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Compliance May 24, 2019
Supreme Court Could Soon Consider Several ERISA Cases
In recent months, writs of certiorari have been filed with the Supreme Court in four cases involving tax qualified defined contribution plans.
Reported by John Manganaro
Marcia Wagner, founder and managing partner of the Wagner Law Group, spends a sizable amount of time tracking and analyzing the development of Employee Retirement Income Security Act (ERISA) lawsuits.
From her position as a defense attorney working with plan sponsors and service providers sued under ERISA, Wagner recently offered PLANADVISER an overview of the current litigation landscape, pointing out that writs of certiorari have been filed with the U.S. Supreme Court in four cases involving defined contribution (DC) retirement plans. The cases include examples of “stock drop” litigation; litigation about the burden of proof to establish loss; a case that tests the “actual knowledge” standard for statute of limitations purposes; and a case that examines pleading standards under ERISA.
IMB v. Jander
According to Wagner, the case of IMB v. Jander could present a chance for the Supreme Court to follow up on its influential decision in a cases known as Dudenhoeffer. Indeed, in IBM’s Supreme Court appeal, the company urges the high court to reinterpret Dudenhoeffer.
“With respect to the IBM case, I think if the Supreme Court were to decide to revisit Dudenhoeffer, it would likely be to address an issue that the Court of Appeals for the 2nd Circuit raised but did not believe was necessary to decide, namely, whether the standard for considering proposed alternative actions requires courts to consider whether a prudent fiduciary in the circumstances: (i) would not have viewed an alternative course of action as more likely to harm or to help; or (ii) could not have viewed an alternative course of action as causing more harm than good,” Wagner said. “This issue arises because the Supreme Court’s decision in Dudenhoeffer uses different language at different points in the opinion.”
The first formulation, in Wagner’s view, suggests that the standard for evaluating fiduciaries’ actions is based upon what the average prudent 401(k) adviser would have done, while the second formulation is much more restrictive in its use of the word “any.”
“The 2nd Circuit did not address this issue because it concluded that, even if applied the latter, more restrictive standard—because of the reputational harm caused by an alleged fraud—the earlier disclosure of information that would inevitably occur would not have been harmful,” Wagner said. “In its writ of certiorari, IBM’s contention is that such a generalized allegation of harm is inconsistent with Dudenhoeffer’s efficient market standards.”
Wagner pointed out that, since the 2nd Circuit sided with plaintiffs against IBM, other filings have been made at the district court level, reflecting the 2nd Circuit’s “inevitable disclosure” language.
“If those suits have success at the district court level, they will be appealed, which would provide a potentially clearer division among the circuits,” Wagner said.
Putnam v. Brotherston
In Wagner’s view, there is “no reason for the Supreme Court not to address” the case of Putnam v. Brotherston.
“There is no dispute that there is a clear split of authority among the circuits, and the circuit courts have analyzed in detail the arguments in favor of placing the burden of proof to establish loss upon a plaintiff or for placing it upon the defendant fiduciary,” Wagner said. “One of the objectives under ERISA was to obtain uniformity in outcome, so this is a ripe area for the Supreme Court to render a final opinion.”
The U.S. District Court for the District of Massachusetts, last year, ruled for Putnam. However, “finding several errors of law in the district court’s rulings,” the 1st U.S. Circuit Court of Appeals vacated the District Court’s judgment in part and remanded the case for further proceedings. In its opinion, the Appellate Court said “we align ourselves with the 4th, 5th, and 8th Circuits and hold that once an ERISA plaintiff has shown a breach of fiduciary duty and loss to the plan, the burden shifts to the fiduciary to prove that such loss was not caused by its breach, that is, to prove that the resulting investment decision was objectively prudent.”
Putnam asked, and the Appellate Court agreed, to stay the case pending the filing and disposition of a petition for a writ of certiorari to the Supreme Court.
Sulyma v. Intel
Two Intel retirement plans have filed a writ of certiorari with the U.S. Supreme Court, asking the high court to step in and reconsider a decision handed down against the company in the 9th U.S. Circuit Court of Appeals late last year.
In their writ, the Intel plan fiduciaries suggest the late-2018 decision out of the 9th U.S. Circuit Court of Appeals to revive claims previously dismissed as untimely by a Northern California district court created a division among the appellate courts as to whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under the Employee Retirement Income Security Act.
“With respect to the claim that the 9th Circuit’s interpretation of actual knowledge with respect to breach of fiduciary claims is unduly generous and will encourage the filing of otherwise stale claims in the Ninth Circuit, there has been a longstanding split of authority among the circuit courts,” Wagner said. “For example, the Court of Appeals for the 3rd Circuit and the 5th Circuit have held that ‘actual knowledge’ requires a plaintiff to know not only the facts concerning the conduct or transaction that constitutes the breach but also that these are actionable under ERISA. Other courts take the position that it suffices if the plaintiff has actual knowledge of the underlying conduct, but that it is not necessary for the plaintiff to have knowledge of the law.”
Wagner said the 4th Circuit has taken a flexible approach, concluding that the less complex the underlying factual transaction, and the more egregious the alleged breach or violation, the more readily a plaintiff may be found to have actual knowledge.
“It would be useful for the Supreme Court to address this underlying circuit court split, but the Intel case does not appear to be the vehicle for addressing that issue,” she said. “What may be of concern to the Supreme Court, however, is that if the 9th Circuit Court view is accepted, it will be almost impossible to dismiss a claim on statute of limitations grounds at the motion to dismiss stage. That is, until a defendant has had the opportunity either on discovery or deposition to ask a plaintiff is he/she read and comprehended a document, defendant will lack the requisite information.”
White v. Chevron
The plaintiffs in an ERISA lawsuit against Chevron Corporation and its defined contribution plan committee also filed a recent petition with the U.S. Supreme Court. Specifically, the petition for writ of certiorari asks the Supreme Court to answer the question: “In pleading a breach of fiduciary duty under ERISA, is it sufficient for a plaintiff to allege a deficient decision-making process indirectly through inferences from the facts known to her?”
“Of the four cases, this case is the one in which the Supreme Court is least likely to grant certiorari, at least at the present time, if for no other reason that the three-page 9th Circuit Decision is marked ‘Not For Publication,’ which means it does not have precedential value,” Wagner said. “Even if the 9th Circuit opinion were of precedential value, it is not clear that it imposes a stricter pleading standard on plaintiffs than other circuit decisions.”
According to Wagner, uniformity in all aspects of ERISA litigation is an important objective.
“But this does not appear to be the appropriate case to present the issue of inconsistent pleading standards,” Wagner said. “However, the recent decision by the Court of Appeals for the 3rd Circuit in the University of Pennsylvania case indicates that there is likely to be a clear split between the circuits at some point. The pleading issue is a difficult one. The law is clear that prudence is measured by process rather than outcome, so poor investment results does not indicate that the process is flawed. However, prior to discovery, plaintiffs will have no knowledge of a committee’s process. The Supreme Court precedents with respect to motions for summary judgment do not clearly address this issue.”
Other judicial and regulatory matters
Wagner pointed to other interesting issues coming up in the courts with respect to defined benefit plans, one of which the Supreme Court may address, namely, standing for a participant in a fully funded defined benefit pension plan to maintain a suit for breach of fiduciary duty.
“The courts that have held that participants lack standing take the position that harm to plaintiff is speculative at best, even though the plan may be adversely affected,” Wagner said.
Another issue that just surfaced in 2019 is the use of seemingly outdated actuarial equivalents to determine non lump sum distributions.
“In the absence of clear IRS guidance on this subject, it would not be surprising if district courts reached inconsistent conclusions,” Wagner said.
Finally, Wagner noted that the DOL has a clear position that forum selection clauses in plans are inconsistent with ERISA and contrary to public policy, although to date the DOL has not persuaded any circuit courts to this effect.
“If plan sponsors want to amend plans to require that claims of breach of fiduciary duty have to be addressed in individual arbitrations rather than class actions, that is another practice that likely will be challenged,” Wagner said.
