The upcoming term of the U.S. Supreme Court is shaping up to be a busy one with respect to cases arising under the Employee Retirement Income Security Act of 1974 (“ERISA”). There have been other terms with multiple ERISA cases – for example the 2015 term had at least three1 – and it looks like the upcoming term will again be an extremely eventful one for ERISA in the Court. In Thole v. U.S. Bank, the Court will consider whether constitutional or statutory standing requirements prevent a participant in a defined benefit plan from bringing a claim for breach of fiduciary duty where the plan is overfunded; in Intel Corporation Investment Policy Committee v. Sulyma, the Court will address whether constructive knowledge of a breach or other violation of ERISA is sufficient to trigger the statute of limitations applicable to a claim relating to plan investments, and the degree to which whether the specificity of the knowledge is relevant; and, in Retirement Plans Committee of IBM v. Jander, the Court will yet again revisit the applicable standard for pleading a claim of a breach of the duty of prudence where a retirement plan is invested in employer stock.
Thole v. U.S. Bank N.A.
In Thole, the Court will consider the question of whether a participant in a defined benefit pension plan may bring suit to restore plan losses under Section 502(a)(2) of ERISA or seek injunctive relief under Section 502(a)(3) of ERISA, without alleging individual financial harm.2 Thole concerns a putative class action brought originally in 2013 against an employer group in connection with the management of a defined benefit pension plan. The plaintiffs allege a number of fiduciary violations under ERISA relating to the investment of the plan’s assets.
At the time the lawsuit was brought, the plan was apparently underfunded (i.e., generally, the value of the plan’s liabilities exceeded the value of the plan’s assets). In 2014, after the litigation was commenced, the plan became overfunded. As a result, the District Court for the District of Minnesota dismissed the plaintiffs’ claims as moot under Article III of the U.S. Constitution.
In general terms, under Article III’s case-or-controversy requirement, a plaintiff seeking judicial review in the federal courts must have standing by virtue of having suffered an actual injury that constitutes an invasion of a legally protected interest that is (i) concrete and particularized, and (ii) actual or imminent, as opposed to conjectural or hypothetical.3 In addition, the doctrine of mootness generally restricts a federal court’s ability to decide cases in circumstances where there is no longer a case or controversy, although a case is to be considered moot "only when it is impossible for a court to grant any effectual relief whatever to the prevailing party."4 In Thole, the District Court concluded that, because the plan currently had more than enough funding to meet its obligations to plan participants, the plaintiffs lacked a “concrete interest in any monetary relief that might be awarded to the [p]lan if [the plaintiffs] prevailed on the merits.”
On appeal, the Court of Appeals for the Eighth Circuit affirmed, but on statutory rather than Article III grounds. The Eighth Circuit determined that, regardless of possible questions under Article III relating to standing and mootness, participants in an overfunded defined benefit plan do not fall within the category of plaintiffs authorized to bring suit to restore plan losses under Section 502(a)(2) of ERISA and likewise determined that a showing of actual or imminent injury was necessary to seek injunctive relief under Section 502(a)(3).
The Supreme Court granted certiorari on three points. First the court will resolve a possible split in the circuits5 as to “[w]hether an ERISA plan participant or beneficiary may seek injunctive relief against fiduciary misconduct under [Section 502(a)(3)] without demonstrating individual financial loss or the imminent risk thereof.” Second, the Court will consider the separate question of “whether an ERISA plan participant or beneficiary may seek restoration of plan losses caused by fiduciary breach under [Section 502(a)(a)(2)] without demonstrating individual financial loss or the imminent risk thereof.” Finally, the Court has directed the parties to brief and argue the question of whether “whether petitioners have demonstrated Article III standing,” even though such a question was not presented in the underlying petition.
Regarding the Article III point, the issue previously surfaced in Harley v. Minnesota Mining and Manufacturing Company,6 where the Eighth Circuit held that there were indeed constitutional impediments to the bringing of a claim under ERISA for an overfunded defined benefit plan.7 In reaching this conclusion, the court in Harley held that “the limits on judicial power imposed by Article III counsel against permitting participants or beneficiaries who have suffered no injury in fact from suing to enforce ERISA fiduciary duties on behalf of the Plan.”8 It will be interesting to see whether the Supreme Court in deciding Thole ultimately reaches this issue. While ordinarily the Court will decline to address a constitutional issue where a case can be resolved on statutory grounds, here the Court’s specific direction to the parties to brief the issue suggests that the Court may be willing to take on the question.
It is noted that the case of Spokeo v. Robins,8 from the 2015 term, had been seen by a number of practitioners as a case that, while not itself arising under ERISA, could have helped to resolve Article III questions under ERISA. The issues in Spokeo revolved around the importance of the concreteness of an alleged injury in fact in determining Article III standing for claims of statutory violations, with the court observing that “Congress' role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” However, the manner in which Spokeo was decided ultimately avoided the underlying substantive issues, leaving for another day an opportunity for the Supreme Court to address the ERISA implications of these Article III issues. Thole may well present that opportunity.
Intel Corporation Investment Policy Committee v. Sulyma
Sulyma concerns a putative class action brought against a plan sponsor alleging fiduciary violations under ERISA. While certain investment funds under the plans in question had originally not included significant allocations to alternative investments, the allocations to such investments increased over time, allegedly coming “at the cost of higher fees and lower performance during periods of strong returns in the equity market” and causing performance to lag “compared to index funds and comparable portfolios.” Although disclosures regarding investment strategy and investment performance were made more than three years prior the filing of the suit, the plaintiff alleged that he did not learn of the strategy while he was employed and would not in any event have understood at the time that they were imprudent.
Section 413(2) of ERISA prohibits civil actions from commencing more than three years from “the earliest date on which the plaintiff had actual knowledge of the breach or violation.”10 In Sulyma, the District Court for the Northern District of California dismissed plaintiff’s suit as time barred.
The Court of Appeals for the Ninth Circuit reversed and remanded, concluding that there was a dispute of material fact as to whether plaintiff had “the requisite ‘actual knowledge of the breach’ for [section 413(2)] to bar the action.” According to the Ninth Circuit, “for a plaintiff to have sufficient knowledge to be alerted to his or her claim, the plaintiff must have actual knowledge, rather than constructive knowledge.” The Ninth Circuit concluded that the existence of the disclosures was insufficient, by itself, to establish “actual knowledge” for these purposes, and that, due to the nature of the claim plaintiff brought, plaintiff needed “actual knowledge both that those investments occurred, and that they were imprudent,” in order to trigger the running of the statute of limitations.
The Supreme Court granted certiorari to resolve a conflict in the circuits11 on the question of “[w]hether the three-year limitations period in Section 413(2) … which runs from ‘the earliest date on which the plaintiff had actual knowledge of the breach or violation,’ bars suit when all the relevant information was disclosed to the plaintiff by the defendants more than three years before the plaintiff filed the complaint, but the plaintiff chose not to read or could not recall having read the information.” The resolution of this issue could have a significant impact on the viability of many claims across a wide variety of factual situations and legal issues arising under ERISA.
Retirement Plans Committee of IBM v. Jander
In the 2014 case of Fifth Third Bancorp v. Dudenhoeffer,12 the Supreme Court generally addressed the application of ERISA’s prudence standard in the context of a plan (specifically, an employee stock ownership plan) invested in employer stock. While Dudenhoeffer may have had a significant impact in stemming the flood of so-called “stock drop” cases under ERISA, the Court seems to continue be quite interested in the issue, as, with Jander, the Court will revisit that fairly recent case for the second time.13
In Dudenhoeffer, the Court had held that, although plan fiduciaries are not entitled to a presumption of prudence with respect to plan investments in employer stock, the proper pleading standard for duty of prudence claims relating to such investments requires a plaintiff to allege plausibly “that a prudent fiduciary in the defendants’ position could not have concluded that [an alternative action] would do more harm than good to the fund.” Putting more color on this requirement, the Court further stated that (i) the duty of prudence “cannot require [a] fiduciary to perform an action…that would violate the securities laws,” (ii) courts should “consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws” and (iii) courts should consider “whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases . . . or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
The first revisiting of Dudenhoeffer was in the very next term, with Amgen Inc. v. Harris.14 Amgen is a somewhat stridently worded (per curiam) decision in which the Court chastised the Ninth Circuit for what the Court perceived as a failure properly to follow Dudenhoeffer as precedent, concurrently granting certiorari and deciding the case without argument. In Amgen, the Court clarified the Dudenhoeffer standard, emphasizing that, in order properly to plead a prudence claim under ERISA, a complaint must do more than merely allege that the fiduciary in question could have pursued an alternative path consistent with federal securities laws; it must do so “plausibly” by laying out “sufficient facts and allegations.” However, it remains unresolved just what facts and allegations are sufficient to satisfy this standard.15
The Dudenhoeffer saga continues. In Jander, participants in the employer’s employee stock ownership plan that was invested in company stock argued that plan fiduciaries “knew that a division of the company was overvalued but failed to disclose that fact,” allegedly resulting in the artificial inflation of the company’s stock price.15 Plan fiduciaries allegedly violated their fiduciary duties by continuing to invest in employer stock despite knowledge of the artificial inflation in stock price. According to the plaintiffs, the fiduciaries should have disclosed the truth about the artificial inflation in company stock value or, in the alternative, issued new investment guidelines that “would temporarily freeze further investments in” the stock.” Plaintiffs subsequently contended that the plan could have also avoided breaching their fiduciary duty “by purchasing hedging products to mitigate potential declines in” stock value.
The District Court for the Southern District of New York concluded that the plaintiffs had not adequately plead their claims because a prudent fiduciary could have concluded that each of these three alternative actions proposed by plaintiffs would have done more harm than good. On appeal, with plaintiffs’ proposed alternative actions limited to early corrective disclosure, the Second Circuit reversed, concluding that, under either formulation, the plaintiffs had properly plead their duty of prudence claim. According to the Second Circuit, plaintiffs satisfied even the more restrictive “could not have concluded” formulation by alleging that (i) the defendants knew of the artificial inflation in company stock, (ii) the defendants had the power to make corrective public disclosure, (iii) the failure to make such prompt corrective disclosure caused reputational harm to the plan sponsor and hurt management’s credibility, (iv) corrective disclosure would not precipitate an irrational overreaction in market price beyond a reduction in stock price by the amount which was artificially inflated, and (v) the defendants knew that the disclosure of the truth was inevitable.
For the Second Circuit, each of these factors supported a plausible conclusion that no prudent fiduciary could have found that prompt corrective disclosure would have done more harm than good. The Supreme Court granted certiorari on the particular question of whether the more-harm-than-good pleading standing “can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” It is noted that the Supreme Court accepted the case even though there is no circuit split on the point.
The Court’s jurisprudence in the ERISA area has historically been unpredictable, and so the outcomes of the pending cases are far from certain. What seems clear, however, is that, one way or another, significant developments affecting plans, fiduciaries and the ERISA bar are imminent.