Statutes of limitation restrict the time period in which a plaintiff can bring a claim. These rules are designed to prevent a plaintiff from sleeping on his or her cause of action for an unreasonably extended period of time because the resulting delays can often result in unfairness and prejudice to a defendant who, with the passage of time and the loss of evidence, may lose the ability to mount an effective defense. Above, we discussed the Seventh Circuit’s decision in Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., which provided significant guidance on when an ERISA claim for benefits accrues for statute of limitations purposes. In this article we discuss the statute of limitations governing breach of fiduciary duty claims under ERISA.
While ERISA does not provide a limitations period for benefit claims, a claim for breach of fiduciary duty is governed by ERISA § 413, 29 U.S.C. § 1113. Section 413 provides that a claim for breach of fiduciary duty must be brought within the earlier of six years from the date of the last action that constituted a part of the alleged breach or violation, or three years after the earliest date that the plaintiff had actual knowledge of the alleged breach or violation.
Whereas the three-year period acts as a traditional statute of limitations, in that it runs from the date of actual knowledge of the claim, the six-year period acts as a statute of repose: it provides for a strict deadline, which may not be tolled, and is tied to the fixed date in time when the last act of the alleged breach or violation occurred. These two provisions work in conjunction with each other, providing a balanced approach that allows a plaintiff three years to file an action from the date that he or she acquires actual knowledge of the claim, as long as that date is within six years of the alleged breach or violation.
ERISA does not define actual knowledge and, as a result, the courts have been left to establish their own approaches to determine whether and when a plaintiff has actual knowledge of the alleged breach or violation sufficient to begin running the three-year limitations period. This rule has been applied differently among the circuits: some courts define actual knowledge as when a plaintiff knows the facts and events that underlie an alleged breach or violation, while other courts define actual knowledge as knowledge of those facts and events plus an understanding that those facts support some sort of legal claim under ERISA. A third group of courts that, for the most part, appears to fall into one of the aforementioned categories, claims to apply hybrid approaches based on fact-driven inquiries.
The Permissive Approach
The Third Circuit follows a permissive approach, requiring that in order for a plaintiff to have actual knowledge for purposes of the three-year limitations period, the plaintiff must have knowledge of all the material facts necessary to understand that a claim exists and also knowledge that those facts give rise to an actual claim under ERISA. Under this approach, the Third Circuit does not require plaintiffs to have met with their lawyer or have a complete understanding of their rights under ERISA, but they must know that a fiduciary has breached its obligations under the statute. This differs from the conservative approach described below, which does not require a plaintiff to understand that a legal claim exists.
The Fifth Circuit’s definition of actual knowledge is similar to the Third Circuit’s, requiring that a plaintiff have knowledge of all the material facts needed to know that a claim exists and also knowledge that those facts support a claim for breach of fiduciary duty under ERISA. For example, for a plaintiff to have actual knowledge, he or she would have to know that a plan was governed by ERISA and that a fiduciary acted in such a way as to give rise to a legal claim. This more lenient approach favors plaintiffs as it postpones the start of the three-year limitations period under ERISA § 413 until a plaintiff understands that he or she has a cause of action under ERISA.
The Conservative Approach
Following a markedly more conservative approach, the Sixth Circuit only requires that a plaintiff have knowledge of the relevant facts of a transaction or actions giving rise to a violation to start the three-year limitations period. The Sixth Circuit specifically declined to follow the more permissive approach adopted by the Third and Fifth Circuits and does not define actual knowledge to include a plaintiff’s understanding that the known facts support a legal claim under ERISA.
The Seventh Circuit has also defined actual knowledge for the purpose of ERISA § 413 as knowing the “essential facts of the transaction or conduct constituting the violation,” without requiring “a potential plaintiff to have knowledge of every last detail of a transaction, or knowledge of its illegality.” Because neither the Sixth nor Seventh Circuits require that the plaintiff have knowledge that a legal claim exists under ERISA or otherwise, the three-year period for purposes of ERISA § 413 could start running much earlier in these circuits than it would under the approach applied in the Third and Fifth Circuits.
The Ninth Circuit has stated that actual knowledge requires that a plaintiff have knowledge that a fiduciary committed a breach, not just knowledge of the transaction itself. The Ninth Circuit declined to equate knowledge of a transaction that is not illegal on its face with actual knowledge of an alleged breach of fiduciary duty for the purposes of triggering ERISA’s three-year statute of limitations period. Instead, the Ninth Circuit requires that a plaintiff have actual knowledge of the act by the fiduciary that constitutes the breach before the limitations period will begin to run. The Ninth Circuit does not, however, require that a plaintiff understand that a cause of action exists under ERISA.
The Eleventh Circuit has determined that actual knowledge requires more than knowledge “that something was awry” – a plaintiff must have “specific knowledge of the actual breach of duty upon which he sues” before the statute of limitations period will begin to run. Nevertheless, like the Sixth, Seventh, and Ninth Circuits, the Eleventh Circuit does not require that the plaintiff know that those facts support a legal claim under ERISA.
The “Hybrid” Approach
The D.C. Circuit was one of the first circuit courts to consider the meaning of actual knowledge for the purpose of ERISA § 413. While it did not develop a specific approach like other circuit courts to later consider the issue, the D.C. Circuit did provide helpful guidance by concluding that the disclosure of a transaction that is not prohibited under ERISA cannot provide a plaintiff with actual knowledge of an underlying violation. Subsequently, the Second and Eighth Circuits both agreed with the D.C. Circuit’s analysis that knowledge of a transaction that is legal on its face will not serve to trigger the running of the three-year limitations period.
More recently, the First Circuit stated its belief that the differences between the aforementioned approaches were exaggerated, and that, were there actually a circuit split on the issue, the First Circuit would find itself in the middle. The First Circuit took more of a hybrid approach, concluding that, while “facts cannot be attributed to plaintiffs who have no actual knowledge of them,” a plaintiff has actual knowledge for the purposes of ERISA § 413 when he or she knows the “essential facts of the transaction or the conduct constituting the violation.” In so doing, the First Circuit noted that actual knowledge must be distinguished from the concept of constructive knowledge, which Congress removed from ERISA § 413 in 1987, and that the inquiry is one that must be flexible, allowing a court to take into account the factual scenario at issue. The First Circuit would find that a plaintiff had actual knowledge for purposes of ERISA § 413 if he or she knew the essential facts of the transaction or the conduct constituting the violation; and, like the Sixth, Seventh, Ninth, and Eleventh Circuits, the First Circuit does not require that a plaintiff understand that a legal claim exists under ERISA to begin running the three-year limitations period.
Refusing to develop a “hard and fast definition,” the Fourth Circuit adopted a fact-intensive, hybrid approach that is similar to the one developed by the First Circuit. The Fourth Circuit was similarly concerned with the 1987 amendment to ERISA § 413 that replaced constructive knowledge with the current actual knowledge requirement, and agreed with the First Circuit that actual knowledge of facts cannot be attributed to a plaintiff who has no knowledge of them. Thus, the Fourth Circuit concluded that actual knowledge exists when a plaintiff knows the essential facts of a transaction or the conduct that constituted the violation. How the approach adopted by the First and Fourth Circuits falls in the “middle” or differs from the conservative one adopted by the Sixth, Seventh, Ninth, and Eleventh Circuits is somewhat unclear because neither court requires, like the Third and Fifth Circuits do, that a plaintiff have an understanding that a legal claim exists under ERISA.
The Second Circuit follows a more lenient hybrid approach, requiring that a plaintiff have knowledge “of all material facts necessary to understand that an ERISA fiduciary has breached his or her duty or otherwise violated” ERISA. While the Second Circuit does not require that the plaintiff have knowledge of the relevant law, a plaintiff must have knowledge of the material facts necessary to constitute a claim under ERISA, which might include expert opinions or an understanding of the harmful consequences. Furthermore, the Second Circuit will not find actual knowledge where a plaintiff only has knowledge of a transaction that is not, on its face, “inherently a statutory breach of fiduciary duty.” Thus, the Second Circuit’s approach appears to be a slightly more conservative variation of the one promulgated by the Third and Fifth Circuits, requiring that a plaintiff have some understanding that a breach or violation has occurred, not just knowledge of the underlying facts.
Finally, in defining actual knowledge for the purposes of ERISA § 413, the Eighth Circuit declared that it would adopt a hybrid approach. The Court stated that it “agreed with the interpretation developed with substantial unanimity by [its] sister circuits,” that a plaintiff must have actual knowledge of the material facts to be aware that a claim exists. The Eighth Circuit approved of the D.C. Circuit’s reasoning that the disclosure of a transaction that is not facially a breach or violation would not serve to create actual knowledge on the part of a potential plaintiff. Thus, the Eighth Circuit noted that the “nature of the alleged breach is critical to the actual knowledge issue.” The Court opined that where a fiduciary commits a breach by making, for example, an imprudent investment, a plaintiff would have to have more knowledge than simply being aware that the transaction had occurred. Instead, a plaintiff would need to have some understanding of how the investment was selected to trigger the start of the three-year limitations period. Conversely, the Eighth Circuit stated that where a fiduciary engages in a prohibited transaction, a plaintiff’s knowledge of the transaction itself would constitute actual knowledge for the purposes of ERISA § 413’s three-year statute of limitations period.
Even though the First Circuit characterized the circuit split as exaggerated and the Eighth Circuit declared that the circuit courts were substantially in agreement in their interpretation of actual knowledge, the differences between the conservative and permissive approaches can significantly impact the outcome of motions to dismiss on statute of limitations grounds.
Allowing the tolling of the three-year limitations period until plaintiffs understand that the facts they already know would support a claim under ERISA, as required by the Third and Fifth Circuits, seems to reach beyond the intent of the statute. ERISA § 413 does not specifically require such extensive understanding by a plaintiff, and the lenient standard may allow plaintiffs to escape the three-year period by arguing simply that they did not understand there was a legal claim available under ERISA to redress an alleged breach or violation of which they already had knowledge. The more conservative approach adopted by the majority of the circuit courts promotes a more objective standard because it is easier to determine when facts are communicated to a plaintiff than when a plaintiff realizes he or she had a claim under ERISA.
Given the disparity among the approaches of the circuit courts, plaintiffs bringing fiduciary breach claims may engage in forum-shopping as a means to avoid application of the three-year rule or the more onerous interpretations of that rule. It is hoped that the issue of when a fiduciary breach claim accrues eventually makes its way to the Supreme Court, since only then will there be an opportunity to develop a uniform rule for actual knowledge that could be applied consistently throughout the courts.