I have been a fan of Scott Simon’s Morningstar articles on the various fiduciary relationships among those who run plans and those who advise them. This one here is a good, practical, business oriented view of the different forms of fiduciaries – named and functional (or deemed) – in 401(k) and other plans. It is written more from the business perspective, of who are the different players and what fiduciary niches do they occupy, in the structuring and operation of a plan. This is somewhat different than how we lawyers, particularly litigators, tend to look at these issues, because it is forward facing and addresses the deliberate structuring of the plan and of these roles. We litigators in particular tend to look at things from a different vantage, more in hindsight, and say did this person or that entity, looking at what they actually did, acquire the status of a fiduciary for purposes of liability exposure, whether they were intended to be put in that position or not at the outset of the plan’s establishment. And from that perspective, one of the most useful comments in his most current article is his explanation of one type of functional fiduciary, namely the party that assumed control over plan assets to some extent unintentionally, but that nonetheless then became a fiduciary with fiduciary responsibility for any acts taken in that regard. As he points out, that party assumes fiduciary liability in that situation, even if it did not knowingly cross the line into that role. As Simon Says:

A more serious scenario is where a person unilaterally exercises discretionary control or authority over a plan without express authorization. Such a person can become a "functional" 3(21) limited scope/non-named fiduciary–without a written contract–through its mere conduct of providing unauthorized advice or exercising unauthorized control or discretion. Given that no contract is present in this situation, the entity obviously doesn’t intend to become a 3(21) limited scope/non-named fiduciary but becomes so anyway through its inadvertent conduct.

From a litigation perspective, this is a far more common circumstance than one might assume, and is a central point in much breach of fiduciary litigation, where a key question is often whether a particular defendant became a fiduciary by its actions concerning the plan and its assets, where it was not intended by the plan’s authors and founders to be a fiduciary.

Well, everybody and their mother’s lawyer has an article, blog post or client advisory memo out on the Hardt case, and I suspect that is because, frankly, its about as easy a Supreme Court decision to understand as you can find. What’s it hold? Procedural victory requiring remand of an ERISA denied benefit claim is sufficient to justify an award of attorney’s fees to the claimant so long as there is some substantive achievement by the claimant in moving his or her case forward. The question left open? What more than just a simple order of remand is necessary to trigger an award of attorneys’ fees, since that alone isn’t enough. The answer? Frankly, on a practical level, it is hard to conceive of a remand that isn’t driven by the claimant showing some significant problem in the administrative record whose existence advances the claimant’s case sufficiently to justify an award under the Hardt ruling. That said, however, I am sure there are going to be factual scenarios in which the issue is arguably close, and one can predict that the development of the case law on that point going forward will be driven by how certain fact patterns intersect with the quality of the lawyering, the quality of the administrative record at issue (and thus of the administrator in question as well, since the caliber of the administrative record in a given case is, in essence, a stand in for the quality of the work done by the administrator and is its physical representation), and with the approach of the particular judge to which the case is assigned. How’s that for an easy and safe prediction? The great southern novelist Walker Percy once commented to the effect that a well written horoscope is one that many people can fit themselves into, and, similarly, this prediction is one into which you can shoe horn pretty much any future development of the case law on this issue. That doesn’t make it any less accurate, though.

This is all a preamble to this link, registration required, to a Lawyers USA story on the decision, in which yours truly is quoted:

Stephen D. Rosenberg, a partner at the McCormack Firm in Boston and author of the Boston ERISA and Insurance Litigation blog, said the relaxed standard could result in more cases being filed.

“I can see more cases being brought by plaintiffs’ lawyers because they can file a case with a procedural problem, knowing they don’t have to win the whole case at the end of the day to collect a fee,” he said.

But a remand order to a plan administrator might not be enough by itself to be considered success on the merits, Rosenberg noted. . . .

“The fight that is going to play out in these cases [involves] the question of how much beyond just a failure to dot an “I” on remand does [a claimant] need to have,” Rosenberg said.

I have a lot more thoughts on the case, some of which are actually more subtle than these broad brush thoughts, but an important one to pass along relates to the issue I am quoted on, of the possibility of Hardt opening the door to more cases being filed. Certainly, there is room and motivation now for participants’ lawyers to bring cases where a clear procedural problem is present, thus making recovery of attorneys’ fees more likely and making filing suit more feasible economically from their perspective, in cases where previously the relatively low dollar value of the benefits at issue combined with a reasonably high degree of difficulty in prevailing on the substantive claim to reverse the denial of the benefits itself would have argued against filing suit. But even that dynamic, in terms of its likelihood of producing more lawsuits, is tempered by a dynamic somewhat peculiar to ERISA litigation, namely the relative paucity of participant lawyers who can spot both a procedural error and a strategic path from it to remand; that is not something just any old plaintiff side lawyer or moonlighting personal injury attorney is going to be able to do. As a result, you may see more cases filed by the better ERISA focused participant lawyers on claims that they otherwise would not have seen as financially worth pursuing, but I doubt you are going to see a noticeable or measurably significant increase in the filing of such suits across the legal and participant population as a whole.

I posted recently on the Supreme Court’s consideration in Hardt v. Reliance Standard Life Insurance of the question of just how much success on the merits is necessary to trigger a plan participant’s right to an award of attorneys’ fees, and discussed the fact that requiring an outright and complete win by the plan participant is likely too high of a standard for a fair and equitable system. In a case mostly remarkeable for its unanimaty, the Supreme Court ruled to this effect today, upholding, in essence, the approach to this issue taken by those courts that find some substantive success by the plan participant to be enough to trigger an award of attorneys’ fees.

A decision a week or so ago, Gelumbaukskas v. USG Corporation Retirement Plan Pension and Investment Committee, out of the United States District Court for the District of Maryland provides a perfect example of why this is the correct rule. As the case reflects, the plan participant in that case was never provided with a substantively and procedurally compliant internal appeal process, leaving a record in place from which the court could not pass on the question of whether, in fact, the decision denying benefits was arbitrary and thus should be overturned, which would have resulted in an award of benefits by the court to the plan participant. Rather, the court found that the matter had to be remanded to the plan administrator to redo the appeal process in a manner that would comply with its obligations under ERISA and would create the necessary record for the court to pass on the ultimate question of whether or not the plan participant was actually entitled to the benefits after application of the arbitrary and capricious standard.

Certainly, this is a significant enough win for the plan participant that it should allow an award of attorney’s fees, in that the remand is likely to either end in: (1) a settlement or an award of benefits to him, to avoid the court passing on the question again after having already found deficiencies in the record and having noted potential substantive problems with the record in its opinion; or (2) in the creation of a record that the plan participant can actually use to challenge the denial. In that first possible outcome, the remand order in essence becomes a victory for the plan participant, and it is hard to justify, other than as form over function, the idea that the plan participant should not be entitled to attorney’s fees for that result, when the outcome ends up substantively comparable to an actual outright victory at the courthouse. In the second potential outcome, it is clear that the procedural victory by the plan participant was, at a minimum, a necessary counterweight to the administrator’s control of the appeal process and, simultaneously, the necessary prerequisite to the court ever ruling on the substantive claim for recovery of the actual benefits in dispute; should the plan participant thereafter prevail in court, that initial procedural victory becomes a necessary prerequisite to overturning the substantive denial of benefits, thus warranting treating the remand decision as a necessary part of the court process in litigating the case and one that is therefore capable of supporting an award of fees.

Of course, one can point out the other possible outcome after the administrative appeal process is concluded after the remand by the court, which is that the benefits are still denied on remand, and the court eventually upholds that denial. But even then, the original win served the purpose of enforcing ERISA’s procedural regulations and mandates, which the court found were violated by the administrator. ERISA imposes those procedural obligations on plan administrators for a reason, which is to guarantee the type of fair process that is supposed to stand in for a quick trip to the courthouse clerk’s office; recall that ERISA is interpreted to disfavor litigation for the resolution of disputes, in favor of an administrative handling of disputes outside of the court system, so as to lower plan expenses, encourage the adoption of benefit plans, and make use of the administrator’s expertise in deciding claims for benefits. It is the plan participant in this third potential outcome who has vindicated those underlying principles, and thus has, in essence, scored a win, which should be the predicate for an award of attorney’s fees.

That’s what this case here begins to answer, at least in the Boston market and in the context of the fees that should be awarded to a prevailing plaintiff. This case was intended to be the next in the series of recent Massachusetts/First Circuit centric decisions I started writing two weeks ago, and haven’t returned to since. It is interesting on two fronts, the first being, as intimated above, it’s survey of billing rates for ERISA counsel in the Boston market. The second is it provides a good explanation, as well as example, of applying a lodestar.

It seemed particularly timely to return to the series of recent decisions by bringing up this one, in light of the Supreme Court’s recent hearing of arguments on the question of the nature of attorney’s fee awards to prevailing plaintiffs in ERISA cases. That case, and the argument before the Court, revolved heavily around exactly what result adds up to a sufficient enough win by a plaintiff/plan participant to trigger an award of attorney’s fees, since an ERISA case involving denied benefits can end up with a result that falls anywhere across a broad continuum of possible outcomes that range from a win for the plan, to a remand back to the plan administrator to fix procedural errors and make a new decision, to an outright win for the plan participant. It is my view, even as predominately a defense lawyer, that those courts who use substantial success (under other names sometimes) by the plan participant in his or her suit as the proper trigger for awarding attorney’s fees under ERISA have it right. There are a lot of barriers to plan participants bringing suit over denied benefits that relate to the costs of doing so, including the fact that many cases simply don’t involve enough in benefit amounts to warrant the plan participant incurring the costs needed to prosecute a claim out of his or her own pocket; making attorney’s fees available so long as the participant proves some substantive problem in the handling of the claim, even if it only results in remand to the plan administrator, is both a necessary counterweight to this problem and consistent with the premise that a plan participant is entitled, even if not to benefits, than to the proper handling of his or her claim and a correct decision making process.

Indeed, if you think about it, the animating principle that makes arbitrary and capricious review morally appropriate is the idea that the decision must be based on a proper process; absent a proper process, the justification for allowing the plan administrator the leeway to make the decision, with only limited review by a court, is weak at best. One can only assume that the administrator’s decision making is appropriate, which is the essential assumption behind discretionary review, if in fact the process used to make that decision was correct; anything less, and there is no reason to assume a correct outcome by the administrator. From a practical perspective, as one who has represented various plan administrators over the years, there is nothing wrong with this approach and idea either, as it is my experience that most good companies strive for a proper process and a correct result (something that itself is dependent on a quality decision making process in the first instance).

For arbitrary and capricious review to exist in a fair legal system, there has to be a realistic opportunity for plan participants to test whether the process pursued was correct, and the opportunity to recover the legal costs incurred in proving that the process was flawed is a necessary part of that, as in its absence, participants will become, for financial reasons, even less likely than they are now to challenge the procedural underpinnings of decisions that go against them. This is simply logical, if you think about it. Why would any rational economic actor spend tens of thousands to prove a mere procedural error leading to remand to the administrator, in cases that often involve only five figures in benefits, absent a realistic opportunity to recoup those fees if correct in his or her belief that the process was flawed?

From this point of view, the exceptional (when compared to every other legal area I can think of at the moment) degree of latitude granted to the administrator by arbitrary and capricious review, something firmly shored up most recently by Chief Justice Roberts in Conkright v Frommert, must exist hand in hand with rules that create a realistic system under which participants can test the administrator’s process in reaching decisions, and the ability to recover legal fees by proving a procedural error and forcing a remand is a sensible part of that system.
 

Well, I guess this wouldn’t be much of an ERISA blog if I didn’t put up a post about the Supreme Court’s decision in Conkright v. Frommert, on the question of whether an administrator continues to be entitled to deferential review when it has already had one interpretation of the challenged plan terms rejected by the court under that standard. Interestingly, coming on the heels of Glenn, the simple fact that the Court had accepted cert in the case suggested some type of change was in the offing for the standard of review, even if it was only incrementally with regard to the application of that standard of review in this type of a fact pattern. Otherwise, frankly, one could see no reason for the Court’s particular interest in the case. The Court, though, found no change to be warranted, and simply reinforced the basic themes of its main cases over the years related to this issue: that deferential review is to be applied, that lower courts are not to deviate from it on ad hoc rationales, and that deferential review is a necessary element of the balancing act between employee rights on the one hand and the need to encourage employers to provide benefit plans on the other. Its not a bad ruling, in the sense that it does give lower courts and practitioners some much needed guidance after decisions such as Glenn, by the Supreme Court, and lower court decisions that played at the margins of the deferential review standards; the decision can, in many ways, be understood as a signal to stick to the basic rules that apply in this area, to not accept the many creative challenges to deferential review that participant lawyers come up with (and which, to their credit, seem to be limited only by the extent of their imagination and legal skills), and to not read cases like Glenn as suggesting any fundamental weakening of that standard outside of the specific factual circumstances presented by that case. And in that regard, the majority opinion can be read as sending that message loud and clear; in fact, the language of the opinion seems to have been selected to purposely drive that point home in as strong a tone as possible. That’s my take on it, anyway.

In fact, the majority opinion was written by Chief Justice Roberts, who, you will recall, authored a concurring opinion in LaRue that has been interpreted by some writers, myself included, as an attempt to prevent the ruling from significantly expanding the extent and scope of ERISA litigation, by placing the type of claim at issue in that case in the realm of denied benefit claims – where deferential review, limited discovery, limitation to the administrative record, and internal administrative appeals rule – rather than in the more free form realm of fiduciary duty litigation. His opinion in LaRue strikes the same tone of wanting to prevent an escalation in ERISA litigation that is at play in the opinion authored by him in Conkright, and this ruling may well have that exact effect; if nothing else, it should quickly become arrow number one in a defense lawyer’s quiver whenever a participant or a participant class seeks to deviate from a strict application of the arbitrary and capricious standard.

There have been a series of interesting ERISA decisions over the past several weeks out of the United States District Court for Massachusetts, whose Boston courthouse I can see through my office window as I type this post. The decisions have stacked up on my desk a little bit, like a leaning tower of paper. I am going to run a series of posts, some short and others perhaps longer, passing them on with my comments as to their value. The first is this summary judgment ruling in DiGiallonardo v. Saint-Gobain Retirement Income Group, which has to do with a challenge to a denial of disability retirement benefits. It is most interesting, and useful to other practitioners, for one specific point, namely its handling of an administrator’s procedurally poor processing of a claim and its appeal. The court found that the administrator had not considered the actual key term in the contract in ruling on the claim for benefits, and that this required remand to the administrator for a proper handling of the claim, because under those circumstances, the claimant had not received the “full and fair review of the administrator’s decision” to which a claimant is entitled under ERISA. The court found that this procedural irregularity rendered the administrator’s decision arbitrary and capricious.

I expect to be litigating, down the road, issues, complications and conundrums created by health care reform. Let’s be honest – its impossible to imagine any large structural undertaking not generating problems, including unforeseen ones, that will have to be resolved by the courts. For now, though, the issue is more one of planning for changes, and what needs to be done now to accommodate them. My colleague George Chimento, whose paper suggesting that employees should not be given the option of managing their own 401(k) accounts is discussed here, passes along this client advisory on “Baby Steps: an Employer’s First Year under Health Reform,” which addresses these changes.

Over the past week or so, several interesting items have crossed my desk, none of which have appeared while I have had time to do them justice with a full blown post. We will do three for Wednesday today – even though there is no alliteration at all to that title, as opposed to five for Friday or twofer Tuesday – and run them down here.

First is this interesting article on the 403(b) regulations, and the intersection of the tax code and ERISA. It’s a good starting point for understanding the current regulatory status of such plans.

Second, in a perfect intersection (well, almost, since surety bonds aren’t exactly insurance) of the two topics included in the title of this blog, is an excellent post summarizing ERISA’s surety bond requirements. From fiduciary liability insurance to surety bonds to the personal liability of fiduciaries, ERISA in theory, structure and operation, is built around a framework that is intended to surround retirement plan management with pockets of funds that can be used to reimburse plan participants against losses.

Third, here is a nice squib on the question of when ERISA applies to, and governs, severance package programs as part of company reductions in force. Most such programs will fall within ERISA’s ambit, and, as the article points out, it is beneficial to the employer to structure the program to bring it within the confines of ERISA.

Yesterday, the Supreme Court effectively rejected the idea that mutual fund fees, in the non-ERISA context, are not actionable if consistent with the market as a whole, in response to a Seventh Circuit decision finding that a fund did not pay excessive fees to its investment advisor in light of marketplace discipline (I am oversimplifying the Supreme Court ruling a little bit, as this is not actually a blog on the Investment Company Act of 1940). Shrewd observers of ERISA excessive fee case law, or even most casual ones, will likely quickly note that, in the ERISA context, the Seventh Circuit essentially applied the exact same thesis to an ERISA excessive fee claim in its highly influential decision in Hecker, finding, in part, that fees were not excessive if consistent with the market as a whole. In the new Supreme Court decision, the court instead applied a different test – albeit in a different context than ERISA excessive fee claims – to determine whether the fees were excessive, asking instead whether a fee is being charged “that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”

Is this a what is good for the goose is good for the gander situation? Is the same market based approach to testing fees that the Supreme Court has now rejected in the investment advisor scenario also, by implication, unwarranted in the context of a fiduciary’s obligations to protect participants against excessive fees in ERISA governed plans? Isn’t the test that the Supreme Court references for the investment advisor context equally a good fit for ERISA excessive fee cases, by asking not whether the fees were consistent with the market as a whole but instead whether the fees are disproportionate to the services provided and whether the evidence reflects them to be the product of an arms length negotiation? In many ways, this is what critics of the Hecker test – at least in my case – have complained about: not that the fees being paid by the defendant company in that case were necessarily too high, but rather that the court didn’t adequately test and vet them before deciding that the excessive fee claim had no merit. The Supreme Court’s new (well, actually a restatement of an old) test for fees in a different context would fit the situation very well, much better than the Hecker approach. The standard would still give a great deal of deference to plan administrators, sponsors and fiduciaries, allowing a wide range of fees to pass muster. The standard, though, would require that there be a reasonable linkage between the fees being charged and the value received by the plan, and that the evidence support the conclusion that the fees came about as a result of arm’s length, business like negotiating by the fiduciaries. In essence, this would bring the test back to the prudence required of the fiduciary, by asking not whether the fees were per se too high, but rather whether the evidence reflects that the fiduciary engaged in the basic business activity of seeking appropriate fees.

Here is the new decision from the Supreme Court, in Jones v. Harris Associates, and here, pat on the back to me, is a post I did last November suggesting that the opinion in Jones may well impact the Hecker line of thinking on ERISA excessive fee cases.

I have written before, probably on more than one occasion, about the fundamental philosophical problem underlying electronic discovery, which is that lawyers and courts continue to view it through the traditional rubric of discovery, one formed in the world of paper documents, interrogatory answers, and deposition testimony. As I have discussed in the past, battles over scope, relevance, costs and burden in that context had some built in controls and limits, namely the actual range of existing files, documents and witnesses. Thus, except in the most extreme and outlier cases, allowing broad discovery wouldn’t overwhelm any party, back in the days of paper. That’s not the case today with electronic discovery, which, as we all know, can expand exponentially, without the type of built in, apparent physical limitations that exist with paper discovery.

As a result, when parties begin seeking electronic discovery under the old rubric of it should be produced if it could possibly lead to evidence, and courts look at an electronic discovery dispute through that old prism, you end up with a presumption of production and a correspondingly broad – and expensive – electronic discovery mandate. It is understandable that lawyers and the courts look at electronic discovery through this traditional frame of reference, for we are all products of our training and experience, and neither the federal rules nor the developing case law in this area push very strongly against this traditional approach to discovery. But the costs of applying the traditional discovery thinking to electronic discovery problems are high, because assuming the relevance of discovery and allowing unfettered electronic discovery without strong controls guarantees broad electronic discovery and high costs, given the expense of that area of discovery. The right approach and antidote to this, I have said before, is a shift away from the traditional thinking on discovery, and towards hands on judicial control of the process, one in which cases are staggered whenever possible to avoid electronic discovery into areas that, as the case plays out, may become unimportant (think of, for example, holding off on damages discovery until liability is proven), in which a party seeking electronic discovery that could be burdensome is required to really show an evidentiary basis for seeking it (think, for example, of requiring deposition testimony or other documentary evidence indicating that the electronic discovery could actually hold some evidence of value before the electronic discovery is allowed), and in which a party opposing the discovery must actually prove high cost and business disruption by competent and admissible evidence.

The analogy that comes to mind for me is a Daubert hearing, conducted to test the admissibility of an expert’s testimony in advance of trial. A similar type of mini-trial type proceeding would be a natural forum for testing whether electronic discovery, when challenged by a party, is warranted. It seems a safe assumption that, over time, the amount saved by parties from the reduction in the scope of electronic discovery that would likely ensue would significantly outweigh the increased discovery costs of engaging in a mini-trial of this nature. And as for the benefits to the courts? Well, all litigators know the old saying that nothing focuses the mind on settlement like a trial date; I suspect nothing will more motivate lawyers to compromise on, and agree to, a particular scope of electronic discovery, than the possibility of having to try the issue in a Daubert like setting.

Oh, and here’s a nice article on the problem from the National Law Journal that started this reverie for me this morning.