The United States Supreme Court yesterday issued a unanimous opinion in Tibble et al. v. Edison International et al. vacating a Ninth Circuit Court of Appeals ruling that claims by employees of Edison International against the company over allegedly imprudent 401(k) plan investments were time-barred under applicable ERISA statute of limitation rules. The issue before the Court was whether a fiduciary breach claim can be brought under ERISA based on such an allegedly imprudent retirement investment when that investment initially was selected outside of ERISA’s applicable six-year statute of limitations. Writing for the Court, Justice Stephen Breyer stated that since plan fiduciaries have a continuing duty to monitor plan investments, any claims falling within that duty’s statute of limitations would be valid.

In this case, individual beneficiaries of the Edison International 401(k) Plan filed a lawsuit on behalf of the 401(k) Plan and similarly situated beneficiaries against Edison International and other related parties. The petitioners sought to recover damages for losses suffered by the Plan in addition to other equitable relief based on alleged breaches of the respondents’ fiduciary duties. Specifically, the petitioners argued that the respondents violated their fiduciary duties with regard to mutual funds added to the Plan in 1999 and in 2002. The action was filed by the petitioners in 2007. The underlying fiduciary claim was that the respondents imprudently selected six higher priced retail-class mutual funds as plan investments when materially identical but lower priced institutional-class mutual funds were available. Since ERISA generally requires a breach of fiduciary duty complaint to be brought no more than six years after the date of the last action that constitutes a part of the breach, the lower courts ruled that the petitioners’ complaint with respect the 1999 funds was barred under ERISA’s statute of limitations because those funds were added to the 401(k) Plan more than six years before the complaint was filed (the lower courts concluded that the attendant circumstances had not changed enough to require that review of the selected mutual funds by the respondents). On the other hand, the lowers courts concluded that the respondents’ failed to satisfy their fiduciary obligations with respect to the selection of the three funds in 2002 (and that portion of the lower court opinions may yet prove to be problematic in other similar situations).  While the rulings of the lower courts with respect to the 1999 funds likely cheered plan sponsors temporarily, the Court did not embrace the position of the lower courts and instead vacated the previous rulings and remanded the case back for further examination of the proper application of fiduciary obligations to the facts at hand.

Justice Breyer notes that the District Court in this case allowed the petitioners to argue that the complaint was timely with respect to the funds added in 1999. The petitioners argued that the respondents should have commenced a review and conversion of the higher priced retail-class mutual funds to lower priced institutional-class mutual because the previously selected funds incurred significant changes within the 6-year statute of limitations period. The District Court concluded, and the Court of Appeals later agreed, that the petitioners failed to show that changing circumstances would have required a prudent fiduciary to undertake a review of the funds within the 6-year statute of limitations period.

Breyer began his review by focusing on the language contained in ERISA’s statute of limitations rule. In that regard, he stated that ERISA Section 1113 reads, in relevant part, that “[n]o action may be commenced with respect to a fiduciary’s breach of any responsibility, duty, or obligation” after the earlier of “six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.” Breyer noted that both prongs of the rule require that a breach or violation occurs within the applicable 6-year period. The petitioners contend that the respondents breached the duty of prudence by offering higher priced retail-class mutual funds when the same investments were available as lower priced institutional-class mutual funds. While in Breyer’s view, the Ninth Circuit Court of Appeals correctly focused on whether the last action that constituted a part of the breach occurred within the relevant 6-year period, he wrote that the lower court inappropriately concluded that only a significant change in circumstances could cause a new breach of a fiduciary duty.

The Court ultimately concluded that the lower courts erred by applying a statute of limitations bar to such a claim of a breach of fiduciary duty without considering the nature of that duty. The opinion states that the lower courts failed to recognize that under applicable trust principles a fiduciary is required to conduct a regular review of plan investments with the nature and timing of the review contingent on the circumstances. Citing a by-now familiar standard, Breyer noted that an ERISA fiduciary must discharge his or her responsibility “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. When examining the range of that fiduciary duty, courts often look to the law of trusts. The Court went on to note that under trust law a fiduciary has a continuing duty to monitor plan investments and to remove imprudent ones (this continuing duty is in addition to the trustee’s duty to exercise prudence in selecting investments).  Since under trust law a fiduciary has a continuing duty of some kind to monitor investments and to remove imprudent ones, a petitioner should be permitted to allege that a fiduciary breached the duty of prudence by failing to properly monitor investments. In such a case, Breyer concluded that “so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.”

The Court in this decision expressed no view on the scope of the respondents’ fiduciary duty in this case.[1]  In effect, the case has been remanded so that the Ninth Circuit Court of Appeals can consider claims by the petitioners that the respondents breached their duties within the relevant 6-year statute of limitations period.  Breyer noted that on remand the Court of Appeals may conclude that the respondents did indeed conduct the sort of review that a prudent fiduciary would have conducted absent a significant change in circumstances.  Either way, the Court may well see this case again.

[1] The respondents argued that the petitioners failed to raise in the lower courts a claim that the respondents committed new fiduciary breaches due to a failure to monitor their investments. Given its decision to remand the case back to the Ninth Circuit Court of Appeals, the Court opted to let the Ninth Circuit resolve this ancillary issue.