ERISA Litigation Update - June 2010

In a 5-3 decision, the U.S. Supreme Court held in Conkright v. Frommert, 130 S. Ct. 1640 (2010), that where plan documents confer discretion on a fiduciary to interpret the plan, a court should apply deference in reviewing that fiduciary’s interpretation of the plan provision, even if a different, earlier, good faith interpretation of the same plan provision was previously overturned by the court as unreasonable. 

At issue in Conkright was a plan administrator’s interpretation of a plan provision regarding how to account for a lump sum distribution previously received by a participant who later became reemployed, earned additional plan benefits and ultimately retired.  In its first opinion in this case, the Second Circuit overturned the administrator’s original interpretation of this provision.  On remand, the administrator proposed a new interpretation of the plan, and the reviewing district court declined to apply a deferential standard to the second interpretation.  The Second Circuit affirmed, in part, stating that the district court need not “afford deference to the mere opinion of the plan administrator in a case, such as this, where the administrator had previously construed the same terms and we found such a construction to have violated ERISA.”  Frommert v. Conkright, 535 F.3d 111, 119 (2d Cir. 2008) (emphasis in original).

The Supreme Court reversed this decision.  Chief Justice Roberts began the majority opinion simply: “People make mistakes.  Even administrators of ERISA plans.”  The court then held that “an ERISA plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion” even if it has previously made “a single honest mistake in plan interpretation.”  The majority cautioned that ad hoc exceptions should not be applied to the rule of discretion – a rule based on trust law principles underlying ERISA as well as policy considerations:  “ERISA represents a careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.” (internal quotations and citations omitted).  Chief Justice Roberts emphasized that the court’s holding promotes “interests in efficiency, predictability, and uniformity” in ERISA plan administration, consistent with congressional intent. 

Justice Breyer wrote the dissent, joined by Justices Stevens and Ginsburg.  They agreed with the general proposition that, “where an ERISA plan grants an administrator the discretionary authority to interpret plan terms, trust law requires a court to defer to the plan administrator’s interpretation of plan terms.” (emphasis in original).  The dissenters, however, were persuaded that under trust law “a court may exercise its discretion to craft a remedy if a trustee has previously abused its discretion” (emphasis in original) and that ERISA policy goals of “promoting predictability and uniformity” “are, at the least, offset by . . . discouraging administrators from writing opaque plans and interpreting them aggressively.”

Section 502(g)(1) of ERISA provides that, in any action brought under ERISA’s enforcement provisions (other than actions by multi-employer plans to collect employer contributions or those brought by the Department of Labor), “the court in its discretion may allow a reasonable attorney’s fee and costs to either party.”  In Hardt v. Reliance Standard Life Insurance Co., No. 09-448, 2010 WL 2025127 (U.S. May 24, 2010), the U.S. Supreme Court held that, to be eligible for an attorney’s fee award under ERISA Section 502(g)(1), the fee claimant need not show that he was a “prevailing party” in the case, but need only demonstrate that he had achieved “some degree of success on the merits.”

In Hardt, an insurance company denied the plaintiff’s claim for long-term disability benefits under an ERISA-covered plan.  After exhausting her administrative remedies under the plan, the plaintiff sued the insurer under ERISA in federal district court in Virginia.  Although the district court stated that it was “inclined to rule” for the plaintiff, it denied her motion for summary judgment and remanded the case back to the insurance company.  Finding that the insurer had not complied with ERISA’s requirements regarding the review of benefit claims, the district court indicated that, in its view, there was “compelling evidence” supporting the plaintiff’s claim that the insurance company had failed to consider adequately, and that the remand would give the insurer “the chance to address the deficiencies” of its claim review.  The remand order stated that judgment would be entered in the plaintiff’s favor unless the insurance company made a decision on her claim within 30 days, after adequately considering all of the evidence.  Upon remand, the insurance company determined that the plaintiff was entitled to benefits.

Having received a favorable benefit determination upon remand, the plaintiff moved for attorney’s fees under ERISA Section 502(g)(1).  The district court awarded the plaintiff her fees, but on appeal, the Fourth Circuit reversed that award, holding that the plaintiff was not a “prevailing party” and therefore was not eligible for a fee award under Section 502(g)(1).  In the Fourth Circuit’s view, a fee claimant could qualify as a prevailing party for this purpose only if she obtained an enforceable judgment on the merits or a court-ordered consent decree.

The Supreme Court reversed.  In a decision written by Justice Thomas, the court noted that, unlike certain other statutory fee award provisions, ERISA Section 502(g)(1) does not expressly impose a “prevailing party” standard.  Borrowing a standard from its prior interpretations of statutory fee award provisions that do not require prevailing party status, the court held that a party could be eligible for attorney’s fees under Section 502(g)(1) if it has had “some degree of success on the merits.”  To satisfy this standard, the party must achieve more than “trivial success on the merits” or a “purely procedural victory.”  Based on its review of the district court order, the court concluded that the plaintiff had satisfied this standard.

Notably, in a footnote, the Supreme Court indicated that, in deciding Hardt, it was not foreclosing the possibility that a court which determines that a fee claimant is eligible for an award under the Hardt standard could consider other factors (such as the five-factor test applied by a number of courts in the ERISA fee award context¹) in deciding whether to award attorney’s fees.

In Renfro, et al. v. Unisys Corp., et al., Case No. 2:07-cv-02098 (E.D. Pa. Apr. 26, 2010), the U.S. District Court for the Eastern District of Pennsylvania granted the defendants’ motions to dismiss claims under ERISA, challenging the fees charged to a large 401(k) plan.

One of more than a dozen similar lawsuits filed around the country by the same plaintiffs’ law firm, the case involved allegations that the plan sponsor and the plan’s service providers (the trustee, recordkeeper and the investment adviser to the plan investment options) breached duties owed under ERISA by charging excessive administrative and investment management fees to the plan, and by failing to take advantage of the plan’s large size to negotiate lower fees for plan participants. 

With respect to claims against the service provider defendants, the plaintiffs had alleged that the trustee/recordkeeper defendant had discretionary authority or responsibility in the administration of the plan giving rise to ERISA fiduciary status on the ground that, under the trust agreement, the only mutual funds the plan could offer were those advised by the trustee/recordkeeper’s affiliated investment adviser or those that trustee/recordkeeper approved.  The court held that it did not need to reach the question of whether this alleged “veto power” over changes to investment options was a sufficient grant of discretionary authority or discretionary responsibility in the administration of the plan to render the provider a fiduciary, because there was no such veto power under the facts alleged.  While the trust agreement set forth rules governing that particular trust, it “did not limit [the sponsor]’s ability to establish another trust that would offer [p]lan participants the opportunity to invest in [other] mutual funds.”  Because the trustee/recordkeeper did not have a veto power over investment selections giving rise to fiduciary status, and because the plan sponsor retained sole authority to determine what investment options were offered to the plan, the claims against that defendant were dismissed.  Claims against the affiliated investment adviser were also dismissed because the plaintiffs’ theory of liability as to the adviser was premised on its alleged exercise of authority delegated to it by the trustee/recordkeeper.   

With respect to claims against the plan sponsor and named fiduciary, the court held that the plan offered a sufficient mix of investments to participants and that no rational trier of fact could find, based on the pleaded facts, that the named fiduciary breached an ERISA fiduciary duty by offering this particular array of investment vehicles.  In support of this holding, the court cited to the Seventh Circuit’s decision in Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), reh’g and reh’g en banc denied, 569 F.3d 708 (2009), cert. denied 130 S. Ct. 1141 (2010), in which the Seventh Circuit affirmed dismissal of similar claims involving another large 401(k) plan on the ground that a plan fiduciary is not obligated to select the cheapest funds available, and that where the plan offered sufficient range of options to afford participants control over their risk of loss, any loss to participants was attributable to their individual choice and could not form the basis for fiduciary liability.  The Hecker decision was discussed in Goodwin Procter’s June 25, 2009 ERISA Litigation Update.  Citing the Hecker decision, among other authorities, the court dismissed the plaintiffs’ second amended complaint in its entirety.

Numerous ERISA stock drop suits filed in the wake of the recent financial crisis continue to work their way through the system.  To date, no case has gone to trial, but several have resulted in notable decisions at the motion to dismiss and/or summary judgment stages – with victories for both plaintiffs and defendants.  The following are two examples of recent decisions in subprime-related class action lawsuits.

Johnson v. Radian Group, Inc.

In Johnson v. Radian Group, Inc., No. 08-2007, 2010 WL 2136562 (E.D. Pa. May 26, 2010), the district court granted the defendants’ motion to dismiss an amended putative class action complaint for breach of fiduciary duties.  The Johnson complaint asserted claims against the plan’s employer-sponsor, a credit enhancement company that offered mortgage insurance and other financial services (the “Sponsor”), and the plan’s named fiduciaries, and was filed on behalf of all participants whose plan accounts held Sponsor stock.  The plaintiff alleged that the defendants breached their fiduciary duties to prudently and loyally manage the plan and to not mislead plan participants about the risks associated with Sponsor stock in relation to the Sponsor’s investment in Credit-Based Asset Servicing and Securitization LLC (“C-BASS”), an issuer, servicer and investor in credit-sensitive residential mortgage assets, in which the Sponsor held a 46% interest.  The plaintiff further alleged that the Sponsor failed adequately to disclose that it faced a “monumental liquidity crisis” caused by the subprime mortgage crisis coupled with C-BASS’s business model, and that as the subprime mortgage market deteriorated giving rise to a material increase in mortgage loan defaults to which C-BASS was vulnerable, the Sponsor failed to disclose this investment risk to participants.  On these allegations, the plaintiff asserted that the Sponsor breached fiduciary duties owed to participants by imprudently continuing to offer Sponsor stock as an investment option and matching contributions.

In granting the motion to dismiss, the court applied the presumption of prudence first articulated by the Third Circuit in Moench v. Robertson, 62 F.3d 533 (3d Cir. 1995), which affords deference to fiduciary decisions regarding investment in employer stock.  Under the Moench presumption, fiduciaries investing in company stock where the plan at issue encourages such investment are presumed to have acted consistently with ERISA fiduciary duties, and their conduct is judged under an abuse of discretion standard. 

The court held that the Moench presumption properly applied in Johnson, where the plan called for all matching contributions to be made in Sponsor stock and therefore required investment in the stock.  The court also rejected the plaintiff’s argument that, because plan fiduciaries had the ability to add, remove or change plan options, the Moench presumption should not apply, noting that courts apply the presumption to plans that offer various investment options.  The court further held that inclusion of the Sponsor stock fund was not discretionary just because the Sponsor had the right to amend the plan to discontinue investments in Sponsor stock.  The right to amend a plan is a settlor function not subject to review under ERISA’s fiduciary provisions.

In addition, the court found that the plaintiff failed to rebut the Moench presumption where the plaintiff failed to demonstrate that the defendants could not have believed reasonably that continued adherence to the plan’s terms was in keeping with the settlor’s expectations of how a prudent trustee would operate.  Specifically, the plaintiff had failed to plead facts to support the kind of “dire situation” that would require plan fiduciaries to depart from the plan’s terms requiring investment in company stock, in part because the plaintiff did not demonstrate that the defendants were aware of any “monumental liquidity crisis” at the time that the Sponsor announced that its investment in C-BASS was materially impaired.  The court also noted that the drop in the Sponsor’s stock price after this announcement was insufficient in itself to rebut the Moench presumption.

The court also dismissed the plaintiff’s claims for breach of the duties of disclosure and loyalty for failure to put forth allegations sufficient to sustain those claims.  Having dismissed the plaintiff’s original complaint for failure to state a claim, the court granted the defendants’ motion to dismiss the amended complaint with prejudice.

Dann v. Lincoln National Corp.

In another recent decision addressing claims challenging the inclusion of company stock in a retirement plan, the court allowed the plaintiff’s claims to go forward.  In Dann v. Lincoln National Corp., No. 08-5740, 2010 WL 1644276 (E.D. Pa. Apr. 20, 2010), the district court denied the defendants’ motion to dismiss a putative class action complaint for alleged breaches of ERISA fiduciary duty in connection with inclusion of employer stock in a 401(k) plan offered by a corporation that sold, among other things, retirement income products (the “Sponsor”). 

The Dann complaint asserted claims against the Sponsor and its CEO on behalf of all plan participants and beneficiaries whose accounts held Sponsor stock, alleging that the defendants knew or should have known that, as financial markets struggled in 2008, the Sponsor was exposed to investment losses due to its investments in mortgage-backed securities, structured investment products and other derivative securities.  On these allegations, the plaintiff claimed that the defendants breached their duties of prudence and loyalty by continuing to invest the plan’s assets in Sponsor stock.  The plaintiff further alleged that the defendants breached duties by failing to disclose complete and accurate information about the company’s exposure to investment losses, which prevented plan participants form making informed investment decisions, and failed to adequately monitor other plan fiduciaries or to provide them with complete and accurate information about the risk of loss.

In their motion to dismiss, the defendants argued, among other things, that they were entitled to a presumption of prudence for their decision to invest in Sponsor stock, and that they had met their disclosure obligations.  While the court agreed that the Moench presumption applied because a component of the plan was an employee stock ownership plan that was designed to invest primarily in Sponsor stock, it denied the defendants’ motion to dismiss on the ground that the plaintiff had pleaded “dire circumstances” sufficient to overcome the presumption.  The plaintiff’s allegations of dire circumstances included: (i) that the Sponsor stock price incurred a “precipitous decline,” at one point a 90% drop; (ii) that the defendants knew or should have known of the company’s exposure to losses in its investment portfolio, particularly when, among other things, two ratings agencies had downgraded the Sponsor’s credit and debt ratings; and (iii) that certain defendants suffered conflicts of interest because their compensation was tied to the price of Sponsor stock, creating an incentive for those defendants to continue investment in the stock.  Accordingly, the court held that the plaintiff had sufficiently alleged circumstances that might cause a prudent plan fiduciary to discontinue investment in Sponsor stock, and that the plaintiff was entitled to discovery on his prudence and loyalty claims.

New ERISA Supreme Court Rulings in Conkright and Hardt: Leveraging Court Guidance on Deferential Review Standards and Attorney Fee Awards 

July 28, 2010
Teleconference

Jamie Fleckner will serve as a faculty member for this Strafford Publications teleconference, which will provide an analysis of the U.S. Supreme Court’s rulings in Conkright, which provides additional guidance since Met-Life, and Hardt, which upholds attorney fees to a claimant awarded benefits. The panel will review how the cases interrelate and their impact on ERISA litigation.