Wow. Don’t think the heat is on for company 401(k) sponsors and other fiduciaries of employee retirement benefit plans who may not have done enough benchmarking and due diligence to make sure that mutual fund and advisor fees are as low as possible? Then take a look at this article out of the Washington Post about congressional hearings into the issue. The gist of the testimony is to the effect that fees are too high, are not disclosed fully or understood by plan participants, and have a significant impact on returns in the plans. While the mutual fund industry disputes this characterization, anecdotal evidence certainly suggests that at least some significant portion of company sponsored plans suffer from these problems. It would certainly be nice if the sponsors of plans investigated right away whether or not their plans suffer from these defects and, if so, promptly remedied the problems. But for reasons I have discussed before in other posts, doing so would not only be good business and the right thing to do for company employees who participate in such plans, but is also necessary to protect the plan’s fiduciaries from legal exposure. It clearly appears at this point that conducting due diligence to root out these problems and then remedy them – or even better, to find out that the particular plan in question does not suffer from these problems and that there is nothing to remedy – is an essential element of satisfying a fiduciary’s obligations in the operation of these plans, and that the failure to do so is an open invitation for a breach of fiduciary duty lawsuit.

Why do we have insurance coverage lawyers, and why, as Mark Mayerson has written, has “insurance-coverage law . . . developed over the last 20 years into a rarefied specialty practice”? Because when lawyers who don’t know their way around the subject get involved with insurance coverage, problems just pile up. A case out of the New Jersey Supreme Court reflects this dynamic. In that case, as this article describes it, a law firm retained to represent a business in a dispute won a judgment that was then overturned because the lawyers had blown the statute of limitations. But that wasn’t the worst part for the attorneys who lost that case; they then turned out to not have coverage for the resulting legal malpractice claim, because they had failed to disclose the potential error and potential claim on their application for professional liability insurance. Now even if they had disclosed it, they may well not have been covered for it, as the insurer may have refused to issue a policy without excluding any claims that might arise out of the disclosed events. However, one will never know, because what we do know for sure is that a failure to disclose on an application a potential claim is a quick way to lose coverage. Indeed, as the article sums up:

[T]he ruling sends a clear signal to attorneys: Be forthcoming, and err on the side of discretion, when applying for malpractice insurance. "Law firms have to disclose in the application any potential error they’ve committed," [one of the lawyers involved] says. "Here, they knew there was a likelihood a complaint was going to be filed. If there is any basis to believe you have breached a duty, there is a good chance you’re going to be sued." The insured’s lawyer . . . does not disagree in principle. "It is in an attorney’s best interest to disclose to its carrier any possible mistake because then the carrier is responsible," he says. "You’re putting the carrier on notice."

 

Here is an interesting little twist on the common scenario of a plan overpaying retirement benefits and then seeking reimbursement, as allowed under the plan’s terms, of the overpayment from the plan beneficiary. Normally, these cases are focused on whether the reimbursement qualifies as equitable relief that the fiduciary is allowed to pursue. In this case out of the District Court for the District of New Hampshire, however, the court simply assumed the plan fiduciary could legally obtain that recovery as equitable relief under ERISA, even though the judge commented in the opinion that “the scope of this court’s equitable authority in an ERISA context is not well-defined.”

However, the court then went on to let the beneficiary off the hook (or at least to find a question of fact that precluded an award of summary judgment to the plan), on the theory that the beneficiary could have reasonably believed that he was entitled to receive the overpayments, even though they amounted to many thousands of dollars a month for a number of months beyond the one time lump sum he had elected to receive as his pension benefit, and had changed his position, by spending those funds, in reliance on that belief. The court found that ordering reimbursement from the beneficiary, under those circumstances, could be inequitable, and that the plan could not recoup the overpayments if that were the case.

Of interest, there was one factual quirk that made the case somewhat different than the usual recoupment case where the overpaid beneficiary argues that he or she already spent the money and it would be inequitable to order repayment as a result. There was actually evidence showing that the beneficiary, prior to the time of the request for reimbursement, had performed rough calculations that showed him entitled to a sum significantly larger than he was actually entitled to receive. Although the math was grossly incorrect, the court found that even if his “calculations are inaccurate, the mere fact that he prepared the estimate suggests that he may have reasonably believed that he was entitled to the erroneous payments.” Most of the published decisions where beneficiaries claim they didn’t know they were receiving large payments in error and thus should not have to repay them involve fact patterns where that assertion is simply hard to believe; the court here, rightly or wrongly, was clearly swayed by evidence that placed this case outside of that mainstream.

The case is Laborer’s District Council Pension Fund for Baltimore v. Regan.

I recently had a fun virtual meeting, by conference call and downloads, with Animators at Law, who produce 2D and 3D trial graphics, and in particular with Christine McCarey, a former in-house counsel and now the company’s national director of business development. I have been at this long enough to remember when trial graphics were big glorified poster boards or, worse yet, were projected by what appeared to be simply updated versions of the overhead projectors that jurors, typically recoiling in fright, remembered with horror from junior high school.

Well, that was then and this is now. Christine, tracking my professional interests, showed off some great pieces of work from a range of intellectual property and insurance coverage cases that were both imaginative and informative; in this visual age, they are the kind of things that a jury will actually note and remember. I particularly liked two examples, the first a graphic from a trade dress infringement trial that showed the defendant’s product literally morphing over time from its original design into a design that perfectly mimicked the plaintiff’s product (for those of you who don’t do this kind of work and wouldn’t know trade dress infringement from a cocktail dress, that kind of a match puts the defendant in the position of having to rely on technical legal defenses, while letting the plaintiff reinforce in the jury’s mind that, hey, the competing products look too much the same for this to be legal).

The second example that I really liked was a series of exhibits from an environmental insurance coverage case. What I liked best about them was that they took what is in essence a dry textual issue – what does insurance contract language mean and how does it apply to these facts – and transformed it into something visual and catchy. That’s no mean feet, and it’s a long way from those bar graphs showing layers of excess policies that passed for exhibits in insurance coverage cases lo these many years ago.

Fun stuff, and if you have an interest in state of the art trial graphics, you could certainly do worse than talk with Christine.

Although I am diligent about covering in this blog ERISA decisions coming out of the courts in the First Circuit, I also keep an eye on ERISA decisions elsewhere in the country and discuss them when there is something particularly interesting about them that catches my eye. The Ninth Circuit has just done exactly that, luring me into the realm of the intersection of criminal law and ERISA by its en banc decision in USA v. Novak, and giving me an opportunity to use this blog to make my pitch to any readers in Hollywood for my proposal for a new and thrilling television show, CSI:ERISA. Can’t you just see it? Ripped from the headlines, a husband and wife resell stolen telephone equipment, fail to report the millions of dollars they earn from that to the government on their tax returns, and are caught (these are the real underlying facts of Novak, and that gave rise to the ERISA issue before the court); in tonight’s exciting episode, what happens to their retirement benefits after the conviction? Well, I don’t know, maybe that’s going a bit far, but the Novak decision is pretty interesting, on a few levels.

In Novak, the Ninth Circuit addressed the impact of ERISA’s anti-alienation provision on a federal criminal restitution order that attempted to attach the garnishee’s retirement benefits. Recognizing that ERISA itself contains an anti-alienation provision that would appear to bar such attachment, the Ninth Circuit held that the federal Mandatory Victims Restitution Act of 1996 (“MVRA”) overrode the prohibition and allowed attachment of the retirement benefits for purposes of satisfying criminal restitution orders. There is much that could be said about this opinion, but I’ll limit myself today to a few points.

First, as the court recognized, the two statutes themselves – ERISA and the MVRA – do not expressly resolve the issue of whether, despite the anti-alienation provision in ERISA, retirement benefits can be attached to pay restitution. The court presents a very persuasive and well reasoned exercise in statutory construction to reconcile the two statutes and conclude that the MVRA controls the issue and allows such attachment. To a certain extent, the court provides really a mini-tutorial on the rules underlying statutory interpretation, and the opinion is useful reading for anyone who ever has to argue a case involving construction of a previously unaddressed statutory provision. At the same time, though, the analysis reflects a real problem with trying to reach a final decision over rights and obligations by means of statutory construction, in that there is no real definitive basis in the legislative history or statutory language relied upon by the court that mandates reaching the particular conclusion accepted by the court, and instead one can argue that the opposite result could just as credibly be reached in the case.

Second, and building off of the point that the statutory language itself is not determinative of the proper result here, the court’s analysis and approach rings true, even if the result might be arguable. Conceptually and intellectually, the court’s opinion reminded me of nothing so much as Ronald Dworkin’s mythical Judge Hercules, who, when presented with a particular statute whose meaning is open to debate, sees himself as the next of a series of authors – a series that began with the legislature – and who tries to interpret the statute by adding the necessary additional layers of meaning to it that are needed to effectuate its purposes. The Ninth Circuit’s analysis reads exactly like that, with the court taking a complicated statutory text – two of them, actually, ERISA and the MVRA – and adding more meaning to the statutory text to allow it to deal with this particular fact pattern, one not addressed by the congressional drafters of the statutes.

And third, on a more prosaic basis, it is interesting how the court resolved the question of exactly what could be attached – all the assets of the retirement plan itself that are attributable to the garnishee, or only the payments due to the garnishee as they come due. The court resolved this in a quite sensible manner, concluding that what can be garnished are only those assets the garnishee himself has a current right to receive.

Michael Pratico, a fiduciary advisor to retirement plans throughout New England for Captrust Financial Advisors, and one of my favorite touchstones for real world – i.e. non-lawyer – information about the actual operation of retirement benefit plans, pointed out an interesting conundrum to me the other day concerning the operations of retirement plans and the fiduciary obligations of those who operate them. As I have discussed in other posts, the fiduciary obligations of those who sponsor or administer such plans clearly require, at this point in time and in light of current developments in the law, a certain level of due diligence, requiring at a minimum a regular comparison of fees and other aspects of a 401(k) or other retirement plan to the broader market as a whole.

Michael points out an interesting side effect of this, however, which is that once a plan sponsor or other fiduciary undertakes such due diligence, the plan becomes obliged, for all intents and purposes, to act on any bad news uncovered by the due diligence. What this means is that, yes, the plan sponsor is obligated to do the due diligence, and it seems to me is a sitting duck for a stock drop or excessive fees type suit if it fails to do so based simply on that failure.  But that is certainly not the end of it.  Instead, it means as well that once the sponsor has done that, if the due diligence shows a disjunct between better results or costs in the market as a whole and what the particular plan is earning or paying in expenses, the plan sponsor or other fiduciary becomes obligated to act on that information and change the plan to address those problems, with the failure to take that step likewise then becoming a legitimate basis for a breach of fiduciary duty lawsuit.

This is what Michael and other fiduciary advisors of his ilk do, take the existing plan, see where it is off base relative to the mutual fund world as a whole, and then recommend how to fix it. Taking both steps, and not either playing ostrich and skipping the due diligence entirely or else doing the due diligence but skipping the action it points out is needed, is really the best way to avoid incurring liability from excessive fee and similar types of claims.

When I posted my interview with veteran insurance executive Robert Kingsley a couple weeks ago, on the subjects of insurance industry consolidation and what insurers think about the lawyers they hire, I failed to mention that, in addition to his years in the industry, Rob is also the founder of the Anne B. Kingsley Ovarian Cancer Foundation, something which I probably should have included when I profiled him in the post. I was reminded of this when I received the foundation’s recent mailing announcing that the foundation, though young, had already made its first significant research grant.

I am a big supporter of the foundation, not least because Rob’s long record of success suggests to me that the foundation is likely to be a success as well. I would encourage you to take a look at the foundation’s website, and to pitch in with a contribution. I can assure you, its not a foundation where the donations will go to waste.

And that, I suppose, should satisfy the FCC requirement that all bloggers publish the required amount of public service posts. That’s a joke – if it went right by you, go down the hall and ask the communications lawyers at your firm to explain it.

Kevin O’Keefe, the trial lawyer turned legal blogging evangelist who runs LexBlog, the company that provides the technical support – but not any of the copy – for this blog and for the many other blogs listed on the lower left hand corner of this page, has been running a series of posts on the question of the impact of legal blogs on law reviews. I have my own thoughts, based on years of practice and my own stint on a review’s editorial board, on the question of what the growth of legal blogging means for the future of these august but hide bound publications. Now I try to stay away from blogging about blogging – in fact I think I have managed to blog for many months now without ever discussing the subject in a post – because I think it’s essentially navel gazing and it has nothing to do with the reason why people come to this blog, which – I hope not naively – I assume to be to learn about ERISA, intellectual property litigation and the law of insurance coverage. But I couldn’t let the subject raised by Kevin (who, by the way, has no compulsion against blogging about the topic of blogging because, well, that is what his blog is about – blogging) pass without commenting on it from the standpoint of a practicing litigator who focuses on the areas discussed in this blog.

When I came across Kevin’s posts on this topic, the old song lyric that video killed the radio star immediately started sounding in my ears, and no, I wasn’t listening to my ipod at the time. Law blogging is in the early stages of making detailed legal analysis on specific subject areas available to the entire legal community in ways that are both searchable and far more practical and useful than anything that law reviews generally provide. There is little doubt in my mind that practicing lawyers can find far more useful information about specific issues in insurance coverage, for instance, from David Rossmiller’s blog, or on the law of ERISA from Roy Harmon’s blog, or on intellectual property issues from Patently O, and so on and on, then they will ever locate in the published law reviews.

And why is this? There are multiple reasons. First, at the risk of being too negative, law reviews have, over the years, essentially become echo chambers for law faculty to talk to one another or, worse yet, have simply become a place for law professors to publish esoteric work that is absent significance to practicing lawyers or the courts simply because they feel they need to do so if they are to pursue tenure. This is hardly a novel criticism, as I can remember a federal judge – I forget who it was, but he was out of the industrial mid-west – pointing out years ago that published legal scholarship had no merit or relevance to what he did every day. Law blogs are obviously different; the point is to publish useful legal information at a level of legal sophistication sufficient to be relevant to the practicing community, the courts and clients. That is an entirely different audience than the one that law reviews are targeted at, and an entirely different type of information that is intended to be transmitted.

In fact, when I was in law school, a particular near octogenarian law professor, rumored to have been during his earlier days at Harvard the model for Professor Kingsfield in the book and movie The Paper Chase, spoke once about how, many years ago, the writing of treatises that were of practical use to the profession was considered a worthy output for a law professor, but how that was no longer the case. Instead, esoteric topics, the more so the better, were what advanced a career in legal scholarship.

Second, blogs are searchable in a matter of moments. Run a search for ERISA, for instance, over at Google Blog Search, and see how quickly you can find information about the differing approaches to the standard of review in ERISA cases when the administrator is operating under a conflict of interest, a favorite topic of this blog. Then compare that to how quickly you can actually find law review articles on this subject, with the exception of those pieces commented on and linked to in blog posts. I know that those articles are out there, because I have read many of them, but you won’t find them quickly, or without doing traditional types of legal research to locate them.

Third, law reviews have divorced themselves from the practicing lawyer, in multiple ways, only one of which I will comment on here, so as to avoid turning this blog post into, well, the length of a law review article. They make publication too time consuming for many successful lawyers to consider pursuing, thereby limiting the pool of potential author/experts – perhaps intentionally? – to law faculty. I have on my own hard drive, for instance, a nearly finished law review article covering the law of trade dress infringement in the First Circuit that grew out of a summary judgment memorandum in a trade dress infringement case I was litigating. The substance is all there, but finding the time to fix the cites, and dress up some of the transitions, and dot each I and cross each T? Almost impossible, unless I am going to assign it to an associate, which somehow strikes me as cheating. But what I may well do is finish it up to a nearly finished draft status, and put it up on this blog, and just plain bypass the time consuming law review publication system, while still putting the information easily in the hands of those who may have use for it. Blogs make all of this type of information far more readily available to the community than law reviews do or, frankly ever will, unless and until they not only add accompanying blogs but also make all of their text freely available for on-line searching.

So yes, whether you practice in ERISA, insurance coverage, intellectual property, or any of an endless variety of other practice areas, legal blogs are far and away the best source of information, and they are turning law reviews into dinosaurs. The whole subject reminds me of some discussions in Seth Godin’s book small is the new big that can essentially be summed up as, in the age of the internet, businesses can either change or die. As far as I am concerned, that is where law reviews find themselves right now: they can either figure out how to transform themselves into an easily accessible on-line repository of valued information, or they can continue to be marginalized, only at ever increasing speed, into a place where law professors simply go to impress one another.

Here is a fascinating decision out of the federal district court for Rhode Island arising out of a dispute over plan contributions required of a contractor under collective bargaining agreements in the construction context. What I most liked about the case is its discussion of the challenge to the plaintiffs’ standing to bring an ERISA action, on the ground that the plaintiffs were not participants, beneficiaries or fiduciaries of the plans in question. The central issue concerned whether the plaintiffs qualified as fiduciaries for these purposes, and the court’s primary analysis was directed at whether one of the plaintiffs, who was the plan administrator, qualified as a fiduciary.

The district court concluded that it did, and in addressing this issue, provides a terrific synopsis of the law in the First Circuit concerning when an entity qualifies as a fiduciary for these purposes, and in particular when a plan administrator qualifies for that status. The court stated (I have omitted the voluminous citations to statute and case law, but it is here in the opinion itself for those of you who are interested):  

An ERISA fiduciary includes any person who "has any discretionary authority or discretionary responsibility in the administration of [an employee benefit] plan." ERISA also provides that a fiduciary "exercises any discretionary authority or discretionary control respecting management of [a] plan or exercises any authority or control respecting management or disposition of its assets." In addition: [r]egulations promulgated by the Department of Labor interpreting ERISA make clear that the administrator and trustees of a pension plan are fiduciaries within the meaning of the statue, for a plan administrator or a trustee of a plan must, b[y] the very nature of his position, have discretionary authority or discretionary responsibility in the administration of the plan within the meaning of section 3(21)(A)(iii) . . . . Thus, at least according to many courts that have addressed the issue, a plan administrator is per se a fiduciary. The Court of Appeals for the First Circuit appears to have expressed a similar tenet, although recently, the court has characterized this as an assumption, not a holding. Absent any clear authority in any circuit to the contrary, this court will also proceed on this assumption. Consequently, because the plan administrator is named as a plaintiff in this suit, and is acting in a fiduciary capacity, he therefore must be considered a fiduciary within the meaning of 29 U.S.C. § 1132(e)(1). Accordingly, because the plan administrator has standing this court has jurisdiction to hear the claims.

The case is Rhode Island Carpenters Annuity Fund v. Trevi Icos Corp.

Sometimes when I give seminars on directors and officers coverage, I like to pass along a story I once heard of a law professor who gives his students what he considers an impossible hypothetical, namely, how would you respond to a client who walks in the door saying that she has been asked to join a board of directors and needs to know whether the company’s directors and officers insurance is sufficient protection for her. The reason the hypothetical is impossible, the professor posits, is because no one can say whether the directors and officers policy is sufficient in the abstract, and the scope of its coverage can only be understood by waiting to see the latest theories of liability being asserted against directors, and then examining how insurers are responding to them under the language of the directors and officers policies that they issue.

Now I have always thought that story overstates the case a little bit, in that certainly most areas of directors and officers exposure are sufficiently well developed that one can look at a directors and officers policy and provide a present or future board member with at least some general sense of the scope of their insurance protection. This is, after all, why people and companies hire insurance coverage lawyers: because they have the experience and knowledge base to understand a policy and provide some guidance, even in the abstract, as to what it covers and what it does not.

That said though, the story I noted above rang clearly in my head – and rang true – the other day when I came across a New York Times piece (only available by subscription or to those of you who still have Friday’s paper lying about) on the expanding risk of personal liability for directors based on backdated option grants. Two things jumped out at me. The first is that if there was ever an object lesson as to the need for directors and officers coverage, and why no one should ever leave home for a board meeting without it, this is it. Counsel to board members must look in advance, preferably at each renewal, at the scope of coverage being acquired for directors and officers exposures and the potential exposures of the board members, and make sure that the best product available on the market, the one that is best suited for those board members and their exposure risks, is obtained.

The second thing that really drew my attention was that the story fit perfectly with the law professor’s hypothetical, although in a way that may reflect insurers being at risk as much as the directors. To what extent are lawsuits and liabilities arising out of this newest scandal, if that is in fact what we should call it, within the coverages provided by directors and officers policies, most of which were drafted before the expansion of this fast growing risk? Does it fit within standard coverages that were already in play, or within standard exclusions already contained in the policies? Or is it a risk of a nature no one anticipated, and insurers are sitting there with policies that don’t have language that controls this risk? The answers to these questions are going to make a big difference in who actually ends up paying if directors are personally liable for these type of stock option manipulations – the officers themselves (or the companies they serve if they are obligated to indemnify the directors) or the insurers who issued directors and officers policies to those companies.