Class Certification
Art by Tim Bower
Frequently, actions for breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) are filed by plaintiffs as class-action lawsuits. Therefore, before any of the substantive issues in the case are addressed, the court rules on whether the putative class satisfies the requirements for certification under Federal Rules of Civil Procedure Section 23, to proceed as a class-action suit.
Yet, a recent Colorado District Court case, Ramos v. Banner Health, raises the issue of whether, in the defined contribution (DC) plan context, there may be circumstances where filling those requirements can be avoided. Although breach of fiduciary claims are more frequently brought against plan sponsors and committees with fiduciary responsibilities under the plan than against advisers, advisers are potential defendants. To the extent that plaintiffs can avoid having to be certified as a class in a breach of fiduciary duty case, the likelihood of an expensive settlement of the case increases.
By way of background, a 2008 Supreme Court decision, LaRue v. DeWolf, Boberg & Associates Inc., relying upon the nature of a DC plan, held that ERISA Section 502 authorized recovery for fiduciary breaches that impair the value of plan assets in an individual’s account, although it does not allow remedies for individual injuries —e.g., if the participant’s vested percentage was calculated incorrectly—distinct from plan injuries. However, LaRue did not address whether participants in a DC plan may seek remedies only for their own accounts or for all plan injuries.
District courts considering the issue have reached opposite conclusions in interpreting LaRue, as did courts in the 9th Circuit in addressing the implications of individualized arbitration in lieu of class actions. Courts that allow direct action claims reason that ERISA Section 409 makes a plan liable to repay itself for losses that have resulted from a breach of fiduciary duty and that ERISA Section 502(a)(2) allows a participant to bring an action for relief of such a violation.
For example, in Waldron v. Dugan, the district court concluded that “neither ERISA itself nor the Federal Rules of Civil Procedure require ERISA participants to bring Section 502 claims derivatively” or as a class action. Other courts have expressed skepticism about the ability of plaintiffs to proceed on behalf of the plan absent class certification and have voiced concerns about whether the action is appropriately structured to bind all plan participants: Some may be unaware of the litigation and about the possibility of inconsistent rulings, should the defendants face multiple lawsuits.
Another district court in Illinois also expressed this concern, in Fish v. Greatbanc Tr. Co.: “[T]o permit the action to go forward without the type of protections provided by Rule 23 or Rule 23.1 or their equivalent would be overly myopic.”
The District Court in Ramos v. Banner indicated that each of the aforementioned approaches was unsettling in its own way. To allow plaintiffs to proceed in a direct action for all plan losses attributable to the defendant, rather than only their individual losses, would create significant due process concerns about whether and how potential plaintiffs would be bound by resolution of the case, whether by settlement or by trial. It also would raise the question as to why any plaintiff bringing an action under Section 502(a)(2) would ever seek class certification. However, to require a plaintiff to obtain class certification in order to recover planwide losses is inconsistent with the language of ERISA Section 409 and does not reflect the Supreme Court’s historic interpretation as set forth in Mass Mutual Life Insurance Co. v. Russell.
To resolve this, the Colorado District Court looked to the opinion of the 2nd Circuit in Coan v. Kaufman. In that case, the 2nd Circuit concluded that a participant is not always required to satisfy the Federal Rules of Civil Procedure to obtain class certification to act in a representative capacity. Still, the participant bringing an action under ERISA Section 502 would most likely be acting in a representative capacity, and therefore must “take adequate steps under the circumstances properly to act in a representative capacity on behalf of the plan.” The 2nd Circuit indicated that Congressional silence as to the appropriate safeguards “does not mean Congress intended to allow individual participants and beneficiaries to bring suit on behalf of an employee benefit plan without observing procedural safeguards for other interested parties.”
Applying that standard, in Ramos v. Banner, the court concluded that plaintiffs had failed to take adequate steps to act in a representative capacity. However, the extent to which a plaintiff can satisfy those procedural requirements remains an open issue that advisers should monitor.
Marcia Wagner is an expert in a variety of employee benefits and executive compensation areas, including qualified and nonqualified retirement plans and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 32 years. She is a frequent lecturer and has authored numerous books and articles.