Talkin' With Tom Gies, Counsel for the Respondents in LaRue
I promised awhile back that I would run more interviews at some point on this blog, and we return today to our - granted, somewhat sporadic - series of interviews with movers and shakers in the worlds of ERISA and insurance. What provoked me to get back into the interviewing business, which I noted before are among the most difficult of posts to do well? The chance to provide more insight on the oral argument before the Supreme Court in LaRue v. DeWolff, Boberg, which was argued right after the Thanksgiving weekend. And with that lead in, here’s the blog’s interview with Tom Gies, a partner at Crowell & Moring in Washington, D.C., who was lead counsel for the respondents. Tom was gracious enough to provide some real thought provoking commentary on both the issues raised by the case and some aspects of the argument before the court:
Blog: How did you end up representing the respondents?
Tom Gies: We have represented the employer, and the plan, in a variety of employment, benefits, corporate and commercial litigation matters for years. They are longstanding valued clients of our firm. When this case was initially filed in the district court in South Carolina, we were retained to defend against the claim.
Blog: Many ERISA cases, particularly in the area of pensions and 401(k)s, never reach the merits, and instead are resolved by procedural motions addressed to whether there is even a cause of action or remedy available to the plaintiff. That’s what happened here. Would the law of ERISA be better developed, or the parties themselves better served, if courts were resolving questions such as those presented by LaRue after development of the facts of a particular case? On the merits, as it were, rather than on procedural issues?
Tom Gies: An interesting question. The case was pled and litigated in the district court solely as a Section 502(a)(3) claim. We moved for judgment on the pleadings because it was pretty obvious plaintiff sought compensatory damages that are not available under Section 502(a)(3), following the Supreme Court's "rather emphatic guidance" in Mertens, Great-West and Sereboff. Every court that has looked at this question so far agrees with us on this point. And, not to get too much into the prediction game, I think it is unlikely that the Supreme Court will use this case to reverse field on the question of what's appropriate equitable relief under Section 502(a)(3). Had plaintiff pled the 502(a)(2) claim in the district court, the litigation may well have proceeded differently. For instance, there may have been a more fully developed record after discovery, so that the case could be resolved on a motion for summary judgment. The Fourth Circuit was correct in observing that the 502(a)(2) claim was waived, having not been litigated in the district court. As with other types of litigation, the parties to ERISA actions are better served when the basic rules of engagement are followed and parties are not permitted to raise new issues for the first time on appeal. In our judgment, a more complete record in this case would have made it even easier for a reviewing court to understand that this is not a good vehicle for expanding the scope of Section 502(a)(2). A court looking at this fact pattern in response to a motion for summary judgment would readily conclude that this case does not present a triable claim for “losses to the plan” resulting from a fiduciary breach. More generally, I don’t think it’s wise to have some sort of special, more lenient, pleading rules in ERISA cases. The Supreme Court’s recent decision in Twombly recognizes the negative consequences, both to parties and the civil justice system, of the substantial costs imposed on defendants in having to go through discovery in complex litigation involving putative class claims. Those litigation costs are obvious in the 401k plan “stock drop” cases. The excessive fee claims present the same kinds of costs for employers and plan sponsors. The Court’s decision in Twombly wisely recognizes that bare allegations of a statutory violation, without more, should not subject a defendant to the tremendous cost of full-bore class action litigation. It shouldn’t make any difference whether such claims are brought by antitrust plaintiffs, Title VII claimants, or by lawyers representing ERISA participants.
Blog: Any particularly surprising questions or lines of inquiry at the oral argument directed at either you or LaRue’s counsel? What’s particularly interesting or surprising about it?
Tom Gies: Although the questioning of Mr. Stris regarding Section 502(a)(1)(B) was not a surprise (we mentioned it in our brief, and one of our amici devoted considerable time to the issue), I was intrigued with the implications in some of the questions asked by three of the Justices about the potential interplay between 502(a)(1)(B) and 502(a)(2). These questions suggest the Court will provide a careful analysis of the inter-relations of the various subdivisions of Section 502. The Court’s subsequent denial of certiorari in Eichorn v. AT&T may be another indication of the Court’s approach to this corner of ERISA law.
Blog: Any answers you’d like to have back? Any questions you’d like another shot at?
Tom Gies: I would have liked the opportunity to engage Justice Breyer more fully, perhaps in response to his second diamond theft hypothetical, on his question of "why" 502(a)(2) should not be read to extend to a situation like this. A decision to expand the remedies available under Section 502 has significant consequences because it is contrary to ERISA’s goal of encouraging plan formation. Permitting such lawsuits would inevitably require someone to make judgments as to a variety of issues, including: should there be a limit on damages, whether there should be jury trials for such claims, whether there should be an obligation on the part of the plaintiff to do some due diligence before bringing a damages action years after the alleged mistake, whether employers and plan sponsors can require arbitration of these kinds of claims, what should be done about the consequences of such litigation to the fiduciary insurance industry, and how would such claims be fit into the current rules for certification of class actions under Rule 23. There are surely others. These kinds of policy judgments seem best left to Congress.
Blog: Play it out for us. What’s the negatives for the industry if the Court reverses the Fourth Circuit and allows these types of claims to go forward?
Tom Gies: Imagine you have a new employee who joins your law firm, which, we assume, sponsors a 401k plan. Four years after you hire her, you get a lawsuit seeking compensatory damages for a violation of ERISA’s fiduciary duty rules. Her lawyer claims she was not given enrollment forms when she was hired, because of a mistake made by your HR director, and, as a result, employee contributions into the 401k plan were not made. The complaint goes on to assert that, had the contributions been made, she would have invested in Google the day after its IPO, and that the plan fiduciaries are personally liable for more than $500,000 in lost profits. When you look into it, your HR manager has a vague recollection that the employee took the paperwork and said she’d “think about” whether she wanted to join the plan. Should that case go to trial? Before a jury? Justice Scalia’s comment during oral argument in LaRue seemed to appreciate our point – there would be no end to the type of damages claims that plan participants could devise if these types of claims are permitted to go forward.
Imagine another situation. One of your employees who participates in your 401k plan had 75% of her account balance invested in mutual funds heavily concentrated in real estate. Now that those investments have lost considerable value, she seeks counsel. You get a complaint for compensatory damages that includes the allegation that someone in HR told the employee to “stay with” the real estate investments because that sector of the market would be sure to turn around soon.
The considerable costs of defending against such lawsuits will be born ultimately by employer plan sponsors. Fiduciary insurance will become even more expensive. Permitting these kinds of claims would undercut one of the fundamental assumptions made by employers in deciding to offer DC plans, rather than DB plans – the ability to shift investment risk to employees. All in all, a bad idea if you believe, as we do, that it’s critical not to take steps that would discourage employers, particularly small employers, from continuing to offer DC plan.
Blog: Paul Secunda, at the Workplace Prof blog, and I have been going around and around for a bit about whether ERISA is properly understood as having been intentionally enacted by Congress with only limited rights of recovery and remedy for plan participants. Clearly, that idea underlies DeWolff’s arguments to a substantial degree and, in fact, the lower courts’ rejection of LaRue’s claims can be understood as a recognition of this principle and of the fact that, as a result, LaRue simply has no recourse at this point. What’s your view on this? Are those of us who treat ERISA as specifically and intentionally limited in this way right about that?
Tom Gies: I start with Pilot Life and Mertens where the Court is clear in stating that ERISA represents a series of political compromises, not all of which were in favor of plan participants. ERISA is thus fundamentally different from other employee protection statutes. Encouraging plan formation, through the tax laws and otherwise, seems to me to be a cornerstone of the statute. And, of course, it’s not accurate to say that people like Mr. LaRue have “no recourse” in a situation like this. From what we know from the record, this is a case that could have been avoided by a telephone call. If you want to sell 100 shares of stock, you probably call your broker and place the trade. If you don’t get a confirmation order pretty quickly, you’ll call back, and if you don’t get a satisfactory answer, you’ll call her boss. If the boss won’t help you, you’ll escalate the situation until you get your trade executed. People like Mr. LaRue who want to trade securities in their 401k plan accounts have a variety of remedies available to them; they just don’t have a cause of action for compensatory damages based on a lost profits theory.
Blog: I shouldn’t put you on the spot, but I will - want to hazard a guess as to the outcome of the LaRue case?
Tom Gies: The Fourth Circuit will be affirmed 5-4, with the majority concluding that it is up to Congress to decide whether to extend the remedies currently set forth in Section 502.
Robert Kingsley, Insurance Industry Oracle
Permalink | In the first and so far last of our series of interviews with people of interest in the insurance and ERISA communities (I will do more at some point, but the interview post turns out to be the most difficult and time consuming to do well, which is probably why most people leave them to professional journalists turned bloggers like Peter Lattman at the WSJLaw blog, who do them really, really well), veteran insurance executive Robert Kingsley discussed the pace of consolidation in the insurance industry. Asked whether he saw that trend continuing, Robert noted that “there is little doubt the pace of consolidation will accelerate” and explained that in an industry, such as insurance, flush with capital, consolidation was inevitable. Robert had more to say on the subject, and you can find it here.
I am reminded of Robert’s comments by this story here in Massachusetts, that Spain’s largest insurer has now offered to pay $2.2 billion for comparatively small Massachusetts insurer Commerce, with the intention of using it as a platform to grow its business in the American market. Commerce was previously known primarily as a Massachusetts company focused on automobile insurance.
One of the interesting aspects about the news coverage of the Commerce acquisition is that the Spanish insurer, Mapfre, already operates in some 40 countries, but has a relatively small footprint in the United States and intends to use the purchase as a primary vehicle to expand its operations here. As Robert pointed out in the interview he did for this blog, insurers are making growth promises to investors that cannot be met by organic growth, which is driving the need to grow through acquisitions; that drive to grow appears to have played a large role in this purchase as well.
Latest Events at the Anne B. Kingsley Ovarian Cancer Foundation
Permalink | I think every blog should have an official charity or good cause, and this one’s is the Anne B. Kingsley Ovarian Cancer Foundation. Not only is it a truly good cause, but it also falls under this blog’s bailiwick, given that the Foundation’s founder is long-time insurance industry executive Robert Kingsley. The Foundation is currently running a fundraiser structured around a cookbook called Recipes Recollections Research, a collection of recipes from friends of the Foundation. Food and eventually a cure, who could ask for more? The Foundation’s website is here, and information on purchasing the cookbook to help support their work is here.
Anne B. Kingsley Ovarian Cancer Foundation
Permalink | When I posted my interview with veteran insurance executive Robert Kingsley a couple weeks ago, on the subjects of insurance industry consolidation and what insurers think about the lawyers they hire, I failed to mention that, in addition to his years in the industry, Rob is also the founder of the Anne B. Kingsley Ovarian Cancer Foundation, something which I probably should have included when I profiled him in the post. I was reminded of this when I received the foundation’s recent mailing announcing that the foundation, though young, had already made its first significant research grant.
I am a big supporter of the foundation, not least because Rob’s long record of success suggests to me that the foundation is likely to be a success as well. I would encourage you to take a look at the foundation’s website, and to pitch in with a contribution. I can assure you, its not a foundation where the donations will go to waste.
And that, I suppose, should satisfy the FCC requirement that all bloggers publish the required amount of public service posts. That’s a joke - if it went right by you, go down the hall and ask the communications lawyers at your firm to explain it.
Robert Kingsley on Insurance Industry Consolidation, and the Pros and Cons of Hiring Lawyers
This blog serves many purposes, at least in my mind. Among them is to bring to the reader information he or she may otherwise not have access to, and another is for me to investigate things in the insurance and ERISA fields that I am interested in. I think both of these purposes are well served by a recent discussion between the blog and Robert Kingsley, who until last year was the President and CEO of Financial Pacific Insurance Company, a California based insurer; Rob left the company after closing its sale to the Mercer Insurance Group. Rob spoke with the blog recently to provide some insight from inside the insurance industry:
Blog: You have certainly had a close up view of the trend towards consolidation in the insurance industry, having just overseen the sale of one insurer to another. Any thoughts on whether this trend will continue, accelerate, or instead slow down?
Rob: In a declining rate environment with the pressure to grow and companies flush with capital there is little doubt the pace of consolidation will accelerate.
Blog: Is the trend towards consolidation a positive or instead a negative for the industry?
Rob: I think consolidation is a good thing for any industry so long as the markets remain competitive and the barriers to new capital and new ideas remain relatively low. The fact of the matter is that smaller, entrepreneurial organizations innovate in ways the larger companies, due to their sheer size, are incapable of.
Blog: What about for the consuming public?
Rob: So long as the market remains competitive the trend toward consolidation will help consumers. For one thing, as companies grow through consolidation they achieve greater economies of scale in their expenses and a portion of the savings will be passed on to consumers in the form of lower rates.
Blog: What is driving the urge to merge in the industry?
Rob: The industry is over capitalized and companies have made certain growth and profit growth ‘promises’ to investors, which are simply not achievable through organic growth.
Blog: Big insurers, smaller insurers? Who’s got the bigger upside at this point?
Rob: I may be biased (having a small company background) but I am a believer in the small insurer. I think they generally know their markets better and react and respond to opportunity more effectively than their larger counterparts. It’s not a universal rule, but on average, smaller niche companies have outperformed their larger peers. Conning has performed a couple studies on this subject.
Blog: There is probably no bigger consumer of legal services than the insurance industry. From your point of view of having led a company that consumes those services, what is your biggest complaint about lawyers and the services they provide to clients?
Rob: The big disconnect is that the lawyers are selling time and the insurance companies are buying results. That’s all I say about that subject (note my wife is an attorney).
Blog: What’s the single biggest thing lawyers could do to better serve clients like the company you headed?
Rob: Financial Pacific had (has) an in-house law firm that handled 80% or more of our litigated cases. The reason we formed that firm was to change the economics of the loss adjustment process. When a carrier is paying an hourly fee to an attorney it can affect the carrier’s settlement appetite and price point. Turning that variable cost into a fixed cost allows the carrier to cleanly evaluate the merits of the litigated case without being affected by the ‘meter is running’ mentality. Law firms that are sensitive to that dynamic and/or are willing to be evaluated and compensated based on their results (their outputs) as opposed to their inputs (hours) would be valuable and highly coveted.
Blog: Rob, thanks for your time.