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.

I don’t generally like to play first to post, and would rather wait to see what I can add to the discussion of any particular issue before posting on a breaking story. But as I have been watching and waiting for the Supreme Court’s opinion in the ERISA fiduciary duty case of Beck v. Pace International to be issued, I was quick to read it today when it hit my in box and thought I would pass it along. Hopefully, I will return to it in the next few days – after a hearing tomorrow and a deposition on Wednesday – and talk more about it, because there are some interesting aspects to the Supreme Court’s opinion. In the meantime, here is a quick summary of the opinion from SCOTUSBLOG:

Continuing the pattern of unanimity, the Court ruled in Beck v. PACE International Union (05-1448) that a company that sponsors its own pension plan for workers has no duty to consider merging it with another plan as a method of ending the plan while carrying on the benefits. In this case, the bankruptcy trustee opted to buy an annuity rather than consider merging with an ongoing plan. Justice Antonin Scalia authored the opinion.

You can find the opinion itself here, and some news coverage summing up what the case was about here. My prior posts on the case are here and here.

In a post on Friday, I discussed how a large pension fund’s large losses from a hedge fund investment had given rise to litigation between the pension and the hedge fund, as discussed in this post in the WSJ Law Blog, and how it further raised the question of whether the pension plan’s fiduciaries might be liable to plan participants for their failure to properly vet and monitor that investment prior to the large loss. In essence, the question raised by the loss is whether the pension plan simply blindly – or at least half-blindly – invested the plan’s assets in the hedge fund without really understanding why or what they were doing, and was instead simply seeking to goose the pension plan’s returns without sufficient analysis of the risks, in much the same way individual mutual fund investors are often said to simply follow the latest investing trend without really knowing much about it or whether it is right for them.

Interestingly, I am clearly not the only one concerned whether pension fund fiduciaries and others charged with the management of pension assets are sufficiently knowledgeable about hedge fund investing and the ins and outs of any particular hedge fund, as the good folks at Pension Governance have now rolled out a series of webinars intended to educate retirement plan decision makers about hedge fund investing. Information about the series, called the Hedge Fund toolbox, can be found here.

We’ve talked a lot on this blog about the due diligence obligations of fiduciaries and other advisors to pensions, 401(k) plans and the like when it comes to investment choices. A story yesterday offers the opportunity for a little thought experiment demonstrating why it matters, and why anything less than stringent oversight and investigation of investment choices will put fiduciary advisors front and center as potential targets of lawsuits.

The WSJ Blog yesterday had this description of litigation by a public employee pension fund against a hedge fund in which it had invested that managed to lose literally billions of dollars, in spectacular and newsworthy fashion: 

Amaranth, the hedge fund that lost $6.4 billion in a few days last fall in the worst debacle in the industry’s history, responded today to a lawsuit filed against it in March by the San Diego County Employees Retirement Association, or SDCERA. SDCERA is the only investor to have filed suit against the hedge fund. . . At the time it filed the lawsuit, SDCERA said Amaranth’s collapse resulted from “excessive and unbridled speculation in natural gas futures that was directly contrary to statements made to SDCERA that Amaranth would be diversified and risk controlled.”
Amaranth says SDCERA knew exactly what it was getting into. In its motion, it quotes the funds private-placement memorandum, which read in big bold letters: THE FUND IS A SPECULATIVE INVESTMENT THAT INVOLVES RISK, INCLUDING THE RISK OF LOSING ALL OR SUBSTANTIALLY ALL OF THE AMOUNT INVESTED.
[A lawyer for Amaranth] said in a statement that he hopes “SDCERA will now withdraw its suit and stop wasting the resources of its 33,000 county employees and pensioners on this misguided and ill-fated litigation.”

So here’s the thought experiment to play out, the line of dots to connect. We know we are currently watching the rise of a pension/401(k) investment plaintiffs bar, clearly modeled after the securities litigation class action bar, ready and waiting to sue pension advisors and anyone else in the line of fire for excessive fees, poor investment choices, and anything else that affects returns in the plans. We see here as well in this blog post from the WSJ Blog that Amaranth’s defense to litigation by a pension plan is that the plan and its advisors knew exactly what they were getting into and should take responsibility themselves for the risks they took. Now here is where we connect the dots – if the hedge fund’s lawyers are right, then aren’t the plan’s fiduciaries and other advisors potentially liable for breaching their own obligations to the plan and its participants to properly select and monitor plan investments? And if so, then their best defense should the newly forming class action bar come after them for this mess would be that, contrary to what the hedge fund’s lawyers say, they actually did full and complete due diligence, and therefore lived up to their obligations and cannot themselves be liable for the fact that the investment went south.

And at the risk of sounding like a scold, that, I suppose, is what I would like fiduciaries to take away from the story of the Amaranth collapse, that hedge fund issues can come back on them, and they need to take steps in advance to insulate themselves. Just something to muse over on an early summer weekend at the beach, right?

There’s a hot topic of discussion out there all of a sudden – I think originally triggered by this post a few weeks back by Suzanne Wynn – concerning whether ERISA strategies should be able to be patented. The discussion, thanks to a detailed look at the issue in this week’s issue of the BNA Pension and Benefits Reporter, has finally reached the point where there is now more light than heat on the subject. I am quoted extensively in the BNA article, which is A WARNING TO ERISA PRACTITIONERS: YOUR BENEFIT PLAN STRATEGIES MAY BE PATENTED, 34 Pens. & Benefits Rep. (BNA) 1329. As per my usual practice of deeming it fair use for purposes of the copyright laws to quote verbatim sections of articles that quote me, here is what I had to say on the question of whether these types of strategies should be covered by the patent regime: 

Stephen Rosenberg, a partner with The McCormack Firm LLC, Boston, told BNA in an e-mail May 20 that he is "not a big fan" of business method and similar patents, such as for tax strategies, because these patents "aren’t really advancing technology and the like in the scientific or mechanical arts." Rosenberg is a commercial litigator who specializes in litigating ERISA and intellectual property cases.

"With regard to patenting ERISA ideas and methods in particular, I believe you are moving out of patenting innovation and really simply into the realm of what is, in essence, simply the professional knowledge and expertise of the practitioner," Rosenberg told BNA. He added that he did not believe that the counseling of a lawyer or other professional service provider, who is simply applying his or her learned expertise in a particular field of training, should fall within the patent regime. Rosenberg said he believes that advances in professional knowledge of ERISA "should belong to the profession as a whole, as part of the advancement of knowledge in that field."

Rosenberg said that the real purpose of a patent is to provide protection to those who have invested resources into inventing something and who, without patent protection to allow them to exploit the invention, would not profit from it sufficiently to warrant the investment. "I am hard pressed to believe that a professional in the ERISA community who comes up with a new idea for how to attack an ERISA strategy problem won’t go forward without [the protection of a patent]; instead, they will sell it to the client, with the expectation the client will be impressed enough to keep returning for more professional services and will recommend that provider to others," Rosenberg said in the e-mail.

In addition, Rosenberg said he believes that patents should not be granted to advances that would be obvious to others who are skilled in the particular field. "I am highly skeptical that a new ERISA strategy is likely to be so beyond what other practitioners, presented with the same problem by clients, would have come up with that it would justify placing exclusivity in the hands of the first to seek a patent for it," Rosenberg added.

I guess you can tell from my comments that I think it is pushing business method patenting a little too far, and in a direction that is simply not beneficial to clients, the profession or the public.

This whole question of how far patent protection should be allowed to extend echoes as well in what the WSJ Law Blog is calling the Patent Reform Battle Royale among the real big spenders, Cisco and Goldman Sachs and big pharma, and in the alleged patent troll problem complained about by Sun’s general counsel on his blog. Weighing in on what they have to say and how it fits in with the questions posed in the BNA article would take a lot more words than I have time to type today, but their posts on the issue are worth taking the time to read; you can then draw your own conclusions as to whether their complaints about the patent system likewise support precluding the patenting of ERISA strategies. If you would like a little more substance on the patent reforms at issue, you can find it here and here.