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By: Ian Morrison and Nadir Ahmed

The Fourth Circuit’s LaRue decision went largely unnoticed until the Supreme Court decided to take the case, and the ensuing opinion has had a significant impact on the development of ERISA law.  Could the next Supreme Court ERISA decision be brewing in the Fourth Circuit?

On December 21, 2011, in David v. Alphin, Case No. 11-2181 (4th Cir.), plaintiffs, participants of Bank of America’s 401(k) Plan and Pension Plan, appealed to the Fourth Circuit after the district court partially dismissed and later entered summary judgment for the defendants on their claims that the defendants engaged in imprudence and self-dealing by offering Bank of America-affiliated mutual funds as plan investments.

Plaintiffs raise four issues on appeal.  First, they challenge the district court’s statute of limitations ruling, which held that their prudence and loyalty claims arising from the offering of  bank-affiliated mutual funds were untimely because the funds had been selected well before the applicable statute of limitations.  Plaintiffs argue that the defendants had failed to remove the funds despite alleged excessive fees and poor performance and that they had only sued defendants responsible for plan management during ERISA’s six-year statute of limitations.  Therefore, they assert it was error to treat their claims as relating solely to the initial selection of the investments, which admittedly occurred outside the limitations period.  Plaintiffs also contend that the court ignored established authority holding that the failure to remove an investment is a distinct breach of fiduciary duty giving rise to a distinct cause of action.   

Second, plaintiffs claim that the district court erred in treating their claim as one challenging the initial selection of imprudent investment options, because, according to the plaintiffs, the last act to constitute a breach was offering the investment options to participants, which had taken place within the limitations period.  Specifically, plaintiffs argue that the funds were last used as investment options on August 7, 2000, well within the six-year statute of limitations under ERISA. 

Third, plaintiffs argue that it was error for the judge, who was new to the case, to dismiss all claims with prejudice rather than allowing them to amend their complaint again.  Plaintiffs contend that this decision was premised on the judge’s incorrect impression that the court had given the plaintiffs three opportunities to amend the complaint, when only one amendment had required court approval.  However, plaintiffs concede that they had amended their complaint multiple times by the time the court dismissed the case. 

Last, plaintiffs argue that the lower court misapplied the law of standing when it dismissed plaintiffs’ Pension Plan claims.  The district court found that because the Pension Plan is a defined benefit plan, participants were entitled to fixed payments, funded by the employer, and therefore, were not harmed by the improper and excessive fees.  Plaintiffs argue that the lower court erred and that they demonstrated four distinct injuries, each of which independently conferred constitutional standing.  Plaintiffs argue at length that they satisfy the Article III standing requirements, that they have standing to sue for self-dealing transactions absent direct economic injury to themselves or the Pension Plan, that they suffered personal injuries from the Pension Plan’s losses, and that they have standing to enforce legal rights vested in them by statute.

Appellate briefing is still in its early stages, but the David case has the hallmarks of a potentially significant ERISA decision in the making.  First, the district court decision is one of very few to dismiss claims relating to the continued inclusion of allegedly imprudent investments on the theory that the claim actually focuses on the initial offering of investments.  Second, it touches on the cutting edge question of whether defined benefit plan participants have standing to sue for plan investment losses even though they do not claim the plan to be unable to satisfy benefit payment obligations.  Third, the Fourth Circuit is sure to comment on the growing trend of plaintiffs in ERISA class actions attempting to amend their pleadings to avoid dismissal.  Besides these issues, this case has already attracted the attention of a number of interested parties.  In fact, while waiting for the defendants to file their brief, the Pension Benefit Guarantee Corporation, AARP, and the Secretary of Labor each filed Amicus Curiae briefs in support of the plaintiffs.  We will continue to watch the appeal and will report back as it progresses.

 

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By: Mark Casciari and Ronald Kramer

Seyfarth Synopsis:  The courts have stated that their review of fiduciary decisions is both exacting and deferential.  A recent decision from the Court of Appeals for the Seventh Circuit offers help to ERISA benefit professionals who prefer to maximize judicial deference in favor of the fiduciaries.

One of the enduring paradoxes of ERISA litigation is the judicial standard of review of fiduciary decisions. The standard of review is important because an easier standard will uphold more fiduciary decisions in court and encourage more individuals to serve as fiduciaries.  No one who acts in good faith – as the vast majority of ERISA fiduciaries do – likes to make tough decisions and be sued or reversed.

On the one hand, the courts frame their review of fiduciary decisions in exacting terms.  For example, in Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982), the Court of Appeals for the Second Circuit said that the ERISA fiduciary’s duty of loyalty to plan participants and beneficiaries is “the highest known to the law.”

But, in Bator v. District Council 4, Graphic Communications Conf., No. 18-cv-1770 (7th Cir. Aug. 27, 2020), the court proffered another viewpoint.  It considered whether ERISA fiduciaries violated their duties by undercutting the financial health of the pension plan they managed.  The plaintiffs alleged that the fiduciaries breached their duties by not enforcing the contribution terms of the Trust Indenture when they allowed one participating local union’s members at one company to contribute to the plan at lower rates than other members form the same local at another company.. Notably, the case did not involve a review of a claim for benefits, and the court’s decision did not turn on claim review.

The Bator court upheld the fiduciary decision by reasoning that the fiduciary interpretation of the governing plan document “falls comfortably within the range of reasonable interpretations” and “is compatible with the language and the structure” of that document.  The Court did so even though it recognized that the plaintiffs’ interpretation of the Trust Indenture was equally reasonable.

So, how can these very different standards of judicial review be reconciled?

Yes, reconciliation is possible.  ERISA’s core focus is the governing plan documents.  If, as in Bator, they provide the fiduciary with broad discretion to interpret their terms, and provide that the fiduciary decision shall be final and binding, the court should give the fiduciary the benefit of the doubt.

One final point is worth noting.  Plaintiffs often argue that equitable principles should govern judicial review of fiduciary decisions.  But, as Justice Thomas said recently in his concurrence in Thole v. U.S. Bank, 140 S.Ct. 1615 (2020) (Seyfarth analysis here), the common law of trusts is not the starting point for interpreting ERISA.  The starting point is the statute itself, and the statute commands that the courts honor ERISA plan terms, including terms that give interpretative discretion to fiduciaries.

Our take away is – there is no substitute for good drafting of ERISA plan terms.

By: Mark Casciari

Synopsis: ERISA stock-drop litigation has diminished in recent years due to the Supreme Court’s Dudenhoeffer decision (and a rising stock market). Now, the Court will have another chance to weigh in on whether federal ERISA litigation in this space should breathe new signs of life.

There is a trend-line in recent Supreme Court decisions limiting federal court jurisdiction before a plaintiff ever enters the world of expansive and expensive discovery. This trend-line is a great assist to all federal court defendants, including ERISA defendants. Key decisions to note are Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Spokeo, Inc. v. Robbins, 136 S. Ct. 1540 (2016).   As to Twombly’s “plausibility” precondition to discovery, see generally here. As to Spokeo’s “concrete injury” precondition to discovery, see generally here.

The Supreme Court has just accepted certiorari in Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2d Cr. 2018). In Jander, ESOP plan participants claimed that the ERISA plan fiduciaries knew but failed to disclose that IBM’s microelectronics division (and thus IBM’s stock) was overvalued. The district court found that the plaintiffs did not plausibly plead a violation of the ERISA fiduciary duty of prudence. The Court of Appeals for the Second Circuit reversed.

The Second Circuit ruled that the following allegations equated to plausibility: (i) the fiduciaries knew that IBM stock was artificially inflated by virtue of the impairment of a business unit and its associated accounting violations, (ii) the fiduciaries had the power to disclose the truth to SEC filing recipients and to plan participants, (iii) the failure to disclose long-term investment prospects was harmful because uncorrected fraud causes greater damages the longer the fraud continues, (iv) correcting the fraud would reduce the stock price only by the amount of the artificial inflation, and (v) the fiduciaries knew that disclosure of the truth was inevitable. The Second Circuit was not dissuaded by the fact that the district court dismissed a related securities fraud claim that the plaintiffs did not appeal.

The petition for certiorari accepted by the Supreme Court presents this issue: Can the Dudenhoeffer standard that a plaintiff must “plausibly allege[] that a prudent fiduciary in the defendant’s position could not have concluded that [an alternative action] would do more harm than good to the fund,” be satisfied by “generalized allegations that the harm of inevitable disclosure of an alleged fraud generally increases over time.”

Cutting through the legal niceties, the issue boils down to the level of detail required in a federal complaint to open the discovery door. Entering that door is of utmost significance to plaintiffs because discovery is so expensive to defendants, even after taking proportionality preconditions into account. Many large cases that find themselves stuck in discovery settle without any adjudication on the merits.

The forthcoming Jander decision will advise ERISA litigants whether the trend towards closing the discovery door will continue. A Court majority seems disinclined to loosen pleading standards in the hyper-partisan political culture now enveloping the country. Should the Court reverse the Second Circuit, moreover, ERISA plaintiffs may find it tougher to assert fiduciary breach claims in contexts other than the stock-drop context, in the absence of inculpatory information uncovered outside discovery.

 

By: Mark Casciari

Synopsis: A new Third Circuit decision has allowed an ERISA fee complaint to stand even though there were no specific allegations of fiduciary errors in the process of selecting investment options and fees. This development is yet another in the line of decisions that decide if the federal door to discovery will be opened or closed at the complaint stage of the litigation. Expect judges to differ and more such decisions to issue.

We recently reported, in a sister blog, on a Supreme Court decision affirming that a federal plaintiff needs to allege concrete allegations of injury, caused by a defendant, in order to trigger the onerous discovery weapons in the Federal Rules of Civil Procedure. See here.

ERISA lawsuits are not immune from this specificity precondition to discovery, and the expensive consequences if is satisfied.

A new decision from the Court of Appeals for the Third Circuit, Sweda v. University of Pennsylvania, 2019 U.S. App. LEXIS 13284 (May 2, 2019), shows the difference of opinion of judges when it comes to opening the discovery door.

In Sweda, a putative plaintiff class of 20,000 participants in an ERISA-regulated 403(b) defined contribution plan with assets in 2014 totaling $3.8 billion sued plan fiduciaries to recover on alleged overpayments of fees and underperformance of investment options. The class undoubtedly seeks tens of millions of dollars in damages.

The Sweda putative class presented the question whether the allegations of a breach of ERISA fiduciary duties were sufficiently specific and plausible. Two judges answered in the affirmative; one dissented.

The majority employed a “holistic” analysis that did not parse the complaint “piece by piece to determine whether each allegation, in isolation, is plausible.” The majority twice described the allegations as “numerous” — showing that lengthy complaints help plaintiffs pass through the discovery door. The majority also said that the complaint contained “circumstantial” evidence allegations of better performing benchmarks and allegations that the fiduciaries selected high fee retail mutual funds, as opposed to lower fee institutional funds, as investment options.

The majority ignored the lack of allegations of how the fiduciaries mismanaged the plan — there is no fiduciary breach if the fiduciary process is reasonable. To be sure, specific allegations of an illegal fiduciary process are hard to come by because ERISA fiduciary disclosure rules are limited, but that is the balance Congress struck in limiting fiduciary legal obligations in order to encourage the establishment of ERISA plans and not discourage individuals from serving as fiduciaries.

The dissent tracked recent Supreme Court decisions that require “concrete” and “plausible” allegations before allowing the discovery “pressure to settle,” regardless of the merits, to kick in. The dissent found the complaint insufficient, for example, because it lacked allegations of facts linking any of the named plaintiffs to any chosen investment option and shortcoming. The allegations of harm, the dissent reasoned, lacked the specificity (“concreteness”) needed before full discovery can commence.

Sweda shows that federal judges will continue to grapple with whether to find complaint allegations sufficiently specific to allow the case to proceed to discovery and a likely settlement. This is especially so when the complaint is lengthy and the plan assets are substantial. ERISA is no different than other federal statutes in this regard. The result in any one case likely depends on the level of concern a judge has about allowing litigation to devour resources and cause settlements as a result, without a trial on the merits of the federal claim.

By Mark Casciari

Seyfarth Synopsis: The Supreme Court’s Spokeo decision is sure to impact ERISA litigation.  Expect ERISA plaintiffs to focus more on alleging a “concrete” injury, and ERISA defendants to argue more often that the claim cannot proceed in federal court because its alleged injury, while it may allege a breach of ERISA, does not rise above a purely technical violation.

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We have blogged previously about the Spokeo Inc. v. Robbins case just decided by the Supreme Court, and our sister blog has recently commented on that decision. The following comments do not repeat what already has been said, and are intended to limit the discussion at this time to the ERISA litigation context.

The facts in Spokeo concern the federal Fair Credit Reporting Act, but the holding implicates litigation under a number of other federal statutes, including ERISA.  The Supreme Court said that, while Congress can create federal claims, those claims can be litigated in federal court only if the plaintiff alleges a “concrete” injury (i) that affects the plaintiff in a personal and individual way, (ii) that is traceable to the defendant, and (iii) that is repressible by the federal judge.  Add to these preconditions the Supreme Court’s Twombly holding, which said that any federal complaint, as a matter of federal civil procedure, must state a “plausible” claim, beyond speculation and conclusion, in order to be considered by a federal judge.

The Supreme Court found the allegations in Spokeo possibly less than concrete, and remanded the case back to the Court of Appeals for the Ninth Circuit with instructions to address that issue in detail.  Here is the Court’s explanation of what a claim needs to allege to be “concrete” enough to be heard by a federal judge:

  • The alleged injury must “actually exist”; it must be “real.”
  • The alleged injury can be tangible or intangible. As to intangible harm, the courts will give some deference to what Congress thinks on the subject.  But Congress cannot create an intangible harm merely by creating a claim to remedy a statutory violation.
  • The alleged injury can be a “risk” of real harm that is difficult to measure. For example, the Court said, a failure to obtain information that Congress decided must be make public can (but not necessarily will) be a concrete injury.  Still, it seems, any risk of real harm must rise to a level above speculation.

Some ERISA litigation claims obviously involve concrete injuries.  These include claims for denial of benefits that plan terms allow, plan investment losses resulting from a fiduciary breach and detrimental reliance on fiduciary misrepresentations.  Other ERISA litigation claims less obviously involve concrete injuries.  These include claims challenging a denial to provide plan documents in a timely fashion, claims challenging notice of plan amendments that arguably violate ERISA section 204(h), claims challenging a fiduciary breach attendant to an investment of plan assets in an overfunded defined pension plan, and claims challenging a failure to fund a defined benefit plan where the plaintiff has suffered no benefit denial.

Where lines are drawn undoubtedly will be a subject of much discussion.  How lines are drawn may determine the outcome of high-stakes litigation.  For example, line-drawing will affect class certification decisions, as the more individualized the alleged concrete injury, the less likely the court will certify a class.

ERISA litigators should expect plaintiff s to spend more time drafting complaints, so they plausibly allege concrete injuries.  They should expect defendants to spend more time arguing that, notwithstanding all the extra work, the plaintiffs still cannot enter a federal court because all that the plaintiff is merely alleging a technical violation or “gotcha” claim.

By Ron Kramer and Jim Goodfellow

Today, a Sangamon County Circuit Court judge in In re: Pension Litigation, struck down Illinois’ pension reform law, Public Act 98-059, in its entirety as unconstitutional.

By way of background, Illinois faces a pension funding crisis that has been reported at over $100 billion dollars.  The aim of the pension reform law was to save the state $160 billion over the next 30 years by decreasing cost-of-living adjustments, capping pensionable salaries, and raising retirement ages, among other reforms. The law was set to go into effect on June 1, but implementation had been stayed pending the outcome of this litigation.

The Court concluded that the pension reform law impaired and diminished retiree benefits in violation of Article XIII, Section 5 of the Illinois Constitution, which clearly and unambiguously prohibits the impairment or diminishment of retiree benefits.  The Court struck down the State’s affirmative defense claims that it could diminish benefits despite the Article XIII of the Constitution based upon an exercise of the State’s “reserved sovereign powers or police powers.”  There was “no such legally valid defense” according to the Court,  because the pension protection clause of the Constitution does not provide for any such exception or limitation. In light of this conclusion, the Court did not even need to address the merits of the State’s defense.

In essence, the Court followed the rationale set forth in the Illinois Supreme Court’s recent decision in Kanerva v. Weems, 2014 IL 115811, wherein the Supreme Court concluded that the Illinois Constitution’s pension protection clause protects the state’s subsidization of health insurance for retirees from any unilateral diminishment and impairment. Undeterred, the Governor and Attorney General have stated that they will move for an immediate appeal of the In re: Pension Litigation decision to the Supreme Court. Given the Supreme Court’s ruling in Kanerva, however, it is unlikely that this decision will be overturned on appeal.