I’ve had an interesting collection of educational materials and seminars piling up on my desk for awhile now, a number of which may be of interest to various readers of this blog. In the hope of both clearing up that backlog and passing along useful information, I am going to start a short series of – or maybe a series of short – blog posts on them, until they are exhausted. I expect I won’t run through them all seriatim, as I suspect breaking news or new court decisions will interpose themselves, but we will see.

The first one I wanted to pass along is something you can blame the Workplace Prof for, whom I have fingered in the past as the filter I use to screen law review articles and decide which ones might be worth reading. Some of you know from past posts that I don’t put a lot of stock in most law review publications, but some fit my criteria for being useful, which revolves heavily around whether they break any new ground in an area or manner that makes them useful to courts and practitioners. This one here, a 142 page analysis of when ERISA governed benefits can be transferred to anyone other than the participant or the participant’s selected beneficiary, fits this criteria to a tee. The Workplace Prof passed along the abstract of the article a little while back, which is:

This Article argues that a beneficiary designation made by a participant pursuant to the terms of an ERISA plan determines who is entitled to survivor benefits from that plan. Such designation may not be superseded by

(A) an agreement made in a marital dissolution or separation whereby a participant promises to make or retain a different designation (such agreements are not qualified domestic relations orders, "QDROs," because QDROs are limited to orders directed not at participants but at ERISA plans);

(B) an agreement made in a marital dissolution or separation whereby a participant’s former or separated spouse "relinquishes" any interest in the participant’s ERISA plan benefits; or 

(c) a state law or federal common-law principle whereby killers of a participant are deprived of the entitlement to the participant’s survivor benefits from an ERISA plan.

ERISA pension plans must incorporate the only two ERISA required beneficiary designations, QDROs and spousal survivor benefit designations. Neither statutory designation applies to an ERISA plan that is not a pension plan, such as a life insurance or disability plan. Thus, neither statutory designation may supersede a beneficiary designation made pursuant to the explicit terms of an ERISA life insurance or disability plan.

ERISA voids both (A) a direct benefit claim against an ERISA plan that is not based on a designation that was made pursuant to the terms of the plan, and (B) an indirect benefit claim against the recipient of plan benefits that is not based on a designation that was made pursuant to the terms of the plan.

What jumped out at me from the article itself is the author’s discussion of the application and impact of Qualified Domestic Relations Orders (known in common parlance as QDROs), which can supercede a participant’s designation of the party to whom plan benefits should be paid. The author gives QDROs a far narrower scope of application and power under ERISA than it appears to me courts have been giving to them, and in fact his position on their impact runs counter to what appears to me to be the trend at the trial level in the federal system in applying QDROs. He makes a fascinating and well-supported argument, although at this point, I reserve judgment on the ultimate issue he raises, of exactly how QDROs should be understood under ERISA. At a minimum, however, for anyone arguing the point in a case, there is a wealth of information in the article, as well as support for arguments that a party might make in court over that issue.

For better or worse, I’m old enough to remember where I was when MTV debuted, back when it actually played music videos. I am sure there is something to be said about the fact that a quarter century later, I now watch music videos about fiduciary risks concerning pensions, but I am not sure exactly what. You should watch it too, right here.

Well now, at some point, I am convinced, we are going to get the Supreme Court to weigh in on exactly when and when not states can regulate employers’ provision of health care to their employees in light of ERISA preemption. As we have discussed here on numerous occasions, the Fourth Circuit has staked out a strong position precluding states from meddling in that relationship, while a panel of the Ninth Circuit, ruling on an interlocutory matter concerning injunctive relief over the institution of a similar act by the City of San Francisco, has found that local governments have some substantial leeway in this regard despite the existence of ERISA preemption. I, and I think most other commentators, think the Fourth Circuit has the upper hand in this conflict, given the existing Supreme Court case law on preemption.

This introduction is a long way of getting to the point of noting that a collection of businesses aggrieved by the San Francisco act may be speeding up the timetable for the Supreme Court’s consideration of this issue, at least to some extent, as they have now asked the Supreme Court to set aside the Ninth Circuit panel’s conclusion that the city’s act was not preempted and can go forward at this time. The whole story on this event is here.

We all know that in reality, most companies that sponsor retirement plans, including 401(k)s, for their employees bring in outside advisors to manage the plan. There are at least two primary reasons for this, the first being that most companies don’t have the expertise to select investments and otherwise run plans themselves, and hope to get better retirement plan performance by relying on outside expertise. The second is the hope that fiduciary exposures will be reduced by bringing in, and relying upon, an outside advisor who has superior expertise with regard to retirement investing. These two factors ideally work in conjunction to improve retirement accounts for plan participants; the fear of legal liability inspires a desire to bring in experts, who in turn can do a better job in selecting investments than the company could on its own. In this way, we see the operation of a perfectly selected legal rule, and we see the important role that fiduciary liability rules play in the ERISA scheme; the exposure does not simply exist to support litigation after the fact, but also as a motivating force that improves plan performance on a day in, day out basis, by driving plan sponsors towards reliance on expertise that will both protect them and improve performance. It is possible, to some extent, to view almost all breach of fiduciary duty litigation as examples of failures in this dynamic. For instance, what are claims that companies breached their fiduciary obligations by excessively including company stock in a plan but instances in which a company, insufficiently afraid of its potential liability for breach of fiduciary duties, failed to either diversify investments on its own or bring in sufficient outside expertise to allow it to do so?

A good example of this dynamic at work can be seen in Judge Young’s just released ruling out of the United States District Court for the District of Massachusetts in Bunch v. W.R. Grace, in which the court found that the company was insulated from breach of fiduciary duty claims with regard to the retention and sale of company stock in one of its retirement funds by the company’s retention of and reliance on an outside investment manager to make those decisions. The court found that the investment manager had properly acquitted itself with regard to those issues, and therefore the company could not be liable on claims that it had breached its fiduciary duties by selecting and relying upon that advisor. The court explained that If the investment manager “did not commit a breach, then [the company] did not fail in the discharge of its duty to select and monitor” the manager.

But you can take that analysis one step further. The interesting aspect in this regard of the ruling in Bunch is that the company was absolved of liability by its reliance on an outside expert because the outside expert did not itself breach any fiduciary obligations by the actions it took and decisions it made in that role. But what if the advisor had violated fiduciary obligations in its handling of its delegated duties? What then of the company’s attempt to protect itself by retaining and relying upon an outside expert? The answer in general is that the company can probably still successfully defend itself against claims for breach of fiduciary duty, so long as it can show that its own steps in selecting and monitoring the outside advisor were prudent, even if the chosen advisor turned out, in hindsight, to be the wrong choice of advisor or investment manager. And in that lies the two real teachings of Bunch. First, that companies can protect themselves from fiduciary liability by selecting and delegating to an outside expert and, second, companies have to pursue that old cliche – best practices – in making that delegation if they really want to avail themselves of the protection that bringing in outside expertise can provide. By abiding by the second teaching, they should be protected even if the advisor they selected thereafter, unlike the advisors relied upon by W.R. Grace in the Bunch case, falls down on the job.

A number of different things I want to talk about, including an interesting decision discussing the obligations of plan sponsors when it comes to selecting advisors and some interesting thoughts on QDROs. I will sprinkle those in later, but for now I thought I would pass along Steve Bailey of the Boston Globe’s column today on the issues raised by the Massachusetts Health Care Reform Act, which basically mirrors what I have said in prior posts, such as my last one, about the statute and issues with its implementation. A couple of interesting tidbits to point out though, from his column. First note his reference to the fact that the statute effectively left the business community off the hook (in truth, this is only true financially, and even then only partly so; they still bear some administrative headaches, and some currently modest financial exposures), which fits exactly with my explanation in the past as to why the statute has not faced a preemption challenge in court to date. Second note his reference to the idea that the political and legislative will to continue with the program is strong. All well and good, but the issue now is the plan’s escalating costs, which are going to have to be borne by taxpayers or else by the business community; one wonders about the commitment of those who will actually have to pay the bill for this program. Anyone going to ask them?

Stories like this make clear that advocates of state fair share plans who like to point to the Massachusetts Health Care Reform Act as a shining exemplar of what could be accomplished if only ERISA preemption would go away are barking up the wrong tree. Rather, the article, with its discussion of spiraling costs to the state and the state’s need for federal funding to remedy the resulting shortfalls demonstrates the opposite, namely that, as I have argued in other posts, there is real reason to doubt whether the problem of the uninsured is one that can be cured on a state by state basis. Indeed, the fact that the Commonwealth needs significant – but as yet unpromised – infusions of federal money to effectuate coverage of the uninsured suggests that this problem cannot be solved by states and instead can only be solved on a larger playing field, namely at the federal level with the type of resources that only the federal government can commit to the issue. And if the issue can only be solved on a national level, and not on a state by state level, then isn’t that an argument for preemption? I hate to be a cynic, and prefer the title of skeptic, but there are a lot of reasons that ERISA preemption both exists and is valuable, and it is not the bogeyman preventing health insurance in this country that many of its critics make it out to be. There are real, fundamental problems in trying to increase health insurance coverage in this country, ones that are not solved by these state acts, which, as I have discussed before, basically play at the margins without addressing the real problem – cost – that is handicapping both the ability of employers to continue to provide health insurance to their employees and the ability of Massachusetts to actually successfully pull off its health insurance experiment.

This is something you don’t see every day, namely an award of significant attorney’s fees to the prevailing defendant in an ERISA governed action. In R.I. Carpenters Annuity Fund v. Trevi Icos Corp., just decided by the United States District Court for the District of Rhode Island (but not yet up on its website), the court entered such an award against the losing plaintiff, a union provided employee benefit plan, on a claim brought by it under ERISA, even though the court acknowledged that ERISA’s fee shifting provisions are seldom used to require a losing plaintiff to pay attorney’s fees to a prevailing defendant. Here, however, the plaintiff had used ERISA as an alternative mechanism for litigating a jurisdictional dispute with another union over a project, apparently for tactical reasons related to adverse rulings against it before the National Labor Relations Board in other, similar circumstances. The court provides a nice review of the factors in the First Circuit that govern the decision whether to award attorney’s fees to a prevailing party, and noted that the key issue in the case before it was whether the plaintiff’s decision to use ERISA as a tactical tool for litigation strategy constituted a misuse of the statute, warranting an award of attorney’s fees in favor of the prevailing defendant. The court explained:

The Court should consider five factors in deciding whether to award fees and costs to a party: (1) the degree of culpability or bad faith attributable to the losing party; (2) the depth of the losing party’s pocket, i.e., his or her capacity to pay an award; (3) the extent (if at all) to which such an award would deter other persons acting under similar circumstances; (4) the benefit (if any) that the successful suit confers on plan participants or beneficiaries generally; and (5) the relative merit of the parties’ positions. Cottrill v. Sparrow, Johnson & Ursillo, Inc., 100 F.3d 220, 225 (1st Cir. 1996); see also Beauvais v. Citizens Fin. Group, Inc., 418 F. Supp. 2d 22, 33 (D.R.I. 2006). These so-called Cottrill factors are guidelines and do not preclude the Court from consideration of other factors. Cook, 334 F.3d at 124. Rather, the Court may – and should – consider "additional criteria that seem apropos." Cottrill, 100 F.3d at 225. Ultimately, the test for granting or denying attorney’s fees and costs in an ERISA case is, in a word, "flexible." Id.; see also Gray v. New England Tel. & Tel. Co., 792 F.2d 251, 258 (1st Cir. 1986).ERISA’s broad language permits the Court to award fees and costs to "either" party. However, the substantive purpose of ERISA is remedial, i.e., it is designed to protect "the interests of participants in employee benefit plans and their beneficiaries." 29 U.S.C. § 1001(b). Consequently, some courts have noted that fees or costs seldom should be assessed against unsuccessful ERISA plaintiffs. See, e.g., Operating Eng’rs Pension Trust v. Gilliam, 737 F.2d 1501, 1505-06 (9th Cir. 1984); Marquardt v. N. Am. Car Corp., 652 F.2d 715, 719-20 (7th Cir. 1981). Before the Court tackles the individual Cottrill factors it should be noted that this is not a typical ERISA case. As was discussed in the Court’s decision denying summary judgment, the driving force behind this action seems to be a jurisdictional dispute between two labor unions — the Carpenters Union Local 94 and the Laborers Union, both of which claimed the right to represent the workers on the "front-end" of the CM-120. R. I. Carpenters Annuity Fund v. Trevi Icos Corp., 474 F. Supp. 2d 326, 331 (D.R.I. 2007). Whether fees should be awarded turns on the question of whether it is appropriate to use ERISA litigation as a vehicle to pursue Local 94’s claim of jurisdiction. If it is legitimate to use ERISA in this way, then even an unsuccessful Plaintiff might not be "culpable" under the Cottrill factors. If it is not, then to use ERISA this way (at the expense of an innocent employer) more likely evidences culpability under the Cottrill analysis.

The court then concluded that the plaintiff’s strategic use of ERISA in this manner was not appropriate, and justified an award of attorney’s fees to the defendant.

It is a fascinating decision for at least two reasons. The first is the relative rarity of a court granting attorney’s fees to the prevailing defendant, and the case presents a road map as to one particular line of argument that a defendant can pursue to seek such an award. The second is that the case drives home the need to consider the rationale for including an ERISA claim in a case, and suggests that there are risks to using ERISA in situations where other statutes or theories of liability are better suited to targeting the specific mischief at issue.

Well, it’s finally Super Bowl weekend, so how do we tie that into the issues covered by this blog? Easy. Here’s a terrific article in this week’s Sports Illustrated (hey, we can’t get all our reading from Aspen Publishers) on the problem of disability and health benefits – and the fact that there effectively aren’t any – for long retired NFL players. The article isn’t about the legal issues, obviously, although it does touch on the distinction between the current retirement and disability plan, which is generous in this regard, that the union has negotiated for modern era players, and the plight of the players I, and probably many of you too, grew up watching in the seventies and earlier, who were never covered under any even marginally generous union negotiated benefit plan. Of the hundreds of posts I have written on this blog, probably none has had longer legs than this one, on the long legal struggle of former Steelers’ center Mike Webster to obtain benefits from the NFL under the applicable plan. The Sports Illustrated piece is a fine story of the people behind these issues, and presents a sympathetic portrait of them all.

And this, I note, is the first time I have ever linked to Sports Illustrated on this blog, and it wouldn’t surprise me if it turned out to be the last time, too.

In an opinion it issued on Monday, the United States Court of Appeals for the Sixth Circuit confronted essentially the exact same facts and issues as are at play in the LaRue case currently pending before the Supreme Court, and effectively entered its own prediction as to how the Supreme Court will rule in LaRue. Tackling the same arguments that were presented to the Supreme Court in LaRue, the Sixth Circuit concluded that individual participants could recover on their own behalf for losses solely to their accounts in the plan, and that breach of fiduciary duty claims under ERISA are not limited to actions brought on behalf of the plan as a whole or for recovery benefiting the entire class of plan participants as a whole. This, of course, is the primary issue presented to the Supreme Court by the LaRue case.

Interestingly, the Sixth Circuit even borrowed and relied upon Justice Breyer’s diamond hypothetical that he posed to the plan’s counsel in LaRue in reaching its ruling in favor of the participants, a hypothetical that clearly caught many lawyers’ fancy after it was offered up by the justice during oral argument.

The decision is Tullis v. UMB Bank, N.A.

I’ve noted in the past that the problem with state health care reform acts mandating health insurance is that they don’t tackle the issue that is deterring employers from providing broader health insurance benefits, namely the ever increasing and rapidly escalating cost of health insurance. In response, Massachusetts lawyer David Harlow argues on his blog that incremental steps towards resolving this problem are moving forward on their own schedule, separate from state legislation mandating employer provided health benefits, and cost control will come in time. Personally, I am skeptical that governments can actually control these costs, or even significantly reduce their annual rate of increase, but I would be happy to be wrong.