Attorneys Make Predictions on Fee Litigation, Questions of Constitutional Standing


Plan fee litigation, questions of constitutional standing and the fate of the pro-fiduciary presumption of prudence are the big issues currently driving fiduciary litigation under the Employee Retirement Income Security Act, practitioners said during a webcast.

Both Karen L. Handorf of Cohen Milstein Sellers & Toll PLLC in Washington and Shannon Barrett of O'Melveny & Myers LLP in Washington predicted that future plan fee litigation would center on what constitutes a “material change” in a plan investment selected outside of ERISA's statute of limitations.         

The April 1 webcast on ERISA litigation was sponsored by the Practising Law Institute as part of a larger program titled Pension Plan Investments 2014: Current Perspectives.         

Presumption of Prudence          

The panelists discussed the future of the pro-fiduciary presumption of prudence that some courts have used to protect fiduciaries of employer stock plans from liability for declining share price. The U.S. Supreme Court heard oral arguments on the presumption April 2 (Fifth Third Bancorp v. Dudenhoeffer, U.S., No. 12-751, argued 4/2/14).         

Elizabeth Hopkins, counsel for appellate and special litigation with the Department of Labor in Washington, said that for many years, the presumption had been “pretty close to an irrebuttable presumption,” until the U.S. Court of Appeals for the Sixth Circuit articulated a weaker standard in its Dudenhoeffer decision.         

“Circuit after circuit adopted this presumption and ran with it,” Hopkins said. However, the Sixth Circuit's iteration of the presumption “sounds very much like the normal prudence standard,” Hopkins said.         

One important issue the Supreme Court may decide when it rules in Dudenhoeffer is the stage at which the presumption applies, Hopkins said. While many courts have applied it at the pleadings stage of litigation, the Sixth Circuit declined to do so and allowed the participants' claims to survive a motion to dismiss.         

This question of timing has important implications, Hopkins said.         

“A lot really turns on what stage of the case you can win or lose at,” she said. “If you get past a motion to dismiss, from a plaintiffs' perspective, you're in pretty good shape, and you're more likely to get a settlement.”           

“It's a huge thing, whether you can dismiss a case before there's even been discovery,” she added.        

Barrett spoke in favor of the presumption, arguing that it recognized the “unique nature” of employer stock plans.         

“It's somewhat unfortunate that this got cast as a presumption, because a presumption takes on certain specialized meaning,” Barrett said. “I view it really as a standard, and a standard that recognizes the unique nature of employer stock and the way that Congress treated it.”         

“What courts are really doing is looking at the difficult position that fiduciaries can be in with employer stock,” Barrett said.         

The presumption is one way to alleviate the tension fiduciaries experience when their plans call for the purchase of employer stock, Barrett said. He said that without the presumption, fiduciaries could face liability for failing to sell declining stock, but they could also face liability for selling employer stock that later rebounds.         

“Courts have adopted this standard as a path out for fiduciaries,” he said.         

Hopkins questioned whether this path out was truly necessary.         

“One thing that's worth thinking about is that fiduciaries are allowed to be in this position of conflicting loyalties, but they don't have to put themselves in that position,” Hopkins said. “They argue that they're between a rock and a hard place, but it's because they've taken on those two roles.”         

Constitutional Standing Questions          

The panelists also weighed in on the recent trend of courts denying standing to defined benefit plan participants who couldn't demonstrate that their benefits were in jeopardy. Both the U.S. Court of Appeals for the Fourth Circuit and the U.S. District Court for the Western District of Washington have issued recent rulings to this effect (David v. Alphin, 704 F.3d 327, (4th Cir. 2013); Palmason v. Weyerhaeuser Co., 2013 BL 225409, (W.D. Wash. 2013)).         

Handorf called this trend a “frightening development” that “completely rewrites ERISA.”         

In Handorf's view, any time a fiduciary breach occurs, plan participants have suffered an injury that confers standing.         

Barrett took the opposite view, saying that courts are beginning to recognize that defined benefit plan participants have “three backstops” protecting their benefits—the funded status of the plan, the solvency of the plan sponsor and the benefits guarantee made by the Pension Benefit Guaranty Corporation.         

Courts denying standing to defined benefit plan participants have recognized that each of these backstops makes the chance that participants will suffer a loss of benefits increasingly speculative, Barrett said.         

Handorf predicted that this standing issue wouldn't be going away anytime soon.         

“I think this will be a big issue that will ultimately go to the Supreme Court again,” Handorf said.

Excerpted from a story that ran in Pension & Benefits Daily (4/3/2014).