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.

The Cavalcade of Risk: 1st Anniversary Edition, is now up at Insure Blog. Noting that “it was a year ago this week that we published the first Cav,” Insure Blog explains that the Cav is intended as a round up “of interesting/unusual risk-related posts from around the blogosphere.” One of my posts is up on the Cavalcade, but perhaps of more interest to those of you who already read my posts, so are a number of other, interesting posts on insurance, employee benefit, and pension issues from some of my favorite bloggers. I recommend you take a quick gander, and hope you enjoy it.

Does copyright matter in the real world, or is it just about billion dollar disputes between media companies and Google? In my own practice I see that it does, trickling right down to employee/employer relations in knowledge based industries. This article here is a perfect, and highly entertaining, example, discussing the improper use of a dead celebrity’s image in an advertisement, a brouhaha that grew, apparently, out of a misunderstanding as to the scope of copyright clearance actually obtained by the ad agency. And not only do you see in this article how a problem of this type can arise, but you also see the costs of not recognizing and avoiding the problem in advance – in this instance, the loss of a large account by the ad agency.

Interesting case out of the Massachusetts Appeals Court at the end of last month on one of the more difficult questions in insurance coverage law, which is when does an insured commit a misrepresentation in providing information to its insurer such that the policy should be deemed void. Lots of tricks and ins and outs on that one.

In the latest wrinkle, the insurer of a commercial auto policy sought to avoid coverage because the insured had never notified it, upon renewals of the policy, that the company for which the policy had originally been written had in fact been dissolved, and that, while the auto remained in use and listed under that policy, the company to whom the policy was issued was no longer in existence. The Appeals Court found that, absent actual inquiry from the insurer upon renewal into the question and a misrepresentation by the insured in response, the policy could not be voided for misrepresentation; the insured’s silence alone, without more, did not rise to actionable misrepresentation.

The court summed up the law in Massachusetts on misrepresentations and insurance policies, and extended it to the scenario presented by the case, as follows:  

Peter [the insured] does not dispute that he was required to provide accurate information in the original application for insurance and inform Quincy [the insurer] of any material changes that occurred between the time of the application and the inception of the policy. See Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (2003) (applicant has duty to inform insurer of changes prior to inception of policy that render initial representations untrue). He also does not dispute that Quincy could have insisted on updated information at each yearly renewal of the policy, and that upon inquiry as to changes, he would have been obliged to answer honestly and accurately. However, he contends that where the policy did not impose such an obligation, and where neither Quincy nor Fair & Yeager [the insurance agent] requested such information nor conditioned renewal upon completion of an application or questionnaire, he was under no obligation to identify the matters that the insurer might deem material and notify it of such changes. Contrast Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 60 (1995) (insured’s failure to disclose in renewal application that location of insured vehicle had changed concerned the calculation of risk at the time the renewal application was submitted).

Whether Peter’s silence amounts to a misrepresentation turns on whether the obligation is one of inquiry by the insurer or sua sponte disclosure by the insured when neither a policy provision nor a renewal application or questionnaire requires such information of an insured. Does an insurer have a duty to identify and ask its insured for information that it deems material (relevant to the risks being underwritten during the period of insurance or renewal)? Or does the insured have a duty to identify what is material and notify the insurer of such changes from prior policy periods?

We conclude that, when neither a policy provision nor a renewal application requires the insured to provide updated information to the insurer, the insured’s failure to do so is not a misrepresentation within the meaning of G. L. c. 175, § 186. In such circumstances, the onus is on the insurer to identify the information that it considers material and request from the insured updated information concerning any changes. Absent such obligation or request, the insured’s silence is not a misrepresentation within the meaning of the statute.  

I am not sure I disagree with the court at all; it seems easy enough for an insurer to always ask at renewal even a broadly phrased question such as whether any facts at all stated on the initial application for coverage have changed, which should thereby place the onus instead on the insured to fess up facts such as those at issue in this case and allow the policy to be voided if the insured doesn’t do so. On the other hand, if the insured actually had any reason to know that the information in question would be relevant to the insurance company, but didn’t disclose it, I am hard pressed to understand why that type of active and knowing decision not to disclose should not void the policy. Perhaps the tipping point on this issue is in the fact that this case involved an auto policy, and not some other form of coverage. There is an extent to which auto policies really exist for the benefit of the public at large placed at risk by the automobile, rather than for the benefit of the insured himself, who can protect his assets through umbrella policies and other avenues; the mandatory nature of auto coverage is there to make sure that those injured have recourse to insurance benefits of the tortfeasor, and perhaps making it easier, rather than harder, to void such policies would run opposite of that public interest.

In any event, the case is Quincy Mutual Fire Insurance Co. Vs. Quisset.

The current issue of the National Law Journal has an article providing an excellent overview of litigation over allegedly excessive fees charged on investments in 401(k) plans. The article notes the variations in the theories, and discusses what are likely to be large, class wide actions in the near future. There are those who think these types of claims are going away but, as this article suggests, that doesn’t actually look to be the case.

Now connect the dots between that story and the LaRue case, which I discussed here and about which more can be learned here, in which the Supreme Court is being asked to determine whether a single participant in a 401(k) plan can bring a breach of fiduciary duty claim for breaches that harmed only his account. Right now, with regard to the excessive fee issue, we are seeing, as the National Law Journal article reflects, the development of essentially plan wide suits. But if developments in the LaRue case establish that any individual plan participant can sue for breaches of fiduciary duty affecting that participant’s account, that will change. We will instead have a universe of individual participants, all with the capacity to sue over their own account balance and over any complaints they have that excessive fees drove down the balance of their own accounts over the course of years, and I suspect we will see plenty of lawyers appear who are ready and willing to represent individual account holders in such lawsuits. This will create a different litigation world for fiduciaries, plan sponsors, plan administrators and the like, then the current one in which the real risk is large plan wide actions by specialist plaintiff firms. In its place will be more of a death by a thousand cuts type of litigation regime that will confront plan fiduciaries and their allies.

I am not saying this is necessarily a bad thing, or a good thing. It is what it is. But in at least one way it may well be a good thing. We are all bombarded with the mantra that, in this defined contribution plan world we now inhabit, individuals are now responsible for their own retirement, as opposed to when companies provided it by means of guaranteed pensions. Well, I suppose if we are going to make individual plan participants the risk bearers and care takers of their own retirement funding, the least we can do is provide them with the legal tools to protect their investments.

Very few things can still reduce me to an adolescent rumble of uttering very, very, very cool, and it is particularly remarkable when something in the practice of law has that effect. These three posts, from Workplace Prof, Adjunct Law Prof Blog, and SCOTUSBLOG had that effect on me when I came in to them on my desktop this morning. They all discuss the fact that the Supreme Court has accepted a case presenting the question of whether parties to arbitration agreements can contract around the Federal Arbitration Act and change the extent of judicial review of an arbitrator’s ruling. As I have discussed in a number of posts in the past, I am one of many people who have a healthy skepticism about commercial arbitration, and one of my many concerns with the format has to do with the extremely limited judicial review of arbitration decisions, even ones that are obviously and fundamentally flawed. I discussed this point in some detail here. For those clients who are interested in arbitrating, I often counsel close analysis of the pluses and minuses of doing so, and in particular I recommend attention to the arbitration agreement itself with the idea of adding into it particular protections or litigation tools that would otherwise be missing from the process. Now, it looks like the Supreme Court will be addressing the question of to what extent parties can actually do this. As I said, very, very cool, at least to those of us with a long standing interest in the pros and cons of arbitration, and how to improve it by private agreement.

This article on an upcoming law review study on the role, effect and potential liability exposure of the insurance industry with regard to climate change provides the perfect opportunity for me to branch out into a new line of discussion on this blog on another issue that is of professional and intellectual interest to me, alternative energy and the climate change debate. To be more precise, what has long interested me about this subject isn’t the doom and gloom sci-fi stuff, but the more prosaic question of the economic and marketplace realities and the myriad ways in which they interact with the need to reduce both oil dependency and greenhouse gas emissions. It seems to me that the profit motive is the real stick that will drive the changes needed to solve this problem and that the marketplace will pick what companies will win and what ones will lose as a result of this environmental issue. A simple example: as gas prices continue to move up, and as Toyota expands availability and lowers the cost of its hybrid engines, competitors who fall too far behind in the race to put oil efficient engines in their cars – anyone in Detroit listening? – will inevitably lose ever more market share to Toyota. It is a safe bet that oil usage per car in first world economies will inevitably decline, simply driven by gasoline pricing and the decisions of millions of individual consumers to avoid overpaying at the pump, and the companies who can cater to that dynamic will win in the marketplace, to their benefit as well as to that of the environment.

But this dynamic doesn’t have to be driven by pure marketplace forces alone. Instead, government tax and regulatory policies can goose those marketplace incentives significantly, prodding automobile companies to win the race against their competitors to produce the most gas efficient autos possible while simultaneously encouraging consumers to punish companies that fail to do so out of their own self-interest in avoiding high gasoline prices. That, in essence, is the point of this recent op-ed piece by the good folks at MIT.

And this article on the role of the insurance industry in climate change can be understood as making the same macro point – that climate change is an economic issue, and how the problem plays out depends on how those economic actors most affected by it respond to it. And for those of you who might be inclined to downplay the extent to which climate change will impact this industry, British insurance blogger ReRisk had this terrific post some time back, illustrating the property damage in the London market should sea levels rise over time. As he points out, will insurers actually continue to provide property coverage long term in such threatened areas? And if so, should forecasts of rising sea levels bear out, just imagine the loss payouts by the insurance industry.