Here is an excellent article on electronic discovery under the federal rules, and efforts to reduce the expense of this process by protecting against inadvertent waiver of privilege. As long time readers know, I have frequently criticized the structure and format of the federal rules, and their application by the courts, concerning electronic discovery, for the extraordinary burden and expense they impose on litigants. Moreover, I have focused on the fact that the major problem is that the scope of relevancy is very broad in discovery, which has not been too big a problem in traditional forms of discovery because the very nature of depositions, producing existing documents held in hard copy form, etc., puts some outside limits on the process and thus, on the expense. Electronic discovery, obviously, doesn’t have the benefit of being limited in this way by such simple physical restrictions of time and space; because the quantity of data that can and is stored is immense – and not as easily confined physically as, say, simply pulling all file folders at a client related to a particular transaction – the broad scope of relevancy, when applied to electronically stored information, can expand discovery obligations exponentially in comparison to traditional forms of discovery. For this reason, I have argued in the past that courts need to leave their past rubric for discovery (which basically consisted of the view that discovery is broad, the parties are expected to work most problems out among themselves, and court intervention is only warranted for outlier type issues) where it belongs, in the past, and create new approaches to dealing with electronic discovery, in which the courts – either pro-actively or in response to motion practice by the parties – attempt to focus electronic discovery in a manner that properly balances the importance of the documents in question with both the benefits of that discovery to the requesting party and the costs of that discovery. I am, sadly, still waiting for this to happen. The reason I like this article is its focus on the fact that electronic discovery is far too expensive, and that the latest attempt to target that problem is at best, a finger in the dyke approach, in that it just isn’t a lasting solution to the bigger problem. Moreover, the article rightly focuses on the construct that rests at the heart of the problem; the incompatibility of the historically broad definition of relevance applied in discovery with the amount of data now available in a technological society.

Litigators who read this blog already understand my obsession with this issue; while trying cases is the joy of the work, discovery – and fights over it – is the heavy lifting that takes up much of a litigator’s time and a client’s money. It’s a particular problem in ERISA cases, where any type of a plan with a significant number of participants is going to create a great deal of electronically stored data, almost none of it of relevance to any particular dispute yet still possibly open to discovery as things currently stand.

Here is a case from a week or so ago that I haven’t had time to post on yet, but which warranted a little more discussion than suited inclusion in Monday’s Thanksgiving Week potpourri post. In his latest ruling in In re Boston Scientific Corporation ERISA Litigation, Judge Tauro of the United States District Court for the District of Massachusetts delves in depth into the question of whether and when putative class representatives satisfy the requirements to represent a class in an ERISA breach of fiduciary duty case involving alleged securities law violations by the defendants. Building on the work of Judge Gertner, of the same bench, in her opinion in Bendaoud, issued two months ago, Judge Tauro analyzes the question of whether the requirements of both ERISA and constitutional standing, including injury in fact by the putative class representatives, are satisfied, finding that the requirements were not satisfied. The case provides a good tutorial on these issues. Beyond that, however, of perhaps even more interest, given the ongoing development of the law with regard to the intersection of securities violations and ERISA, is that the court’s analysis is heavily influenced by certain defenses to standing and injury in fact that are borrowed from securities law. Normally, in most instances, we are seeing ERISA used as a broader forum for attacking these types of violations, as compared to relying on the securities laws to do so, but in this case, doctrines developed as part of securities litigation serve to blunt a related ERISA case.

Well, I am not quite sure what to say, or perhaps more accurately where to start, with regard to this article in the New York Times today on the surprising financial health – at least for now – of the GM pension plan. As the company otherwise founders, the article describes years of responsible, forward thinking stewardship of the pension plan’s funds, including with regard to investments of the plan’s assets. Obviously, as the article points out, with the company itself in grave danger of running out of money, that may not continue for too much longer, but GM’s handling of the pension plan to date is clearly commendable, particularly so in a world in which so many other businesses insist that they cannot possibly carry the risks and expenses of offering a defined benefit plan. But GM’s contrary experience raises more questions than it answers. Is it only a company with a gigantic financial footprint – like a GM – that can handle the long term financial investments and exposure needed to run a defined benefit plan? Or is a well thought out investment strategy and a corporate willingness to actually contribute the money needed to execute it all that is needed, such that other companies – many of whom have abandoned pension plans – could have pulled it off as well, had they been so inclined? Or, finally, does GM’s current predicament and the likelihood that, barring a turnaround of the company’s fortunes, its pension plan will be in trouble as well, show that defined benefit plans are simply impractical at best in modern American economic life, where – as the GM example shows – the length of pension commitments is not concomitant with the likely life span of the company that makes those commitments?

Some of the more prolific bloggers manage to be prolific by posting short notes on various topics of interest written by others, which isn’t my usual style. But over the past week or so I have managed to back up a good stack of things that I have wanted to talk about in detail, but haven’t had the time to comment on. So in the spirit of a Thanksgiving host laying out a big spread, here’s a whole bunch of things at once:

First, here is a good follow up story providing more detail on Wal-Mart’s success in defending itself against excessive fee litigation, a topic I first discussed in this post here. This particular story, in PlanAdvisor, does a nice job of illustrating the point I made in my earlier post, which is that the court, in ruling in favor of Wal-Mart, did not focus on or analyze the propriety of the particular fees themselves, but rather focused on the method used by the fiduciary to select the investment options in question and whether that was prudent. Interestingly, the article describes the Wal-Mart investment menu, and it reads like one you would find in just about any 401(k) plan. Does this suggest that most plans are actually fine on this front? Or might it suggest that fiduciaries as a whole accept fees that are too high, and that perhaps comparing a particular plan’s investment choices, such as Wal-Mart’s, against industry benchmarks is not really the right focus for deciding whether the fees in a particular plan were too high? Just asking.

Second, here’s one court’s answer to an oft asked question: is a plan participant seeking benefits entitled to attorney’s fees for the administrative appeal portion of his claim?

Third, here’s an interesting webinar rounding up the Supreme Court’s treatment of ERISA issues during the 2008 term. The Court’s fascination with ERISA during the past year has been well documented and the biggest item of discussion in ERISA related media, and pretty much everything about those developments has been chronicled on this blog and a million other places. But if you haven’t seen it all enough by now, the webinar may be for you. Interestingly, one of the topics noted in the webinar is the Court’s involvement in a case, still pending and not yet decided, concerning waivers by divorcing spouses of plan benefits. This is the quickly becoming infamous Kennedy case, which to date has caught the eye for two reasons: first, many people have some question as to why the Court took on this case and whether it merited the Court’s involvement, and second, because of the Court’s decision to seek supplemental, post-argument briefing on the very basic issue of the extent to which plan administrators are bound – barring an effective QDRO – to the express written terms of a plan. As a very experienced benefits consultant recently commented to me, the Court is going to upturn an awful lot of apple carts if, intentionally or even (probably by accident) implicitly, they indicate that administrators are not strictly controlled by the actual written terms of the plan instrument. As a result, a case that started out as perhaps the least substantively significant of the ERISA cases taken up by the Court in the past year threatens to become one of the more disruptive to settled practices, in a manner similar to how the Court reopened much settled thinking on fiduciary duty issues by indicating in LaRue that rules long established in the defined benefit context may not hold true for all other situations.

Okay, that clears some of the backlog.

There’s an old saying that nothing focuses the mind like an execution date; all trial lawyers have heard judges rephrase it as nothing focuses the mind so much on settlement as an imminent trial date. I thought of this saying when I read this article, in which Susan Mangiero of Pension Governance, whose Cassandra like warnings that companies need to focus on improving quality and other aspects of retirement plans – including their handling of hard to value assets – predates the utter disaster that has befallen such plans in the past several weeks, discusses the fact that, having now fallen into the abyss, pension plans and fiduciaries must focus their efforts on how to respond to the market collapse, which may have a larger impact on the pension plans than the market collapse itself. If there was ever a metaphorical execution date for plan fiduciaries and administrators, it’s the upcoming and ongoing storm of litigation risks, government investigations and intervention, and need to respond to the market volatility by tightening up investment strategies. If it may be hard, in hindsight, to defend the kind of alleged problems in investment management that occurred in the past that are at the heart of the “stock drop” type suits that are being filed against 401(k) and pension plans, it will be doubly hard to defend any continuation of the same types of errors in future cases, given the extent to which the world has changed over the past several weeks, both in terms of the environment in which such cases will be litigated and the expectation that fiduciaries should have learned from past mistakes.

I am a real big fan of this article here, on two recent rulings in major excessive fee 401(k) lawsuits, one against Wal-Mart and the other against Bechtel. While I haven’t read the rulings in those cases themselves yet, what I like about the rulings, at least as depicted in the article, is that they apparently did not focus on the actual amount of the fees, but rather on the process used by the defendant companies in selecting them, to decide whether the amount of fees attached to the plan’s investment options violated fiduciary obligations. As the article sums up the rulings:

The details in the recent rulings in the Wal-Mart and Bechtel suits vary, but both cases offer a reassuring message to large corporate plan sponsors: In determining whether a corporation breached its fiduciary duties to 401(k) participants, the actual fees charged to workers are not nearly as important as the procedure a sponsor has in place supporting its decision to hire, and keep, any firm that provides 401(k) services to plan participants.

So, for instance, if plan sponsors offer actively managed mutual funds on their 401(k) platforms, sponsors are not acting negligently if these funds wind up underperforming—even if the funds are more costly to participants than passive investment options that could have generated better returns for a lower fee. As long as 401(k) sponsors can document that there was sound reasoning and process underlying its selection of the actively managed funds, then they are not breaching their fiduciary responsibilities.

I like this because it is a perfect match for something I have been preaching on this blog for some time, and which is exactly what I tell reporters who call up asking for suggestions as to how plan sponsors and administrators can best protect themselves against fiduciary liability: follow and document best practices that show that the company tried to locate the best funds at the best fees. Sponsors and fiduciaries can do this by such steps as: (1) bench marking selections against other options and the market as a whole; (2) bringing in outside experts who can provide that information; (3) choosing funds whose costs are consistent with the industry and not outliers; and (4) considering multiple vendors, options and choices before settling on the best overall option, just as the company would in picking vendors for any other service or product. What this really means in the real world as to follow, or mimic, an RFP type approach to selecting funds and vendors, and never, ever, just buy funds from someone a fiduciary knows from playing golf.

Stop me if I am beating a dead horse, but this press release/short story on a class action law firm’s investigation into a stock drop involving Hartford’s stock reads exactly like one that, a few years ago, would have been issued prior to pursuing a securities class action; now its written in advance of pursuing an ERISA breach of fiduciary duty claim, with the class consisting of the company’s 401(k) participants. There is no better or more succinct illustration of the movement away from using the securities laws to pursue these types of claims and towards instead using ERISA to pursue these types of claims than this brief story. The facts at issue haven’t changed; they just replaced the words “securities act” with the word “ERISA.”

More grist for the mill for those who believe that the merging of the two areas by plaintiffs’ firms needs to be met by integrating the obligations under both areas of law so that fiduciaries are not operating under two separate and sometimes contradictory legal regimes.

So you’re an amateur fiduciary, nominally in charge of a company’s pension plan or 401(k) plan but generally relying on your outside vendors and service providers for substantive advice and decision making, and you get sued for breach of fiduciary duty because of losses resulting from the investment advice you received from them. So what’s the first thing you do? File third party actions for contribution or indemnity against the outside vendors on the theory they were fiduciaries as well and must reimburse you for any loss you are held responsible for because of your role as a fiduciary? Well, not necessarily in Massachusetts, where at least one judge has now concluded, on an issue that has been treated differently in different courts, that ERISA did not expressly incorporate such rights as against other fiduciaries, and so therefore they do not exist. The case is Charters v. John Hancock, and here is a nice article on it, here is nice post elsewhere on it, and here is the decision itself.

The central issue of the case and of the court’s reasoning is presented well in the article, where the court’s reasoning is explained as follows:

Under the indemnification and contribution principle, when one person is subject to liability because of another person’s action, the second person has to make good the loss, and contribution requires the loss to be distributed among several liable fiduciaries. In his ruling, Groton noted that federal appellate courts are divided on the issue of whether ERISA permits indemnification and contribution, but said Groton was siding with those courts that have found that courts should not imply statutory remedies, which are not allowed under ERISA.

"Here neither party disputes that ERISA does not explicitly provide for claims of contribution and indemnification among co-fiduciaries. Allowing fiduciaries who have breached their duty to resort to contribution and indemnification to recover from co-fiduciaries is not ‘of central concern’ to ERISA," Groton asserted.
 

There is a lot of room for argument on both sides of this issue, as to whether a fiduciary should have or does have such a claim against another fiduciary, and I can certainly see both sides of it, or argue either side of it. It is more of a policy issue as to how ERISA should be applied, than it is a jurisprudence question of understanding and interpreting the statute, and is one that the entire system would benefit from a simple declaration one way or the other, by Congress or the Supreme Court, as to what the rule shall be on this going forward.

In the Charters case itself, it is worth noting, and important to practitioners to recognize, that the court was confronted by this issue in a case where the defendant was using indemnification as a counterclaim to ward off a breach of fiduciary duty claim against it by a trustee by trying to pass the liability back to the trustee; it may well be that the court would have reached a different conclusion if presented with a more traditional contribution/indemnification scenario, where the defendant fiduciary was not trying to use the doctrines offensively, but instead simply to spread the liability owed to the plaintiff as a result of fiduciary breaches among all fiduciaries who may have participated in the breach.

Finally, although it seems to be the court’s rejection of the contribution and indemnity doctrines as applicable under ERISA that has caught the attention of observers, of at least equal interest is the court’s further discussion of a particularly timely issue, which is the defendant’s status as a fiduciary and possible breach of fiduciary duty based on failure to disclose fees fully and on receiving “revenue sharing payments in the form of 12b-1 and sub-transfer agency fees from
the funds in which it invested on the Plan’s behalf.” The court provides a nice analysis of these issues, making the case a good starting point for analyzing them with regard to the ever growing number of such cases being filed.

The macro view of trends is often fun, but detailed analysis of what is really going on is often more fruitful. A long, long time ago – in blog years, anyway, which given the youth of legal blogging is akin to dog years – I wrote this post about how the rise of employment practices liability insurance would inevitably lead to a certain level of price pressures, standardization and commoditization with regard to employment law services. This excellent article here details the underlying developments that drive this type of commoditization of legal services.

Geez, I hate to do this, but sometimes you have to play connect the dots. Reading this story about amateur (some would call it democratically run – small d, local government style) municipal pension plans and their investment strategies that got them caught up in the current collateralized debt obligation/securitization mess, I kept thinking to myself, where is the responsible, professional, knowledgeable fiduciary (or fiduciary retained vendor) in the investment decisions being chronicled. I don’t see them anywhere in the story. I see what appear to be the fiduciaries in over their heads and taking advice from what, in essence, are sales people. So what happens now in those cases (I mean besides the pension plans taking big losses)? Well, either the fiduciaries are liable for the mistakes they made, or they need to find – and sue – someone who is, as suggested in this piece here.

Many commentators often have a problem with fiduciary obligations and how they are interpreted, but to me, they play an essential role, and reflect a perfect fit between aspirations and legal obligations. The fiduciary alone stands in a position to protect plan assets, while simultaneously bearing the initial exposure for failing to do so, and thus has both an obligation and a deep rooted need to actually manage a pension plan well. It is not a job for amateurs, and is not simply a role in which it is enough to just do your best. Plan participants deserve, and legal obligations require, a level of expertise far beyond what is reflected in these types of stories.