Fiduciary Liability Landscape Uncertain After Supreme Court Decision In LaRue

Because the administrator failed to follow those instructions, Mr. LaRue argued that his interest in the plan was "depleted" by approximately $150,000. This, Mr. LaRue contended, constituted a breach of fiduciary duty under the Employee Retirement Income Security Act of 1974.

In the district court and Fourth Circuit Court of Appeals, issues arose regarding how Mr. LaRue could bring such a case to court. Ultimately, however, the Supreme Court reversed an appellate court decision rejecting Mr. LaRue's claim for relief under Section 502(a)(2) of ERISA.

The Supreme Court essentially held that this particular section, which allows lawsuits for monetary relief, doesn't just allow suits for fiduciary breaches affecting an entire retirement plan but also allows suits for breaches that impact the accounts of individual participants. (See related article, "Case History," this page, for more details.)

While this decision has caused concern in some circles–a February 21 article on NU's Online News Service states that at the trial the American Council of Life Insurers filed an amicus brief warning that supporting the plaintiff could have "legal and practical ramifications extending far beyond the parties to this case"–others saw the Supreme Court ruling as expected.

Gregory Braden, a partner with Morgan Lewis in its labor and employment practice in Washington, D.C., said that he and others in the defense bar with experience in the area "weren't really holding our breath for a defense verdict on this."

If the defense had won, then the court would effectively be saying that, while an individual or group of participants could sue for breach of fiduciary duty in a defined benefits plan, they could not in a 401(k) plan, he noted.

"So I think the question that was answered by the court is one that was not in my mind novel, profound, or revolutionary."

John H. Reid III, a partner in the Hartford, Conn. office of Edwards Angell Palmer & Dodge, said, "There's a lot of talk to the effect that [the decision is] a landscape change, but I think that if you read it literally, all it's saying is" that a participant in an individual account plan, as opposed to a defined benefits plan (where all the assets are in one pool), can sue the fiduciary if that fiduciary fails to carry out the participant's instructions and the participant's account is less than it should be because of that failure.

Mr. Reid said that such occurrences happen frequently because of the large volume of 401(k) transactions, but he said that, most times, a financial institution will work to make the participant whole before the issue goes to court.

"In my experience, when a financial institution makes a mistake, it rectifies the mistake without forcing someone to go to court to correct it," he said.

From the perspective of a fiduciary liability insurer, Christine Dart, a vice president of Chubb & Son and the CSI global fiduciary liability product manager for Chubb Specialty Insurance (CSI), said that it's too early to tell what the decision's ramifications will be. But she said Chubb will not make any underwriting changes based on the Supreme Court's determination.

"There are a lot of articles out there saying it's much ado about nothing," she said, adding there are others saying the decision does have the potential to allow more individuals to assert claims. "But at this stage, from an underwriting standpoint, we're not doing anything differently."

Asked if she was concerned about the prospect of a flood of new lawsuits because of the decision, Ms. Dart said that "if we see a trend along those lines…, then from an underwriting aspect, to me, that could be treated via deductibles versus taking major drastic changes in the fiduciary world."

If experts interviewed seemed skeptical of the notion that the sky will fall because of the decision, they were a bit more cautious regarding the indirect implications and outstanding issues regarding the LaRue case.

Mr. Braden said that, indirectly, the Supreme Court resolved the question of whether a former plan participant who has already taken cash out of a plan can bring a lawsuit. A number of courts, Mr. Braden explained, had held that if a participant cashed out and no longer had an account in the plan, then that participant could not sue even if the alleged breach covered a period when the participant was in the plan. Those courts, he said, had taken the view of "you have to be a participant to be able to sue."

The Supreme Court, however, has now said, at least indirectly, that former plan participants can sue. "That's going to make it easier for plaintiffs lawyers to find clients," he said, noting that it is easier to get former employees to sue than to convince employees to sue their current employers.

Ms. Dart cited this aspect of LaRue as the second of two key issues that she saw in the decision–the first, of course, being that individuals can now bring a lawsuit on behalf of their own accounts rather than the whole plan.

Expanding the pool of possible claimants to those who have already cashed out of a plan could result in a greater number of claims, she said. Regarding the idea that former employees may be more inclined to sue than current ones, Ms. Dart said, "This is something to consider."

"Certainly it's easier to find someone who no longer works for a company versus, say, myself. I'm employed, and I don't necessarily want to sue my employer."

Another potential concern, Mr. Braden said, is that plaintiffs will try to argue that the LaRue decision means they can get jury trials. Although he sees no basis for such a prospect in the opinion, he noted that he has heard some speculation regarding that issue. Plaintiffs may contend that because LaRue says a participant can get money damages under Section 502(a)(2), that means legal relief–and legal relief is tried by juries.

There is incentive for the plaintiffs' bar to pursue such an option because juries can be manipulated more easily than judges, Mr. Braden said.

Still, he said Section 502(a)(2) has always stated that lawsuits could be brought for money damages, and he does not believe that ERISA cases will be tried by juries.

Ms. Dart pointed out that courts have denied jury trials for ERISA cases up to now. "The one thing to think about is why was ERISA passed in the first place."

First, it was passed to protect participants from potential abuses by fiduciaries. It was also passed to encourage employers to offer benefit plans, she said. "I think if you find that jury trials become available, and you have potential runaway juries awarding damages that were previously not awarded under ERISA, companies are just not going to want to offer benefit programs," she said.

"I think the courts are going to weigh that" and consider Congress' intent in passing ERISA, she said.

Addressing another potential concern arising from LaRue, Mr. Braden said he is confident that plaintiffs' attorneys will argue that LaRue means individuals can assert fiduciary misrepresentation claims under Section 502(a)(2). Mr. Braden defined these as "he said, she said" claims under ERISA.

A typical claim, he said, would be if an employee asserts that he/she was told by the plan administrator that he/she would get a benefit under the plan when the plan "clearly says they're not entitled to that benefit." The participant cannot sue to collect under the plan, Mr. Braden said, because the plan does not provide for the benefit, and so the participant will try to sue the fiduciary for misrepresenting the plan.

Up until LaRue, he noted, the courts have said that those types of cases could only be brought under Section 502(a)(3), which only allows equitable relief and no money damages. If plaintiffs can now assert those claims under Section 502(a)(2) and collect money damages, "you're going to see a lot more of these 'he said, she said' claims getting filed under ERISA by plaintiffs lawyers," Mr. Braden said.

This could have significant underwriting implications for insurers, he added, suggesting they may want to add exclusions for "he said, she said" type claims.

Also to be determined will be whether lower courts choose to consider points raised in two concurring opinions accompanying the Supreme Court decision–one written by Chief Justice John Roberts, and the other written by Justice Clarence Thomas.

While concurring that the analysis by an appellate court was flawed, he questioned the Supreme Court's conclusion that Section 502(a)(2) authorizes recovery in cases such as LaRue. Justice Roberts suggested it may be more appropriate to bring such a claim under Section 502(a)(1)(B).

"That provision allows a plan participant or beneficiary 'to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan,'" Justice Roberts wrote. "It is difficult to imagine a more accurate description of LaRue's claim," he wrote.

The significance, he continued, is that under Section 502(a)(1)(B), a plan participant would have to "exhaust the administrative remedies mandated by ERISA…before filing suit under Section 502(a)(1)(B)."

Mr. Braden explained that Justice Roberts is essentially saying that LaRue is a claim for benefits rather than for a breach of fiduciary duty. If defense lawyers can characterize similar claims as claims for benefits, then participants would have to go through an appeal procedure provided by the plan before filing a lawsuit, he said.

"Even more importantly," he said, "the people who make the final decision at the end of that grievance procedure are usually the very fiduciaries who will be sued if the participant disagrees with the decision."

Basically, he said, the fiduciaries would get to make the initial decision on a claim against them, and if the participant sues, the court would typically give deference to the decision of the fiduciaries. "So, you're in a pretty strong position if you're a fiduciary and you can re-characterize LaRue's claim as a claim for benefits," he said.

Justice Thomas, meanwhile, took a simpler approach to the case in his opinion, stating that he does not believe the issue hinges on changes in the pension plan market or on the concerns of ERISA's drafters. Rather, Justice Thomas said the plain language of the statute authorizing ERISA, and Section 502(a)(2) of ERISA, allows Mr. LaRue to sue under that section "because the assets allocated to petitioner's individual account were plan assets." He added, "The allocation of a plan's assets to individual accounts for bookkeeping purposes does not change the fact that all the assets in the plan remain plan assets."

Both Mr. Braden and Ms. Dart said they were unsure how or if these concurring opinions would influence lower court decisions on LaRue, or similar future cases.