Whether people generally understand it or not, and whether the NFL and team lawyers and other representatives quoted in Jenkins’ article know it or not, most lawyers are aware of the general, historical basis for workers compensation schemes, and of the underlying tradeoff on which they are based: in exchange for abandoning the tort system as a means of remedying employment related injuries, employees are given an essentially assured, but limited, recovery for injuries caused by their employment. The NFL players discussed in Jenkins’ article thus either are entitled to workers compensation benefits (or should be, absent gamesmanship by the NFL of the type depicted in her article) for their injuries, or their injuries must be deemed to fall outside of the scope of the workers compensation system, with the former players allowed to seek recovery in the court system from the NFL and their former teams for the injuries from which they suffer. There really is no other appropriate understanding of the proper operation of the intersection of the judicial and workers compensation systems in this context, unless the NFL is going to step up to the plate (I know I am mixing my sports metaphors here) and accept responsibility for the medical care under its disability plan.
 

This has meant, however, that for years, large amounts of quality work discussing ERISA issues has sat on my desk, reviewed only by me and not passed along, despite the value of much of that work. It has always bothered me when an article or decision worth passing along has come in front of me, but that I would not be able to discuss in a blog post, either because I was posting on a different issue, or because of the crush of my real job (which is litigating these and other types of disputes).

Eventually, though, light dawned on Marblehead, and I realized I could solve the problem by using Twitter for one of its originally expressed purposes, as a microblogging tool, and tweet articles, comments, decisions and the like that I believed to be of value, but which I did not expect to discuss in a full blown blog post. I have been doing so for awhile now, and have taken to regularly passing along relevant ERISA news that will not make it onto the blog. You can follow me, and my running list of interesting ERISA information, at @SDRosenbergEsq.
 

I discussed this concept in much greater detail in my recent article in the Journal of Pension Benefits, “Looking Closely at Operational Competence: ERISA Litigation Moves Away from Doctrine and Towards a Careful Review of Plan Performance.” The article discusses how the last several years of ERISA litigation, including in particular the Supreme Court’s recent activism in this realm, has created this phenomenon. You can find a much more fully realized presentation of these points in the article.
 

I was thinking of this when I read the Workplace Prof’s excellent and extensive blog post on the two latest developments at the Supreme Court concerning ERISA law, the first being the very recent decision in US Airways v. McCutchen, which I suspect will soon be reduced to the defense assertion that courts must always apply the plan terms as written, and the Court’s grant of cert in Heimeshoff v. Hartford, on the application of statute of limitations to benefit claims under ERISA. You don’t have to really study the source material on either of these cases to hold forth on them at this point, because you can just read the Prof’s post, and be all set to pontificate on them without a problem. Less tongue in cheek, it really is worth reading, if you want to understand, with a limited investment of time, what these two cases are about and why they matter.

I would also throw in, with regard to the opinion in McCutchen, two additional comments that you can borrow, if you really want to look erudite without doing any homework on your own first. One, it really is a well-written piece of work, taken simply as an example of the written form in the legal context, without regard to how one may feel about the merits of the decision. I would suggest it to connoisseurs of the form for a read, under any circumstances. Second, the case, although an ERISA decision, has an easy transition to the doctrines of insurance law, where subrogation and the impact of the common fund doctrine are in play on a routine basis; it adds additional support for any argument that the common fund doctrine should always apply in that circumstance. In this regard, feel free to drop a knowing reference to footnote 8, if you really want to appear in the know.
 

Second, there is a lot of talk about the expansion of litigation against DC plans and their providers, and has been for sometime now. How does that fit with the minimal recovery by the class in Tibble? To some extent, Tibble, although affirming a trial court award to the class, is not much of a victory, given that the class only recovered a few hundred thousand dollars. In fact, to call it a victory for the plaintiffs, while correct , reminds me of nothing so much as the comment of British General Henry Clinton after the Battle of Bunker Hill, when he noted, given the extent of British casualties, that “"a few more such victories would have surely put an end to British dominion in America." Likewise, a few more victories similar to this one for class plaintiffs in excessive fee cases will put an end to this area of litigation quicker than anything else could, as these types of cases simply would no longer be worth the costs and risks to the class action plaintiffs’ bar. However, it is important to remember that the dollar value of the recovery in Tibble was likely driven down substantially by the statute of limitations ruling, which took much of the time period of potential overcharging out of the case and with it, presumably much of the recovery. If participants bring suit over fees closer to the time that the investment menu that included the excessive fees was created, they will not face that barrier to recovery and the likely recovery could easily be high enough to justify the risks and costs of suit. This, interestingly, is where fee disclosure should come into play – participants, and thus the plaintiffs’ bar, should have enough information about fees to bring suit early enough to avoid the statute of limitations problem that impacted the plaintiffs in Tibble. As a result, there should be more than enough potential recovery in many possible excessive fee cases to motivate plaintiffs’ lawyers to pursue the claims.
 

Of import to ERISA, however, is a much narrower and more specific point, which is the Court’s cabining of the scope of the 404(c) defense so as to only encompass participant decisions that take place after the selection of the investment menu, on the basis that this reading matches the Department of Labor’s interpretation of 404(c). Based on this reasoning, the Ninth Circuit concluded that a fiduciary’s selection of investment options is not protected by 404(c). This is, at the end of the day, perhaps the most important aspect of the Court’s opinion, although in the immediate aftermath of the ruling it may well not be the aspect that garners the most comment and attention. However, it is really the one key part of the ruling that expands the scope of fiduciary liability and that adds to the arsenal for lawyers who represent plan participants, in that it clearly demarcates the selection of plan investments as an issue that falls outside of a 404(c) defense. Not only that, but the opinion does so in an articulate, well-reasoned manner, making it likely to have significant persuasive force when the issue is considered by other courts.
 

The second though, is the more important one. I have done a fair bit of patent and copyright litigation (especially the latter) over the years, almost exclusively for defendants, and it is a lot harder to actually win and recover significant money on copyright infringement claims than many people – including most lawyers – believe. The headline stories of massive awards in patent infringement cases lead people to extrapolate across the board to other types of intellectual property cases, but those cases don’t actually extrapolate well. The various defenses available to defense counsel in copyright infringement cases makes for a tough road in that area for plaintiffs (much to my happiness, I admit, when I am representing copyright defendants).

And finally, the third point the article drives home is this one. When representing plaintiffs in intellectual property cases, always think twice before deciding to accept bifurcation without a vigorous battle. Its hard enough to convince a jury to find infringement, but once having done so, it is better to move onto damages in front of that same jury, with whom you have presumably already established credibility. Bifurcation forces the plaintiff to reestablish that credibility, and any sympathy, all over again in front of a new jury, and causes the plaintiff to lose whatever momentum led to the liability verdict in the first place. All trial lawyers have their own pet theories; that is one of mine.
 

I plan instead, however, to run a series of posts, each tackling, in turn, a separate point that is worth taking away from the Ninth Circuit’s opinion. The first one, which I will discuss today, concerns ERISA’s six year statute of limitations for breach of fiduciary duty claims. The Court held that, in this context, ERISA’s six year statute of limitations starts running when a fiduciary breach is committed by choosing and including a particular imprudent plan investment. The Court held that the fact that it stayed in the investment mix did not mean that the breach continued, and the statute of limitations therefore did not start running, for so long as the investment remained in the plan.

Beware future arguments over this holding. You can expect defendants to regularly argue that this case stands for the proposition that the six years always runs from the day an investment option was first introduced, and that any breach of fiduciary duty claims involving that investment that are filed later than six years after that date are untimely. You can also expect defendants to argue to expand this idea into other contexts, and to ask courts to rule that anytime the first part of a breach began more then six years before suit was filed, the statute of limitations has passed. This would not be correct. The opinion only finds this to be the case where there were no further, later in time events that, as a factual matter, should have caused the fiduciaries to act, or which, under the circumstances of those events, constituted a breach of fiduciary duty in its own right; if there were, then those are independent breaches of fiduciary duty from which an additional six year period will run. Those independent, later in time breaches would presumably be their own piece of litigation, evaluated independent (to some extent) of the original breach.
 

And it is true that company officers who play roles in company benefit plans – often simply as an adjunct to their usual list of job responsibilities – are sitting ducks for fiduciary exposure. I have spent years extracting company officers, whose real job focus was elsewhere (marketing, or sales, or operations, or the like) from suits against them for breach of fiduciary duty related to company benefit plans that they were involved with simply as a sideline to their “real” responsibilities. At the end of the day, though, what such officers have to understand is that they face potentially significant, and substantial, personal liability under ERISA for problems in the operations of such plans and therefore, if for no other reason than self-preservation, they need to treat this part of their responsibilities as also part of their “real” responsibilities. It can cost them too much money if they don’t.

I was prompted to write about this today by this interview with Samuel Rosenthal, the author of a deskbook on the potential legal liabilities of directors and officers. There isn’t much doubt that the significant risk of ERISA exposure, and the details of how to avoid that risk, need to be in any such book. There are standards of conduct that officers can follow that will avoid liability in this area; actions in contemporaneously documenting that conduct that can mean the difference between winning and losing lawsuits against them over company benefit plans; and issues with insulating themselves prospectively from potential liability for breach of fiduciary duty under ERISA, such as through insurance or indemnification agreements.
 

For most ERISA lawyers, including myself, the response to this typically falls in the category of yup, what else is new, followed by a shrug and an assertion that plan requirements, funding issues, age limitations and other retirement plan issues have to be managed in a way that recognizes and accepts this reality. The Washington Post article, however, points out that there is a moral element to this evaluation, which is that a correlation exists (or appears to exist, as I am always skeptical of any statistical claims unless and until I am satisfied about the underlying data, as per my discussion here) between wealth at retirement age and life expectancy. I highly doubt that there is much that ERISA really has to say or can do about this phenomenon: the reality is that plans are only required to provide what the plans say they are required to provide, and ERISA basically (and very generally speaking) requires only that. But to the extent this correlation truly exists, then perhaps ERISA, and how it is interpreted and applied by courts, has a role to play, at least at the margins, when it comes to this problem, in the sense that it warrants courts holding plans and their authors to high standards of excellence and competence. This is probably the least, and may well be the most, that ERISA can bring to the table in addressing this issue.
 

[ESOP] trustees . . . have a duty to prudently select . . .appraisers and that, even if the appraiser is prudently selected, the trustee still has an obligation to make sure the assumptions on which the valuation is based are reasonable under the circumstances. [The DOL] also said that trustees should be wary of a seller’s role in selecting the appraiser [and that] trustees should also read the appraisal.

The authors then captured what the DOL identified as key failings in appraisals that can make a valuation suspect:

•No discount applied for lack of marketability;
•Failure to take into account the risk associated with having only a single supplier or customer;
•Inflated projections;
•Inconsistencies between the narrative of the valuation and the math in the appendices;
•Use of out of date financial information;
•Improper discount rates;
•Incomparable comparable companies – for example using a large public company as a comparable to a small private company; and
•Failure to test the underlying assumptions.

What is most interesting to me about this is that, although the authors were focusing on valuation and appraisal issues that risk drawing the attention of the DOL, they have also captured the fundamental issues in breach of fiduciary duty litigation arising out of ESOPs. These types of mistakes by ESOP plan fiduciaries in using and relying on appraisals will support breach of fiduciary duty litigation by ESOP participants, and if such mistakes caused a loss to the plan, will be sufficient to impose liability on the fiduciaries. In contrast, avoiding all of these potential traps is likely enough to insulate fiduciaries of ESOP plans from liability for breach of fiduciary duty.

The takeaway for ESOP fiduciaries? Pay attention to each one of these points in the handling of valuations, and you may prevent not just DOL enforcement action, but being named as a defendant in breach of fiduciary duty litigation instituted by plan participants.
 

The most important way of viewing the decision, in my thinking, is to remember that exhaustion of administrative remedies in this scenario is not a statutory requirement, and is instead a judge-made doctrine that is based on certain assumptions about ERISA plans and certain premises that are thought to be implicit in the statute. In practice, the imposition of an exhaustion of administrative remedies standard on ERISA claims has generally not been a problem, has worked well, and has been effective in effectuating many of the goals for the statute, such as cost efficiency, limited litigation, and encouraging employers to create benefit plans. That said, however, there is certainly no clear cut basis in the statute for believing that, if a plan sponsor doesn’t clearly communicate the need to appeal within the plan, a plan participant should be required to do so or be shown the courthouse door for having failed to do so. This is essentially all that the Second Circuit concluded: if the plan sponsor doesn’t make it clear to the participant in the relevant documents that certain internal administrative appeals are required, along with explaining how to do that, an obligation to do so cannot be imposed on a plan participant.

This is not a new issue, although the decision in Kirkendall may be the most significant authority to date for this proposition. I have litigated this issue in the past, but most often you see it in one-offs like top-hat plans (or virtual one-offs, like SERPs for just a few executives), where a custom document is created for certain employees to address compensation-related issues, and the ERISA procedural component of doing so is not front and center in the authoring attorney’s mind. Usually, the outcome of any dispute over administrative exhaustion in those situations ends up the same as the ruling by the Second Circuit in Kirkendall for all intents and purposes, but getting to that result is harder than just citing a leading decision from a prominent appellate bench; you instead had to rely on a collection of lower court decisions finding exhaustion to not be required for a multiple of different reasons. Certainly, at the end of the day, Kirkendall will make it easier for lawyers for plan participants faced with this scenario to support their arguments that they can prosecute a claim in court without first exhausting internal administrative appeals, but I don’t think it will much change the outcome from what would have occurred without that decision.
 

This is true for plan documents, LTD policies, and essentially any contract – words and anticipation aren’t always enough to create a document that fully provides for everything that might happen in the future, leaving the parties to dispute how the document applies when a novel event eventually occurs. This has never been so evident as in this new decision from the First Circuit Court of Appeals, in which the issue arose as to whether the future risk of a relapse by an anesthesiologist who had been diagnosed with addiction rendered the physician disabled for purposes of an LTD policy. The case itself is fascinating, as is, to some extent, the question at its heart: if the currently disabling event has passed, but the participant may become again disabled, is the participant still disabled for purposes of the policy? The question itself sounds like a Zen koan and, phrased as I just have, almost as unanswerable. Almost, but not quite, because the First Circuit found an answer, rooted in the limitations on language and foresight I noted above. The Court found that the risk of relapse rendered the participant still disabled, because the LTD policy did not specifically exclude this risk. So there you have it: if you don’t want to cover the currently rehabilitated participant whose risk of relapse means he can’t go back to work, you better write that down somewhere in the plan or the policy.