Yesterday, the United State Supreme Court heard oral argument in Tibble v. Edison International. A link to the transcript published by the Court can be found here. For those who are interested, I highly recommend you read through it.
The main stream media, in articles such as this one, interpreted yesterday as hinting at a victory for the plaintiffs. But let’s be clear: that’s not necessarily a clear cut outcome. Even a reversal, as I will explain below, requires difficult decisions by the Justices about what is required of fiduciaries.
I generally got the sense that not one of the Supreme Court Justices (other than Justice Thomas who hasn’t asked questions in years) supported the Ninth Circuit test that held where an investment is selected more than 6 years before a lawsuit is brought, there is no ongoing duty to monitor unless changed circumstances amounting to the investment almost being like a new investment would cause a fiduciary to reevaluate the fund. Being like new could mean a defined style drift, new management, dramatic change in performance, etc… On the other end of the spectrum, it also wasn’t 100% clear that there is enough support for the Plaintiffs’ position to simply have a constantly moving 6 year window with no test or limitations on what exactly a fiduciary should be doing to monitor investments. There may be a handful of Justices willing to do this, but one of them surely isn’t Justice Scalia who seemed more comfortable with the changed circumstances test than the others.
So given what we know, what is the likely outcome? Very unlikely they affirm the Ninth Circuit’s test but almost as unlikely they simply reverse without providing guidance on what the duty to monitor looks like. So that leaves us somewhere in the middle, swimming in shades of gray.
Given that the last few ERISA opinions have been 9-0 votes, I wouldn’t be surprised to see some compromises happening behind closed doors to get to another 9-0 vote here. How do they get there? The Justices will have three options: (1) they can reverse and remand back to the Ninth Circuit to develop a nuanced test for the duty to monitor, something that Justice Sotomayor was uncomfortable with the Supreme Court doing itself…if the parties are later unhappy with that test, they can file another cert petition to the Supreme Court, (2) they could do the same thing but provide “limited” guidance on what the test should look like, or (3) they reverse and provide robust guidance on what the duty to monitor requires of ERISA fiduciaries, more or less cutting the Ninth Circuit out of the process.
Of course, I don’t pull these options blindly out of a hat. Option #2 with the limited guidance is something the Court has been comfortable doing in recent decisions, including in Dudenhoeffer v. Fifth Third Bancorp last year and in Cigna v. Amara, a few years back (which my new colleague Stephen Rosenberg recently discussed on his blog sometimes brings unintended consequences). If they go this route, questions we don’t have answers to until we see a decision include what kinds of information is a fiduciary required to look at (performance, fees, etc…)? Will they keep calling it a changed circumstances test but change the criteria? Will they throw that test out and call it something different?
No matter the outcome, we will cover the decision here on the blog as soon as it’s published, which is expected before the end of June, but possibly earlier.