Many, but probably not all of you, know the story of Alex Smith, the San Francisco 49ers quarterback. Long derided in the early part of his career, he came into his own over the past two seasons, succeeding especially well this past season, according to mathematical standards widely accepted among the football loving public as fair measurements of performance by quarterbacks (I would point out that since these measurements don’t demonstrate that the best quarterback in Sunday’s game – Baltimore’s Joe Flacco – is in fact the best quarterback in Sunday’s game, that they are deeply flawed measuring rods, but that is a story for a different day). It turned out though, that for Mr. Smith, all that statistical success is worth, for now, a grande cup of coffee at Starbucks, assuming he also has two bucks and eight cents on him. This is because he lost his starting job to his backup after an injury, and despite returning healthy within a short time, was never able to regain his job.

Has he pouted, caused trouble for the new quarterback, gone to twitter to rant, or tossed a hissy fit? No, no, no and no, according to all published reports. In fact, again according to all published reports, he has been helping the new quarterback – his former backup and the man who took his job from him – succeed, and has focused on helping the team win the championship.

I am sure Mr. Smith will get another starting job soon as a professional quarterback, but when his football career is over, I have the perfect job for him: ERISA plan fiduciary. I joke somewhat, but the reality is that his story, sketched in outline form above, is a perfect metaphor for the role of a fiduciary. Smith put the team ahead of his own interest, including financial (there’s a lot more money to be made as a starting quarterback, particularly one with a Super Bowl ring on his hand, than as a backup), and has focused on helping his teammates and employer succeed.

Isn’t that exactly what a plan fiduciary is supposed to do? A plan fiduciary is supposed to act prudently in the best interests of the plan participants and on behalf of the plan sponsor, who has placed him or her in that role. It requires, legally speaking, prudent decision making that is in the best interest of the fiduciary’s team – namely the participants and the plan – without regard to whether or not it is beneficial to the fiduciary. In fact, what could be a more accurate description of the prohibited transaction rules, than to say that they preclude a fiduciary from engaging in transactions to his or her own benefit, as opposed to transactions that benefit the plan and the participants? This is essentially the same thing as what Alex Smith has done in his workplace, which is avoid acting in ways that might benefit him at the expense of his teammates (such as undermining the new quarterback), conduct which would likely be seen as prohibited in the culture of his workplace.

Similarly, one can understand the structural conflict of interest rules in deciding claims for benefits as simply a codification of the idea that a plan or its fiduciary must not put its interests ahead of those of plan participants when deciding claims for benefits. Alex Smith, in the context of his work environment, has likewise elected to not favor his interests over those of his teammates, despite the fact that the interests of each conflict. He has, in essence, subjugated his interests – financial and otherwise – in being “the man” to his team’s conflicting interest in having him be a team player as they prepare for the biggest game of the year and, for many of his teammates, of their careers.

Smith has, in effect, demonstrated the exact obligation of putting others first, ahead of his own interest, that the law – both statutory and judicial – imposes on plan fiduciaries. One can also view it in reverse, as well. Imagine the chaos that would erupt in preparing for Sunday’s game if Smith instead took umbrage, undermined his coach or the starting quarterback, or otherwise acted out while his team tried to prepare for the Super Bowl. Not a good situation, one can be sure. Is this any different than the impact a fiduciary has when he puts his interests ahead of those of the plan’s participants? Think, for instance, of the circumstance where the fiduciaries of an ESOP are company officers, who, by dint of that role, may benefit from certain corporate actions that would not benefit, or might harm, employees participating in the ESOP. Acting in their own best interest and in disregard of the interest of the fiduciary’s team, namely the plan participants, would likewise create chaos, in the form of losses to plan participants and inevitable breach of fiduciary duty litigation. At the end of the day, both Smith in his realm and the fiduciary in his realm can make only one correct decision, which is to put the team, in the first instance, or the plan, in the second, first; anything else is a disaster waiting to happen.

So yes, Alex Smith – plan fiduciary. I like it.
 

I am, for a change, flabbergasted and struck dumb: most people who know me will tell you I am seldom either. Luck, though, just landed me on ERISA Pundit, Warren von Schleicher’s well-written and insightful blog. Warren’s writing reminds me of a dirty, not really secret, secret about lawyers, especially litigators, which is that all lawyers think they are good writers, but very few demonstrate an actual foundation for that belief. Even a quick read of ERISAPundit makes clear that Warren isn’t among the latter; his writing brought a smile to my face on a cold January morning. If you haven’t read his blog yet, it is worth following this link.

I have to say, I had an amazingly busy 2012, but I still can’t believe I didn’t stumble across his blog until this morning.
 

These are two oddly complimentary stories, that tie closely to topics I have discussed regularly on this blog, including, among others, the difficulty faced by smaller shops of running a pension or other benefit plan, and the fact that no one at all wants to run a pension anymore. The first story is about a law firm in Detroit which is in the process of turning its pension plan over to the PBGC. What’s interesting about it is the sheer impracticality running a pension plan is for even a decent sized – but not massive – professional services firm. As the article notes, the coming and goings of partners, and the length of pension obligations, resulted in a plan in which “"you have people in the firm who aren’t in the plan and people in the plan who aren’t in the firm." Think about that for a minute. A law firm or other service entity isn’t really in the position of predicting out its obligations and future work force in the same way that a company with a large unionized or otherwise reasonably predictable workforce is; partners come, partners go, and you end up with the ones who stay funding a pension plan for the ones who have left. Heck, the routine collapses of law firms these days, even the biggest ones, make clear the folly of predicting that firms whose sole real assets are their intellectual capacity will be around long enough for a pension plan to survive and thrive.

And of course, as I have discussed in numerous posts, things aren’t much different even for companies with hard assets, most of whom have either gotten out of the pension business already or are now looking to do so by means of de-risking, which is the process of pursuing “options for transferring some or all of a sponsor’s plan risk” to third-parties. This is a broad, deep and complicated topic that touches on a wide range of issues and disciplines, from finance to litigation risks to fiduciary prudence to ERISA. One of the best descriptions in a nutshell I have seen on this topic can be found in the second story I wanted to pass along today, which is Susan Mangiero’s excellent post on this subject on her blog, Pension Risk Matters. I highly recommend it as a starting point for understanding this topic.
 

We – meaning lawyers who do civil side work involving ERISA plans – mostly think about the rules against prohibited transactions from two perspectives. The first concerns whether clients can structure certain transactions or engage in specific plan actions without running afoul of the prohibited transaction rules. The second arises in litigation, where we either challenge certain plan actions as prohibited transactions or defend plan fiduciaries against claims that they engaged in prohibited transactions. What we don’t normally think of, though, is the idea that if a fiduciary goes just way too far over the line between prohibited and appropriate actions, a whole heck of a lot of hurt is coming down the pike; this isn’t typically on our radar screens because most plans and fiduciaries not only don’t want to get into the kind of trouble that would come from taking such a step, but also because most plans and fiduciaries, in my opinion (even if they are ones I am suing, rather than ones I am defending), have an overall bias towards generally trying to do the right thing. Here’s a very good story illustrating what happens when that dynamic isn’t in play, though, and a fiduciary invokes significant DOL action over prohibited transactions.

What do these two stories have in common, the first about a claims administrator not being allowed to change the basis for a denial of benefits during the internal appeal and the second about an administrator not being allowed to deny benefits based on factual investigation during litigation? They both highlight the importance, for the parties on both sides of the “v” in any denial of benefits case, of the administrative claim process. Under the court decisions discussed in both stories, the record, and the grounds for denying benefits, were effectively frozen thereafter. In one of the two cases, in fact, the administrator was not even allowed to shift the grounds for denial during the processing of the appeal of its initial denial of claim, before the case even moved to litigation, and was forced to stand on the basis for denial contained in its original, initial denial.

From a practical perspective, there are lessons to be learned here about the need to stake out your position, and back it up, very early on in the claim process in an ERISA denial of benefits dispute. From a more philosophical perspective, the cases raise a serious question, about what the rule should be if, in fact, there is new evidence or analysis that would invoke a new plan term limiting coverage or otherwise affect the outcome of a claim, that is learned by the natural course of the claim’s progression. For instance, it may well be that an administrator denies a claim on one ground under the plan, but evidence submitted during an appeal of the initial denial taken by the participant demonstrates the applicability of another plan term as a basis for denial. Should the plan or the administrator be frozen out of raising that plan term as a ground for denial on the final decision, after the appeal of the initial decision, just because it wasn’t raised in the initial denial of benefits?
 

One of the interesting aspects of litigating ERISA cases is the extent to which, for me anyway, it is part and parcel of a broader practice of representing directors and officers in litigation. From top hat agreements they have entered into, to being targeted in breach of fiduciary duty cases for decisions they participated in related to the management of an ERISA governed plan, directors and officers of all size companies spend a lot of their working life operating – in terms of legal issues – under the rubric of ERISA. In some ways, this is even more true of officers of entrepreneurial, emerging or smaller companies; due to the relative lack of hierarchy or distinct departments, in comparison to the largest corporations, officers of these types of companies often find themselves involved to one degree or another in almost every aspect of the company’s business, including retirement and other benefits that are likely to be governed by ERISA.

For me, one of the more interesting aspects of representing officers and directors in litigation is the question of when, if ever, they can be reached personally for actions that one would otherwise expect to be the responsibility of the company itself. Although lawyers are all taught in law school about the sanctity of the corporate form and the protection against liability it grants to company officers, lawyers quickly learn that, in practice, that is a principle more often honored in the breach. Both common and statutory law offer plaintiffs various ways around the protection of the corporate form, including, when it comes to retirement or benefit plans, breach of fiduciary duty claims under ERISA. The theories of piercing the corporate veil and participation in torts can also be exploited to avoid the shield against liability granted by the corporate form in many types of cases, although those can be difficult avenues to use to impose liability on a corporate officer.

 

All of these issues have one thing in common, which is a question of line drawing, consisting of determining exactly where the line should rest between the protection of the corporate form and the ability to impose liability on a company’s officers. One aspect of this line drawing that has always held great interest for me is the economic loss doctrine, which holds that contractual liabilities cannot be used as the basis for prosecuting tort claims. In the context of defending officers and directors against claims for personal liability based on a company’s actions, it serves as a strong defensive line against imposing tort liability on a corporate officer for the contractual liabilities and undertakings of the company itself. You can find a good example of this defense tactic in this summary judgment opinion issued by the business court in Philadelphia last week in one of my cases, in which I defended a corporate officer in exactly that type of case.

This is great. I have lost count of how many times I have explained my view that arbitration is not, by definition, preferable to litigation for resolving disputes, and that instead, in each and every given case, a party should think carefully about which dispute resolution forum is preferable. I have written and spoken on the idea that, initially, company decision makers should put aside the assumption that arbitration will save money, because it generally does not. There are more controls on the litigation process than are built into the arbitration process and, as a result, if one side or another is interested in bogging down the process in excessive discovery, motion practice, or other efforts, they can more easily run up the costs in an arbitration than they can in litigation. Arbitration, as a result, is only less expensive if both parties set out in good faith to make it that way. If one party sees a tactical benefit in doing otherwise, though, the dynamics of arbitration make it far too easy to turn arbitration into an expensive, time consuming, seemingly never ending event. Judges, as a general rule, won’t allow this to the same extent in court.

Second, there are tactical considerations in deciding between arbitration and litigation, which have to do with the strength of a party’s case, and whether that strength is based on legal arguments or instead on facts. It is my view that a case based on legal theories is better prosecuted in court, for at least two reasons. First, motions to dismiss and summary judgment are effective avenues in that forum to have the court rule, relatively early on, as to the strength of those legal defenses. Arbitration panels are, for various reasons, more often inclined to hold all such issues over for the final hearing, eliminating the possibility of an early outcome without having to engage in a full evidentiary hearing on the evidence. In my experience, the only real consistent exception to this dynamic in arbitrations is when the arbitration panel is chaired by a well-regarded retired judge, who may be inclined to incorporate more of the courtroom structure into the arbitration process. Second, in a case built on legal theories, it is always better to have a second chance to press that theory if it is rejected the first time around, which litigation allows by means of appeal. Arbitration generally doesn’t allow that, as state arbitration acts and the Federal Arbitration Act generally impose very limited rights of appeal from arbitration rulings.

In this excellent article in Inside Counsel, authors Alan Dabdoub and Trey Cox provide empirical support for these views, which have, until now, been based simply on my own years of arbitrating and litigating cases, and of observing the difference between the two. The authors use a comparative study of 19 different cases, about half in arbitration and about half in litigation, to demonstrate that litigation, and not arbitration, can often be the faster and less expensive path for resolving disputes. It is well worth a read.
 

I don’t know how many of you have had a chance to read, or have any interest in reading, the transcript of the argument yesterday in McCutchen, but its actually fairly entertaining. For one thing, it is clear that everyone – litigants, the justices, you name it – are a little flummoxed by the need to go back to “days of the divided bench” to figure out how to handle equitable relief claims under ERISA. The cases cited by the parties are, by definition, archaic, and do not perfectly fit the scenarios arising today. Further, as the argument makes clear, it puts way too much value on treatises, which often – particularly in the insurance context, such as the Couch treatise referenced in the argument – reflect the analysis and synthesis of the authors more than anything else. Questioning from the bench and discussion from the lawyers makes clear that everyone recognizes the effect all of this has on deciding cases. At least two justices, in fact, make what I take to be mocking references to the need to reason and decide as though it was centuries earlier, with Justice Breyer placing a hypothetical in the 15th century and another justice referencing the need to act as though it is the beginning of the 20th century.

This is no way to run a ballclub, pretending that we can figure out in 2012 what a judge, educated only on the legal principles and aware only of the factual scenarios that existed hundreds of years ago, would do with the complex fact patterns and contracts that arise out of a statute that wasn’t enacted until 1974. I have written elsewhere that I highly doubt that the statute’s drafters were deliberately and knowingly incorporating the 19th century into the statute, including when they drafted the remedial procedures. One has to ask then, in that circumstance, how it can make any sense to retreat to the 19th century to decide how to apply that statute. Wouldn’t it make more sense, as a matter of statutory construction and simple commonsense, to ask what equity rule would have applied in 1974 to decide an issue like this and then, if there was no rule governing it at that time, say so and then choose one based on all of the competing factors that the Court normally considers in deciding an open question involving statutory interpretation?
 

I was somewhat stunned – and frankly, to some extent angered – by this article yesterday in Slate, in which a business school professor asserts that, if research from Holland does not support the idea that tax breaks motivate savings, one should do away with the 401(k). This completely misses the point that, in a country where the 401(k) is now effectively the only private sector retirement plan available to most employees, the tax break in question is a necessary element of increasing employees’ retirement assets, and is thus a retirement subsidy, not a savings incentive. As a result, the proper frame of reference for debating whether or not to maintain the 401(k) tax preference is that of retirement policy, in terms of considering whether or not it is the proper approach to creating retirement income for the American public; the proper frame of reference for debate is not the tax code, and the preference’s relationship to the deficit.

DWC’s Adam Pozek has a great post on his blog explaining exactly why the tax preference should not put the 401(k) in the crosshairs of budget cutters and revenue raisers, right here.
 

US Airways, Inc. v. McCutchen is scheduled to be argued at the Supreme Court tomorrow, the next round in the on-going investigation by the Court of the scope of equitable relief available under ERISA. In this instance, the Court must consider the extent to which traditional limitations on equitable remedies are incorporated into ERISA. For those of you needing some background, I thought this was a good discussion of the case. For what its worth, I think everything from the Court’s selection of this case, to the recent Court opinions on equitable issues in ERISA litigation, to the language of the statute, point firmly towards the Court upholding and agreeing with the Third Circuit’s take on this issue. I think at the end of the day, the more interesting question is not going to be whether the Court agreed with the Third Circuit on the narrow points at issue in the case, but instead how many various Pandora’s boxes the Court’s discussion of equitable relief in its opinion will inevitably open up, which litigants and lower courts will have to resolve in the future. When the Court has delved recently into the proper scope of equitable remedies under ERISA, it has tended to answer one question while simultaneously opening up many more issues that must be resolved; McCutchen itself, as the Third Circuit’s opinion reflects, is the outcome of just that dynamic.