, administrators fall down on their own fiduciary obligations in such circumstances. As Wagner’s comment suggests, it may well be that the administrators’ fiduciary duties under those circumstances require them to then try to remedy their initial mistakes by suing to recover the losses, rather than compounding their own fiduciary breaches by simply absorbing the loss; that latter course of action would likely just make the administrators themselves targets for breach of fiduciary duty lawsuits based on their own mistakes in investing in the State Street funds.
LaRue, Auditing, and 401(k) Plans
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On various occasions on this blog I have tried to turn away from its understandable focus on legal issues and onto the real world consequences of the legal rulings that govern ERISA plans. In particular, I have a particular interest, because of the manner in which it impacts my clients, on what practices companies should follow to best protect themselves from potential exposure in the current - and in the ERISA world these days, ever changing - legal environment.
As a result, I took particular interest in this piece out of Legal Times today by an experienced accountant and employee benefit plan auditor on the practical auditing steps that should be taken to ensure proper operation of a 401(k) plan and to limit potential liability in the operation of such a plan. The author’s hook into this topic? The Supreme Court’s decision in LaRue, and the manner in which the opening of liability, at least in theory, by the case is best met by that hoary chestnut, best practices. More than that, though, the author details exactly what, on an operations level, should be part of those best practices.
Big Questions From A Small Story on a (Relatively) Small Loss
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Here’s a short newspaper story of a local municipal pension plan that suffered a $2.4 million loss to its pension fund, which is only about a $53 million fund, as a result of investments in subprime mortgage backed assets made either by State Street or in State Street funds (the article isn’t clear on the relationship between the pension plan and State Street, the current poster boy for breaching fiduciary duty by subprime investments). As the article points out, the pension plan has retained counsel to pursue State Street over the loss, on the theory that State Street did not adequately disclose the nature of the investments and the risk; this is pretty much par for the course for the various State Street subprime lawsuits being brought by pension and 401(k) plans, which essentially allege that volatile subprime related exposures were not disclosed but were instead contained within investment products sold as safe, conservative bond investments. Although dressed up to suit ERISA and breach of fiduciary duty issues, they can essentially be understand as highly gussied up bait and switch claims, in which retirement plan administrators and fiduciaries allege that they thought they were buying one thing from State Street - a conservative investment vehicle to balance out riskier investment allocations - but instead were sold something else, namely a highly volatile and risky exposure. State Street, of course, as the article reflects, views the cases otherwise, as instances in which the proper disclosure was made, but market downturns harmed the investments.
This whole scenario raises an interesting question, aside from whether it is the plaintiff administrators or instead State Street that is right, because no matter which one is correct in their interpretation of the events at issue, you still end up in the same place, which is that the plans signing off on these investments just plain didn’t know what they were buying. This is certainly the case if, as the plaintiff fund fiduciaries claim, they weren’t told the truth, but it is likely also the case if, as State Street claims, plan sponsors were told the truth and are now simply complaining about market outcomes; if it’s the later case, one can only assume that the sponsors didn’t understand the risk being taken when they signed up for the investment.
And this goes right back to the most important question of all here, which is what were the plan sponsors and fiduciaries doing when they were offering these investment options or making these investments themselves? This scenario speaks of poor investigation and over reliance on the investment provider, namely State Street, and suggests the plans themselves did not have proper processes, including independent administrators with the sophistication to analyze the investment choices and risks, in place for choosing investment options, prior to offering them to plan participants or investing the plans' funds directly. In this day and age, I think we are moving past the point of debating whether those types of processes are part of the fiduciary obligations of those running retirement plans.
And by the way, for the record, I am not buying the article’s spin that the loss was not that damaging to the pension plan discussed in the article, because it was only about $2.4 million. Against total plan assets of approximately $53 million, and with the taxpayers on the hook to fund the pensions because it is a municipal plan, that’s an important hit, both financially and to the public pocketbook.
Excessive Fee Litigation: A Real Problem or An Imaginary One?
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Here's a piece passed along by the Workplace Prof, noting the rise in excessive fee litigation under ERISA. I have noted before that the combination of demographic and economic factors with the ruling in LaRue is going to create more of these types of actions over the years, not less, and thus I share the skepticism the Prof expresses over whether, as a defense lawyer quoted in the piece suggests, these cases don't pose a significant problem for plan administrators. Moreover, I don't necessarily buy the sentiment suggested by defense counsel quoted in the article, to the effect that these cases are about a battle of the experts over whether any particular plan's fees were too high relative to the market or not. I think of them more as due diligence and best practices cases, as really revolving around whether the administrator followed a proper process to pick providers and funds, and to make sure the fees involved remained appropriate as measured against appropriate benchmarks.
Why Structural Conflicts of Interest, Standing Alone, Are Irrelevant
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Workplace Prof passes along today this opinion out of the Seventh Circuit by Judge Easterbrook addressing the question of structural conflicts of interest and their effect on the standard of review in ERISA governed benefit cases. Anyone who has read the bulk of my past posts on this subject knows that I do not buy the idea that the mere existence of the structural conflict standing alone - without more, such as an inference of distorted decision making that can be drawn from the administrative record itself - should affect the standard of review. There are a number of reasons for this, many of which I have explored in past posts on the question. One of the most persuasive of which, however, has always been that the assumption that the structural arrangement by definition is affecting the decision making is frequently belied by close observation of the evidence concerning the processing of particular individual claims in situations where the administrator was also the payor; the evidence simply does not support the view that outcomes are typically varying simply because the administrator is also the payor of the benefits at issue.
Judge Easterbrook presents a very interesting take on this idea, focusing on the actual decision making by the administrator in any particular case, and suggesting why the mere fact that the same organization will also pay any covered benefits does not logically lead under those circumstances to improper claims processing. As the judge writes, in a section discussed by the Workplace Prof:
[O]ne must not anthropomorphize “the administrator.” Rarely is a pension or welfare plan’s administrator a person whose own welfare is at stake. Administrators commonly are large organizations, and the real people who make decisions on its behalf are no more interested in the outcome than federal judges are “interested” in the resolution of a tax case. True, judges’ salaries won’t be paid if taxes can’t be collected, but the effect of any one case on federal finances is so small that the judge does not care who prevails. Just so with the people who act on requests for pension or welfare benefits. Corporations often find it hard to align employees’ incentives with stockholders’ interests; they use stock options, bonuses, piece rates, and other devices. Administrators usually don’t try. There would be a real conflict of interest if a given administrator put in place a method of linking decisionmakers’ income to the substance of their decisions. A quota system (“grant no more than 50% of all applications”) or some other means of tying the wages or promotion of staff to its disposition of claims could call for non-deferential judicial review. But [the claimant here] has not argued that anyone who handled his claim had any personal interest in the outcome.
To which I would say, exactly. Note as well that the judge emphasizes one important distinction that I fear often gets overlooked when critics get their back up when anyone, myself included, suggests that structural conflicts of interest should not affect the standard of review. He is not saying that it can never affect the standard of review and that an administrator who also pays the benefits may not be acting under a conflict, but is instead recognizing that, given the realities of claim administration, it is inappropriate (perhaps more accurately, illogical) to assume that this alone is corrupting the claim determination process. Rather, as the judge points out, something more is needed in this situation to justify such an inference, something such as, in the judge’s example, evidence of a quota system or other activity that would suggest that the process was corrupted and not impartial.
The case is Williams v. Interpublic Severance Pay Plan.
Some Thoughts on the Oral Argument in MetLife v. Glenn
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I had a chance over the weekend after a busy few days to ruminate on the oral argument in MetLife v. Glenn, a transcript of which you can find here; you can find Workplace Prof’s review of the argument here and a thorough recap of the argument here, at SCOTUS blog. My take? There will be some sort of rule announced governing the standard of review that a court is to apply when presented with an appeal from a decision by an administrator functioning under a so-called structural conflict of interest - how’s that for going out on a limb, since that’s what the Court accepted cert to address? Moreover, there can’t help but be a rule of general applicability of some type set forth by the Court for these situations, since, as I discussed in detail here for instance, there is wide divergence among the circuit courts of appeals in the decision making rules they apply when confronted with that situation; given the idee fixe that ERISA is supposed to give rise to uniform rules governing employee benefits across the country (an idea that in practice, tends to be honored more in the breach, something particularly illustrated at the district court level where you can often find two judges in the same circuit reaching opposite conclusions on the same open issue), this is not a situation that can be allowed to continue. That said, however, those hoping this case would lead to a wholesale reinterpretation of the standards of review that apply to ERISA cases, and more particularly to an overall rejection of both the “arbitrary and capricious” standard of review and of the existing formulations as to when that standard of review applies, are going to be soundly disappointed; I read the argument as telegraphing a fixation on determining, and creating (and then announcing), exactly what the technical rule should be when arbitrary and capricious review is applied by a supposedly conflicted administrator, and as telegraphing a lack of interest in changing the overall structure of the case law governing the standard of review question.
MetLife v Glenn in a Nutshell
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On Wednesday, the Supreme Court is holding oral argument in MetLife v. Glenn, the case that will supposedly tell us once and for all what the effect is on ERISA litigation when the party who has to pay ERISA governed benefits is also the one who decides whether to pay those benefits. Given the Court’s history when it comes to addressing issues related to litigating ERISA cases, starting with Sereboff (at a minimum) and running up through the recent ruling in LaRue, you can predict that the Court’s ruling will add as many questions and issues to litigating such cases as it will resolve. I have discussed before here on this blog my view that the actual evidence in a particular case should be the basis for deciding how to handle any particular instance in which one party is both the administrator and the payor, and that it is specious to instead impose and enforce blanket assumptions that a meaningful conflict always exists in such situations. But I can tell from the responses to my prior posts to this effect how many people simply don't agree with me on that, and this case offers the Court the opportunity to make the call on that one. In any event, now that I have whet your whistle for all things Glenn, you can find all things Glenn, including everything you need to know in advance of the oral argument if this is something of interest to you, right here.
On Discovery Problems and Solutions
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Here’s an interesting law review article, passed along in detail by the Workplace Prof, on problems, and potential solutions, in managing discovery. Discovery, to beat what must now be a dead horse, has become infinitely more complicated and expensive - with far more consequences for mistakes - in any type of complex litigation with the adoption of the federal rules governing electronic discovery (and in fact with the rise of computerized data itself). Regular readers know that I have argued before in this space that the courts need to develop a jurisprudence that analyzes the need for and cost of electronic discovery - which can often involve massive amounts of computer generated and/or stored data - in much greater depth than the more superficial analysis of discovery disputes that has historically been the norm: in essence, courts should engage in a more searching inquiry into disputes over electronic discovery, given their costs and how much of such data is likely to be irrelevant in any given case, before granting extensive discovery into electronically stored data. At a minimum, there should be a degree of inquiry that, even if it won’t allow conclusive enough findings to decide to outright not allow such discovery, will still allow an intelligent, reasoned limitation on exactly what the scope of that discovery should be. I would argue that, in cases that warrant it, it would even be appropriate to hold a mini-trial type proceeding, maybe of two or three witnesses, and then to rule on to what extent such discovery is warranted. This approach would be a far cry from how courts have traditionally addressed discovery disputes, but, as the article suggests, it is past time for the courts to begin applying a more systemic and in-depth approach to controlling discovery.
This is particularly important in the areas covered by this blog, ERISA litigation and insurance coverage litigation, where computerized data, communications and information processing, is almost literally the coin of the realm. Electronic discovery is therefore truly a major cost-driver and risk factor in these areas of the law. The development, at the boots on the ground level of magistrate judges (to whom discovery disputes are often assigned), special discovery masters and trial judges, of the law of electronic discovery provides an opening for courts to really address these issues, in the manner suggested by the article and with fresh eyes, and its an opportunity that should be taken advantage of, one that calls for curiosity, innovation and reasoned experimentation. I will give you one example, to make my point. One of my partners was recently handling a massive, multi-party litigation, in which there were numerous interrelated legal and factual issues, some of which may be outcome determinative. Rather than engage in the traditional approach of years of discovery with only minimal court oversight, followed by summary judgment motions, the court instead ordered some discovery, followed by summary judgment motions on the key potentially outcome determinative legal issues, followed by, if any party believed further discovery was needed to resolve those issues, the filing of Rule 56(f) affidavits to justify such discovery; the court would then decide what further discovery would be allowed before it would rule on the legal issues. The end result was order out of what otherwise could have been chaos, and a case that stayed on track towards resolution. It’s a good example of a court proactively using existing procedural tools to narrow the issues, and decide on what issues further and potentially expensive discovery is actually needed. This appears to be exactly the type of use of existing procedural tools and focus on the timing of discovery that the article's author is advocating as the means to improve discovery.
Pension Estimates: Not Worth The Computer They Are Printed On
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Here’s an interesting decision out of the First Circuit yesterday, concerning errors in providing estimates of pension amounts to participants and whether a participant can hold the sponsor to the erroneous estimate, rather than receive only the correct amount under the actual terms of the retirement plan in question. Short answer? A participant only gets what the plan, by its express terms, grants, and not the larger erroneously estimated amount. Although it is fair to say that the actual outcome of any such dispute will depend on the actual facts of a given circumstance and the particular theories under which a particular participant elects to proceed, this case reflects that enforcing the estimate, rather than simply receiving the lower actual amount due under the plan, is an uphill battle, at best. In this particular case, Livick v Gillette, the employee struck out both on attempts to obtain the higher amount by arguing that the erroneous estimate was an actionable breach of fiduciary duty, and on an estoppel theory. The court’s analysis of the estoppel theory is particularly noteworthy, as it provides great fodder for any sponsor or fiduciary defending against an estoppel claim related to an ERISA governed plan. If you are litigating a case in the First Circuit concerning an estoppel claim related to the benefits available under a particular ERISA governed plan, this case would be the place to start.
Does Employer Stock Even Belong In Retirement Plans?
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Should there even be employer securities in a 401(k) plan or other retirement vehicle? That’s the million dollar question (or more like the hundred million dollar question) that cases like those arising out of the Bear Stearns collapse raise. Moreover, it goes right to the underlying tension between ERISA and the securities laws that plays out in the concept of fiduciary duty: namely, the extent to which it is appropriate for a fiduciary to continue to allow employer stock holdings in a retirement vehicle when the company is simultaneously facing market pressure on its stock price and an obligation to comply with the securities laws in dealing with the marketplace as a whole. The legal and philosophical issues of this inquiry go on and on, spinning on like a fall into the rabbit hole; this is manifest in cases such as the Seventh Circuit’s ruling in Baxter, discussed here, in which these types of issues are merely raised, but not resolved. It’s a good topic for a law review article, but since blog posts traditionally don’t run to the hundreds of pages, I am not going to get very far into answering those issues here, but rather want only to raise the topic, which I think will be played out in a fundamental manner in the case law as the subprime mess lurches its way through the legal system. And on a practical level, what raised this thought this morning was this story here in the New York Times about pension funds moving out of equities, because, while there is a certain apples and oranges aspect to any comparison between that issue and employee holdings of employer stock in defined contribution plans (in that pension funds are moving in this direction because of future liabilities related to pension plan payouts and not necessarily for the same reasons that an employee might not want to be invested in his or her own employer’s equities), that fact does raise an interesting question. Simply put, if the professionals who run pension funds are moving out of the stock market for, in part, volatility reasons, should comparatively unsophisticated 401(k) investors be allowed to, even in some instances encouraged to, overload with one particular company’s equities?
Passing Along Some Reading on Excessive Fee Cases and Other Timely ERISA Topics
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What would this blog be if it was done as a newsletter instead? Well, probably something like this new ERISA newsletter out of Proskauer Rose, with its detailed but readable length discussions of current events in the field, such as the Supreme Court’s recent decision in LaRue and the Supreme Court’s consideration of whether to hear a case that will allow it to return again to the problem of defining the available scope of equitable relief under ERISA. For me personally, I particularly liked the discussion of the latest trends at the trial level in the federal court system with regard to lawsuits filed over allegedly excessive fees charged on mutual fund investment options, as it takes an approach that I like to pursue whenever possible in my own posts here on this blog: it discusses the early decisions on the issue at the motions stage in the trial courts, and looks ahead to what this may mean for the industry as a whole and service providers. Its worth a read, and if you enjoy this blog, you will almost certainly enjoy this newsletter as well.
What Happens When ERISA and the Law of Insurance Coverage Collide?
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Wow, I guess this is really Seventh Circuit week here, with, I guess, a particular focus on the jurisprudence of Judge Easterbrook, whose opinion in Baxter I discussed in my last post. This time, I turn to his decision from Wednesday in Federal Insurance Co. v. Arthur Andersen, which strikes right at the intersection of the two subject areas in the title of this blog, insurance and ERISA. The Arthur Andersen opinion concerns the extent of coverage, if any, for Arthur Andersen’s massive settlement of lawsuits related to its retirement liabilities upon its well publicized, post-Enron collapse, under a policy covering breaches of fiduciary duty. The court found that there was no coverage, for a number of reasons, the most salient of which being that, first, the losses in question were the actual pension amounts, which the policy does not cover (it instead covers only other losses related to a pension plan, separate from the actual amount of the pension benefits in question), and second, that although the claims in question related to pension plans, they were not actually for breaches of fiduciary duty related to such plans, which is all that the policy actually responds to. There are some interesting lessons for plan sponsors and plan administrators in these findings: first, that it is important to remember that, in buying fiduciary liability coverage, this is not the same thing as insuring the benefits owed to pensioners themselves, and, second, that the exact scope of the coverage is narrow and limited by its exact terms, which may not extend coverage to the specific allegations of any particular lawsuit arising from the pension plan. What’s the take away? A close look by an expert is needed when selecting insurance coverage for pension plans and the people who run them, if for no other reason than to have an accurate understanding of the extent to which potential problems with the plans may actually be covered.
Beyond these lessons in the case for people on the ERISA side of this blog’s title, the decision provides a fascinating run through a number of complicated insurance coverage topics for those of you who are interested in the insurance coverage half of this blog’s title. The judge - or perhaps his clerk, I don’t know the practices in that particular court - writes fluidly on the law of estoppel, waiver, the duty to defend, and the respective rights of the insurer and the insured when it comes to control of the defense and settlement of a covered lawsuit.
What LaRue Wrought
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Suzanne Wynn has the story of the day when it comes to ERISA litigation, as she posts on the Seventh Circuit’s application of LaRue to exactly the type of case that, had the Supreme Court ruled otherwise, would have gone away without any potential liability on the part of the fiduciaries or, for that matter, recovery by the plan participant. The case, as Suzanne explains, concerns a single plan participant who charges plan fiduciaries with breaches of fiduciary duty related to the amount of company stock held in that particular participant’s account; the plaintiff’s theory holds that the fiduciaries breached their duties because they “allowed participants to invest in [company] stock despite knowing that the stock was overpriced and therefore was a ‘bad deal’.” The Seventh Circuit recognized that, after LaRue, a plan participant can move forward with such a claim, at least in terms of having standing to pursue relief that is not plan wide.
The Seventh Circuit’s decision touches on a number of themes that are not fully addressed in the opinion, but which really rest at the crossroads that the law of ERISA finds itself at today. The first has to do with the extent to which LaRue will or will not increase litigation. I have previously discussed that, in my view, the real impact of LaRue is that the types of cases, such as stock drop cases of the kind considered by the Seventh Circuit in this case, that in the past would only be brought if the scale was sufficient to attract the interest of the organized plaintiffs’ class action bar, will now be brought in many instances even if the scale is insufficient to give rise to class or plan wide litigation. Rather, as this case illustrates perfectly, these types of theories will be pressed now if even only one participant has enough loss to warrant the action, as LaRue expressly authorizes and as occurred in this case. This is where you will see the impact of LaRue with regard to expanding litigation, not necessarily in terms of a massive increase in numbers of suits, but rather in an incremental increase in the types and natures of suits brought against fiduciaries. And don’t kid yourself - as the baby boomer generation moves towards retirement, there are going to be a huge number of plan participants in 401(k) and ESOP plans and the like who have large enough accounts and holdings (for instance of company stock) for it to be worth their while to bring these types of suits if their accounts take a significant hit.
The second that I wanted to mention relates to something that is certainly not going to be news to any long time reader of this blog, and its certainly not an idea unique to me, namely, the fact that, in the aftermath of judicial and political responses to the growth - and some would say overuse - of class action securities litigation, the plaintiffs’ bar has begun using ERISA to prosecute what are in essence securities fraud claims of the kind that, in the past, would have been simply litigated under the securities laws. The plaintiffs’ bar has found that, given the evolution of the securities laws and of ERISA, ERISA may well be the better theory to prosecute in stock drop type cases. The swarm of litigation already being filed over the collapse of the Bear Stearns stock is a perfect example of the type of event that we have long been conditioned to expect to be litigated under the securities laws, but which is instead generating putative class actions under ERISA related to the company’s ESOP and other retirement vehicles. Among the many issues that this evolution in securities related litigation raises is how to integrate the securities laws and ERISA under these types of scenarios, to prevent ERISA from being distorted from its original purpose and transformed instead into simply some type of alternative securities law regime; Judge Easterbrook, writing for the Seventh Circuit, raises exactly these points, but doesn’t resolve them, noting instead that they will have to be developed in the future.
The case is Rogers v. Baxter International, and thanks to Suzanne for bringing it to my attention.
The Meaning of Justice Roberts' Concurrence in LaRue
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There’s nothing really new in this piece for those who have already closely followed and studied the LaRue decision (how’s that for opening with a bang?), but this column on the decision in the April 2008 issue of Metropolitan Corporate Counsel magazine by two Proskauer attorneys is interesting. They focus on playing out the meaning of Justice Roberts’ concurrence concerning whether such claims need to be pursued as denial of benefits claims, rather than as breach of fiduciary duty claims, and just what that means practically if the lower courts take him up on that suggestion.
Some Quirks About QDROs
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Wow, QDROs (otherwise known as qualified domestic relations orders) are all the rage these days, aren’t they? QDROs concern the intersection of divorce/family law and ERISA governed benefit plans, in particular retirement plans. As a general rule, a QDRO is a court order in a state divorce proceeding that, if it meets certain requirements, has the effect of controlling dispersal of the ERISA governed plan benefits, benefits which, in the absence of such an order, would simply be paid according to the express terms of the ERISA governed plan itself.
The First Circuit just got into the act at the end of last week, with a detailed ruling on the collision of QDROs, retirement benefits, divorce proceedings, and jurisdictional issues. To me, the most interesting aspect of the case concerns the court’s discussion of the power of the state probate court to resolve this issue, and the court’s suggestion that a parallel, but separate, federal action over the enforcement and interpretation of a QDRO is, at a minimum, not an approach the court favors. Rather, the First Circuit emphasized that the state probate court has jurisdiction to determine whether a particular order qualifies as a QDRO and to thereafter enforce it, and that this particular issue does not have to be severed off from a particular probate court/divorce action and brought to federal court. The operative words of the court were:
Geiger [the party complaining about the QDRO] argues that state courts do not have jurisdiction to determine whether domestic relations orders are QDROs . . .Geiger cites no cases in support of his position. Instead he relies on what he calls the "unambiguous language" of ERISA, specifically, 29 U.S.C. § 1132(e)(1), which provides that federal courts "have exclusive jurisdiction over civil actions under this subchapter brought by a . . . participant," with the exception that state courts have concurrent jurisdiction over actions brought to recover benefits or enforce or clarify rights under a plan. 29 U.S.C. § 1132(a)(1)(B). In Geiger's view, this is the beginning and the end of the inquiry. His view, however, has been rejected by several courts. See e.g., Scales v. Gen. Motors Corp., 275 F. Supp. 2d 871, 876-77 (E.D. Mich. 2003) ("[S]tate courts have concurrent jurisdiction regarding the interpretation of QDROs . . . and are fully competent to adjudicate whether their own orders are QDROs."); In re Marriage of Oddino, 939 P.2d 1266, 1272 (Cal. 1997)(action to qualify domestic relations order is an action to "obtain or clarify benefits claimed under the terms of a plan," and thus within state courts' jurisdiction); Robson v. Elec. Contractors Ass'n Local 134, 727 N.E.2d 692, 697 (Ill. App. Ct. 1999) ("[S]tate and federal courts have concurrent subject matter jurisdiction to construe the ERISA provisions relating to a QDRO . . . ."); Eller v. Bolton, 895 A.2d 382, 393 n.6 (Md. App. 2006) ("State and federal courts have concurrent jurisdiction to review a plan's qualification of a state domestic relations order . . . .").
Geiger acknowledges the one-sidedness of the caselaw, but argues that the rationale set forth by those decisions both violates ERISA's plain language and is "logically senseless." We do not agree. In our view, it is significant that Congress has expressly exempted QDROs from ERISA's general preemption of state law. 29 U.S.C. 1144(b)(7). We are further persuaded that, "separate litigation of the QDRO issue in federal court presents the potential for an expensive and time-consuming course of parallel litigation . . . in the two court systems." Oddino, 929 P.2d at 1274-75. And finally, we share the view of the Oddino court that: Congress, having given state courts the power to issue orders determining and dividing marital rights in retirement plans, would require a separate federal court proceeding to decide whether the order is a QDRO. This would cause undue hardship, expense and delay to the affected party, and impose an unnecessary workload on already overburdened federal courts.
The case is Geiger v. Foley Hoag LLP Retirement Plan, and you can find it here. And you can find S. COTUS’ take on another central aspect of the case - various federal abstention and civil procedure issues - here, at Appellate Law & Practice.
Choosing a Defendant in ERISA Litigation
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In the First Circuit, the proper party defendant in an action concerning ERISA benefits is the party that controls administration of the plan; in other circuits, that’s not so plain. The question to which this is the answer is, who do you sue to recover benefits due under an ERISA governed plan. Here’s a timely and useful law review article, courtesy of the Workplace Prof blog, that provides a more lengthy and detailed answer to this particular question.
The Hard Headed Business Case for ERISA Preemption of State Health Insurance Mandates
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Why does ERISA preemption matter in the health insurance context, and why do many people think it should preclude state health insurance mandates, such as the Wal-Mart law already deemed preempted in Maryland and the San Francisco ordinance that is currently the subject of litigation over the question? Leaving aside the legal reasons why the acts are preempted, it is because employers, who provide most of the health benefits in the country, rely upon the stability and predictability generated by ERISA and the preemption doctrine. That, in any event, I think is a fair reading of this article here.
A Blog to Pass Along, and Some Thoughts About the Supreme Court's Interest in ERISA
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Lots going on, lots to talk about. Let’s start with this one, which, coincidentally, allows me to kill two birds with one stone. You may recall that some time back I mentioned that I had come across two interesting blogs that I wanted to pass along, one of which was The Float, covering primarily investment related issues and their intersection with ERISA. I mentioned I would pass along the other blog in a subsequent post, which, almost inevitably since I had promised to do so, I never did, as breaking news and a pending trial shunted it to the side. Well, that other blog is this one, Benefits Biz blog, by the benefits and executive compensation lawyers at Baker & Daniels, which I have found to be a consistently interesting read. Moreover, I return to it today to pass that link along because of a very interesting post they have concerning a case that the Supreme Court has now elected not to add to its docket, concerning the relationship of age discrimination laws and employer provided health insurance benefits. As many already know and as I have discussed in the past here on this blog, the Supreme Court has shown a continuing interest in all things ERISA, with three cases either already decided or added recently to its docket. The Supreme Court’s lack of interest in this particular case perhaps hints - I am reading tea leaves here now, in the august tradition of Kremlinologists and other students of secretive institutions - at the outer limits of the Court’s interest in the subject of ERISA. The cases accepted for review to date by the Court emphasize litigation issues and, in particular, the effect of the evolution of retirement benefits from pensions to 401(k) plans on the litigation environment. This is not a fair reading of the case passed on by the Court that the Baker & Daniels’ lawyers discuss in their post; we may be able to infer that if you want to attract the Court’s interest in an ERISA case right now, you better make it about litigation and defined contribution type plans.
Back to the Well: Fiduciaries and Subprime Assets
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I guess this is the flip side of all the grief that is starting to come down on fiduciaries for excessive - or at least what seems to plaintiffs’ lawyers to be excessive in hindsight - exposure to the subprime mortgage mess in pension and 401(k) holdings: pension plan fiduciaries now adding such exposure to their funds in the hope of goosing returns by buying these beaten down assets at fire sale prices (kind of like they are playing at being Jamie Dimon). Here’s the story, and thanks to my colleague Eric Brodie for bringing this development to my attention.
Back From Trial, But the World Kept Spinning In the Interim
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My trial finally concluded late yesterday after two weeks, with the jury returning a verdict in favor of my client (pause here for self-congratulatory pat on the back). While I was able to get some posts up last week, during the first week of trial, events during trial this past week left me with no time to post. A lot went on during that week that would be of interest to readers of this blog, running from the almost certain ERISA litigation that will follow from the Bear Stearns collapse, to further Department of Labor attempts to mandate transparency, to the Commonwealth of Massachusetts’ continuing efforts to single handedly prove that state regulation of employer provided health insurance benefits should, in fact, be preempted. We’ll return to these themes, and other topics, next week, now that we have time to get the printing press rolling again here.
More Supreme Court Interest in ERISA Remedies Cases
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The Supreme Court continues to look for ERISA cases to serve as vehicles for exploring the current and proper parameters of that statute, and last week requested from the Solicitor General’s office the government’s views on a potential ERISA case for the Court’s docket, Amschwand v. Spherion Corp. This in and of itself is old news, in a way, to anyone who follows this stuff. I wanted to pass along a post, however, from employment law blogger Donald Heyrich, about the underlying facts of the Amschwand case and the possibility the case presents for the Court to address the issues raised by claims seeking equitable relief under ERISA. I haven't had a chance yet to look into the case itself, so I can't actually vouch yet for his analysis - or provide my own - but I liked the post enough and the blog as well to want to pass it on today.
Want to Learn More About the Post-LaRue World?
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I am trying to kick the LaRue habit, but couldn’t resist going back to the well one more time (how’s that for mixing my metaphors?). I know from readers of this blog and from talking to other lawyers that people are very interested in LaRue and the Supreme Court’s current interest in ERISA cases - in fact, one lawyer told me that right after LaRue was decided he was at a meeting on an entirely different topic but LaRue is all anyone wanted to talk about that day- so I wanted to pass along this very interesting looking teleconference next month on individual 401(k) suits post-LaRue. The faculty includes Tom Gies, who represented the plan and its sponsor in LaRue, and Karen L. Handorf, an attorney currently in private practice who previously worked for the Office of the Solicitor of Labor, background that may make her ideally suited to comment on one of the biggest mysteries of all raised by LaRue and the Supreme Court’s selection for its docket of two more ERISA cases, namely what’s with the Supreme Court’s sudden fascination with ERISA litigation.
Passing Along an Interesting Blog: Number One
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One interesting thing about the LaRue case is the amount of blog commentary it inspired. For me personally, the best aspect of that wasn’t so much what other bloggers had to say about the subject, but more the fact that the discussions brought some blogs to my attention that I had not previously been aware of. I thought I would pass along two of the more interesting ones to you, as they may be of interest to people who come here to read up on the ERISA and retirement benefit issues discussed in this blog.
The first is The Float, published by Interlake Capital Management. The Float is mostly focused on financial news related to 401(k) plans and the like, but is somewhat unique in that it blends discussion of those economic issues - as well as just plain old fashioned business media bashing - with intelligent comments on breaking legal issues affecting such plans, such as the LaRue decision. It’s a lot of fun to read, not the least of which is because you don’t need a Wall Street background to enjoy their financial commentary, just some interest in and experience with the subject.
I’ll pass the second blog along in my next post.
More on LaRue: Lawyers USA Weighs In
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Thought I would pass this along right now, while the article is still available to non-subscribers - I suspect if you read this post tomorrow, you will have to subscribe to get access to the article by then. Either way, here’s an interesting article available on Lawyers USA today on the LaRue decision, and on the broader topic of what impact it will have. I am quoted in it on the issue of whether it will spawn more litigation; to quote the article:
Some see the ruling as spawning multiple lawsuits by individual 401(k) account holders.
"It will open the door to a lot more litigation. I don't think it will be an avalanche, but plan sponsors are definitely looking at death by a thousand cuts," said Stephen Rosenberg, an attorney with The McCormack Firm in Boston, who blogs on ERISA issues.
This is pretty consistent with what I said in my post last Friday, in which I discussed my views about how much litigation will result from this case. It is hard, as I said then, to quantify, but it is clear that the case paves the way for sponsors to face a steady stream of smaller cases, whereas in the past they really - or at least predominately - only had to worry about whether they were in a position to be targeted for a large dollar value, class wide type suit.
Choice Architecture, 401(k) Plans and the Argument for Restricting Choice
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The topic of this article from yesterday’s Boston Globe, concerning behavioral economics and the idea that most people simply get it wrong when making investment choices with regard to retirement if they are left to their own devices, will be familiar to any long time reader of this blog, but it did catch my eye because its suggestion that employees need to be guided towards the right retirement choices echoes George Chimento’s point, which I discussed the other day, that perhaps 401(k) plans should actually be set up to take those choices away from employees and place them in the hands of someone with more knowledge about the subject. It’s a provocative idea, one that runs counter to the general Zeitgeist that we are all now responsible for funding our own retirements rather than passively relying on our employers to provide that as well, but the question of how best to generate appropriate returns for employees invested in such plans is, and should be, more widely discussed, including with regard to how much say individual employees should have in the matter. The Globe article is a nice survey of the theory behind the idea of just how much choice should be granted to employees in that context, and how structuring the choices available to them may affect the outcome for their retirements.
Fair warning, though: you may have to register (its free, but still annoying) to access the Globe article.
Will LaRue Actually Lead to An Increase in Litigation?
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I thought I would pass along today this article from Business Insurance in which I am interviewed about LaRue, and its impact on plan sponsors. The point of the article is that the decision opens them up to more potential liability, and they need to be aware of that. I am actually a little bit agnostic as to how much this ruling will increase litigation over these types of cases, given the expense and difficulty of litigating these types of cases if you are a participant. Probably for practical reasons - because I could, and probably did in the interview, go on at length about this topic - the article doesn’t contain all of my comments on this point. The gist of my thoughts on the issue, however, is that, as a practical matter, LaRue lowers the financial bar for suits over problems in 401(k) plans and makes it more likely that smaller company plans may be sued for the types of errors - such as excessive fees, company stock, and the like - that big plans get sued over. This is because these types of claims have predominately been brought so far on a class wide basis by class action plaintiff firms. As a result, only larger sponsors with large possible exposures were really in the cross hairs for these types of defects in 401(k) plans, because that is who the class action bar targets; LaRue, by at least establishing the right of participants to bring suits over these same issues only on their own behalf lowers the bar and provides an avenue for much smaller suits over these types of issues. This puts smaller company plans in the line of fire for suits over these issues, because while they may not have sufficient assets to attract the interest of the class action bar, they still have enough assets to attract lawsuits from their own participants.
Fiduciary Obligations - and Common Sense - Support Hiring Outside Expertise for 401(k) Plans
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One of the common themes of many of my posts, as well as of many of the judicial opinions, concerning fiduciary obligations of companies sponsoring 401(k) plans is the need to bring in outside expertise to manage the plans, particularly for the purpose of insuring that investment selections are appropriate and priced right. As I have discussed both in numerous posts and in a range of articles in which I have been quoted, smaller and mid-sized companies generally lack the expertise to properly handle all of the aspects of 401(k) plans and can best discharge their fiduciary duties - and best protect themselves against litigation - by retaining outside experts to manage a plan. There is an entire industry that exists to service such companies and their plans. Here is a story out of New Hampshire that illustrates this point brilliantly; it concerns a small company that believed it could operate its own 401(k) plan without an outside vendor, and ended up, without any intention to defraud, being pursued by the Department of Labor for $33,000 in employee contributions that were never paid into the plan. By all accounts, the company was not engaged in anything underhanded; it just was wrong in thinking it could handle the logistics itself.
And not to beat the LaRue drum too much, but obviously the establishment in that case of the right of plan participants to sue fiduciaries for mistakes affecting their 401(k) accounts (whatever may be the exact parameters of that right, an issue up for some debate in light of some of the vagaries of the three opinions from the Supreme Court), just drives home the importance of making sure that a 401(k) plan is run absolutely as well as possible.
A Couple of Other Perspectives on LaRue
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There’s a lot out there on the Supreme Court’s ruling in LaRue, and I thought I would pass along today a couple of articles and blog posts that approach the issues raised by the case from a slightly different perspective than simply the technical legal issues raised by the case. Employee benefits lawyer George Chimento discusses the LaRue decision in this client advisory here, with a focus on a particular question, namely, whether in light of the problems posed by LaRue type cases, it makes any sense to sponsor a 401(K) plan that allows participants to pick and choose among investments. He makes a compelling argument that it just may not make any sense to do this, given the liability risks, amply illustrated by the LaRue case, and the investment skills of the average participant. He sums that issue up in this paragraph from his article:
With all this additional liability, is it wise to sponsor self-directed plans, with the extra expenses associated with open-end mutual funds and daily investment switching? Are participants really better off self-managing their retirement assets, doing something they were not educated to do? Perhaps it's safer, and better for all parties, just to have an "old fashioned" managed fund, without participant direction, and to employ properly certified investment managers who can be delegated fiduciary liability under ERISA. A dividend of LaRue is that it may cause employers to step back and reconsider the current, expensive, and dangerous fad of self-direction.
And Kevin LaCroix, a lawyer/expert insurance intermediary, tackles LaRue in this interesting blog post on his well-regarded D&O Diary blog, in which he focuses on the issues for fiduciary liability insurance raised by the case. One interesting point he makes is that the availability of coverage may be affected by exactly that split between the Justice Roberts’ concurrence and the other two opinions, related to whether or not claims of this nature should actually be prosecuted only as denial of benefits claims, or instead as breach of fiduciary duty claims. Anyone interested in the insurance implications of LaRue should find it a useful and informative post.
Interpreting LaRue
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Some follow up thoughts on the Supreme Court’s opinion in LaRue, after having some time to digest it. First, the court’s three opinions make for an interesting assortment of analyses of the issue, but what is most important on the front lines, down at the trial level where these issues play out in court, is the unanimous agreement that an individual 401(k) participant can sue for losses to just his or her account. This resolves a key dispute that, I know from my own practice, has become a key issue in the question of when and how participants can seek legal redress with regard to their 401(k) accounts.
Second, the three opinions set forth almost radically different answers to the question of how and why such an individual participant can sue for losses just to his or her account in a 401(k) plan. The majority opinion posits that this is the appropriate reading of ERISA in the context of defined contribution plans, which may be different from what the rule should be with regard to defined benefit plans. The second opinion, by Justice Roberts, poses the extremely thorny argument that, while a plan participant can sue for such losses, he or she should do so under the denial of benefits portion of ERISA, rather than under the breach of fiduciary duty portion of ERISA. The third opinion, by Justice Thomas, finds that the plain language of the statute warrants individual participants being allowed to bring such claims, and holds no truck with the idea, relied on by the majority, that there is some underlying principle distinct to defined contribution plans that either justifies - or is necessary to justify - this conclusion.
The competing opinions present some interesting issues. First off, Justice Roberts’ suggestion that the law governing denied benefits, rather than the law of breach of fiduciary duty, should apply to the circumstances of the LaRue case appears unworkable in the context of that particular type of claim, for a variety of practical and legal reasons; there is a certain extent to which it seems to me that even suggesting that is to work mischief, particularly for the judges and litigants who, going forward, are going to have to work out the myriad issues that claims like that brought by the participant in LaRue raise, none of which were preemptively resolved by the Supreme Court. Second, there is something telling in the contrast between Justice Thomas’ approach and that of the majority, something that may well be a clash of philosophy, not just with regard to statutory construction for purposes of the instant case, but also perhaps as well with regard to the road that lays ahead for the law of ERISA. Justice Thomas is correct in his opinion that the issue can be resolved, in the participant’s favor, simply off of the plain language of the statute, without relying on any special considerations raised by the fact that the case involves a defined contribution account rather than a defined benefit plan, which is the issue animating the majority’s opinion. Does the majority’s heavy emphasis on the fact that LaRue concerned a defined contribution plan hint at a belief among the majority that, in fact, ERISA needs to be treated as an organic, evolving body of law that needs to shift from its past precedents to account for the rise of defined contribution plans? And if so, is the emphasis on this point in the majority’s opinion a subtle suggestion to lower courts to approach new issues brought before them concerning defined contribution plans - or even old issues never before resolved under defined contribution plans - with an eye to how ERISA should develop to fit those types of plans? At a minimum, it is hard not to see lawyers for participants arguing exactly that to district courts and circuit courts of appeal in the aftermath of the ruling in LaRue.
The Supreme Court Decides LaRue, In Probably Predictable Fashion
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As a practicing litigator, I often can’t delve too deeply into a particular issue right when it arises, and instead have to return to it that night to analyze it for further discussion the next day. With a trial set to start in one of my cases and a court appearance this afternoon, this is one of those instances, but I did want to pass along the Supreme Court’s opinion in LaRue, just issued today. I will give it a more in-depth read tonight and may post more on it tomorrow, but in the interim, here is the opinion itself, along with two initial, superficial thoughts. First, as I - and others - expected, the opinion goes in favor of the plan participant, and expands the right of individual plan participants to sue for breach of fiduciary duties. Second, on first glance, the opinion seems animated by the need to account for the particular risks of defined contribution plans such as 401(k)s, and to recognize the need for the law of ERISA to develop in a manner that accounts for the transition to those types of benefit plans. In a weird bit of precognition, that’s something I just talked about in my post earlier this morning, on the Supreme Court accepting cert on still another ERISA case.
Supreme Court and Qualified Domestic Relations Orders
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Interestingly, right after I posted about Albert Feuer’s detailed analysis of the proper role of Qualified Domestic Relations Orders (“QDRO”) in the ERISA scheme, the Supreme Court granted cert in a case on that exact issue (although I don’t intend to imply a causal relationship between the two events). The Court granted cert yesterday in the case of Kennedy v. DuPont Plan Administrator, but only on Question number 3 raised in the petition, which was whether ERISA’s QDRO provisions are the only manner in which an ex-spouse can waive rights to a former spouse’s pension benefits. SCOTUS blog has the story here, and the petition (as well as the opposition) here.
This order continues a trend I suggested we would see, namely the Supreme Court, having concluded its efforts to redirect the path of patent law after substantial criticism in the business, legal and academic communities that the governing body of law in that area was veering wildly off course, turning to another statutory body of law, ERISA, that has likewise come under significant criticism, in this instance because of the stress points that have erupted as the law of ERISA has attempted to cope with the transition from a defined benefits world of pensions - where employees bore little risk - to a defined contribution world, in which employees bear most of the risk and thus place more demands on ERISA and the case law interpreting it. Still, even under those circumstances, the focus on QDROs seems a slightly unusual point of emphasis for the Court, given the range of ERISA related issues that the Court could select from. The case and the issue presented do, however, concern pension benefits and the impact of ERISA on employee’s rights under them, fitting with the theme I identified above, plus QDROs themselves are being interpreted in some interesting ways at the district court level, as I suggested in this post, ways that may not be an exact fit with the statutory requirements.
Alienation of ERISA Governed Benefits
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I’ve had an interesting collection of educational materials and seminars piling up on my desk for awhile now, a number of which may be of interest to various readers of this blog. In the hope of both clearing up that backlog and passing along useful information, I am going to start a short series of - or maybe a series of short - blog posts on them, until they are exhausted. I expect I won’t run through them all seriatim, as I suspect breaking news or new court decisions will interpose themselves, but we will see.
The first one I wanted to pass along is something you can blame the Workplace Prof for, whom I have fingered in the past as the filter I use to screen law review articles and decide which ones might be worth reading. Some of you know from past posts that I don’t put a lot of stock in most law review publications, but some fit my criteria for being useful, which revolves heavily around whether they break any new ground in an area or manner that makes them useful to courts and practitioners. This one here, a 142 page analysis of when ERISA governed benefits can be transferred to anyone other than the participant or the participant’s selected beneficiary, fits this criteria to a tee. The Workplace Prof passed along the abstract of the article a little while back, which is:
This Article argues that a beneficiary designation made by a participant pursuant to the terms of an ERISA plan determines who is entitled to survivor benefits from that plan. Such designation may not be superseded by
(A) an agreement made in a marital dissolution or separation whereby a participant promises to make or retain a different designation (such agreements are not qualified domestic relations orders, "QDROs," because QDROs are limited to orders directed not at participants but at ERISA plans);
(B) an agreement made in a marital dissolution or separation whereby a participant's former or separated spouse "relinquishes" any interest in the participant's ERISA plan benefits; or
(c) a state law or federal common-law principle whereby killers of a participant are deprived of the entitlement to the participant's survivor benefits from an ERISA plan.
ERISA pension plans must incorporate the only two ERISA required beneficiary designations, QDROs and spousal survivor benefit designations. Neither statutory designation applies to an ERISA plan that is not a pension plan, such as a life insurance or disability plan. Thus, neither statutory designation may supersede a beneficiary designation made pursuant to the explicit terms of an ERISA life insurance or disability plan.
ERISA voids both (A) a direct benefit claim against an ERISA plan that is not based on a designation that was made pursuant to the terms of the plan, and (B) an indirect benefit claim against the recipient of plan benefits that is not based on a designation that was made pursuant to the terms of the plan.
What jumped out at me from the article itself is the author’s discussion of the application and impact of Qualified Domestic Relations Orders (known in common parlance as QDROs), which can supercede a participant’s designation of the party to whom plan benefits should be paid. The author gives QDROs a far narrower scope of application and power under ERISA than it appears to me courts have been giving to them, and in fact his position on their impact runs counter to what appears to me to be the trend at the trial level in the federal system in applying QDROs. He makes a fascinating and well-supported argument, although at this point, I reserve judgment on the ultimate issue he raises, of exactly how QDROs should be understood under ERISA. At a minimum, however, for anyone arguing the point in a case, there is a wealth of information in the article, as well as support for arguments that a party might make in court over that issue.
I Want My (Pension Tension Blues) MTV
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For better or worse, I’m old enough to remember where I was when MTV debuted, back when it actually played music videos. I am sure there is something to be said about the fact that a quarter century later, I now watch music videos about fiduciary risks concerning pensions, but I am not sure exactly what. You should watch it too, right here.
A First Step Towards Supreme Court Consideration of Whether Fair Share Acts are Preempted
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Well now, at some point, I am convinced, we are going to get the Supreme Court to weigh in on exactly when and when not states can regulate employers’ provision of health care to their employees in light of ERISA preemption. As we have discussed here on numerous occasions, the Fourth Circuit has staked out a strong position precluding states from meddling in that relationship, while a panel of the Ninth Circuit, ruling on an interlocutory matter concerning injunctive relief over the institution of a similar act by the City of San Francisco, has found that local governments have some substantial leeway in this regard despite the existence of ERISA preemption. I, and I think most other commentators, think the Fourth Circuit has the upper hand in this conflict, given the existing Supreme Court case law on preemption.
This introduction is a long way of getting to the point of noting that a collection of businesses aggrieved by the San Francisco act may be speeding up the timetable for the Supreme Court’s consideration of this issue, at least to some extent, as they have now asked the Supreme Court to set aside the Ninth Circuit panel’s conclusion that the city’s act was not preempted and can go forward at this time. The whole story on this event is here.
The Benefits of Relying On Investment Managers
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We all know that in reality, most companies that sponsor retirement plans, including 401(k)s, for their employees bring in outside advisors to manage the plan. There are at least two primary reasons for this, the first being that most companies don’t have the expertise to select investments and otherwise run plans themselves, and hope to get better retirement plan performance by relying on outside expertise. The second is the hope that fiduciary exposures will be reduced by bringing in, and relying upon, an outside advisor who has superior expertise with regard to retirement investing. These two factors ideally work in conjunction to improve retirement accounts for plan participants; the fear of legal liability inspires a desire to bring in experts, who in turn can do a better job in selecting investments than the company could on its own. In this way, we see the operation of a perfectly selected legal rule, and we see the important role that fiduciary liability rules play in the ERISA scheme; the exposure does not simply exist to support litigation after the fact, but also as a motivating force that improves plan performance on a day in, day out basis, by driving plan sponsors towards reliance on expertise that will both protect them and improve performance. It is possible, to some extent, to view almost all breach of fiduciary duty litigation as examples of failures in this dynamic. For instance, what are claims that companies breached their fiduciary obligations by excessively including company stock in a plan but instances in which a company, insufficiently afraid of its potential liability for breach of fiduciary duties, failed to either diversify investments on its own or bring in sufficient outside expertise to allow it to do so?
A good example of this dynamic at work can be seen in Judge Young’s just released ruling out of the United States District Court for the District of Massachusetts in Bunch v. W.R. Grace, in which the court found that the company was insulated from breach of fiduciary duty claims with regard to the retention and sale of company stock in one of its retirement funds by the company’s retention of and reliance on an outside investment manager to make those decisions. The court found that the investment manager had properly acquitted itself with regard to those issues, and therefore the company could not be liable on claims that it had breached its fiduciary duties by selecting and relying upon that advisor. The court explained that If the investment manager “did not commit a breach, then [the company] did not fail in the discharge of its duty to select and monitor” the manager.
But you can take that analysis one step further. The interesting aspect in this regard of the ruling in Bunch is that the company was absolved of liability by its reliance on an outside expert because the outside expert did not itself breach any fiduciary obligations by the actions it took and decisions it made in that role. But what if the advisor had violated fiduciary obligations in its handling of its delegated duties? What then of the company’s attempt to protect itself by retaining and relying upon an outside expert? The answer in general is that the company can probably still successfully defend itself against claims for breach of fiduciary duty, so long as it can show that its own steps in selecting and monitoring the outside advisor were prudent, even if the chosen advisor turned out, in hindsight, to be the wrong choice of advisor or investment manager. And in that lies the two real teachings of Bunch. First, that companies can protect themselves from fiduciary liability by selecting and delegating to an outside expert and, second, companies have to pursue that old cliche - best practices - in making that delegation if they really want to avail themselves of the protection that bringing in outside expertise can provide. By abiding by the second teaching, they should be protected even if the advisor they selected thereafter, unlike the advisors relied upon by W.R. Grace in the Bunch case, falls down on the job.
Money Talks, Even About the Massachusetts Health Care Reform Act
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A number of different things I want to talk about, including an interesting decision discussing the obligations of plan sponsors when it comes to selecting advisors and some interesting thoughts on QDROs. I will sprinkle those in later, but for now I thought I would pass along Steve Bailey of the Boston Globe’s column today on the issues raised by the Massachusetts Health Care Reform Act, which basically mirrors what I have said in prior posts, such as my last one, about the statute and issues with its implementation. A couple of interesting tidbits to point out though, from his column. First note his reference to the fact that the statute effectively left the business community off the hook (in truth, this is only true financially, and even then only partly so; they still bear some administrative headaches, and some currently modest financial exposures), which fits exactly with my explanation in the past as to why the statute has not faced a preemption challenge in court to date. Second note his reference to the idea that the political and legislative will to continue with the program is strong. All well and good, but the issue now is the plan’s escalating costs, which are going to have to be borne by taxpayers or else by the business community; one wonders about the commitment of those who will actually have to pay the bill for this program. Anyone going to ask them?
The Massachusetts Health Care Reform Act as Evidence of the Need for Preemption
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Stories like this make clear that advocates of state fair share plans who like to point to the Massachusetts Health Care Reform Act as a shining exemplar of what could be accomplished if only ERISA preemption would go away are barking up the wrong tree. Rather, the article, with its discussion of spiraling costs to the state and the state’s need for federal funding to remedy the resulting shortfalls demonstrates the opposite, namely that, as I have argued in other posts, there is real reason to doubt whether the problem of the uninsured is one that can be cured on a state by state basis. Indeed, the fact that the Commonwealth needs significant - but as yet unpromised - infusions of federal money to effectuate coverage of the uninsured suggests that this problem cannot be solved by states and instead can only be solved on a larger playing field, namely at the federal level with the type of resources that only the federal government can commit to the issue. And if the issue can only be solved on a national level, and not on a state by state level, then isn’t that an argument for preemption? I hate to be a cynic, and prefer the title of skeptic, but there are a lot of reasons that ERISA preemption both exists and is valuable, and it is not the bogeyman preventing health insurance in this country that many of its critics make it out to be. There are real, fundamental problems in trying to increase health insurance coverage in this country, ones that are not solved by these state acts, which, as I have discussed before, basically play at the margins without addressing the real problem - cost - that is handicapping both the ability of employers to continue to provide health insurance to their employees and the ability of Massachusetts to actually successfully pull off its health insurance experiment.
Seldom Seen: Awarding Attorney's Fees Under ERISA to a Prevailing Defendant
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This is something you don’t see every day, namely an award of significant attorney’s fees to the prevailing defendant in an ERISA governed action. In R.I. Carpenters Annuity Fund v. Trevi Icos Corp., just decided by the United States District Court for the District of Rhode Island (but not yet up on its website), the court entered such an award against the losing plaintiff, a union provided employee benefit plan, on a claim brought by it under ERISA, even though the court acknowledged that ERISA’s fee shifting provisions are seldom used to require a losing plaintiff to pay attorney’s fees to a prevailing defendant. Here, however, the plaintiff had used ERISA as an alternative mechanism for litigating a jurisdictional dispute with another union over a project, apparently for tactical reasons related to adverse rulings against it before the National Labor Relations Board in other, similar circumstances. The court provides a nice review of the factors in the First Circuit that govern the decision whether to award attorney’s fees to a prevailing party, and noted that the key issue in the case before it was whether the plaintiff’s decision to use ERISA as a tactical tool for litigation strategy constituted a misuse of the statute, warranting an award of attorney’s fees in favor of the prevailing defendant. The court explained:
The Court should consider five factors in deciding whether to award fees and costs to a party: (1) the degree of culpability or bad faith attributable to the losing party; (2) the depth of the losing party's pocket, i.e., his or her capacity to pay an award; (3) the extent (if at all) to which such an award would deter other persons acting under similar circumstances; (4) the benefit (if any) that the successful suit confers on plan participants or beneficiaries generally; and (5) the relative merit of the parties' positions. Cottrill v. Sparrow, Johnson & Ursillo, Inc., 100 F.3d 220, 225 (1st Cir. 1996); see also Beauvais v. Citizens Fin. Group, Inc., 418 F. Supp. 2d 22, 33 (D.R.I. 2006). These so-called Cottrill factors are guidelines and do not preclude the Court from consideration of other factors. Cook, 334 F.3d at 124. Rather, the Court may - and should - consider "additional criteria that seem apropos." Cottrill, 100 F.3d at 225. Ultimately, the test for granting or denying attorney's fees and costs in an ERISA case is, in a word, "flexible." Id.; see also Gray v. New England Tel. & Tel. Co., 792 F.2d 251, 258 (1st Cir. 1986).ERISA's broad language permits the Court to award fees and costs to "either" party. However, the substantive purpose of ERISA is remedial, i.e., it is designed to protect "the interests of participants in employee benefit plans and their beneficiaries." 29 U.S.C. § 1001(b). Consequently, some courts have noted that fees or costs seldom should be assessed against unsuccessful ERISA plaintiffs. See, e.g., Operating Eng'rs Pension Trust v. Gilliam, 737 F.2d 1501, 1505-06 (9th Cir. 1984); Marquardt v. N. Am. Car Corp., 652 F.2d 715, 719-20 (7th Cir. 1981). Before the Court tackles the individual Cottrill factors it should be noted that this is not a typical ERISA case. As was discussed in the Court's decision denying summary judgment, the driving force behind this action seems to be a jurisdictional dispute between two labor unions -- the Carpenters Union Local 94 and the Laborers Union, both of which claimed the right to represent the workers on the "front-end" of the CM-120. R. I. Carpenters Annuity Fund v. Trevi Icos Corp., 474 F. Supp. 2d 326, 331 (D.R.I. 2007). Whether fees should be awarded turns on the question of whether it is appropriate to use ERISA litigation as a vehicle to pursue Local 94's claim of jurisdiction. If it is legitimate to use ERISA in this way, then even an unsuccessful Plaintiff might not be "culpable" under the Cottrill factors. If it is not, then to use ERISA this way (at the expense of an innocent employer) more likely evidences culpability under the Cottrill analysis.
The court then concluded that the plaintiff’s strategic use of ERISA in this manner was not appropriate, and justified an award of attorney’s fees to the defendant.
It is a fascinating decision for at least two reasons. The first is the relative rarity of a court granting attorney’s fees to the prevailing defendant, and the case presents a road map as to one particular line of argument that a defendant can pursue to seek such an award. The second is that the case drives home the need to consider the rationale for including an ERISA claim in a case, and suggests that there are risks to using ERISA in situations where other statutes or theories of liability are better suited to targeting the specific mischief at issue.
And in Super Bowl News . . .
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Well, it’s finally Super Bowl weekend, so how do we tie that into the issues covered by this blog? Easy. Here’s a terrific article in this week’s Sports Illustrated (hey, we can’t get all our reading from Aspen Publishers) on the problem of disability and health benefits - and the fact that there effectively aren’t any - for long retired NFL players. The article isn’t about the legal issues, obviously, although it does touch on the distinction between the current retirement and disability plan, which is generous in this regard, that the union has negotiated for modern era players, and the plight of the players I, and probably many of you too, grew up watching in the seventies and earlier, who were never covered under any even marginally generous union negotiated benefit plan. Of the hundreds of posts I have written on this blog, probably none has had longer legs than this one, on the long legal struggle of former Steelers’ center Mike Webster to obtain benefits from the NFL under the applicable plan. The Sports Illustrated piece is a fine story of the people behind these issues, and presents a sympathetic portrait of them all.
And this, I note, is the first time I have ever linked to Sports Illustrated on this blog, and it wouldn’t surprise me if it turned out to be the last time, too.
LaRue is Decided . . . Well, Sort of
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In an opinion it issued on Monday, the United States Court of Appeals for the Sixth Circuit confronted essentially the exact same facts and issues as are at play in the LaRue case currently pending before the Supreme Court, and effectively entered its own prediction as to how the Supreme Court will rule in LaRue. Tackling the same arguments that were presented to the Supreme Court in LaRue, the Sixth Circuit concluded that individual participants could recover on their own behalf for losses solely to their accounts in the plan, and that breach of fiduciary duty claims under ERISA are not limited to actions brought on behalf of the plan as a whole or for recovery benefiting the entire class of plan participants as a whole. This, of course, is the primary issue presented to the Supreme Court by the LaRue case.
Interestingly, the Sixth Circuit even borrowed and relied upon Justice Breyer’s diamond hypothetical that he posed to the plan's counsel in LaRue in reaching its ruling in favor of the participants, a hypothetical that clearly caught many lawyers’ fancy after it was offered up by the justice during oral argument.
The decision is Tullis v. UMB Bank, N.A.