Maryland has given up the fight over its Wal-Mart bill, which essentially targeted Wal-Mart and tried to force it to increase the health care benefits provided to its employees; as many of you will recall, the Fourth Circuit and the district court both found the act to be preempted by ERISA. Most commentators, including this one, agree that it is preempted, under current law. Maryland officials will not try to take the issue to the Supreme Court, feeling that they are unlikely to be successful.  I suggested as much a while back, in this post.

An interesting counterpoint, for those of you with access to the National Law Journal and/or its subscription only website, is an opinion piece by law school professor Ed Zelinsky, whose work I have commented on in the past here in this blog, that Congress should address the problems of availability and affordability of health insurance by revoking federal preemption of the issue and allowing states to pass their own initiatives to try to solve the problem. I guess I have a few thoughts and concerns on that issue, the first of which is that, for every example, such as Massachusetts’ effort to provide universal health insurance for the currently uninsured, of a broad based effort to address a fundamental problem, there is a countervailing example, such as the Maryland act, of a statute that is narrowly crafted at only one small piece of the problem, often one, such as Wal-Mart, that can be easily vilified. In addition, state by state regulation in other areas is certainly not devoid of a “race to the bottom” mentality, where states seek competitive advantage over others in attracting employers by imposing lesser burdens on companies than do other states. I would hate to see that happen in health care and health insurance, which is an area already bedeviled by enough problems; a universal, national health care solution, rather than the removal of preemption with a resulting state by state system, avoids this problem.

I have a confession to make: I like houses. I remember an old Arlo and Janis cartoon, in which they respond to a bad day by pulling out the plans for their dream home, which they know they will never build, and add another elaborate room to it: that’s me. And so I greatly enjoy this blog about a couple’s attempts to build their dream home. Now normally, this would not be grist for this blog, for obvious reasons, but for one thing – in a post yesterday, they mirrored reality for me, touching on issues in a case I greatly enjoyed litigating recently, which was a dispute over the right to use plans drawn up by an architect who was subsequently terminated from the project. Given my interest in architecture and copyright law, this case was an absolute ball from where I sit. And in this blog post, the authors are astounded when they learn that the contract forwarded to them by their architect was, first, one sided in that it protected the architect but not the party retaining the architect, and, two, made the plans the property of the architect, even though the authors were paying for them. Their shock falls right in line with what I have always thought of as the three take aways from that recent case I handled. First, that the standard architecture contract, drafted by the architects’ trade group, is completely one sided, was drafted that way intentionally, and should never simply be signed off on, without changes, by anyone retaining an architect to design property for them. Two, that the most egregious part of that standard contract is that it gives all rights in the design of the building to the party designing it, the architect, rather than the person who should hold it, the one paying for that design. And three, that the consumers of the services, unless represented by counsel, don’t know any of this, would be shocked if they did, normally just sign on the bottom line to get the project started, and never learn this unless and until something goes wrong with the project. That standard contract should never be signed off on as is, without changes made to some of these more one sided terms. And at the end of the day, for purposes of this post, it is simply fun to find these truths documented by this couple’s experience, discussed in their blog.

Here is a very neat and interesting paper contrasting defined benefit plans – i.e. pensions – with defined contribution plans – i.e. 401(k) plans – and addressing, in particular: (1) the decline in the former in the workplace and replacement by the latter; and (2) the problems engendered by that change. In essence, the authors argue that the defined contribution plans, as they currently are regulated and operated, simply are not satisfactory replacements for the vanishing pension system, and cannot be counted on to provide an appropriate stream of retirement income for most retired workers. The authors provide suggested changes for both types of plans that, they hope, will make pensions more palatable to employers and 401(k) plans more beneficial to employees.

I have spent a couple days musing on the paper, which was first brought to my attention in this post last week on Workplace Prof, and have a few thoughts to offer, mostly about how the facts and arguments in this paper fit in with the litigation climate involving, in particular, 401(k) plans. What jumps out at me is the central theme of the paper, that pensions are overly regulated and employee contribution plans like 401(k) plans insufficiently regulated, with the result that the latter plans are unlikely to meet the needs of the prototypical employee. And this leads to two thoughts about excessive fee, breach of fiduciary duty and other types of lawsuits against companies sponsoring 401(k) plans and the advisors they retain. First, are the suits driven, at core, by the defined contribution plans’ absence of overarching regulation and government protection, placing the onus for policing them on employees and their lawyers, who can be seen to have been forced into serving almost in a “private attorney general” role with regard to such plans? And would this be the case if, like pensions, they were more heavily regulated and backstopped by the government, much like pensions are by the Pension Benefit Guaranty Corporation? And second, echoing a theme I have commented on in the past, to what extent is the litigation driven by the exact problem emphasized in the article, namely that workers cannot confidently assume an appropriate retirement income by relying on 401(k) plans and therefore may rightfully be afraid for their long term economic security? If they didn’t have that fear, and instead were confident in their retirement income, much as – sometimes wrongly – they generally are in pensions, would they be so quick to authorize lawyers to sue in their names?

I have talked before about my tendency to veer from my appointed rounds when something more interesting appears on the horizon than that which I had planned to work or post on, and today is another one of those days. I came in full of grand hopes to discuss insurance coverage for intellectual property risks and discovery issues in insurance bad faith cases, using two upcoming seminars on those topics as a foundation from which to riff. Those can wait for another day, and I will return to them, either over the weekend or next week, but something more interesting appeared on the horizon this morning that I wanted to post on, and that is likely to be of interest to those of you who read this blog out of a professional interest in ERISA and how it applies to 401(k) plans and pensions, namely, the launching of Pension Governance LLC, a subscriber website providing independent advice and information for pension investment fiduciaries. Among other features, the website, http://www.pensiongovernance.com/home.php, provides analysis, research and commentary on issues affecting defined contribution and defined benefit plans; interviews with industry leaders; annotated online articles from a variety of news sources; access to research team members; original content from expert practitioners; and educational webinars.

Readers of this blog who have been curious enough to peruse either the “About Stephen Rosenberg” part of this blog or the what’s new section of my firm’s website already know that I am a member of the website’s editorial board; I have already submitted one article for the site, and am looking forward to contributing still more to it.

While I am excited about the launch of the website, that’s not the only reason I write about it today. The more urgent reason for writing about it today, and to introduce Pension Governance to you right on the heels of its launch, is that the site is currently offering a free two week trial subscription, and I think the information that it makes available will be of interest to many who read this blog.

Here is a terrific and in-depth review of the underlying facts and issues in the pending Supreme Court case of Beck v. Pace International Union, which is scheduled to be argued later this month, and which involves the extent, if any, to which fiduciary obligations apply to a decision to terminate a pension plan by purchasing an annuity rather than by merging the plan into other existing plans. Thanks to Workplace Prof for the heads up about this on-line publication out of the Cornell Law School, a source that I don’t regularly follow (but of course, that is what I rely on the Prof to do, to follow academic sites like that in my stead).

On a side note, one of the things that I simply really enjoy about ERISA is that whenever the Supreme Court weighs in on an ERISA issue, we can look forward to years of – usually conflicting – district court and circuit court decisions trying to apply the Supreme Court’s ruling, giving us great material for litigating cases and for blog discussions.

This case, out of the United States District Court for the District of Massachusetts, provides a nice little rule of thumb for amending, merging or otherwise altering retirement benefit plans – namely, that it makes it hard to get sued and lose if you make the changes in a way that avoids altering the actual benefit amounts of any given participant. In this case, an employee complained about changes to the company’s retirement plan made as part of a corporate acquisition and about a later change intended to protect other participants’ participation in the plan. The court found that the changes did not violate ERISA’s merger or anti-cutback provisions, as the evidence showed the changes had no adverse impact on the plaintiff’s benefits. In an interesting discussion of the merger and anti-cutback provisions, the court explained that:  

Pursuant to ERISA § 208 and I.R.C. § 414(1), when benefit plans are merged, each plan participant must receive benefits immediately after the merger that are equal to the benefits he would have received had his plan terminated immediately prior to the merger. . . .At its core, this merger rule is a simple one, intended to prevent companies from eliminating an employee’s previously accrued benefits when merging one benefit plan with another. . . . Much like the merger rule, the purpose of the anti-cutback provisions of § 204(g)(1) of ERISA is to prevent an employer from "pulling the rug out from under employees" by amending its benefit plan to eliminate or reduce a previously accrued early retirement subsidy. Specifically, the anti-cutback rule provides, with certain exceptions not relevant here, that "[t]he accrued benefit of a participant under a plan may not be decreased by an amendment of the plan." 29 U.S.C. § 1054(g)(1). . . .The Act requires that the merger or amendment of retirement plans does not result in a plan that has the effect of reducing an employee’s previously accrued benefits.

The court ruled across the board in favor of the defendant, not just on the merger and anti-cutback counts but on all counts pled by the participant, with the decision driven in large part by the fact that the evidence demonstrated that the changes to the plan did not detrimentally alter the benefits available under the plan to the complaining participant.

The case is Gillis v. SPX Corp. Individual Retirement Plan.

Interesting collection of articles across the mainstream business press today for those interested in the subjects covered by this blog. Two interesting pieces – one factual, one commentary – on the rickety condition of state and municipal pensions, and their impact on the fiscal health of states and local governments. Still more interesting, at least to me, is this article from the New York Times on how Vermont is the new Bermuda, only sans golf courses, and the new Cayman Islands, only sans beaches, at least when it comes to domiciling captive insurers.

If I have said it once on this blog, in seminars and in meetings, I have said it a thousand times: always look to your insurance coverage when sued, even if you don’t think the lawsuit fits within the coverages you or your company purchased, and when necessary, such as if the dollar amounts at issue are significant, hire coverage counsel to look into that question and to press for coverage. There are various ways in which policies can be triggered, often providing at least coverage of defense costs for claims that do not seem to fall within the express language of a policy. In seminars, when I start talking about examples of coverage being found for patent infringement actions, despite the absence of any policy expressly granting coverage of such claims, that is when the pens start scribbling furiously in the audience. And that is just one example of the type of claims that experienced coverage counsel may be able to force into the scope of a policy, even a policy that may never have been written to cover that type of claim. Now I am not saying that all of those types of claims should be covered, but, given the vagaries of policy language and the manner in which courts interpret them, they sometimes are, regardless of whether or not they should be, and it is the job of a policyholder’s coverage counsel to try to find coverage where none was intended (and the job of the insurer’s coverage counsel to prevent that). This article makes the same point, discussing how marshaling corporate insurance policies when threatened with significant litigation should be a first step in defending the company.

Day 3 of my discussion of the First Circuit’s recent ruling concerning structural conflicts of interest and their impact on claims for benefits under ERISA: Workplace Prof blog has his take, and quotes from others, here, and one of my favorite, quirkier, law blogs, Appellate Law & Practice, has its take here.

One of the things lawyers learn early in their careers is that the time it takes to research a particular issue can be reduced dramatically by finding a good published decision out of one of the better federal courts on the issue; such an opinion will often include an excellent synopsis, at a minimum, of the key case law on the issue. In essence, the opinion offers up the outstanding work product, already concluded on the issue in question, of high quality law clerks. Wednesday’s decision in the Denmark case in the First Circuit, which I discussed in yesterday’s post, is a perfect example of this phenomenon, as it provides, in a four paragraph section of the lead opinion, a summary of the law in each circuit on the effect on benefit cases of so-called structural conflicts of interest. As the opinion states: 

The circuits have adopted varying approaches to the issue of whether the structural conflict that arises when an insurer both reviews and pays claims justifies less deferential review. In addition to this court, the Seventh and Second Circuits have held that a structural conflict alone is insufficient to alter the standard of review. Instead, these circuits require an actual showing that the conflict of interest affected the benefits decision before there will be any alteration in the standard of review. See Rud v. Liberty Life Assurance Co., 438 F.3d 772, 776-77 (7th Cir. 2006) (holding that a structural conflict of interest, without more, does not affect the standard of review); Sullivan v. LTV Aerospace & Def. Co., 82 F.3d 1251, 1255-56 (2d Cir. 1996) (holding that a claimant must show that a conflict of interest affected the benefits decision, but if such showing is made, de novo review applies).

However, seven other circuits have held that a structural conflict warrants alteration to the standard of review, although six of these circuits apply less deferential review within the arbitrary and capricious framework. Of these six circuits, all except one have adopted a "sliding scale" approach to the standard of review, in which the court applies less deferential review to the extent that a conflict of interest exists. See, e.g., Fought v. Unum Life Ins. Co. of Am., 379 F.3d 997, 1004 (10th Cir. 2004) (per curiam) (explaining that "the court must decrease the level of deference given to the conflicted administrator’s decision in proportion to the seriousness of the conflict" (internal citation and quotation omitted)); Pinto, 214 F.3d at 379 (expressly adopting a "sliding scale method, intensifying the degree of scrutiny to match the degree of the conflict"); Vega v. Nat’l Life Ins. Servs., Inc., 188 F.3d 287, 297 (5th Cir. 1999) (en banc) (explaining that "[t]he greater the evidence of conflict on the part of the administrator, the less deferential our abuse of discretion standard will be"); Woo v. Deluxe Corp., 144 F.3d 1157, 1161-62 & n.2 (8th Cir. 1998) (explicitly adopting the sliding scale approach while noting that "not every funding conflict of interest per se warrants heightened review"); Doe v. Group Hosp. & Med. Servs., 3 F.3d 80, 87 (4th Cir. 1993) (applying less deference "to the degree necessary to neutralize any untoward influence resulting from the conflict"). The Ninth Circuit employs a "substantially similar" approach, but with a "conscious rejection of the ‘sliding scale’ metaphor" on the ground that "[a] straightforward abuse of discretion analysis allows a court to tailor its review to all the circumstances before it." Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 967-68 (9th Cir. 2006)(en banc).

The Eleventh Circuit uses a different framework. It first determines, under de novo review, whether the decision was wrong; if it was, and if an inherent conflict of interest exists, "the burden shifts to the claims administrator to prove that its interpretation of the plan is not tainted by self-interest." HCA Health Servs., Inc. v. Employers Health Ins. Co., 240 F.3d 982, 993-94 (11th Cir. 2001). The claims administrator may then meet this burden "by showing that its wrong but reasonable interpretation of the plan benefits the class of participants and beneficiaries." Id. at 994-95.

Finally, the D.C. Circuit has not yet established a standard of review in cases involving a structural conflict of interest. See Wagener v. SBC Pension Benefit Plan-Non Bargained Program, 366 U.S. App. D.C. 1, 407 F.3d 395, 402 (D.C. Cir. 2005) (finding that the result would be the same under either arbitrary and capricious or de novo review).