Editor’s Overview

This month, we provide an update on the developing law regarding the “fiduciary exception” to attorney-client privilege and the work product doctrine. This “exception” often confounds in-house and outside counsel alike, and the article concludes with some best practices suggestions. We also highlight a U.S. Supreme Court decision from this term, AT&T Mobility v. Concepcion, which held that the Federal Arbitration Act preempts a state law prohibiting waivers of class arbitration. The article discusses the decision’s potential implications for employee benefits practitioners.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest. The section includes a summary of a decision that will be discussed in depth in next month’s Newsletter: Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., in which the Seventh Circuit held that participants’ claims arising from improper calculations of lump sum benefit distributions accrued upon receipt of those benefits.

An Update on ERISA Attorney-Client Privilege and the Work Product Doctrine Under ERISA’s “Fiduciary Exception”[1]

Supreme Court Justice Roberts has acknowledged the complexities confronting ERISA plan administrators: “People make mistakes. Even administrators of ERISA plans. That should come as no surprise, given that the Employee Retirement Income Security Act of 1974 is ‘an enormously complex and detailed statute,’ Mertens v. Hewitt Associates, 508 U.S. 248, 262, 113 S. Ct. 2063, 124 L. Ed. 2d 161 (1993), and the plans that administrators must construe can be lengthy and complicated.” Conkright v. Frommert, 130 S. Ct. 1640, 1644 (2010). It is also no surprise that ERISA plans often seek advice of counsel to assist in plan administration and settlor function matters. Whether in-house or outside counsels’ benefits-related advice remains legally privileged and confidential, and/or protected by the attorney work product doctrine, continues to be a hot topic for the courts, participants, plan administrators, and ERISA plans.

There is a large and growing body of law addressing whether an exception exists for the typical attorney-client privilege, where counsel advises ERISA plan fiduciaries. See Stacey Cerrone, Proskauer Rose LLP, Reconciling the Attorney Client Privilege with ERISA’s “Fiduciary Exception,” Bloomberg Law Reports — Employee Benefits, Vol. 3, No. 21 (Oct. 11, 2010). Under the so-called “fiduciary exception” crafted by the courts, “an employer acting in the capacity of ERISA fiduciary is disabled from asserting the attorney-client privilege against plan beneficiaries on matters of plan administration.” U.S. v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999). However, where the advice relates to a settlor function, such as the adoption, modification, or termination of an employee benefit plan, the fiduciary exception does not apply. In re Long Island Lighting Co., 129 F.3d 268 (2d Cir. 1997).

Frequently, in an effort to sustain legal privilege, defendants have invoked the concept that counsel’s communication is shielded from disclosure because. at the time the communication occurred, the plan participant’s interests diverged from the plan and litigation was foreseeable. That is to say, the participant no longer shared common interests with other plan participants and the plan fully expected that if the claim was denied, surely a lawsuit would follow. This defense argument often is intertwined with the doctrine of attorney work product, as defendants argue that because litigation was foreseeable, communications between counsel and the fiduciaries were privileged and protected by the work product doctrine. Work product refers to the writings, notes, memoranda, reports on conversations with the client or witness, research, and confidential materials that reflect an attorney’s impressions, conclusions, opinions, legal research, or theories. Unlike the attorney-client privilege, the right to assert work product protection belongs principally to the attorney. The work product doctrine confers a qualified privilege on documents prepared by an attorney in anticipation of litigation. Hickman v. Taylor, 329 U.S. 495, 509–14, 67 S. Ct. 385 (1947). Opinions dealing with the divergence/work product issue have revolved around the timing of counsel’s communication.

Recently, the Fourth Circuit has promulgated an opinion on legal privilege and work product in the ERISA context. Also, many district courts have applied these concepts to actual discovery disputes with varying results.

The Rationale for the Fiduciary Exception to the Attorney-Client Privilege

The fiduciary exception developed in non-ERISA cases involving other types of fiduciary relationships, such as between estate trustees and beneficiaries and shareholders and corporate managers. See Mett, 178 F.3d at 1063-64 (reviewing genesis of fiduciary exception); see also Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970) (recognizing fiduciary exception and stating, “where the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be involved in the particular instance”).

As applied to ERISA litigation, the exception is rooted in two distinct rationales. Some courts have held that the fiduciary exception derives from an ERISA fiduciary’s duty to disclose to plan beneficiaries all information regarding plan administration, particularly when it is the administration of the plan that is being challenged in the litigation. In such cases, the fiduciary exception can be understood as an instance of the attorney-client privilege giving way to a competing legal principle. Other courts have endorsed the theory that, as a representative for the beneficiaries of the plan which he is administering, the fiduciary is not the real client. In these cases, the fiduciary exception is not an “exception” to the attorney-client privilege; rather, it reflects the fact that, at least as to advice regarding plan administration, a fiduciary is not “the real client” and thus never enjoyed the privilege in the first place.

Fourth Circuit Applies the Fiduciary Exception to Legal Privilege and Work Product

In Solis v.The Food Employers Labor Relations Association, No. 10-CV-1687, __ F.3d __, 2011 WL 1663597 (4th Cir., May 4, 2011),[2] the Fourth Circuit Court of Appeals issued its first opinion dealing with the application of the ERISA fiduciary exception. The case arose from a common fact pattern involving a Department of Labor (DOL) audit/investigation of plan asset investments. Two multiemployer plans invested approximately 3% of their assets in Bernard Madoff funds, resulting in approximately a $10.1MM loss to the plans. Pursuant to ERISA § 504(a)(1), 29 U.S.C. § 1134(a)(1), the DOL commenced an investigative audit as to fiduciary decision-making related to the plans’ Madoff investments. The DOL subpoenaed certain documents related to Board of Trustees meetings, including meeting minutes, documents distributed at meetings, notes taken at meetings, and Trustee correspondence relating to Madoff investments. During the investment decision-making process, the Board of Trustees was advised by counsel. Counsel withheld certain documents and redacted portions of other documents, claiming that the documents were protected by attorney-client and work product privileges. Counsel did not submit a privilege log, asserting that documents were not produced because of contemplated future litigation.

In a unanimous decision, the court applied the fiduciary exception to attorney-client privilege and held the plans failed to carry their burden to demonstrate the applicability of the work product doctrine. The court first surveyed the existing case law, discussing the two different theories used to invoke the fiduciary exception: some courts conclude that the ERISA fiduciary’s duty to act in the exclusive interest of beneficiaries supersedes the fiduciary’s right to assert attorney-client privilege, while other courts hold that the ERISA fiduciary – functioning as a representative of participants and beneficiaries – is not counsel’s real client for advice as to plan administration, meaning no privilege ever existed. Solis, __ F.3d at __, 2011 WL 1663597 at *4.[3] Without specifying a controlling theory, the court held that the fiduciary exception to attorney-client privilege extends to communications between an ERISA trustee and a plan attorney regarding plan administration. The panel cautioned that limits exist as to the application of the fiduciary exception. The court stated that the exception will not apply to a fiduciary’s communications with an attorney regarding his personal defense in an action for breach of fiduciary duty. See Mett, 178 F.3d at 1064. Also, the panel held that communications between ERISA fiduciaries and plan attorneys regarding non-fiduciary, settlor function matters, such as adopting, amending, or terminating an ERISA plan, are not subject to the fiduciary exception. Solis, __ F.3d at __, 2011 WL 1663597, at *5.[4]

Albeit in dicta, the court also provided its views as to the work product doctrine. The panel reiterated the relationship between the plan Trustees and the participants, noting that the Trustees owed fiduciary duties directly to the participants and beneficiaries of the plans. Surveying the case law, and based upon the duties owed by the Trustees, the court opined that it could discern no reason to distinguish between the application of the fiduciary exception to attorney-client privilege or the work product doctrine. However, the court then held that because the plans failed to provide privilege logs identifying specific litigation for which documents were prepared, there was no reason to reach the issue of whether the work product doctrine is subject to the fiduciary exception. Solis, __ F.3d at __, 2011 WL 1663597 at *9.[5]

The Fiduciary Exception at the District Court Level

Many of the disputes implicating the fiduciary exception arise during the administrative review of benefit claims. Frequently, during the exhaustion of plan administrative procedures, plan fiduciaries interact with counsel. To resist production of certain documents that are arguably subject to the fiduciary exception, whether created by in-house or outside counsel, plans often argue the advices are shielded from production because they are documents created in anticipation of litigation or because the interest of the plaintiff and the plan had diverged already when the documents were created.

In Carr v. Anheuser-Busch Cos., Inc., No. 10-CV-1729, 2011 WL 2174853 (E.D. Mo., June 3, 2011),[6] plaintiff sued for severance benefits. After the initial claim denial, but before the appeal was considered, in-house counsel sent an e-mail to the plan administrator providing guidance for use when reviewing the appeal of a denied claim. The district court held that the exception applied because the content of the e-mail directly related to how the administrator would conduct the appeal procedure and made no reference whatsoever to future litigation strategy. The district court held there was no divergence of interest between the participant and the plan because in-house counsel was informing the administrator of his duties generally toward all participants. However, the court held that a series of e-mails created after the appeal denial decision was made, but before the final letter was sent denying the appeal, were legally privileged. The district court held these e-mails related specifically to the denial of plaintiff’s claim. As the drafting of the denial letter was merely the final end stage in the plan administration process, at this point plaintiff’s interest was sufficiently adverse to the plan administrator, negating the application of the fiduciary exception.

These “timing” issues recur in various cases where plan administrators consider benefit claims and defendants argue that legal documents are shielded from production because the interests of the plaintiff and plan have diverged, and/or that the documents were created in anticipation of litigation. In Gunderson v. MetLife Ins. Co., No. 10-CV-50, 2011 WL 487755 (D. Utah, Feb. 7, 2011),[7] plaintiff sought production of a legal opinion provided to the plan administrator two weeks before final resolution on appeal of the claim. Even though the opinion came at the end stage of claim denial, the district court required production of the document because it was advice given to ensure the plan administrator acted correctly in its claim decision and had nothing to do with future, anticipated litigation. In Thies v. LINA, No. 09-CV-98, __ F. Supp. 2d __, 2011 WL 482876 (W.D. Ky., Feb. 4, 2011),[8] two documents were withheld from production on the grounds of legal privilege: one e-mail was written by counsel between the time of the initial claim denial and the appeal; the second e-mail was written in response to plaintiff’s request for reconsideration communicated by his attorney after the final denial of the claim. The district court held the first e-mail was subject to the fiduciary exception because the claim was treated as a routine appeal and there was no indication of future litigation. The second e-mail differed. There the plan had denied the claim, exhaustion was complete, and plaintiff sought reconsideration. The district court noted that in the same letter, plaintiff’s counsel demanded payment and threatened to pursue his claim in court. The district court held that at this point the interests of the plaintiff and the plan had diverged, and that there was a real and substantial possibility of litigation.

Other cases exploring similar “timing issues” include: Moss v. UNUM, No. 09-CV-209, 2011 WL 321738 (W.D. Ky., Jan. 28, 2011)[9] (holding that where litigation was filed before claim review was completed, in-house counsel’s communication was legally privileged and confidential because it related to the litigation, not the claim review process); David v. Alphin, No. 07-CV-11, 2010 WL 3719899 (W.D.N.C., Sept. 17, 2010)[10] (holding that documents regarding settlor function issues are privileged, while ordering production of documents dealing with plan administration and investment of plan assets); Buzzanga v. LINA, No. 09-CV-1353, 2010 WL 1292162 (E.D. Mo., April 5, 2010)[11] (ordering production of three documents written before the claim was denied, while shielding the fourth document from production because it was generated in response to plaintiff’s appeal; the court held that the prospect of litigation was sufficient to erect the work product barrier to production); Allen v. Honeywell Retirement Earnings Plan, 698 F. Supp. 2d 1197 (D. Az. 2010) (rejecting defendants’ divergence argument for documents created after the initial denial letter issued and requiring the production of documents from outside counsel because, inter alia, the initial denial letter invited plaintiffs to appeal and the final denial letter stated defendants undertook a careful review of the administrative record).

Proskauer’s Perspective

This area of the law is difficult for in-house counsel and outside counsel. In-house counsel and outside counsel are asked questions by their clients; clients expect immediate responses. However, clients may wear two hats: they may have fiduciary duties and settlor function duties with respect to benefit plans. Clients frequently pose questions as to benefit plan issues without distinguishing between whether their questions deal with settlor functions or plan administration and whether, in their client capacity, they are acting as an employer/settlor or a fiduciary. One model for preserving legal privilege and work product protection is for a client to divide functions between counsel: one attorney provides plan administration advices, anticipated to be subject to discovery; a second attorney provides settlor function advices and advices in anticipation of litigation, anticipated to be privileged and confidential. This division of tasks can take place among attorneys in the same in-house law department or in the same outside law firm. Such a division of legal tasks is predicated on counsel and client clarifying the engagement and what entity the attorney will actually represent. However, despite best practices as to the scope of the engagement and identification of the client, plan fiduciaries must be made aware that when involved in plan administration, increasingly they operate in an arena where their interactions with counsel may be subject to discovery during litigation.