Here’s a great story on the latest developments in the breach of fiduciary duty lawsuit arising out of the use of the Tribune’s ESOP assets as part of a complicated leveraged buy out. For some really deep background on this case, you can check out my post here from when the case commenced. I have been following it with one eye since it began, and think the summary in this newspaper article is pretty well-balanced. To the extent that there is a broader, more macro/forest and not the trees lesson here, it is the importance of thinking of ESOP holdings in the same way that a company would think of its employees’ 401(k) or other defined contribution holdings, and to both protect and respect them as retirement assets of plan participants. Unfortunately, the fact that ESOP accounts hold employer stock can make them instead appear to be another potential tool of corporate finance. The Tribune case reflects the fact that making use of that stock for transactional purposes can well end up, in at least the outlier cases, with large losses to plan participants, after which the class action bar or the Department of Labor are likely to try to transfer those losses to one or more of the parties involved in the transaction.
 

I wanted to say that much ink has been spilled over the Department of Labor’s regulatory initiatives concerning fee disclosure, but no one really uses ink anymore, and we all just post on the internet, in either blogs or in intermediary sites that publish law firm client advisories. Either way, though, there is no getting around the tsunami of reporting on the fee initiatives, much of which is quite good. That said, for those of you who don’t feel overwhelmed by the amount of information out there on this subject or, on the other end of the spectrum, are not yet comfortable with the impact of the regulations, I liked this publication here for an easy to digest summary on the issue. Beyond that, Josh Itzoe, author of Fixing the 401(k), is offering this webinar on the subject on a few occasions over the next several weeks.

I have always wanted to write another blog about trial tactics and litigation strategy, and call it Percentage Players Die Broke Too, after the famous line by Paul Newman in the world’s finest film, The Hustler (that’s the first one, mind you, not the embarrassing sequel they did with Tom Cruise many decades later). For now, though, I am going to settle on adding a new subheading to the digressions section of this blog, titled “Percentage Players Die Broke Too: Notes on Litigation and Trial Tactics.”

And the very first entry in that section is a link to this excellent post here, by North Carolina business litigator Mack Sperling, about upcoming changes to the federal rules that are intended to end one of my favorite pieces of federal court gamesmanship, the discovery of communications between experts and the lawyers who retain them, as well as of draft versions of expert reports. For awhile there, before everyone caught on, you could get ahold of such material, which could often be of great help in impeaching an opposing expert, simply because opposing lawyers mistakenly believed that they could engage in such communications and have drafts of reports revised under the cloak of privilege. They could not do so, in fact, and nothing was more fun that seeing the face of opposing counsel when they learned this.

In truth, over the last few years, it has become rarer and rarer to find opposing counsel who walked into this trap, and it was more a question of whether a particular expert prepared drafts that contradicted his or her final report without realizing the earlier draft might be discoverable.

Nonetheless, as the author points out, those days are gone forever. I should just let them go.

As a general rule, I don’t write blog posts about cases I am handling. For the most part, nothing good can come of it. I do make an exception once and awhile, but only to the extent of passing along a particular ruling, without commentary, that may be of broader relevance and interest. Today is one of those days, in which I am posting this recent federal district court decision from one of my cases which concerns class certification related to a 401(k) dispute, and I post it only because the Court provides a nice synopsis of one particular wrinkle raised by the Supreme Court’s ruling in LaRue, namely its impact, if any, on the propriety of certifying a class in a dispute involving a defined contribution plan. In the words of the Court:

There is a question whether the Supreme Court’s decision in LaRue v. DeWolff,
Boberg & Assoc., Inc., 552 U.S. 248 (2008), bars class certification of fiduciary breach claims by participants in defined contribution plans because participants as a result of LaRue’s holding may now pursue individual ERISA actions against plan fiduciaries. Although some courts have so held, see, e.g., In re First Am. Corp. ERISA Litig., 622 (C.D.Cal. 2009), other courts, including this one, have not been persuaded that so radical a revision of Rule 23 was intended by the Supreme Court. See Hochstadt v. Boston Scientific Corp., 2010 WL 1704003 at *12 n.12 (D. Mass. Apr. 27, 2010); see also Stanford v. Foamex L.P., 263 F.R.D. 156, 174 (E.D. Pa. 2009) (“The availability of an individual account claim under § 502(a)(2) [of ERISA] does not alleviate the concerns cited by numerous courts that have certified ERISA class actions pursuant to Rule 23(b)(1)(B) in situations where claims on behalf of the Plan are identical to those on behalf of an individual account.”).

 

You can find the discussion at footnote 4.

 

Investment option fees are the current bête noire of 401(k) plans, but to date the government response to them has not been a direct attack on the amount of fees themselves, in the form of regulatory or legislative establishment of appropriate ranges of fees. This differs, for instance, from the manner in which the government has effectuated health care reform, where the new regulatory structure is built around establishing and dictating exact manners of compliance. In contrast, with 401(k) fees, the government response, as formulated through regulatory initiatives, is to increase transparency, as Ryan Alfred of BrightScope discusses in this insightful post, presumably in the belief that greater transparency will lead to greater pressure to reduce fees. At a minimum, one would expect broad knowledge of the fees that are part of different investment options to increase competition, as plan participants and fiduciaries seek lower fees for their own reasons when confronted with this information, and the providers respond to that pressure by competing more on price. That, in any event, would seem to be the theory.

Will it work? Probably, would be my guess, although obviously if we give it a little time, someone will be able to give us quantitative evidence at some point as to whether or not this approach succeeded in bringing down fees. But looking prospectively, rather than in hindsight, it only makes logical sense that it would. That relatively small subset of participants who understand the impact of fees on their 401(k) plans can be expected to press for lower fee options, and fiduciaries can in turn be expected to respond by seeking such options, if for no other reason than to reduce the risk of getting sued down the road by disgruntled participants; in this way, the self-interest of the key set of players on the buy side ought to reduce plan fees, as providers respond to this pressure by competing on price. Maybe that’s a little too “invisible hand of the market” for some people, and that may not be the answer to all problems everywhere, but it seems a nice logical outcome in this instance.

Moreover, it is likely to work here because the use of transparency to bring about lower fees is not occurring in a vacuum, but instead is reinforced by the private attorney general aspect of ERISA litigation, in which participant classes and individual participant plaintiffs simultaneously pressure fiduciaries to reduce fees or risk paying out a small fortune in defense costs and settlement money if they don’t, as this story about a recent settlement over fee disputes entered into by Bechtel reflects. Greater transparency combined with increased risks of liability for failing to act on fees seems like a pretty potent combination, and a sensible way to try to bring down fees without simultaneously hemming in fiduciaries and their vendors by dictating exact fee ranges.

Well, here’s a story on an unpublished Ninth Circuit decision on the impact on the duty to defend of related claims provisions in claims made insurance policies. Although policies vary in the language and structure they use to accomplish it, these provisions essentially declare a claim made during a policy period to be linked to earlier events or an earlier claim if they all arise from related events, with there being no coverage if the earlier related events occurred before the policy period of the policy under which coverage is being sought. The operation of these provisions is of crucial importance for the operation of claims made insurance policies and for insurance programs built on them, in that a claims made policy is built around the idea that the policy will only provide coverage for claims – such as lawsuits – actually first made against the insured during the effective period of that policy, and that the policy won’t provide any coverage if the loss for which coverage is sought relates to a claim that began before the commencement of that policy period. Claims made policies are priced on only covering claims actually first arising during the policy period – and not on covering those that started before the policy period or were not made until after it ended. By precluding coverage when a particular claim actually stems from events or another claim that predated the policy, the related acts language is the mechanism for effectuating this intent. I will warn you up-front that this is a very simplistic introduction to a fairly complicated subject, but it captures the idea.

The article discusses an example of a court refusing to apply such language in that way, by instead finding events that predated the policy to not be related to the claim made during the policy period and for which coverage is sought. The article, however, overstates the case by making it sound as though there is some sort of blanket prohibition against this approach to limiting coverage under claims made insurance policies, and that courts simply won’t find a claim during a policy period to not be covered when it is related to events that occurred before the policy period. That is, however, overstating the case. This issue is inevitably highly fact specific, and courts look closely at the factual interrelationship of the events at issue to decide this, rather than simply rejecting outright the assertion of such a linkage or denying the legitimacy of policy terms voiding coverage in the presence of such a linkage. While it is fair to say that, to some extent, such linkage is in the eye of the beholder and thus the denial of coverage on this ground is never simply an easy, mechanistic activity, it is simultaneously unfair to present it – as the article at least intimates – as a policy defense that is not accepted by the courts or ever applicable.

I mentioned in a prior post that I was speaking on a panel with David Webber of Boston University Law School. David’s blog, Labor Capital, has a nice post on the financial weakness of public pension plans, and the questionable financial transactions that have led to it; you can find it here. I have commented in various posts on the same phenomenon at different times, but what was interesting to me about David’s post is how much it sounds like the gamesmanship with pension funding that eventually brought about the enaction of ERISA itself. One wonders whether the problems of state pension funds will eventually lead to some sort of broader national reform effort of a similar nature targeted at those funds.

This in turn leads to another thought, which again links to the seminar I presented last week, which concerned the legal implications of the shift from pensions to 401(k) plans. ERISA was enacted, as noted, in response to pension problems and to create some uniform rules and regulations to govern them. One can argue that, in hindsight, the system that was created – a mix of regulation, insurance and private enforcement – did a pretty good job controlling pension issues. Now, however, we have, in essence, moved out of the pension world and, for all intents and purposes, into the defined contribution world, and ERISA in all its forms – litigation theories, judicial doctrines, regulatory provisions, etc. – have not yet caught up, resulting in ERISA not currently being as well suited to govern defined contribution plans as it was for governing pension plans. From this perspective, one can see the new fee disclosure regulations, for instance, as steps towards grafting on the type of regulatory and other controls that are appropriate for the defined contribution world, and that were not needed before, when pensions roamed the earth.

I think it is important to realize this, as we watch both the DOL develop new rules and the courts develop doctrines to govern employer stock drop, excessive fee, and other hot topics related to defined contribution plans, so that we are aware of exactly what we are watching proceed, which is – from a very broad and macro perspective – the creation of a framework for applying ERISA, and its fiduciary duty obligations in particular, to the defined contribution world which we now inhabit. In hindsight, in terms of jurisprudential philosophy, that is what the Supreme Court’s decision in LaRue was about: the recognition that the fiduciary liability rules applicable to defined benefit plans may have to change to match the reality of the defined contribution world.
 

Now here’s an interesting tale, namely the story of the Ninth Circuit’s adoption of the Moench presumption with regard to breach of fiduciary duty claims alleging that fiduciaries erred by allowing a plan to hold too much employer stock or otherwise failing to act to protect participants from the risk of holding that stock as an investment option. As I discussed in this post, the Moench presumption essentially shields the fiduciaries from such claims where the plan expressly authorizes employer stock as an investment unless the company and/or its stock value had been placed at extreme risk. As the blog post on the Ninth Circuit’s decision notes, and as I have commented elsewhere, courts vary in how they frame the circumstances in which the presumption can be overcome and a breach of fiduciary duty claim maintained, but in all circumstances it can fairly be described as requiring a significant risk to the investment, beyond just a major stock decline.  The Ninth Circuit, in its opinion, notes the variance in formulating the standard, and then formulates a pretty high bar for overcoming the presumption.

As I discussed in this post, the Department of Labor is in the process of arguing to the Second Circuit that this presumption should not exist, and the outcome of this at the Second Circuit becomes key, I think, for the future of this theory of liability against fiduciaries. If the Second Circuit joins the Ninth and a few other circuits in adopting this presumption, this becomes a very unattractive potential theory of liability for the class action bar or anyone else to pursue; large scale breach of fiduciary duty cases against large, well run and sophisticated plans are tough cases to win in the first place, before adding in the significant defense at the motion practice stage that this presumption grants to plan fiduciaries. If, on the other hand, the Second Circuit agrees with the Department of Labor and rejects the Moench presumption, it doesn’t take a soothsayer to suspect the issue goes from there to the Supreme Court, given the obvious circuit split on a significant issue of federal law that such a decision would create.  On that front, with regard to the question of what the Second Circuit may do in response to the Department of Labor’s arguments, it is worth noting that the Ninth Circuit’s opinion in many ways anticipates and provides the rejoinder to much of the Department of Labor’s argument in its briefing to the Second Circuit, on whether the presumption is compatible with ERISA; the opinion actually presents a well reasoned framework for viewing the presumption as consistent with the statutory framework.

The Ninth Circuit decision, in Quan v. Computer Sciences Corporation, adopting the presumption, is interesting for another reason. I will confess – and frequently do, to anyone who will listen – to a preference for issues being decided on their merits and, preferably, at trial, after thorough investigation and vetting. As discussed in this interview I did awhile back with Tom Gies, right after he argued the LaRue case before the Supreme Court, I believe the jurisprudence develops better, and we get more accurate results, when key issues are decided after an evidentiary record is developed that will shed light on the propriety, or lack thereof, of challenged conduct, than is the case when such issues are decided based upon the legal arguments, hypotheses and assumptions that checker any decision made in advance of factual development, such as at the motion to dismiss stage. My experience as a trial lawyer has taught me to put my trust in facts, and to believe that they are more likely than not to lead one to the right result. They are, as the saying goes, stubborn things, far less manipulable than legal doctrine and argument.

That said, though, the Ninth Circuit case adopting the presumption presents a perfect justification for the presumption. As detailed in this blog post, the stock drop at issue in the case, and on which the claim of breach of fiduciary duty rested, was a 12% single day decline, which was recovered in a reasonable length of time. Given the variability and the volatility of the market in general, it is extremely hard to think of a convincing rationale for imposing fiduciary liability simply because of a moderate, but not company threatening, short term decline in the value of the company stock, or for allowing expensive, time consuming litigation over that stock drop. In that particular case, the presumption resolves this, by establishing that the stock drop alone isn’t enough, and much more must be shown to justify the suit going forward.

 

I mentioned in a previous post that I am speaking on ERISA issues in a seminar for the Professional Liability Underwriting Society. The presentation is “I Have to Retire on THIS? ERISA and the 401(k) turn 30,” and its tomorrow, Thursday, October 7th, at 2 pm. You can find registration information here if you would like to attend. I am joined on the panel by David Webber, a law professor at Boston University School of Law whose research interests run to securities law and regulation, and Mary Rosen, the Associate Regional Director of the Employee Benefits Security Administration, U.S. Department of Labor.

How cool is this? I have talked in various posts and in seminars, webinars and the like for years about the transition from defined benefit plans to defined contribution plans, and how that integrates with the development of the law of fiduciary liability under ERISA. I am, in fact, outlining comments for a seminar later this week structured around that theme. Right in the middle of doing that, I look up and find this fascinating article about the death of pensions and the rise of defined contribution plans, only through the eyes of an ERISA attorney who began practicing in this field right after ERISA was enacted, and whose practice has covered the heyday of the pension, the vanishing of the pension, and the rise of the defined contribution plan. Neat story, and worth a few minutes to read.