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  • BC Network
    Wednesday, July 1, 2015

    Gavel and RingsAs has now been widely reported, the Supreme Court ruled on June 26 (the second anniversary of the Windsor decision) that same-sex couples have a right to marry in any part of the United States. Despite being hailed as a victory for marriage equality, as this New York Times article points out, it may not be such happy news for currently unwed domestic partners. Specifically, there is a concern, as the article points out, that employers who previously extended coverage to domestic partners out of a sense of equity may now decide not to since both opposite-sex and same-sex couples can now marry.

    As the article mentions, there was a concern at one time that domestic partnership rules would be used by some employees to cover individuals with whom they are not really in a committed relationship. Given that not all states have registration requirements or clear standards, it was largely up to employers to set the standards for what constituted enough of a commitment for a domestic partner to warrant coverage. The difficulty was that employers had to balance not covering individuals who really were not in committed relationships with setting a standard low enough that those who really were in such relationships could qualify. The article says that it does not appear that this was really a problem, but of course, the validity of such relationships are more difficult to verify than a marriage.

    What the article also fails to point out is that there are some valid reasons why employers may want to eliminate coverage for unmarried domestic partners. Health coverage provided to a spouse is generally nontaxable under federal and state laws. However, domestic partnerships, by contrast, are subject to a patchwork of various rules ranging from essentially marriage equivalence in some states to complete non-recognition in others. This means that, in many cases, domestic partner health coverage results in imputed (that is, non-cash) income to employees for federal and some state purposes. The calculation of that imputed income is not 100% clear and the administration of those benefits can be complex.

    Many employers who saw extending coverage to same-sex couples as important were willing to suffer those difficulties and take on that risk of the IRS or state agencies second-guessing their calculations when marriage was not uniformly available to those couples. Now that it is, those employers have to engage in a cost-benefit analysis to determine if the complexity and risk are worth it on a going-forward basis.

    Additionally, it is unclear what the effect of state domestic partner and civil union laws will be after the Obergefell decision. Even though marriage is now available to same-sex couples, the decision did not remove those laws from the states’ books. What movement, if any, states make in this regard will likely influence what employers do going forward as well.

    The talent recruitment marketplace will eventually sort this out, but in the interim, employers should at least consider evaluating whether offering unmarried domestic partner benefits continues to be important as part of their recruitment and retention strategy.

    Tuesday, June 16, 2015

    OMG HeadlineEveryone seems to be talking about last month’s Supreme Court decision in Tibble v. Edison International, even though its holding wasn’t all that momentous. But I’m not complaining. As an ERISA lawyer, I love when ERISA developments hit mainstream news because, for at least one brief fleeting moment, there is a connection between the ERISA world in which I dwell and the rest of the world.

    That said, some question whether Tibble warrants the level of attention it is generating. Some say Tibble merely affirms a well-known principle of ERISA law—that is that an ERISA fiduciary has an ongoing duty to monitor plan investments. Others see Tibble as a reflection of enhanced scrutiny of the duty to monitor plan investments, as well as recognition of a statute of limitations that facilitates enforcement of that duty.

    Specifically, the Supreme Court found in Tibble that because retirement plan sponsors, as fiduciaries, have a “continuing duty to monitor trust investments and remove imprudent ones,” plaintiffs may allege that a plan sponsor breached a duty of prudence by failing to properly monitor investments and remove imprudent ones. Further, the Court found that such a claim is timely as long as it is filed within six years of the alleged breach of continuing duty.

    Facts: Tibble arose when current and former employees of Edison who were participants in a 401(k) savings plan offered by Edison brought suit against the company and other fiduciaries for alleged breaches of fiduciary duty. The alleged breaches occurred with respect to six retail class mutual funds selected for the savings plan, a group of three selected in 1999 and an additional group of three selected in 2002. The plaintiffs objected to these retail class mutual funds because similar institutional funds were available at a lower cost. Under ERISA, a plaintiff has six years after “the date of the last action which constituted a part of the breach or violation” to bring a claim. At commencement of the suit, the two groups of funds straddled the 6-year period from the date of their selection. If the only date that triggers the running of the statute of limitations is the date the funds were selected, the case would be simple. However, the law clearly provides a plaintiff with six years after the most recent action that constitutes a breach of fiduciary duty to bring their claim. Though this seems straightforward, what exactly comprises a breach or violation of a fiduciary duty has arguably not been clear.

    In an attempt to resolve the uncertainty, the Ninth Circuit held that the continued offering of an allegedly imprudent investment is not sufficient on its own to trigger a new breach upon which plaintiffs can base a timely claim. Although the Ninth Circuit rejected the continued offering theory, it acknowledged that a showing of changed circumstances that occurred within the six-year period that would have prompted a replacement of existing funds may constitute a new breach upon which plaintiffs can base a timely claim.

    The Supreme Court decided to clarify the issue and began by criticizing the Ninth Circuit for failing to consider the law of trusts in formulating its decision. Relying on trust law, the Supreme Court vacated and remanded the Ninth Circuit’s decision, holding that “a trustee has a continuing duty to monitor trust investments and remove imprudent ones,” and this continuing fiduciary duty allows a plaintiff to allege that “a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.” So long as the alleged breach of the continuing duty to monitor the investment occurred within the six-year statutory bar, the claim is timely.

    Where are we now? So where do we stand today? The Supreme Court has reiterated that a continuing fiduciary duty to review plan investments attaches to plan sponsors and fiduciaries; although there is still uncertainty with regard to the precise scope of that duty. The extent to which fiduciaries must monitor plan investments will surely be the subject of future litigation. In the meantime, plan sponsors and fiduciaries should review their current processes and procedures for monitoring ERISA plan investments in light of their recognized fiduciary obligations. They should ensure that their investment reviews are properly documented and that they take into account the reasonableness and allocation of plan fees, performance, diversification and all other relevant facts. If Tibble can prompt such reviews, then the headlines will have served a far greater purpose than a momentary validation of my professional relevance – they will have enhanced participant protections and reduced fiduciary exposure with respect to plan investments. In that case, the “ado” would be warranted.

    Friday, June 5, 2015

    In Duda v. Standard Insurance Company, a recent case decided by the Federal District Court in the Eastern District of Pennsylvania, we are reminded of the limits on the type of relief an employer may obtain for participants in its insured ERISA plans.  In this case, the employer filed suit against the insurer of its long-term disability plan under Section 502(a)(3) of ERISA, which provides the following:

    “A civil action may be brought…(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan.”

    A suit brought by a fiduciary under 502(a)(3) is preferable since the de novo standard of review, which is less deferential to the party making the initial benefit determination, would apply.  The court determined that the employer was not a plan fiduciary for purposes of making claims determinations, and therefore could not rely on this provision to sue the fiduciary that held such authority (i.e., the insurer). The court noted that even if the employer was considered to be a fiduciary, ERISA does not afford a fiduciary the right to sue if the relief sought can be obtained directly by the participant under 502(a)(1)(B), which provides the following:

    “A civil action may be brought …(1) by a participant or beneficiary… (B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan or to clarity his rights to future benefits under the terms of the plan.”

    Thus, an employer’s leverage, if any, to pressure insurers to pay benefits rests with the power to move the business to a different insurer.  Of course, that leverage is significantly impaired if the insurer is not interested in keeping the business.

     

     

    Tuesday, April 7, 2015

    For many years, medical plan drafting was viewed as a commodity. Insurance companies, third-party administrators and brokers often prepared summary plan descriptions and plan documents for self-insured medical plans using form documents. With the passage of the Affordable Care Act and other health-care related laws, however, medical claims, appeals and litigation have increased exponentially. In many instances, the terms of the plan documents have been outcome-determinative with respect to these disputes. There never has been a better time for an employer to step back and take a comprehensive review of the terms of the employer’s self-insured medical plan document and summary plan description, not only for compliance reasons but also to put the employer in the best position in the event of any dispute. The following are three drafting tips which might be considered during such a review.

    Kitchen SinkAvoiding the “Kitchen Sink” Appeal. Increasingly, our clients have been receiving lengthy appeals of denied claims for benefits. We refer to these epistles as “kitchen sink appeals” because the authors of the letters seemingly throw in everything but the kitchen sink. A typical kitchen sink appeal is prepared on behalf of an out-of-network provider who claims standing to appeal based on an assignment of benefits by a plan participant. A kitchen sink appeal is often a “cut-and paste” compilation of 25 pages or more, usually containing long passages and references to cases which appear to have no bearing whatsoever on the appeal. Usually, only one or two pages of a kitchen sink appeal contain any marginally relevant point, and yet the claims administrator must respond to the appeal in compliance with the strict requirements of the ERISA claims procedures.

    One manner of dealing with these nuisance appeals is to draft the medical plan document to prohibit the assignment of claims to third parties. Courts have uniformly recognized the enforceability of anti-assignment clauses, which are particularly effective in preventing kitchen sink appeals made by out-of-network providers who seek through litigation higher reimbursement amounts than they could negotiate with the plan directly.

    Subrogation Provisions. Medical plans should include carefully drafted subrogation provisions which are informed by Supreme Court precedent in Sereboff v. Mid Atlantic Medical Services, Inc. and U.S. Airways v. McCutchen. For example, a well-drafted subrogation provision will expressly state that the common law “make-whole doctrine” does not apply and will require plan participants to do nothing to prejudice the plan’s subrogation rights.

    On March 30, the Supreme Court announced it would review the Eleventh Circuit’s decision in Board of Trustees of the National Elevator Industrial Health Benefit Plan v. Montanile, another medical plan case involving subrogation. The Supreme Court’s decision in Montanile may further inform best practices in drafting medical plan subrogation provisions in self-funded plans.

    Plan Limitation Periods. The period of time during which a plan participant may bring a lawsuit in connection with a claim for medical benefits is typically governed by the most analogous state statute of limitations, which may be as long as ten years. A medical plan may be drafted, however, to shorten the limitations period for bringing such a lawsuit. Recent cases have upheld such provisions, provided they are reasonable and afford a long enough period of time to file a lawsuit after the administrative appeals process has been completed.

    Tuesday, February 3, 2015

    SCOTUS

    The death knell for the so-called “Yard-Man Inference” has sounded. If you think we’re being a little dramatic – OK, maybe you’re right – we have a tendency to get a little too worked up about employee benefits cases that make it to the Supreme Court. But, in any event, last week the Supreme Court resolved a circuit split and overturned the Yard-Man Inference with its decision in M&G Polymers USA, LLC v. Tackett.

     

    The Yard-Man Inference is named for the important retiree benefits decision handed down in 1983 in International Union et. al. v. Yard-Man, Inc., 716 F.2d 1476. In that case, the Sixth Circuit applied a presumption of vesting of retiree medical benefits in the absence of a termination provision in a collective bargaining agreement. You can read more about the original Yard-Man case in our earlier post on the case.

    In M&G Polymers, the Supreme Court found that Yard-Man improperly “plac[es] a thumb on the scale in favor of vested retiree benefits” and “distorts the intent to ascertain the intention of the parties” with respect to the collective bargaining agreement. The unanimous opinion authored by Justice Thomas held that the Sixth Circuit’s reliance on Yard-Man is “incompatible with ordinary principles of contract law.”

    The collective bargaining agreement at issue provided for retiree health care benefits and provided that retirees with a certain level of service would receive a full company contribution toward the cost of health care benefits. The agreement also provided that “for the duration of [the] Agreement…the Employer will provide [medical benefits].” The duration of the agreement was three years.

    The retirees alleged that the company had promised them lifetime health care benefits with no required contribution in the collective bargaining agreement, and that M&G had created a vested right to those benefits through the agreement. Once the case made its way to the Supreme Court, the Court was faced squarely with whether to approve or reject the Yard-Man presumption once and for all.

    In the Supreme Court opinion, Justice Thomas noted that “[a]lthough ERISA imposes elaborate minimum funding and vesting standards for pension plans…it explicitly exempts welfare benefits plans from those rules…” He quoted the 2013 Heimeshoff opinion and noted that “…the rule that contractual provisions ordinarily should be enforced as written is especially appropriate when enforcing an ERISA welfare benefits plan” (internal citations omitted). Justice Thomas concluded that the Sixth Circuit court had improperly “…derived its assessment…from its own suppositions about the intentions of employees, unions, and employers negotiating employee benefits…” and had “…failed even to consider the traditional principle[s] that courts should not construe ambiguous writings to create lifetime promises…[and that] contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement” (internal citations omitted). The M&G case was remanded with directions for the reviewing court to apply “ordinary principles of contract law in the first instance.”

    The concurrence authored by Justice Ginsburg and joined by Justices Breyer, Sotomayor and Kagan stressed that vesting does not require “clear and express” language, but rather may arise from “implied terms of the agreement.” The Sixth Circuit may “turn to extrinsic evidence – for example, the parties’ bargaining history,” she wrote, “if the [Court] concludes the contract is ambiguous.” Notably, Justice Thomas’ opinion did not make mention of the introduction of parol evidence in interpreting ambiguous contract terms, although such evidence is widely considered admissible when the terms of a contract are ambiguous. What, if anything, do you make of this? Please leave your comments below.

    This decision from the High Court reiterates the benefit of clear language in contracts and plan documents with respect to vesting and/or possible termination of regarding retiree health and welfare benefits to help avoid litigation, even without the Yard-Man inference.

    Tuesday, January 27, 2015

    On December 23, 2014, the U.S. Court of Appeals for the Second Circuit upheld the District Court’s dismissal of plaintiffs’ claims alleging that the same-sex spouse exclusion in the employer’s self-insured medical plan violated Section 510 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and also dismissed plaintiffs’ breach of fiduciary duty claim under Section 404 of ERISA.

    As you may recall, the underlying case, Roe v Empire Blue Cross Blue Shield, decided by the District Court of the Southern District of New York, involved an employee of St. Joseph’s Medical Center who tried to add her same-sex spouse as a covered dependent under the employer’s self-insured health plan administered by Empire Blue Cross Blue Shield. The plan at issue did not define “spouse” but it did expressly exclude same-sex spouses and domestic partners. The District Court granted defendants’ motion to dismiss the ERISA 510 claim because there was no allegation that an adverse employment action was taken in retaliation for asserting rights under ERISA or for the purpose of interfering with the attainment of those rights. The District Court reasoned that ERISA 510 only prohibits interference with the employment relationship and that Roe was still employed by St. Joseph’s Medical Center and had suffered no adverse employment action.  Having held that the exclusion did not violate Section 510 of ERISA, the District Court dismissed the ERISA 404 claim because it was based on an argument that enforcing an unlawful plan term constituted a breach of fiduciary duty. To read more about the underlying case click here to see our prior blog post.

    After conducting a de novo review, the Second Circuit concluded, in an unpublished opinion, that the District Court properly dismissed the ERISA 510 claim because plaintiffs failed to adequately allege any right to which they are entitled, or may become entitled under the plan with respect to which defendants discriminated against them or with which defendants otherwise interfered. The Second Circuit also concluded that the District Court properly dismissed the ERISA 404 claim because plaintiffs did not adequately allege that defendants were acting in a fiduciary capacity or that they breached any fiduciary duty under ERISA.

    Employers considering such an exclusion for their self-insured plans should note that the decision is expressly limited to consideration of the ERISA claims and both the District Court and Second Circuit declined to address whether the exclusion is constitutional or valid under any other federal or state law. Same-sex spouse exclusions will likely be challenged on other grounds. In addition, the legal landscape surrounding same-sex marriages continues to change as the U.S. Supreme Court recently agreed to decide whether the Fourteenth Amendment requires states to allow same-sex couples to marry and whether it requires states to recognize same-sex marriages performed in other states.

    Stay tuned!

    Tuesday, December 30, 2014

    What is a plan administrator’s obligation under ERISA to seek and obtain information potentially relevant to a participant claim where the participant has not provided it? The Fourth Circuit recently provided guidance on that issue in the case of Harrison v. Wells Fargo Bank, N.A. A copy of that opinion is available here.

    Nancy Harrison was an online customer service representative for Wells Fargo Bank. In 2011, she underwent a thyroidectomy to remove a large mass that had extended into her chest and which caused chest pain and tracheal compression. She was unable to work and received short-term disability benefits under the Wells Fargo plan. While she was recovering and waiting for a second, more invasive surgery, her husband died unexpectedly, triggering a recurrence of depression and post-traumatic stress disorder (PTSD) related to the death of her children in a house fire a few years before.

    Approximately three weeks after Ms. Harrison’s first surgery, Wells Fargo determined that she had recovered and it discontinued her short-term disability benefits. (It later provided short-term disability benefits after Ms. Harrison’s second surgery.) Ms. Harrison submitted a claim for reinstatement of the short-term disability benefits due to her depression, PTSD and related physical ailments. The outside claims administrator denied that claim. Ms. Harrison submitted an administrative appeal to Wells Fargo, supported by documentation from two of her physicians and a detailed letter from a relative who was her primary caretaker. She also disclosed that she was under the care of a psychologist and provided the psychologist’s contact information, as well as a signed medical release.. Wells Fargo submitted the administrative appeal to an independent peer review. The peer review physician contacted Ms. Harrison’s primary care physician, but he did not contact the psychologist. The peer reviewer ultimately concluded that in the absence of psychological records, it could not be determined whether Ms. Harrison’s psychiatric status limited her functional capacity. Wells Fargo denied Ms. Harrison’s administrative appeal and upheld the prior claim denial.

    Ms. Harrison filed a lawsuit for benefits under ERISA. The district court found there was insufficient evidence of disability under the plan to conclude that Wells Fargo had abused its discretion in denying Ms. Harrison’s claim. On appeal, the Fourth Circuit reversed.

    The Fourth Circuit held that by not contacting Ms. Harrison’s psychologist, Wells Fargo “chose to remain willfully blind” to readily available information that might have confirmed her claim of disability. The court noted that ERISA requires that an administrator use a “deliberate, principled reasoning process” in claims determination. It does not require that the plan administrator “scour the countryside in search of evidence” to bolster a participant’s claim. But where potentially relevant information is readily available, the court noted, ERISA does not permit an administrator to “shut his eyes” to that information.

    In light of this appellate court opinion, plan and claims administrators are well-advised to affirmatively pursue all readily available information in the claims determination process, even where the claimant has not provided it as part of the original claim or appeal. Otherwise, a court may determine that the administrative claims process was deficient, resulting in a remand of the claim for further consideration. Furthermore, after the Supreme Court’s ruling in Hardt v. Reliance Standard Life Ins. Co., 532 U.S. 598 (2009), such a remand could be considered “some degree of success on the merits” in the litigation, entitling the claimant to an award of attorneys’ fees.

    Monday, September 8, 2014

    When is a signature more than just a signature?

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    In Perez v. Geopharma, decided on July 25, 2014, Geopharma’s CEO, Mihir Taneja, brought a motion to dismiss an ERISA breach of fiduciary duty claim under the company’s health and welfare plan brought against him by the DOL. In its suit, the DOL alleged that because Taneja had signature authority on Geopharma’s bank accounts – which included the plan’s participant contributions – he was a plan fiduciary. The claim arose from findings that the company: (1) withheld employee premium contributions over a two-month and ten-month period in 2009 and 2010 respectively; (2) failed to segregate the contributions from company assets as soon reasonably possible; and (3) failed to use the funds to pay claims. The DOL alleged that the company also failed to segregate COBRA contributions from general assets and to use the funds to pay claims.

    The DOL sought to hold Taneja, the company and two other company officers jointly liable for fiduciary breaches under ERISA including:(1) participating knowingly in an act of another fiduciary, knowing the act was a breach, in violation of 29 U.S.C. § 1105(a)(1); (2) failing to monitor or supervise another fiduciary and thereby enabling a breach in violation of 29 U.S.C. § 1105(a)(2); or (3) having knowledge of a breach by another fiduciary and failing to make reasonable efforts under the circumstances to remedy the breach in violation of 29 U.S.C. § 1105(a)(3). The DOL argued that, as CEO, Director, Secretary, and signatory to the company’s bank accounts, Taneja had a fiduciary duty to monitor the plan’s other fiduciaries, as well as the company’s management and administration of the plan.

    Taneja countered that he was not a plan fiduciary because there was no proof that he performed any function or exercised any authority related to the “particular activity” of the payment of employee premium contributions. Further, the fact that he had general signature authority over the company’s bank accounts was not enough to trigger ERISA’s fiduciary responsibilities, as this would make every company officer an ERISA fiduciary. Finally, Taneja argued that he could only become a plan fiduciary if he were named a fiduciary under the plan or exercised discretionary control or authority over the plan or the management of its assets.

    In denying the motion, the court held that Taneja’s signature authority made him a plan fiduciary because, among other things, ERISA provides that a person can become a plan fiduciary by exercising any authority or control over the management or disposition of plan assets, even without discretion. The Court declined to decide whether discretion was an ERISA fiduciary requirement at this stage, but noted that at least one Circuit (the Eleventh) has suggested that discretion is a necessary prerequisite for ERISA fiduciary status.

    Lesson Learned: Although the ERISA discretion requirement is still in limbo, CEOs and other company officers responsible for ERISA-governed plans who do not want to be plan fiduciaries should consider segregating plan assets and having only plan fiduciaries serve as signatories on the plan’s bank accounts to avoid potential fiduciary liability under ERISA.

    Friday, August 29, 2014

    Tatum v. RJR Nabisco Investment Committee, decided by the Fourth Circuit on August 4, involved the divestiture of the Nabisco stock funds following spin off of Nabisco.  Some 14 years after Nabisco and RJ Reynolds merged to form RJR Nabisco, the merged company decided to separate the food and tobacco businesses by spinning off the tobacco  business.  Following the spinoff, the RJR 401(k) plan, which was formed after the spinoff, provided for the Nabisco stock funds as frozen funds, which permitted participants to sell, but not purchase, Nabisco stock.

    Although the Plan document provided for the Nabisco stock funds, RJR decided to eliminate the funds approximately 6 months following the spinoff.  The decision was made by a “working group” of several corporate employees and not by either of the fiduciary committees appointed to administer the Plan and review its investments.

    During the 6 months following the spinoff, the price of the Nabisco stock declined significantly.  However, the stock was rated positively during this period by analysts who recommended a “hold” or a “buy” for the stock during 1999 and 2000.

    After the Nabisco stock funds were divested in January 2000, the price for the Nabisco stock began to rebound.  In December 2000, following a bidding war, Nabisco was sold for a price well in excess of the price that the stock was sold by the Plan in January.  In 2002, this litigation commenced.

    District Court Decision.  The District Court found that RJR had breached its fiduciary duty because the “working group” that recommended the divestiture of the Nabisco stock funds did no investigation of the merits of maintaining or divesting the stock funds.  Although the District Court found a fiduciary breach, it dismissed the case because the decision to divest the Nabisco stock fund was objectively prudent:  a reasonable and prudent fiduciary could have made the same decision after a proper investigation.

    Appellate Court Decision.  On appeal, the Fourth Circuit, in a two to one decision, agreed that RJR had breached its duty of procedural prudence.  Two judges concluded that the proper standard for determining objective prudence is whether a prudent fiduciary would have, not could have, made the same decision. The majority concluded that the “could have” standard adopted by the District Court sets too low a bar for a breaching fiduciary.  According to the majority a “could have” standard describes what is “merely possible while a “would have” standard describes what is “probable.”

    The dissent agreed that RJR had not been procedurally prudent but sharply disagreed with the majority’s standard for objective prudence.  The dissenting opinion stated that objective prudence does not “dictate one and only one investment decision.”  ERISA allows for more than one prudent decision when all of the facts existing at time the decision is made are considered.  The dissent implied that the majority may have applied hindsight in reaching its conclusion.   It characterized the takeover attempt and bidding

    war in late 2000 as unexpected.

    The majority vacated the District Court’s decision and remanded with instructions to review the evidence and determine whether RJR met its burden of proving that a prudent fiduciary would have made the same decision:  to divest the Nabisco stock funds in January 2000.

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    Lessons Learned.  The majority and dissent’s sharply conflicting views regarding the standard for whether a fiduciary decision is objectively prudent provide great material for theoretical discussion among lawyers.  Plan fiduciaries should assure, however, that they never become part of the debate.  Had the RJR fiduciaries simply (i) performed a thorough investigation of the alternatives, (ii) made a reasoned decision based on their investigation, and (iii) documented the basis for their decision, no breach of duty would have occurred in the first place even though, with hindsight, the decision may have been different.

    Thursday, July 17, 2014

    On June 25, 2014, a unanimous United States Supreme Court weighed in on the legal standards applicable in stock drop cases in Fifth Third Bancorp v. Dudenhoeffer.

    Facts. Beginning in 2007, Fifth Third Bank began experiencing a large number of mishaps, most of them associated with borrowers not repaying their loans when due. As a result, Fifth Third’s stock price suffered the same phenomenon as that of virtually every other publicly traded financial institution in the world during the great recession: it dropped precipitously, falling 74% from July 2007 to September 2009. With the benefit of hindsight, plaintiffs brought a class action lawsuit against the fiduciaries of the Fifth Third 401(k) Plan, alleging that all of this should have been patently obvious based on public and nonpublic information allegedly possessed by the fiduciaries. The plaintiffs asserted that the fiduciaries should have taken one or more of the following actions with respect to the company stock fund in the 401(k) Plan: (1) sell the stock before it declined; (2) refrain from purchasing any more Fifth Third stock; (3) cancel the Plan’s company stock option; and (4) disclose the inside information allegedly in their possession so that the market would appropriately adjust its valuation of Fifth Third stock downward and the Plan would as a result no longer be overpaying for it.

    The Supreme Court’s Ruling. Much of the decision focuses on whether the so-called “Moench” presumption of prudence attaches to a fiduciary’s decision to allow or continue the investment of plan assets in company stock when the governing plan documents direct that such investment shall be made. This presumption was originally articulated by the Third Circuit in the case of Moench v. Robertson, and was subsequently adopted by every circuit which had considered the matter, although there was some disagreement regarding whether the presumption applied at the pleading or evidentiary phase. The Supreme Court Justices read and reread ERISA’s statutory language, looked in every nook and cranny, and directed their law clerks to do the same, but ultimately they were unable to find even a single word in the statute which accorded such a presumption of prudence. The Court then concluded that the Circuit Courts had made it all up, and that no such presumption existed.

    Rather than stopping at the point of simply deciding the issue presented, the Court elected to offer some advice to the lower courts regarding how meritless stock drop cases might be weeded out, perhaps because the lower courts, at least in the eyes of the Supreme Court, had gotten the law in this area so wrong for so long. The Court stated that, in the case of a publicly traded security, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valued are “implausible”, at least in the absence of special circumstances. The Court noted that ERISA fiduciaries have little hope of outperforming the market, and so may, as a general matter, prudently rely on market price.

    Stock MarketUnder this standard, is it even possible to plead a breach of fiduciary prudence as it relates to investment decisions involving a publicly-traded company stock fund? The Court left this question open with the following observation: “We do not here consider whether a plaintiff could nonetheless plausibly allege imprudence on the basis of publicly available information by pointing to a special circumstance affecting the reliability of the market price as ‘an unbiased assessment of the security’s value in light of all public information.’” To even have a chance of succeeding in stock drop litigation based solely on publicly available information, therefore, plaintiffs would have to prove that the plan fiduciaries were aware or should have been aware of a special circumstance which would lead to the conclusion that the most efficient market in the history of mankind was not operating efficiently with respect to the value of the company’s stock. The Moench presumption of prudence has been replaced with the Dudenhoeffer presumption of an efficient public market. Unlike the Moench presumption, which was rebuttable, the Dudenhoeffer presumption appears to be virtually irrebuttable. To our brethren in the plaintiffs’ bar who make their living handling stock drop cases, we offer the following words of encouragement: Good luck with that.

    The Court next moved to a discussion of the plaintiffs’ allegations that the plan fiduciaries failed to act on the basis of nonpublic information. The Court noted that the duty of prudence does not require a fiduciary to break the law. Presumably, therefore, litigation premised on the theory that fiduciaries should have taken action which would have violated the securities laws should be dismissed. The Court also instructed the lower courts faced with stock drop claims to consider whether the suggested fiduciary action (e.g., deciding to liquidate a company stock fund or disclose material nonpublic information) might do more harm than good by causing a drop in the value of the stock already held by the plan.

    Reaction from the Department of Labor. The Department of Labor, which had filed an amicus brief in support of the plaintiffs’ position, immediately declared victory, once again proving the ability of Washington bureaucrats to put a positive spin on any defeat. The DOL blog post may be found here.

    Lessons from Dudenhoeffer. The Dudenhoeffer decision suggests that fiduciaries in charge of monitoring a company stock fund should not only review and analyze press releases, SEC filings, and other publicly available information, but should also build the following considerations into their fiduciary process:

    1. In considering publicly available information with respect to company stock, fiduciaries should determine whether any special circumstance exists affecting the reliability of the stock’s market price as an unbiased assessment of the stock’s value that would make reliance on the market’s valuation imprudent.

    2. It is still a bad idea to have insiders serve on the committee which oversees the company stock fund. Consider removing insiders from the investment committee, or at least consider vesting sole authority to oversee the company stock fund in a subcommittee consisting solely of non-insiders.

    3. In the event an insider does serve on the committee tasked with overseeing the company stock fund, and the insider comes into possession of material nonpublic information suggesting the company’s stock is overvalued, the insider should consider whether he or she could take action with respect to the company stock fund consistent with the securities laws that a prudent fiduciary in the same circumstances would not view as more likely to harm the fund than to help it.

    The decision also suggests a possible change to the historical approach to drafting plan language relating to plan investments in company stock. Many practitioners had hardwired language into the plan document mandating investments in company stock in order to place the fiduciaries in the best position to claim the Moench presumption of prudence. Given the demise of the Moench presumption, such language would no longer appear to be helpful, and may even prove detrimental in the situation in which the plan fiduciaries desire to discontinue the company stock fund. Assuming the portion of the plan which invests in company stock is an employee stock ownership plan (“ESOP”), consider language which simply recites that the ESOP portion of the plan has been designed to invest primarily in employer securities.