Concluding that “courts sometimes make standing law more complicated than it needs to be,” in a 5-4 decision, the nation’s highest court has ruled that plaintiffs in a suit involving a defined benefit plan hadn’t incurred the loss of benefits necessary to establish the right to bring suit.
More succinctly, in an opinion authored by Justice Kavanaugh (joined by Chief Justice Roberts, as well as Justices Alito, Thomas[i] and Gorsuch), the court ruled that “none of the plaintiffs’ arguments suffices to establish Article III standing.”
The case involved 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 were not yet threatened, and—significantly—when those participant-plaintiffs had not yet suffered any individual harm. Indeed, it was on that basis that the plaintiffs alleged that the Eighth Circuit inappropriately affirmed the district court’s earlier dismissal of their claims.
At the heart of the suit 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 alleged 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.”
The U.S. Court of Appeals for the Eighth Circuit 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.
DB is Not DC
The Supreme Court (James J. Thole et al. v. U.S. Bank NA et al., case number 17-1712, in the U.S. Supreme Court) first rebuffed the plaintiffs’ reliance “…on a trust analogy in arguing that an ERISA participant has an equitable or property interest in the plan and that injuries to the plan are therefore injuries to the participants.” Kavanaugh went on to note that “…participants in a defined-benefit plan are not similarly situated to the beneficiaries of a private trust or to participants in a defined-contribution plan, and they possess no equitable or property interest in the plan.” In fact, he noted that it was “of decisive importance to this case” that the plan in question was a defined benefit plan, rather than a defined contribution plan, going on to write that “In a defined-benefit plan, retirees receive a fixed payment each month, and the payments do not fluctuate with the value of the plan or because of the plan fiduciaries’ good or bad investment decisions.”
Explaining that, win or lose, the plaintiffs here would receive “the exact same monthly benefits that they are already slated to receive, not a penny less,” he wrote that “the plaintiffs therefore have no concrete stake in this lawsuit.”
He then went on pointedly to note that “to be sure, their attorneys have a stake[ii] in the lawsuit, but an “interest in attorney’s fees is, of course, insufficient to create an Article III case or controversy where none exists on the merits of the underlying claim.”
As for the plaintiffs’ other arguments, Kavanaugh noted that while they had asserted standing as representatives of the plan itself, but dismissed that explaining that “…in order to claim “the interests of others, the litigants themselves still must have suffered an injury in fact, thus giving” them “a sufficiently concrete interest in the outcome of the issue in dispute.”
A third argument—that under ERISA, the Secretary of Labor, fiduciaries, beneficiaries, and participants—including participants in a defined-benefit plan—are granted a general cause of action to sue for restoration of plan losses and other equitable relief—was discarded because “…the cause of action does not affect the Article III standing analysis,” and—according to Kavanaugh—“this Court has rejected the argument that “a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.”
The fourth, and final argument made by plaintiffs in support of their standing to bring suit, was that if defined-benefit plan participants may not sue to target perceived fiduciary misconduct, no one will meaningfully regulate plan fiduciaries. Kavanaugh dismissed that as insufficient to establish Article III standing, but went on to state that “the argument rests on a faulty premise in this case because defined-benefit plans are regulated and monitored in multiple ways.” He noted that employers and their shareholders often possess strong incentives to “root out fiduciary misconduct because the employers are entitled to the plan surplus and are often on the hook for plan shortfalls. Therefore, about the last thing a rational employer wants or needs is a mismanaged retirement plan.” Oh, and he also noted that not only does “ERISA expressly authorizes the Department of Labor to enforce ERISA’s fiduciary obligations,” but that “the Department of Labor has a substantial motive to aggressively pursue fiduciary misconduct, particularly to avoid the financial burden of failed defined-benefit plans being backloaded onto the Federal Government.”
One Last ‘Wrinkle’
Kavanaugh cited “one last wrinkle”—the notion that plan participants in a defined-benefit plan have standing to sue if the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits. However, while acknowledged as an issue, he wrote that “the plaintiffs do not assert that theory of standing in this Court,” that “the plaintiffs’ complaint did not plausibly and clearly claim that the alleged mismanagement of the plan substantially increased the risk that the plan and the employer would fail and be unable to pay the plaintiffs’ future pension benefits.” Despite the reality that the plan here was underfunded for a period, Kavanaugh explained that a “bare allegation of plan underfunding does not itself demonstrate a substantially increased risk that the plan and the employer would both fail.”
Concluding, and affirming the decision by the U.S. Court of Appeals for the Eighth Circuit, Kavanaugh wrote that “the plaintiffs lack Article III standing for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs’ monthly pension benefits. The plaintiffs have no concrete stake in this dispute and therefore lack Article III standing.”
The decision here was a narrow one—and the four justices who dissented (in a dissent authored by Justice Sotomayor) basically challenged a result that they said “conflicts with common sense and longstanding precedent,” and meant that “the Constitution prevents millions of pensioners from enforcing their rights to prudent and loyal management of their retirement trusts. Indeed, the Court determines that pensioners may not bring a federal lawsuit to stop or cure retirement-plan mismanagement until their pensions are on the verge of default.”
In contrast with the court’s majority opinion, Sotomayor found the equitable claim to be compelling under “traditional trust law,” challenged the notion that participants and beneficiaries in a DB plan are “mere bystanders to their own pensions,” and questioned the assumption that simply because they were receiving benefits now, they would continue to do so indefinitely. “The Court does not explain how the pension could satisfy its monthly obligation if, as petitioners allege, the plan fiduciaries drain the pool from which petitioners’ fixed income streams flow,” she writes.
The dissent also took issue with the notion that these plaintiffs were unable to sue on behalf of the plan. “Typically that is the fiduciary’s job,” Sotomayor writes, going on to explain that “But imagine a case like this one, where the fiduciaries refuse to sue because they would be the defendants. Does the Constitution compel a pension plan to let a fox guard the hen-house?”
“The purpose of ERISA and fiduciary duties is to prevent retirement-plan failure in the first place,” she writes, noting that, “in barely more than a decade, the country (indeed the world) has experienced two unexpected financial crises that have rocked the existence and stability of many employers once thought incapable of failing. ERISA deliberately provides protection regardless whether an employer is on sound financial footing one day because it may not be so stable the next.” She also noted that the majority’s “references to Government insurance also overlook sobering truths about the PBGC.”
Reminding her colleagues of the circumstances behind the alleged abuse,[iii] the dissent concludes that “the Court’s reasoning allows fiduciaries to misuse pension funds so long as the employer has a strong enough balance sheet during (or, as alleged here, because of ) the misbehavior. Indeed, the Court holds that the Constitution forbids retirees to remedy or prevent fiduciary breaches in federal court until their retirement plan or employer is on the brink of financial ruin.”
Why it Matters
The decision, though a narrow one, seems likely to forestall any number of potential fiduciary breach suits, if only because it limits the circumstances under which workers and retirees can sue. Indeed, while the U.S. Bank pension had restored its funding status during the seven-year duration of the suit, it’s not clear that even an underfunded plan would be vulnerable to suit, so long as benefits continued to be met.
In fact, during oral arguments in this case earlier this year, the justices seemed to be skeptical of lawsuits by pensioners who hadn’t actually suffered injury (at the time that included Justice Stephen Breyer, who, in the final opinions, joined in the dissent).
It’s worth remembering that a key reason this case got to the Supreme Court: The plaintiffs had alleged that not only did the Eighth Circuit’s decision veer from decisions in other districts—specifically the Second, Third and Sixth Circuits (in addition to the Administration), in holding that violation of ERISA rights alone was sufficient to have standing to bring suit, without establishing loss. Meanwhile the Fourth, Fifth, and Ninth circuits had gone another way—denying standing to bring suit to participants in similar contexts, though they have done so on Constitutional grounds—as has the Supreme Court—unlike the Eighth Circuit, which cited ERISA.
[i]Justice Thomas contributed a short concurring opinion, basically taking issue with arguments that connect ERISA rulings to the common law. He wrote: “I continue to object to this Court’s practice of using the common law of trusts as the ‘starting point’ for interpreting ERISA,” because its “statutory definition of a fiduciary departs from the common law.” He concludes with an opinion that “in an appropriate case, we should reconsider our reliance on loose analogies in both our standing and ERISA jurisprudence.”
[ii]A $31 million “stake” the majority opinion points out, and one that the dissent challenged as “misplaced” and “mistaken” in inferring that as a motivation in the suit’s filing.
[iii]Sotomayor writes: “Respondents misused a pension plan’s assets to invest in their own mutual funds, pay themselves excessive fees, and swell the employer’s income and stock prices.”