I mentioned in yesterday’s post that my goal for the week was to move rapidly through several items that had caught my attention over the last week or so, and that I wanted to pass on to readers of this blog. I thought the next one I would mention is this conference in New York in December, sponsored by the American Conference Institute, on litigation and regulatory issues related to 401(k) plans. The subject matter of the conference ranges across the hottest topics in litigation and potential exposures for sponsors and fiduciaries of 401(k) plans, including stock drop litigation, excessive fee issues, and in a topic that hits both primary subjects of this blog, insurance coverage for fiduciary liability risks. Here’s the brochure for the conference.

Coming off the holiday weekend, I have a long list of items I want to pass on or talk about. I will try to put up as many as I can over the next few posts, to work through the backlog. I thought I would start with this one, because it ties two of the items together. Susan Mangiero of Pension Governance and the Pension Risk Matters blog, passed along this article on last week’s decision by Judge Tauro that I blogged about here, holding that cashed out participants in a 401(k) plan could sustain breach of fiduciary duty claims, a finding contrary to that of some courts – including at least one by another judge sitting in the same district as Judge Tauro – but supported by the holdings of some other courts.

What I liked about the article, aside from the fact that it adds some further discussion about the case and the issues it presents to that contained in my earlier blog post on the case, is the article’s comment that the case is likely part of “a trend that will result in most courts following suit.” An animating theme of my posts and thinking on ERISA litigation concerning defined contribution plans such as 401(k) plans is that we are in the process of watching the case law evolve to hand more protections to plan participants, with a corresponding growth in the potential liability exposure of plan fiduciaries. As the world shifts from a defined benefit world – read pensions – to 401(k) plans, the law of ERISA is going to shift with it to better protect investors in those latter types of plans. For the first thirty years or so of the development of ERISA jurisprudence, defined contribution plans were simply not that important and the unique concerns of those plans – such as what becomes of the rights of cashed out plan participants, the issue addressed by Judge Tauro last week – played a relatively peripheral role in the development of ERISA jurisprudence. That is all changing and changing quick. Moreover, we can expect that evolution in the law to proceed with real force for some time, given the expected exponential growth in assets held in 401(k) plans. On this last point, three economist authors have done the heavy lifting, and document this point in this paper, as summarized in the abstract of their article: 

Over the past two and a half decades there has been a fundamental change in saving for retirement in the United States, with a rapid shift from employer-managed defined benefit pensions to defined contribution saving plans that are largely controlled by employees. To understand how this change will affect the well-being of future retirees, we project the future growth of assets in self-directed personal retirement plans. We project the 401(k) assets at age 65 for cohorts attaining age 65 between 2000 and 2040. We also project the total value of assets in 401(k) accounts in each year through 2040 and we project the value of 401(k) assets as a percent of GDP over this period. We conclude that cohorts that attain age 65 in future decades will have accumulated much greater retirement saving (in real dollars) than the retirement saving of current retirees.

Follow the money is always a safe bet. As the majority of Americans’ individual savings move into 401(k) plans, the law governing those plans is going to shift with it.

I posted a couple of days back about California’s interest in enacting a state health care reform law that, like the current law in Massachusetts and the Maryland Fair Share Act that was struck down by the courts, operates at least in part by imposing new obligations on employers who provide health insurance to their employees. In the post, I noted my skepticism that the state could pull this off without running afoul of ERISA preemption. The National Law Journal has an interesting article, available here, on the same subject, from which I took away two thoughts. The first is that the consensus opinion is exactly the one I voiced earlier this week, that California’s attempt is almost certain to be subject to preemption if challenged in court. The second is that any statutory enactment of this nature in California is, in fact, certain to be challenged in court, and quickly, if only because of California’s bellwether status in American economic and political culture, and the possible influence on other states if such a statute is allowed to stand in California.

Judge Tauro, of the United States District Court for the District of Massachusetts, has weighed in lately on some of the more cutting edge and currently unsettled issues in ERISA litigation, such as the impact of ERISA preemption on the powers of a state agency. This week, he ventured into the now hot topic of whether a plan participant who has cashed out of a 401(k) plan has standing to sue for breach of fiduciary duty, in this instance for imprudently investing in allegedly inflated company stock. In the decision, involving a putative class action against Boston Scientific, the judge surveyed case law from other jurisdictions on the issue and broke from the opinion of another judge of the circuit, who had found that such a participant, once cashed out, lacked standing to bring a claim for benefits. Judge Tauro reviewed case law from other circuits to the contrary, and elected to follow those rulings.

The cases relied upon by the judge are an instructive lot, and almost a road map for briefing this issue when arguing in favor of standing for such a cashed out participant: 

More persuasive is the reasoning of the Seventh Circuit, which recently reached an opposite outcome and found that a plan participant did have standing, despite having cashed out of the plan. [The Seventh Circuit found that] "[b]enefits are benefits; in a defined-contribution plan they are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty." The Third and Sixth Circuits have adopted this line of reasoning as well. Also instructive is the analysis by Judge Hall in the District of Connecticut: “[T]he court is puzzled by the . . . assertion that a claim for benefits lost due to imprudent fiduciary investment becomes a claim for damages once the plaintiff accepts a lump sum payment constituting the balance of her account with the relevant plan. . . . Regardless of whether [the participant] accepted or refused the balance of her account, her underlying claim would still be for the money lost by the Plan as a result of the defendants’ imprudent investments. The court sees no logical reason why such a claim seeks an ascertainable benefit when the plaintiff refuses a lump sum, but the very same claim seeks an unascertainable damage award once the plaintiff accepts a lump sum.”

 

Ever mystified by what goes on inside that black box with the colorful flat screen on top that sits on your desk at work? Me too, and when I am I check in with my colleague Robert Plotkin, a patent prosecutor who specializes in computer patents. Robert is a fine source of expertise on patent law and computer technology, and I thought I would pass along this link to his patent tip for August 07, which discusses changes at the Patent and Trademark Office concerning continuation applications. As Robert points out in his publication, the rule change will alter patent applications in a manner that may increase their expense, but do not go into effect until November, creating a short window that patent applicants should try to exploit before the effective date of these changes. And as Robert doesn’t point out in his note on the subject, but did mention to me – given that I litigate patent infringement actions but don’t prosecute patents – the shakeout from the rule change is likely to affect litigation over patents as well, as we move down the road and past the implementation date of these changes.

And aside from my professional interest in patent litigation, how does this relate back to the primary subject matters of this blog?  Well, we might point out that business strategy patenting has caused ERISA law to crash head long into patent law, as discussed in this BNA article that I am quoted in.

There’s an entertaining little story today in the Boston Globe on the question of whether, in the next few weeks, the California legislature and the Governor will roll out a state plan to reform health insurance by adding fees and other obligations to the employer provided health care system with the intent of providing universal health insurance, similar in some ways to what Massachusetts has done. I have talked frequently here about Massachusetts’ plan, which is in its earliest stages of implementation, with some concomitant glitches. Readers of this blog know I am highly skeptical of the ability of states to fashion these types of plans without running afoul of ERISA preemption, and, without knowing the details of the California plan, I am pretty skeptical they can pull it off either. In a nice little juxtaposition, for those of you who are interested in the question of how ERISA preemption impacts these types of attempts by states to change the health insurance paradigm, Sharon Reece out of the University of Maryland Law School has a very timely paper that is just out addressing the barrier posed by ERISA preemption to these types of state laws. The paper itself is available here, and the post from Richard Bales at Workplace Prof that brought it to my attention a few weeks back is here.

I wanted to return for a moment to a decision from the Massachusetts Supreme Judicial Court from earlier this month, Allmerica Financial Corporation v. Certain Underwriters at Lloyds’ London, in which the court held that an excess carrier that had issued a follow form policy to an insured was not bound by or required to follow the settlement decisions of the insured’s primary carrier, to whose policy the excess carrier’s policy followed form. For those of you who may not be familiar with follow form policies, they are excess policies that incorporate – or borrow or "follow form" to – the same terms and exclusions as are contained in the primary policy issued to the mutual insured of both the excess carrier and the primary carrier. There’s nothing very surprising in this holding, and anyone knowledgeable about the practices of the insurance industry since the time of, oh, say the end of the civil war, would know that excess carriers who have issued following form policies do not abdicate to the primary insurer the right to decide whether to spend the excess carrier’s money as part of a settlement. So nothing too surprising in the court’s opinion, to that extent.

But what might be surprising to some or interesting to others is the fact that, while the law may well be that excess carriers are not bound by the settlement decisions of underlying primary carriers, they may well be exposed to significant bad faith liability, in particular under Massachusetts’ unfair trade practices statute, if they refuse to join in on such a settlement. As a general rule in Massachusetts, by statute insurers are obligated to agree to a reasonable settlement of a claim and, by statute, can be hit with multiple damage awards if they fail to do so. Now, think about it, and play out the scenario in which the primary carrier elects to settle, even if the amount will exceed the limits of the primary policy and require some payment by the excess carrier. Presumably, the primary carrier is doing so because settlement on those terms is reasonable. Well then, what about the excess carrier? If it refuses to go along, has it committed a breach of the obligation to reach a reasonable settlement by refusing to participate in the settlement reached by the primary carrier, which was premised on the participation of the excess carrier in the settlement?

There are a lot of ins and outs to this, and I would have to write a full blown law review article here to address them all. But for now, my point is only this. It is one thing for the state’s highest court to say that an excess carrier is not obligated by the terms of a follow form policy to join in a settlement reached by the primary carrier, but it is an entirely different question whether other sources of legal obligation, such as the state’s unfair trade practices act, impose an obligation to the contrary. I would argue that they don’t and shouldn’t, but outside of the digital confines of this blog, I certainly don’t get the last word on this subject.

It should be noted, however, that the Supreme Judicial Court did nod at this issue in its opinion, and in so doing suggested both that excess carriers have a great deal of leeway in deciding whether to settle a case where the loss will be in excess of the primary policy’s limits and that it should not be easy to show that an excess carrier committed bad faith by declining to participate in an arguably reasonable settlement to which the primary carrier was willing to commit. The Court, in a footnote, explained that the question of the excess carrier’s bad faith obligations was not at issue, but cited Hartford Casualty Insurance Company v. New Hampshire Insurance Company, a 1994 decision, as reflecting current Massachusetts law on the duty an excess carrier “owes to its insured not to act negligently in refusing to settle a case.” Indeed, the Court then went one step further and, in a different footnote, expressly declared that the Court’s conclusion in Allmerica with regard to the follow form obligations of excess carriers with regard to settlements “should not be construed to limit the settlement responsibilities of insurers articulated in” Hartford Casualty.

The Hartford Casualty case set forth a very high standard for imposing bad faith liability on a carrier that fails to settle a case, finding that there is only a bad faith failure to settle if no reasonable insurer at all would have failed to settle the case on the terms presented to it. That’s a pretty high standard. I would argue, given the Supreme Judicial Court’s deliberate citation of that case in two footnotes in a case, Allmerica, that didn’t require the Court to even address issues of bad faith failure to settle, that the Court was reinforcing that bad faith failure to settle claims can only be maintained against excess carriers – even ones that issued follow form policies and even where the primary carrier wants to settle – if the very high bar set forth in the 1994 Hartford Casualty case is met.

I wanted to take a moment over the next couple of posts to return to a couple of cases from earlier this month that are worth a look and a comment, but that I haven’t had a chance to talk about yet. One of them is a decision by Judge Lindsay of the United States District Court for the District of Massachusetts from the beginning of the month, Dickerson v. Prudential Insurance Company, in which the court considered the question of whether plan documents actually conferred discretionary authority on the administrator of an ERISA governed long term disability plan; as most of you already know, if it did not, then the court had to decide a dispute over benefits under that plan de novo, while if it did, the court was to decide the dispute by applying a deferential standard of review.

Now, we see many cases finding that discretionary authority is conferred and that deferential review applies, but cases finding the opposite are actually not quite as common. This is usually because the plan in question in a case either clearly grants discretion, or doesn’t do so at all. As a result, it is comparatively infrequent that a court has to address in any depth whether or not particular plan language grants discretion. Into this relative void steps the Dickerson decision, which is an interesting example of a case finding that the particular language used in a plan did not clearly confer discretionary authority. I liked Judge Lindsay’s description of the applicable standard, which was that: 

Courts have recognized that "there are no magic words determining the scope of judicial review of decisions to deny benefits." Brigham, 371 F.3d at 81 (quoting Herzberger v. Standard Ins. Co., 205 F.3d 327, 331 (7th Cir. 2000)). Until insurance plans include language that "could leave no doubt about the administrator’s discretion . . . we must in fairness carefully consider existing language that falls short of that ideal." Id.

"[T]he critical question is notice: participants must be able to tell from the plan’s language whether the plan is one that reserves discretion for the administrator." Diaz v. Prudential Ins. Co. of Am., 424 F.3d 635, 637 (7th Cir. 2005). Language that merely requires a determination of eligibility by the administrator and proof of the applicant’s claim "does not give the employee adequate notice that the plan administrator is to make a judgment largely insulated from judicial review by reason of being discretionary." Herzberger, 205 F.3d at 332. Cf. Diaz, 424 F.3d at 639 (for Plan language to confer discretion on the administrator, it must "communicate the idea that the administrator not only had broad-ranging authority to assess compliance with pre-existing criteria, but also has the power to interpret the rules, to implement the rules, and even to change them entirely.").

The Court concluded that the particular language in the plan at issue in Dickerson gave the administrator the “ the power to make the determination” but imposed a list of specific conditions on the exercise of that power. As a result, the judge held that “[b]ecause the Plan language” suggests that "the plan administrator is to make a judgment within the confines of pre-set standards [and does not have] the latitude to shape the application, interpretation, and content of the rules in each case . . . the language [was] insufficient to trigger deferential review by the court.”

I think every blog should have an official charity or good cause, and this one’s is the Anne B. Kingsley Ovarian Cancer Foundation. Not only is it a truly good cause, but it also falls under this blog’s bailiwick, given that the Foundation’s founder is long-time insurance industry executive Robert Kingsley. The Foundation is currently running a fundraiser structured around a cookbook called Recipes Recollections Research, a collection of recipes from friends of the Foundation. Food and eventually a cure, who could ask for more? The Foundation’s website is here, and information on purchasing the cookbook to help support their work is here.

I wanted to pass this along while the electronic brochure was still (fairly) hot off the metaphorical presses and cooling off in my in-box. Here’s the information for West Legalworks’ 20th Annual ERISA Litigation Conference, held in, well, probably the three best places you could pick: Florida in February, and California and New York City in the fall.

On a more analytical note, what really jumped out at me is the conference’s focus this year on what the marketing materials describe as “ the continuing lessons from the post-Enron wave of litigation over employer stock investments in 401(k) and ESOP plans and . . . the current wave of decisions addressing whether former employees who withdrew their plan balances before bringing suit have standing,” as well as on the “impact of procedural violations of the claims and appeal regulations [and] [t]he recent crop of preemption cases,” all topics that have been discussed extensively over the past year here on this blog.