All right now, its time to get back up on the horse – the blogging horse, that is. I didn’t actually go on vacation for the last month, believe it or not – I had a major brief concerning a piercing the corporate veil case against a corporate officer due not long after the July 4th holiday, followed almost immediately by briefing concerning the First Amendment rights of internet posters. Fun stuff, but it hasn’t left much, if any, time for blogging.

So I am now going to try to catch up on a number of items that I spotted – but was never able to find the time to post on – over the past month. I am going to start today with this story right here, about the Sixth Circuit ruling that ERISA claims against a bank failed on the ground that the bank did not qualify as a fiduciary, while the state law claims against the bank could not go forward because they were preempted.

Speaking last month at an MCLE seminar on the subject of litigating top-hat and other compensation disputes, I discussed one of my favorite conceptual points, which is the theoretical possibility in certain cases of prevailing, as a defendant, by showing that the ERISA claims fail on technical grounds while state law claims are preempted at the same time because the underlying fact pattern – whether or not capable of supporting successful claims under ERISA– turn on the terms of an ERISA governed plan. The end result is that a plaintiff would not be able to recover at all – or even have any viable causes of action – against the defendant. I discussed it, in fact, right here in this PowerPoint slide in my presentation, which referenced a case, Aubuchon v. Benefirst, in which I pursued that defense strategy. As my fellow panelists at the seminar and I discussed, it is a conceptually elegant and perfectly logical argument, but one that courts generally don’t like, finding that, much as the dissent did in the Sixth Circuit case referenced in the article, the circumstances either cannot or should not be interpreted in a manner that would leave the plaintiff with no viable cause of action under ERISA itself while simultaneously eliminating any state law rights by operation of preemption.

Here, though, the Sixth Circuit accepted that argument and found the plaintiff to have no viable claims, for this reason, against a defendant. It is interesting to note, though, that the defendant who benefited from that here is a bank. For whatever reason, banks – traditional, old-fashioned depository/lending institution type banks – make out very well in ERISA litigation when a party tries to bring them in, as happened in this case, as a functional or deemed fiduciary, based on the bank’s role in handling and distributing a plan asset; there is a long history of cases, although perhaps relatively few in number, placing such an institution outside of the role of fiduciary for purposes of ERISA litigation, when the bank is serving in a traditional banking role as a depository or lending institution. Add in the impact of preemption, and a bank that is merely holding the plan assets or lending against them (or supposedly only doing that, as the facts alleged in the case before the Sixth Circuit, as is often true in similar cases, could be construed as involving much more than that on the part of the bank in question) is in a very privileged position when it comes to defending litigation over its involvement with an ERISA governed plan.

The decision is McLemore v. EFS, and you can find it here.
 

This is a very fun – if you can use that word for insurance disputes – discussion of the United Kingdom’s Supreme Court determining what trigger applies under insurance policies issued to insureds sued for asbestos related injuries. Its partly fun because it replays a highly contentious and, for all involved, expensive chapter in American legal history, namely the decade or so long battle in the United States courts to decide which insurance policies were triggered by – and thus had to cover – injuries caused by asbestos exposure. The courts here struggled for many years to decide which of many possible triggers apply, including: a continuous or multiple trigger which found coverage under all policies in effect from the time the worker was exposed to asbestos through the incubation period in the worker to the time the worker’s illness actually came to exist; an exposure trigger, making policies in effect when the worker was exposed to asbestos applicable; a manifestation trigger, under which policies in effect when the asbestos related disease manifested itself apply; and an injury-in- fact trigger, under which the policies apply that were in effect when a worker, previously exposed to asbestos years before, actually suffered injury from the exposure. Because of the diverse American legal system, with its numerous federal circuits and 50 state court systems, no one, single rule was ever settled upon as universally applicable. It appears in the UK, though, they are settling on one single rule, at least according to the article.

Some of you, particularly those of you who have heard me speak over the years, are familiar with my view that modern American insurance law, for all intents and purposes, springs out of the trigger of coverage and other disputes from the early 1980s concerning coverage for asbestos related losses, and in particular out of the D.C. federal court’s adoption of the multiple trigger standard for applying general liability policies to asbestos losses; in part, these events became the touchstone for coverage disputes to come because of the ease with which court decisions on these issues could, by analogy, be extended to other types of long tail exposures, such as environmental losses and other types of toxic torts, in which – as with asbestos – the event that would eventually cause injury (whether to person or property) happens years before either injury occurs or is learned of. In my view, before then, insurance law had changed little (speaking broadly) for generations. After the explosion in coverage litigation over asbestos, close textual analysis of key terms in insuring agreements, policy definitions and exclusions became crucially important and widespread, far more than it was before these watershed events; indeed, some of the methodology applied by courts at that time and the decisions they made in interpreting policy terms still reverberate in coverage decisions today. Many issues and developments in the insurance industry and the law of insurance coverage can be traced back to these events, from the expansion in use of the claims made policy form to the existence of significant, always on-call insurance coverage practice groups representing policyholders.

A few months ago, I spoke on the subject of cyberinsurance before a large insurance industry group, and the organizing principle of my talk was the idea that the evolution of coverage forms and coverage litigation involving insurance for cyber exposures was mimicking, and would continue to mimic, the industry’s past experience with both asbestos and – in terms both of temporal proximity and legal analysis – its close cousin, environmental exposures. The reality is that, while past performance may not guarantee future results, the development of new insurance coverage exposures as well as of policy forms to deal with them always harken back at this point to the legal and industry developments of 30 years ago that arose out of asbestos and environmental exposures, but almost never, interestingly enough, to legal and industry developments that predate that.
 

Is there a more hot button topic in the world, just as a general principle, than compensation, especially of the executive kind? From Salary.com to the outrage of politicians over financial industry pay, the subject is never far from your internet browser. In fact, just for amusement’s sake, I just googled executive compensation, and the first page of results had no less than three links claiming to tell me what executives throughout the country earn.

Of more interest to me professionally than what executives earn, though, is what happens when they end up litigating disputes with their employers over their compensation. ERISA often gets dragged into such disputes, although there are an increasing number of judicial decisions – though still few – questioning whether individual agreements with executives to set compensation should fall within ERISA, rather than being handled as pure breach of contract cases under state law. The forum, venue, nature of defenses, potential damages, and strategy in such disputes can all be greatly affected by whether the dispute should be governed by ERISA or is instead simply an old fashioned state law dispute.

I will be talking about this and more next week when I address the details of litigating executive compensation disputes in this MCLE seminar. Two other excellent speakers, Marcia Wagner and Philip Gordon, will be discussing various aspects of crafting and negotiating executive compensation agreements – I will then weigh in on what happens when that work, as it sometimes does, leads to the parties suing each other.

You can find registration information for the seminar itself and for the webcast here.
 

This is an interesting story on a number of levels, about the GM pension plan, its size, GM’s efforts to reduce the size of its liabilities, and the company’s decision to transfer administration and future costs to a certain extent to a large insurer. GM and its pension plan have continued to be one of the few public stories of a well-run pension plan that has largely stayed out of trouble and largely – at least from public view – maintained the company’s retirement compact with its salaried, non-union employees. That hasn’t stopped, however, the size, cost and complexity of the pension plan from impacting and taking attention away from GM’s actual reason for existing, which is to compete successfully as a car company. It is also worth noting how few well-run, well-regarded large private pension plans continue to exist out there. The combination of all three of these things – the rarity of such an example, the impact on a company of continuing to be such an example, and the desire of that example to get the heck out of the pension business – is as good a death knell for the private pension system as you can find.

Here’s a very nice piece on fee disclosure, as mandated by the Department of Labor, and the idea that it is to everyone’s benefit. I have long maintained that fee disclosure of the type at issue falls squarely in the ballpark of the old saying that sunshine is the best disinfectant, and that running from fee disclosure – whether as a plan sponsor or a service provider – is the intellectual equivalent of running from the bogeyman; there is, in fact, nothing to fear from it, for well-run plans and above-board advisors, and for those who aren’t yet those but aspire to be.

Why is that? Well, let’s run through the list of players in the 401(k) rubric. Plan participants obviously benefit from knowing what their funds costs, and from the opportunity to use that information to demand proper attention to fees from their plan’s sponsors, administrators and fiduciaries. Where is the downside to them? I can’t see one. And then there are plan fiduciaries. Plan fiduciaries should be avoiding fees that are higher than needed, both to protect themselves from fiduciary liability and to best serve participants. Now this doesn’t mean they are required to, and nothing in fee disclosure or the law governing fees requires them to, chase the lowest possible cost investment options. What it does mean, though, and which cases like Tibble make clear, is that they have to investigate and follow a prudent process directed at using the right investment option at the right price. The more information they have, the better they are able to do this; likewise, the more they are pressed by participants to do this, the more likely they are to install a good process to review these aspects of their plans and, correspondingly, the less likely they are to fall below their fiduciary duties in this regard. This all make them less likely to be sued for, or found liable for, excessive fee claims, and thus protects them from financial risk in running the plan. These outcomes flow naturally from the public disclosure of the fees inherent in a plan. And finally there are the investment advisors and other service providers. More than one such provider has told me that they already make this information available or have changed their business models to build around the open disclosure of this information, and that they believe their ability to compete both on transparency of and attention to controlling expenses is a competitive advantage for them. I have long believed that transparency works to the business advantage of the best players in this area, and aren’t those the ones who should be winning business? Just another side benefit of fee disclosure, and one more reason why, when it comes to fee disclosure, there is, to quote a former president who knew a thing or two about creating a retirement plan, nothing to fear but fear itself.
 

Here is a neat little story that illustrates a bigger point. The article describes the resolution of a Department of Labor lawsuit brought against a small company to recover approximately $100,000 of participant holdings in a profit sharing plan that was diverted to other uses. Its own moral is clear – plan sponsors need to remember that plan assets belong to the plan, not them – but one that is too often forgotten in closely held, smaller companies. The bigger story, though, is the one this case illustrates. I have written before about the idea that ERISA is really a private attorney general statute, one that uses the awarding of legal fees to a prevailing participant as a means of allowing individual participants to retain counsel and enforce fiduciary discipline, even in cases where the amount at risk – such as the one hundred thousand at issue in the article – wouldn’t otherwise justify either a participant paying out of pocket to hire counsel or a lawyer taking the case on contingency. And yet, as this case shows, there are real breaches, real problems, and real losses in many plans that require legal redress; this remains true even when the amounts at issue aren’t particularly large, as the losses are still significant to the participants who incur them. The Department of Labor itself does not have the litigation resources, relative to the number of plans out there, to litigate each and every such case, and has to pick and choose. Allowing recovery of attorneys fees allows those participants whose cases are not pressed by the Department of Labor to still bring breach of fiduciary duty actions and thereby enforces a level of legal oversight on plan sponsors that might otherwise not exist. The ERISA structure is, to a certain extent, dependent upon – and assumes the existence of – such private enforcement actions; they impose a level of discipline on fiduciary conduct that would otherwise be absent.

Often when I chat with middle and upper level managers of mid-size and larger companies who have been assigned the job of administering their employer’s 401(k), ESOP or other benefit plans, I wonder if they are fully cognizant of the risks of personal liability they are taking on, and whether they have made sure that, through insurance or otherwise, they are protected against breach of fiduciary duty lawsuits. I particularly wonder this in those cases in which it appears that, while they are taking on the role, they are simultaneously not high enough up the corporate food chain to clearly have enough power to control for and avoid potential problems in the plans they have been charged with administering. This leaves those administrators in the situation of being exposed as fiduciaries to personal liability for problems in the plan, while not having enough power to avoid or cure the problems. As fiduciaries, of course, they risk personal liability for the plan’s losses, and, as this excellent piece here explains in detail, it’s a liability they will have trouble ever shaking, even if their employer goes belly up and leaves them sitting there holding the bag.

If you like an extended metaphor – and anyone who has read this blog for awhile knows I do – you should enjoy the Eleventh Circuit’s decision this week in Lanfear v Home Depot, adopting the Moench presumption and explaining exactly how it is to be applied in that circuit. What’s a better analogy than the hard working ant who stores food up for winter, to stand in for plan participants?

But the decision has other things going for it that are much more useful than a nice analogy. In particular, it nicely synthesizes the current state of the case law among those circuits that apply the presumption, and explains exactly how, under its synthesis, a stock drop case needs to be analyzed. In so doing, it also explains how to plead one if you want to get around the barriers that the Moench line of cases has created. Its as good and workable an explanation of a standard as any of the cases offer, and one that, frankly, seems to grant participants as fair a shot at recovering on a stock drop claim as they are likely to see. In my view, it nicely balances the conflicting interests and obligations that come into play when you allow, as occurs in stock drop cases, corporate insiders, securities laws and ERISA to intersect.
 

Well, as if there weren’t enough barriers to successfully prosecuting breach of fiduciary duty actions under ERISA, it turns out that you also can’t do it if the fiduciary’s errors consisted of wrongfully withholding benefits and turning them over to the IRS as tax payments. A participant, according to this opinion fresh off the presses of the Northern District of Illinois, can only remedy that mistake by getting the IRS to refund the money to them.

Defense lawyers are always fond at trial of having an empty seat – i.e., a missing potentially culpable party – to point to while saying my client didn’t do it, the person that should be sitting in that other chair at the defense table did. For those of you old enough to remember it, this defense theory is similar to, but not exactly the same as, the famous “Plan B” of noted fictional defense lawyers Donnell, Young, Dole, & Frutt, who somehow always managed to make that strategy work. For a plan fiduciary charged with fiduciary breaches or other errors related to tax aspects of a plan, pointing to the IRS and saying the participant’s only recourse is to seek a refund from the IRS is an extraordinarily potent variation of this defense. It also, as the decision in Mejia v Verizon et al appears to make clear, has a sound foundation in the federal code.
 

I spent some time thinking about whether to even post on this subject today, not wanting to feel on any level that I might be either rushing to judgment too quickly, or even worse, exploiting a tragedy in any way to make a point. But the suicide of retired football star Junior Seau perfectly captures a point that I have been thinking through for years, as the concussion/head trauma issues have played themselves out in the NFL and the media. Way back in 2006, I wrote about the ERISA case brought by former Pittsburgh Steeler great Mike Webster, and the Fourth Circuit’s decision to overturn, as arbitrary and capricious, the decision of the plan administrator for the NFL’s retirement plan to award Webster “the lesser of two possible disability benefit awards available under the league’s retirement plan,” due to brain damage he apparently suffered as a player. At the time, the Fourth Circuit reviewed extensive evidence in the administrative record that soundly refuted the administrator’s determination, and concluded that the administrator’s determination was not supported by substantial evidence.

I have often thought about the Webster case and that blog post in the interim, because in many ways the actions of the administrator, at least in the snapshot provided by the Court, seem so questionable that it makes one wonder how the administrator could have reached the conclusion that it did. The evidence from the administrative record, although debatable in terms of how to interpret it, focused on by the Court ran strongly towards attributing the player’s mental incapacity to head injuries from playing and to have begun close to, if not during, his playing days, thus qualifying him for the benefits he sought. Yet, even under those circumstances, the plan administrator ruled against him.

Among the possible explanations for how this came to pass is one – incompetence by the plan administrator – that I have always ruled out. The second is a corporate decision by the plan and its administrator to hold the line against brain damage type claims, which is at least certainly possible, even if doing so on a broad level instead of simply testing the facts of each particular claim against the plan terms would be a clear cut violation of fiduciary obligations.

The third possible explanation that has rattled around in my head for the last few years, as more and more research has been done linking diminished mental capacity to the repetitive head trauma suffered by football players, has come to me to seem the most likely explanation. This is the idea that a decade and more ago, when the events at issue in the Webster case occurred, there was scant, if any, medical literature soundly tying post-playing mental impairment to playing-derived head trauma. That is not the case anymore, as Andy Staple’s piece here on Junior Seau’s suicide discusses, but it was then. Plan administrators are often faced, in many contexts, with disability claims in which there is little if any significant medical research that would allow a firm conclusion on causation with regard to the disability at issue. In those instances, it can be very difficult for a plan administrator to make a call on whether or not the plan terms governing disability benefits are satisfied. When one compares what we know now about the effect of repetitive head trauma in football – a knowledge level that is still limited – with the state of the research a decade and more ago, you can easily imagine the NFL plan’s administrator being trapped by the conundrum, and being unwilling to credit the evidence of impairment submitted by Webster because the medical literature lacked support for linking it to his playing days in the manner needed to award him the benefits sought by him. This, to me, is both the most benign and the most likely explanation for the long ago ruling against Webster, which it took an appeal all the way to the Fourth Circuit to set right. The state of medical knowledge though, as Staple’s current piece and many others in the past few years have made clear, no longer allows for that same possible mistake by a plan administrator.