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Has the Litigation Pendulum Swung Back to Plan Sponsors?: NAPA 401(k) Summit


While a flood of lawsuits from the plaintiff’s bar continues at an unprecedented rate, top ERISA attorneys at an April 3 workshop session at the NAPA 401(k) Summit debated whether recent successes from plan sponsors may help finally stem the tide.

Indeed, the Oshkosh case is repeatedly being cited in a number of recent cases won by plan sponsors at the early stages, where some courts have ruled in favor of a higher standard of “plausibility,” explained Tom Clark, Partner and Chief Operating Officer at The Wagner Law Group, who recently debated Jerome Schlichter in NAPA’s DC Pension Geek Podcast.  

Clark, who served as moderator of the panel discussion “Suit ‘Routes’: Lessons Learned from Litigation,” was joined by Daniel Aronowitz, Managing Principal of Euclid Fiduciary, and Jamie Fleckner, Partner at Goodwin Procter LLP.

“The whole game these past few years has been to get past the motion to dismiss,” noted Aronowitz. But Commonspirit and Oshkosh for the first time said it’s okay to have active funds and that one cannot just compare those funds to passive funds, he explained. Basically, what the courts are saying is that ERISA doesn’t give broad 20-20 hindsight to bring cases; you have to give some context, he further observed. 

One problem, however, is that the decisions still vary depending on the judge and the court. Posing a question on why some judges let “simplistic views” through the motion to dismiss stage, Fleckner explained that there are a lot of competing issues going on with cases.

If you’re looking at the bigger picture and taking a step back, 2022 had the second most cases filed, while 2020 was the first, with the most litigious involving DC plan fees, he noted. “A lot of discretion is still left to the individual judges and there's a lot of variety across the circuits,” Fleckner emphasized. To that end, he believes that it might be a little too early to declare that the pendulum has swung back in favor of plan sponsor defendants.

Similarly, Aronowitz observed that in recent years, plaintiffs were winning about two-thirds of cases, but that has shifted to about an even 50-50 split, suggesting that “results-oriented jurisprudence” could be at play.

Turning back to the question about whether the pendulum is swinging back, Clark suggested that if some of these firms that are bring copycat cases are no longer winning and not making money, that might help stem the tide. One theory, Clark noted, is that the plaintiff lawyers will eventually get cut off from using other people’s money to bring these cases, adding that it can cost millions of dollars just to bring a case.

Aronowitz pushed back on that contention, however, suggesting that he believes the plaintiff’s bar will still continue to bring cases and that losing a few is not going to persuade these firms. Fleckner added that he’s aware of funding methods that have been created by the plaintiff’s bar to bring ERISA suits.   

Either way, Clark observed that, unfortunately, there’s not much else that fiduciaries can do differently, other than doubling down and sticking to a firm process and documenting decision-making.

“You can have the best process in the world, but plaintiff’s lawyers are good at making defendants look dumb if a case gets to trial. You have to prove a good process to the judge and it can be very difficult to do,” Aronowitz further emphasized.

ESG, Cybersecurity and Participant Data

Turning to the question of whether there might be an increase in litigation surrounding fiduciaries use of environmental, social and governance (ESG) factors, Aronowitz believes that the “jury is still out,” adding that if you have two to three quarters in a row that aren’t good, then that will certainly increase the risk of being sued. “If you decide to do it, document it well because it does increase the risk,” he added.  

Echoing Aronowitz, Fleckner similarly advised having a good process in place. “If you have down quarters, then it probably won’t protect you from being sued, but if you can show a good process, that’s going to help.”

Clark also made the point that he would never recommend offering an ESG fund as the only fund in an asset class.

Additional issues addressed by the panelists included the issue of cybersecurity. Asked by Clark about the Colgate-Palmolive case, Fleckner explained that that was a rather unique case where the individual participant lost $750,000 from an apparent fraud scheme, and for now, these types of cases seem to be one-off cases, rather than class action suits. 

The panelists observed that, while this is an ongoing case and most recordkeepers have good indemnification insurance, plan sponsors should have their own coverage as well.

Concerning the use of participant data, Clark noted that if you want to use the data as part of an advisory agreement, it needs to be disclosed and in the agreement, along with other promises. While Schlichter has been losing these types of cases, Clark emphasized that you need something documented to help fend off these types of suits.