ERISA & Employee Benefits Litigation Blog

The EEOC Tries To Ground HIPAA-Compliant Wellness Programs Through Litigation

Posted in Uncategorized

By: Mark Casciari, Ben Conley and Kylie Byron

The EEOC has commenced two lawsuits since August against employers who have established wellness programs that appear to comply with HIPAA’s wellness rules (as expanded by the Affordable Care Act).  The EEOC contends that the programs violate the Americans with Disabilities Act (ADA). The EEOC alleges that the ADA prohibits employers from penalizing participants who fail to complete a health risk assessment/biometric screening if participation was not “voluntary.”

Nothing in the ADA restricts wellness programs to those that are “voluntary.”  To the contrary, the ADA contains a benefit plan safe harbor that limits ADA applicability in the benefit plan context to claims that a plan is used as a subterfuge for disability-based discrimination in non-benefit aspects of employment.  The EEOC conveniently ignores this safe harbor.

The EEOC has said that it is considering formal guidance on the applicability of the ADA to HIPAA-compliant wellness programs, but now that guidance appears unlikely given a split in views of the EEOC Commissioners on the subject.

The facts of the two cases just filed by the EEOC are worth noting.  In the first case, involving Orion Energy Systems, the employer allegedly canceled an employee’s medical insurance and subsequently terminated her employment because she would not participate in medical exams that are said to have asked disability-related wellness program questions.

In the second case, the EEOC sued Flambeau, Inc. for allegedly cancelling an employee’s medical plan after he failed to complete a health risk assessment and biometric screening that was part of the company’s wellness program.  The employee alleged he could not complete the health risk assessment/biometric screening because he was on medical leave.

Considering the wellness program structures alone (and putting aside for now the alleged termination of employment in Orion and the fact that the employee was arguably not given an effective opportunity to complete the requirements in Flambeau), the EEOC’s position in both cases runs counter the decision of the Court of Appeals for the Eleventh Circuit in Seff v. Broward County, 691 F.3d 1221 (11th Cir. 2012).  In Seff, the Court upheld what could be characterized as an “involuntary” wellness program by citing to the ADA benefit plan safe harbor.  There, the employer imposed a $20 biweekly premium surcharge on employees who refused to complete a health risk assessment/biometric screening. The Court found that deduction was a term in a benefit plan, and thus protected by the ADA safe harbor.

A challenge based on a similar program is pending in Oregon against the Oregon Public Employees’ Benefit Board (PEBB).  Notably, the EEOC did not participate in the Seff case and has not yet weighed in on the suit against the Oregon PEBB

Employers with wellness programs, especially HIPAA-compliant programs that can be seen as aggressive, need to be aware that, even though the EEOC is lurking, there are sound arguments to keep the EEOC at bay.

The Supreme Court To Address ERISA’s Statute Of Limitations In A 401(k) Fee Case

Posted in 401(k) Fees and Investment Selection Litigation

By: Mark Casciari and Gina Merrill

In 2006, a number of large companies that sponsored ERISA 401(k) plans were sued by clients of the Schlichter, Bogard & Denton law firm for, among other things, excessive 401(k) plan provider fees.  The fee litigation placed at issue ERISA Section 413’s limitations rule, which requires the filing of a complaint within the earlier of a six year repose period after the claim accrued or a three year period after the claim accrued with actual knowledge of the violation.  Section 413 also provided a special rule if fraud or concealment of the violation is adequately alleged and shown — the complaint then must be filed within six years after the date of discovery of the violation.

Most of the Schlichter firm cases, but not all, have been resolved though settlement or decisions on the merits of the complaints.  One ongoing Schlichter firm case is Tibble v. Edison International, 729 F.3d 1110 (9th Cir. 2013).  In Tibble, the Court of Appeals for the Ninth Circuit held, in part, that “the act of designating [401(k)  plan investment options] starts the six-year period under section 413(1)(A) for claims asserting imprudence in the design of the plan menu.”  Id. at 1119.  The Ninth Circuit explained that a contrary result would “make hash out of ERISA’s limitation period and lead to an unworkable result.”  Id.  The Ninth Circuit roundly rejected the plaintiff “continuing violation” theory endorsed by the Department of Labor as out of step with the language and purpose of the statute.  The limitations concerns animating the Tibble decision reflect the quintessential concerns that have led to the imposition of statutes of limitation — loss of hard evidence, faded witness memories, and the possibility of being hauled into court for events that occurred 15 or 30 years prior to the commencement of the litigation.  The courts have also been concerned that lax or no enforcements of limitations periods will lead to more litigation and uncertainty in the administration of the law.

On October 2, the Supreme Court announced that it will decide if the Ninth Circuit got it right when it applied a limitations bar in Tibble.

If the Court reverses the Ninth Circuit’s limitations decision, Section 413’s six-year limitations periods may provide little repose and less comfort for plan fiduciaries defending cases to which Section 413 applies.

Contract’s Limitation Provision Is Not Reasonable, Says Court

Posted in Plan Administration Litigation

By: Amanda Sonneborn and Jim Goodfellow

In Heimeshoff v. Hartford Life & Accident Insurance Company, last year the Supreme Court unanimously concluded that a plan’s limitation period, which required a claimant to bring an action within three years of when proof of claim was due, was enforceable, even though the contract’s limitation period was shorter than the applicable statute of limitations.  The Court said that a plan limitations period should be enforced so long as it is reasonable.

Following Heimeshoff, the Southern District of California recently provided guidance as to what may constitute an unreasonable limitations period.  In Nelson v. Standard Insurance Company, the Southern District of California concluded that application of a limitations provision that provided the claimant with 100 days within which to file a complaint in federal court was not reasonable and thus not enforceable.  The plan’s provision required a legal action to be brought within three years after the earlier of either (1) the date the administrator received proof of loss or (2) the time within which Proof of Loss was due to the administrator.  First, the Court stated that it could not determine with certainty the date upon which the date the contractual limitations period began to run.  As such, it was possible that the time period ran before the administrator finished its administrative analysis of the claim.  Alternatively, the Court stated that even if it used Defendant’s suggested date, it only provided Plaintiff with, in effect, 100 days to file his suit.  The Court found that both potential time frames were unreasonably short.

This case makes clear that to be reasonable, at least in certain jurisdictions, the time period allotted by a plan should be long enough to encompass the administrative review process.  If the plan’s period calls for a lawsuit to be filed prior to the completion of the administrative review, a Heimeshoff argument becomes more difficult to win.  But, if the plan’s term expired after the administrative review process, chances of success on a statute of limitations argument increase.  The Supreme Court did not set a base line limitations period, and it will take further case law to establish the minimum that courts generally will accept.  What we know now is that, at least in the circumstances presented in Nelson and in the Southern District of California, 100 days was not reasonable.

Labor Department Focusing On Brokerage Windows in 401(k) Plans

Posted in 401(k) Fees and Investment Selection Litigation, Plan Administration Litigation

By: Ian Morrison, Sam Schwartz-Fenwick and Abigail Cahak

On August 20, 2014, the U.S. Department of Labor’s (“DOL”) Employee Benefits Security Administration announced that it is requesting information on the use and prevalence of brokerage windows in 401(k) and similar plans.

Brokerage windows are a common feature in defined contribution plans (most commonly 401(k) plans).  They allow participants to choose investment options beyond those selected and monitored by a plan fiduciary.  Brokerage windows are popular amongst participants and plan sponsors as they enable participants to build more customized and diversified investment portfolios.

The DOL’s Request for Information (“RFI”) is intended to “assist the Department in determining whether, and to what extent, regulatory standards or safeguards, or other guidance, are necessary to protect participants’ retirement savings.”  Specifically, the RFI asks interested parties to provide information to answer 39 questions concerning the

  • Scope of investment options available;
  • Types of individuals who participate;
  • Process used to select a brokerage window and provider;
  • Fiduciary oversight;
  • Costs;
  • Role of advisers; and
  • Disclosure of information and options to participants.

The DOL’s focus on brokerage windows could result in regulations that will have an impact on large numbers of defined contribution plans.  If past experience is any indicator, the ensuing regulations may prove onerous for plan sponsors and fiduciaries, and may serve to curtail participant choice in investing.

Comments are due to the DOL by November 19, 2014.

Employer Has No Claim Against Multiemployer Trustees for Mismanagement

Posted in Withdrawal Liability

By: Ron Kramer

On August 14, 2014, in DiGeronimo Aggregates, LLC, Case No. 13-4389 (6th Cir. August 14, 2014), the Sixth Circuit Court of Appeals held that employers have no cause of action  against multiemployer fund trustees for their negligent management of plan assets.  Right or wrong, the decision is bad for employers and for the oversight of multiemployer funds generally.

DiGeronimo Aggregates was one of several employers impacted when the defendant Trustees terminated the Teamsters Local Union No. 293 Pension Plan (“Plan”) after substantially all of the participating employers had withdrawn.  This triggered a mass withdrawal, subjecting DiGeronimo to $1.7 million in liability.  DiGeronimo filed suit against the Trustees alleging their negligent management of Plan assets caused DiGeronimo harm in the form of increased withdrawal liability.  Under ERISA Section 4301(a), 29 U.S.C. § 1451(a), DiGeronimo as an employer is entitled to bring an action for appropriate legal or equitable relief if it is adversely affected by the act or omission of any party under Subtitle E of ERISA (the multiemployer plan provision subtitle) with respect to a multiemployer plan.  DiGeronimo and the Trustees agreed that Section 4301 was simply a “standing” provision, and that it conferred no substantive rights.  DiGeronimo, however, asked the court to recognize a common law right of employers to bring negligence claims against trustees.  The district court dismissed the claim, and DiGeronimo appealed.

The Sixth Circuit made short work of the claim, holding that DiGeronimo had no cause of action under the common law of ERISA for harm caused by the Trustees’ alleged negligent plan management.  The Court first recognized that the parties agreed that Section 4301(a) “confers no substantive rights but simply identifies who can pursue a civil action to enforce the sections governing multiemployer plans.”

Turning to federal common law, the Court acknowledged that it has recognized common law claims in limited instances where:  (1) ERISA is silent or ambiguous; (2) there is an awkward gap in the statutory scheme; or (3) federal common law is essential to the promotion of fundamental ERISA policies.  Here the Court did not consider ERISA to be silent or ambiguous since ERISA  provisions expressly address who can bring claims against trustees for what is basically a breach of fiduciary duties, and employers were not included.  The Court did not see any awkward gap in the statute given trustees could still be held accountable for any mismanagement, it was just that participants and beneficiaries would make the claims — not employers.  The Court presumed Congress deliberately omitted an employer remedy for mismanagement from the statutory scheme because the trustees’ plan management duties flow to participants and beneficiaries, not contributing employers.

Third, the Court found that imposing for the benefit of employers an enforceable duty of care upon trustees regarding plan management is not essential to the promotion of fundamental ERISA policies.  The fundamental policy of ERISA (and according to the Court the Multiemployer Pension Plan Amendments Act (MPPAA)) is ensuring that private sector workers would receive pensions that employers promised them.  The Court ended by noting it could find no case where a court has ever recognized the existence of a negligence claim in favor of contributing employers under the federal common law of pension plans.

DiGeronimo Aggregates is a disappointing decision for employers who participate in multiemployer plans and who are concerned as to how they are managed.  In the Sixth Circuit,  they have the option to withdraw from funds if they do not believe they are well-managed.  Withdrawing employers then may challenge the assessment in arbitration.  Even though the DiGeronimo Aggregates says nothing about the scope of withdrawal liability arbitration, the decision may lead to even more employers exiting multiemployer funds, further damaging the financial stability of those funds and further depriving employees of the opportunity to participate in defined benefit pension plans.

Was the Sixth Circuit right?  An argument certainly can be made that employers should have a right to bring court actions against trustees.  Congress’s civil enforcement provision, ERISA Section 502, which address the right of participants, fiduciaries, beneficiaries and the DOL to bring claims for breaches of fiduciary duties, was adopted long before the MPPAA and its withdrawal liability scheme was imposed.  While Congress in theory could have amended Section 502, Congress likely never recognized or considered how negatively impacted participating employers would be by trustee negligence, or how that may impact the long term viability of the plans themselves.

There is a gap in the statutory scheme, and recognizing the right of employers — who have both a vested interest in well-run plans and the financial wherewithal to take legal action — to bring suit in court would help achieve one of the key goals of the MPPAA.  As the Court recognized in another part of its decision, a key issue that led to the MPPAA was the problem of employer withdrawals, and how rising costs as a result of the diminished contribution base caused by withdrawals forced further withdrawals that could lead to the demise of pension plans.  Granting employers the ability — as any other interested party — to sue in court to ensure plans are well-managed will improve the stability of those plans and eliminate the need for employers to withdraw.

Lastly, both parties agreed Section 4301(a) was only a standing provision and conferred no rights, but is that correct?  The Court cited Bay Area Laundry and Dry Cleaning Pension Trust Fund v. Ferbar Corp., 522 U.S. 192, 202-03 (1997), but there the Supreme Court rejected an employer’s attempted use of Section 4301(a) to argue that the statute of limitations for collecting on withdrawal liability ran from the date the employer withdrew since a withdrawal “adversely affected” the Plan.  The Supreme Court noted Section 4301(a) sets forth who may sue for a violation of the obligations established Subtitle E, and that it did not make an “adverse effect“ unlawful per se.  Here, DiGeronimo basically was arguing the Trustees breached their fiduciary duties in managing plan assets.  While DiGeronimo was impacted by that in the sense its withdrawal liability assessed under ERISA Subtitle E would be higher, the purported malfeasance was indirect and involved ERISA violations outside of Subtitle E.  Employers who truly are more directly impacted by a plan’s actions or omissions over substantive provisions of Subtitle E, especially violations of those substantive provisions, may nonetheless have a cause of action to sue in court under Section 4301(a).

In the meantime, until a court rules otherwise, employers who are not satisfied with the management of their funds are left with withdrawing and arbitrating if they cannot convince the trustees  to see the error of their ways.

Sixth Circuit Holds That To Be Enforceable, Contractual Limitations Period Must Be Stated in Benefits Denial Letter

Posted in Uncategorized

By Ada Dolph and Chris Busey

In a divided decision, in Moyer v. Metropolitan Life Insurance Co.,  No. 13-1396 (6th Cir. Aug. 7, 2014) the Sixth Circuit held that MetLife’s failure to provide notice of a contractual limitations period in its final denial letter violated 29 U.S.C. § 1133 and related regulations and rendered the limitations period unenforceable against the plaintiff, sending it back to the district court for a merits review.

By way of background, the plaintiff Joseph Moyer received disability benefits under his employer’s ERISA-governed long term disability plan.  After paying two years of benefits, MetLife determined that the plaintiff could perform work other than his own occupation, and terminated the plaintiff’s benefits.  On administrative appeal, MetLife upheld the decision and notified the plaintiff of his right to bring suit, but failed to include notice of the benefit plan’s contractual limitations period in the adverse determination letter.  The plaintiff filed suit under ERISA Section 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), beyond the three years permitted under the plan’s contractual limitations period.  The district court held that the plaintiff had constructive notice of the limitations period because the applicable provision was contained in the plan documents that were available to participants upon request, and dismissed the complaint as untimely.

On appeal, writing for the majority, Judge Stranch rejected MetLife’s argument that the issue of limitations was not properly before the Court because the plaintiff had failed to argue that the denial letter’s failure to include the limitations period violated 29 U.S.C. § 1133.  Moving to the merits, the Court analyzed 29 C.F.R. § 2560.503-1 which provides that denial letters must include “[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 . . . following an adverse benefit determination on review.”  The Sixth Circuit concluded that “[t]he claimant’s right to bring a civil action is expressly included as a part of those procedures for which applicable time limits must be provided” (emphasis added).  Because MetLife failed to include notice of the contractual limitations period in the denial letter, the Court concluded that the letter was “inconsistent with ensuring a fair opportunity for review and rendered the letter not in substantial compliance [with Section 1133]” thereby failing to “trigger” any time bar contained in the plan.  The Sixth Circuit reversed the district court’s dismissal of the case on limitations grounds and remanded for review of the benefit determination.

The dissenting opinion argued that the issue of whether the administrator violated § 1133 was not before the court because the plaintiff had previously only argued that the summary plan description’s omission of the limitations period violated another ERISA provision.

Notably, in 2014 alone, district courts in the Third, Ninth and Eleventh circuits have rejected the position adopted here by the Sixth Circuit.  See, e.g., Fontenot v. Intel Corp. Long Term Disability Plan, No. 3:14–cv–00153–AA, 2014 WL 2871371, at *1 (D. Or. June 24, 2014); Torpey v. Anthem Blue Cross Blue Shield of California, No. 13-3853, 2014 WL 1569498, at *1 (D.N.J. April 17, 2014); Freeman v. American Airlines, Inc. Long Term Disability Plan, No. CV 13–05161–RSWL–AJWx, 2014 WL 690207, at *1 (C.D. Cal. Feb. 20, 2014); Wilson v. Standard Ins. Co., No. 4:11–CV–02703–MHH, 2014 WL 358722 (N.D. Ala. Jan. 31, 2014).

Recognizing that there is a difference of opinion, after the Sixth Circuit’s Moyer opinion, plans and administrators should nonetheless consider including a notice regarding any applicable contractual limitations period in their denial letters to eliminate any question as to whether a limitations period may be enforceable against a claimant who files an untimely lawsuit.

Arbitration of ERISA Benefit Claims In Lieu of Judicial Review

Posted in Plan Administration Litigation

By: Mark Casciari and Robert T. Szyba

The U.S. Supreme Court has recently upheld arbitration provisions in various contexts — an employment agreement in Rent-A-Center, West, Inc. v. Jackson, a consumer contract with a cell phone service provider AT&T Mobility LLC v. Concepcion, and a merchant agreement with a credit card company in American Express Co. v. Italian Colors Restaurant.

What would the Court do with an arbitration provision precluding judicial review of ERISA claim and appeal denials?

The establishment of ERISA plans are voluntary, and ERISA plan sponsors “have large leeway to design disability and other welfare plans as they see fit.”  Heimeshoff v. Hartford Life & Accident Ins., 134 S. Ct. 604, 612 (2013).  The same is generally true of ERISA pension benefit plans, provided they meet minimum participation, vesting and funding requirements.  In Heimeshoff, the Court recognized the importance of enforcing plan terms as written.

The Supreme Court has also said that “courts must place arbitration agreements on equal footing with other contracts, … and enforce them according to their terms.”  AT&T Mobility LLC v. Concepcion, 131 S. C. 1740, 1745-46 (2011) (citations omitted).

ERISA is silent on mandatory arbitration in lieu of judicial review under Section 502(a) of ERISA (although a DOL regulation arguably prohibits it in the non-collective bargaining context).  The recent Supreme Court decisions suggest, however, that plan sponsors may condition benefits on an agreement to arbitrate a final claim denial.

Arbitration may soon be seen as an attractive alternative to federal court litigation, especially if the plan sponsor is of the view that the federal courts will allow expensive discovery as part of litigation seeking to review a final claim denial.

There are negatives to arbitration, to be sure.  Arbitration would not allow any appellate review on the merits.  An award may be attacked only on the basis of fraud or the arbitrator’s exceeding the scope of his authority.  Arbitration must be consistent with requirements in other applicable laws, such as the National Labor Relations Act and state insurance statutes not preempted by ERISA.  An arbitration clause in lieu of ERISA review also may face a challenge based on DOL regulations.

Federal courts have reviewed ERISA plan provisions requiring arbitration of final claim denials, without the benefit of the Supreme Court decisions noted above, and issued these decisions worth noting:

  • In Snyder v. Federal Ins. Co., 2009 WL 700708 (S.D. Ohio Mar. 13, 2009), the court was asked to compel arbitration after exhaustion of the plan’s claim and appeal procedure for denial of benefits.  The court denied arbitration because of the DOL regulation at 29 C.F.R. § 2560.503-1(c)(4) prohibiting mandatory arbitration in lieu of court review.  The arbitration provision was deemed voluntary — one that can be declined by any party.
  • In Wicklander v. Defined Benefit Pension Plan, 2004 WL 2260609 (D. Or. Oct. 5, 2004),  the plaintiffs arbitrated their claims following denials of disability benefits.  After the denials were upheld by the arbitrator, the plaintiffs filed suit in federal court.  The defendant moved to dismiss by arguing that the arbitration decision was not reviewable on its merits.  The court denied the motion to dismiss, finding that the plan language did not prohibit plaintiff from bringing a civil action under ERISA Section 502(a) after completing mandatory arbitration.  Left open was the issue whether plan language could, if worded properly, preclude Section 502(a) judicial review.
  • In Chappel v. Laboratory Corp. of Am., 232 F.3d 719 (9th Cir. 2000), plaintiff was denied benefits.  The court enforced the plan’s mandatory arbitration provision (without addressing whether the arbitrator’s decision could still be reviewed under ERISA Section 502(a)).

We expect that the Supreme Court’s recent, strong endorsement of arbitration will prompt some ERISA plan sponsors to consider implementing arbitration as an alternative to court litigation.  Whether that makes sense, of course, will turn on the individual circumstances of the sponsor and its analysis of the associated legal risks.


Courts Will Have to Determine Boundaries of Supreme Court’s Hobby Lobby Decision

Posted in Uncategorized

By John T. Murray, Justin T. Curley and Reanne Swafford[1]

Two years after upholding the constitutionality of the Affordable Care Act (ACA), the Supreme Court has narrowed the Act’s contraceptive coverage requirement, and opened the door to new challenges to ACA.  In Burwell v. Hobby Lobby Stores, Inc., 573 U.S. ___ (2014), the Supreme Court considered whether the Religious Freedom Restoration Act of 1993 (RFRA) allows for-profit corporations to avoid ACA’s requirement that they provide insurance coverage for certain contraceptives on religious grounds.  In a 5-4 vote, the Court held that for-profit corporations—at least those that are closely held—can assert religious rights under RFRA and, on that basis, can obtain exemptions from ACA’s contraception coverage mandate.  Thus, Hobby Lobby and similar employers whose owners assert religious objections cannot be required to offer insurance coverage to their employees for contraceptive methods that conflict with the owners’ religious beliefs.

While Justice Alito’s majority opinion stressed that the ruling was limited to ACA’s contraceptive coverage mandate, the opinion does not necessarily foreclose attacks on other ACA provisions based on religious grounds.  Justice Ginsburg emphasized this very point in a strongly worded dissent.  Therefore, it is likely that, in the coming months, the courts will have to decide on new RFRA-based challenges to other ACA mandates.

These challenges could include objections to coverage for other forms of birth control, blood transfusions, prescription antidepressants and other mental health therapies, participation in trial studies that rely on the use of embryonic stem cells, vaccinations, or the implantation of replacement heart valves derived from animals, all of which are or could be objectionable to certain religious groups.  Indeed, the potential challenges to ACA’s coverage requirements based on religious grounds are as varied as individual religious convictions.

Likewise, although the majority limited its holding to closely held corporations, the majority opinion did not completely foreclose the possibility that corporations that are not closely held will attempt to also avail themselves of RFRA’s protections.  As a result it is conceivable that corporations that are not closely held—perhaps even publicly traded corporations—may try to make use of the same exemption, or seek new exemptions, based on the religious beliefs of individuals holding controlling interests in the companies’ stock.

By the time the Court issued its decision in Hobby Lobby, there were nearly 50 pending federal lawsuits brought by for-profit employers raising religious objections to various aspects of ACA’s contraceptive coverage mandate—this figure is sure to increase with other religious challenges to ACA in the wake of Hobby Lobby.

And it remains to be seen whether the challenges may expand to other faith-based objections.  For example, some employers may also seek to leverage Hobby Lobby to challenge healthcare coverage for same-sex spouses in the 19 states (with more likely to come) that permit same-sex marriage.  In fact, a group of religious leaders has already written a letter to President Obama in light of Hobby Lobby arguing for a RFRA exemption to a pending executive order that would prohibit federal contractors from discriminating against LGBT individuals in hiring practices.  However, the courts may cast a critical eye on these claims, as Justice Alito’s opinion cautioned that the decision should not be read to provide a shield for discrimination (although the opinion only specifically references race discrimination), and the federal government might also argue that it has no obvious, readily available alternative to provide same-sex spouses with the benefits that would otherwise be provided by an employer.

Hobby Lobby has set the stage for new waves of litigation beyond the narrow bounds of benefits coverage for certain forms of contraception—only time will tell how and to what extent the decision will play out in the lower courts.


[1] Ms. Swafford is a law student at UCLA and summer fellow in Seyfarth Shaw’s San Francisco office.

The Supreme Court—“We Reject the Moench Presumption, But Give Some Comfort to ERISA Fiduciaries”

Posted in General Fiduciary Breach Litigation

By Mark Casciari

Today, the Supreme Court, in a 9-0 decision authored by Justice Breyer, issued its decision in Fifth Third Bancorp v. Dudenhoeffer, stating, “We hold that no such presumption [of prudence] applies. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.”  The Court did not address the ERISA duty of loyalty.

Even though the Court has firmly placed the presumption of prudence, created in Moench v. Robertson, 62 F. 3d 553, 571 (3d Cir. 1995) and adopted in some form by all of the Courts of Appeal, see our prior articles, into the dustbin of American jurisprudence, there is much in Dudenhoeffer to warm the hearts of ERISA fiduciaries.

The Court reversed the decision of the Court of Appeals for the Sixth Circuit.  The Sixth Circuit had held that a complaint alleging that the fiduciaries should have sold publically traded stock (or take other action not specifically authorized by ESOP documents) just before a substantial decline in stock prices stated a valid ERISA claim.

Practitioners, employee benefits professionals, and of course fiduciaries, should note these statements of the Court in Dudenhoeffer:

• The Court expressly recognized that a goal of Congress is to encourage the establishment of ESOPs, and that Congress “is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat [ESOPs] as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establishment and success of these plans.”  This passage could be cited to the Department of Labor, which, for years, has exhibited antagonism towards ESOPs.

• The Court stated that plaintiffs should be unable to survive a motion to dismiss and thereby engage in discovery merely by alleging that the fiduciaries should have taken action to protect publically-traded company stock in light of publicly available information.  Discovery, of course, dramatically increases settlement values.  Prior Supreme Court decisions allow discovery only if the complaint makes “plausible” allegations.  The Court in Dudenhoeffer said:  “[W]here a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”  (Emphasis added.)

• The Court stated that plaintiffs will not enter the discovery door without strong allegations that the fiduciaries breached their duties on the basis of inside information:  “To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”  (Emphasis added.)  For a further analysis of the relation between securities laws and ERISA, see M. Casciari and I. Morrison, “Should the Securities Exchange Act be the Sole Federal Remedy for an ERISA Fiduciary Misrepresentation of the Value of Public Employer Stock,” John Marshall Law Review, Vol. 39 No. 3 (Spring, 2006).

• The Court stated that plaintiffs cannot survive a motion to dismiss without plausible allegations of conduct the fiduciaries should have undertaken:  “[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”  (Emphasis added.)

These statements of the Court may help fiduciaries win motions to dismiss not only in the company stock context, but also in other contexts.  The Court’s statements may be seen as having the effect of raising the plausibility bar applicable to all ERISA fiduciary breach claims.

ERISA Has a Whistleblower Provision? Yep.

Posted in Uncategorized

By: Ada Dolph and Robert Szyba

Most employee benefits practitioners are familiar with ERISA Section 510, 29 U.S.C. § 1140, which is frequently used by participants to assert claims that they were terminated in order to prevent them from obtaining certain benefits under an employee benefit plan.  A lesser known part of Section 510, however, is its second clause, which protects ERISA whistleblowers from retaliation after engaging in certain protected whistleblowing activity.  It states that “[i]t shall be unlawful for any person to discharge, fine, suspend, expel, or discriminate against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to [the Act].”  ERISA, 29 U.S.C. § 1140.  A circuit split regarding the meaning of this second clause has emerged, and employers and benefit plans should be aware that in some jurisdictions, even unsolicited internal complaints could form the basis for a claim under ERISA Section 510.

More recently, however, in Sexton v. Panel Processing, Inc., __ F.3d __, 2014 WL 1856692 (6th Cir. May 9, 2014), the Sixth Circuit concluded otherwise, finding that a plaintiff’s one-time, unsolicited complaint about a possible ERISA violation did not constitute “giv[ing] information . . . in any inquiry” as required to be protected under Section 510.  Plaintiff Sexton and one other trustee of an employee retirement plan had been removed as trustees after actively campaigning for the election of two board candidates that the company ultimately refused to seat.  Subsequently, Sexton sent an email to the chairman of the board of directors asserting that the refusal to seat the board candidates and his removal as trustee was a violation of ERISA and state law.  He threatened that if the violations were not “remedied,” he would go to the Department of Labor and the Michigan Department of Licensing and Regulatory Affairs.  Notably, neither the company nor Sexton took any further action regarding his email.  About six months after the email, Sexton was terminated.  He sued, alleging that he was terminated in retaliation for sending the email, which he argued constituted protected conduct under ERISA Section 510.

In analyzing the language of Section 510, the Sixth Circuit reasoned that generally there are two types of anti-retaliation provisions: (1) opposition clauses, protecting employees who oppose, report, or complain about unlawful practices; and (2) participation clauses, shielding employees from retaliation for participating, testifying, or giving information in inquiries, investigations, proceedings, or hearings.  Other laws might contain one of these provisions, with many laws containing both.  The court found it meaningful that ERISA Section 510 contains only a participation clause, given that Congress had included both types of provisions with numerous other statutes enacted both before and after ERISA. Sexton, 2014 WL 1856692, at *3-4 (citations omitted).  The court concluded that Congress had enacted this second clause with the intent of preventing interference with inquiries and proceedings, as opposed to protecting all persons who disclosed violations of the Act.

The Sixth Circuit found that its more narrow reading of Section 510’s second clause was consistent with precedent in the Second, Third and Fourth Circuits.  See Nicolaou v. Horizon Media, Inc., 402 F.3d 325, 329 (2d Cir. 2005); Edwards v. A.H. Cornell & Son, 610 F.3d 217, 225-26 (3d Cir. 2010); King v. Marriot Int’l, Inc., 337 F.3d 421, 428 (4th Cir. 2003).  However, the Court distinguished the Seventh Circuit’s conclusion in George v. Junior Achievement of Cent. Ind., Inc., 694 F.3d 812, 817 (7th Cir. 2012) that Section 510 covers any complaint about ERISA that either asks or answers a question, on the narrow grounds that Sexton’s email “did neither.”

Judge White wrote a lengthy dissent, stating that she would have followed George to conclude that “unsolicited internal employee grievances [are protected] regardless whether the employer or employee initiated the ‘inquiry.’”  Judge White also noted additional circuit opinions from the Fifth and Ninth Circuits that she concluded supported her broader reading of Section 510.  See Hashimoto v. Bank of Hawaii, 999 F.2d 408 (9th Cir. 1993); Anderson v. Electronic Data Systems Corp., 11 F.3d 1311 (5th Cir. 1994).  The Department of Labor filed an amicus brief which had also urged that the broader reading be applied.

Given the emerging circuit split on this issue and the Department of Labor’s advocacy in this area, employers should be mindful that even unsolicited, internal complaints involving ERISA could be found to be protected for the purposes of ERISA Section 510 claims.