If you have an interest in both ERISA and in well written, logical judicial opinions, I can’t recommend highly enough this opinion, by Judge Gertner of the United States District Court for Massachusetts, in Bendaoud v. Hodgson, deciding a number of issues at the motion to dismiss stage. I have a trial starting on Monday, so, unfortunately, I can’t delve as deeply today into the range of issues the opinion discusses and that warrant comment as I would like, but a few issues are worth commenting on right off the bat, even in the limited time I have today.

First, I have discussed before the trend, which others are recognizing as well, of ERISA replacing securities law as a preferred structure for attacking stock drop and similar stock related manipulation type cases. Judge Gertner comes as close as anyone has to demonstrating in her opinion why this state of affairs has come to pass, in her analysis of standing and the question of whether the plaintiff, since he sold his stock holdings in the company plan before the stock manipulation in question came to light and drove down the stock price, could still show he suffered injury. The court found that the plaintiff could show injury by demonstrating that the alleged fiduciary breaches resulted in less profit than the plaintiff would have earned “had the funds been available for” other purposes than the investment made by the plaintiff. This is a pretty open damages theory, and not one as closely tied to the actual timing of disclosures and its impact on stock prices that the court recognizes would control the issue if it were more of a traditional stock manipulation securities action.

Second, the case raises questions about whether, after Justice Breyer’s famous diamond hypothetical in LaRue, a single plan participant can actually sue for losses to the plan anymore in defined contribution cases, if the diamond that was lost did not actually come from that participant’s account (or safe deposit box, in the terms of the hypothetical). The court suggests that such a plan participant may not seek recovery for the other plan members on his or her own, but that instead a class action structure may be required.

And finally, reading the court’s opinion and the analysis of the damages issue, I couldn’t help but think of the LA Times ESOP case that I discussed here and my thought that, regardless of the merits of that particular case, it certainly illustrated the risks of using ESOP held stock in corporate transactions, because the interests of those pursuing the transaction, while not by definition wrong in any way, may not line up perfectly with the best interests of the employees holding that stock in the ESOP, raising risks of breach of fiduciary duty. The damages analysis in Bendaoud goes right to this point; under that analysis, the issue is not whether the stock holding employees made out okay in the deal, but whether the ESOP assets would have been worth more had the stock been used in a different manner or different transaction. That analysis suggests a broad range of attacks on a complicated ESOP implicating transaction such as that in the LA Times case.

Who knew what and when did they know it?

No, I am not talking about the Wall Street bailout; I am talking about something really interesting, prior knowledge exclusions in insurance policies (well, interesting to me anyway). Prior knowledge exclusions basically work like this: they say that there is no coverage under a liability policy if the insured knew or should have known, prior to commencement of the policy period, that activity it was involved in would result in a claim against it. But how much knowledge the insured must have had, and how certain it must have been that its activities would lead to a claim in the future, have always been the tricky questions in applying these types of exclusions. Set the standard too low and the exclusion encompasses too many prior events, deleting coverage for losses that the insured may have literally had to be prescient to have anticipated; set the standard too high and the exclusion loses its intended effect of preventing insureds from buying policies to protect itself from things that it, but not the insurer selling the policy, knows is lurking in the closet.

This story here concerns the interesting case of a large law firm that apparently knew a client was engaged in misconduct with regard to securities, thereafter bought a professional liability policy, and wanted coverage under that policy for the claim eventually made against it as a result of its legal work for the client engaged in the misconduct. A New York appeals bench concluded that the standard for denying coverage on the basis of a prior knowledge exclusion had to require more than just knowledge of the client misconduct and the ability to anticipate that claims against the insured might possibly arise as a result, but also some level of participation in the misconduct by the insured law firm itself that would justify a belief on its part that it might be subject to liability. As the article describes the court’s conclusion:

Here, while evidence strongly suggests that defendant Gagne and other firm members subjectively either believed or feared that the firm might be subjected to professional liability claims by entities claiming injury as a result of SFC’s conduct, his or the firm’s subjective belief that a suit may ensue based upon SFC’s misconduct is not enough," Saxe wrote.

"In our view, the policy cannot be properly read to require Pepper Hamilton to notify its potential insurers of its client’s misconduct and its own recognition that it may be subjected to legal claims brought by those insureds as a result of its client misconduct," the judge added.

However, the panel held that "if it is ultimately established that the law firm participated in the misconduct, such as by preparing documents on behalf of the client knowing that the documents contained false or insufficient information, or by knowingly creating the forbearance payment mechanism … then application of the prior knowledge exclusion could be justified."

Frankly, from where I sit, that finding seems to put the bar a little high, essentially concluding that evidence of an active role by an insured in actual wrongdoing is necessary to invoke this bar to coverage. The exclusion itself, which is contained in a policy purchased by a quite sophisticated and knowledgeable insured, does not state that it only applies to active wrongdoing before the policy period that leads to a claim, but is instead written more broadly and for broader purposes. Moreover, this interpretation leaves coverage in place for losses, such as this one, where it is fair to say that the insured could have foreseen the exposure before issuance of the policy but it does not appear that the insurer could have done so and thereby built the risk of it into the premium charged for the policy.

With regard to my post yesterday about fiduciaries having the power, authority and motivation to act to protect plan participants, of course, that’s a lot easier for a fiduciary to do if its vendors are giving it advance notice of losses before the rest of the market finds out, and a lot harder to do if a fiduciary is one of the vast majority who aren’t given that advantage. See this story right here. A little less flippantly, this story – of alleged advantageous information given to some customers in advance of disclosure to the market as a whole – goes right to why its easy to say (as class action complaints always do) that fiduciaries owe a high duty of care to protect plan assets and beneficiaries, but it isn’t all that easy for fiduciaries to actually do.

In an odd coincidence, at the same time Wall Street has been imploding, laying bare valuation and other problems with investments in retirement plans and elsewhere, I happen to have been reading independent fiduciary/401(k) advisor Joshua Itzoe’s book, Fixing the 401(k), which is premised on the idea that 401(k) plans are compromised by inherent, systemic problems, ranging from issues in plan design to the significant impact of fees charged against plan assets (Susan Mangiero, who knows as much as anyone around about valuation, fee, and other issues impacting pension investments, has a valuable review of Joshua’s book here). I hope to return to some specific chapters in the book and discuss them in detail and in the context of the types of cases that I see and that appear on the court dockets, but for now what struck me most was the extent to which the problem that Joshua identifies as needing to be fixed is really one of fiduciary talent and application; excessive fees that decrease performance, poor investment choice selection, and controlling plan costs – all items that he identifies as systemic problems at this point in the 401(k) regime – are all issues that are or should be right in the wheelhouse of plan sponsors and fiduciaries. They alone, either on their own or by exercise of their authority to bring in outside expertise, are in the position and have the authority to protect plan participants against essentially every one of these problems; further, by operation of the liability imposed on them for failing to do so, they are the one and only players in the system who both have the power to address these issues and the legal incentives to do so. Plan participants have neither the power, responsibility nor authority to do so, and outside vendors – particularly ones who do not rise to the level of a fiduciary or who will at least argue that they do not – likewise may lack, at a minimum, the incentives to address these problems. The Wall Street implosion just drives these points home further; fiduciaries alone are in a position to protect plan participants from the pressures and potentially explosive risks in retirement investing by means of company plans such as 401(k)s, and there really isn’t anyone else with the authority, power or interest in doing so. Indeed, at heart, isn’t this really what a breach of fiduciary duty lawsuit really is – a claim that the only party in a position to put the participants’ needs first, didn’t?

This is one of those days in which the possible blog topics come fast and furious, many of them driven by the once every hundred years or so events on Wall Street and what they tell us about both the obligations of fiduciaries of retirement plans and their concomitant ability to live up to those obligations. That may or may not be a story that can be covered adequately in the blog format, but at least some of the highlights of those issues may make for some posts along the way. For today though, I thought I would focus on something a little more concrete, namely the LA Times/ESOP/ERISA /breach of fiduciary duty case that I blogged about in my last post. Here is a nice article giving a little more context to the suit, and which is probably worth a read if you have an interest in ESOPs, ERISA, newspapers or all of the above. One thing in particular caught my eye in the article, which relates to its discussion of the underlying problems in the newspaper industry and how it relates to the lawsuit; one of the class plaintiffs comments that those problems are not with the product turned out by the reporters, but with the industry’s difficulties with “monetizing the product online.” As someone who used to read three newspapers a day in law school and now skims three or more a day on-line and on my blackberry without spending a dime for the content, I can only say amen to that. I am not sure, though, that this point really has anything to do with the validity or viability of the suit itself, other than to the extent of pointing out the underlying problems that gave rise to the transaction that allegedly harmed the ESOP participants and gave rise to the class action. Either way, the story illustrates an important point, which is that there is a need for caution in any transaction of this nature that is going to impact the dollar value of stock held in ESOP plans, in light of fiduciary obligations that run in tandem with such plans.

What happens when journalists, Sam Zell, ERISA and employee stock ownership plans collide? Well, at a minimum, you get a really interesting and well written complaint alleging breach of fiduciary duty under ERISA. Here is the WSJ Law Blog post on this, and thanks to the post, here is the complaint itself. A couple of brief thoughts off the top of my head. First, this case fits in nicely with the trend that I have discussed in the past on this blog, which concerns the replacement of the securities laws with ERISA as the preferred means of attacking large scale corporate transactions. Second, like most such complaints filed as potential class actions, the complaint tells a wonderful story. As a litigator, I often wonder who is the target audience for these types of dramatically written pleadings, as a jury will never see them (not that any cases like this ever reach trial or, if they do, before a jury) and I am hard pressed to think that judges pay much attention to them when it comes time to consider the merits of a case. And third, if there is any fire behind the smoke that makes up the complaint’s allegations, then it will be an interesting case to follow as it proceeds along.
 

During the Olympics, I read an interview with someone who said he just wanted to be the Michael Phelps of something, anything at all. While my aspirations may not run quite that unrealistically high, its certainly fun to be recognized as one of the top 50 of anything. LexisNexis has announced its list of the Top 50 insurance related blogs in the country, and -insert self-congratulatory pat on the back here- this blog is one of them. You can find the whole list here.

A. Broken;
B. Subject to abuse;
C. So expensive that it can force settlements even where the merits don’t warrant it;
D. An aspect of civil procedure that is still waiting for the courts to create a jurisprudence that will properly manage its potential costs and complexity;
E. Good only for vendors;
F. All of the above.

If you guessed F, you have been reading my posts over the last couple of years on this topic. Simply put, there is obviously an appropriate realm and scope for what lawyers refer to as electronic discovery – who hasn’t found something useful in an adversary’s deleted emails? – but the federal rules are written so broadly that in any given case, electronic discovery is likely to be much broader, more expensive, and more unworkable than is warranted by the value of the case or the value to accurate adjudication of the electronic discovery itself. I have talked many times on this blog about the need for the federal courts to develop a jurisprudence for electronic discovery that takes into account all of these issues before electronic discovery is allowed and relies upon those factors to focus the scope of electronic discovery and keep it as narrow as is possible; absent such an approach, electronic discovery, I have argued before, is going to become the monster that eat St. Louie, or more literally, the procedural rule that doomed litigation, already expensive, from being an even marginally effective tool for resolving complicated disputes. This will be too bad, because as readers of my posts on arbitration know, I am not a big fan of that method of alternative dispute resolution for resolving complicated cases and generally believe that American courts provide as good a forum for resolving disputes as anyone has yet devised.

Anyway, it looks like these concerns about electronic discovery are moving into the mainstream, as is reflected in this report, which echoes these concerns.

You know that theme music from the movie Jaws? Cue it up – the sharks are circling the Massachusetts Health Care Reform Act. Hard on the heels of the recent reports that the state is going to have to increase the financial obligations of employers to maintain the near universal coverage called for by the act comes this story noting the same thing I said yesterday, that increasing the obligations the act imposes on employers will likely provoke a preemption challenge. The story quotes a D.C. lawyer, Kevin Wrege, who says that several law firms there are getting ready to file suit over this and that "[a]ll they are lacking is a paying client and a green light." (I think that quote is what started the Jaws theme playing in the juke box of my mind.)

More substantively, here is an interesting survey piece from the Congressional Research Service (really, one of the jewels of the federal government, a source of generally thoughtful non-partisan analysis, in my experience) on ERISA preemption and its application to “pay or play statutes.” In particular, the piece focuses on the Massachusetts statute, and on the question of whether the First Circuit will find it preempted if it is challenged. In essence, and not too surprisingly, the author finds that the statute will likely be found preempted if the First Circuit follows the reasoning of the Fourth Circuit in Fielder (concerning the Wal-Mart Act in Maryland), but not if the First Circuit follows the reasoning to date of the Ninth Circuit in the on-going litigation over the San Francisco ordinance.

The piece also provides an interesting and detailed explanation of the provisions of the Massachusetts statute, and how it operates. The article parrots something I have said often on this blog, which is that it is likely that the low burdens at this point placed on employers by these provisions of the act is the likely reason no one has challenged it to date as preempted. When you read the piece, you will see pretty clearly both how low those burdens are at this point (it is hard, for instance, to imagine any major employer not already being in compliance just as a matter of course with the “play” requirements of the statute as they are described in the article, thus precluding the statute from significantly affecting them or their bottom lines) but also the avenues for those burdens to be increased.

Thanks is due to BenefitsLink, by the way, for passing the report along.

I have said it before and I will say it again: the day they fess up to the real costs of insuring the uninsured in Massachusetts and admit they need to pass that cost onto employers is the day before someone files a lawsuit asserting that the Massachusetts Health Care Reform Act is preempted. Take a look at this, and this.