Supreme Court to Weigh In on ‘Actual Knowledge’ in ERISA Cases

The Employee Retirement Income Security Act (ERISA) does not actually define "actual knowledge" required by participants who file fiduciary breach cases, and U.S. Circuit Courts are split on the issue.

The U.S. Supreme Court has granted a petition for writ of certiorari filed by the Intel Corporation Investment Policy Committee asking the court to determine 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 (ERISA).

The lawsuit says Intel invested participant assets in custom-built target-date funds (TDFs), which included alternative investments, that have underperformed peer funds by approximately 400 basis points annually. The lawsuit claims automatic enrollment and a re-enrollment of existing participants resulted in more than two-thirds of participants being allocated to custom-built investments. The text of the complaint goes into great detail about why the plaintiffs believe hedge funds and private equity funds are inappropriate investments for ERISA retirement plans.

In April 2017, a federal district court judge found that claims against Intel Corporation’s Investment Policy Committee were time-barred under ERISA’s three-year statute of limitations. U.S. Magistrate Judge Nathanael M. Cousins of the U.S. District Court for the Northern District of California noted that actual knowledge exists when a plaintiff knows of the transaction constituting the alleged violation. He found that the plaintiff had actual knowledge of the facts underlying his substantive claims because financial disclosures sent to plan participants over the years provided information about plan asset allocation and an overview of the logic behind investment strategy.

However, the 9th U.S. Circuit Court of Appeals overturned the decision in December 2018 and remanded it back to the District Court, finding that the lower court used an errant interpretation of “actual knowledge.”

The appellate court’s decision says: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred. ‘Actual knowledge’ must therefore mean something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”

The court concluded: “In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed. The exact knowledge required will thus vary depending on the plaintiff’s claim.”

Speaking about the case with PLANADVISER, Marcia Wagner, founder and managing partner of the Wagner Law Group, said there has been a longstanding split of authority among the circuit courts about the issue. “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,” she said.

Wagner added that 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,” 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.”