ERISA Litigation Newsletter

In a highly anticipated decision concerning 401(k) excessive fee litigation, the U.S. Supreme Court ruled in favor of the plaintiffs in Tibble v. Edison, Int’l, No. 13-550, vacating the lower court’s decision that had found certain of the plaintiffs’ excessive fee claims time-barred under ERISA’s six-year statute of limitations. Previous developments in Tibble were discussed in our March 28, 2013 and September 29, 2014 ELUs.

Filed in 2007 in the U. S. District Court for the Central District of California, the Tibble suit, among other things, challenged the use of retail share classes of mutual funds that paid revenue sharing in a large 401(k) plan. Plan participants specifically challenged three funds that had been added to the plan in 1999 and three funds that had been added in 2002. With respect to the funds added to the plan in 2002 - within the limitations period - the district court entered judgment for the plaintiffs, finding that the defendant fiduciaries breached their fiduciary duties where they could offer no credible explanation for offering retail share class mutual funds when institutional share classes were available. The district court held that the plaintiffs’ claims concerning the funds selected more than six years prior to suit were time-barred, and that the plaintiffs failed to demonstrate that a prudent fiduciary would have undertaken full due-diligence review of the funds as a result of alleged changed circumstances. 

The U.S. Court of Appeals for the Ninth Circuit affirmed. With respect to the three funds added outside the limitations period, the Ninth Circuit held that the plaintiffs’ claims were untimely because they had not established a change in circumstances that might trigger an obligation to review and to change the investments within the limitations period.

The plaintiffs petitioned the U.S. Supreme Court for a writ of certiorari and in October 2014, the Supreme Court granted certiorari on the following question:  “Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”

After merits briefing and oral argument, on May 18, 2015, the Supreme Court vacated and remanded the case. The Court ruled unanimously that the Ninth Circuit erred when it applied ERISA’s statute of limitations to breach of fiduciary duty claims based on the initial selection of investments without considering that the fiduciaries had a separate, continuing duty derived from trust law to monitor plan investments and to remove imprudent funds.  In so ruling, the Court declined to define the scope of an appropriate ongoing investment review, but noted that the nature and timing of such review would be contingent on the circumstances. The Court remanded the case to the Ninth Circuit to consider the plaintiffs’ claims that the fiduciaries breached their duties within the six-year limitations period.

Background

On June 25, 2015, the U.S. Supreme Court will decide whether to grant certiorari in Tatum v. RJR Pension Investment Committee, 761 F.3d 346 (4th Cir. 2014). As discussed in the September 29, 2014 edition of the ELU, Tatum concerns fiduciary claims arising out of the plan fiduciaries’ decision to eliminate employer stock from the plan.  The district court held that the defendants were not liable because they met their burden of proof that the elimination of employer stock was a decision that a prudent fiduciary “could have” made after proper investigation. The Fourth Circuit reversed, holding that the defendants were required to show that a prudent fiduciary “would have” made the same decision.

The defendants seek a writ of certiorari from the Supreme Court concerning two questions: (i) whether a plaintiff bears the burden of proving loss causation throughout a fiduciary breach case, or whether that burden shifts to the defendant once a plaintiff establishes a breach of duty and loss to the plan; and (2) whether an ERISA defendant that has failed to prudently investigate before making an investment decision must be liable for loss to a plan unless a prudent fiduciary “would have” made the same investment decision. In support of the petition, the defendants argued that there is a circuit split about which party holds the burden of proof regarding loss causation, with five circuits holding that the burden remains with the plaintiffs throughout a fiduciary breach action, and three circuits (including the Fourth Circuit) holding that the burden shifts to the defendant once the plaintiff establishes a breach of duty and loss to the plan.

The defendants also argued that in interpreting the requirement that an ERISA fiduciary that conducted an imprudent investigation before making an investment decision may not be held liable for damages if the ultimate investment decision was “objectively prudent,” the Fourth Circuit created an unprecedented standard: that a majority of hypothetical prudent fiduciaries would have made the exact same investment decision.  The defendants noted that, as discussed in a dissenting opinion to the Fourth Circuit decision, in any given investment situation there is generally a range of reasonable investment decisions and rarely a single “best” decision around which hypothetical prudent fiduciaries necessarily would have coalesced.

The Supreme Court invited the Solicitor General to weigh in, and the Solicitor’s amicus brief was filed on May 26, 2015. The Solicitor’s brief recommends that the Court deny the pending petition on the ground that the issues presented are not suitable for the Court’s resolution at this time.  First, the Solicitor General denied that a circuit split exists with respect to the burden-shifting issue because, in his view, the circuit courts that have rejected a burden-shifting approach have not considered whether a shift is warranted in cases where the plaintiff has already proven a breach of fiduciary duty and related plan losses. Second, the Solicitor General argued that no circuit split exists as to the second question and that it is premature for the Court to consider the issue until others courts of appeals examine the extent to which there is really a difference between a “would have” and “could have” standard in proving or disproving loss causation. 

What to Expect

The Court’s request for the Solicitor General’s views is a reliable indicator that the Court is seriously considering granting certiorari. And, while certiorari is almost always granted if the Solicitor General endorses a petition, it is not uncommon for the Court to grant certiorari even if the Solicitor General recommends denial. The Court’s decision on the petition is expected on Monday, June 29, 2015.

Factual Background

As described in greater detail in the December 18, 2014 edition of the ELU, this case involves claims for breach of fiduciary duty when two 401(k) plans remained invested in the employer stock at a time when the value of the stock was alleged to have been artificially inflated as a result of material misstatements made by the company or its officers and directors regarding the efficacy of its products. Before the Supreme Court eliminated the so-called Moench presumption of prudence, as described in the June 26, 2014 edition of the ELU, the district court dismissed the claims, holding that the defendants were either protected by the presumption of prudence, or that, alternatively, the plaintiffs did not state a claim for imprudence where discontinuing the plans’ holdings of employer stock would either cause losses to the plans or require defendants to violate the securities laws.

The Amended Appellate Decision Allows Claims to Proceed

Following Dudenhoeffer, on October 30, 2014, a panel of the Ninth Circuit reversed the district court’s order dismissing the complaint. The defendants sought en banc review of the panel’s decision, arguing that, if it stands, it “will have far reaching deleterious effects.” On May 26, 2015, the panel issued an amended opinion, which again reversed the district court’s order dismissing the complaint. The full Ninth Circuit also denied the petition for rehearing en banc, although four judges dissented from that decision.

In its amended decision, the Ninth Circuit panel again allowed the complaint to proceed where it claimed that plan fiduciaries should have removed publicly traded stock from the plans when they knew or should have known that material information was being withheld in violation of federal securities laws. The panel again held that Dudenhoeffer stood as no bar to such claims. It reasoned that (i) the harm to participants of the eventual disclosure of negative information would be greater than the harm to participants of any fiduciary decision to remove a stock; and (ii) any tension fiduciaries may have between acting consistent with the securities laws and ERISA, where there is an alleged failure to disclose material information, is a “problem of the defendants’ own making.” 

The Dissent Reads Dudenhoeffer as Providing Greater Protection for Fiduciaries

Judge Kozinski, writing for a four-judge dissent, argued that Dudenhoeffer “created stringent new requirements” that were ignored by the panel.  He argued that the decision “creates almost unbounded liability for ERISA fiduciaries” and that it “will have grave consequences for corporations across America, leaving them acutely vulnerable to meritless lawsuits and subjecting them to novel, judicially-fashioned disclosure requirements that conflict with those of the securities laws.” The dissent chided the panel for not paying heed to the Supreme Court’s admonition that courts still need to “weed out meritless lawsuits” under Dudenhoeffer. It expressed concern that under the panel’s holding, any complaint alleging that the plan fiduciary could have withdrawn a fund or provided greater disclosure can survive a motion to dismiss, a holding that not only conflicts with Dudenhoeffer, but “fundamentally undermines” the Supreme Court’s earlier decisions establishing the pleading standard to be applied under FRCP 12(b)(6), Twombly and Iqbal.

On June 9, 2015, the panel agreed to stay its mandate pending the defendants’ filing a petition for writ of certiorari to the Supreme Court.

In Teets v. Great-West Life & Annuity Insurance Company, Case No. 14-2330 (D. Col. May 22, 2015), the U.S. District Court for the District of Colorado denied in part and granted in part a motion to dismiss claims under ERISA challenging the offering of an insurance company’s guaranteed investment contract (the “Fund”) as an investment option to 401(k) plan investors.

The plaintiff, a participant in a plan that offered the Fund, brought suit on behalf of a purported class of all participants and beneficiaries of defined contribution plans invested in the Fund. The plaintiff alleged that the defendant acted as an ERISA fiduciary to the plans with respect to the Fund because it exercised authority or control over the management of disposition of plan assets, including the Fund.  The plaintiff asserted three claims: First, the plaintiff alleged that the defendant breached fiduciary duties by setting the Fund’s interest rate artificially low and charging excessive fees in order to increase its own profits. Second, the plaintiff alleged that the defendant engaged in prohibited fiduciary self-dealing by dealing with the Fund for its own interest and for its own account. Third, the plaintiff alleged that the defendant, as a fiduciary of the plans, caused the plans to be entered into a contractual arrangement with the defendant under which the defendant also acted as a party in interest with respect to the plan, and that the defendant received unreasonable compensation in violation of ERISA’s rules governing party in interest transactions.   

The defendant moved to dismiss the complaint on the grounds that (i) the Fund falls under the guaranteed benefit policy exemption to ERISA’s plan asset rule, and the defendant’s control over the Fund does not give rise to fiduciary status; and (ii) the plaintiff’s party-in-interest prohibited transaction claims fails because they are "predicated on the same party – defendant – in the roles of both the fiduciary and the party in interest."

The court denied the first ground for dismissal, holding that the guaranteed benefit policy exemption does not apply. In so ruling, the court stated that the exemption only applies where the investment contract allocates investment risk to the insurer and provides a “genuine guarantee of an aggregate amount of benefits.” The court cited Supreme Court authority in John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86 (1993) as stating that if the participant bears the risk and the participant benefits can fall to zero, then the guaranteed benefit policy exemption does not apply. Because the Fund’s contract guaranteed a minimum interest rate of 0%, the court held that it could not definitively conclude at this stage of the case that the exemption applied.

The court granted the second ground for dismissal, agreeing with the defendant that the plaintiff could not maintain a prohibited transaction claim on the theory that the defendant was both the fiduciary and the party in interest to the transaction because such claim was duplicative of the plaintiff’s fiduciary self-dealing claim. The court permitted the plaintiff leave to amend the complaint, and an amended complaint was filed on June 16, 2015 that purports to assert a prohibited transaction claim on the theory that the defendant knowingly caused the plans to enter into prohibited party-in-interest transactions.

Goodwin Procter is a frequent national presenter on ERISA and related topics. Our upcoming conferences and presentations include:

Insured Retirement Institute’s 2015 Government, Legal & Regulatory Conference
June 28 - July 1, 2015
Washington, DC

National Association of Plan Advisors DC Fly-In Forum
July 21, 2015
Washington, DC

Tibble v. Edison: Implications of the Supreme Court’s First ERISA Fee Decision
July 23, 2015 - Save the Date!
Goodwin Procter Webinar

401(k) Fee Litigation After Tibble v. Edison Int'l: Navigating the Continuing Duty to Monitor Plan Investments
August 6, 2015
Strafford Webinar

American Conference Institute's 10th National Forum on Defending and Managing ERISA Litigation 
October 26, 2015
New York, NY