Seven months ago, the United States Supreme Court asked the Solicitor General of the United States to weigh in on a case with significant implications for the burden of proof in ERISA lawsuits. Now they have.
In a 28-page “friend of the court” brief (Putnam Investments, LLC v. Brotherston, U.S., No. 18-926, amicus brief 11/27/19), U.S. Solicitor General Noel J. Francisco (Solicitor of Labor Kate S. O’Scannlain joined Francisco’s brief) told the nation’s highest court that it needn’t hear a case involving the use of proprietary funds, at least in part due to the case’s “unusual midtrial posture.”
The petitioners in this case were Putnam Investments, LLC, and they had asked for a Supreme Court review of the case to resolve two issues: which party bears the burden of proof on the issue of causation once a plaintiff has established a breach of fiduciary duty under ERISA and related plan losses, and to address whether passively managed index funds can be appropriate benchmarks for establishing losses from the improper monitoring of actively managed funds.
Case History
The request to weigh in was in Brotherston v. Putnam Investments, LLC, a suit filed in 2016 by participants in the Putnam Investments plan who alleged that the defendants “loaded the Plan exclusively with Putnam’s mutual funds, without investigating whether Plan participants would be better served by investments managed by unaffiliated companies.” That case – which alleged many of the same arguments that have been made in excessive fee/proprietary fund suits – was dismissed in June 2017, only to be revived in October 2018 when the appellate court opted to “…align ourselves with the Fourth, Fifth, and Eighth 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.”
Another issue in the case – involved the invocation by the participant-plaintiffs of a benchmarking comparison of the actively managed funds in the Putnam plan with passively managed alternatives. In the appellate court’s decision the First Circuit’s Judge William J. Kayatta, Jr. who, dismissing arguments that the shift in burden of proof would undermine plan formation and encourage litigation (“irrespective of the merits”) as crying “wolf,” wrote: “…any fiduciary of a plan such as the Plan in this case can easily insulate itself by selecting well-established, low-fee and diversified market index funds.” The Putnam defendants had cautioned that “allowing plaintiffs to plead loss as a matter of law by comparing actively managed to passively managed funds, it will inevitably lead fiduciaries to prefer passive investment vehicles, reducing plan participants’ choices and potentially generating smaller returns.”
Correct 'Shun?'
Explaining that “the court of appeals correctly decided both questions,” the Solicitor General’s response acknowledged that while “…some disagreement exists among the courts of appeals on the first question”, the Administration believes this particular case “would be a poor vehicle in which to resolve that disagreement because its midtrial interlocutory posture means that the facts have not been fully developed.” Said another way, in their opinion, the trial had not proceeded to a point where the issues that needed to be established had been fully adjudicated – essentially a decision made “mid-trial.” That being the case, the brief argues that the Supreme Court “lacks the benefit of both sides’ full factual presentations, which could aid it in understanding the contours of the burden-shifting issue in this case.”
Beyond that, the filing notes that the things that need to be determined to address the issue of “whether petitioners’ alleged breach caused a loss — whether there was even a breach and a related loss — have not been decided.”
As the brief lays out, “the district court entered judgment on respondents’ prudence claim midway through a bench trial, before petitioners began presenting their case,” and the “court accordingly “refrain[ed] from making conclusive findings” on whether petitioners had in fact breached the duty of prudence.” So, when the court of appeals subsequently “vacated the finding that respondents failed as a matter of law to show loss, it thus remanded for the district court to decide whether respondents could establish both a breach and a related loss to the Plan.” And then, if the plaintiffs fail to establish either element, “the causation dispute will become moot.”
Exception 'Null'
The brief states that the court of appeals “correctly concluded that petitioners bore the burden of proving that their failure to engage in appropriate monitoring did not cause the Plan’s losses.” It notes that the “text of ERISA does not specify who bears the burden of proof on the issue of loss causation,” but that “while the default rule” in ordinary civil litigation when a statute is silent is that “plaintiffs bear the burden of persuasion regarding the essential aspects of their claims,” there are exceptions – and one of those is under trust law. Under trust law, “when a beneficiary has succeeded in proving that the trustee has committed a breach of trust and that a related loss has occurred, the burden shifts to the trustee to prove that the loss would have occurred in the absence of the breach.” And the brief explains that “applying trust law’s burden-shifting framework, which can serve to deter ERISA fiduciaries from engaging in wrongful conduct, thus advances ERISA’s protective purposes.”
And while the Putnam petitioners here assert that the courts of appeals are “deeply divided about which party bears the burden of persuasion regarding” causation, the Administration’s position was that while “some disagreement exists on that question” the decision of the appellate court was “consistent with decisions of the majority of the courts of appeals that have directly addressed it, and the contrary view is not as widely held as petitioners assert.” The brief goes on to note that the Sixth, Seventh, Ninth, and Eleventh Circuits have not “squarely addressed the burden-shifting issue, although they have indicated in general terms that a plaintiff bears the burden of establishing an ERISA claim.”
'Passive' Tense?
According to the brief, the court of appeals also correctly concluded that passively managed index funds are not, as a matter of law, improper comparators for determining whether a loss has occurred from an ERISA fiduciary’s breach involving the improper monitoring of actively managed funds.
While the (Putnam) “petitioners characterize the court of appeals’ conclusion as a “per se rule” that determining losses by comparison to an index-fund portfolio is “always appropriate.” But that characterization misconstrues the court’s opinion. The court concluded only that suitable index-fund comparators could support a finding of loss in this case, not that comparisons to index funds compel a finding of loss as a matter of law in all cases.”
The selection of comparator funds largely depends on the facts and circumstances of the case, including the nature and scope of the breach, and petitioners accordingly do not identify any conflicting decision of this Court or of any other court of appeals. For that reason, and given the limited scope of the court of appeals’ decision, the question does not warrant the Court’s review.”
And, having considered all that, the brief concludes “the petition for a writ of certiorari should be denied.”
What This Means
This is the perspective of the federal government on the issues raised before the U.S. Supreme Court, but perhaps more importantly, the “ask” seems to be that the trial needs to take its course before its even clear that there is an issue to be considered.
There is, of course, a lot of interest in the case; friend-of-the-court briefs on behalf of the plaintiffs have been filed by AARP, the AARP Foundation and the National Employment Lawyers Association and the Putnam fiduciary defendants by the Chamber of Commerce of the United States of America, the American Benefits Council, the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute. Moreover, this case has been cited by a number of settlement filings as indicative of the uncertain nature of plaintiffs prevailing in similar cases.
It’s not yet clear what the Supreme Court will decide to do – but the Solicitor General has just given them a handy reason to take a “pass.”
