Honestly, I have spent a week scratching my head, off and on, over the Supreme Court granting cert to consider the standards governing when attorneys fees can be awarded in an ERISA case, particularly when they denied cert shortly thereafter in Hecker, which presented the opportunity to address the much more substantive issue of the scope of fiduciary responsibility for the amount – and corresponding degree of disclosure – of 401(k) fees. In my mind, there is already a conflict among the circuits over that issue, with the Seventh Circuit finding outright that there was no viable theory against fiduciaries of large plans with market standard fees, and the Eighth finding this same theory worthy of factual inquiry. However, as I thought more on it, the denial of cert for Hecker makes some jurisprudential sense. Hecker itself was decided on a motion to dismiss, leaving essentially no factual record for evaluating these types of claims (critics will say, of course, that this didn’t stop the Seventh Circuit from deciding the theory had no merit) and forcing any Supreme Court ruling to turn solely on the allegations in the pleadings. This is a complicated issue, one I have said before would have been more properly evaluated by the Seventh Circuit after factual development, and I suppose it is likewise fair to say that a Supreme Court review of the issues posed by Hecker by means of reviewing Hecker itself would have suffered from the same flaw; Supreme Court review of the fee issues raised by the Hecker line of cases is probably better suited to a case that has played out sufficiently to allow all of the factual and legal fault lines to develop prior to Supreme Court review.

But the attorneys fee case itself still doesn’t make a whole lot of sense to me, as a practicing litigator who spends plenty of time with cases pending in the federal courts that are governed by that fee statute. The reality is that such attorney fee awards are either subsumed within settlements, or the courts award them under current standards only, typically, where there is significant merit to a party’s position and the party obtains significant relief; the district court judges, in my experience, do a good job of utilizing the current standards and understanding of the fee shifting provision of the statute to bring about that result, such as in this case here. And at the end of the day, no matter certain peculiarities that exist in the wording of the statute, this is really the only standard for awarding or not awarding fees that makes practical sense in the real world. After all, do we really want attorneys fees awarded for less than obtaining at least a significant portion of the relief sought by a plan participant?

I understand that the Fourth Circuit, in the case under review, applied a somewhat more stringent test than what I am discussing here, but, from a courtroom level view, courts get this issue right often enough that it doesn’t seem to warrant Supreme Court intervention. But the Court seems to have a thing for ERISA cases these days, for whatever reason.

Alright, here we go on Conkright v. Frommert, which will be argued at the Supreme Court on Wednesday. SCOTUS has the full run down of the case and what is at issue right here, and long time ERISA blogger Paul Secunda has an amici brief before the Court on the core issue, which can be found here. At its heart, the case presents one fundamental question, though cloaked – like many ERISA cases – in a wide ranging and complicated documentary, factual, and judicial history. That, by the way, is what makes ERISA cases fun for litigators like me – nothing is ever simple, even the issues that one would think should be. This is a natural outcropping from a number of aspects of this area of the law, running from a complicated statute that leaves much to further development by the courts, to the inherent limitations posed by both the English language and the (inevitably finite) skill of the scrivener in drafting complicated benefit plans, to the frequent disagreement among circuits (and even among district court judges within the same circuit in some instances) on a variety of issues under the statute. Here though, the key issue is one of deference, and whether a court must continue to apply deferential review to a plan administrator’s interpretation of a plan when the court has already rejected the administrator’s earlier interpretation as being arbitrary and capricious. A non-lawyer – and most lawyers too – would say the case is simply about whether the plan administrator only gets one bite at the apple, or perhaps is about whether its one strike and you are out.

This case continues a recent trend of the Court taking on ERISA cases that pose very finite issues, ones that aren’t likely to recur frequently but that pose the opportunity to present some sense of what are the outer guidelines of ERISA litigation – how broad is deference, does it apply when there is a conflict, what kind of conflict matters, how much room does the administrator get to work with plan language, and what is the proper balance between the plan administrator and the district courts (and eventually the circuit courts) in deciding factual and plan language issues in ERISA cases. Much of this goes back to Firestone, and the universe governing ERISA cases that it spawned; if I had my guess, I think the Court would like to have that one back, and start all over again with a cleaner, more easily applied legal structure. But they can’t go back, and I don’t think anyone believes they will go so far as to overturn that ruling and start anew with a new framework. So what we will have instead is cases like this one being decided in a manner intended to reign in the outer limits of the universe spawned by Firestone (ouch, that extended “Firestone as the Big Bang” metaphor is beginning to make my head hurt), which means I call this one for the participants, with a finding that the plan administrator gets deference only the first time around.

And yes, I know I am dramatically simplifying how the parties frame the questions here – but what I have said above will be the essence of the outcome.

Here’s a very interesting article from the Financial Times on the Deere/Wal-Mart line of 401(k) suits, in which class actions are being brought on behalf of plan participants alleging that fees in the plans at issue were too high and insufficiently disclosed. I have discussed in other blog posts the essentially diametrically opposed results in Hecker and in Wal-Mart, with one circuit essentially finding no merit to the underlying legal theory, and the other deeming it viable and worthy of further fact finding to determine whether fiduciary breaches had in fact occurred. Me, personally, I think the theory, independent of actual facts of any given case, is viable and has merit. I don’t think, though, that the fiduciary obligations require the particular plans to have the lowest possible fees, but rather require reasonable fees under all the circumstances, along with a realistic and reasonably aggressive process to obtain lower fees than smaller companies or the consumer off the street would have ended up with, this later point being something which the opinion in Hecker did not require.

Factually, though, I thought it would be fun to combine two of my favorite hobby horses – the Hecker theory of fiduciary liability and BrightScope ratings – in light of the Financial Times article, and see what we learn. Interestingly, it is in Wal-Mart that the Eighth Circuit let this line of attack on 401(k) fees proceed, but we learn from the BrightScope ratings on Wal-Mart’s 401(k) plan that it has low fees in comparison to other companies. John Deere’s plan, at issue in the Hecker case, isn’t rated yet on the BrightScope site. Two other large companies identified in the Financial Times article as being the target of such suits, Lockheed Martin and Boeing, are both rated as likewise having low total fees. The same can be said of Caterpillar, which just settled such a suit. ABB Inc., which the article identifies as proceeding to trial as we write on just such a claim, doesn’t score as well as those other companies in this regard, but is rated as having low fees.

Now, long time readers know that I am quick to quote (especially when the other side on one of my cases has a statistician for an expert witness) the old line that there are three kinds of lies – lies, damn lies and statistics – and certainly there are subtle points to be made about the comparison between what the plaintiffs are claiming against those various companies and what the BrightScope ratings on fees tell us. This, though, isn’t the place to fully vet those points. What is clear, though, is that easily accessible data – for us, anyway, but surely not for the folks at BrightScope when they went through the work of getting it – suggests there is a pretty good disjunct on a macro level between the theories being crafted by participants’ lawyers in this particular area and the factual reality of the operation of many of the plans that are being targeted.

I have posted frequently on BrightScope and their work in rating 401k plans, and in particular about their decision to rate them in a Zillow like manner that can be quickly understood by employees. Here’s a terrific article out of BusinessWeek on the site, and on the people behind it. Its an excellent way to wile away the end of a workweek.

I just noticed I haven’t posted since last year, for a few weeks to be more accurate, due to the usual end of the year crunch and a briefing schedule in a case overlaid on top of that to boot. No matter the reason, it runs afoul of my general feeling that you shouldn’t host a blog if you are not going to post frequently. In any event, Paul Secunda, over at Workplace Prof, has given me an easy reentry into posting, with his post here on the Seventh Circuit – the Seventh Circuit! – overturning a denial of short term disability benefits in a case where the administrator had been cloaked with discretionary authority. The interesting thing, to me anyway, about the ruling is that the court focused on certain minute details of the administrator’s handling and the precise details of the medical review relied on by the administrator, finding that a flaw in the medical review warranted overturning the denial. This is much different than what, for many years, has been the essence of judicial review of benefit denials where the arbitrary and capricious standard of review is applied, in which the courts essentially just looked to see if there was some medical evidence in the record that could justify the decision and, if so, affirmed the decision by the administrator. What you see in the Seventh Circuit decision is something different, and something more and more apparent in rulings over the past year or two, namely a closer look behind that evidence by the judicial body before whom the case is pending, to see not just – as was traditionally the case – whether there is evidence to support the administrator’s determination, but to instead test the quality of that evidence, followed by a decision as to whether the evidence is of a sufficient quality, and not just quantity, to support the administrator’s decision. If you think about it, that is tending more and more towards de novo review, to a certain extent, just under a different name.

Speaking of new blogs, I would be remiss as well if I didn’t pass along a link to Adam Pozek of Sentinel Benefits’ new blog, the wonderfully named Pozek on Pension (I have always been a big fan of alliteration). Adam has always been a font of knowledge on compliance issues and the day to day management and operational challenges of benefit plans, and I am pleased to see he has taken up the opportunity blogging presents to share that knowledge with the rest of us. When he was president, John Kennedy, in a far less politically correct world, reputedly described Washington as the perfect combination of Northern charm and Southern efficiency; if that was true then, Adam, a recently transplanted Southerner, and his benefit plan work, including on his new blog, is walking evidence that the New South has turned that phrasing on its head, into a place of Northern efficiency and Southern charm.

 

I like this (relatively) new blog here, the Benefits and Employment Observer, by the lawyers at the small – only in numbers – Washington D.C. shop of Bailey & Ehrenberg. This is the cleanest, most easily understood presentation of the findings of the DOL’s recent advisory opinion “addressing the issue of whether the assets of ‘target-date’ or ‘lifecycle’ mutual funds constitute ‘plan assets’ of employee benefit plans which invest in the funds” that I have come across over the couple of weeks since the opinion’s issuance.

I have been wondering about the question of whether state insurance commissioners can effectively gut the industry practice of including discretionary clauses in disability policies by refusing to approve forms for use that include them, or whether ERISA preemption precludes that action. I was preoccupied with a trial at the end of October when the Ninth Circuit concluded that they could do exactly that, without running afoul of preemption, according to this post by Mitchell Rubinstein at the Adjunct Law Prof blog. I have to wonder, though, whether it is something of a pyrrhic victory, since my view, without ever having seen actuarial data one way or the other, is that discretionary clauses reduce litigation costs and thus likely reduce the price of group long term disability policies. If insurance commissioners effectively gut the industry of that option, it would seem to me it could only drive up claim costs and, naturally then, policy pricing. Will that reduce employer willingness to provide this important benefit? Time will tell, but we already know that rising costs are the primary reason that employers don’t provide as much health insurance as they used to. We should keep this in mind when legal and regulatory decisions occur that can only drive up the cost of other employer provided, and ERISA governed, benefits.

I have a stack of substantive ERISA matters that I have been trying to post on for the last week or two, and I am going to try to work through them over the next few weeks. The thing about a blog, though, is the world keeps on spinning, and each day you find something new you want to post on, which keeps shunting those older items further into the background. That’s happened again today.

Regular readers know I am fond of the saying that Marx was wrong about a lot of things, but he was right that everything is economics. It is economic reality that is driving the increase in ERISA litigation, both at the big ticket class action level and at the micro level of individual participant claims; as I often say, the same compliance errors or high plan fees that participants ignored while their account balances were just going up, up, up, are being sued over, now that account balances have spent a year or more going down, down, down (yes, I know, I am not accounting for recent upticks, but you get my drift). Along this line, fiduciary liability insurance expert and fellow blogger, Joe Curley of U.S. Reinsurance, and I were discussing a couple days ago the ticking time bomb posed by the impending retirement – for the first time – of a generation of employees devoid of pensions and forced to rely instead on their 401(k) plans. It is conventional wisdom and common knowledge that these retirees are not, as a class, financially prepared for retirement by the assets in those accounts, particularly after the recent market downturn. Those people are not going to go quietly into decades of financial struggle in retirement, if there is a target for complaints about the operation, returns, or anything else concerning their 401(k) plans who can be sued; they make for a nice big pool of potential class action representatives, a huge pool of potential class members, and gazillions of potential individual claimants, for the latter of whom even a relatively small recovery will be significant relative to the values of their accounts. On a practical, day in and day out level, this means two things for plan sponsors, named fiduciaries or functional (who are often simply accidental) fiduciaries. One is to make sure there is sufficient fiduciary liability insurance in place; as Joe noted when we spoke, some service providers and others who may become functional fiduciaries by their roles in company 401(k) plans are not aware of that risk, and are not necessarily prepared for it. The second is an old hobby horse of this blog – compliance, compliance, compliance. ERISA litigation, particularly breach of fiduciary duty litigation, is an area of the law where a good defense is always the best offense – watch the fees, watch the operational compliance, document a sound practice for selecting investment options, etc. A fiduciary who does that severely decreases the likelihood of being sued, and strongly increases the likelihood of not being found liable if suit is filed.

This is on my mind today particularly because of this article from the Wall Street Journal about unemployed workers in the age 55 to 64 bracket who cannot find work and are, for all intents and purposes, being forced to retire, long before they intended to and long before they are financially prepared to do so. These people – or at least the lawyers they go to – are not going to overlook problems in their retirement accounts, even if they are just arguable or comparably minor or, as is often the case, were things that no one paid attention to years ago, like fees and costs. And this is where we loop back around to the Marx quote – there may be nothing different about the operational aspects of these 401(k) plans then there ever were, but the economic forces that are driving these people into retirement are going to likewise drive them to pursue any opportunity to bolster the returns on their accounts, even if that is by suing those who ran the plans.

I am going to catch up on a number of items I have meant to blog on this week, all in one fell swoop. So here goes:

• I posted before about my appearance in an article in the Boston Business Journal, but one that was only available on-line to subscribers. Here it is in another forum, openly available.

• I, and a cast of thousands, have been saying for some time now that the plaintiffs’ class action bar has wisely latched onto ERISA breach of fiduciary duty theories as an excellent replacement for bringing pure securities actions. As I have discussed in other posts, there are a variety of reasons for this, including easier discovery and possibly easier avenues to recovery. In addition, securities law in the area of what we in ERISA would call “stock drop” type litigation is much more well developed than it is under ERISA, leaving more room for tactical and theoretical maneuvering. Beyond that, the sort of backlash in public opinion, in Congress and in court decisions that existed – at least prior to the most recent market meltdown – with regard to securities class action litigation was non-existent with regard to framing the same types of cases under ERISA. Here’s a dog bites man story out of Business Insurance reporting on this phenomenon. Anyone who has been reading this blog or similar sources over the past few years already knows what the article is reporting, but it is still a nicely done introduction to the topic.

•And speaking of using ERISA for class action litigation, one of the central questions with regard to the increasing use of that statute to press stock drop litigation and its cousin, excessive fee litigation, has long been whether it is a successful tactic. The successful defense of the excessive fee claims in Hecker v. John Deere, in the Seventh Circuit, at an early procedural stage and prior to detailed discovery into the facts of the plans and the fees at issue, strongly suggested that ERISA claims of this nature may be no more likely to get past the procedural stage and into expensive litigation of the merits than a pure securities theory would be. The Supreme Court’s subsequent pronouncements in Iqbal seemed to confirm the approach taken by the Seventh Circuit in Hecker, of testing the legal viability of the underlying ERISA based theories before allowing the plaintiffs to conduct discovery that might more strongly establish the legitimacy of their claims (or lack thereof, for that matter). As many have been reporting, the Eighth Circuit has just essentially taken the opposite tack, in a putative class action case against Wal-Mart, Braden v. Wal-Mart Stores. Braden can be understood, in part, as rejecting the approach taken by the Hecker court and finding that discovery is necessary before the merits of a complex excessive fees type claim can be decided. For more detail on Braden, here is Paul Secunda’s take on the matter over at the Workplace Prof (including a link to the case itself) and Roy Harmon’s take on the matter (which focuses nicely on the Rule 8 pleading requirements) at his always illuminating Health Plan Law blog. I have said before that with the increased focus on fees, the increased focus on the lack of retirement savings of most Americans, and the economic impact of high fees on returns in 401(k) plans, Hecker may turn out, in hindsight a few years down the road, to have been the high water mark for the corporate bar in defending against such claims. I am not sure whether that’s a good or a bad thing (I suspect, actually, that it’s a mix of both, but addressing that in depth here would make for an awfully long post), but it may well be the case either way.