ERISA Litigation Round Up

This article originally appeared in the Fall 2015 issue of Plan Consultant magazine.

I’m always surprised every time the U.S. Supreme Court takes another ERISA case. It is an open secret among federal judges that ERISA cases are their least favorite ones. They often are complicated, counterintuitive and time consuming.

Yet, it seems the Supreme Court has taken a major ERISA case or two every term in recent memory. Last year it was Fifth Third Bankcorp v. Dudenhoeffer, which surprisingly threw out the Moench Presumption was used by fiduciaries of company stock funds to argue that offering the investment had a presumption of prudence against fiduciary breach claims. The Moench Presumption has been around for more than 20 years since first being adopted by the 3rd Circuit.

In Dudenhoeffer, the Supreme Court found that company stock fiduciaries are held to the same stringent ERISA fiduciary duties as all other fiduciaries with the exception of the duty of diversification. In the opinion, the Supreme Court also rejected hard-wiring fiduciary decisions into a plan document by rejecting the argument that the plan document required the company stock to be offered and there was nothing the fiduciaries could do.

Tibble: ERISA Statute of Limitations

This year the major case heard by the Supreme Court was Tibble v. Edison International, which addressed the proper scope of ERISA’s 6-year statute of limitations. In Tibble, the Supreme Court reversed an earlier 9th Circuit ruling that under ERISA’s 6-year statute of limitations, a breach of the fiduciary duty of prudence was time barred for investments selected more than 6 years before a lawsuit is brought.

The 9th Circuit had ruled the only exception to the time bar is if there was a material change in circumstances with regard to the investment such that it was almost like having a brand new investment in a plan. Rejecting this interpretation, the Supreme Court agreed with the plaintiff plan participants and the Secretary of Labor, who submitted an amicus brief in support of the plaintiffs, that ERISA’s fiduciary duties include a duty to monitor separate and apart from a prudent duty of selection.

At oral argument, the justices were skeptical that they should delve into what exactly the duty to monitor means. Ultimately that skepticism was enshrined in their opinion. In a rare 9-0 opinion, they found that a duty to monitor exists but declined to provide any details beyond pointing to the common law of trusts as inspiration — which they have done in numerous previous opinions. Instead, the case was remanded to the 9th Circuit to decide on the scope, although it won’t be surprising if the decision is sent all the way back to the district court.

Tatum: Reverse Stock Drop

Shortly after deciding the Tibble case, the Supreme Court declined to hear Tatum v. RJR Pension Committee, a so-called “reverse stock drop” case in which the primary complaint was that the fiduciaries improperly eliminated a company stock fund when they should have known that the price of the stock would go up in the future. 

Ultimately, the Tatum case less about company stock funds and more about the consequences of when a fiduciary has breached their duty of prudence by failing to put in place a prudent process to evaluate an investment decision. Can the defendant avoid liability by arguing that the result would be the same even if they had a prudent process in place (i.e., the ultimate decision was still substantively prudent)?

Here, it was the decision of whether to keep or eliminate Nabisco stock in the RJR 401(k) plan after the company split into two. The plaintiffs alleged that the defendants met for just about an hour and only considered their own liability in deciding to eliminate the stock. Ultimately, the stock price bounced back and the participants in the plan missed out on these gains.

The 4th Circuit concluded that the defendants failed to have a prudent process because they failed to consider the best interests of the participants. The question then becomes: Once you’ve shown a failure of procedural prudence, what can the fiduciary prove to show they still made the right substantive choice? The defendants wanted a standard that would have allowed them to put on evidence that a prudent fiduciary could have made the same decision. The plaintiffs, and ultimately the 4th Circuit, supported a standard where the defendant must show that a prudent fiduciary would have made the same decision. Hence the “Could Have vs. Would Have” issue that the case became known for.

As explained it was to me by one of the attorneys representing the plaintiffs, the “Could Have” standard is essentially proving that if you surveyed 100 prudent fiduciaries, one of them would make the same decision, while the “Would Have” standard would require proving that 51 of 100 would make the same decision. Simply stated, the “Would Have” standard gives the defendant no benefit of the doubt, and they can only escape liability in the most stringent of circumstances.

In declining to hear the case, the Supreme Court probably took into consideration a brief from the Solicitor General and the Department of Labor that argued the 4th Circuit got the decision right and that the Court should not hear it.

The High Court’s Current Term

What can we expect during the Supreme Court’s 2015-2016 term, which began this month? The justices have not agreed to hear any major fiduciary cases, but they have agreed to hear two ERISA cases dealing with very different issues:

• In Gobeille v. Liberty Mutual Insurance Company, the issue to be decided is whether the 2nd Circuit was wrong in holding that ERISA preempts Vermont’s health care database law as applied to the TPA for a self-funded ERISA plan.

• In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, the Court will decide whether under ERISA, a lawsuit by an ERISA fiduciary against a participant to recover an alleged overpayment by the plan seeks “equitable relief” within the meaning of ERISA Section 502(a)(3), if the fiduciary has not identified a particular fund that is in the participant’s possession and control at the time the fiduciary asserts its claim.

For more information about these cases, readers are encouraged to go to scotusblog.com to read the briefs filed in the cases — as well as the author’s own blog, fiduciarymattersblog.com, which will cover the opinions when they are handed down next year.

Thomas E. Clark Jr., JD, LLM is Of Counsel with The Wagner Law Group. He recently opened the firm’s St. Louis office, where he provides counsel to plan sponsors, fiduciaries and service providers.