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Co-Authors: Craig C. Martin, Co-Chair Litigation Department
and Amanda S. Amert, Chair ERISA Litigation Practice
Editors: Reena R. Bajowala, Associate and Douglas A. Sondgeroth, Partner
2011 was a busy year for ERISA litigation. The significant developments we highlight here will impact employers and plans in 2012 and beyond. Whether it will be new class certification standards, developing law on misrepresentation claims and remedies, or the standard of review for conflicted plan administrators, litigators within and outside the ERISA world will need to grapple with these new developments. Employee benefits attorneys will also need to be acutely aware of all of these developments, along with other noteworthy regulatory and legislative developments governing ERISA plans.
1. THE SUPREME COURT WEIGHS IN ON EQUITABLE RELIEF UNDER ERISA.
In the biggest development of the year, the Supreme Court’s decision in Cigna Corp. v. Amara, 131 S. Ct. 1866 (2011), promises to have far-reaching impact on the law governing misrepresentations and corresponding remedies. The plaintiffs brought suit under ERISA §§ 502(a)(1)(B) and 502(a)(3), claiming that the defendants misleadingly described the benefits that would be available after a pension plan was converted to a cash balance plan. Significantly, plaintiffs presented affirmative statements that were directly contrary to the plan terms and internal evidence from the employer that encouraged deliberately not educating plan participants about their post-transition balances.
After a lengthy trial, the district court sided with the plaintiffs, holding that under § 502(a)(1)(B), the defendants’ “representations have become terms of the Plan” and ordering [the plan] to calculate benefits under those modified terms. Amara v. Cigna Corp., 559 F. Supp. 2d 192 (D. Conn. 2008); Amara v. Cigna Corp., 534 F. Supp. 2d 288 (D. Conn. 2008). The court did not consider if these remedies were available under § 502(a)(3). The Second Circuit affirmed the district court opinions, calling them “well-reasoned and scholarly.” Amara v. Cigna Corp., 348 Fed. Appx. 627 (2d Cir. 2009).
The Supreme Court vacated the district court’s decisions and remanded for further proceedings, concluding unanimously that no relief was available under § 502(a)(1)(B) because that section authorizes actions to enforce, and not change the terms of an ERISA plan. All the Justices but Scalia and Thomas suggested that §502(a)(3) might authorize the remedies the district court imposed. The Court theorized that the district court’s remedies could fall within “appropriate equitable relief” under § 502(a)(3), including: (a) reformation, (b) estoppel, and (c) “surcharge,” which the Court suggested could allow relief in the form of monetary “compensation” for a loss to a trust resulting from a fiduciary breach. The Court remanded the case to determine whether, if at all, any relief is appropriate.
In the wake of Amara, courts will need to consider carefully whether plaintiffs’ claims entitle them to any equitable relief. In the coming year, defendants faced with these claims should consider whether the remedies the plaintiff seeks are appropriate under the specific statutory enforcement section at issue.
2. THE SEVENTH CIRCUIT ADMONISHES DISTRICT COURTS TO DO “MORE WORK” BEFORE CERTIFYING AN ERISA CLASS ACTION.
The Supreme Court’s watershed decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) in June grabbed attention for clarifying the analysis courts must undertake before certifying a class, but prior to Wal-Mart, the Seventh Circuit led the charge in reining in the granting of class certification in ERISA matters.
On January 21, 2011, in Spano v. The Boeing Co. Inc., 633 F.3d 574, 591 (7th Cir. 2011), the Seventh Circuit vacated class certification orders in two cases from the Southern District of Illinois: Spano v. The Boeing Co., Inc., No. 06-0743, and Beesley v. International Paper Co., No. 06-0703. In both cases, defined contribution plan participants alleged the defendant plan sponsors caused the plans to pay excessive fees, offered imprudent investment options, and provided insufficient or misleading information about plan investment options. The Seventh Circuit began by instructing that “
efore certifying a class, the district court must do more than review a complaint and ask whether, taking the facts as the party seeking the class presents them, the case seems suitable for class treatment.” In analyzing class certification, the court held that at a minimum the typicality element required “a class representative . . . to have invested in the same funds as the class members.” The adequacy of representation requirement also could not be met because some members of the class would be harmed by the relief sought given the different dates of investment and divestment. Although it did not rule out class treatment if one or more better-defined and more-targeted classes are defined, the court said on the record before that “[t]oo much is up in the air, and too much work remains to be done in the district court.” The court’s rigorousness will likely continue to affect future cases because it held that many misrepresentations would require “precisely the kind of individualized attention that would make it difficult to find a class representative with claims typical of enough people to justify class treatment.” Going forward, this heightened level of analysis of the Rule 23 requirements will provide defense counsel with additional opportunities to combat unwieldy class actions.
The decision in the Second Circuit will likely afford defendants greater protection, but the continuing uncertainty the Seventh Circuit expressed demonstrates the litigation risks fiduciaries may face in future stock drop cases.
4. DEFENDANTS OBTAIN MIXED RESULTS IN 401(K) FEE LITIGATION RULINGS.
2011 was a complicated year for 401(k) fee defendants, with two unfavorable opinions followed by two favorable ones. On April 11, 2011, in George v. Kraft Foods Global, Inc. (“Kraft I”), 641 F.3d 786 (7th Cir. 2011), the Seventh Circuit partially reversed the grant of summary judgment for Kraft on ERISA breach of fiduciary duty claims related to recordkeeping fees and company stock funds offered in Kraft’s defined contribution plan. The court reversed summary judgment because the record was devoid of any plan fiduciary decision regarding the allegedly problematic features of the stock funds. The court concluded that failing to exercise discretion by balancing relevant factors and making a reasoned decision is a breach of the duty of prudence if a prudent fiduciary would have done so. So the court remanded for consideration of whether discretion was exercised and, if so, whether the fiduciaries abused their discretion.
The defendants in George v. Kraft (“Kraft II”), __ F.Supp.2d __, 2011 WL 2784153, (N.D. Ill. July 14, 2011), a related excessive fee matter pending against Kraft and defendant Altria (Kraft’s former parent), were also dealt a blow when the court allowed plaintiffs to proceed on their claim that defendants improperly retained the funds as investment options, and rejected defendants’ arguments that drawing comparisons to investments in the defined benefit plan is irrelevant to a prudent fiduciary’s decisions in the defined contribution plan.
In the fall, however, things began to look up for 401(k) fee defendants. In Renfro v. Unisys Corp., __ F.3d __ , 2011 WL 3630121 (3d Cir. Aug. 19, 2011), the Third Circuit affirmed the dismissal of a lawsuit brought by participants in Unisys’ defined contribution plan alleging Unisys and a plan service provider imprudently selected retail mutual funds to offer among the 73 investment fund options. The court affirmed the dismissal of the action because, unlike in the Eighth Circuit’s Braden v. Wal-Mart, where 10 of the plan’s 13 fund options were retail mutual funds, “the plan’s mix and range of options was reasonable . . . [and] do not plausibly support [plaintiffs’] claims” challenging the fund selections.
Similarly, in Loomis v. Exelon Corp., 658 F.3d 667 (7th Cir. 2011), the Seventh Circuit affirmed the dismissal of an excessive fee lawsuit against Exelon based on its inclusion of 24 retail mutual funds among its lineup of 32 investment options and decision to charge participants for plan expenses.
As for the future, it appears that Kraft I and Kraft II are headed for settlement. Plans and their fiduciaries can expect, however, that the 401(k) fee litigation story will continue in 2012, with new challenges to the decision-making process plan fiduciaries undertake when assessing 401(k) plan investment options, and their features.
5. PENSION LITIGATION BASED ON TROUBLED SECURITIES LENDING INVESTMENT PROGRAM FACES UNCERTAIN FUTURE.
On August 5, 2011, the Southern District of New York partially granted summary judgment for defendant JPMorgan Chase Bank, NA (“JPMorgan”) in Board of Trustees of Aftra Retirement Fund v. JPMorgan, Nos. 09-cv-686, 09-cv-3020, 09-cv-4408, 2011 U.S. Dist. LEXIS 86923 (S.D.N.Y. Aug. 5, 2011), on ERISA claims brought against it by retirement trusts that allegedly incurred significant pension plan asset losses as a result of JPMorgan’s securities lending program. In the program, client securities are lent to third parties, who post collateral (generally cash), which JPMorgan invests for the client’s benefit. The putative class plaintiffs alleged, among other things, that it violated the ERISA fiduciary duty of loyalty, duty to disclose, and duty to prudently manage plan assets because Sigma collapsed in 2008.
The plaintiff moved for summary judgment on the duty to disclose and duty of loyalty claims; the defendants moved on the latter claim alone. The court granted JPMorgan’s motion on the loyalty claim, concluding that JPMorgan was acting as a fiduciary when one of its divisions accepted Sigma-issued securities as securities lending collateral, but not when another division seized assets from Sigma for defaulting on a series of financing agreements it had with JPMorgan. The court said “a bank’s liability to its fiduciary clients cannot turn on its state of mind when extending financing to its non-fiduciary clients.” JPMorgan’s creation of an “information barrier” between the two divisions involved in those activities meant that there was no conflict. There was also no causal connection between JPMorgan’s alleged misconduct and the losses. Instead, the loss was caused by “the Lehman bankruptcy, coming on the heels of the worst financial crisis since the Depression, [which] cause[d] the market value of Sigma’s assets to plummet.”
The court denied the plaintiff’s motion on the duty to disclose claim, which was premised on JPMorgan’s failure to disclose the material fact that it was in a “conflicted” position because there was no conflict of interest, and requiring disclosure there would mean “every bank would be required to disclose to every fiduciary client the existence of any secured loan made at any time to an issuer whose securities are held in trust for that fiduciary.” The court noted that JPMorgan’s alleged lack of action in response to knowledge of Sigma’s default risks was evidence that “JPM[organ] may have breached its duties to prudently manage plan assets . . . [but that those] claims are not at issue on this motion.” Instead, the court would resolve that issue at trial, which is expected in early 2012. The outcome of the trial will certainly garner attention in the coming months.
6. THE NINTH CIRCUIT OVERRULES MORE THAN TWENTY FIVE YEARS OF PRECEDENT AND ALLOWS BENEFIT CLAIMS AGAINST THIRD-PARTY INSURERS.
On June 22, 2011, in Cyr v. Reliance Standard Life Insurance Company, 642 F.2d 1202 (9th Cir. 2011), an en banc panel of the Ninth Circuit shook up accepted ERISA precedent dating back to 1985 by holding that appropriate defendants in an ERISA claim for benefits are not limited to the plan and the plan administrator. It held a third-party insurer of the plan was properly sued because, although it was not identified as the “plan administrator,” it controlled the decision to honor or deny a claim under the plan and possessed the funds used to pay the claim.
Critical to the Ninth Circuit’s analysis was Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000), in which the Supreme Court held that the civil enforcement provision of ERISA did not limit the proper defendants in a §502(a)(3) claim for “appropriate equitable relief.” The Cyr court extended Harris to §502(a)(1)(B) claims because there was “no reason to read a limitation into [§502(a)(1)(B)] that the Supreme Court did not perceive in [§502(a)(3)].” Third party administrators, and the counsel that represents them, should brace themselves for potential benefits lawsuits filed in the coming years as a result of Cyr.
7. THE NINTH CIRCUIT CLARIFIES THE STANDARD OF REVIEW FOR BENEFIT CLAIMS AGAINST PLAN ADMINISTRATORS OPERATING UNDER A STRUCTURAL CONFLICT.
The Ninth Circuit also issued a significant decision in Salomaa v. Honda Long Term Disability Plan, 637 F.3d 958 (9th Cir. 2011), amended by 642 F.3d 666 (9th Cir. 2011) by articulating the standard of review for benefit denials where the plan administrator is also responsible for paying benefits. Following the Supreme Court’s opinion in Metropolitan Life Insurance Co. v. Glenn, 554 U.S. 105 (2008), the Ninth Circuit held that a court must judge the reasonableness of the plan administrator skeptically where the administrator has a conflict of interest. Going forward, the Ninth Circuit will apply the same test for abuse of discretion in a factual determination as in the non-ERISA context, which provides that a decision will be upheld if a court is “left without a definite and firm conviction that a mistake has been committed.” Accordingly, courts will need to consider whether application of a correct legal standard was: (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record. A higher degree of skepticism is employed where the administrator has a conflict of interest. 2012 will likely bring litigation applying the Salomaa standard, which may guide other circuits in dealing with the hefty issue of structural conflicts in benefit plans.
8. DOL EXTENDS DEADLINE FOR COMPLIANCE WITH CLAIMS AND APPEALS PROCEDURES UNDER PPACA.
On March 18, 2011, the DOL issued Technical Release 2011-01, which extended the non-enforcement period for regulations governing certain internal claims and appeal procedures under the Patient Protection and Affordable Care Act (“PPACA”) from its former date of July 1, 2011 to January 1, 2012. PPACA was signed into law on March 23, 2010. PPACA, among other things, supplements existing DOL guidelines for claims and appeals procedures for group health plans and health insurance issuers under 29 CFR 2560.503-1. The regulations expand the information provided to, and the rights of, patients in virtually all aspects of their group health plan benefit determinations.
One key change that will affect ERISA litigation going forward is that a plan will be deemed to have exhausted remedies for the claimant if it fails to strictly adhere to all of the claims and appeals requirements – substantial compliance is insufficient. In pursuing judicial remedies under §502(a), the plan is subject to a heightened standard of review, subject to $100/day in fines. A new conflict of interest provision also prohibits employment decisions based on the likelihood the employee will support a denial of benefits, which may also cause increased litigation or more costly discovery.
The new regulations also:
As more employers become subject to, and more participants and their counsel become aware of, these new regulations, we can expect 2012 to bring increased claims challenging compliance with the new procedures.
9. DOL EXTENDS DEADLINE FOR COMPLIANCE WITH REGULATIONS RELATED TO PLAN SERVICE PROVIDERS AND SERVICE PROVIDER ARRANGEMENTS UNDER §408(b)(2).
On July 19, 2011, the DOL issued final regulations under §408(b)(2) that require certain “Covered Service Providers” (“CSPs”) to make aggregate fee disclosures about the plan to plan sponsors. CSPs include all fiduciaries, recordkeeping and brokerage service providers and all parties receiving indirect compensation. Each CSP receiving $1,000 or more (directly or indirectly) from the plan must disclose to the plan separately. As a result of the §408(b)(2) regulations, plan sponsors must pro-actively determine if existing service arrangements are reasonable and the failure to do so is a fiduciary breach. The regulations also require the plan sponsor to act on an assessment that an existing arrangement is unreasonable and make changes to the service provider arrangement(s), replace the service provider(s), or report the service provider(s) to regulators. While these regulations are certain to impose greater risk on fiduciaries, the DOL extended the initial proposed enforcement date from January 1, 2012 to April 1, 2012, and then again last week to July 1, 2012, in response to numerous requests by service providers for more time to come into compliance with the new disclosures.
10. NEW REGULATIONS REQUIRING FEE DISCLOSURES FOR INDIVIDUAL ACCOUNT PLAN PARTICIPANTS UNDER §404(A)(5) GO INTO EFFECT.
On October 14, 2010, the DOL released final regulations that expand the fee-related disclosures that must be made to participants under §404(a)(5) in participant-directed individual account retirement plans, such as 401(k) plans. The regulation requires plan fiduciaries to give employees:
The initial §404(a)(5) annual disclosures for calendar year plans are due 60 days after the §408(b)(2) deadline, so they should be issued no later than August 30, 2012.
In sum, 2011 altered the legal landscape for plan sponsors, plan fiduciaries, third-party administrators, service providers, and plan participants. Although the precise consequences of the top ERISA developments of 2011 remain to be seen, they are certain to present new risks and challenges in 2012 and beyond.