I wanted to pass along today a fascinating law review article by one of the better ERISA scholars, Susan Stabile, on the retirement benefit system. In the article, “Is It Time to Admit the Failure of an Employer-Based Pension System,” to be published in the Lewis & Clark Law Review, Professor Stabile raises the question of whether, given recent developments concerning pensions and 401(k) plans, it is time to give up on the current system for funding employee retirement and instead create a new paradigm for it. She starts from the premise that incremental changes to the system are not sufficient to achieve retirement security, which is interesting to me because, at a minimum, it is fair to say that the stock drop and other ERISA and pension benefit litigation chronicled on this blog, and the judicial responses to them, really are exactly that – incremental changes to how 401(k) plans and pension benefits are governed and provided. She proposes that a much more radical response to the problem of providing Americans with retirement security is needed, such as the provision of a government pension for everyone or mandatory employer pensions with more stringent regulation than currently exists.
These are obviously radical departures from what currently exists, and from the ERISA governed system I discuss regularly in this blog, which is why the article is particularly interesting. But as a side benefit to those of you who are interested in the ERISA issues regularly chronicled here, Professor Stabile provides a nice presentation of the impact of ERISA’s fiduciary duty and other obligations on the problem addressed in her article.

Here is the story of the $50 million payday that the fired chief executive of MassMutual Financial Group has been awarded in an arbitration. There are a lot of lessons here, and maybe the first one is that in some instances it may just be better to be wrongly fired than rightly employed. Of course he was making over $11 million a year when he was fired, a fact apparently justified by the company’s growth cited in the article.
But beyond that, the better lesson may be that it is simply not wise to just insert arbitration agreements willy nilly into employment contracts and other agreements. As the article points out, the award only came to light because the arbitration award is being appealed to the courts. As the article also rightly – and correctly – points out, the grounds on which a court can overturn that award are pretty narrow, a point I have discussed before. In comparison, of course, if a trial court had imposed that award, at least one, and perhaps two, levels of appellate review would remain before courts possessing broad powers to overturn the award.
I have often said that companies that want to be able to assert their full panoply of legal rights should avoid arbitration like the plague, and I am betting that MassMutual, stuck with a huge arbitration verdict against it and a limited ability to overturn it, recognizes that now. This is particularly interesting because it reflects in a way on something I discussed the other day, that statistics indicate that the most sophisticated companies are avoiding inserting arbitration clauses in their contracts, and this MassMutual result suggests the wisdom of that.

I should probably take a page from my elders at this blogging business, and create a blogroll on the links section on my blog listing the blogs I read regularly and that are good resources on issues addressed by this blog. For now though, I continue with my Logrolling entries to record that information. And with that in mind, I wanted to note that Susan Mangiero, at her blog Pension Risk Matters, has a terrific synthesis of recent posts and other work, including mine, on the question of unreasonably high 401(k) fees and the possibility that they can support a breach of fiduciary duty claim under ERISA. Beyond that, I am a regular reader of Susan’s work, which covers issues involving pension management and governance, and can recommend it to others who may have an interest in the subject.

Although we treat insurance coverage cases as contract disputes, I am not altogether convinced that the law of contracts really is the animating principle behind insurance coverage decisions. Certainly, at the very least, one can’t take a gander at a standard contracts hornbook (that is lawyer talk for a book that provides a readers digest type summary of an entire legal subject) and really have any idea from it how to resolve an insurance coverage dispute. At a minimum, it is certainly the case that only by adding quasi-contractual principles – such as the reasonable expectations doctrine – to the traditional rules of contract law that the contract law regime can be seen as explaining the outcome of insurance coverage cases.
Whatever the case may be on that front, one of my favorite blogs, covering decisions out of the First Circuit, has the story of a recent decision from the First Circuit that applies the old law school contracts class chestnut of mutual mistake to an insurance coverage dispute. The post and the case are interesting reading, for those of us who like either contract law or insurance coverage, or worse yet, like me, both.

In addition to litigating ERISA and insurance coverage cases, I have maintained a pretty active intellectual property litigation practice for a number of years. Routinely, when I meet with business people to discuss intellectual property problems, the subject of the expense of protecting intellectual property rights and how to control legal costs in doing so comes up. This is especially the case when I talk with entrepreneurs and people at small start ups who feel that the intellectual property at the heart of their business plans has been misappropriated by someone else – often a more established competitor – but don’t think they can afford to do anything about it given the high hourly rates often charged by lawyers.
Now I have written before about better ways to fund insurance coverage litigation than simply paying counsel by the hour, and when it comes to protecting intellectual property, I tell these people the same thing, that they should not let the billable hour model frighten them off from protecting their intellectual property and vindicating their rights. There are, or should be if the lawyers they are talking to are willing to put a little skin of their own in the game, other ways to pay counsel, that are more economically feasible for businesses that don’t already have the deepest pockets in the world, but hope to some day, than paying lawyers by the hour to prosecute a patent or copyright infringement action.
And this article here presents those options quite nicely, although in more words than I use when I discuss the same topics with business folk.

I have written before about my view that arbitration is not necessarily preferable to litigation, and that, in my experience, litigation can be the better forum for resolving disputes. I know this runs contrary to the usual platitudinous bon mots frequently tossed off about the wonders of arbitration, but hard earned experience tends to discredit flowery sentiments of that ilk. As I discussed here and here, I am skeptical that arbitration is the better dispute resolution method for many cases or is in the best interest of all parties to a contract, including an insurance contract.
It turns out that many sophisticated commercial actors hold the same thought, and don’t freely give up the courtroom, with all of its attendant protections (many of which are absent from arbitrations), as the forum for resolving their commercial disputes. Two law professors have analyzed this question statistically, and document this fact here, in this newly published scholarship. To the extent that there is such a thing as the wisdom of the crowd, this article seems to show that my gut sense about arbitrations, borne out of years of resolving disputes in a variety of forums, is on the money.

I spoke awhile back on the phenomenon of lawyers suing insurance companies just because that is where the money is. As a long time coverage and bad faith litigator, it has always been clear to me that there is at least some of that going on (which is not to suggest that no such lawsuits have merit, as clearly many do). Turns out that what empirical data there is, such as the numbers discussed here and here showing the disproportionate degree to which insurance companies are involved in litigation, are consistent with my gut sense on this point.

The First Circuit released its most recent ERISA decision, Carrasquillo v. Pharmacia Corp., a few days ago. Of interest in the decision, the court notes the standards that the appellate court should apply in reviewing a district court’s entry of summary judgment when the arbitrary and capricious standard applies. The court reiterated that while the First Circuit reviews a district court’s summary judgment decision de novo, if the district court’s decision was governed by “arbitrary and capricious review, [the First Circuit] evaluate[s] the district court’s determination by asking whether the aggregate evidence, viewed in a light most favorable to the non-moving party, could support a rational determination that the plan administrator acted arbitrarily in denying a claim for benefits;” if not, then the First Circuit will uphold the plan administrator’s determination.
The First Circuit also spends a little time in this case reemphasizing that an administrator’s interpretation of the plan terms, and not just its ultimate benefit determination, is to be accepted and applied by the court in ruling on the challenge to the benefit determination so long as the administrator’s interpretation was not arbitrary and capricious, if the plan reserved discretion over such interpretation to the administrator. And what does it mean to be an interpretation that is not arbitrary and capricious? It simply means the interpretation needs to be reasonable.
The court also returned to what was once a common point of contention in this circuit, namely whether and to what extent judicial review of a benefit determination is limited to the administrative record that was before the administrator at the time the administrator decided the claim for benefits. A series of First Circuit opinions issued in the last few years put an end to any question over this issue, to the point that in this most recent decision, the First Circuit saw no need to make any further comment on this point than to note that “there is a presumption that judicial review is limited to the evidentiary record presented to the administrator.”
And finally, in something I liked, the court summed up the state of preemption law in this circuit, and provided a nice little handy one paragraph starting point for lawyers who might brief preemption issues before the district courts of the First Circuit in the future, stating:

We next turn to the district court’s finding that Otero’s state law claims are preempted by ERISA. In light of ERISA’s goal to promote uniformity in the nationwide regulation of employee benefit plans, Congress designed the statute to supersede “any and all State [causes of action] insofar as they may now or hereafter relate to any employee benefit plan.” Id. (emphasis added). The Supreme Court has identified two instances where a state cause of action relates to an employee benefit plan: where the cause of action requires “the court’s inquiry [to] be directed to the plan,” or where it conflicts directly with ERISA. . . . Because the resolution of Otero’s Commonwealth law claims for fraudulent inducement and intentional infliction of emotional distress would require analysis of the Plan, the district court correctly concluded that they are preempted.

Jerry Kalish has a terrific post, drawing on a law firm white paper, about the potential ERISA liabilities of financial advisors and others who manage or otherwise help to run company 401(k) plans. As he discusses, class action lawsuits are being filed alleging ERISA violations in the operation of such plans; the suits stem from the decisions made by plan advisors and others concerning plan investments and the effect of those decisions on plan expenses.
Substantively, these types of suits raise interesting questions as to exactly how much discretion in making investment decisions should be extended to administrators, sponsors and advisors of such plans before second guessing becomes appropriate. On a broader note, these suits also point out the extent to which the simultaneously high and somewhat amorphous standards that govern the actions of fiduciaries under ERISA make the responsibilities and potential liabilities of 401(k) administrators, sponsors and advisors a fertile field for imaginative plaintiffs’ lawyers.
And finally, given the number of different advisors and other players involved in the operations of these types of retirement vehicles, there are bound to be plenty of fiduciaries – as that term is understood in the context of ERISA – involved in almost any 401(k) plan, making for plenty of targets for such suits.

Every state has its litigation tricks and traps, and we all know that there are some states that insurers would simply rather steer clear of. With this in mind, some insurers try to control what states’ litigation risks and regimes they will be exposed to by limiting the states in which they write business. But covered risks are often mobile, and even when they are not, we all know that an insured’s business operations in one state may expose it to liability in another. As a result, as this story reminds us, an insurer can find its obligations and exposures governed by the law of a state whose law it never intended to subject itself to.