In a unanimous ruling, the nation’s highest court says you don’t need more than a dictionary to know the meaning of “actual knowledge” when it comes to participant awareness regarding 401(k) disclosures.
The decision came in a case involving Intel’s 401(k), its decision to invest its custom target-date funds in alternative assets (including hedge funds), and exactly when a participant became aware of a decision that he claimed was a breach of fiduciary duty.
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, 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.”
The Intel defendants moved for, and ultimately received summary judgment based on their argument that the claims were filed too late, beyond the three-year statute of limitations, measured from when the plaintiff had actual knowledge of the underlying facts constituting his claim. The defendants had presented evidence, cited in in their petition to the Supreme Court, 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.”
However, upon appeal, 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.’” The Ninth Circuit acknowledged that their view of actual knowledge conflicted 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.”
Well, as it turns out the nation’s highest court lined up solidly behind the position of the Ninth Circuit. In a unanimous decision authored by Justice Samuel Alito, Intel Corp. Inv. Policy Comm. v. Sulyma (U.S., No. 18-1116, 2/26/20), the court held that “a plaintiff does not necessarily have ‘actual knowledge’ under §1113(2) of the information contained in disclosures that he receives but does not read or cannot recall reading. To meet §1113(2)’s ‘actual knowledge’ requirement, the plaintiff must in fact have become aware of that information.”
Now, you might be saying to yourself, “Well, doesn’t that substantially diminish the protection for fiduciaries?” However, even if you aren’t (yet), the Intel defendants had argued that, and Justice Alito acknowledged that concern—only to brush it aside, writing “if policy considerations suggest that the current scheme should be altered, Congress must be the one to do it.” He also cautioned that by the same token, “…petitioners’ interpretation would greatly reduce§1113(1)’s value for beneficiaries, given the disclosure regime that petitioners themselves emphasize. Choosing between these alternatives is a task for Congress, and we must assume that the language of §1113(2) reflects Congress’s choice.”
Alito also noted another argument put forward by the Intel defendants—that once a plaintiff receives a disclosure, they have the knowledge that §1113(2) requires because he effectively holds it in his hand. “In other words, he has the requisite knowledge because he could acquire it with reasonable effort”—but that he noted, “turns §1113(2) into what it is plainly not: a constructive-knowledge requirement.”
Making the Case
Lest you think fiduciaries are without hope of making a case going forward, Justice Alito not only noted that the ruling “does not foreclose any of the ‘usual ways’ to prove actual knowledge at any stage in the litigation,” but that “Plaintiffs who recall reading particular disclosures will be bound by oath to say so in their depositions.” Moreover, he not only explained that “actual knowledge can also be proved through “inference from circumstantial evidence,” but also laid out a path for success for future defendants, noting that “this opinion does not preclude defendants from contending that evidence of ‘willful blindness’ supports a finding of ‘actual knowledge.’”
But ultimately, Alito explained that (citing Hardt v. Reliance Standard Life Ins.), “We must enforce plain and unambiguous statutory language” in ERISA, as in any statute, “according to its terms.” And, just in case that wasn’t clear enough, he confirmed that, “Although ERISA does not define the phrase ‘actual knowledge,’ its meaning is plain. Dictionaries are hardly necessary to confirm the point, but they do. When Congress passed ERISA, the word ‘actual’ meant what it means today: ‘existing in fact or reality.’”
What This Means
There’s little question that the ruling will make it harder for plan fiduciaries to claim that effective notice has been provided by the series of disclosures, mandated and otherwise, that are purportedly designed to not only communicate plan specifics, but to establish a point of reference from which the statute of limitations may objectively be established.
It’s not that the disclosures are less essential to the process—but it may well mean that employers will feel the need to obtain more specific validation that the disclosures were, in fact, seen and read. That said, keep an eye out for more assertions of “willful blindness”—and a surge in those ubiquitous pop-ups that lawyers love in various online service agreements. You know, the ones that assert you’ve read something… that you almost never do.