I have an interesting relationship with ESOPs, both as a matter of my personal preference for corporate designs that place at least some of the value of a company in the hands of those who create that value, and from the perspective of a lawyer who has spent many years litigating ESOP disputes. The two perspectives I hold tend to run counter to each other, or at least to not overlap, because while a well-run ESOP tends to by definition involve the former, it is typically a poorly – or even an intentionally deceptively – run ESOP that ends up the target of litigation (not to suggest, however, that only bad actors in the ESOP space get sued, as obviously that is not the case with ESOPs or anything else).

I often try to capture this dichotomy in the comment that ESOPs are only as good as the good faith of those who run them. By this, I mean that the inherent structure provides many opportunities for insiders and advisors to profit at the expense of participants. When those running an ESOP are acting in good faith, mistakes may happen, but overall, the goals of the ESOP structure (a fair exit for selling insiders and wealth creation for employees) are accomplished. Otherwise, questionable occurrences and actionable misconduct tend to occur.

One of the central aspects of the ESOP undertaking is valuation of the company stock (I am discussing here private company ESOPs), which is central to operating an ESOP for many reasons. Valuation is a regulated activity in this regard, but it also is, in many ways, subject to the honor system – with much of the litigation involving ESOPs originating from someone trying to manipulate valuation under those circumstances.

The central role of valuing private company stock, and doing it in a manner satisfactory to the Department of Labor, is discussed by Rick Pearl of Faegre Drinker in this excellent piece, “Thinking ESOPs: Amicus Brief Argues that DOL has been Misinterpreting the Adequate Consideration Exemption.” Right there, in that question of the central concept of how company stock in an ESOP needs to be valued, is the primary issue both in most ESOP litigation and in avoiding litigation in the first place by properly running an ESOP. As you see in the article, there are many factors to consider in analyzing a valuation and that should be thought about in considering whether a challenged valuation has been done correctly. For almost every one of those factors, there is both a way to look at it which can justify litigation and a way to do it that will decrease the likelihood of litigation arising – but so much of the process is amorphous, and the propriety of different considerations so often in the eye of the beholder, that seeing which one is which isn’t always obvious.

And that, in a nutshell, is why the key to a well-run ESOP rests in the unadulterated good faith of those in charge. That amorphousness means it is easy for a plan to run off kilter, and in particular for stock to be unfairly valued, and the only real protection against that is the desire of those running the ESOP to get it right, for the benefit of both exiting company founders/owners and the employees taking on an ownership interest in the company.

I didn’t want July to pass without commenting on The Fid Guru’s excellent blog post reviewing excessive fee litigation over the first half of the year and the corresponding state of the fiduciary liability insurance market. I particularly appreciated the extensive discussion of the history of the market for fiduciary liability coverage, as it gives excellent context to the commentary that is out there on the internet and elsewhere about changes in the availability and pricing of fiduciary liability insurance. As many of you likely know, there has been much internal discussion among lawyers and plan sponsors concerning the availability of fiduciary liability coverage. The post explains that – subject to exceptions – coverage generally remains available but policy limits have become – pun intended – limited, and the use of substantial retentions or sub-retentions has increased substantially, all to control the level of risk taken on by insurers in light of the dramatic rise in class action litigation against plans.

I have defended a few clients over the years against lawsuits who didn’t have fiduciary liability coverage (either because they chose not to purchase it or tried to but couldn’t obtain it) and who regretted not having the coverage after being sued. Whatever the terms were for the coverage when they could have purchased it, it was less expensive than the cost of fully funding the defense of the litigation itself and the settlement in full, from dollar zero, as they were required to do in the absence of any coverage at all. Even with a high retention, they still would have significantly reduced their liability in each case by having had fiduciary liability coverage in place.

Twenty years or so ago, I represented an insurer in a $20 million insurance bad faith and Chapter 93A claim in which one of the key issues was whether the insurer was right to rely on the advice of a terrific lawyer, Tom Burns (the Burns in the Boston firm Burns and Levinson), who had defended the insured in a substantial personal injury case. Judge van Gestel, a former Goodwin trial partner who was the founding judge of Massachusetts’ well-regarded business litigation court, found after a bench trial in favor of the insurer and, by inference, of Burns’ original advice as well.

What I most often think about from that case is one particular question from the plaintiff’s counsel to Burns and his one answer. In an attempt to show that Burns’ advice should have been disregarded, plaintiff’s counsel tried to show that he was overly dependent on the insurance industry by characterizing him as an insurance defense lawyer; the question caused Burns to explain that in his 40 plus years as a trial lawyer he had tried everything from securities fraud cases to wrongful death claims and countless types of claims in-between. From a courtroom tactics perspective, one of the great things about that answer was that it put an end with only one thoughtful answer to what otherwise undoubtedly would have been a long line of hostile questioning on the subject of whether counsel was overly connected to the insurance industry.

I often think of this because, while I am predominately at this point in my career an ERISA and insurance bad faith litigator, I have litigated and tried many other types of cases over the years, ranging from patent infringement cases to business disputes to construction accident cases and a host of others. One of the more interesting things to me, probably as a result, is when a decision in one area of my practice is instructive for another area, as long as you see, and are prepared to make use of, the overlap.

A couple of weeks ago, in Vermont Mutual Insurance Company v. Poirier, the Massachusetts Supreme Judicial Court addressed a number of issues related to attorney fee awards in Chapter 93A cases. One of the commonalities between ERISA litigation on the one hand and insurance bad faith litigation in Massachusetts on the other is that each is an exception to the American rule on attorney’s fees, with each statute containing a fee shifting provision. Two aspects of the Court’s discussion in Vermont Mutual are, I think, of particular value to lawyers litigating fee disputes in both contexts, and are easily transferable to briefing of fee disputes in the ERISA context.

There are two common arguments in defending fee requests, and you see them particularly often in ERISA cases. One is that the work of plaintiffs’ counsel doesn’t justify the amount of the request. It isn’t always easy to find a succinct statement in the case law of how a court should think about whether the amount being sought is justified, and lawyers often respond by instead writing far more on that subject in a brief than they should. In Vermont Mutual, though, the Supreme Judicial Court provided a pithy explanation of the right way to analyze this question, explaining that:

What constitutes reasonable attorney’s fees “is a multifactor assessment of ‘the nature of the case and the issues presented, the time and labor required, the amount of damages involved, the result obtained, the experience, reputation and ability of the attorney, the usual price charged for similar services by other attorneys in the same area, and the amount of awards in similar cases.’”

I would venture that, in 99% of cases where fees are sought, a court could settle on the right amount to award simply by applying this framework.

Second, defense lawyers always complain in fee disputes (particularly in ERISA cases, where cases can take many years and the incurred fees can therefore be substantial) that the amount sought is too high, and sometimes that is true – all lawyers working in these areas have seen fee requests that appear to be an attempt to gouge a losing defendant. Many times, however, the truth of the matter is that the real reason the fee request is large is because the defense team did an excellent job, forcing plaintiff’s counsel to invest many hours to win the case. In a footnote in Vermont Mutual, the Supreme Judicial Court addressed exactly this point, noting that “[d]ue in no small part to the very capable defense presented by defendants’ counsel, the plaintiffs’ counsel had to work long and hard to overcome numerous hurdles and to build their case,” with the Court acknowledging that this should be considered “[i]n evaluating the work done by the prevailing attorneys.” To me, the quality of the defense team’s work is always an important point that should be considered when a court passes on a fee request, because it often can explain the size of a particular request and is often the key issue in evaluating whether what appears to be a particularly high fee request is actually not when viewed in context.

Bobby Bonilla day is celebrated every July 1st, as the day on which the retired outfielder is paid $1,193,248.20 from the New York Mets, which the Mets will continue to do until the last payment in 2035. Its usually recognized in the media as the punchline of a joke about the Mets and their previous ownership, which took on this long term obligation rather than simply paying Bonilla the $5.9 million that, in 2000, was still owed on his contract. As the Wall Street Journal pointed out over the weekend, the brilliance of the deal for Bonilla was the 8% interest that was built into the deferral, which turned out to be a high interest rate relative to the low interest rate environment that was to come.

There are two interesting things about this deal and story, which tend to get lost in the fun people have at the expense of prior Mets ownership based on the deal. The first is that its not a fluke that Bonilla got paid and there is a reason why he had big money coming – whatever player Bonilla might have been by the time he finished up with the Mets, the Pittsburgh Pirate Bonilla of the late 1980s was a brilliant baseball player, and the outfield he formed with a young Barry Bonds and Andy Van Slyke was beyond exciting to watch. I have always thought that point about Bonilla always gets forgotten when Bonilla day, and its inevitable fun at the Mets’ expense, comes around.

Second, if you strip away the baseball overlay, Bonilla’s agreement with the Mets is a classic deferred comp agreement, of the type widely used with executives in all types of fields. Deferred compensation agreements are often granted by employers to senior management or executives, and provide contractually promised payments to those executives during their retirement (just like the Mets’ deal with Bonilla does for him). The Mets had their reasons for deferring the payout into his retirement years, and so too employers defer executive compensation into retirement for reasons of value to the company, such as encouraging executives to stay with the company until retirement rather than to leave for competitors.

To a litigator like me, though, Bonilla’s deferred comp deal and its history highlight a dark side of deferred compensation programs. Despite changes in ownership and management at the Mets, the deferred comp agreement continues to live on and, at least to an outsider, it does not appear that new management has ever tried to get out from under the deal, even though the interest rate environment shifted in ways that made the original deal a poor one for ownership. In the business world, though, it is not unheard of for management to try to revise the terms of deferred compensation agreements in their favor and at the expense of retired former executives when, as in Bonilla’s case, the interest rate assumptions on which the agreement was based become outdated in a way favorable to the former executive but unfavorable to the company. Sometimes these types of attempted revisions can be minor, and other times more dramatic, but if you look closely, you often find the same thing: a payout calculation that is based on an interest rate that made sense at the time the agreement was executed but that over time has become excessively favorable to the retired employees.

I have litigated this issue more than once (here’s an example) and that is probably why the most interesting thing to me about Bonilla day is that his long term payout is hiked up by an out of date interest rate – but without the payor trying to do anything about it. And that’s the second aspect of Bonilla day that is interesting to me. At the end of the day, despite the fun people take from it at the Mets’ expense, its really just a classic deferred comp agreement that was based on a prediction as to future interest rates, and that was entered into by a company that, to its credit, has abided by the terms of that deal, even though it miscalculated.

One of my partners emailed me the other day with kind words about my blog, and I responded that there was plenty to write about these days when it comes to ERISA and insurance. Amusingly, this morning’s inbox ended up presenting the perfect exemplar. I was sitting down to write some follow up comments on the idea of crypto in 401(k) plans, which I wrote about last week, in light of this excellent article in the Guardian on the crypto crash and its impact on individual investors, when this article from Bloomberg Law (subscription may be required) popped into my inbox, discussing a new Eleventh Circuit decision holding that “[a] doctor’s widower can seek $350,000 in supplemental life insurance payments [because] ERISA authorizes claims for equitable relief based on alleged fiduciary breaches in the benefit plan enrollment process.” As the article explains, the Court held that the equitable relief remedies authorized by ERISA provide the proper avenue for the putative beneficiary of the life insurance to recover the life insurance benefits that would have been available, had the employee been properly enrolled, where errors in plan administration prevented actual enrollment. In other words, the Court held that equitable remedies allow recovery of the value of the lost life insurance benefits, even though the employee was never actually enrolled and thus never technically actually qualified for the benefit under the plan terms.

I have litigated this issue several times, and its been a slow evolution. Initially, courts tended to treat the fact that the employee was never enrolled, and thus entitlement to the absent life insurance benefits never existed, as an existential level barrier to recovery. Courts were open to hearing how the deceased employee’s beneficiary might nonetheless be entitled to recover, but they were initially skeptical of arguments in favor of recovery under these circumstances. Over time, however, including in cases I have prosecuted, district courts have come to accept the premise that, in light of the Supreme Court’s recognition in Amara of equitable remedies for fiduciary errors, the value of the absent life insurance benefits should be recoverable as equitable relief independent of the plan and the lack of coverage for that amount under the plan itself. The acceptance of this premise has now progressed to the Circuit Court of Appeal level, with the article depicting this ruling by the Eleventh Circuit as a decision of first impression at the appellate level.

The decision is here, and a Massachusetts Lawyers Weekly article discussing a district court decision to the same effect in favor of my client in one of my cases that anticipated this type of appellate ruling several months ago, is here.

Somehow, Shakespeare seems to have anticipated crypto; the ongoing kerfuffle over offering crypto in the investment menus of 401(k) plans is seeming more and more to be simply “sound and fury, signifying nothing.” For those of you who may have missed it, in the past several weeks, just to hit the highlights, Fidelity announced it would offer crypto investment options in 401(k) plans, the Department of Labor warned against offering crypto in 401(k) plan investment options, and investment platform provider ForUsAll sued the Department of Labor over that warning. All are about the same thing – the effort by vendors to plans to include Bitcoin in retirement plan options. There is a lot to be said about whether Bitcoin and the like belong in retirement plans and whether the option should even be offered to employees, as well as about the reasons for this sort of gold rush into this area by service providers to plans.

But none of it may even matter. If you read your Wall Street Journal weekend edition this past Saturday, you found article after article about the crypto crash, and one has to wonder at this point how many participants in 401(k) plans really even want such an investment option. Certainly, there are always going to be people who want to be able to make big, bold bets in their 401(k) plans, but just like most employees learned not to overweight their holdings towards their employer’s stock, so too is it likely that most will not want to incur the risk of this type of investment.

But to the extent it does still matter, I have one significant question for plan sponsors considering either offering such an option or even signing up with a vendor who pushes the option, which is have they thought about who bears the fiduciary risk of including crypto? As I often say about ERISA litigation, all is hunky-dory when the markets are going up, but once they start falling, the lawsuits against plan fiduciaries will pile up fast. I assume that the option to invest in Bitcoin and the like is generally going to be provided in a way that seeks to leave the risk on the participants of the investment choice, but decades of ERISA litigation leave me skeptical that this will hold up in court. So who will be liable for imprudent crypto investment options? Plan sponsors and named fiduciaries should study this question closely before agreeing to offer the option to participants.

This is a great article on the question of why smaller businesses do not offer retirement plans. I recommend reading it, and won’t simply restate its findings here, but instead want to add two thoughts.

First, there are many important issues in the world when it comes to retirement security for employees, but the lack of access to retirement plans in many smaller businesses is as important as any of them. Although there is room for debate over how exactly to interpret the data on small business employment, there is no question that vast numbers, and a very high percentage, of employees in the United States work for small companies. Simple logic tells you that, if small businesses either cannot or simply are not providing retirement plans, large numbers of employees then have no access to employer provided plans. That cannot help with retirement security in this country.

Second, the article omits one barrier to small companies providing retirement plans, which I have found time and again in my practice, namely, the difficulty for small businesses in accessing quality third party administrators and other resources. Every vendor wants to land a big employer as a client, but not all are prepared to or interested in servicing small shops with correspondingly small plans. This often leaves smaller companies to use weaker vendors, leading to increased mistakes and other problems with administration (leading then, in turn, to unexpected legal and compliance costs for small employers seeking to provide retirement plans). To be clear, I in no way mean to suggest that all, or even a majority, of vendors targeting the small employer market are deficient, and I admit that selection bias guarantees that I see a disproportionate share of poor quality vendors in my cases. However, there is also no question that this is, in fact, yet another barrier to providing retirement plans for the employees of small companies.

I am of two minds when it comes to ERISA decisions out of the Second Circuit. My first is to naturally jump to the conclusion that, in the immortal words of Willy Loman, attention must be paid, simply because of the Court.  Then I remember the long retired big law partner from my long ago days as a summer associate who would only allow me to cite to Second Circuit decisions, which he believed carried more heft than those of other courts, and I decide I don’t want to give decisions out of any particular circuit pride of place.

So what I do is balance those two responses, and allow them to cancel each other out; this ends up with ERISA decisions out of the Second Circuit being treated by me the same as those out of any other circuit, to be analyzed on their own merits and discussed only if their substance warrants. This case from last week out of the Second Circuit passes that bar, although possibly by not that much. McQuillin v Hartford Life holds that a disability insurer should be held to the strict letter of the Department of Labor’s claim handling regulations, and deemed to have forfeited its right to insist on completion of its own internal review prior to being sued if it failed to fully complete its review and issue a final decision within the time period set by the regulations. The insurer had instead issued, in effect, an interim decision within the necessary time period, and claimed for itself the right to proceed with further internal evaluation of the claim before the insured participant could sue for benefits. The Court held that the regulations allowed the insured to bring suit without waiting for the insurer to conclude that additional review.

The Court explained:

Under ERISA, a claimant may sue in federal court for benefits due to him under his disability plan. But first a claimant must exhaust his plan’s internal remedies. A plan’s remedies are deemed exhausted if the plan administrator does not “strictly adhere” to § 503-1’s requirements. McQuillin asserts that, because Hartford did not provide a “benefit determination on review” within the 45-day window required by § 503-1(i)(3)(i), his administrative remedies should be deemed exhausted. Although Hartford’s April 23 letter “overturned” the original decision and “forwarded” his claim to the claims department for further consideration, McQuillin maintains that the letter failed to render a “benefit determination.” Thus, because Hartford did not strictly adhere to the rule’s requirements, McQuillin’s remedies were deemed exhausted such that he was free to bring suit in district court. Hartford responds that its April letter was a timely benefit determination on review because such a determination need only resolve the issue appealed, not the entire benefits claim.

The dispositive question in this appeal is whether a valid benefit determination on review must determine whether a claimant is entitled to benefits. Based on the regulation’s plain language, structure, and purpose, we hold that it must. We further hold that, because Hartford did not extend the benefit determination period, McQuillin’s duty to exhaust had ceased by the 46th day, the day he filed his federal case.

It’s not exactly rocket science, to conclude that the Department of Labor regulations in this context mean exactly what they say and should be applied literally, and thus I almost passed on discussing this case despite its court of origin. In a way, though, the case makes me think of that justiciability doctrine of “capable of repetition, yet evading review,” under which issues are worth the court’s attention simply because they may happen many more times over. It seems certain that this type of problem in the handling of disability claims will recur many times over as insurers seek to process numerous claims – there is value to knowing what one leading court has said concerning how the Department of Labor’s claim regulations apply to the situation.

Section 510 of ERISA makes it illegal to take any job action for the purpose of interfering with an employment benefit that would otherwise have been due to the employee. The classic formulation of such a claim is terminating an employee right before a pension would have vested, simply to avoid owing the benefit; some observers believe that Section 510 was originally included in the statute specifically to address the concern that employers might respond to ERISA’s vesting requirements by terminating employees before vesting could occur. The statute’s language itself, of course, captures far more than just that circumstance, and in fact the provision is written broadly enough that it can be read to include within its scope some of the more creative theories that a plaintiff’s lawyer might come up with.

But here’s the thing – by definition, so long as a job offers benefits at all, you cannot have a termination that doesn’t negatively impact the employee’s ERISA protected benefits: everything from 401(k) contributions, to pension accrual, to employer provided health insurance, end or become limited by the fact of the termination. So the mere fact of the termination and the resulting deprivation of benefits can only be the beginning, but not the end, of the inquiry.

The statute, though, doesn’t address what more is needed for actionable retaliation to lie, and that is the interesting aspect of a recent decision, Joffe v. King & Spalding, by the Southern District of New York. In Joffe, a fired big law associate alleged that his employer retaliated against him in violation of ERISA by terminating him shortly before a 401(k) contribution otherwise would have vested. He lost, after the Court held that there wasn’t a scintilla of evidence indicating that the firm ever considered the vesting date of the contribution in deciding when to terminate his employment.

The Court in Joffe borrowed the classic employment discrimination burden shifting structure of McDonnell Douglas to decide whether the terminated employee was retaliated against in violation of ERISA because he was terminated before the contribution vested, when the employer could have simply terminated him a few weeks later and thereby allowed the contribution to vest. Under this test, as applied in the context of a Section 510 claim, the terminated employee must establish a prima facie case; if he does so, then “the burden shifts to [the employer] to articulate a legitimate reason for his termination unrelated to the interference with his ERISA rights;” and if the employer satisfies that burden, then it becomes the terminated employee’s burden to show that the reason depicted by the employer was pretextual.

So what happens in a case, like Joffe, where the employee is terminated right before vesting, thus causing forfeiture of the benefit, when there is no good reason that the employee couldn’t have just as easily been terminated a short time later, after the benefit had already vested? Does the employer have to be able to present a good reason for having terminated the employee when it did, or is the date of termination irrelevant so long as the employer didn’t subjectively pick the date of termination for the purpose of avoiding being stuck with funding the benefit?

The answer is driven by the burden shifting standard. As the Joffe court explained, “[c]lose temporal proximity between an employee’s discharge and the pension vesting date is sufficient to support an inference of intentional interference.” In other words, the employee meets his initial burden of proving his prima facie case simply by showing that the benefit was lost directly because of the date of termination selected by the employer and the employer could have simply selected a different, but not too distant, date of termination, which would have avoided the loss of the benefit. Under the burden shifting structure, that, however, is not enough to recover for retaliation, and the employee only recovers if the employer cannot then present a legitimate reason for the termination itself.  That’s the key point, in my view, of Joffe – the focus is on the reason for the termination, not on the reason for the timing of the termination.  As the Court put it,  “[t]o dispel the inference of discrimination arising from the [termination prior to vesting, the employer] is required to articulate — but not prove — a legitimate, nondiscriminatory reason for the discharge” itself, rather than for the timing of the discharge.

 

You may need a subscription to read it, but I greatly enjoyed this Bloomberg Law article today on cyber insurance. The title of the article sort of says it all, although the article delves into the topic in decent depth: “Cyber Insurance Policies Grow Pricey Amid Rising Hacks, Lawsuits.”

For those of you who might not have a way behind the paywall, the article’s primary points are that: (1) prices for cyber insurance are going up, up and away, and have been increasing for some time; (2) this is due at least in part to the increasing cost and frequency of such claims; and (3) coverage litigation over these exposures is increasing. This last point is interesting to me, in terms of its relationship to the prior two. Although I have no data to back it up, thirty years of experience has taught me that, whatever the line of insurance, coverage suits increase as coverage becomes harder and/or more expensive to obtain and claims severity increases. It’s sort of a “how much blood can you get from a stone” dynamic – as coverage becomes harder to access, insureds look to expand what they do have as much as possible. (If you wanted to write a law review article proving the point, you could do it simply by going back to the asbestos coverage suits and the litigation over the meaning of the asbestosis exclusion, tracing the pattern from there to environmental coverage litigation and the meaning of “sudden and accidental,” and then continuing on with the pattern until you run into the explosion of business interruption litigation arising out of the pandemic).

Beyond that, though, there was one practical point that jumped out at me from the article, and it did so because it relates to something I talk about with lawyers and business people all the time (in fact, I just discussed this right before the holiday with one of my partners with regard to the scope of directors and officers coverage for purposes of an upcoming transaction): namely, the need to study the policies in the market proactively, before purchasing and long before a claim is made, to get the right coverage at the right price. As the article points out, too many companies buy such coverage off the rack, when what they really need is a close study of the available coverages and a determination as to what best fits their risk profile. I thought Troutman Pepper partner Kamran Salour summed it up nicely in the article when he pointed out that “finding that ‘sweet spot’ [among premiums, deductible and scope of coverage] is critical for companies as they seek to maximize coverage and minimize expenses.” Couldn’t have said it better myself, even if I have been saying it, in one form or another since at least the time I launched this blog.