Tag Archives: Tibble v. Edison

Plaintiffs Score Victory Before Supreme Court in Tibble v. Edison

Today, May 18, 2015, the Supreme Court unanimously ruled in favor of the plaintiff plan participants in Tibble v. Edison. The decision reversed an earlier 9th Circuit ruling that under ERISA’s six year statute of limitations, a claim involving a plan investment that was initially chosen outside the 6 year window from when a lawsuit is brought could only be viable if there was a change in circumstances that would cause a fiduciary to reexamine the fund’s inclusion in the plan. The Supreme Court rejected this interpretation, finding that under ERISA, there is a continuing duty to monitor and remove imprudent investments. Today’s decision also effectively reversed rulings in the 4th and 11th Circuits that were similar to the 9th Circuits.

The Decision

 As we suggested may happen, the Supreme Court voted 9-0 to reverse the 9th Circuit but did so in a way that did not definitively rule on how exactly a claim must be plead to trigger the continuing duty to monitor and remove.

The decision by Justice Breyer began its analysis by examining the previous 9th Circuit decision:

The Ninth Circuit correctly asked whether the “last action
which constituted a part of the breach or violation” of
respondents’ duty of prudence occurred within the relevant
6-year period. It focused, however, upon the act of
“designating an investment for inclusion” to start the 6-
year period…The Ninth Circuit stated that “[c]haracterizing the mere continued offering of a plan option, without more, as a subsequent breach would render” the statute meaningless and could even expose present fiduciaries to liability for decisions made decades ago…But the Ninth Circuit jumped from this observation to the conclusion that only a significant change in circumstances could engender a new breach of a fiduciary duty, stating that the District Court was “entirely correct” to have entertained the “possibility” that “significant changes” occurring “within the limitations period” might require “‘a full due diligence review of the funds,’” equivalent to the diligence review that respondents conduct when adding new funds to the Plan.

The decision then rejects this approach:

We believe the Ninth Circuit erred by applying a statutory bar to a claim of a “breach or violation” of a fiduciary duty without considering the nature of the fiduciary duty. The Ninth Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.

Different Justices of the Supreme Court showed during oral arguments that they struggled with the question of exactly what this continuing duty to monitor looks like. Rather than resolve the question, they have remanded the case back to the 9th Circuit to decide what the duty to monitor requires and whether the plaintiffs here met that burden to have viable claims. But they did so while also providing important context from trust law. Here are few excerpts:

Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset. The Bogert treatise states that “[t]he trustee cannot assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely.” A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees §684, pp. 145–146 (3d ed. 2009) (Bogert 3d). Rather, the trustee must “systematic[ally] conside[r] all the investments of the trust at regular intervals” to ensure that they are appropriate. Bogert 3d §684, at 147–148; see also In re Stark’s Estate, 15 N. Y. S. 729, 731 (Surr. Ct. 1891) (stating that atrustee must “exercis[e] a reasonable degree of diligence in looking after the security after the investment had been made”); Johns v. Herbert, 2 App. D. C. 485, 499 (1894) (holding trustee liable for failure to discharge his “duty to watch the investment with reasonable care and diligence”). The Restatement (Third) of Trusts states the following: “[A] trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.” §90, Comment b, p. 295 (2007).

The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.” §2, Comment, 7B U. L. A. 21 (1995) (internal quotation marks omitted). Scott on Trusts implies as much by stating that, “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.” 4 A. Scott, W. Fratcher, & M. Ascher, Scott and Ascher on Trusts §19.3.1, p. 1439 (5th ed. 2007). Bogert says the same. Bogert 3d §685, at 156–157 (explaining that if an investment is determined to be imprudent, the trustee “must dispose of it within a reasonable time”); see, e.g., State Street Trust Co. v. DeKalb, 259 Mass. 578, 583, 157 N. E. 334, 336 (1927) (trustee was required to take action to “protect the rights of the beneficiaries” when the value of trust assets declined).

The decision then summarized its holding as follows:

In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely. The Ninth Circuit erred by applying a 6- year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.

Finally, the Supreme Court made clear that it was not ruling on the scope of the duty to monitor:

We express no view on the scope of respondents’ fiduciary duty in this case. We remand for the Ninth Circuit to consider petitioners’ claims that respondents breached their duties within the relevant 6-year period under §1113, recognizing the importance of analogous trust law.

Our Thoughts

 This is obviously a significant victory for the plaintiffs in this case and plan participant lawsuits generally, as many lawsuits in the last 5 years had been dismissed citing the overly restrictive interpretation of ERISA’s six year statute of limitations.

In plain English, what this decision holds is that if a plaintiff can make a valid claim for a violation of the continuing duty to monitor, there is a effectively now a rolling 6 year window of liability. But of course, now the question is: what exactly is that duty and did the defendants violate it here? The panel of three 9th Circuit judges that previously rules in favor of the defendants will get the first chance to answer those questions. Additionally here for these plaintiffs, the defendants have raised an argument that amounts to a technicality that the plaintiffs failed to raise a duty to monitor claim in the lower courts. The Supreme Court again stated that they had no opinion on the matter and would let the 9th Circuit decide.

So what does this decision mean for the (quite probably) millions of ERISA fiduciaries out there? There is no longer any dispute that a fiduciary must have a process to monitor a plan’s investments. We think it is also fair to say that this duty to monitor extends to all other areas of plan administration and responsibility (e.g. fees paid to providers, quality of providers, whether services are necessary, etc…) However, the duty does depend on the circumstances as the Supreme Court pointed out by citing to ERISA’s statutory language. But we suggest that if a fiduciary does not have a robust monitoring process in place, they do not wait for any further court decisions. Develop a process, document why you think it’s a prudent process, and execute that process.

As we’ve done for the Tibble case since the original decision in the 9th Circuit through the granting of the cert petition, we will continue to update our readers on any further developments.

Supreme Court Wrestles with Issues in Tibble v. Edison

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.

Supreme Court Requests DOL Opinion in Tibble v. Edison Petition

Today, March 24, 2014, the Supreme Court announced the results of their Friday conference where the plaintiffs’ cert petition from the Tibble v. Edison International case was considered. In a surprise move, the Supreme Court has asked the Solicitor General of the United States, working in conjunction with the Secretary of the Department of Labor, to file a brief offering their view on the issues. We have previously discussed the 9th Circuit opinion that plaintiffs are seeking to have heard, the rehearing opinion issued by the 9th Circuit panel, and the plaintiffs’ petition to the Supreme Court.

Many might remember that this is exactly what happened in Fifth Third Bancorp v. Dudenhoeffer, the case set for oral argument before the Supreme Court on April 2 concerning stock stop cases and the so called Moench Presumption. There, the Supreme Court requested the DOL’s views and shortly thereafter granted the petition to hear the case. (to read the briefs from the Fifth Third case, head over to the SCOTUSBlog website which is the preeminent source for information related to the Supreme Court)

As a reminder to our readers, the plaintiffs in Tibble are seeking to have the following issues heard by the Supreme Court:

1. Notwithstanding the ongoing nature of ERISA’s fiduciary duties, does the statute of limitations under 29 U.S.C. §1113(1) immunize 401(k) plan fiduciaries for retaining imprudent investments that continue to cause the plan losses if the funds were first included in the plan more than six years ago?

2. Does Firestone deference apply to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants?

In our opinion, these issues are ripe for decision by the Supreme Court. Defining exactly how the 6 year statute of limitation should be interpreted would provide needed clarity to both plan participants and plan sponsors. Additionally, as we mentioned last week, the issue of deference to ERISA fiduciaries could not be more timely, as the 8th Circuit in the Tussey v. ABB appeal found that the district court should have viewed the action of the ABB defendants with regard to investment decisions at issue in the case through a lens of deference. The idea of deference as to the interpretation of a fiduciary’s own duties under ERISA is not something that appears in the plain text of the statute and is a relatively new court created doctrine. There is much disagreement in the legal and scholarly community so to whether deference is appropriate and we should expect to hear those opinions voiced in the coming weeks.

As to what the DOL will say, we can be reasonably sure they will agree with the plaintiffs as to the statute of limitations issue, as they are on record many many times in filed amicus briefs supporting an interpretation that is favorable to plan participants. As to the issue of deference, I am not aware of any previously filed positions by the DOL but I wouldn’t be surprised to see them agree with the plaintiffs again on this issue.

If that is the case, then the question becomes, what will the Supreme Court do? Will they agree to hear the case? In the last go around with the Fifth Third petition, many legal observers made the argument that when the Supreme Court asks for the Solicitor General’s opinion, it greatly increases the chances the case will be heard. (for the truly interested, this law review article does a very good job of empirically analyzing the success of petitions when a response is requested and when the solicitor general’s opinion is requested, both of which happened here)

We here on this blog are not in the business of tea leaf reading and we will not make a prediction. Instead, the only thing we can promise is that when the DOL files their brief and when the Supreme Court makes their decision,  you will hear about it here expeditiously.