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.

We have all taken note of the run up in filings of very large breach of fiduciary duty cases against plan fiduciaries that are based on the tremendous losses incurred in investments held by plans as a result of the subprime lending mess. The filings themselves are noteworthy, and the numbers, losses and alleged misconduct depicted in them are eye-grabbing, in ways reminiscent of tabloid headlines that focus on the most sensational elements of a story for the purpose of separating readers from their three quarters. Most lawyers, myself included, and other observers have immediately delved into the ERISA defense lawyers playbook in thinking through these cases, looking towards the procedural, and if they fail, substantive defenses that the fiduciaries can present. But it may well be that the best defense is in the fact that fiduciary obligations may be high, but they do not require omniscience, and therefore in the argument that even a fiduciary who did everything at the level of competent industry professionals was still going to have the plan assets suffer these large losses, and thus cannot be liable here. I thought about this as I read this article here (the latest in what I have always thought of as Paul Krugman’s simplified economics seminars for the non-economists among us, including myself), which could almost serve as a trial lawyer’s closing argument that, whatever happened to the plan’s assets, it wasn’t the fiduciary’s fault, but a systemic problem giving rise to losses that could not have been avoided.

I am not entirely sure I believe that argument myself, at least in all cases, but in the case of a fiduciary who can document that standard, best investment practices were pursued, and the losses happened anyway, it’s a pretty persuasive argument. For the plaintiffs’ bar bringing these cases, and for the plan participants who have suffered large losses in their retirement holdings, what does this mean? It means that pragmatically, the case to be put in will probably have to combine the existence of the large systemic losses with compelling evidence that the fiduciaries in question in any particular case did not actually follow the industry’s best practices, but instead fell down on the job somewhere along the way, before those losses struck home. That second piece of the case is where the fun will be for the lawyers, in the nitty gritty of discovery battles seeking that evidence and in the fights to submit or exclude expert testimony as to whether the professionals did not pursue appropriate practices and whether that caused or increased the losses.

Two interesting but different stories that both relate to the broad impact that ERISA has across the workplace. Here, in this first one, you find the story of the Third Circuit concluding that certain death benefits were not pension, but instead welfare, benefits, which did not vest and could be revoked, despite long time practice and the reliance of employees on the benefit as part of retirement planning. This story illustrates a theme that often arises on this blog, concerning the crucial importance of understanding what is really promised as retirement benefits under ERISA governed plans, and the trouble participants get into when they don’t grasp it prior to litigation and during the time they are active participants in the plan, which is something that seems to have clearly occurred, for instance, in this case here. In the second story, you see the potential reach of ERISA in an attempt, ultimately rejected by the court, to have it reach and protect what was otherwise allegedly illegal conduct in providing fringe benefits; even there, it was only the specifics of the intersection between the requirements of the allegedly violated compensation law and the obligations of ERISA that allowed the issue to fall outside of ERISA’s reach, rather than any sort of general assumption that this criminal proceeding was simply a separate area of the world than ERISA.

Probably the only really note worthy decision out of the First Circuit with regard to ERISA while I was out of the office is this one here, in Kouvchinov v. Parametric Technology Corp., which addressed the standards for proving a claim of retaliatory job action in response to a claim for ERISA governed benefits. The First Circuit found that a plaintiff has to come forward with evidence of a specific intent to retaliate to maintain the claim, and that the mere, possibly coincidental, overlap of an adverse job action and a recent claim for benefits is not enough to sustain a claim. The First Circuit stated:

The plaintiff’s overarching claim is that the defendants cashiered him in retaliation for his exercise of the right to receive short-term disability (STD) benefits under an employee benefit plan, thereby violating the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§1101-1461, and tortiously interfering with an advantageous business relationship. … Here, however, the plaintiff suggests that proof of specific intent is not required because the discrimination complained of is retaliatory rather than preemptive. . . . We reject that suggestion. The plaintiff fails to appreciate that, without a specific intent requirement, every terminated employee who has exercised his or her right to benefits would, ipso facto, have a potential retaliation claim against the employer. … That would destroy ERISA’s carefully calibrated balance of rights, remedies, and responsibilities in the workplace. Presumably for this reason, every federal court of appeals to have addressed the question has demanded a showing of specific intent in ERISA retaliation cases. … Accordingly, we hold that a plaintiff must make a plausible showing of specific intent in order to survive summary judgment on an ERISA retaliation claim.

I don’t have much truck with the decision, though others do. Call me naive, but I can’t say in my practice or among my clients – whether companies, sponsors, administrators or participants – I have seen much conduct that would even possibly raise these issues, regardless of how strict a standard of proof is imposed on a plaintiff/participant.

When people start emailing you to inquire about your health, you know you have been away from your blog too long. Rumors of my demise, however, were premature, as I was simply on vacation; normally I keep up with developments and am able to put up some posts while away, but I didn’t get a chance to this time. A number of interesting things did cross my desk while I was away, and a number of them I read remotely while out; I will try to pass along the more interesting pieces over the next few days.

For starters though, my colleague Patrick Spangler at Vedder Price in Chicago passed along a survey of some recent discovery rulings by the federal courts related to whether extra-administrative record discovery should be allowed in light of the Supreme Court’s ruling in MetLife v. Glenn. They find that such discovery is warranted under Glenn, but only if linked to the possibility of proving biased decision making. Patrick notes:

In Hogan-Cross v. Metropolitan Life Ins. Co., 2008 WL 2938056, at *3 (S.D.N.Y. July 31, 2008) the Southern District of New York compelled written discovery seeking information related to: (1) denial rates; and (2) the compensation structure for the claims representatives who evaluated the participant’s claim. However, the Southern District previously granted the participant’s motion to compel and simply confirmed its decision on Metlife’s motion to reconsider in light of Glenn, reasoning that the requests were appropriate under existing Second Circuit law and further supported by Glenn.

The Northern District of Texas reached a similar conclusion in Copus v. Life Ins. Co. of N.A., 2008 WL 2794807, at *1-2 (N.D. Tex. 2008). The court reasoned that a history of biased decisionmaking and steps taken by the administrator to reduce a conflict are relevant and should be considered under Glenn. Incorporating existing Fifth Circuit precedent, the Court allowed discovery on a variety of topics, including: (1) the selection of the claims reviewer; (2) steps taken by the administrator to reduce the conflict; (3) the compensation system for claims reviewers, and (4) any claims procedures or manuals. 

The decisions are similar to Dubois, a case out of the United States District Court for Maine that I discussed previously, which addressed when such discovery is appropriate in light of Glenn and found, like these other two decisions, both that: (a) it is appropriate if necessary to evidence biased, conflicted decision making; and (b) existing circuit precedent on the issue was consistent with Glenn and could govern the question.