Well now, we talked recently about how plaintiffs’ lawyers chasing fiduciaries appear likely to help drive changes in how fiduciaries of pension and defined contribution plans operate. Are we going to see the same with alternative energy companies and how businesses operate with regard to climate change issues? I have talked before about how climate change, in my view, will be successfully addressed if profits and losses – and those include liability exposures – drive companies to reduce greenhouse gas emissions and otherwise reduce their impact on the environment; as I wrote previously, the problems can be addressed if we create a business environment in which the winners are those who target these problems, and the losers are those who do not.

This article here, from the Dallas Morning News, and this blog post on it from the WSJ Law Blog point out that the lawyers are lining up to both sue and defend companies over climate change liabilities and exposures. Liability exposures are the kinds of costs of doing business that companies can be expected to want to avoid, and thus the rise of this area of the bar may well be a harbinger – much like the proverbial canary in a coal mine – of a further impetus on the part of the manufacturing and energy industries to reduce their contribution to global warming. Beyond that, the story told in that article and blog post emphasize a point I made in my earlier post on alternative energy issues and the insurance industry – that this is a liability issue, and as such, is by definition a serious threat and risk to the insurance industry, one that it needs to anticipate and account for in advance, rather than be gobsmacked after the fact like it was by long tail environmental and asbestos exposures.

I wrote, it seems to me, an awful lot over the last couple of weeks on the question of the fiduciary obligations of plan sponsors and others with regard to the investment selections made by pension funds and the investment choices offered in 401(k) plans. Susan Mangiero has a lot more to say about this in her series of posts – here, here, here and (most recently) here – on the due diligence obligations of fiduciaries when investing plan assets.

One particular issue that constantly comes up in this area is the belief of many employers and plan sponsors that they have satisfied any obligations they may have and have immunized themselves, for all intents and purposes, from liability for breach of fiduciary duty, by hiring an outside company to administer the plan and make investment decisions. Whenever I speak to people who offer investment and other assistance to plan fiduciaries, their need to disabuse fiduciaries, and particularly plan sponsors, of this belief is a constant topic of discussion. Quoting Rick Slavin, an attorney and former regulator, Susan nails down in three sentences why this is not the case:  

In his overview of case precedent and enforcement actions, Slavin offered that sloppy, obtuse or incomplete paperwork is usually the beginning of trouble. He reiterated that the use of outside parties does not absolve plan sponsors of their fiduciary duties. Oversight obligations remain.

You know, the simple fact of the matter is that, in all the areas I have litigated cases in over the years, plan sponsors have the easiest ability to preemptively and pro-actively position themselves to defeat an action against them – due diligence, due diligence and more due diligence throughout the life of the pension fund or defined contribution plan will come as close to serving as a silver bullet to protect plan sponsors as exists anywhere in the world of litigation. But plan sponsors who forget that they still have to engage in due diligence in the form of oversight and instead elect to rely simply on the fact that they retained an outside manager effectively forfeit this safe harbor.

My email inbox is often inundated with seminar pitches, book offers, and informational material, much of which, even if it looks valuable, I could never get to unless I decide to give up the practice of law and just read all this stuff full time. Fortunately, though, I can cut through the junk pretty quick and spot the diamond in it within minutes of sitting down at my desk in the morning (or, more often than not, while remotely surfing my inbox in the middle of the night).

And here is one such diamond, a really terrific paper on the rapidly evolving nature of the fiduciary standards affecting plan sponsors of defined contribution – most commonly 401(k) – plans and the steps they should be taking as a result. The paper, authored by Laurence Cranch and Daniel Notto of AllianceBernstein, is Evolving Fiduciary Standards for Defined Contribution Plan Sponsors – The Impact of New Thinking About Employee Participation and Investment Selection, and you can find it here.

In short, the authors argue, correctly I believe, that we are not only in an era of rapid change in the standards of care expected of fiduciaries, driven to a large extent by advances in knowledge in the area of retirement investing and the transition from pensions to defined contribution plans, but also in a time of vastly increased litigation threats to such fiduciaries. Perhaps the most interesting part of the paper concerns using the tools provided by the Pension Protection Act, in conjunction with the investment selection thinking that underlies the statute and its enabling regulations, to simultaneously demonstrate prudence on the part of the fiduciary and decrease the likelihood of litigation.

Just a terrific paper, and well worth the time to read it.

You know, the term martial arts is really just an umbrella for a whole range of more particular styles of physical combat, and the diversity is actually kind of fascinating. What does this have to do with anything? Well, I was reminded of this by this post from the Adjunct Law Prof on a ruling by the Virginia state supreme court concerning the grounds on which one can challenge an arbitration ruling when the arbitration is governed by the Virginia state arbitration act. Litigation is much like martial arts, in the sense that we subsume within that phrase a lot of areas that actually have their own specific quirks, and for which experience in one area may not necessarily transfer to success in another. Commercial arbitration, as the Adjunct Law Prof’s post reflects, is one such area. States have their own arbitration acts, unique to their states, and the federal system has its federal arbitration act, which is what most people talk of when discussing the law of arbitration. But the outcome of an arbitration can vary depending, as that post shows, on which particular arbitration act governs an arbitration. The Adjunct Law Prof’s post explains that the outcome in Virginia under that state’s arbitration act would be different under both New York law and in the federal system.

And thus among the black arts of arbitrating cases is knowing when, and how, to maneuver around various state arbitration acts and the federal arbitration act, and knowing how to get the best act for your case to be applicable. And subtleties like that are why it is important to hire a lawyer skilled and experienced with arbitration, rather than to just assume that litigation is litigation, and that a different set of skills is not necessary for the subset of litigation known as commercial arbitration.

Apparently there is something in the air these days about socially responsible investing and the fiduciary obligations of pension fiduciaries.  I discussed here, just the other day, the argument that it is not a fiduciary breach to utilize a particular social agenda in investing and the litigation implications of that approach.  Susan Mangiero has more to say on the same subject at her blog, Pension Risk Matters, here.   I don’t know about this one, frankly.  I know, as I discussed in my last post on this issue, that the more defensible position, if sued as a fiduciary, is to have stayed out of socially responsible investment in preference for a focus on maximum return investing.  But geez, who wants to be the one who says fiduciary obligations preclude avoiding, in the scenario Susan discusses, investments in so-called terrorist countries?

Criminals and terrorists in my last two posts.  I don’t know, maybe I better get off the ERISA beat and over to the digressions section of this blog, to write about intellectual property for a bit, a subject where, I don’t think, I can find any reason to write about such things.

We return, as promised, to America today, to two particular, but certainly not unique, American obsessions, the Supreme Court and criminals. As discussed here and here, the Supreme Court has refused to hear an appeal presenting the question of whether pension and retirement benefits governed by ERISA can be attached in the criminal context. As I discussed in this post, in at least some instances courts are finding that retirement funds can be attached as part of the penalty for criminal conduct, including to pay criminal restitution.

It is interesting – although there is probably nothing more to read into it other than that the Court agreed with the Solicitor General’s office that there was no circuit split warranting review of the precise issue presented by the particular case at issue – that the Supreme Court passed on this one, as they have taken on a fair number of ERISA cases, most recently accepting the LaRue case, which I discussed here and here, and which presents questions as to whether or not a single plan participant can sue for breach of fiduciary duty. And just a short time ago the Court reached out to address questions related to mergers and terminations of pension plans, as discussed here.

But I guess the question of whether or not criminals lose any protection provided by ERISA to their retirement benefits as a result of conviction doesn’t rate as high as those other issues on the Court’s agenda. And perhaps it shouldn’t. That’s an issue for another day, and one I will not voyage into today. But it is important to remember, however, that, as I discussed in a National Law Journal article a few months ago concerning one circuit that does allow attachment of a felon’s retirement benefits, alienating retirement benefits doesn’t necessarily punish only the wrongdoer, but may well seriously impoverish possibly innocent spouses, who may have expected to rely on those funds in retirement, and adult children, who may end up with no choice but to subsidize the so-called golden years of that innocent spouse. Of course, it is also fair to say that victims who have suffered financial losses as a result of the criminal conduct may have an equal, or even superior, claim to the funds. Either way, what is clear is that there is plenty of collateral damage to go around in the situation presented by this type of case, enough that it would certainly be worthwhile to at least have an authoritative decision out of the Supreme Court as to whether those courts that do allow attachment of those funds to pay criminal restitution or other similar sums are correct about it or, for that matter, that those jurisdictions who don’t allow it are correct.

Here’s a little twist on an issue we have often discussed on this blog, namely the fiduciary obligations of plan sponsors and other fiduciaries. To what extent does the fiduciary obligation to properly manage and invest fund assets leave room to consider social, environmental or political agendas in selecting investments? This article, by Benjamin Richardson of York University in Canada, concludes that there is room, within fiduciary obligations, to engage in socially conscious investing. Here is the abstract with his conclusions:

In recent years, pension funds and other institutional investors have begun to give more attention to the environmental and social behaviour of the companies in which they invest. A recent movement for socially responsible investment (SRI) seeks to exclude companies that pollute or ignore human rights, for example, and to champion those that behave ethically and responsibly. However, some confusion among investment decisionmakers persists about the extent to which their fiduciary duties to beneficiaries allow policies that may sacrifice financial returns for environmental or other philanthropic causes. This is compounded by the belief that they cannot secure the best returns in respect of their fiduciary obligations with current socially responsible companies. With reference to the main common law jurisdictions, this article critically examines whether the fiduciary duties of pension fund investors hinder SRI. Contrary to some commonly held beliefs, SRI can often sit comfortably with fiduciary duties to invest prudently. However, legal reforms to improve the climate for SRI would help, as evident by some recent initiatives in several jurisdictions.

Interesting points. But I will tell you, that as a litigator, its always an easier case to make that returns were as high as possible if plan members sue, than to argue that they were as high as possible while still consistent with a reasonably appropriate social agenda. On the other hand, disinvestment movements, of which socially responsible investing can be seen as an heir, have a respected and valued social history, one that, whether or not it can be easily reconciled with fiduciary obligations, should not be disregarded.

I have been meaning to come back to some issues concerning the Massachusetts Health Care Reform Act, the state’s potentially groundbreaking attempt to combine individual, employer and government roles to provide health insurance coverage for most of the Commonwealth’s uninsured, and now seems like a good time to do so, with its effective date coming up right around the corner. I have discussed before the question of whether the Act may be preempted by ERISA, and, if challenged, it would not surprise me if the employer obligations under the Act are struck as preempted. At the same time, it is important to bear in mind that the requirements imposed on employers by this particular statute are relatively benign, and this Act is nowhere near being the sort of heavy handed smackdown of particular targeted employers that was the now preempted and not particularly lamented law passed by the Maryland legislature that targeted Wal-Mart.

At the same time, the underlying issue with regard to preemption of state regulation of employer provided health insurance has to do with whether we should insist upon maintaining one consistent overlay of federal law and regulation on the subject, as is the case if state acts of this nature are consistently preempted, or whether we should instead, as the old saying goes, allow “a thousand flowers to bloom,” in the guise of allowing multiple different state experiments to address the problem of the uninsured. If the latter is to be the case, then that is where you really begin to run into problems of the type that underlie the preemption debate. It is one thing to say that the Massachusetts Act imposes only the most benign of record keeping and costs on nationwide employers, so perhaps preemption should not apply to it. But the issue becomes something entirely different when you instead consider having 30 or 40 or 50 states come up with their own experiments that likewise impose only minimal obligations on employers, each one so relatively benign, standing alone, that it is hard to justify declaring it preempted; when you combine all of those different regulatory regimes, however, then you start to get into the kind of conflicting and burdensome web of state actions that can become a real and legitimate burden to a nationwide employer. It is that ultimate result, that web of inconsistent state by state mandates, that the preemption requirement under ERISA is intended to guard against.

And a couple of other points on this question beg to be mentioned, although I don’t feel like I have seen them anywhere with regard to the preemption question. First, if you take away consistent overarching federal control of the question and allow state by state regulation of employer provided health insurance, how quick will we start to see a “race to the bottom” mentality, with at least some states looking to impose the least health care requirements possible on nationwide employers so as to attract businesses to relocate or at least site facilities there? We have seen it in the past with other subject areas that states pitch as competitive advantages over other states; I see no reason why health insurance should be one that is immune from such economic pressures and realities. There are certainly aspects of the Massachusetts Health Care Reform Act that I can think of right off the top of my head that a competing state could leave out, while incorporating in their own statutes all the other aspects of the Massachusetts Act, that might well tilt the balance – in at least a close case – for an employer deciding where to site its business.

Second, the idea of preferring state regulation of a health insurance marketplace that is predominately an employer provided product is premised, at heart, on the assumption that the state approaches will be an improvement over what could be done under the sort of federalized employer provided system we currently have.  How confident really are we about this?  It is probably fair to say we really won’t know until at least some state – here Massachusetts – is allowed to impose its own regime and we wait and see how well it works out.

And when you consider all of these issues, this is when you start to get an inkling of why solving the uninsured problem on a federal level, rather than on a state by state level, with a consistent overall approach structured on the already existing infrastructure of the employer provided, ERISA governed model, may actually be the better approach.

What SCOTUSBLOG does for the Supreme Court – maintaining a steady and running review of goings on at the high court – Appellate Law and Practice does for the First Circuit, only with a little more humor and quirkiness than SCOTUSBLOG employs. A regular check of Appellate Law and Practice ensures that you don’t miss anything at all, yet alone anything of importance to your own practice areas, that takes place at the First Circuit.

I mention this today because Appellate Law and Practice has the story of a decision out of the First Circuit last week concluding that, as is in fact the rule, business decisions and activities that are not unique to the type of professional services conducted by an insured are not within the scope of that insured’s professional liability coverage. To quote Appellate Law and Practice,  

In short, under what the First thinks is Massachusetts law, professional “Errors and Omissions” insurance (in this case for an insurance broker) doesn’t cover business decisions, which, in this case was a breach of an exclusivity agreement that resulted in an arbitration award. Or, in the words of the First, “A promise by an agent to represent one insurer exclusively for certain lines of insurance is not itself a professional service, nor does a diversion of business in breach of such a contract comprise the performance of professional service. The closest cases interpreting Massachusetts insurance law hold that overcharging clients in fees, even though for work done in a professional capacity, is not itself a professional service covered by malpractice or E&O policies.”

The First Circuit is right about this issue, and between rulings out of that circuit and from the state courts, Massachusetts is becoming a jurisdiction in which this rule is clear and can be expected to be enforced. Not all jurisdictions are like that about this issue, and it can sometimes be hard to convince a court that this is the rule, because it is a limitation on coverage that is generally not expressly laid out in professional liability policies and is instead something that logically flows from the language and structure of the policy. This is not the case in the First Circuit or Massachusetts, however, where the courts clearly get this point.