Skip to main content

You are here

Advertisement

Full Court 'Press'?

Litigation

It’s not every day that issues presented by ERISA cases make it to the U.S. Supreme Court – but after more than two years without one, we’ll see three ERISA cases come before the nation’s highest court this term. 

Is No (Actual) Harm a Foul? (Thole v. U.S. Bank, N.A.)

The first of the cases (Thole v. U.S. Bank, N.A., U.S., No. 17-1712, certiorari granted 6/28/19) involves a suit by participants in U.S. Bank’s pension plan who, after the plan fiduciaries alleged mismanagement resulted in $750 million in losses to the plan, brought suit – even though the benefits promised by the pension plan are not yet threatened, and – significantly – when the participant-plaintiffs have not yet suffered any individual harm. Indeed, it was on that basis that the plaintiffs here allege that the Eighth Circuit inappropriately affirmed the district court’s earlier dismissal of their claims.

At issue here was U. S. Bank’s decision to invest all $2.8 billion of the pension fund’s assets (in 2007) in what was described as “high-risk” equities, including more than 40% in their own proprietary mutual funds “even though they were more expensive than similar alternatives,” which the plaintiffs allege not only “flouted” ERISA’s prohibited-transaction rules, but also “violated basis fiduciary principles of prudence and loyalty.” Ultimately, when the markets crashed in 2008, the plan lost $1.1 billion, which the plaintiffs claim was $748 million more than an “adequately diversified plan would have.” That loss “left the plan reeling,” they claim, and “virtually overnight the plan went from significantly overfunded to 84% underfunded,” according to the plaintiffs.

However, the U.S. Court of Appeals for the Eighth Circuit, in rejecting those claims, noted that the bank’s pension plan had recovered (thanks in no small part to a substantial contribution to the plan by the employer) and was now in a healthy financial condition (more precisely, it was overfunded), which meant the participants hadn’t suffered any actual losses.

Why It Matters

The plaintiffs allege that not only did that decision veer from decisions in other districts – specifically the Second, Third and Sixth Circuits, which held that violation of ERISA rights alone was sufficient to have standing to bring suit, without establishing loss – but with the administration’s sense of things as well. However, the Fourth, Fifth, and Ninth circuits have gone another way – denying standing to bring suit to participants in similar contexts, though they have done so on Constitutional grounds, unlike the Eighth Circuit, which cited ERISA.

Nancy Ross, partner at Mayer Brown LLP in Chicago, explains that the Thole case raises an important standing question regarding DB plans. “If participants can challenge plan funding without showing an actual risk of harm, the litigation floodgates will open every time plan funding takes a dip,” she says. “That upsets the fundamental balance at the core of ERISA in protecting promised benefits while limiting a plan sponsor’s risk of liability if it pays what it commits to.”

In fact, as one litigator comments, “Thole has the greatest potential to be most devastating to DB fiduciaries,” and, while it has been pretty well settled, except in unusual circumstances, that DB participants cannot sue for claimed breaches if the plan is fully funded, he acknowledged that “allowing claims of fiduciary breach in a fully funded DB plan really opens the floodgates to what some might perceive as second-guessing litigation.” On the other hand, he noted that the Supreme Court asked for the parties to address standing, which he saw as signaling an end to that specific threat. 

“If the issue is looked at as a still photograph, it is reasonable to say that there aren’t any damages,” noted Drinker Biddle & Reath LLP’s Fred Reish. That said – and affirming that there are always (at least) two perspectives to each legal situation – he cautioned that “if viewed as a moving picture, the market could tank next year and part of the reason that the plan is underfunded is the bad investments in prior years.” Though, as he also noted, by then, the statute of limitations may have run.

Would Have vs. Should Have (Ret. Plans Comm. of IBM v. Jander

In Ret. Plans Comm. of IBM v. Jander (U.S., No. 18-1165, certiorari granted 6/3/19), the Supreme Court agreed to consider “Whether Fifth Third Bancorp v. Dudenhoeffer’s ‘more harm than good’ pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.”

Here the plaintiffs alleged that the IBM defendants (IBM itself, along with the Retirement Plans Committee of IBM; Richard Carroll, IBM’s Chief Accounting Officer; Martin Schroeter, IBM’s CFO; and Richard Weber, IBM’s general counsel) failed to prudently and loyally manage the plan’s assets and adequately monitor the plan’s fiduciaries. Specifically, they argued that once the defendants learned that IBM’s stock price was artificially inflated, they should have either disclosed the truth about Microelectronics’ value or issued new investment guidelines temporarily freezing further investments in IBM stock by the plan.

Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___, 134 S.Ct. 2459 (2014) had been the law of the land in such matters since – well, 2014. Under the new “Fifth Third” standard, plaintiffs now must “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

Why It Matters

The presence of employer stock in an employee stock ownership plan had been entitled to a “presumption of prudence” going back to the 1995 Moench v. Robertson case, where a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer’s financial condition “deteriorated.” In that case the Third Circuit affirmed the duty of prudence, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an employee stock ownership plan (ESOP), and found a rebuttable presumption that an ESOP fiduciary that invested plan assets in employer stock acted consistently with ERISA. 

In 2014 the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs – and in fact, until that point the vast majority of these cases (including BP and Delta Air Lines, Lehman and GM) failed to get past the summary judgment phase. Indeed, the plaintiff in the IBM case had argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen. They had also noted that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”

However, when the “more harm than good” standard emerged with Fifth Third Bancorp v. Dudenhoeffer, it didn’t just establish a new standard, it also led to a refiling of claims of many of the so-called “stock drop” suits. Ironically, up until the IBM decision, those too had generally come up short of the new standard – though they did at least get past the summary judgment stage.

Goodwin Proctor’s Jamie Fleckner acknowledges that following the Dudenhoeffer decision, there had been a decline in this type litigation, but now the Second Circuit’s Jander decision appears to allow a loophole, that if allowed to stand may mark a return to the rapid pace of litigation involving company stock, particularly if there is a market downturn and more stocks held in DC plans decline in value. 

In fact, as Ross notes, the Dudenhoeffer “more harm than good” standard “leaves a lot of discretion for the courts, and places them in the role of judging business decisions as much as fiduciary conduct.” She notes that even the Second Circuit itself (the court whose decision produced the case on which the Supreme Court will weigh in) has applied the same standard with inconsistent results. “The revised standard collides head on with the responsibility of a fiduciary to be prudent, not prescient,” she explains, going on to note that it has not produced “clarity as to what this standard requires of fiduciaries in real world circumstances.” 

While it’s been just five years since Dudenhoeffer was decided, there’s been some significant turnover in the panel of justices that will hear this case – though, as Fleckner reminds us, that case was decided by a 9-0 vote. However, he notes that one element that applies now what was not present in 2014 is that the Securities and Exchange Commission has now presented its views to the Supreme Court by signing onto the government’s amicus (friend of the court) brief. “When the Court previously decided Dudenhoeffer, Justice Breyer, who wrote that decision, thought that the SEC’s views could have been helpful to the Court,” he comments. “Now the SEC has signed on to the government’s brief – which was also signed by the Department of Labor – so the SEC’s views are now being presented to the Supreme Court. That could be meaningful this time around.”

Ultimately, it seems at least possible that the Supreme Court might clarify Dudenhoeffer, particularly as to whether a plaintiff must plausibly allege that no prudent fiduciary “would have,” rather than “could have,” viewed action as more likely to cause harm than not. As Matthew Russell of Morgan Lewis & Bockius LLP writes, “‘Would’ suggests what an average, prudent fiduciary would do, while ‘could’ suggests the realm of possibility, making the latter standard more difficult for plaintiffs.”

‘Know’ Way, Know How? (Intel Corp. Inv. Policy Comm. v. Sulyma)

While each of the cases under review have the potential for a dramatic impact on advisors, this case (Intel Corp. Inv. Policy Comm. v. Sulyma, U.S., No. 18-1116, cert. granted 6/10/19) is perhaps the one most ripe with potential. As the Wagner Law Group’s Tom Clark explains, “This case is ripe for the Supreme Court to go beyond the questions asked and create new law.” Or, as Mayer Brown’s Ross puts it: “The consequences are monumental, as a plan sponsor is still at risk notwithstanding accurate ERISA disclosures.”

Those potential consequences could come from this review of a decision by the U.S. Court of Appeals for the Ninth Circuit that said that “…‘actual knowledge’ means 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.” More precisely, the issue under consideration is “[w]hether the three-year limitations period in Section 413(2) of the Employee Retirement Income Security Act, which runs from ‘the earliest date on which the plaintiff had actual knowledge of the breach or violation,’ bars suit when all the relevant information was disclosed to the plaintiff by the defendants more than three years before the plaintiff filed the complaint, but the plaintiff chose not to read or could not recall having read the information.”

The original lawsuit was filed in November 2015 in the U.S. District Court for the Northern District of California by former Intel employee Christopher Sulyma (who turns out to be an engineer with a doctorate in experimental physics). It 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 of the underperformance of the company’s target-date and global diversified funds compared to their peers, and that as a result participants “suffered hundreds of millions of dollars in losses during the six years preceding the filing of this Complaint as compared to what they would have earned if invested in asset allocation models consistent with prevailing standards for investment experts and prudent fiduciaries.”

So, the plaintiffs said they were not fully aware – and yet, in their petition to the Supreme Court, Intel noted that “during his brief tenure with Intel, respondent regularly accessed the website for those materials,” clicking on more than 1,000 web pages within that site; it was undisputed that respondent “accessed some of th[e] information” that disclosed the disputed investment decisions “on the websites.”

Ultimately, the Ninth Circuit reversed and remanded the decision of the lower court, noting that if (as claimed) “Sulyma in fact never looked at the documents Intel provided, he cannot have had ‘actual knowledge of the breach.’”

Why It Matters

ERISA Section 413 requires that a plaintiff file suit in the six years following an alleged breach or violation, but that shrinks to three years if a plaintiff has “actual knowledge” of that breach. The essence of the defendants’ claim here is that the plaintiff can’t bring suit because the plan disclosures gave the plaintiff “actual knowledge” of all information necessary to challenge the Intel plans’ investments and fees – even though the plaintiff claimed not to have read them or remember whether he had read them. In fact, "actual knowledge" is not defined in ERISA, and though courts have attempted to define its meaning, they have arrived at differing interpretations. In this case, the Ninth Circuit determined that it required a showing that the plaintiff was “actually aware of the nature of the alleged breach more than three years before the plaintiff's action was filed.”

Ross notes that the Intel case “essentially eviscerates the more limited time period for challenging fiduciary conduct, as it is very difficult to show even with discovery that a plaintiff actually read the plan disclosures.”

Russell writes, “A ruling in Intel’s favor could have a widespread impact on the potential exposure of plan sponsors and fiduciaries in similar lawsuits. Holding that plan participants have ‘actual knowledge’ of plan disclosures sent to them in compliance with ERISA’s regulations could extinguish some claims altogether, and halve the defendants’ potential exposure in others.”

A representative of the plaintiffs’ bar acknowledges, “Literally read, a plaintiff could avoid triggering the limitations period by not reading any plan communications. While that presents issues, it is hard to interpret ‘actual knowledge’ in a way that excludes those participants but not participants who failed to look up the 5500 and read to page 250. While that is an interesting issue, it does not seem to apply to many cases. That would be unless the Court construed ‘actual knowledge’ to apply to participants who failed to read materials mailed (or emailed) to them. Then, all of a sudden, participants will find their inboxes very full, flooded by haystacks of words concealing liability-avoiding needles.”

This article first appeared in the Fall issue of NAPA Net the Magazine

Advertisement