Cool, what a nice treat to me for the first real workday of the New Year. I have always wanted a reason to link to the Harvard Law School Corporate Governance blog because, well, it just sounds so impressive (that plus it’s a really good read on all things corporate), and one of their contributors handed me the opportunity over the weekend. In a post addressing SEC requirements for online posting of public company proxy materials, the author – a Gibson Dunn partner and visiting professor at Georgetown – points out how these requirements differ from the notice requirements under ERISA:

Compliance with notice and access [rules under the SEC requirements] is not likely to satisfy the requirements for electronic delivery of materials under the U.S. Department of Labor standards for participants in ERISA-covered defined contribution plans, such as 401(k) plans and employee stock ownership plans. Section 404(c) of ERISA permits electronic delivery only if a participating employee has the ability to effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee and for whom access to the employer’s information system is an integral part of the employee’s duties (e.g., a networked desktop computer at work), or if the employee provides written consent accepting delivery of information electronically. As a result, although an issuer may rely on notice and access for permitted employees and consenting employees, other employee participants should receive paper delivery of proxy materials.

You know what’s interesting about this? The focus on procedural aspects of providing information to plan participants (and others, with regard to the SEC rules). We could use an equal level of attention and agreement when it comes to the amount, type and transparency of the information provided to plan participants in particular, something more important than just the formal procedures by which it is provided.

I noticed in my statistics package for the blog that this past Thursday, Christmas Day, had the lowest readership of this blog in months. Come on people, ERISA is for everyday, not just workdays! And here’s why. The day before Christmas, the Second Circuit issued its ruling adjusting its case law on benefit determinations where a structural conflict of interest exists to accord with the Supreme Court’s recent ruling in MetLife v. Glenn. In a well reasoned and highly logical opinion, the court first acknowledged that its prior case law on the issue was no longer proper, in light of the Supreme Court’s ruling, because it had gone too far: the Second Circuit previously held that a structural conflict of interest meant that de novo review applied, even if the plan documents granted the administrator discretionary authority over benefit determinations, which normally invokes a deferential standard of court review. However, as the Second Circuit recognized, the Supreme Court’s ruling in Glenn meant that a structural conflict of interest could not be the basis for abandoning the deferential standard of review, but that, instead, it could only be considered as a factor to be weighed in applying the deferential standard to decide whether the administrator’s decision should be set aside as an abuse of discretion. Nothing controversial or particularly exciting there, as it reflects an accurate, almost verbatim reading of Glenn, although it is interesting to watch the way the Glenn decision, seen as one that broadens the protections available to plan participants, actually, in at least some instances such as this one in the Second Circuit, requires a lessening of the protections previously granted to participants in such jurisdictions in cases involving structural conflicts of interest. The Second Circuit previously allowed such a conflict to change the standard of review entirely, all the way back to a de novo review, which the Second Circuit, in its most recent ruling, now recognizes is not allowed under Glenn.

What is more interesting, though, is how the Second Circuit applied the new standard. By relying on the leeway the Supreme Court in Glenn granted courts to determine, based on the actual facts of the claim and the parties’ activities, how much weight to give to the conflict, the Second Circuit, in essence, applied what may as well have been de novo review to decide the case, only without putting such a label on it. Instead, accepting the Supreme Court’s invitation to review the actual facts of a particular case to decide how much weight to put on a conflict, the Second Circuit gave great weight – essentially outcome determinative weight – to the conflict, in a way that essentially mirrored de novo review.

The case is McCauley v. First Unum.

 

A few months back, I discussed the broad conception of damages in stock drop type cases articulated in the case of Bendaoud, which essentially found that damages exist if the participant could have done better in an alternative investment option. This concept makes it fairly easy to construct a damages theory in 401(k) and ESOP cases that will survive the scrutiny of a motion to dismiss, and that can support a significant award of damages. A prerequisite to getting to the damages analysis, however, is a basis for attributing an actionable error in the plan to the fiduciaries; the fact that a participant could do better in a different investment is irrelevant if there was no mistake in offering the original investment option in the first place.

That, however, is not too hard to show either. The bar, for instance, is low when showing that offering company stock as an option is an actionable error. For instance, "a stock can be imprudently risky for an employee savings plan even in the absence of fraud or imminent collapse,” according to a federal judge sustaining an ERISA case against Ford alleging that the offering of company stock as an investment option was a breach of fiduciary duty, given the extensive problems in the industry at the time and the lack of broad disclosure of how those problems may affect the investment.

With numerous major industries heavily roiled, and a stock market that has tanked, I can’t say that it should really tax the imagination of any good lawyer to come up with both damages to participants and errors by plan fiduciaries in any case involving the inclusion of company stock in a retirement plan or ESOP.

Sometimes the Zeitgeist is hard to read, other times it hits you smack in the face with a two by four. As we move towards the end of the year (the business year anyway, as we all know how much work actually gets done between Christmas eve and New Year’s day), the constant drumbeat of news drives home one unassailable fact, which is that ignorance cannot possibly be bliss when it comes to investing, particularly with regard to pension and 401(k) funds. From Madoff (hey, what an amazing long term track record; lets put our money there without further analysis) to pension plan fiduciaries buying CDOS they know nothing about based solely on the recommendation of the seller, it has become obvious that a little – or more – knowledge would actually be a wonderful thing. Josh Itzoe, author of “Fixing the 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully,” thinks so too, and has elected to step into the breach, launching a new blog, not coincidentally also titled Fixing the 401(k), intended to provide commentary and information related to the business of retirement investing.

As anyone who has read Josh’s work knows, he firmly believes that problems ranging from a lack of transparency to excessive fees to a host of other problems bedevil the industry, and certainly the past year has done little to undercut his thesis. It should be helpful to have his voice added to the commentary already out there.

Well, I suppose nothing could be located more squarely at the intersection of the two topics in this blog’s title than the difference between fiduciary liability insurance (which lets fiduciaries sleep at night) and fiduciary bonds (which protects a plan’s assets, rather than insuring the fiduciaries themselves). Scott Simmonds, who consults, writes and blogs on business insurance issues (and other things) provides this nice overview of this issue, distinguishing among the range of insurance products and bonds that come into play in running an ERISA governed benefit plan:

The Fiduciary Responsibility Liability Insurance Policy is the solution to the ERISA problem [of personal liability of fiduciaries]. Also called a FRIP, the policy provides protection for "wrongful acts" that result in a claim against the administrator of benefit plans. Premiums range from a few hundred dollars to thousands, depending on the size of the employer.

By the way, many people confuse ERISA fiduciary liability with the ERISA bond requirement. The law mandates that employee pension and retirement plans have a bond of 10% of the assets (up to $500,000) to cover loss of the funds through embezzlement. Some fiduciary policies include the fidelity coverage. Most do not.

Some businesses and insurance agents confuse employee benefit liability insurance with the FRIP. Bad call! The FRIP covers errors and omissions in the administration of benefit plans. The employee benefit liability policy covers mistakes but excludes ERISA liabilities.
 

I have written before (such as here, for instance) about the importance of properly structuring insurance programs to protect company officers, and making sure that gaps don’t appear that may leave them exposed to personal liability.  Scott’s commentary targets this exact same point in structuring insurance programs for protecting fiduciaries of ERISA governed plans.

Some bloggers blog their way to greatness, other bloggers have greatness thrust upon them. For some reason, that line popped into my head when Randy Maniloff’s always entertaining article on the top ten insurance coverage decisions of the past year appeared, like manna from heaven, in my in-box yesterday, providing one weary blogger – i.e., me – with a gift wrapped post for this morning. Substantively, there is much to be gleaned from the article and the cases it reviews, on issues ranging from the current state of trigger of coverage problems to an excellent decision on handling duty to defend disputes concerning obviously intentional conduct that has been pled as negligence for purposes of triggering insurance coverage, all written with the author’s trademark good humor and style (something anyone who reads a lot of insurance coverage briefs, opinions, articles and – yes – blogs can attest is not always present in written work in this area of the law). Moreover, the author has tossed in a free extra, a truly comical special section titled “Coverage for Dummies: The Top Ten," which collects ten excellent examples of people doing really dumb things and then demanding that their insurers protect them against the outcome.

And best of all, in what can only have been a transparent attempt by the author to garner a review on this blog, one of his top ten decisions (non-dummy division) is an ERISA case, the Supreme Court’s decision in MetLife v. Glenn. More seriously, its inclusion is almost mandatory in any collection of the most important decisions affecting the insurance industry (which, obviously, underwrites and administers the vast majority of employer provided disability plans), as it is guaranteed to generate more subsequent court rulings than any other insurance related decision of the past year, as the courts of each circuit move, over time, to realign their jurisprudence to accord with Glenn.

I had a whole line of things I was planning to blog on, but events keep overtaking them. Today, that is the story of the Tribune bankruptcy, and its effect, detailed here, on the Tribune ESOP. We have all been watching the booming industry in filing ERISA breach of fiduciary duty cases based on the latest events in the market with, for the most part, some skepticism, as we try to deduce which ones are legitimate and whether some reflect just a piling on in the pursuit of settlements and accompanying legal fees. However, you will recall that, not too long ago and in a very prescient move, a number of participants in the Tribune’s ESOP filed a breach of fiduciary duty suit related to Sam Zell’s use of the ESOP stock in the transaction by which Zell or entities he controlled acquired the Tribune; we now are learning that this apparently deeply flawed transaction (time will tell, but all indications suggest it was deeply flawed right from the get go) placed the ESOP plan participants’ holdings at greater risk than the assets of others involved in funding the transaction, including Zell himself. Targeting the fiduciaries for possibly having allowed the ESOP assets to be used in a more risky way than others were willing to do with their own investments sure smells like a pretty credible theory to me.

At this point, I think we are entering a new era in Massachusetts law concerning insurance coverage, one different than any I have seen before in my decades of litigating such cases in the Commonwealth. In this brave new world, policies are apparently applied as written, and insureds cannot just claim ambiguities or that they had expectations – somehow reasonable despite being contrary to the actual wording of the policy – of coverage somehow different than that actually provided. That, at least, is the moral of Finn v. National Union, decided last week by the Supreme Judicial Court. In essence, the court enforced the plain language of an intellectual property exclusion in the policy, despite attempts by the insured to argue that it did not necessarily encompass some of the factual variation of the particular claim at issue, and the court expressly held as well that the reasonable expectations doctrine is inapplicable because the exclusion unambiguously precluded coverage. The court, interestingly, didn’t even elect to stop there, deciding to also hammer home the point that the plain language of unambiguous policy provisions controls, by pointing out that extrinsic evidence supporting a contrary reading of the policy cannot be considered in the absence of ambiguity; this is contrary to decades of actual practice in the state’s trial courts, where lawyers for policyholders would regularly toss anything and everything possibly pointing towards coverage into their arguments. The novelty of this idea in Massachusetts practice is illustrated by the fact that the court actually had to go back almost 40 years and then another 40 years more to find two Massachusetts cases to cite to that effect, despite how widely accepted and uncontroversial this idea is in other jurisdictions. A new day dawning? Maybe, but it certainly fits with my sense of the development of insurance coverage case law in this state over the past few years.

Well, I think Roy Harmon and I (mostly Roy, actually) just previewed for you what this webinar plans to cover, the ethical and privilege traps involved in providing legal counsel to ERISA governed plans and their administrators. Still – luckily for people like me and Roy who blog on these subjects and for the presenters of the seminar – there is literally always more to be said about these types of topics. That point was made crystal clear by this article here, which details a court ruling waiving the attorney-client privilege as a result of electronic discovery mistakes, just days after I posted – for the upteenth time – on my qualms about the impact of electronic discovery on clients, costs, and litigation, particularly in the data intensive realm of ERISA actions.

On the other hand, here’s a seminar on everything topical in ERISA breach of fiduciary duty litigation, presented by a who’s who’s of practitioners, which, by its description, is covering a lot more ground than can be trod by a few lone bloggers.

This really isn’t an instance of logrolling (or blogrolling, as the case may be), I promise, even though Roy Harmon’s post that I am passing along here refers to me and my electronic discovery post a few times; the subject of Roy’s post got my attention and led me to read it long before I realized the peripheral role I played in it.

Roy provides a very erudite discussion of a particular quirk and issue of some real concern in litigating ERISA cases, which is the scope of the attorney client privilege that exists – or often doesn’t – between a plan’s fiduciaries and its legal counsel, when engaged in a dispute with a plan participant. As Roy details, there often is no privilege in that situation that would prevent disclosure to the plan participant of legal advice obtained by the plan fiduciary. Its an interesting problem, one that arises in everything from determining the contents of an administrative record to be produced in a benefits denial case (i.e., is legal advice received by the plan administrator in deciding to deny benefits privileged or not?) to the extent to which the privilege can be raised in defending a deposition in a breach of fiduciary duty case. Roy’s analogy to multi-level chess with regard to these issues is apt, and illustrative of exactly the type of complicated gamesmanship that keeps litigators interested in the otherwise often dull interstices between trials.