Just read the transcript of Monday’s oral argument in LaRue, which you too can read right here. Interesting argument, and interesting lines of questions from the court, although I am skeptical as to how much guidance as to the court’s thinking one can draw from the Justice’s questions themselves. In many ways, the lines of inquiry seemed to parallel my earlier post here on the arguments made by both sides. I had mentioned in my earlier post that the respondent focused heavily in its briefing on two points, the first being that prior jurisprudence of the Court concerning ERISA cases suggest that the narrow framework of ERISA remedies should not extend to encompass this type of claim, and the second that LaRue’s case itself was pled with holes that did not suggest it as a good vehicle for authorizing these types of claims. With regard to the first line of argument, questioning right off the bat of the respondent’s counsel targeted the fact that the prior jurisprudence relied upon by the respondent did not concern defined contribution or other retirement benefits and was based on a starkly different fact pattern; I mentioned in my earlier post on the parties’ briefing that I thought the earlier jurisprudence was too different in nature to provide much support for either side in the circumstances presented in the LaRue case, and after reading the argument, I think that remains the case. With regard to the second issue, LaRue’s counsel was peppered with questions concerning possible holes in the way he sought to recover for the alleged mistakes at issue, questioning that I thought was consistent with my earlier view that while the Court may well allow the type of claim at issue here to be actionable, the Court may well find that LaRue himself hasn’t placed himself in a position that he qualifies to go forward with such a claim. Perhaps the most interesting nugget to me in the transcript is that, with regard to the question of whether such a claim should be allowed at all – i.e., found to be authorized by the statute – the questioning seemed to consistently focus on one simple issue, namely that the only intelligible and consistently intellectually defensible position is that the plain language of the applicable statutory section would allow a loss to only one or a few plan participants’ accounts to be actionable, and would not require, as the respondent asserts, a loss to most or all of the plan’s participants before a claim for breach of fiduciary duty could exist.

Interestingly as well, the issue of whether a claim could proceed in the LaRue case as an equitable claim for relief under the Sereboff line of cases was discussed in only the most cursory terms by all involved, including the Justices. For various reasons, not the least of which is that the Court’s prior treatment of this issue has painted the Court into a bit of a corner from which it cannot back out without either repudiating prior holdings or engaging in intellectual gymnastics, I don’t see the Court advancing the ball on this issue in its opinion in this case.

Roy Harmon and the Workplace Prof have the story of a severely injured worker whose settlement with the tortfeasor was effectively taken, in its entirety, by the plan administrator – Wal-Mart – on a reimbursement claim in accordance with the administrator’s rights under Sereboff. Roy Harmon has a nice factual discussion of the problem demonstrated by the case, and the Prof raises the ante, pointing out the injustice this is working for the particular individuals involved in the case. No disagreement there. But what concerns me is a point that the Prof makes, in which he effectively characterizes this as a problem driven by ERISA; sayeth the Prof:

In short, a truly horrible situation under ERISA, and not that far-fetched when one comes to understand the manner in which the scope of equitable relief under ERISA and ERISA preemption work together to create what I call the "Grand Irony of ERISA": that employers now use ERISA as a shield against employees; the same employees whose benefits ERISA was supposed to protect.
A Kafka-esque scheme [if] there was one and yet another publicity black eye for Wal-Mart.

But, although I am speaking almost third hand with little knowledge of the actual facts of this exact case, it seems to me this is not an ERISA problem, but a litigation tactics problem. It seems to me that the first obligation of a plaintiff’s lawyer in this type of a situation is either to obtain a waiver or compromise from the plan of its right of reimbursement that will keep the bulk of the recovery in the hands of the severely injured plan participant, or if that is not possible (perhaps because the plan administrator refuses to do so), to include in valuing settlement the amount that will have to be paid back to the plan on a reimbursement claim. If that makes the settlement value so high that the case can’t settle, then so be it, and it becomes a case which simply has to be tried and the amount of medical bills that must be reimbursed to the plan becomes just one part of the damages that go up on the blackboard in front of the jury in calculating the damages that the plaintiff claims should be awarded to him; in this way, if the jury returns a verdict, the amount that must be paid back to the plan is only one portion of the money recovered by the plan participant, with the participant free to retain the remaining amounts, which ought to encompass awards for future care, future loss of earnings, and the like.

One can fairly ask whether this places the participant at risk of losing at trial and taking nothing, and the answer to that question is, of course, that this risk exists and is significant; avoiding that exact risk is, after all, why a plaintiff settles a case for less than full value. But the fact is that a settlement, such as the one involved in the case Roy and the Prof discuss, that does not significantly exceed the reimbursement owed to the plan- after or without compromise by the administrator -can leave the participant in the exact same spot as a loss at trial would, holding no money at all after the plan is reimbursed.

Litigation is a dynamic and ever changing organism, and, much like Newton’s third law of physics, for every action during the course of a lawsuit there is a corresponding, if not necessarily equal and opposite, reaction. The situation presented by the admittedly horrible circumstances detailed by Roy and the Prof is one that needs to be resolved as part of playing out the end game of a lawsuit, not after the fact as a dispute over ERISA rights and remedies.

Given the tragic nature of the events in question, I don’t delve into this point lightly, or just because it looks like good blogging fodder. But in the discussions I have seen so far of this issue, and on the impact of ERISA on it, I haven’t seen this particular aspect discussed in detail, and I think it’s a point that simply cannot be overlooked by any plan participant or lawyer stuck in the same situation in the future.

Oral argument at the Supreme Court is scheduled for Monday in LaRue v DeWolff, Broberg & Associates, which presents the technical question of whether a loss to only one participant’s 401(k) plan is actionable as a breach of fiduciary duty causing a loss to the plan, but which on a broader level concerns the question of who should bear the administration risk (defined as the problems of mistakes or malfeasance in the operation of a benefit plan) inherent in the operation of a 401(k) plan. Is it the participant or instead the plan fiduciaries who should bear that risk? To LaRue, who focuses his arguments around this idea, mistakes attributable to the administrators that harm the account balances of a particular plan participant represent a risk that should be borne by the erring administrator, and should therefore be actionable under ERISA even if the only losses in the entire plan from the mistake were suffered by one particular plan participant. The respondents reply, quite correctly, that ERISA provides limited remedies and some losses are simply – and quite intentionally under the terms of the statute – not actionable; to the respondents, LaRue’s loss, which stemmed from the administrator not following his specific investment instructions related to his specific account, is exactly such a non-remediable event under ERISA.

While the respondents are right that ERISA, presumably intentionally and certainly consistently with the general understanding of the statute and its history, provides only limited rights of recourse and leaves some losses to be borne by the affected plan participant, the statutory language itself at issue in the case – concerning whether an individual’s loss of the type described by LaRue qualifies as an actionable loss to the plan when only the individual was harmed – does not specifically leave in or leave out the circumstances of LaRue’s particular loss from the category of losses that are actionable under ERISA. And that is really where the Supreme Court’s involvement here comes into play, on the question of whether the type of administration risk described by LaRue belongs within or without the statute’s remedies; how the Court interprets the specific statutory language at issue will decide that question.

Personally, I’m of the view that the Court will find that the statutory language allows for the type of claim that LaRue is presenting. The language in question is capable, without any stretching of the language, of including the kind of claim at issue, and past jurisprudence doesn’t bar – or even present a significant impediment – to such an interpretation of the particular statutory language at issue. Moreover, and interestingly given the respondents’ – quite appropriate – tactical reliance on the general theme underlying past Court opinions on ERISA cases that suggest a claim such as LaRue’s is not actionable, the body of law that bears on this issue really was not created in response to one of the primary economic developments in American life over the last handful of years, namely the transition over to a regime of individual responsibility for retirement by means of defined contribution plans such as 401(k) plans and the accompanying transfer to individuals of the risks of retirement investing, and the corresponding disappearance of a defined benefit regime in which all such risks were borne not by individuals, but instead by their employers. Questions like the one presented by the petitioner in LaRue haven’t really been addressed at the high court level in the context of this new economic reality, and I am not convinced of the utility of past ERISA decisions concerning other contexts in resolving the statute’s application in the defined contribution context. I suspect that LaRue will present an early example of the Court accepting that the statutory language in ERISA that remains open to differing interpretations should be understood as transferring at least some of the administration risk inherent in the world of 401(k) plans from the individual saver and onto the party in the best position to avoid the risk, namely the administrator.

At the same time, I am not convinced that this is going to do much good for LaRue himself. The respondents take the tactical approach in their briefing of focusing on the particular flaws in LaRue’s presentation of himself as the poster boy for plan participants confronted by erring administrators, in an attempt to show that the particular claim he presented to the courts below does not justify interpreting the statutory language in a manner that would allow his claim to proceed. It’s a pretty good argument, and I wouldn’t be surprised to see a final opinion that opens up the type of claim he is arguing for, but puts him outside of its scope.

Some years back, I was on a job interview when I was asked a question by a senior partner in a fairly good sized firm. When I began my answer with the comment that I was loathe to brag, he interrupted me to say that it was a job interview, so if there was ever a time when it was appropriate to brag, it was then. Not bad advice, in hindsight. In much the same way and with the same sort of license, I thought I would mention that this blog has been included by the people at LexisNexis on its list of top blogs at its Insurance Law Center, which I can recommend to you as a good place to locate cases, commentary and timely information on insurance related issues. I am told that “the selection of [the Boston ERISA and Insurance Litigation] blog was made by insurance editors at Matthew Bender and LexisNexis Mealey’s Insurance publications as one that can be relied upon to provide its readers with timely review and analysis on insurance and insurance related topics.” Well, we try to, anyways.

Either way, modesty – false or not – aside, I appreciate the recognition, and hope the readers of this blog find some more of the information they are looking for at the LexisNexis insurance law center.

Okay, I mentioned on Friday that I had come across some other interesting blogs and sites over the last few weeks that I wanted to pass along, and that I would do so over the next few days. I jumped off track on doing that right off the bat with this morning’s post on insurance and prior knowledge issues, but now I will return to one of those other blogs I wanted to pass along.

I have talked a lot about the Massachusetts Health Care Reform Act, and one of the things I discussed recently was Professor David Hyman’s article in which he pointed out that the "Massachusetts Health Care Reform Act has problems [unique to it] that stem from the particularly high cost of health care in Massachusetts relative to the rest of the country.” On this point, John Aloysius Cogan Jr., the Executive Assistant for Policy and Program Review for the Rhode Island Office of the Health Insurance Commissioner, recently had a terrific post on his Regulating Health Insurance blog that breaks down the component costs of health insurance and analyzes what elements are driving the high cost of health insurance. Echoing Professor Hyman’s point that it is the high cost of the health care itself that is problematic, John carefully documents that the high cost of health insurance is in fact driven by the cost of medical care itself and not, as is frequently argued and assumed by critics, by insurer profits. It’s an interesting analysis that fits well in any consideration of the merits and problems of state health insurance reform acts. Of course, the willingness of the public and the political class to accept John’s assertion that the driving factors in high health premiums are the costs of medical care itself isn’t helped by stories like this one here.

One of the more ambiguous and gray areas in insurance coverage law is the question of when an insured is or should be aware that a claim is on its way. The law recognizes that this can certainly occur at some point before the insured actually is handed suit papers by a process server, but the law is certainly not crystal clear as to when that is. This is a question of particular importance for insureds because various contractual policy terms in a policy and various common law principles read into the insurance relationship can all preclude coverage if that date is deemed to be before the effective date of the insurance in force when the insured actually is served with the suit papers. For instance, many policies contain terms precluding coverage if the insured knew or should have known of the potential claim before a policy took effect and, for that matter as well, failure to disclose an expected claim in applying for a policy can result in the policy being voided for misrepresentation in many jurisdictions.

Of interest on this topic is this article here at Law.com concerning whether attorneys, covered under professional liability policies, are on notice in this manner whenever an unhappy client complains about a case or, if not whenever the client complains, how much complaining is necessary for the insured to be aware that a claim is likely and to lose coverage as a result if and when that client does file suit. A new declaratory judgment action filed in New Jersey seeks to answer that particular question. Of particular interest to me, however, is the fact context in which the complaining arose. It concerned a client unhappy with the terms of a settlement negotiated by the insured attorney. It’s a cliche of mediation, uttered by every mediator trying to push two unhappy parties to reach agreement on a resolution, that “a good settlement is one where both sides are unhappy.” Well, if that’s the case, then does the complaining after the fact mean that the lawyers involved are always thereafter on notice of a potential claim that they have to report to their malpractice insurers? It would be kind of silly to have a legal rule holding that the usual griping that often accompanies settlement has to be reported to the lawyers’ insurers to protect their rights to coverage in those one out of a million times that the complaining eventually morphs into a malpractice suit. Admittedly, this is something of a deliberately far fetched example, but it does point out the practical considerations that have to be factored into the question of how far in advance of the filing of suit the insured’s obligations can attach. Too far in advance, and the legal rule creates an unworkable, burdensome scenario for all involved, including insurers who would have to process multiple and unnecessary notices concerning many events that will never lead to suit; not far enough in advance and insurers lose the protections those policy terms and common law doctrines were intended to provide.

One of the great things about writing this blog is that the technology of blogging – like links to other blogs and so-called trackbacks, showing who else on the internet is quoting a post – brings writers, topics and other bloggers onto my radar screen who I would otherwise miss out on. That cumbersome, semi-tech savvy sentence is an introduction to my real point, which is that my blog has introduced me over the past couple of weeks to some interesting blogs that I wanted to pass along, and to a particular website involving a unique and interesting insurance product. Barring being diverted by breaking news, I am going to try to discuss a few of those over the next handful of posts.

The one I wanted to mention today is the terrific (and wonderfully named) Mortgage Meltdown blog out of Wisconsin, by a handful of lawyers at the firm of Reinhart Boerner Van Deuren. The blog provides a lot of detail about the subprime mortgage problem as a whole, but what really stands out to me are several excellent posts by Ellen Brostrom on ERISA litigation arising from this problem. In addition to a discussion of my recent post on the ERISA breach of fiduciary duty litigation against State Street arising from plan investments that were exposed to subprime lending risks, she has a pair of interesting posts on ERISA class actions against subprime lenders themselves based on the inclusion in those companies’ benefit plans of company stock that was propped up by subprime lending; you can find those posts here and here. Her posts mirror my comment in my post on the State Street putative class actions that there are a lot of different avenues to target subprime losses through the mechanism of ERISA’s fiduciary obligations.

There was an interesting post yesterday on the Wall Street Journal Law Blog – which by its topics provides a nice little overview of the zeitgeist of the legal world at any given moment – on arbitration as an alternative to litigation. The post discusses a column from the Financial Times supporting the growth of arbitration in the face of consideration by the Supreme Court of a case concerning just how much freedom parties have in constructing the format of the arbitration under the Federal Arbitration Act. The column itself is here. What’s interesting to me about all of this is that at the same time business media of this nature is singing the praises of arbitration, the lawyers for much of that business community don’t much like it as a tool for resolving complicated disputes, as I have discussed in a number of posts, including – most recently  – here. Is there a disjunct over the question of the efficacy of arbitration between the business communities and their lawyers, including their in-house lawyers, who are tending not to favor arbitration for their own disputes? Or is there only a disjunct between the media who cover that issue and the business community and its lawyers?

Incidentally, the Supreme Court case involving arbitration concerns the extent to which the parties can structure their rights and remedies in that process in the face of the Federal Arbitration Act, including the extent to which they can appeal an arbitrator’s ruling in the court system. As a frequent commentator on arbitration and one who regularly represents parties in arbitration, I have no doubt that expanding the power of the parties in such a manner can only improve arbitration, at least of commercial cases involving parties of roughly equal bargaining power.

I have written before that the underlying structural problem with fair share and similar acts, like the Massachusetts Health Care Reform Act, that seek to mandate the provision of health insurance by employers is twofold: first, they play at the margins of a problem that is fundamentally about the base economics of health care costs and, second, they are walking advertisements for the law of unexpected consequences. Two stories that showed up on my (electronic) doorstep yesterday illustrate this beautifully. In the first, Healthcare Reform: The Economics of Pay or Play Employer Mandates, two Cornell University economists explain that, as expected, mandating the provision of health insurance will reduce employment levels among the exact population of lower waged – and presumably lower benefitted – workers that the statutes are intended to help by mandating that health insurance be added to their employment compensation. The authors further argue, however, that the statutes are “blunt instruments” for targeting the problem of the uninsured, as they have negative impacts on employees who already have health insurance through other sources, including by reducing employment levels of such employees. The point, in many ways, of this and other criticism of these statutes is that they look good on the surface, and certainly score political points in some instances for those who have championed them, but in practice they are nowhere near a panacea for the growing problem of the uninsured, a problem I have explained in past posts is one of fundamental economics related to the extraordinary costs that providing health insurance imposes on employers. And that leads directly to the second story of interest, from yesterday’s New York Times, explaining how Wal-Mart, the direct target of some of the pay or play mandates, such as the one enacted in Maryland, having defeated in court statutory attempts to force it to increase its health insurance spending, is beefing up the level of health benefits provided to its employees on its own as being good business and sound economics. The problem with health insurance and the issue of the uninsured is about fundamental economics, and these pay or play mandates, because they can’t repeal whatever laws exist in the dismal science, can’t strike at the root causes of the issue.

I liked the recent opinion in Bonilla v. Bella Vista Hospital, Inc., out of the United States District Court for the District of Puerto Rico (not available online from the court, but here’s a Lexis cite for it: 2007 U.S. Dist. LEXIS 79939) for really only one reason, namely this terrific overview of the law of fiduciary status and duty:

ERISA reserves fiduciary liability for "named fiduciaries," defined either as those individuals listed as fiduciaries in the plan documents or those who are otherwise identified as fiduciaries pursuant to a plan-specified procedure. 29 U.S.C. § 1102(a)(2); see also Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 18 (1st Cir. 1998). However, the statute also extends fiduciary liability to functional fiduciaries, who are persons that act as fiduciaries (though not explicitly denominated as such) by performing at least one of several enumerated functions with respect to a plan. Beddall, 137 F.3d at 18. Under 29 U.S.C.S. § 1002(21)(A), a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

The key determinant of whether a person qualifies as a functional fiduciary is whether that person exercises discretionary authority in respect to, or meaningful control over, an ERISA plan, its administration, or its assets (such as by rendering investment advice). See Beddall, 137 F.3d at 18; O’Toole v. Arlington Trust Co., 681 F.2d 94, 96 (1st Cir. 1982); see also 29 C.F.R. § 2509.75-8, at 571 (1986). The exercise of physical control or the performance of mechanical administrative tasks generally is insufficient to confer fiduciary status, a person is a plan fiduciary only "to the extent" that he possesses or exercises the requisite discretion and control. 29 U.S.C. § 1002(21)(A); see also Beddall, 137 F.3d at 18.

An ERISA fiduciary, properly identified, must employ within the defined domain "the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use." Id. (quoting 29 U.S.C. § 1104(a)(1)(B)). The fiduciary should act "solely in the interest of the participants and beneficiaries," and his overarching purpose should be to "provide benefits to the participants and their beneficiaries" and to "defray reasonable expenses of administering the plan." Id. (quoting 29 U.S.C. § 1104(a)(1)). A fiduciary who fails to fulfill these responsibilities is "personally liable to make good to [the] plan any losses to the plan resulting from… such breach." Id. (quoting 29 U.S.C. § 1109(a)).

Reads like a beautiful nutshell summation of the law of fiduciary duty under ERISA, doesn’t it?

Nutshells, by the way, for you non-lawyer readers, are relatively brief condensations of particular areas of the law that multiple generations of law students have read instead of law textbooks themselves, which not only often run the length of “War and Peace” but are also often as comprehensible as that classic – in its original Russian.