0Supreme Court Expounds on ERISA's Remedial Provisions
In deciding CIGNA Corp. v. Amara, No. 09-804 (May 16, 2011), the U.S. Supreme Court expounded on two of ERISA’s major remedial provisions —Sections 502(a)(1)(B) and 502(a)(3). The Court’s holding that Section 502(a)(1)(B) does not provide a remedy for violation of ERISA’s disclosure requirements clarifies the scope of that provision. By contrast, the Court’s discussion of ERISA Section 502(a)(3) creates substantial uncertainty regarding the remedies potentially available under that provision. The opinion is available here.
CIGNA arose from the following facts. In November 1997, an employer that maintained a defined benefit plan with a traditional benefit formula announced that the plan would be changed to a cash balance pension plan effective January 1, 1998. In late 1998, the employer provided plan participants with a summary of the plan as amended to include the cash balance features. Participants sued the employer and the plan, challenging the changes to the plan and alleging (among other things) that the employer’s disclosures regarding the plan amendments failed to comply with ERISA requirements.
District Court Decision
The district court certified a class of plan participants and ruled that the disclosures to participants regarding the plan changes violated ERISA Section 204(h) and Sections 102(a) and 104(b). In this regard, Section 204(h) requires that participants be provided with advance notice of any significant reduction in the rate of future benefit accrual under a defined benefit plan. Sections 102(a) and 104(b) require that participants be provided with summary plan descriptions and summaries of material plan changes that are sufficiently accurate and comprehensive to apprise participants of their benefit rights and obligations. The district court concluded that the employer’s communications to participants violated these statutory disclosure requirements because they were materially incomplete and misled participants.
In fashioning a remedy to address these violations, the district court relied exclusively on Section 502(a)(1)(B), which authorizes participants to sue to “recover benefits due . . . under the terms of the plan.” First, the court ordered that the plan’s terms be “reformed” to provide enhanced benefits which the court believed was consistent with the communications provided to participants. Second, the court permitted participants to recover benefits under the terms of the “reformed” plan language. In this regard, the court did not require each member of the plaintiff class to demonstrate that he or she had been harmed individually by the disclosure violations – for example, by showing that he or she had detrimentally relied on the disclosures. Instead, the court held that class-wide relief was appropriate because the evidence had raised a presumption of “likely harm” to participants and the employer had failed to rebut that presumption. After the district court’s holding was affirmed by the court of appeals, the Supreme Court granted certiorari to decide whether “likely harm” is the applicable standard under ERISA in determining whether participants are entitled to benefits based on inconsistencies between the plan document and communications regarding plan changes.
Supreme Court Decision
In a majority opinion authored by Justice Breyer, the Supreme Court held that the district court erred in relying on Section 502(a)(1)(B) to “reform” the terms of the plan to conform with communications provided to participants regarding the plan changes. The Court observed that Section 502(a)(1)(B) provides authority to enforce the terms of the plan, not to change those terms. Significantly, the Court rejected the argument that certain statutorily-required plan disclosures (e.g., a summary plan description) should be considered part of the “plan” for purposes of Section 502(a)(1(B). The Supreme Court’s holding that Section 502(a)(1)(B) does not provide a remedy for plan disclosure violations clarifies the scope of the remedy available under that provision and resolves an issue that lower courts had treated inconsistently.
By contrast, the Supreme Court’s discussion of ERISA Section 502(a)(3) raises uncertainties regarding the scope of remedies available under that provision. Section 502(a)(3) authorizes courts to grant “appropriate equitable relief” to redress violations of ERISA. The Supreme Court in CIGNA indicated that, on remand, the district court could consider whether Section 502(a)(3) may authorize equitable relief for members of the plaintiff class based on the disclosure violations the district court had found. The Supreme Court identified three possible remedies from the law of equity that the district court could consider – estoppel, reformation and surcharge – and stated that the level of harm a participant would have to show to recover will vary based on the equitable remedy employed.
For example, the Court discussed equitable estoppel, which would require a showing by a participant that he or she detrimentally relied on an inaccurate communication regarding benefits. The Court noted that detrimental reliance was not required for other equitable remedies that might be available under Section 502(a)(3), such as “reformation” – which has been used in the law of equity to reform contracts to reflect the mutual understanding of contracting parties to prevent fraud. The Court also observed that detrimental reliance would not be required if the applicable equitable remedy were “surcharge,” under which a breaching fiduciary may be required to make a participant whole.1 The Court stated, however, that in each case the participant would have to show actual harm and causation.
While the Court’s general discussion seems to suggest a relatively expansive view of remedies available under Section 502(a)(3), it is uncertain at this time what effect this discussion will have on lower courts addressing the scope of that provision in future cases. The concurrence in CIGNA (authored by Justice Scalia and joined by Justice Thomas) asserts that the entire discussion is “blatant dictum,” as the question of available remedies under Section 502(a)(3) was neither presented nor briefed in CIGNA. The majority opinion itself notes that it does not address any “other perquisites for relief” under Section 502(a)(3), beyond the harm a participant must show to be entitled to recover benefits based on inaccurate plan communications. Further, the majority opinion does not purport to determine whether the general principles it discusses are applicable even to the CIGNA case on remand. Nevertheless, it is likely that plaintiffs lawyers and the Department of Labor (“DOL”) will point to the CIGNA decision in arguing in favor of broad equitable remedies under Section 502(a)(3); indeed, the DOL has already used the decision as a basis to argue in an amicus brief to the Fourth Circuit that surcharge is an available remedy against a life insurance company. McCravy v. Metropolitan Life Insurance Company, Nos. 10-1074, 10-1131 (May 31, 2011, 4th Cir.).
1 In this regard, the majority’s discussion distinguished prior Supreme Court cases which had indicated that Section 502(a)(3) generally does not provide for a monetary, make-whole remedy, see, e.g., Mertens v. Hewitt Associates, 508 U.S. 248 (1993), stating that those prior cases (unlike CIGNA) had not involved defendants who were “analogous to a trustee.”
0Seventh Circuit Requires 401(k) Plan Fiduciaries to Stand Trial Where They Did Not Seek an RFP for Plan Recordkeeping Services Every Three Years
On April 11, a divided panel of the Seventh Circuit set a so-called “excessive fee” case on track for trial, by reversing in part the district court’s decision to grant summary judgment for defendants in George v. Kraft Foods Global, Inc., No. 10-1469 (7th Cir.). On May 26, the appeals court denied the defendants’ request to revisit its decision. The opinion is available here.
The litigation was brought by participants of a 401(k) plan against the plan’s sponsor and various individuals affiliated with the plan sponsor, as well as the relevant corporate committee that was responsible for overseeing the plan. The plan had between 37,000 and 55,000 participants and $2.7 billion and $5.4 billion in assets during the time of the challenged actions. After earlier having certified the case as a class action, the district court thereafter ended the case in its entirety by granting summary judgment to all defendants. An appeal followed. A panel of the Seventh Circuit reversed the decision, in part, thereby setting the case on track for trial, unless further appeals are allowed or the case is resolved by the parties.
After addressing a few procedural issues, the Seventh Circuit focused on three substantive questions. First, the court reversed summary judgment as to whether the defendants acted prudently in continuing the company stock fund as a unitized fund without any trading limit, even after a related plan sponsor switched its company stock fund from a unitized to real time traded fund. The plaintiffs argued that maintaining the fund under a unitized accounting structure caused $83.7 million in harm to participants over a seven-year period, through so-called “investment drag” and “transactional drag” – the alleged inability of fund participants to fully capture appreciation in the employer’s stock where 5% of the fund was invested in a cash buffer, and the alleged deleterious effect on all fund participants where the fund as a whole incurred trading costs necessitated by effectuating trades directed by a few participants who actively traded. The court held that the defendants were not entitled to summary judgment because they introduced no evidence that they made a conscious decision to maintain the unitized stock fund structure after their former parent company switched their fund away from a unitized accounting method, and that there was no evidence that the difference between unitized and real time traded funds was merely trivial.
Second, and of the most potential relevance to the largest number of plan sponsors and their service providers, the court reversed summary judgment as to whether defendants acted prudently in paying recordkeeping fees of between $43-$65 per participant per year where the defendants had not initiated an RFP for recordkeeping services since 1995. The defendants and the court below relied on the assessment of the defendants’ consultant that the fees were reasonable. The Seventh Circuit held that the lower court erroneously discounted the plaintiffs’ industry expert, who opined that it was imprudent not to get market prices every three years, and that the plan paid approximately twice as much as it should have for recordkeeping services. According to the Seventh Circuit panel, a fiduciary’s reliance on a consultant may be evidence of prudence, but is not itself sufficient to establish prudence. The court also explained that the defendants appeared to not follow a recommendation by their consultant that as the plan size grew, recordkeeping fees should be reduced. For a discussion by Goodwin Procter partner Jamie Fleckner and Analysis Group economist Lee Heavner criticizing the court’s decision on legal and economic principles, see “Seventh Circuit Creates Uncertainty About 401(k) Provider RFPs,” 100 Pensions & Benefits Daily (BNA), May 24, 2011.
Third, the court affirmed summary judgment as to whether the defendants breached their fiduciary duties by failing to monitor the so-called “float” income earned by the plan’s bank trustee on uninvested assets, and thereby failed to monitor whether the fees were reasonable. The court held that it was unrebutted that the trustee sent annual statements of its float income to defendants. As such, and in the absence of contrary evidence, the court could properly assume that the defendants were aware of the trustee’s float income.
0Another Circuit Court Adopts Fiduciary Exception to Attorney-Client Privilege in ERISA Context
On May 4, the Fourth Circuit followed four other circuits in adopting the fiduciary exception to the attorney-client privilege in the context of relationships governed by ERISA. The decision, Solis v. The Food Employers Labor Relations Association, et. al, No. 10-1687 (4th Cir.), is available here.
The background is as follows: the Department of Labor (“DOL”) initiated an investigation under ERISA Section 504, 29 U.S.C. Section 1143, into investments made by two multi-employer funds (the “Funds”). The Funds had invested in hedge funds, that in turn had invested in Bernard L. Madoff Investment Securities, LLC. As part of its investigation, the DOL subpoenaed the Funds. The Funds objected to some of the subpoena’s requests on the basis of the attorney-client privilege and work product doctrine. The DOL sought judicial enforcement of the subpoenas. The district court ordered the Funds to produce the withheld documents.
On appeal, a panel of the Fourth Circuit affirmed the decision of the district court that the fiduciary exception to the attorney-client privilege applied under ERISA. It began with the rationale for the rule under common law, “that the benefit of any legal advice obtained by a trustee regarding matters of trust administration runs to the beneficiaries.” The court then went on to identify other circuit courts that have applied the fiduciary exception in the ERISA context (the Second, Fifth, Seventh and Ninth Circuits). It then formally extended the fiduciary exception to the attorney-client privilege “to communications between an ERISA trustee and a plan attorney regarding plan administration.” That the context was a regulatory subpoena under Section 504, as opposed to litigation arising under Section 502, did not affect the court’s view of the applicability of the exception.
The court explained that the exception “is not without limits,” however. It followed other courts holding that the exception does not apply to (i) a fiduciary’s defense in an action charging breach of fiduciary duty or (ii) non-fiduciary activities “such as adopting, amending, or terminating an ERISA plan.” The court also held that the DOL does not need to show good cause to establish the existence of the exception.
The Fourth Circuit then addressed whether the fiduciary exception should similarly apply to the attorney work product doctrine. It found persuasive several district court authorities that extended the exception to apply equally to the work product doctrine. Ultimately, however, the Fourth Circuit held that it did not need to reach this question because the Funds did not otherwise meet their burden of proving that the work product doctrine applied at all, regardless of the exception.
0Publications and Upcoming Conferences
“Seventh Circuit Creates Uncertainty About 401(k) Provider RFPs”
BNA Pension & Benefits Daily
May 24, 2011
Authors: James O. Fleckner and Lee Heavner
American Conference Institute’s 4th National Conference on Defending and Managing ERISA Litigation
October 20-21, 2011
New York, NY
Jamie Fleckner will be presenting at this ACI conference on ERISA litigation. The conference covers the latest developments and trends in ERISA litigation, and provides participants with crucial knowledge and practical strategies needed to defend against ERISA claims.
James S. DittmarRetired Partner
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