Skip to main content

You are here


9th Circuit Sets New ‘Actual Knowledge’ Standard in 401(k) Suit

A plan sponsor who had been sued for allegedly breaching its ERISA fiduciary duties in shifting allocations in a plan’s custom target-date portfolios to “risky and high-cost” investments will have to go back to court.

Suit ‘Able’

The original lawsuit, filed in November 2015 in the U.S. District Court for the Northern District of California by former Intel employee Christopher Sulyma, had charged that Intel’s investment committee boosted the $6.66 billion profit-sharing plan’s allocation for hedge funds in the firm’s target-date portfolios from $50 million to $680 million, while at the same time the allocation for hedge funds in the diversified global fund rose from $582 million to $1.665 billion, and to private equity investments from $83 million to $810 million, between 2009 and 2014.

The suit claimed that participants were not made fully aware of the risks, fees and expenses associated with the hedge fund and private equity investments, or to the underperformance of the company’s target-date and global diversified funds compared to their peers.

Summary ‘Judgment’

The Intel fiduciaries moved for summary judgment on all of the claims, arguing that the claims are time-barred under the statute of limitations – a claim with which U.S. Magistrate Judge Nathanael Cousins agreed. Judge Cousins noted that while Sulyma was an Intel employee, he had access to a number of financial documents, including plan documents, fund facts sheets and summary plan descriptions, which included information about plan asset allocations and an overview of the logic behind the investment strategy, and that this access gave Sulyma “actual knowledge” of the alleged violations three years before he sued – granting the defendants’ motion for summary judgment.

However, on appeal the U.S. Court of Appeals for the 9th Circuit rejected that conclusion – or at least that conclusion without the benefit of a hearing. Specifically, that disputes of material fact as to the plaintiff’s actual knowledge precluded summary judgment, and remanded the case to the district court for further proceedings.

Actual Knowledge

However, as part of that determination, the judges noted that, “because there has been some confusion in our case law over the scope of the ‘actual knowledge’ standard,” they spent some time outlining what it means for a plaintiff to have actual knowledge of a breach. The court noted that “actual knowledge of the breach” does not mean that a plaintiff has knowledge that the underlying action violated ERISA, and also that “actual knowledge of the breach” does not merely mean that a plaintiff has knowledge that the underlying action occurred. In other words, the court said that “…‘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.”

And then, in light of the statutory text and case law, the court concluded 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, though they acknowledged that the exact knowledge required will “vary depending on the plaintiff’s claim.” The court went on to explain that, “the key is that, whatever the underlying ERISA claim, the limitations period begins to run once the plaintiff has sufficient knowledge to be alerted to the particular claim. In reaching this holding, we emphasize that for a plaintiff to have sufficient knowledge to be alerted to his or her claim, the plaintiff must have actual knowledge, rather than constructive knowledge.”

In making that determination, the court acknowledged that their understanding of actual knowledge conflicts with the 6th Circuit’s reasoning in Brown v. Owens Corning Investment Review Committee, where the court held that, “[w]hen a plan participant is given specific instructions on how to access plan documents, their failure to read the documents will not shield them from having actual knowledge of the documents’ terms” – but “respectfully” disagreed with that analysis. “As we have previously recognized, 'plan participants who have been provided with [summary plan descriptions] are charged with constructive knowledge of the contents of the document,' not actual knowledge,” and that “under our interpretation of ERISA, such knowledge is insufficient.”

Judge J. Clifford Wallace issued the opinion, joined by Judge Susan P. Graber and District Judge Robert S. Lasnik of the U.S. District Court for the Western District of Washington, sitting by designation.

The case is Sulyma v. Intel, Corp., 9th Cir., No. 17-15864, 11/28/18.