Issues Two Employment-Related Decisions Late In Term

The U.S. Supreme Court recently issued two decisions that impact employers. In the first case, the justices held that federal immigration law does not preempt or invalidate an Arizona law that subjected employers to sanctions for knowingly or intentionally employing unauthorized aliens. In the second case, the high court ruled that plan participants seeking relief from violations of the notice and disclosure provisions under the Employee Retirement Income Security Act (ERISA) must show "actual" rather than "likely" harm.

State Immigration Law Upheld

The immigration case examined the validity of the Legal Arizona Workers Act (LAWA), which was enacted in 2007. LAWA allows the superior courts of Arizona to suspend or revoke the business licenses of employers that knowingly or intentionally hire unauthorized aliens. It also requires employers to use E-Verify, the federal electronic verification system, to check the work authorization status of employees.

Various business and civil rights organizations filed a lawsuit arguing that the Arizona law is preempted by the federal Immigration Reform and Control Act (IRCA). Alternatively, they argued that the mandatory requirement to use E-Verify is preempted because it conflicts with the voluntary program in the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA).

The trial court held that the law was not expressly or impliedly preempted by IRCA. The Ninth Circuit Court of Appeals affirmed the trial court's determination that LAWA was a "licensing" law within the meaning of IRCA and therefore was not expressly preempted. The Ninth Circuit also held that the law's requirement to use E-Verify is not expressly or impliedly preempted by IIRIRA, which specifically makes E-Verify voluntary. The case eventually reached the U.S. Supreme Court.

The Supreme Court first ruled that Arizona's law is not expressly preempted by IRCA. Chief Justice John Roberts acknowledged that IRCA expressly prevents states from imposing sanctions "other than through licensing and similar laws"; however, he found that the "Arizona law, on its face, purports to impose sanctions through licensing laws." Thus, the Court concluded that Arizona's law falls within IRCA's "savings" clause.

Chief Justice Roberts next addressed whether LAWA is impliedly preempted because it conflicts with federal law. The Court rejected the argument that Congress "intended the federal system to be exclusive," and that, therefore, any state system necessarily conflicts with federal law. According to the Justices, Congress specifically preserved the authority to implement sanctions through licensing laws for the states. "It stands to reason," the Court concluded, "that Congress did not intend to prevent the States from using appropriate tools to exercise that authority."

Finally, the high court turned to the argument that Arizona's requirement that employers use the federal E-Verify system is preempted. The Justices found that the plain language of IIRIRA, which established E-Verify, does not contain any language circumscribing state action. Arizona's require ment that employers use E-Verify, the Court continued, does not obstruct the achievement of Congress' objec-tive in authorizing the development of E-Verify. Thus, the requirement to use E-Verify in LAWA was held to be consistent with federal law.

Since Arizona's law fits within the confines of IRCA's savings clause and does not conflict with federal immigration law, the U.S. Supreme Court affirmed the judgment of the Ninth Circuit. Chamber of Commerce v. Whiting, No. 09-115, U.S. Supreme Court (May 26, 2011).

Practical Impact: According to Jay Ruby, a shareholder in Ogletree Deakins' Atlanta office: "The Court's decision bodes well for other states that have either passed or are considering passage of legislation requiring employers to enroll in E-Verify. Likely, other states will follow Arizona's lead and pass similar laws with some level of confidence that the law will survive constitutional challenges."

Tibor Nagy, Jr., a shareholder in Ogletree Deakins' Tucson and Phoenix offices added: "The Supreme Court's decision fully affirms a law to which Arizona employers have been subject since January 1, 2008. So this ruling doesn't change the status quo, but should remind Arizona employers to reevaluate their current LAWA compliance efforts. A LAWA enforcement action will be less likely, and far less likely to succeed, if employers have been screening their new hires through the E-Verify program."

Employees In ERISA Suit Must Show "Actual Harm"

The benefits case before the Supreme Court arose from CIGNA's decision to convert its traditional defined benefit pension plan to a cash balance retirement plan in 1998. A class of current and former employees who had participated in the defined benefit plan (and who then participated in CIGNA's cash balance plan) filed a class action suit against CIGNA.

The lawsuit alleged that CIGNA failed to provide certain required notices and disclosures to its employees and that the plan descriptions that the company did provide about the conversion and the cash balance plan did not meet the statutory standards under ERISA. CIGNA countered that even assuming that the notices and disclosures were statutorily defective, the workers were not entitled to relief because they failed to demonstrate any actual injury arising from the deficient notices.

The trial court found that the summary plan descriptions (SPDs) and the summary of material modifications (SMMs) issued by CIGNA related to the conversion were deficient under ERISA. The trial court reformed the plan and granted benefits under the reformed plan pursuant to ERISA §502(a)(1)(B).

The Second Circuit Court of Appeals issued a brief summary order that affirmed the trial court's holdings for "substantially the reasons stated" by the lower court. The case was then appealed to the U.S. Supreme Court.

In an opinion authored by Justice Stephen Breyer and joined by five other Justices, the Supreme Court held that the participants were not entitled to benefits under the terms of the plan and therefore §502(a)(1)(B) did not provide the proper remedy. Instead, the Court ruled that the proper avenue for relief was the equitable relief provision in ERISA §502(a)(3).

Of significance, the majority noted that historically when confronted with a breach of fiduciary duty, courts of equity had the power to provide relief in the form of monetary compensation for a loss resulting from the trustee's breach of duty and this relief was called a surcharge. The majority then went on to find that an ERISA fiduciary can be surcharged under §502(a)(3) for violations of the notice and disclosure provisions contained in ERISA if a plan participant or beneficiary shows actual harm. The Court also ruled that participants were not required to satisfy the more rigorous detrimental reliance standard advocated by CIGNA. Thus, the Second Circuit's decision was overturned and the case returned to the lower court. CIGNA Corp. v. Amara, No. 09-804, U.S. Supreme Court (May 16, 2011).

Practical Impact: According to Vance Drawdy, a shareholder in Ogletree Deakins' Greenville office: "It is significant that the Court found plan participants and beneficiaries cannot recover damages under §502(a)(1)(B) for an allegedly deficient or defective SPD/SMM. However, potentially even more significant is the conclusion that `other appropriate equitable relief' under §502(a)(3) includes surcharges _ essentially money damages for the losses caused by violations of the notice provisions in Title I of ERISA. This is a significant development in ERISA jurisprudence. In light of the Breyer opinion, plan fiduciaries must be cognizant of their notice obligations under Title I of ERISA and vigilant in meeting those obligations as they now may face claims for alleged losses arising from claimed failures related to those obligations."

Mark Schmidtke, a shareholder in Ogletree Deakins' Chicago office noted: "This decision is also significant because the requirement of a showing of actual harm would seem to necessitate individualized factfinding among various participants, making it more difficult to pursue a class action."