ERISA Litigation Newsletter March 24, 2015
In This Issue

Federal District Court Dismisses Class Action Litigation Concerning 401(k) Provider’s Float Practices

Summary

In In re Fidelity ERISA Float Litigation, Case No. 13-10222 (D. Mass. Mar. 11, 2015), the district court rejected an ERISA challenge to a 401(k) plan service provider’s float practices.

Background

In In re Fidelity ERISA Float Litigation, Case No. 13-10222 (D. Mass. Mar. 11, 2015), the U.S. District Court for the District of Massachusetts granted a motion to dismiss claims under ERISA challenging a 401(k) plan service provider’s practice with respect to its handling of redemptions from client plan investment options.

The plaintiffs, six plan participants and one plan administrator, filed four separate lawsuits in 2013, which were subsequently consolidated. They purported to assert claims on behalf of a class of thousands of plans serviced by the defendants, affiliated entities that provided services to the plans and/or its investments. The consolidated complaint alleged that the defendants breached ERISA fiduciary duties and engaged in prohibited transactions because they invested money in the process of being redeemed from the plans’ investment options—known as “float”—on an overnight basis, but did not distribute the income from those overnight investments directly to the plans.   

In granting the motion to dismiss, the court held that the plaintiffs failed to plausibly allege that income earned on float is a plan asset under ERISA. The court followed an earlier decision by the U.S. Court of Appeals for the Eighth Circuit in Tussey et al. v. ABB, Inc. et al., 746 F.3d 327 (8th Cir. 2014), in which the appellate court rejected similar claims against the same provider. The district court also held that, even if float were an ERISA plan asset, the provider was not acting as a fiduciary to the plans when it invested the float, and, thus, the conduct that the plaintiffs challenged was not subject to ERISA. The court also recognized that the provider’s float practices complied with the terms of its service contracts with the plans and with the governing plan documents.

Goodwin Procter represented the defendants in this matter. 

Supreme Court Rules No Presumption of Lifetime Vesting of Retiree Health Benefits

Summary

The Supreme Court overturned the Sixth Circuit’s long-standing Yard-Man presumption, ruling that courts should apply ordinary contract principles to determine whether benefits have vested.

Background

In a unanimous decision, the U.S. Supreme Court overturned the Sixth Circuit’s long-standing presumption first articulated in International Union, United Auto., Aerospace, and Agr. Implement Workers of America (UAW) v. Yard–Man, Inc., 716 F.2d 1476 (6t Cir. 1983), that, if a collective bargaining agreement is ambiguous as to the duration of retiree welfare benefits, benefits are presumed to vest for life. In M&G Polymers USA v. Tackett, the Court held that courts should apply ordinary contract principles to determine whether retiree benefits have vested.

The Yardman Presumption

Yard–Man involved a claim that an employer had breached a collective-bargaining agreement when it terminated retiree benefits. The Sixth Circuit found a provision of the agreement governing retiree insurance benefits ambiguous as to the duration of those benefits, and relied on the “context” of labor negotiations to resolve that ambiguity in favor of the retirees’ interpretation. Specifically, the court inferred that the parties to collective bargaining would intend retiree benefits to vest for life because such benefits are not mandatory or required to be included in collective-bargaining agreements, are typically understood to be a form of delayed compensation, and are keyed to the acquisition of retirement status. Based on these inferences, the Sixth Circuit presumed that in the context of collective bargaining, the parties intended benefits for life and would not have left that up to future negotiation. Since its decision in Yard-Man, the Sixth Circuit had extended  its analysis in a series of other cases.

Tackett Background

Tackett involved a collective-bargaining agreement that had conferred retiree healthcare benefits for the duration of the agreement. The agreement was subject to renegotiation in three years, and when it expired, the employer announced that it would begin requiring retirees to contribute to the cost of their healthcare benefits. Retirees sued on behalf of themselves and others similarly situated, alleging, among other claims, a claim for benefits under ERISA. The district court dismissed the complaint for failure to state a claim. The Sixth Circuit reversed, applying its reasoning in Yard-Man and inferring from the collective-bargaining agreement an intent to vest lifetime contribution-free healthcare benefits for retirees. On remand, the district court conducted a bench trial and ruled in favor of the retirees. The Sixth Circuit affirmed. 

The Supreme Court Held that There Is No Presumption Lifetime Vesting of Retiree Health Benefits.

The Supreme Court granted certiorari and vacated. It rejected the Yard-Man presumption as inconsistent with ordinary principles of contract law because it “distorts” the attempt to ascertain the intention of the parties “by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” In so ruling, the Court noted that the written terms of the plan are the “linchpin” of the benefits system, and that such terms should be enforced as written. The Court remanded the case for the Sixth Circuit to apply ordinary principles of contract law. 

In a concurring opinion, Justice Ginsburg, joined by Justices Breyer, Sotomayor and Kagan, directed the appeals court to examine “the entire agreement” to determine whether the parties intended retiree healthcare benefits to vest. The concurring opinion noted as relevant to this examination provisions of the agreement that (i) conferred upon retirees vested, lifetime pension benefits, and (ii) conferred healthcare benefits if the retirees “are ‘receiving a monthly pension."

En Banc Sixth Circuit Rules Against Disgorgement Remedy in Benefits Case

Summary

In Rochow v. Life Insurance Company of North America, No. 12-2074 (6th Cir. March 5, 2015), the U.S. Court of Appeals for the Sixth Circuit, sitting en banc, ruled that an insurance company that wrongfully denied benefits to a participant under a disability plan was not liable under ERISA for the profits it earned on the benefits during the period they were improperly withheld from the participant.

Background

Rochow arose under the following facts. In 2002, a participant in an ERISA-covered, long-term disability (“LTD”) plan resigned from his job for medical reasons. When he subsequently applied for benefits under the LTD plan, the insurer that provided benefits under the plan denied the claim because it concluded that the participant had not become disabled until after his employment (and coverage under the plan) had terminated.

The participant challenged the benefit denial in federal district court. The court held that the insurer acted arbitrarily in denying the claim, and that ruling was affirmed on appeal by the Sixth Circuit. Rochow v. LINA, 482 F.3d 860 (6th Cir. 2007). On remand, the district court concluded that the insurer was not only liable for the benefits that had been denied the participant but also for the profits it had earned on the benefits while they were wrongfully withheld from the participant.  The insurer was ordered to disgorge over $3.5 million in earnings. That ruling was affirmed by a divided panel of the Sixth Circuit, which determined that the wrongful withholding of the benefits constituted a breach of the insurer’s ERISA fiduciary duties that warranted the additional remedy of disgorgement. Rochow v. LINA, 737 F.3d 415 (6th Cir. 2013),

The Sixth Circuit granted the insurer’s motion for rehearing en banc, and the full court of appeals reversed the panel decision. The majority of the en banc court, in an opinion authored by Judge McKeague, noted that the participant had appropriately been awarded benefits under ERISA Section 502(a)(1)(B), which authorizes suit for benefits due under the plan. The question was whether the participant was entitled to additional relief – including disgorgement of the insurer’s profits – under ERISA Section 502(a)(3), which authorizes participants to sue for “appropriate equitable relief” to remedy violations of (among other things) ERISA fiduciary duties.

The majority held that the equitable relief, such as disgorgement of profits, was not available in this case because the participant’s fiduciary breach claim was simply a “repackaging” of his benefits claim. It observed that in Varity Corp. v. Howe, 516 U.S. 489 (1996), the Supreme Court indicated that equitable relief is not ordinarily appropriate under Section 502(a)(3) where ERISA otherwise provides an appropriate remedy for the plaintiff’s injury. The en banc majority viewed the participant’s injury flowing from the insurer’s fiduciary breach of wrongfully withholding of benefits to be the same as the injury associated with the improper benefits denial. Consequently, it concluded that the equitable remedy of disgorgement was unavailable. However, the majority noted that prejudgment interest may be awarded under ERISA Section 502(a)(1)(B) on improperly withheld benefits, and remanded for a determination whether prejudgment interest was appropriate in this case.

Judge Gibbons filed a concurring opinion, stating that the panel decision should have been reversed on procedural grounds.

Judge White filed an opinion concurring in part and dissenting in part, expressing the view that equitable relief may be appropriate in certain benefits denial cases, depending on the facts and circumstances.

Judge Stranch filed a dissenting opinion that was joined by six other judges. The dissent argued that the wrongful withholding of benefits and use of the amounts that should have been paid to the participant as benefits constituted a fiduciary breach and an injury to the plaintiff that was separate from the denial of benefits. In the dissent's view, requiring the insurer to pay the participant the benefits due him under the plan was not an adequate remedy for the separate fiduciary breach. The dissenting judges therefore would have affirmed the panel's decision to grant the disgorgement remedy.

Second Circuit Revisits Remedies In Amara v. Cigna

Summary

The Second Circuit court of appeals held that a court can exercise its equitable powers to reform the terms of a cash balance retirement plan to provide greater benefits than stated in response to material misstatements made by the plan administrator, and that the plan sponsor would be correspondingly required to make payments on a class-wide basis consistent with the reformed plan.

Background

The long-running case of Amara v. Cigna, first filed in 2001, has again been the subject of appellate review. The case involves the conversion of a large defined benefit plan to a cash-balance plan, where a trial judge held that the plan administrator had made materially misleading statements to participants about the level of benefits they would receive under the new plan. The trial judge initially held that participants were entitled to benefits under ERISA Section 502(a)(1)(B) in an amount corresponding to what was represented by the defendant, rather than what was contained in the actual plan document. The Supreme Court disagreed that such relief was allowed under Section 502(a)(1)(B), and remanded the case for further proceedings, as described in our June 15, 2011 edition of the ERISA Litigation Update.

The Decision on Remand

On remand from the Supreme Court, the trial court held that the same remedy it had previously awarded under ERISA Section 502(a)(1)(B) – namely, so-called A+B relief, allowing the class additional sums over what had already been provided to assure them the full value of the accrued benefits under the since-terminated defined benefit plan at the time of its termination, plus benefits under the new cash balance plan – was similarly available under ERISA Section 502(a)(3). It also rejected defendants' motion to decertify a class and plaintiffs' request for different damages, in the form of reinstatement of the defined benefit plan. A panel of the Second Circuit Court of Appeals affirmed in full.

Class Certification

The Second Circuit panel began by addressing defendant's argument under Wal-Mart v. Dukes that certification was not proper under FRCP 23(a)(2). The panel held that defendant had not produced any evidence that any class member would be harmed by the relief awarded. Similarly, the panel held that, unlike in Dukes, where the 23(a)(2) class was ultimately seeking back pay, which was not merely “incidental” to the claim of reformation there, here, by contrast, plaintiffs sought to enjoin defendant from enforcing the plan as written, and any monetary relief flowing from such reformation in those circumstances was appropriately “incidental” to the injunctive relief sought. As such, the panel agreed with the district court that a 23(a)(2) class was proper.

Reformation as an Appropriate Remedy

The Second Circuit panel next rejected defendant's argument that plaintiffs had failed to establish the elements of reformation. After noting that ERISA plan documents are “similar to both trusts and contracts,” the panel applied contractual reformation law. The court explained that contractual reformation focuses on whether the party seeking reformation was deceived, not whether the plan is carried out according to the settlor’s intent. The panel also held that a showing of harm was not required under contractual reformation; instead, a plaintiff seeking reformation needs to show a mistake by plaintiff and fraudulent or inequitable conduct by the opposing party. The panel agreed that the facts at trial found by the district court established that defendant’s statements were “affirmatively and materially misleading” and thus the mistaken plaintiffs were entitled to this remedy.

Affording Discretion to District Court Award

Finally, the Second Circuit panel agreed that the district court properly did not award plaintiffs the expansive relief they sought – restatement of full benefits under the former pension plan. Rather, the panel agreed that the trial court had sufficient evidence for its awarding relief that would provide the class with amounts approximating the value they would have received had defendant's statements about the transition from a defined benefit to cash balance plan been accurate, and that the trial court need not act as though the defined benefit plan had never been terminated.

Plan Sponsor Agrees to $62 Million Settlement in ERISA Case Challenging 401(k) Plan Fees

Summary

Lockheed Martin Corp. has settled the 401(k) excessive fee litigation pending against it in federal court in Illinois.

Background

Lockheed Martin Corp. has agreed to settle ERISA fiduciary breach claims brought on behalf of a class of participants in its 401(k) plans (the “Plans”). 

The parties have submitted to the court a joint motion for preliminary approval of the settlement. The case was originally filed in 2006, and has been the subject of several reported decisions. See, e.g., Abbott v. Lockheed Martin Corp., 725 F.3d 803 (7th Cir. 2013).

The claims in Abbott alleged principally that the Plans’ fiduciaries breached their duties under ERISA by allowing the Plans to pay excessive fees and by imprudently managing the Plans’ stable value fund and three company stock offerings. The plaintiffs sought to obtain compensatory and affirmative relief for the Plans. Prior to the announcement of the settlement, the case was scheduled to go to trial in late 2014.

Under the proposed settlement, Lockheed would not admit any wrongdoing, but would make a settlement payment of $62 million to be allocated among class members (net of attorneys’ fees and other costs). In addition, Lockheed agreed to certain non-monetary terms under the proposed settlement. Specifically, Lockheed agreed during the three-year settlement period: (1) to publicly file with the Court the Schedule C to the Plans’ Forms 5500 as well as information about the assets held in, and performance of, the Plans’ stable value fund and company stock funds; (2) to confirm current limitations on the amount of cash equivalents held in the company stock funds and the amount of money market equivalent assets held in the stable value fund, and to file a notice with the Court if those limitations are changed; (3) to initiate a competitive bidding process for the Plans’ recordkeeping services, and to publicly file with the Court a notice identifying the entities that submitted bids and the selected recordkeeper; and (4) to offer participants the share class of investments that has the lowest expense ratio, provided that the share class is available and consistent with the needs and obligations of the Plans.

Upcoming Events

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

DCIIA 6th Annual Public Policy Forum
April 1, 2015
Washington , DC

2015 Russell Institutional Summit
May 2, 2015
New Orleans, LA

PLANSPONSOR National Conference 2015
June 3, 2015
Chicago, IL