This OnPoint is the first in a series that will examine important trends and developments in class action litigation under the Employee Retirement Income Security Act of 1974 (ERISA). Here, we look at the current litigation landscape, including the types of ERISA cases that currently are being filed, the recent Supreme Court decisions, and the substantial settlements paid in many recent ERISA cases.
Changing Landscape of ERISA Litigation
Over the past five years, there has been a steady increase in ERISA class action litigation involving defined contribution plans, particularly cases alleging “excessive fees” with respect to 401(k) plans. In these cases, plaintiffs generally allege that plan fiduciaries have breached their duty to keep plan recordkeeping and investment management fees reasonable. Unsurprisingly, “excessive fee” litigation also has spilled into the context of 403(b) retirement plans sponsored by universities, with approximately twenty such lawsuits filed against prominent universities since 2016. The increase in excessive fee litigation can be attributed to a multitude of factors, including the “cookie cutter” nature of the complaints and the potential for high-dollar settlements.
However, not all litigation involving defined contribution plans has been on the rise. “Stock-drop” lawsuits—which generally allege that fiduciaries of defined contribution pension plans should not have continued to offer company stock as an investment option after a business or market event caused the company’s stock price to drop—had accounted for a large portion of ERISA cases since the early 2000s, but are now on the decline following the Supreme Court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer.i In Dudenhoeffer, the Court eliminated a presumption of prudence for cases involving employee stock ownership (ESOP) fiduciaries, but nevertheless adopted a more defense-friendly standard for cases alleging a breach of the fiduciary duty of prudence based on inside information. In those circumstances, a plaintiff must “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” Plaintiffs were hopeful that the Court would soften its ruling in the widely-anticipated Jander v. Retirement Plans Committee of IBM case on the Court’s 2019 docket but, as discussed below, the Court’s decision brought little clarity.ii
Litigation involving defined benefit plans, on the other hand, has been increasing steadily over the past two years. Defined benefit plans promise a set monthly amount at retirement, usually based on factors such as salary, age, and years with the company. Plan participants of defined-benefit plans generally have brought two kinds of cases. The first alleges that that plan sponsors used outdated actuarial factors to determine annuity benefits, thereby underpaying plan participants. More than half of these cases have survived a motion to dismiss, suggesting that defined benefit plan participants may have a viable claim based on actuarial factors. The second alleges that plan participants were harmed by a breach of fiduciary duties, even though they continued to receive the benefits to which they are entitled. As the Supreme Court recently outlined in the Thole v. U.S. Bank case, discussed below, participants in defined benefit plans face an uphill battle in alleging breach of fiduciary duty claims in these circumstances.
Lastly, we also expect that more defendants will seek to avoid ERISA breach of fiduciary duty litigation altogether through the use of mandatory arbitration clauses in benefits plans. In 2019, the Ninth Circuit broke with long-standing precedent and, in a concurrent unpublished opinion, validated a mandatory arbitration provision in a 401(k) plan, thereby compelling individual arbitration of the plaintiff’s fiduciary breach claims. See Dorman v. Charles Schwab Corp., 934 F.3d 1107 (9th Cir. 2019).iii Although no other appellate courts have followed suit yet, we expect defense counsel to take advantage of the potential change in the law.
A Preponderance Of Recent ERISA Decisions From The Supreme Court
2020 was set to be a landmark year for ERISA litigation in the Supreme Court.iv Going into its 2019 term, the Supreme Court expressed a renewed interest in ERISA litigation, granting certiorari in three cases and delaying a fourth until its October 2020 term. But overall, the Court’s decisions provided more questions than answers.
Jander v. Retirement Plans Committee of IBMv
In Jander, the most widely-anticipated ERISA ruling from the Supreme Court’s 2019 docket, the Court was set to clarify the “more harm than good” pleading standard established in Dudenhoeffer, which, as discussed above, significantly raised the bar for plaintiffs bringing stock-drop cases. The question presented in Jander was whether the standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time. Rather than answer this question, however, the Court issued a per curiam decision that declined to address the merits of the appeal and remanded the case for further development of the record.
Justice Kagan’s concurring opinion, joined by Justice Ginsburg, provides some guidance, however. Justice Kagan notes that Dudenhoeffer did not limit an ESOP fiduciary’s duty to disclose inside information only to the duty that the federal securities laws already impose; rather, an ESOP fiduciary could have an obligation to disclose inside information, even if not required by securities laws, because “a prudent fiduciary would think the action more likely to help than to harm the fund.” Reading Dudenhoeffer more narrowly, Justice Gorsuch issued his own concurring opinion arguing that “plaintiff’s ability to identify a helpful action that the defendant could have taken consistent with the securities laws is a necessary condition to an ERISA suit. But nowhere did Dudenhoeffer hold this is also a sufficient condition to suit . . .” Although the Court’s holding in Jander did not provide the expected clarity, the concurring opinions give both sides food for thought and additional ammunition for the future.
Thole v. U.S. Bankvi
In Thole, the most defendant-friendly ruling of the three recent Supreme Court opinions, the Supreme Court held, by a 5-4 margin, that participants in defined-benefit pension plans lack Article III standing to sue under ERISA for alleged breach of fiduciary duties because, whether they win or lose the case, they would still receive the exact same payments for the rest of their lives.vii The Court’s ruling has strong implications for defined-benefit pension plan participants, who now lack standing to sue unless their own benefit payments have been reduced. The dissent, authored by Justice Sotomayor and joined by Justices Ginsburg, Breyer and Kagan, criticized the ruling for “prevent[ing] millions of pensioners from enforcing their rights to prudent and loyal management of their retirement trusts.” Notably, however, the Court’s majority did not decide if plan participants in a defined-benefit plan have standing to sue if the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits. Accordingly, while Thole is clearly a win for defendants, that theory of standing remains at least theoretically available.
Intel Corp. v. Sulymaviii
In the third case, Intel Corp., the Supreme Court issued a plaintiff-friendly ruling holding that “actual knowledge” of an alleged breach of fiduciary duty—which triggers the shorter three-year statute of limitations—cannot be established merely by making disclosures available or through other forms of constructive knowledge.ix The case is undoubtedly a “win” for plaintiffs by lowering the bar for the more generous six-year statute of limitations. However, the decision ultimately also may prove useful to defendants: because “actual knowledge” no longer may be established on a class-wide basis using constructive knowledge, the Intel decision could create obstacles to class certification.
The 2020-2021 Term: Another ERISA Decision Expected
Looking ahead, the Supreme Court has another ERISA case on its docket. On October 6, 2020, the Court held oral argument in Rutledge v. Pharmaceutical Care Management Association,x which was initially set for April but postponed due to the COVID-19 pandemic. In Rutledge, the Court will decide whether ERISA preempts an Arkansas law that regulates the drug reimbursement rates set by pharmacy benefit managers, which act as intermediaries between health plans and pharmacies.
High-Dollar Settlements For Plaintiffs
ERISA class action lawsuits can be costly to litigate and often last for several years, which, combined with the potentially high exposure from a class action lawsuit, causes many of the cases to settle before trial. The high dollar value of the settlements is nonetheless notable. A report issued last year by the corporate watchdog group Good Jobs First found that between 2001 and March 2019, large corporations have paid out over $6.2 billion in ERISA class-action settlements, and at least 15 corporations have had total ERISA payouts of $100 million or more.xi
In the largest single settlement, Daimler AG agreed to pay $480 million in 2014 to end a putative class action lawsuit alleging that it improperly cut workers employment benefits. Notable settlements this year include a $27 million payment to resolve a proposed ERISA class action comparing a pension plan’s investment strategy to “drunken gamblers chasing losses,”xii and a $79 million payment by Wells Fargo to resolve allegations that it wrongfully denied payouts to deferred compensation plan participants.xiii
With big settlements come big attorneys’ fees for plaintiffs’ counsel. One of the most prominent ERISA plaintiffs’ firms, Schlichter Bogard, purportedly has obtained more than $1.5 billion in settlements for its clients over the past decade while taking in anywhere from 20-33 percent of those settlement amounts in attorneys’ fees.