One of the Seventh Circuit’s most interesting tricks in its recent decision in Hecker was the extraordinary breadth it gave to the 404(c) defense. This was an aspect of the decision that raised a lot of hackles, and I noted in my own post on the case that I doubted this was the last word on the subject and that it would be interesting to see how the case law developed as other courts tackled this question. Well, here’s a decision from a week or so ago out of the United States District Court for the District of New Hampshire taking a much narrower approach in interpreting the amount of protection granted to fiduciaries by section 404(c), finding that the defense does not apply to “a fiduciary’s designation of the investment options that are available to plan participants.” The court reached this conclusion because:

First, section 404(c) is unclear as to whether it can be used to bar a claim based on a fiduciary’s designation of investment options. Second, section 404(c) requires the DOL to adopt regulations explaining when a participant or beneficiary has sufficient control over his assets to be subject to a section 404(c)defense. 29 U.S.C. § 1104(c)(1)(A). Third, the DOL’s implementing regulations are themselves unclear as to whether section 404(c) applies to a fiduciary’s decision to designate investment options. Fourth, the DOL reasonably determined in the preamble to its regulations that losses which result from a fiduciary’s designation decision are neither a "direct" nor a "necessary" result of a participant’s exercise of control over plan assets. Finally, both the Supreme Court and the First Circuit have recognized in similar circumstances that an agency’s reasonable interpretation of its own regulations in a regulatory preamble is entitled to deference.

Frankly, I am inclined to think that a close review of the actual statutory text and regulations suggest that this judge is closer on the mark on this issue than was the Seventh Circuit in Hecker, leading to what I think is the real takeaway from the continued development of the case law on this issue: namely, that plan sponsors should not overly rely on Hecker in evaluating their potential exposure and their obligations. Rather, as I have said in other forums, Hecker should be understood by plan sponsors and their vendors as setting forth the base minimum in terms of how a plan should be structured with regard to investment option fees, and should not be seen as a get out of jail free card by a sponsor who does no more than build a plan consistent with the reasoning in that case.

Judge Gertner of the federal district court in Massachusetts issued a pair of bookend decisions in long term disability cases a few days back that present an interesting contrast with regard to an issue that troubles many critics of the arbitrary and capricious standard, namely the extent to which an administrator deciding a claim for benefits can favor the opinions of its own reviewing physicians over the opinions of the participant/claimant’s treating physicians. In the first decision, in the case of Sorenson v. Metropolitan Life, the judge sets forth, and then finds in favor of the plan to a large extent based on, the general rule, which is, in the court’s words, that:

The law permits a plan administrator to rely on the opinions of a non-examining, reviewing doctor like Dr. Schroeder, see Tsoulas v. Liberty Life Assurance Co. 454 F.3d 69, 81-82 (1st Cir. 2006), and does not require that the opinions of treating physicians be given special weight, see Leahy v. Raytheon Co., 315 F.3d 11, 20 (1st Cir. 2002). To the extent that the reviewing and treating physicians offer conflicting opinions, the plan administrator has the discretionary right to choose between them, so long as its decision is reasonable.

However, in another decision issued the same day – Taylor v. Metropolitan Life – the court imposes, and bases its decision in favor (this time) of the participant/claimant on, certain limitations on that principle, finding that:

While MetLife is not required to give deference to treating physicians, see e.g., Vlass v. Raytheon Employees Disability Trust, 244 F.3d 27, 30-32 (1st Cir. 2001), Doyle, 144 F.3d at 186-87, it is unreasonable to selectively reference that physician’s notes and fail to address the sections of her submissions most relevant to the claimant’s ability to work. A plan administrator "may not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician."

ERISA litigation, even LTD cases governed by the arbitrary and capricious standard, is not close to the locked in, pro-administrator structure that many critics of ERISA claim it to be. Rather, as the interplay of these two cases show, there is unquestionably a yin and yang to the case law and to the controlling standards, that tries to find the right balance between the authority of the administrator and the rights of the participant.
 

You know what a dog bites man story is, right? Well, here’s one, though a well-written one. This piece on CFO.com surveys the collateral damage from the Wall Street collapse, with a focus on its severe impact on 401(k) plans and the corresponding increase in fiduciary duty litigation. It is a well done piece that is worth a read, though nothing in it will come as a surprise to anyone familiar with the subject.  The take away?  The collapse in 401(k) values, combined with the extinction of pensions, will lead to "lawsuits, new regulations, and the specter of an aging workforce that, like a bad party guest, shows no inclination to leave."  I have to admit, I do like that last analogy.

I and a cast of thousands will be speaking at a webinar on April 14th on “Pension Fiduciaries in the Hot Seat – What to Avoid and How to React if Sued,” put on by Pension Governance, Inc. Well, its not really a cast of thousands, just me and four very experienced worthies, who know so much about the subject that they seem like a cast of thousands.

I have to say that, long before ever being invited to participate in one of Pension Governance’s webinars, I attended as a member of the audience, and not only found them informative but enjoyable as well.

 

Is a motion to dismiss a good tool for disposing of major breach of fiduciary duty lawsuits? In essence, should it be treated as a mini-summary judgment proceeding, that tests the sufficiency of the case’s theories against, not the detailed facts of a specific case, but instead against the world as a whole as understood by the court? Or are these cases instead ones that are better decided by – and both litigants and the development of the case law better served by – a decision on the actual factual merits of a case, after drilling down into the conduct in question?

The former scenario is, in essence, the route taken by the court in Hecker, and Kevin LaCroix provides another example in his post yesterday, on the dismissal of the breach of fiduciary duty lawsuit in the Huntington Bancshares ERISA litigation. What happened in both cases is, in a nutshell, the court comparing the allegations of fiduciary errors to the market as a whole, finding that what took place was not inconsistent with what was occurring in the broader market (in the case of Hecker, that being the pricing on mutual funds in a plan, and in the case of Huntington, that being the stock losses in the plan), and that therefore, essentially by definition, the plan fiduciaries could not have fallen below the standard of care imposed on them. I can understood the arguments on both sides, and particularly those in support of this approach. A fiduciary is charged with acting with the skill and care of a prudent person in that position, and one can argue that this standard was not breached if the plan losses were consistent with what occurred across the market and with regard to others similarly situated; after all, if all the other investment managers took the same beating, then the plan’s fiduciaries, by definition, were acting like all others with expertise in the area when they likewise took the same pummeling. Plus, of course, conducting extensive class action litigation to further analyze what the market itself seems to be telling us – that the fiduciaries were acting like all other prudent investors since all got clobbered to the same extent – is a tremendous drain on the defendant’s resources. Then you add on top of that the realpolitik of the situations, which is that we know that most cases of these types settle after expensive litigation if they survive the motion to dismiss stage and possibly the summary judgment stage, so in many ways these procedural stages dictate the outcome, and there will never actually be a trial to allow a full drilling down into the actual facts of fiduciary conduct which can serve as the basis for a decision; delaying the day of reckoning from the motion to dismiss stage to the summary judgment stage, in this way of thinking, doesn’t really change that, as there will undoubtedly be factual disputes at the summary judgment stage that will preclude a fact based decision and instead any decision at that stage will, like the motion to dismiss rulings, likewise be based on the types of broader legal theories addressed by the courts in the motions to dismiss in these types of cases.

But on the other hand, is it really safe or fair to just assume that fiduciaries have lived up to their obligations, simply from the existence of broader market indicia? I am thinking in particular of two sets of data that crossed my desk recently, the first courtesy of 401(k) blogger Josh Itzoe and the second courtesy of the guys at BrightScope, who slice and dice the data on this field for fun and profit. In this post, Josh points out survey results showing that a large number of plan sponsors don’t really have a structure in place for operating 401(k) plans at a high level, while this chart here, passed along by BrightScope and based on its data, shows the wide range of fees that plans assume in their 401(k)s. This information reflects the tremendous diversity one can find in operating talent, execution, fees and other aspects of a plan that can seriously impact performance. Under those circumstances, is it really appropriate to stop the analysis of fiduciary conduct at the motion to dismiss stage, before investigating the aspects of a particular plan, just because the market as a whole lines up in a reasonably consistent manner with the performance of or fees in a particular plan? Market performance may be down, or fees across the market may line up with those in a plan, but this doesn’t by definition mean that a plan sponsor is living up to its obligations without further analysis. Behind those market numbers and the relationship of a particular plan’s performance to those numbers, may very well be a fiduciary whose operational structures and/or charges to plan participants fall below what other fiduciaries are doing; I am not sure it is fair to allow the muck of a bad market to provide cover for that.

I have been thinking a lot recently about the development and history of particular aspects of insurance policy language, and how they reflect the continuing efforts of drafters to take language that can often be imprecise and refine it to more accurately reinforce what the insurer actually intends to take on as a covered risk. Over time, many policy forms are revised as insurers find that limited knowledge about a particular type of risk at the time a policy provision is first crafted or changes in the development of the law in a particular area after the initial drafting mean that the original language chosen by the policy drafters did not accurately enough capture the extent to which an insurer meant to include, or instead exclude, a particular exposure from coverage. Historically, for those old enough to remember it, my favorite example was the exclusion written by many carriers before asbestos litigation broke out in waves, that precluded coverage of claims for asbestosis. Personally, I have little doubt that those who drafted that policy language thought they were saying by that language that the policies do not cover any bodily injury/tort liabilities arising from the mining, sale, use, etc. of asbestos and asbestos based products, and that based on what the authors knew of the subject at that time, they thought they were writing such a broad limitation on coverage. As time moves on though, it becomes clear that many suits arising out of asbestos involve other physical ailments, and not just the particular disease of asbestosis. End result? Courts find that the exclusion does not apply to the other types of injuries, since they fall outside the express wording of the exclusions, which were only written as applying to asbestosis, even though the authors undoubtedly understood the word asbestosis to mean something much more than just the specific disease that would bear that name. Indeed, what possible logic could there be behind intentionally excluding just the tens of thousands of claims for asbestosis, and not the tens of thousands of claims arising from other, similar diseases that stem from asbestos exposure and inhalation?

The history of pollution exclusions in liability policies is much the same, and another classic example. It has only taken some forty years for policy language to catch up to the extent of exposure created by environmental liabilities, and the industry has spent an untold fortune covering such claims and defending against claims for coverage of such claims in the interim. That this occurred is completely understandable, as the extent of exposure for pollution losses expanded exponentially only after much of the (then) standard policy language governing this issue was written.

Of course, a sane person might ask why I am spending so much time thinking about this these days, and there are a number of answers to that question, some even halfway legitimate or rational. But the reason is primarily that very interesting articles on the historical development of particular pieces of policy language or structure keep crossing my desk, and they keep reinforcing these points.

Here are two of them. First, the D & O diarist, Kevin LaCroix, has as well written a history of the development and adoption of the breach of contract exclusion that has become standard in many forms of policies as I have seen anywhere. As he explains, insurers always understood that the insuring agreement in their policies covered tort liability, and did not expand coverage to contractual liability; in essence, insurers and insureds alike understood that policies did not cover an insured’s failure to comply with its contractual undertakings, without any need for particular or express policy language detailing that point. However, as Kevin captures in his piece, over time this understanding started to fade into the ether, and insurers found it necessary to add a specific exclusion to policies expressly stating what had, in the past, simply been understood by all concerned, without any need for an express exclusion to that effect.

The second is this historical overview of the development and expansion of claims made policies. In this instance, as the author explains, claims made policies were developed for a particular type of exposure, but because of the usefulness of that structure with regard to such issues as setting premiums and other practicalities of the insurance business, it expanded into other forms of coverage, becoming, eventually, the industry’s “go to” form of coverage.

All of these examples bring one back to the same point, which is that the seemingly dry, contractual recitations in insurance policies are actually only the current manifestation (pun intended, for any insurance coverage lawyers reading this) of what is actually a living, breathing, ever evolving form of literature.

I was going to post on something else today – namely the scope of contractual obligation clauses in insurance policies – but my Google Alert pulled in something else that I wanted to pass along first instead, namely, this post by Paul Secunda at Marquette on an amicus brief filed by several law professors asking the Seventh Circuit to reconsider Hecker v. Deere en banc. The brief asks the Seventh Circuit to consider the exact issues that I noted in my post on Hecker as being the debatable parts of the decision, namely the panel’s decision to link a very narrow interpretation of fiduciary obligations with a very broad interpretation of the 404(c) safe harbor. I am very curious to watch how the panel’s analysis of those issues gets played out as the case law develops on excessive fee issues, 401(k) plans, and the application to them of the safe harbor and of breach of fiduciary duty claims, whether that takes place in the courts of other circuits who are confronted by the Hecker decision, or in an en banc revisiting of the issues by the Seventh Circuit.

Fun stuff, either way.

There is an interesting twist to a recent Seventh Circuit decision, Leger v. Tribune Company Long Term Disability Plan. The decision starts out as an attempt by the participant to resuscitate her benefits claim by invoking Glenn v. MetLife and asserting that a structural conflict of interest existed warranting an alteration to the standard of review. The Seventh Circuit, though, quickly rejected that position, finding that there wasn’t even a conflict of a level that warranted being considered as a factor in conducting an arbitrary and capricious standard of review. Uh oh, says the reader, we know how this story ends: the conflict of interest argument in this context signifies in most decisions that the participant has no other hook to hang her claim on, and is taking her last, desperate shot, dooming her when, as in this opinion, the court summarily rejects the argument. But the Seventh Circuit surprises here, as this issue is not the last one addressed, but is instead simply a signpost along the way to the ultimate conclusion and to the application by the court of what, in most cases, is not an approach one sees taken. Rather than stopping with the standard analysis that, one, the conflict of interest doesn’t change anything, and, two, there is reasonable support in the record for the decision to terminate benefits, thus ending the case, the court continued from there, finding, instead, that the decision, despite having support in the record, failed to account for numerous conflicting pieces of evidence contained in the administrative record or possible interpretations justified by the record. The court held that the decision to terminate could not be sustained in that circumstance, and that, instead, the issue had to go back to the administrator for purposes of making a decision that did, in fact, take all such concerns into account (the court actually just remanded it to the district court for proceedings consistent with its ruling, but one presumes this would mean remanding it back to the administrator to address these issues, followed by litigating the issues all over again).

I have commented in the past on this point – the question of courts applying a more searching level of review while nominally still proceeding under the arbitrary and capricious standard of review is much more significant both to parties and to the development of the law in this area than is the question of whether conflicts exist, and if so their impact.
 

Readers of this blog have undoubtedly picked up on the fact that I like to litigate cases (even more to try them), and that the focus of my practice, including with regard to ERISA governed plans, is litigating disputes. But there are probably far more benefit plan attorneys whose focus is on keeping people out of litigation in the first place, by keeping plans and their operations in line with statutory and regulatory mandates. I just recently came across an excellent new blog both by and for exactly those lawyers, and you can find it right here.

If it’s a pleasure to read a piece by someone who gets it, whatever the it may be, it’s even better when that same person can explain it successfully to others. In this case the “it” is how in-house counsel responsible for ERISA governed benefit plans should conduct their oversight of the plans, and the someone is American Airlines’ Vicki D. Blanton, who has that exact responsibility at her company. She has written an excellent “how to” piece for in-house counsel who are charged with those responsibilities, and you can find it right here.