0Solicitor General Urges Supreme Court to Address Plan Investment in Company Stock

The Supreme Court will soon announce whether it will clarify the circumstances under which a plaintiff may state a claim against plan fiduciaries for the continued holding of employer securities.  The federal government is urging the Court to take up the issue – and to move the law in a significantly more plaintiff-friendly direction.  Every federal court of appeals has held that, under at least some circumstances, courts must presume that an ERISA plan fiduciary acted prudently when it continued holding employer securities pursuant to the terms of a written plan.  The federal government has now asked the Supreme Court to take up the issue for the first time and to reject that presumption completely.  The Court will decide on December 13 whether to take up the case.  If it does so – which appears highly likely – the case would be argued in March or April 2014 and decided by June 2014.  (Update: the Supreme Court has granted review and will hear arguments in the case.)

The government staked out its position in a filing in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751.  In that case, the U.S. Court of Appeals for the Sixth Circuit declined to apply a presumption of prudence at the pleadings stage, although the Sixth Circuit agreed that under its precedent a presumption would apply once evidence was submitted.  The defendants asked the Supreme Court to decide when a presumption of prudence should apply.  Before ruling on the defendants’ petition, the Court asked the Solicitor General of the United States to submit the federal government’s views.  On November 12, 2013, the Solicitor General filed a brief urging the Supreme Court to grant review and to reject the presumption of prudence completely.


The Dudenhoeffer case arises against a familiar background.  A publicly traded financial services company offered its employees a defined contribution plan that allowed employees to choose among various options for their retirement savings.  One such option was a fund designed to invest primarily in the employer’s securities.  The governing plan instrument gave a plan committee discretionary authority to select the investment options that would be made available under the plan.  However, the plan document specified that, “in all events,” a fund designed to invest primarily in the employer’s stock “shall be an investment option.”

During the class period, July 19, 2007 through September 18, 2009, the plan allowed participants to invest in the stock fund and 19 other, diversified funds.  During that same period, the price of the company’s stock fell 74%.  The plaintiffs, two former participants in the plan, sued the company, its president and chief executive officer, and members of the plan committee under ERISA, alleging breaches of fiduciary duty for the continued holding in the plan of the sponsor’s stock during the class period.

District and Appeals Court Decisions in Dudenhoeffer

The trial court dismissed the case on the pleadings, ruling that the plaintiffs failed to defeat the presumption of prudence attendant to the plan’s holding such stock.  The Sixth Circuit reversed, largely following its earlier holding in Pfeil v. State Street Bank and Trust Company, reported in  Goodwin Procter’s March 29, 2012 ERISA Litigation Update.  While the Sixth Circuit again agreed that a presumption of prudence should be applied when a plan holds publicly traded shares of the sponsor’s stock consistent with the plan document, it held that the presumption is evidentiary in nature and should not apply at the pleadings stage.

It reached this conclusion, in part, based on its standard for rebutting that presumption, which it held was not as narrow as other circuits that hold that the presumption can only be rebutted by a showing of dire circumstances faced by the company, such as an impending collapse.  In this case, the court held that the plaintiffs had sufficiently stated a claim by alleging that the defendants were aware of sufficient information that rendered the stock an imprudent investment, in large part because of the company’s exposure with respect to sub-prime mortgages.

U.S. Supreme Court Petition for Certiorari

The defendants sought review by the Supreme Court in a petition for certiorari filed on December 14, 2012 (a similar petition had been filed by the defendants in the earlier Sixth Circuit case, Pfeil, though that petition had been rejected by the Supreme Court).  On March 25, 2013, the Court invited the federal government to file a brief.  On November 12, 2013, the Solicitor General, joined by the Solicitor of Labor, filed a brief urging the Court to accept the petition.

While the defendants’ petition had pointed out that the Sixth Circuit has diverged from other circuit courts of appeal in not applying the presumption of prudence at the pleading stage, the government brief urges the Supreme Court to take up the case not just to resolve the circuit conflict, but to moot it entirely by rejecting the presumption of prudence completely.  The government asserts (as the Department of Labor has repeatedly argued in amici briefs in the courts of appeals since Moench v. Robertson was appealed in 1994) that no presumption of prudence for holding employer stock should be afforded at any stage in the proceedings, regardless of the terms of the written plan.  The government argues that the presumption is not directly stated in the statutory text and is inconsistent with its reading of the statutory prudence standard. 

The government acknowledges that the result it seeks is contrary to the rule in every one of the seven courts of appeals to have reached the question.  All of those circuits – the Second, Third, Fifth, Sixth, Seventh, Ninth, and Eleventh – have adopted the presumption given other ERISA provisions favoring the holding of employer stock.  Nonetheless, the government’s brief explains that the Sixth Circuit’s decision meets the Supreme Court’s criteria for review, because the Sixth Circuit diverged from those other circuits in (i) determining what a plaintiff must prove to rebut the presumption, and (ii) holding that the presumption should not apply at the pleadings stage.  And if the Court is to review the question of when and how to apply the presumption, the government asks the Supreme Court to resolve the antecedent question of whether a presumption applies at all.  The Supreme Court had done just that in another recent ERISA case, CIGNA Corp. v. Amara, where it decided a question antecedent to the one on which certiorari actually was granted.

The Supreme Court has distributed the certiorari briefing for its December 13, 2013 conference.  A decision to take up the case would ordinarily be released that day.  The Court almost invariably accepts recommendations by the Solicitor General to grant certiorari, making this case a highly likely addition to the Court’s March 2014 argument calendar. A decision on the merits would come by June 2014.

0Sixth Circuit Allows Expansive Remedies by Awarding Both Disgorgement of Profits and Benefits

In Rochow v. Life Insurance Company of North America, No. 12-2074 (6th Cir. Dec. 6, 2013), the U.S. Court of Appeals for the Sixth Circuit took an expansive view of the remedies available under ERISA by allowing a plaintiff to recover benefits under ERISA § 502(a)(1)(B) and also obtain equitable relief in the form of disgorgement of profits under ERISA § 502(a)(3). 


Rochow involved a disability claim filed by a former company executive.  During his employment, the plaintiff was covered under a disability insurance policy issued by Life Insurance Company of North America (the “Insurer”).  The policy provided for disability benefits if an employee gave “satisfactory proof” that “solely because of Injury or Sickness [the employee is] unable to perform all the material duties of [his or her] Regular Occupation or a Qualified Alternative[.]”  After he began experiencing short term memory loss and other symptoms, the plaintiff was demoted from his position as president of the company, and eventually terminated due to inability to perform his job.

Following the termination of his employment, the plaintiff was diagnosed with a rare and debilitating brain infection and filed a claim for long term disability benefits.  The Insurer denied his claim on the ground that his employment ended before his disability began.

District Court Grants Plaintiff’s Motion for an Equitable Accounting and Orders Disgorgement of Profits

Following the denial of several claim appeals, the plaintiff filed a complaint in the U.S. District Court for the Eastern District of Michigan in which he asserted two claims under ERISA § 502(a)(3): (i) to recover full benefits due to the failure to pay benefits in violation of the terms of the plan; and (ii) to remedy the alleged breach of fiduciary duty.  The district court ruled that the Insurer acted arbitrarily and capriciously in finding that the plaintiff was not disabled while still employed and entered judgment for the plaintiff.

In subsequent proceedings the plaintiff argued to the district court that he was entitled to disgorgement of approximately $2.8 million in profits that the Insurer obtained through its return on equity from the wrongfully retained benefits because the Insurer breached its fiduciary duties, and disgorgement was necessary to prevent unjust enrichment.  The district court granted the plaintiff’s motion for an equitable accounting of profits and ultimately ordered disgorgement of profits as calculated by the plaintiffs’ expert.  The Insurer appealed.

Sixth Circuit Affirms District Court’s Decision

On appeal, among other issues, the Insurer argued that disgorgement relief was inappropriate because equitable relief under § 502(a)(3) is available only where § 502(a) does not otherwise provide an adequate remedy.  In a 2-1 decision by a panel of the Sixth Circuit, the appeals court held that the district court correctly permitted the plaintiff both to recover benefits under § 502(a)(1)(B) and to obtain equitable relief in the form of disgorgement under § 502(a)(3) because “Section 502(a)(1)(B) cannot provide the equitable redress of preventing [Insurer’s] unjust enrichment because it only allows a participant to ‘recover benefits due to him under the terms of the plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.’”

The appeals court further held that “disgorgement does not result in double compensation,” and “cannot fairly be characterized as punitive because it leaves [Insurer] no worse off than it would have been had it paid benefits to Rochow when they were due as the law required.”

In a dissenting opinion, Circuit Judge McKeague stated that “[t]he majority has taken an unprecedented and extraordinary step to expand the scope of ERISA coverage.  The disgorgement of profits undermines ERISA’s remedial scheme and grants the plaintiff an astonishing . . . windfall under the catchall provision in § 502(a)(3).”  As the dissent noted, the plaintiff was made whole when he was paid his disability benefits and attorneys’ fees.  “Allowing Rochow to recover disgorged profits, in addition to denied benefits, results in an improper repackaging of the benefits claims . . . [and] contravenes ERISA’s basic purpose.”

The dissent further noted that the majority’s decision appeared to be inconsistent with the Supreme Court’s decision in Howe v. Varity Corp., 516 U.S. 489 (1996), in which the Court held that Section 502(a)(3) “functions as a safety net, offering appropriate equitable relief for injuries caused by violations that § 502 does not elsewhere adequately remedy.”

0Courts Disagree over Jury Trial Right in ERISA Fiduciary Cases

Two recent federal district court decisions have come to opposite conclusions in addressing the question whether there is a right to jury trial with respect to fiduciary breach claims brought under ERISA Section 502(a)(2).  That statutory provision authorizes actions for “appropriate relief” under ERISA Section 409(a), which in turn provides that a breaching plan fiduciary “shall be personally liable to make good to [the] plan any losses to the plan resulting from each . . . breach, and to restore to [the] plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary.”  As discussed more fully below, the court in Hellman v. Cataldo, No 4:12-CV-02177 (E.D. Mo. August 20, 2013) found that there is a right to jury trial with respect to a Section 502(a)(2) claim, while the court in Bauer-Ramazani v. TIAA-CREF, No. 1:09-CV-190 (D. Vt. Nov. 27, 2013) held that there is no such right.

The Hellman Court’s Analysis

In Hellman, a participant in a defined contribution plan sued plan fiduciaries in a putative class action under ERISA Section 502(a)(2), alleging that the fiduciaries breached their duty of prudence by continuing to offer stock of the sponsoring employer as an investment option under the plan.  The plaintiff sought (among other things) an order compelling the defendants to make the plan whole for losses resulting from their breaches.  The plaintiff demanded trial by jury and the defendants moved to strike that demand.

In ruling on the motion, the court began its analysis by noting that the Seventh Amendment to the U.S. Constitution guarantees the right to jury trial in civil cases “only [in] lawsuits in which legal rights are adjudicated, and not to actions in which only equitable rights and remedies are decided.”  The court observed that, under Supreme Court authority, the determination whether a claim involves a legal right or an equitable right turns on a two-pronged analysis:  (i) whether the claim is analogous to 18th-century actions at law or claims in equity in England before the merger of the law and equity courts; and (ii) whether the remedy sought is legal or equitable.  See Granfinanciera v. Nordberg, 492 U.S. 33 (1989).

With respect to the first prong, the Hellman court concluded that claims for breach of fiduciary duty were traditionally within the jurisdiction of courts of equity, which would support a conclusion that there is no right to jury trial with regard to Section 502(a)(2) claims.  However, with respect to the second prong – which the court identified as the “weightier prong” of the analysis – the court found that the complaint requested legal relief, and on that basis concluded that the plaintiffs were entitled to a jury trial.

In addressing the second prong, the Hellman court relied on the Supreme Court’s decision in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), which involved a claim under ERISA Section 502(a)(3) by an ERISA health plan for reimbursement from a plan beneficiary who had received medical benefits from the plan following an accident and who subsequently obtained recovery for her injuries from a third-party tortfeasor. In this regard, Section 502(a)(3) authorizes actions for “appropriate equitable relief” to redress violations of ERISA or to enforce plan terms.   Great-West held that the remedy sought in that case did not constitute “equitable relief” available under Section 502(a)(3), because a “judgment imposing merely personal liability upon a defendant to pay a sum of money” in return for “some benefit that defendant had received from him” constituted legal (not equitable) relief.

In the view of the Hellman court, the Great-West analysis led to the conclusion that the remedy requested by the plaintiff in Hellman – i.e., monetary compensation for losses resulting from his plan’s continued, imprudent investment in employer stock – constituted legal relief, because the plaintiff sought to hold the defendants liable for monetary damages for their fiduciary breach.  Because the “more important prong” of the test indicated the case sought to adjudicate legal (rather than equitable) rights, the court held that the plaintiff was entitled to jury trial on his Section 502(a)(2) claim and denied the defendants’ motion to strike.

The Bauer-Ramazani Court’s Analysis

In Bauer-Ramazani participants in a defined contribution plan sued a plan service provider under Section 502(a)(2), alleging that the defendant had breached the fiduciary duty of loyalty by delaying investment transfers directed by the participants and retaining the investment returns earned during the delay.  The plaintiffs sought “restitution of the value of the investment gains on their accounts” from the date they contended the investment transfers should have been made to the date of the actual transfer.  The plaintiffs demanded a jury trial and the defendants moved to strike.  The Bauer-Ramazani court applied the same two-prong test as the Hellman court, but reached a different result.  With respect to the first prong, Bauer-Ramazani concluded (like Hellman) that ERISA fiduciary claims are equitable (as opposed to legal) in nature, which indicates no right to jury trial.

With regard to the second prong, the plaintiffs contended that, under Great-West, the remedy they requested should be considered legal relief, since they sought to impose on the defendant a personal obligation to pay money to the plan based on the earnings it had received on delayed transfers. The Bauer-Ramazani court rejected this argument, noting that, subsequent to Great-West, the Supreme Court had decided CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011), which clarified further the meaning of “equitable relief” under ERISA Section 502(a)(3).  Unlike Great-West, the CIGNA case involved claims against fiduciaries, and the Supreme Court explained that monetary remedies requiring breaching fiduciaries to make the plan whole or to disgorge profits constitute “equitable relief” because they are analogous to remedies available traditionally in equity courts against trustees who had breached fiduciary duties. Because the claims in Bauer-Ramazani were for breach of fiduciary duty, the court determined that the relief requested was equitable under CIGNA, and granted the defendant’s motion to strike the plaintiffs’ jury demand.


Hellman is an example of a case decided after Great-West that relied on the Supreme Court’s analysis in that case (dealing with the scope of “equitable relief” under ERISA Section 502(a)(3)) to conclude that types of make-whole and disgorgement monetary relief authorized by ERISA 409(a) are legal remedies, and therefore that plaintiffs are entitled to a jury trial with respect to claims enforcing Section 409(a) in actions under Section 502(a)(2). See, e.g., Bona v. Barash, No. 01 Civ. 2289 (S.D.N.Y. March 18, 2003).

Even before the Supreme Court’s decision in CIGNA, there were cases that rejected the argument that Great-West’s analysis of Section 502(a)(3) claims against a beneficiary requires the recognition of a jury trial right for claims against fiduciaries under Section 502(a)(2). See, e.g., George v. Kraft Foods Global Inc., Nos. 07 C1713, 07 C1954 (N.D.Il. March 20, 2008). After CIGNA, the Hellman analysis is even more questionable, as the Bauer-Ramazani court determined. Notably, cases like Hellman – which rely on Great-West even after CIGNA to find a jury trial right for Section 502(a)(2) claims – do not discuss, or cite, CIGNA. See also Healthcare Strategies, Inc. v. ING Life Ins. Co., No. 3:11-ev-282 (D. Conn. Jan. 19, 2012).

0Upcoming Conferences

Goodwin Procter partner Jamie Fleckner will speak at the following upcoming conferences:

ERISA Class Certification: Strategies to Defeat or Certify the Class After Dukes and Comcast
Strafford CLE Webinar
January 28, 2014

“Developments in Savings and Retirement Plans” 
SIFMA Compliance & Legal Society Annual Seminar
March 30, 2014 - April 2, 2014
Orlando, FL

LIMRA 2014 Retirement Industry Conference 
April 10-11, 2014
Chicago, IL