Supreme Court Grants Cert in Tibble v. Edison – BREAKING

Today, October 2, 2014, the United States Supreme Court granted the Plaintiffs’ Petition for Writ of Certiorari in Tibble v. Edison International. The list of orders from the Court can be found here.

As we’ve discussed in the past, the Supreme Court requested the opinion of the Solicitor General of the United States along with the Department of Labor in asking whether cert should be granted for the two issues that Plaintiffs sought to have heard. The first, regarding the six year statute of limitations found in ERISA was granted after the Solicitor General recommended that the Court take the case:

The petition for a writ of certiorari is granted limited to
the following question: “Whether a claim that ERISA plan
fiduciaries breached their duty of prudence by offering
higher-cost retail-class mutual funds to plan participants, even
though identical lower-cost institution-class mutual funds were
available, is barred by 29 U. S. C. §1113(1) when fiduciaries
initially chose the higher-cost mutual funds as plan investments
more than six years before the claim was filed.”

The second issue regarding deference to a plan fiduciary in interpreting a plan document was not supported by the Solicitor General and the Supreme Court did not agree to hear it. However, the proper level of deference that a fiduciary is to be given under ERISA sec. 502(a)(2) fiduciary breach claims is also the subject of a cert petition in Tussey v. ABB before the Court. At this point, the Court has yet to put consideration of that petition on its calendar and ABB’s brief is due October 6 under the current schedule, which is always subject to change.

Oral arguments in Tibble have not yet been set but currently the Court has availability in January. If heard that late, we can expect a decision sometime between late Spring and the end of June when the term ends.

 

John Hancock Dodges ERISA Class Action – An Analysis of the Bigger Picture

On Friday, September 26, 2014, in Santomenno v. John Hancock, et al. the Third Circuit Court of Appeals found in favor of the John Hancock defendants in a putative ERISA class action filed against them over excessive fees, affirming the district court’s dismissal of the lawsuit. There have been a number of well drafted blog pieces on the specifics of the decision that I would recommend to our readers. See summaries by Sidley Austin and Alston + Bird. The essence of the decision is that the plaintiffs failed to show that Hancock was a fiduciary for the conduct alleged.

Instead what I want to focus on here is the bigger picture for our readers. The decision in favor of Hancock comes after recent decisions have found similar service providers to be fiduciaries and other than have found them not to be:

In most cases, there are no allegations that the service provider is a fiduciary by title such as the Named Fiduciary or the Plan Administrator. Instead, whether the plaintiffs can show the provider is a fiduciary turns to the functional fiduciary test under ERISA 3(21)(A), which by its very nature is fact driven. From there, ignoring 3(21)(A)(ii) which governs investment advice and has a specific set of regulations that are more easily understood, the plaintiffs have been trying to show fiduciary status through 3(21)(A)(i) and (iii). Those provisions read as follows:

 a person is a fiduciary with respect to a plan to the extent

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(iii) he has any discretionary authority or discretionary responsibility in the administration of such plan…

The cases are holding with few exceptions that the functional fiduciary test under 3(21)(A(i) must show that the fiduciary actually exercised their discretion. In decisions in favor of AUL and John Hancock, the plaintiffs were unable to show that. In decisions against Transamerica, MassMutual, and ING, the plaintiffs were able to either show the exercise of discretion or that it was a issue of fact for trial. (I would also submit that the quality of the complaint and the level of detail as to the allegations has also played a part, but an academic analysis of the complaint in these cases might be the subject of a later post)

The decisions are also focusing on the “to the extent” language in the opening line of 3(21)(A), which limits fiduciary liability only to those duties that are specifically that actors. This happened here in the Hancock case, as well as in Hecker v. Deere, where the courts have consistently rejected that fiduciary status comes from the design of a larger investment menu that an actual plan fiduciary then chooses from, even if the provider is a fiduciary in other respects. However, see the decision against Transamerica which seemed to challenge the to the extent language in finding that they should have been responsible over ensuring their own fees were reasonable after becoming a fiduciary.

The open question from these cases is whether 3(21)(A)(iii) requires the actor to actually exercise their discretion or not, i.e. it’s a fiduciary breach to be both malfeasant and nonfeasant. The reason this has not been as prominent is that in most instances, the allegations are centered around the investments which generate the fees and they have little to do with plan administration. The chances are high that allegations against the large service providers in the future will involve claims under 3(21)(A(iii), even if the investments are the core of the conduct, i.e. revenue sharing.

Fidelity Settles Lawsuit with Own Employees Over 401(k) ERISA Allegations

Fidelity has  settled two lawsuits filed last year by its own employees over allegations that they violated ERISA in the administration of their own 401(k) plan by charging excessive fees and committing prohibited transactions. We extensively covered the allegations in our previous posts – Fidelity is Targeted Again and This Time Regarding Its Own In House Plan; Fidelity Files a Motion to Dismiss the Lawsuit Regarding Its Own In-House Plan; Case Against Fidelity Regarding In-house Plan Heats Up; and Fidelity is Sued Again Over In-House 401(k) Plan.

The motion for settlement filed in Bilewicz v. FMR LLC and in Yeaw v. FMR LLC and the accompanying settlement agreement provides for $12 million to be paid to the class and for the following affirmative relief to be taken:

  • The Plan will make available a wide selection of both Fidelity and non-Fidelity mutual funds.
  • The Plan will also continue to offer: (i) the Fidelity Freedom Funds – Class K as the Plan’s qualified default investment alternative; and (ii) Fidelity’s portfolio advisory service, Portfolio Advisory Services at Work (PAS-W). PAS-W will continue to be offered at no cost to participants.
  • Fidelity is increasing auto-enrollment for eligible employees from 3% to 7% of eligible compensation, and will default current participants who are currently deferring below 7% to 7% of eligible compensation. Fidelity will apply its match to those increased contributions.
  • The Plan shall provide that revenue sharing attributable to non-Fidelity mutual funds shall be credited to participants in the same way as revenue attributable to Fidelity mutual funds and collective trusts pursuant to the 8th amendment to the 2005 restatement of the Plan is credited to participants.This revision to the Plan shall remain in effect for at least three years.

The lawyers representing the Plaintiffs have been appointed as class counsel for the purposes of settlement and will be filing a motion for attorney’s fees at a later time. The amount they will be requesting was not disclosed in the settlement agreement. Each named plaintiff has asked for a specific request of $5,000 for their work in bringing the case. In exchange for the monetary payment and affirmative relief, the plaintiffs have agreed to an extensive release of claims related to the allegations in the complaint. However, the claims against Fidelity regarding float interest in In re Fidelity ERISA Float Litigation have specifically been carved out and that case will continue to move forward.

Our Thoughts

Fidelity’s settlement of this case is somewhat surprising as they have typically vigorously defended itself in other excessive fee litigation. On the other hand, no substantive decisions had yet been made in the case and the cost of litigating this case through summary judgment had their motion to dismiss been denied, would likely have been multiples of the $12 million paid to settle the case. For plan sponsors that have Fidelity, the affirmative relief should be of particular interest, as it may serve as a road map of what kind of services are considered best in class when provided by Fidelity (such as K share classes or offering funds from multiple families). Since this settlement did not cover the float litigation, we will continue to monitor it and provide updates.

Court Grants Summary Judgment to Plaintiffs in Rollins v. Dignity Health

Today, July 22, 2014, a Northern District of California court in Rollins v. Dignity Health granted the plaintiffs’ motion for partial summary judgment and denied defendants’. The decision was consistent with the court’s earlier denial of defendants’ motion to dismiss. (See Court Finds Plan Sponsored by Catholic Hospital is NOT a Church Plan).

In finding for the plaintiffs that the pension plan should be governed by ERISA, the court rejected defendants’ argument that it was inequitable or unfair because of the long term reliance on the IRS rulings and that either the ERISA or a California state law statute of limitation applies. The court also found that these was no genuine issue of material fact as to Dignity Health’s predecessor Catholic Healthcare West establishing the pension plan, rather than that they were either controlled by a church or that a church co-established the plan.

So where does this leave the case? The plaintiffs will now need to move the court to grant it the relief it seeks, i.e. meeting ERISA. Needless to say, this will be a herculean task. I wouldn’t be surprised to see the court enter an order granting the relief plaintiffs seek and then immediately stay the order until defendants can appeal the case to the Ninth Circuit Court of Appeals. Again, I wouldn’t be surprised to see the defendants want to move the case along as fast as they can in order to get the case to the appeal stage. No true predictions here as to what will happen next, but I suspect speed will be a dominant factor.

Two New Cases Filed

In addition to the six cases we’ve written about on the blog, two new cases have been recently filed. The complaints in Owens v. St. Anthony Medical Center (N.D. Illinois) and Lann v. Trinity Health (D. Maryland) are similar to the others, with the exception that the St. Anthony pension plan was already terminated in an underfunded status.

Recommendation by Magistrate in Favor of Plaintiffs in Medina v. Catholic Health Initiatives

I’ve been reluctant to report on a development in the Medina v. Catholic Health Initiatives case. There, the district court judge used a procedure under the rules requesting the assigned magistrate judge to review the case and provide their recommendation on how to decide. Sometimes these recommendations are agreed to 100% by a district judge and adopted and other times, the ultimate outcome can be substantially different if the district judge disagrees. So read the recommendation by the magistrate (knowing that it is not binding) siding with the plaintiff and finding that the pension plan at issue is not eligible to be considered a church plan and thus should be subject to ERISA. We will report on the decision of the district court when it is granted.

Some Additional Thoughts on Fifth Third v. Dudenhoeffer

One of the questions I’ve been asked repeatedly by the media, my clients, and industry practitioners is: what does this decision actually mean for ESOP fiduciaries and participants?

We published our immediate reactions in our first blog post on the decision. (See Supreme Court Rejects the Moench Presumption – Vacates and Remands Fifth Third Case)  We discussed the idea that the Supreme Court felt uncomfortable finding a justification for a “presumption of prudence” in the statutory language of ERISA. The Court also rejected any plan document based arguments as unconvincing. As a result, the Supreme Court made clear that there are no “coach class trustees,” citing the phrase Justice Kennedy used at oral argument.

We also discussed the idea that the Court was sympathetic to the plight of ESOP fiduciaries who would otherwise be subject to an avalanche of stock drop litigation every other week as stock prices go up and go down. Out of their toolbox they pulled the Iqbal and Twombly doctrines which generally have made it more difficult for plaintiffs with less information about their claims than the defendant by adding a heightened plausibility standard. The doctrines are a relatively new development in federal jurisprudence with the Twombly case being decided in 2007. If the doctrines were available in 1995, I would bet a dollar that the Moench Presumption might never have existed.

All that being said, what must a plaintiff plead now to get past the motion to dismiss stage? Said another way, what I am supposed to advise my ESOP fiduciary clients to do when the price of the stock drops?

This Is All About the Allocation of Risk

In this post, I’m going to focus on claims based on public information, which arguably is equally available to both ESOP fiduciaries and ESOP participants. (At some point later I may post about the insider information portion) Let’s be clear: both before and after this decision ESOPs are risky. There are very few investments out there more risky than a single security. In the simplest terms, this case is all about allocating risk between the ESOP fiduciaries and the ESOP participants.

Under the Moench Presumption, the ESOP fiduciary with a falling stock price would have been protected unless it was clear the company was effectively headed for bankruptcy or total failure (think Enron, Worldcom, etc…). If you imagine a line graph where the price starts to go down, the risk related to any drop in price was shifted to the ESOP participants until, for argument’s sake, the price of the stock was maybe 10% or less of what it was at it’s height.

Graph 2

The Supreme Court rejected this allocation by rejecting Fifth Third’s statutory and plan document arguments. Nonetheless, what the Supreme Court clearly did not appreciate was the argument that the ESOP fiduciaries are supposed to be clairvoyant and know the stock price is overvalued when the entirety of the investing public did not or has yet to adjust. In the same vein, the Supreme Court did not appreciate the idea that the ESOP fiduciary was supposed to use insider information, again, presumably, when the stock price was at its highest.

Let’s be real about what that argument actually meant. The plaintiffs wanted the damages period to start at the highest price point of the stock. Not when the price starts slipping but instead when the maximum damages will be the greatest difference between the highest stock price and the lowest stock price. A chart showing that allocation of risk would look like this:

Graph 1

Are There Plausible Claims Not Covered by Part B of the Decision?

In finding that ESOP fiduciaries are not supposed to clairvoyant, the Supreme Court introduced the idea that if “special circumstances” were present, then you could possibly bring a plausible claim that the ESOP fiduciaries should have known of the overvaluation. What “special circumstances” means will be decided by the lower courts. But obviously, we will see complaints arguing special circumstances. That is an obvious point.

But after a few days of thinking about the decision, one thing that struck me is whether a more modest plaintiff who brings a complaint saying that an ESOP fiduciary violated the duty of prudence only after the stock dropped in price 10 or 20% and the market is starting to figure out what is happening and other institutional investors are selling the stock, would be subject to this portion of the Supreme Court’s decision at all. If the claim does not involve clairvoyance, then no special circumstances may be necessary. The allocation of risk under this scenario might look something like this:

Graph 3

How the risk is allocated (where the red and green meet in my chart) will be decided by the lower courts and may be slightly different (or dramatically different) in different factual circumstances. What I mean by this is that with 100 different ESOPs, there will be 100 different factual scenarios regarding available public information, circumstances of the stock price drop, and to what extent there is inside information.

Ultimately, I think it is important to understand that risk has not been created or destroyed by this decision.  The risk was always present. Under Moench, ESOP participants bore most of the risk. But  under this decision, ESOP fiduciaries will not bear most of the risk either. Instead, this case was all about shifting a portion of the risk back to ESOP fiduciaries rather than ESOP participants, but leaving it somewhere in the middle. The Goldilocks of ERISA decisions if you will.

So, Again, Now What?

Now that Moench is no more, it appears to me that plaintiffs will argue that the company stock investment is subject to the exact same investing standards as any other core option in a plan. If the price starts to tank and other investors are dumping it, then the ESOP fiduciary will be criticized (read: found liable) if they don’t do the same thing they would do with a mutual fund on their watch list (i.e. freeze or sell).

So while we all wait for the next year or two or nineteen (1995-2014) for the lower courts to figure this out, ESOP fiduciaries should consider treating their company stock investment with the same exacting fiduciary standards they are treating the plan’s other investments. The sun is rising and it’s going to be 130 degrees by Noon. The ESOP fiduciary needs shelter. Here are items they should consider:

  • If they have an IPS, consider including the company stock investment or drafting an entirely separate IPS.
  • If they have a watch-list procedure, consider having it cover the company stock investment.
  • If they receive the services of an investment professional for the plan’s other investments but not the company stock, consider adding it or seeking a capable investment professional.
  • Consider the use of an independent fiduciary who can take over all fiduciary risk but the narrow responsibility to monitor the independent fiduciary.
  • Consider a review of your ERISA fiduciary liability policy to ensure that it covers losses related to the ESOP.
  • And last, but not least, document every fiduciary decision related to the ESOP. Just because a presumption of prudence is gone, does not mean that the ESOP fiduciary should not engage in actual procedural prudence. Having a robust process has gotten more than one fiduciary a favorable result in a courtroom.

 

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