ERISA & Employee Benefits Litigation Blog

The Ninth Circuit Hammers Out A New Successorship Liability Test Under The MPPAA

Posted in Withdrawal Liability

By: Ron Kramer and Nick Clements

The Ninth Circuit, in Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., Case No. 12-17675 (9th Cir. Sept. 11, 2015), joined the Seventh Circuit in finding that an asset purchaser, if a successor, can be liable for withdrawal liability triggered as a result of the sale. Moreover, the Ninth Circuit went a step further by setting forth how it would determine whether the buyer was a successor.

Studer’s Floor Stops, Michael’s Starts

It started innocuously enough.  In November 2009, Studer’s Floor Covering, Inc. (“Studer’s Floor”) announced it would be shutting down the business at the end of the year.  As Studer’s Floor wound down, one of the company’s longtime salesmen, Michael Haasl, incorporated his own company, calling it Michael’s Floor Covering, Inc. (“Michael’s”) and began bidding on his own projects.  Haasl negotiated with Studer’s Floor’s landlord so as to take out a lease on the Studer Floor’s storefront and warehouse the day after it ceased operations.  Haasl even obtained, with Studer Floor’s help, Studer Floor’s business phone number and hired five of Studer’s Floor’s former employees.  Haasl, however, did not technically buy Studer’s Floor.  The majority of Studer’s Floor’s equipment was sold off at auction and Haasl did not obtain or use Studer’s Floor’s business name or contact/customer lists — although Haasl knew many of its customers and suppliers given his years as a salesman.

Studer’s Floor and the Multiemployer Pension Plan Amendments Act

At the time of its closing, Studer’s Floor was a party to a CBA and made contributions to a multiemployer pension plan covered by the Multiemployer Pension Plan Amendments Act (MPPAA) amendments to ERISA.  Studer’s Floor stopped making contributions to the fund after it ceased operations.  Michael’s never made any contributions to the fund because it was not a party to the CBA.

Under the MPPAA, if an employer withdraws from a multiemployer pension plan, it is liable to the plan for withdrawal liability. There is an exception to this general rule, however, for construction companies that close and do not resume operations within the jurisdiction of the CBA for at least five years.  The reason for the exception is that if a company permanently closes, then there is presumably no harm to the fund because that company’s customers will patronize other companies that contribute to the fund, thus keeping contributions to the fund steady.  The dispute in this case — brought by the Resilient Floor Covering Pension Trust Fund — concerned whether (1) a successor employer can be subject to MPPAA withdrawal liability; and (2) if so, whether and how successorship liability might apply to employers for whom the construction industry exception might apply; and (3) whether Michael’s was a successor.

The Fund Sues Michael’s

A Federal District Court in the Western District of Washington held that Michael’s was not liable for withdrawal from the pension plan under the common-law doctrine of successorship liability. The common law test asks whether, under the totality of the circumstances, there was substantial continuity between the old enterprise and the new enterprise.

On appeal, the Ninth Circuit Court of Appeals reversed. The Ninth Circuit, in agreement with the Seventh Circuit (recent ruling reported here), held for the first time that a successor employer can be subject to MPPAA withdrawal liability. The Court rejected arguments that applying successorship principles was somehow contrary to the MPPAA given its provisions for: (i) a sale of assets exception to liability; (ii) the ability of a fund to ignore transactions with a principal purpose to evade or avoid liability; and (iii) the construction industry exception itself. As to the latter, the Court found that just as a fund is harmed when a construction industry employer which ceased operations resumes operations without participating in the fund, it is harmed when a successor operates without participating in the fund. Thus, the Court considered the successorship doctrine to be fully consistent with the construction industry exception.

The Court then examined how established successorship factors are to be weighed in the context of withdrawal liability involving a construction industry employer. For purposes of determining whether there was “substantial continuity” between the successor and predecessor employers, which the Court considered to be the primary and “most important” successorship consideration, the Court found that it should give special significance to whether the successor has “the same body of customers.” In particular, where objective factors indicate that the new employer made a conscious decision to take over the predecessor’s customer base, the equitable origins of the successor liability doctrine support the conclusions that the successor must pay withdrawal liability.

The Ninth Circuit found that the District Court did not properly identify or weigh the successorship factors as applicable to the MPPAA context. First, the District Court did not give prime consideration to whether the Michael’s had the same body of customers (so-called market share capture). In that regard the Circuit Court agreed with the fund’s position that the spotlight should be on the relative amount of revenue generation by Studer’s former customers, versus Michael’s suggested simple headcount comparison. Second, while the factor was not of special relevance in this situation, the District court erred in its method of analyzing workforce continuity. The District Court assessed whether Michael’s employed a majority of Studer’s Floor’s former workforce.  The question should have been whether “a majority of the new workforce once worked for the old employer” and that only those “employees as to whom pension fund contributions would be due, should be included in the workforce continuity test,” not based on a majority of all the new company’s employees.  Last but not least, the District Court errantly considered whether there was a continuity of ownership between the old and new companies, something that is not a consideration in a traditional successorship analysis.

Had the District Court asked these questions, the Ninth Circuit opined, it may have found the requisite successorship factors to also find successorship liability under the MPPAA.  As such, the case was remanded.

Upshot For Companies

Two circuits now agree that asset purchasers can be liable for withdrawal liability as successors. No circuit court has taken the opposite position. And the Ninth Circuit has set forth how it would focus on where a new company’s customer base is derived for purposes of determining successorship. In light of this, employers need to assume that if they are a successor they will be subject to the predecessor employer’s withdrawal liability.

The Future Of ERISA Litigation — Sleeper Supreme Court Case Worth Watching — Part II

Posted in Rule 23 Issues

By: Mark Casciari

On May 12, 2015, we reported at here on a non-ERISA case accepted for review by the Supreme Court in the 2015-16 Supreme Court Term that has ERISA Litigation implications.  Now, as that Term is set to begin on October 5, 2015, we report on a second non-ERISA case with ERISA Litigation implications that soon will be decided by the Court.

On June 8, 2015, the Supreme Court agreed to hear Tyson Foods Inc. v. Bouaphakeo, No. 14-1146, which presents these questions for review:

  1. Whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act (FLSA), where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample.2.   Whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the Fair Labor Standards Act, when the class contains hundreds of members who were not injured and have no legal right to any damages.

Oral argument will be heard in Bouaphakeo on November 10, 2015.  A number of amicus curiae briefs have been filed in the case addressing the likely impact of the Bouaphakeo decision well beyond its unique facts and the FLSA legal context.

The first question presented for decision might not have direct application to putative ERISA class actions as ERISA class counsel do not have a history of proving damages based on statistical samples.  But the second question presented for decision could have far-reaching application to putative ERISA class actions.  Many courts do not now require that a class definition exclude the possibility that a class member suffers no injury.  For example, the Court of Appeals for the Seventh Circuit will certify classes for liability purposes under Fed. R. Civ. P. 23(c)(4) without regard to any consideration of damages.  See e.g., McReynolds v. Merrill Lynch, 672 F. 3d 482 (7th Cir. 2012) (Title VII disparate impact context).  And, while ERISA class action filings are in decline, Courts still allow ERISA certifications that address damages in a hypothetical fashion.  See e.g., Spano v. Boeing Co., 633 F.3d 574 (7th Cir. 2011), where the Court allowed certification even though the reference point for the damage analysis could prove to have no bearing on actual damages.

A Tyson win therefore could mean that a putative ERISA class challenging a defective Summary Plan Description that applied to a class of plan participants will not be certified unless class counsel can trace the defect, in roadmap fashion, to a common injury for each class member.  It could mean that a putative ERISA class challenging allegedly excessive fees for a plan investment in a defined contribution plan will not be certified unless class counsel can show how each class member will receive a common increase in benefits should the claim succeed.  It could mean that a putative ERISA class challenging an investment decision for a defined benefit plan will not be certified unless class counsel can show that each class member likewise will receive a common increase in benefits should the claim succeed.  A Tyson win would build upon the Supreme Court’s focus in Comcast Corp. v. Behrend, 133 S.Ct. 2013 (2013), on frontloading the damage analysis in putative class actions, and would likely result in fewer ERISA class certifications or certifications of classes with fewer members.  Fewer or smaller certifications mean a better settlement bargaining position for ERISA class action defendants.  Defendants could further enhance their settlement positions by pursuing a quick resolution of the class certification question, in line with the Fed. R. Civ. P. 23 (c)(1)(B) mandate that the district court resolve the class question “[A]t an early practicable time after” the action is commenced.

We will keep you advised of further Supreme Court developments on the class action front in non-ERISA contexts, to the extent that they are likely to affect ERISA class action law.

New HHS Rules Will Provide Greater Protections Against Gender Identity Discrimination

Posted in Uncategorized

By: Ben Conley and Sam Schwartz-Fenwick

The Obama administration continues to use its executive authority to expand societal inclusion of transgender individuals. On September 3, the Department of Health and Human Services issued proposed rules under Section 1557 of the Affordable Care Act that provides in part that health programs and activities that receive financial assistance from the federal government cannot discriminate against a person based on the individual’s gender identity.

Gender identity refers to the gender that a person identifies with.  The gender identity of a transgender individual differs from the individual’s sex assigned at birth. When the proposed HHS rule goes into effect, insurers will not be able to include in their policies blanket exclusions for coverage related to gender dysphoria or associated with gender transition or otherwise discriminate against individuals on that basis (However, the current form of the rules does not explain if under the rule insurers will be required to provide coverage for gender transition services specifically or will simply be required to provide general medical services for transgender persons including services that stem from or related to those gender transition services).

To be clear, the proposed rule only applies to entities receiving federal funds. It remains to be seen how this rule might more directly impact employers that do not receive federal funds.  Specifically, these employers might still be impacted if they sponsor a group health plan administered by a TPA that also separately issues policies on the Health Insurance Marketplaces (most major TPAs do).  To the extent the employer’s plan includes a blanket exclusion for medical costs associated with gender transition services, the TPA may require the employer to remove that exclusion, in light of the restrictions imposed on the TPA by Section 1557.

The proposed rule will be finalized after the public comment period closes on November 6, 2015. In issuing the proposed rule, the administration sought comment as to: 1) how to address sexual orientation discrimination, and 2) whether health providers can be exempted from this provision based on their religious beliefs.

The scope of the final rules and the exemptions that are allowed may provide a template for courts, and society at large, as they continue to grapple with balancing notions of LGBT equality with contrary religious beliefs.

The tension between religion and the provision of employee benefits was previously addressed in the Supreme Court’s ruling in Hobby Lobby. There, the Court held that a business could deny mandatory benefit coverage when the coverage conflicted with the closely held religious beliefs of the business owners.  The Court recognized the tension between religious beliefs and the anti-discrimination principles of the Fourteenth Amendment in this summer’s same-sex marriage ruling.

If the final rules allow coverage denials for LGBT individuals based on the providers’ religious beliefs it will signal that notions of religious liberty excuse certain types of discrimination against LGBT individuals. On the other hand, if the final rules contain no religious exemption, it will add strength to the argument that LGBT discrimination should be handled under Federal law in the same manner as other forms of impermissible animus.

Where HHS comes out in the current proposed rules remains an open question. However, how it comes out may signal where society is headed in terms of both the breadth of LGBT anti-discrimination protections and the scope of mandated benefit coverage of LGBT individuals.

The Third Circuit Requires Benefit Denial Letters to Contain Plan Limitations Period

Posted in Plan Administration Litigation

By: Amanda Sonneborn and Christopher Busey 

In Mirza v. Insurance Administrator of America, Inc., No. 13-3535 (3d Cir. August 26, 2015), the Third Circuit became the latest Court to require benefit denial letters to include a notification of the plan’s limitations period for bringing suit. In reaching this conclusion, it joined the First and Sixth Circuits. See Moyer v. Metro. Life Ins. Co., 762 F.3d 503 (6th Cir. 2014); Ortega Candelaria v. Orthobiologics LLC, 661 F.3d 675 (1st Cir. 2011).

The case stems from the denial of Dr. Neville Mirza’s claim for benefits under an ERISA-governed welfare plan. Dr. Mirza was assigned the right to pursue benefits by a patient he performed back surgery on, who was a participant in the plan sponsored by her employer. Dr. Mirza submitted a claim to the claims administrator, Insurance Administrator of America, which denied the claim because the surgery was medically investigational. Dr. Mirza appealed the decision, but the claims administrator upheld its decision by letter dated August 12, 2010. The letter notified Dr. Mirza of his right to bring a civil action under ERISA § 502(a)(1)(B), but did not inform him of the plan’s one-year limitation period for bringing suit. Around that time, the participant visited another medical provided and again assigned her rights to pursue a benefit claim to the provided. Dr. Mirza and the other provider both retained the same law firm to pursue their respective claims. In pursuing the claim from the other healthcare provider, the law firm obtained a copy of the plan on April 11, 2011, which contained the plan provision limiting the initiation of a lawsuit to one year from receipt of the final denial letter. Dr. Mirza brought suit on March 8, 2012 — almost 19 months after receiving the final denial letter.

Eventually the claims made their way to court and the defendant moved for summary judgment on Dr. Mizra’s claim on statute of limitations grounds.  The District Court for the District of New Jersey granted that motion. It reasoned that the plan’s one-year deadline for seeking judicial enforcement was reasonable, that Dr. Mirza’s suit was brought after that period had expired, and that he was not entitled to equitable tolling because he had notice (through his attorney) of the deadline.

On appeal, writing for a three-judge panel, Judge Julio Fuentes vacated the lower court’s opinion based on ERISA’s regulatory requirements for benefit denial letters. The court stated that the equitable tolling issue was irrelevant and focused only on the defendants’ regulatory obligations. The court held that plan administrators must inform claimants of plan-imposed deadlines for judicial review in their benefit denial letters. The ERISA regulation regarding benefit denial letters requires them to set forth “a description of the plan’s review procedures and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action under section 502(a) of the Act following an adverse determination.” 29 C.F.R. 2650.503-1(g)(1)(iv). The court interpreted the word “including” to require that denial letters inform claimants of any plan limitation period for bringing a civil action. Judge Fuentes noted that this approach was also recently adopted by the First and Sixth Circuits. See Moyer v. Metro. Life Ins. Co., 762 F.3d 503 (6th Cir. 2014); Ortega Candelaria v. Orthobiologics LLC, 661 F.3d 675 (1st Cir. 2011). It also rejected defendants’ argument that the denial letter to Dr. Mirza substantially complied with the regulations. The court opined that the failure to include the judicial review time limits in the adverse determination letter rendered it not in substantial compliance. The court then concluded that the proper remedy for the defendants’ failure to comply with the regulation was to abrogate the plan’s limitations period and apply the most analogous state law statutory limitations period. In this case, that was New Jersey’s six-year breach of contract limitation period. Dr. Mirza’s complaint fell within that period and the court thus remanded the case to the district court.

The Third Circuit’s opinion represents a further negative development for ERISA plan administrators. It follows in the wake of the Sixth Circuit’s decision in Moyer, which we wrote about here. As we noted, that decision broke with several district court opinions that had found that adverse determination letters need not contain a notification of the plan’s judicial review limitations period. As a possible silver lining, the Third Circuit stopped short of requiring the inclusion of the limitations period for the most analogous state law claim. It noted that, while the issue was not before the court, such a requirement would require legal research into various state law for each claim and would potentially result in the administrator providing legal advice to claimants. Nonetheless, the decision should at least warrant a review by plan administrators of their procedures for notifying claimants of adverse benefit decisions.



Posted in Withdrawal Liability

By Ron Kramer and Mark Casciari

Many asset buyers believe that, as long as they do not agree to ERISA Section 4204’s sale of assets exception to withdrawal liability, they will acquire the seller’s assets free and clear of any prior contribution history and from any withdrawal liability that may trigger as a result of the sale.  In a startling new decision, the Court of Appeals for the Seventh Circuit disagrees.

In Tsareff v. Manweb Services, Inc., 2015 U.S. App. LEXIS 12924 (7th Cir. July 27, 2015), the Seventh Circuit found that, under a successor liability theory, an asset purchaser could be liable for the seller’s withdrawal liability that triggered as a result of the asset sale, provided that the buyer had been aware of the seller’s “contingent” withdrawal liability that had yet to trigger prior to the sale.  The Seventh Circuit found that imposing successor liability was appropriate, as a matter of equity, to effectuate the congressional goal of the Multiemployer Pension Plan Amendments Act to relieve the financial burden on employers left in the fund and avoid creating a disincentive for new employers to join the fund.  Here, as the asset buyer was aware of the concept of withdrawal liability, engaged in due diligence, and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement, so it was considered on notice of the possibility of seller withdrawal liability.  The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be considered a “successor” and hence liable.

Tsareff thus states that mere knowledge that a seller’s withdrawal liability may be triggered and assessed upon or after the sale imposes joint and several liability on the buyer, provided there is a continuity of operations.  The Seventh Circuit ignores (i) ERISA Section 4204, which limits asset buyer liability, and (ii) the statute’s limitation of withdrawal liability to the contributing employer and its controlled group members as of the withdrawal date.  The Seventh Circuit also dismisses the consequence of its decision that the asset buyer is charged with notice of the seller’s withdrawal liability assessment, even if it received no such notice.  This means that the asset buyer that is a successor after Tsareff cannot challenge the merits of the fund’s assessment if the seller did not timely request review of the assessment.

So, a potential asset purchaser that becomes aware that the seller participates in a multiemployer pension fund and might be assessed withdrawal liability should factor the risk of successor liability into the purchase price, or require the seller to place some of the sale price in escrow to insure there are funds to pay for any withdrawal liability triggered as a result of the sale.  Note that ERISA requires multiemployer funds to furnish upon request estimates of the amount of withdrawal liability each participating employer would incur upon a withdrawal.  Potential asset purchasers also should pay attention to whether and to what extent the Tsareff decision is adopted by the other Courts of Appeal.

Chasing Payments: District Court Holds that Providers Lack Standing to Sue ERISA Plans for Benefits if the Patients Remain Liable to the Provider in the Event of Non-Payment

Posted in Uncategorized

By Jon Braunstein and M’Alyssa Mecenas

A district court in Tennessee recently rejected ERISA claims by healthcare providers against a plan insurer, holding that the providers lacked standing to sue under ERISA as their patients’ assignees.  Brown v. Blue Cross Blue Shield of Tennessee, Inc., 2015 WL 3622338, Case No. 1:14-CV-00223 (E.D. Tenn. June 9, 2015).  In essence, the district court ruled that the risk of non-payment is a burden that must run with the right to collect Plan benefits.

The relevant facts are these: Plaintiff Harrogate Family Practice is a medical provider owned by Plaintiff Amanda Brown that treats patients under Defendant Blue Cross Blue Shield Tennessee (BCBST) plans as a contracted, in-network provider.  Under the contract between Plaintiffs and BCBST, Plaintiffs submit bills on behalf of their patients to BCBST and receive payment directly.  Thereafter, BCBST audited Plaintiffs’ reimbursement claims and discovered that Plaintiffs had allegedly improperly billed and received payment for non-covered investigational procedures.  BCBST promptly notified Plaintiffs of the overpayments.  Eventually, BCBST began to recoup the overpayments by offsetting them against new reimbursement claims.  Plaintiff then filed suit seeking relief under ERISA §§ 502(a)(3) and 502(a)(1)(B), urging that the recoupments violated ERISA.

BCBST moved to dismiss Plaintiffs’ claims for lack of subject matter jurisdiction.  The district court granted the motion, holding that it lacked subject matter jurisdiction because Plaintiffs lack standing to sue under ERISA.

Among other things, Plaintiffs argued that they had derivative standing to sue as assignees of patients covered by the plan, relying on another recent Tennessee case, Productive MD, LLC.  Aetna Health, Inc., 969 F. Supp. 2d 901 (M.D. Tenn. 2013), which held that an out-of-network provider received a valid assignment where its patient agreements authorized payment of medical benefits to the provider for services rendered.

In Brown, under the Plaintiffs’ patient agreements, each patient requested that payment of authorized insurance benefits be made on the patient’s behalf to plaintiffs for medical services provided.  Each patient also agreed that he or she would remain financially responsible for any charges not covered by health benefits.  The court concluded that Plaintiffs’ patient agreements did not constitute assignments of the right to sue under ERISA because: (1) mere agreement for direct payment to a provider, without more, is not a valid assignment; (2) Plaintiffs’ patient agreements did not manifest an intent to assign ERISA rights, and (3) the risk of non-performance did not run with right to receive payment.

“A right to receive payment does not constitute an assignment without a concurrent transfer of the risk of nonpayment,” the court wrote.  Distinguishing Productive MD, the Brown court reasoned that the agreement in Productive MD constituted a valid assignment because Productive MD sought “payment on its patient’s behalf and acknowledged that it would have no recourse against the patient if [the insurer] did not pay.”

In contrast, under the agreement in Brown, Plaintiffs retained the right to sue the patients for unpaid benefits.  Under Brown, providers cannot have their cake and eat it too.  Providers can either retain the right to sue their patients for unpaid benefits or receive the right to sue the plan—but they cannot seek payments from both.

This case is significant because claims by providers under ERISA are now percolating in courts throughout the country.  These cases often present questions of standing, participant assignments, plan anti-assignment provisions, and challenges to enforcement of anti-assignment provisions.  We expect to see many more of these types of cases and claims in the near future.

ERISA Preemption Trumps State Insurance Law Yet Again: Ninth Circuit Declines to Apply California’s Insurance Notice-Prejudice Rule to a Benefits Claim Against a Self-Funded ERISA Plan

Posted in Plan Administration Litigation

By: Jon Braunstein and Nabeel Ahmad

In a recent decision, the Ninth Circuit Court of Appeals rejected a Plan participant’s attempt to extend California insurance law’s notice-prejudice rule to self-insured ERISA plans. Zagon v. Am. Airlines, Inc., 2015 BL 160778, 9th Cir., No. 13-55866 (5/21/15) (unpublished).

The pertinent case facts are these: Zagon, a former American Airlines flight attendant, filed suit in U.S. District Court for the Central District of California asserting a claim for long-term disability benefits against American Airlines, Inc. Long Term Disability Plan (the “Plan”). The Plan documents explicitly warned beneficiaries that the Plan would not, without exception, consider a claim filed beyond a one-year submission window. Ms. Zagon filed her claim several months late. The Plan moved for summary judgment, citing the untimely claim submission. In opposing the motion, Ms. Zagon argued that her claim was timely under California’s notice-prejudice rule. Under this rule, an insurer may not deny a claim solely due to an insured’s delayed notice of the claim, unless the delay caused the insurer substantial prejudice. The district court granted the Plan’s motion for summary judgment.

The Court of Appeals affirmed. The Court of Appeals explained ERISA’s primary interests in protecting contractually defined benefits and enforcing ERISA plans as written. The Court of Appeals determined that the Plan’s one-year claim submission deadline was reasonable and did not conflict with ERISA. While recognizing a general federal judicial duty to formulate federal common law to supplement the provisions and purposes of ERISA, the Court of Appeals found that no such judicial legislation was required.

The Court of Appeals reasoned that applying California’s notice-prejudice rule to Zagon’s claim would undermine, rather than effect, the statutory pattern Congress enacted. ERISA preempts all state laws that would otherwise govern employee-benefit plans except for those laws that govern insurance-based plans. California’s notice-prejudice rule is exclusively a creature of state insurance law. The Court of Appeals concluded that extending an insurance-based rule to uninsured plans, such as the Plan at issue, would defeat the distinction Congress made between insured and uninsured plans.

This case serves as a reminder that Congress explicitly made a distinction between insured plans and self-funded ERISA plans. With respect to the latter, ERISA generally trumps state insurance laws and courts may find claims by participants against ERISA plans rooted in state insurance laws to be preempted. Healthcare benefit litigation is on the rise. We expect to see more creative claims and lawsuits in the near future.

DOL’s Proposed Rule On Fiduciaries

Posted in General Fiduciary Breach Litigation

By: Jon Karelitz and Amanda Sonneborn

On April 14, 2015, the DOL issued a new proposed rule to expand the definition of “fiduciary” under ERISA. This is the second time in recent years that the DOL has gone down this path. The first proposed rule (issued in 2010) was met with strong resistance from the financial services industry, which claimed that anticipated additional compliance costs and increased legal liability for advisors would result in fewer education and advice arrangements that were largely beneficial to investors. The DOL withdrew the 2010 proposed rule in 2011.

In short, this latest proposal takes a holistic approach to determining whether an individual or entity is acting in a fiduciary capacity towards a funded ERISA benefit plan, including a pension or 401(k) plan or IRA. The DOL has also proposed new and revised class exemptions from certain prohibited transactions resulting from a fiduciary engaging in self-dealing and receiving compensation from third parties in connection with transactions involving a plan or IRA.

The new proposal is primarily focused third party service providers to retirement plans that make recommendations on the selection, retention or disposition of plan assets but are not necessarily “fiduciaries” under the current rule. Consequently, the proposal may not affect the relationship between a plan and its fiduciaries who are employees of the plan sponsor, but those individuals may need to consider revisiting the plan’s existing relationships with certain service providers.

The DOL’s current fiduciary rules were created before 401(k) plans and IRAs became common. The market for financial services and investment advice has become more diverse, with more individuals directing the investment of their own retirement income — frequently, based on the advice of professional brokers, consultants and financial planners. Under the current DOL “fiduciary” definition, any person who renders investment advice for a fee or other compensation is a fiduciary, but the definition of “investment advice” is very narrow. An individual who’s not otherwise a fiduciary only provides “investment advice” if he/she satisfies a highly-specific five part test. The preamble to the new proposed rule cites arrangements in which investment professionals make recommendations to plans regarding the allocation of a significant portion of plan assets on an irregular basis, or provide regular advice but subject to a disclaimer that no mutual agreement exists. These types of arrangements are not covered by the current definition of “investment advice.”

The new proposal replaces the old rule’s five-part test with a list of communications and relationships that would be investment advice if provided in exchange for a fee or other direct or indirect compensation, unless a specific carve-out exists:

  • A recommendation on acquiring, holding or disposing of or exchanging plan assets, including whether to take a distribution of benefits and, if so, how to invest the amount distributed;
  • A recommendation as to the management of plan investments, including amounts to be rolled over or otherwise distributed;
  • An appraisal or valuation of plan assets in connection with the acquisition, disposition or exchange of such assets; or
  • A recommendation of a person who would also receive a fee or other compensation for one of the types of advice described in the first three bullets.

Carve-outs exist for certain services/arrangements, including many that are utilized by employer-sponsored 401(k) plans: (i) arm’s length transactions in which the plan fiduciary has financial expertise and the investment advisor does not receive fees directly from the plan or the plan fiduciary for providing the advice; (ii) certain “swap” or “security-based swap” transactions involving a benefit plan; (iii) services by recordkeepers or third-party administrators that offer a platform of investment vehicles to 401(k) plans or IRAs; and (iv) investment education that doesn’t rise to the level of providing specific recommendations or advice.

In addition, if even a carve-out does not apply, the DOL has proposed class exemptions for select arrangements, including (i) advice provided to small 401(k) plan participants and IRA beneficiaries by a financial institution or its independent agents that’s in the participants’ and beneficiaries’ best interests, not misleading and for reasonable compensation; and (ii) advice by a financial institution or its independent agents regarding the purchase of certain debt securities.

Obviously these new rules raise potential concerns from an ERISA litigation perspective as well. It remains to be seen whether this seeming expansion in certain circumstances of the definition of fiduciary will give rise to new claims by the plaintiffs’ bar. If that occurs, one can certainly expect defendants to attempt to dismiss these new claims early through testing of the legal definition of fiduciary. That said, the potentially fact-intensive nature of the fiduciary status inquiry under these new rules may make it problematic for plan sponsors and alleged fiduciaries to dismiss litigation at the motion to dismiss stage.


Continuing Duty To Monitor? Yes. Scope of That Duty? Wait And See…

Posted in Uncategorized

By: Amanda A. Sonneborn and James Goodfellow

In a case we have blogged about before, the Supreme Court in Tibble v. Edison International unanimously has concluded that an ERISA fiduciary has a continuing duty to monitor investments made in an ERISA governed savings plan. Therefore, claims related to the duty to monitor are not barred by ERISA’s six year statute of limitations even if the initial selection of the allegedly imprudent fund took place outside of that period.

By way of background, in 2007, beneficiaries of the Edison 401(k) Savings Plan sued the plan’s fiduciaries to recover damages for alleged losses suffered because of the alleged breach of the fiduciary duty to monitor the investments in the 401(k) plan, among other claims. The district court and the Ninth Circuit concluded that ERISA’s six year statute of limitations was triggered when the investment in the allegedly offending funds initially was made, and that the beneficiaries had not established a change in circumstances that might trigger an obligation to conduct a full due diligence review of the funds within the six-year period.

A unanimous Supreme Court vacated the Ninth Circuit’s judgment. Writing for the Court, Justice Breyer pointed out that ERISA’s fiduciary duty is derived from the common law of trusts. The common law of trusts, in turn, provides that a trustee has a continuing duty to monitor investments made on behalf of trustees, and that this duty is separate and distinct from the duty to act prudently when making an initial investment or selecting an investment on behalf of trustees. Thus, according to the Supreme Court, so long as a claim alleging a breach of the duty to monitor occurred within six years of suit, that claim is timely. The Court remanded the matter to the Ninth Circuit to consider claims that the fiduciaries breached their duties within the relevant six year statutory period. So any claim regarding the initial decision to offer the offending funds is barred by the six year statute of limitations, but claims related to monitoring the investment would remain, so long as that duty to monitor allegedly was breached within six years of filing suit.

So, left for another day is the scope of the duty to monitor. While claims related to initial investments likely will not survive a statute of limitations claim, plan fiduciaries should be sure to engage in an established monitoring process as those claims will now survive.

In sum, stay tuned; this one is not over yet.

The Future Of ERISA Litigation — Sleeper Supreme Court Case is Worth Watching Carefully

Posted in Uncategorized

By: Mark Casciari and Ian Morrison

ERISA sets forth complex reporting, disclosure, vesting and funding rules for most private sector employee benefit plans. It also provides a private claim upon which relief may be granted in federal court for violations of these rules. For example, if a covered plan fails to provide participants with a proper summary plan description, under current law, a participant can sue, perhaps as a class representative, and ask a court to order the plan fiduciary to comply with disclosure rules. That participant could then seek an award of up to $110 per day in penalties, plus substantial attorney’s fees.

On April 20, 2015, over the objection of the Solicitor General, the Supreme Court agreed to decide, in Spokeo, Inc. v. Robbins, No. 13-1339, whether Article III of the Constitution allows Congress to permit lawsuits over a statutory violation where the violation does not necessarily result in a plausible claim of concrete injury. Our sister blog has described the case [here], and, to be sure, it arises under the Fair Credit Reporting Act, not ERISA. But the Constitutional question presented to the Supreme Court has equal applicability to ERISA claims.

If the Supreme Court finds that private plaintiffs cannot sue to enforce statutory obligations when they have not yet been harmed by violations of those obligations, that would mean that an ERISA plan participant would have no access to the federal courts to enforce the myriad of ERISA reporting, disclosure, vesting and funding rules. The participant who fails to receive a compliant summary plan description, for example, could not sue unless she could show that the failure caused her concrete injury. Alleging a possible injury down the road, or merely alleging that no fiduciary should be able to flout ERISA rules, would not suffice. The participant would need to allege that the statutory violation caused her to suffer real harm, such as purchasing a house in reliance on a false representation of benefit amounts. That type of allegation is not an easy one to make in good faith, as is required by Rule 11 of the Federal Rules of Civil Procedure. Any plaintiff lawyer contemplating a lawsuit pays close attention to Rule 11 in order to avoid sanctions for violation of the rule.

What’s more, if the Supreme Court eliminates the right to sue for enforcement of statutory rights, it might curtail a relatively new decision from the Court thought to allow more ERISA remedies. In Cigna Corp. v. Amara, the Court stated that a participant could sue a fiduciary for an ERISA disclosure violation without having to allege detrimental reliance injury. It would be tougher to make a non-reliance-based Amara fiduciary claim of “actual harm” if the Court finds that a desire to vindicate statutory rights is not Constitutionally sufficient to allow access to the federal courts.

ERISA funding rules also may become harder to enforce. Underfunding in violation of statutory rules would not provide access to the federal courts even if the plan is closing in on insolvency, as long as there are sufficient funds now to pay vested benefits. A Supreme Court decision requiring concrete injury may strengthen the cases of the defendants in the ongoing church plan litigation.

While it would surely cut back on private ERISA lawsuits, a Supreme Court ruling against a claim to vindicate statutory rights absent an allegation of plausible concrete injury could lead to more ERISA lawsuits by the Department of Labor or the Pension Benefit Guaranty Corporation to make up the shortfall. In a time of limited government funds, however, increased government litigation may not be in the cards.

We or our sister blogs certainly will advise you of developments in Spokeo, including the oral argument in the case, which probably will take place in the Fall of 2015.