One continuing theme in the posts on this blog is the replacement by plaintiffs’ class action firms of securities actions with ERISA breach of fiduciary duty actions in stock drop and similar type cases; the large class actions are brought on behalf of plan participants who hold company stock, often in an ESOP, against the plan fiduciaries. Such claims, for all intents and purposes, serve as independent securities type lawsuits against the company involved, through the guise of a breach of fiduciary duty lawsuit against the company’s designated fiduciaries, without having to meet all the rigmarole of a traditional class action securities fraud suit. I have posted often about this developing trend pretty much since launching this blog, and it has become a commonplace among other commentators as well.

Well, Georgetown law student Clovis Trevino Bravo has taken this line of thinking one step farther, authoring a detailed look at the advantages of prosecuting these types of cases under ERISA instead of under the securities laws, with a particular focus on the procedural and discovery advantages that accrue to the litigator who files such cases under ERISA rather than under the securities laws. Beyond that, she does an admirable job of synthesizing the often conflicting case law as to the intersection of the two legal regimes, providing an understanding of an evolving consensus – which is still a bit of a moving target, though, as she notes – as to the obligations of an ERISA fiduciary trapped between two separate lines of legal duty, that provided by the law of ERISA and that provided under the securities acts.

You can read her article in full right here, and you should – it will be worth your while.

A little judicial activism anyone? I am not sure what else, when you look at the actual history of how ERISA preemption came into being, you can call the demands that come from many quarters for courts to reduce the scope of preemption in the ERISA context, or, for that matter, the Ninth Circuit’s decision upholding the San Francisco health insurance mandate. James Wooten, of the University at Buffalo Law School, documents the political history of the enactment of ERISA and its broad preemption provision in this article here, emphasizing that the history of federal regulation and statutory enaction in this field progressed from one – based in legislation from the 1950s – that ceded much authority to the states to one – encapsulated in ERISA – that removed the states entirely from the field. Professor Wooten explains that the eventual progression reached the point where: “Over the course of the Ninety-Third Congress, which passed ERISA, lawmakers further expanded the preemption language so that employee benefit plans became ‘an area of exclusive federal concern.’ ERISA § 514(a) preempts state regulation of benefit plans even with respect to matters federal law does not address.” It is simply hard to understand how decisions such as the Ninth Circuit ruling that – contrary to all other courts presented with the same issues – found that a local ordinance mandating a certain structure with regard to employee benefit plans is not preempted can square with the well-documented legislative history of a deliberate intent to preempt the states even, as the professor phrases it, “with respect to matters federal law does not [even] address.” Quite simply, rulings and arguments by commentators that ERISA preemption should be read more narrowly than has been the case, and concomitant decisions like the Ninth Circuit ruling on the San Francisco act, may be understandable as an argument for or exercise in some sort of normative cum Dworkian cum Judge Hercules decision making, where the courts are to bring an aging statute into compliance with current circumstances, but they certainly cannot be justified as an accurate interpretation of congressional intent itself.

Remember the grave concern in different quarters about whether the Supreme Court’s ruling in LaRue would lead to a flood of litigation? Turns out it didn’t even do so in the LaRue case itself, which, now on remand at the trial court level, has been voluntarily dismissed by the plaintiff to avoid the expense of litigating the case. There’s your real check on excessive litigation: the costs of pursuing them. While ERISA grants a prevailing party the right to recover attorney’s fees, it is not a given that they will be awarded, particularly in a case, such as LaRue, where – as the multiplicity of opinions at the Supreme Court make clear – the law governing the issues in dispute is unsettled. Moreover, they are only awarded if you win; litigating a questionable case at significant expense risks large attorney’s fees that may never be recouped.

Of course, I guess all of this is just a back door argument for the outcome suggested by the opinion in Bendaoud discussed here: that the LaRue type cases are better structured as class actions than individual actions, for a variety of reasons, apparently including that litigating one small case is just plain not cost effective.

I have written before about why insurance companies use experts on insurance coverage, and why policyholders need to use them too. Indeed, there is little doubt in my mind that lawyers who aren’t specialists in the field often put their clients at a disadvantage when they engage insurance companies in disputes over insurance policies without bringing in someone with years of experience interpreting and arguing over the language in policies. This case here out of the Massachusetts Appeals Court yesterday, involving a seemingly routine dispute over which of two insurers should foot the bill for an accident involving an automobile, illustrates the point beautifully. The court’s decision – which placed the risk on an auto insurer and liberated a general liability insurer – pivoted on one issue, consisting of what exactly is meant by the three mundane words “arising out of.” Plain English words, of course, ones that we have all used since we were children and which everyone knows the meaning of. But to understand and interpret an insurance policy, you need to understand the gloss on those words that generations of insurance coverage litigation have grafted onto them and, indeed, to apply the relevant policy terms you have to give a more precise definition to that term than most individuals would bother to give to it in daily speech. Here’s how Massachusetts law now defines those three little words:

Our cases indicate that the expression "arising out of," both in coverage and exclusionary clauses,

"must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. Indeed, cases interpreting the phrase … suggest a causation more analogous to ‘but for’ causation, in which the court examining the exclusion inquires whether there would have been personal injuries, and a basis for the plaintiff’s suit, in the absence of the objectionable underlying conduct."

Bagley v. Monticello Ins. Co., 430 Mass. 454, 457 (1999), and cases cited.

The statement in Ruggerio, supra at 797, that "the expression [‘arising out of’] does not refer to all circumstances in which the injury would not have occurred ‘but for’ the involvement of a motor vehicle," does not weaken the broad standard of Bagley, and that standard has been quoted by the Supreme Judicial Court with approval. See Fuller v. First Financial Ins. Co., 448 Mass. 1, 6-7 (2006). Put another way, what is required for injuries to "arise out of" the loading of a vehicle is a reasonably apparent causal connection between the loading of the vehicle and the injury. See Ruggerio, supra at 798; Metropolitan Property & Cas. Ins. Co. v. Santos, 55 Mass.App.Ct. at 795.

Plain as day, right?

Here’s an interesting looking and timely webinar from West next week on the stock market meltdown, the bank bailout, and their effect on ERISA governed plans. The short version of their pitch for the webinar, which ought to be in 20 point type spread across a banner headline, is “here come the breach of fiduciary duty lawsuits.” Overhyped? I doubt it. If the markets are down 40%, so are gazillions of dollars in 401(k) assets. If an individual financial company’s stocks are being battered, then so to are megamillions of dollars in that company’s stock likely held by its own employees in esops and other vehicles. Who are all of these plan participants going to be looking at? Who can they actually make out a claim against, and have standing to sue? To ask these questions is to answer them: the applicable plan’s fiduciaries.

Now the interesting question, more so than whether such lawsuits are coming (the answer to that question falls in the dog bites man category) is the structure of the defenses that will be raised by the fiduciaries. You can expect some consistencies across the positions raised by the defendants, not the least of which – and the best of which may well be – that prudent investment processes were followed, so no breach occurred, and proper levels of disclosure to the plan participants were maintained, so again no breach occurred, but the fiduciaries got blindsided, with the underlying theme of, one, so did everybody else (supposedly, anyway) and, two, no one could have anticipated and avoided these losses. What do I think of these likely defenses? Well, it would take a book length piece to address the ins and outs of these defenses, their holes, their strengths, and their weaknesses. But I do know this – any fiduciary relying on such defenses better have a squeaky clean documented trail of disclosures to participants, investigation into investment options and vendors, and informed decision making to back it up, or they are going to be writing very big checks when all is said and done.

Fee shifting provisions, such as the one in the ERISA statute, that authorize a court to award attorney’s fees to a prevailing party, are facially neutral, and allow for an award in favor of the prevailing party, whomever that may be, and against the losing party, again whomever that may be. But should attorney’s fees be awarded to a large plan or administrator, such as a multimillion or billion dollar pension plan, from a plan participant who has lost a case seeking benefits that he or she believed was owed under the plan’s terms? In essence, does a facially neutral fee shifting statute really require David to pay Goliath?

The elements that are to be considered in ruling on an award of attorney’s fees under ERISA are, like the statute’s fee shifting provision itself, facially neutral; they do not presuppose that any particular type of party is more or less entitled to an award of attorney’s fees than any other party, nor that any particular type of party is entitled to protection against being hit with such an award. But the devil, as always, is in the details or, perhaps more accurately when, as in this case, broad open ended standards in the law are applied to a particular case, in the application of the standard to the concrete facts before the court. And as this case here, and Roy Harmon’s discussion of it shows, the application of those elements to this type of scenario tends to end up with a finding that the individual plan participant who has lost a case against a large plan does not have to pay attorney’s fees to the prevailing defendant.

A couple of different things from my desk today that are worth passing on.

First, for those of you interested – as I am and have often discussed in these electronic pages – in the need to balance effective litigation tactics with the costs of litigation, particularly given discovery and e-discovery issues, I pass along this article here, which I truly enjoyed. In many ways, it mirrors what I said in my own article on the subject, which you can find here.

Second, the Supreme Court delved back into the ERISA world yesterday with an argument on what, from a practical perspective, is a particularly vexing problem that bedevils plan administrators: namely, who is entitled to plan proceeds when a plan participant has divorced and thereafter a dispute arises as to who should rightly get plan proceeds after the parties thought they had negotiated resolution of the issue as part of the divorce proceedings? The prototypical circumstance, which seems straight out of television but actually happens all the time, is the death of a plan participant who changed the beneficiary, post- divorce, to a new boy or girlfriend, in ways that contradict the agreed division of property made as part of the divorce. For those of you interested in this question, here is a terrific article on the details of the particular case before the Court, and here is the Workplace Prof’s analysis of the argument yesterday before the Court. My own general sense of the case is that it really revolves around the question of whether ERISA’s QDRO provisions, which are directed at this issue, are to be strictly construed and treated as the only manner in which payments in accordance with the plan’s express terms and the operative beneficiary designation can be avoided, or whether, instead, the issue can be handled in a more loosey-goosey fashion that, even if the QDRO provisions aren’t technically satisfied, effectuates the apparent intent of the divorcing parties. Me, I am betting the Court’s opinion ends up at the former.

I talked about a case last week that addressed the damages aspect of making out a breach of fiduciary duty claim related to stock drop type issues, and pointed out the broad, ambiguous and easy to manipulate nature of a damages claim in that scenario. Another case last week, also out of the United States District Court for the District of Massachusetts, points out that other aspects of making out a breach of fiduciary duty case on a class action basis based on the administration of 401(k) plans provide a real check on such cases. The issue in that case? Namely that not everyone involved in operating a 401(k) plan is a fiduciary, and that while deep pockets involved in allegedly inappropriate behavior with regard to such a plan may make tempting targets, they cannot be sued successfully for breach of fiduciary duty if the prerequisite of having acted as a fiduciary is not satisfied.

As Judge O’Toole’s opinion in Columbia Air Services v. Fidelity Management Trust Company illustrates, an administrator of a plan – and who is not a named fiduciary of the plan – is only a functional fiduciary with regard to those specific limited areas in which it exercised discretionary, decision making authority; alleged wrongdoing by it with regard to other areas of its work for the plan do not subject it to fiduciary liability because the administrator is not deemed to have been serving as a fiduciary in those other contexts, regardless of the fact that it served as a fiduciary for other purposes. Thus, in that case, claims that improper fees were paid to the administrator as part of the structure of the 401(k) plan it was administering could not be the basis for a breach of fiduciary duty class action, because that did not occur as part of the activity where the administrator was, in fact, a fiduciary. As a result, ERISA granted no avenue for redressing those allegations of improper fees being paid to the administrator as part of its work for the 401(k) plan in question.

Although, as I have discussed in the past and as is discussed as well in this interesting article here, ERISA is becoming a favored structure for bringing securities related class actions, as this case shows, there are hurdles to these types of claims as well, ones that should dissuade anyone who thinks that bringing a stock manipulation class action under ERISA rather than the securities laws themselves equates with shooting fish in a barrel.

Disparate thoughts. Connect the dots. Or maybe more unintended consequences. Take your pick. While many advocates of health care reform cheer the Ninth Circuit’s conclusion that ERISA does not preempt all state pay or play laws, I am a little dubious as to whether this represents anything more than a Pyrrhic victory for anyone actually interested in ensuring that everyone is insured. Report after report, many of them credible, tell us that employers, who provide most of the country’s health insurance, are aghast at the idea of losing ERISA preemption, and would consider it one more reason not to continue to provide health insurance to employees and to instead pull back from that role. I am hardly inclined to think that, should employers relinquish that role, state or federal governments are prepared fiscally or intellectually to step into the breach and effectively fill that hole well. I thought this before, in the past, and wrote about it in a number of postings (such as here), when we saw the financial costs of Massachusetts’ reform plan balloon, supposedly unexpectedly; I thought it again when we saw the effectiveness of federal government regulation of Wall Street; and I thought it for sure when I read Paul Krugman this morning.

Perhaps this obsession among health reform advocates with defeating ERISA preemption is a case of putting the cart before the horse; maybe we should first have effective non-employer health insurance structures in place, before we go trying to dismantle the preemption structures on which employers rely in choosing to provide health insurance to their employees.

Well, my trial this week is over, and I return to the blog with a – cue self-congratulatory, self-promoting note here – win in my back pocket. Last time I tried a case, I complained, tongue firmly in cheek, about the courts insisting on issuing major ERISA decisions while I was not available to discuss them, and they did it again this time around as well, with court decisions and legal developments in this area of the law pouring into my in-box all week. Its exactly as one of my favorite philosophers once wrote: “the wheel is turning and you can’t slow down, you can’t let go and you can’t hold on, you can’t go back and you can’t stand still.”

Among the most prominent decisions issued while I was in court was, obviously, the Ninth Circuit’s ruling finding that San Francisco’s pay or play law was not preempted by ERISA. Can’t say I buy that one. Whatever is the scope of preemption in the field of ERISA, it logically reaches state efforts that result in a multi-jurisdictional company having to comply, with regards to its employee benefit plans, with a differing web of regulation that varies from one state to the next.

Of more interest, perhaps, is the wide ranging group of consequences, some predictable and others unintended, that the Ninth Circuit ruling likely unleashes. The first that jumps out at me is predictable, and the same that immediately occurred to every other commentator: that with the direct conflict it creates between the Fourth and Ninth Circuits on this issue, in combination with the political impetus in numerous states and localities to legislate on this issue, Supreme Court review seems certain. What is less predictable, or at least less widely predicted at this point, is what I fear may be the unintended consequences of that occurring; much as the LaRue decision did little, if anything, to clarify the law in the area of 401(k) losses going forward, but instead opened up a Pandora’s box of not yet addressed and still to be resolved legal issues (as commented on here, for instance), I suspect a ruling in this area by the Court will have the same effect on the question of the legal validity of state action in this area. I am disinclined, given the number of differing approaches to ERISA law and interpretation applied by the differing opinions in LaRue, to think that Supreme Court review of this issue will result in one coherent, uniform theory that can easily be interpreted and applied prospectively to these types of statutes, and suspect that such a ruling is instead more likely to open up a range of issues that will have to be litigated if and when such statutes are challenged as preempted. I could be wrong, but recent history in this area of the law suggests I am not; we may know more after the Supreme Court rules on the ERISA cases currently on its docket, as to how uniform an approach in this field of law and how much helpful guidance will come down from the Court. Bear in mind on this question though, that the Court’s decision in LaRue alone already has courts and litigants thinking that every issue (“every” may be a little bit of an overstatement, but you get the point) that was previously thought resolved is up for grabs in cases filed involving 401(k) plans, if those issues were originally resolved only in cases involving defined benefit plans.