Recent decision limits the protections from liability for ERISA pension plan fiduciaries

James Hazlehurst wrote an article published in The Daily Journal on June 12, 2013, that discussed the Ninth Circuit Court of Appeals ruling in Harris v. Amgen that limited the protections from liability for ERISA pension plan fiduciaries afforded by the “presumption of prudence” for investments in employer stock.

As Hazlehurst points out, the “presumption of prudence” developed out of the tension between the competing goals of protecting employee pension plan investments and providing loyalty incentives to employees. The prudent investor standard requires plan fiduciaries to diversify investments held by the plan. To allow for employee loyalty incentives through employer stock, Congress created an exception to the diversification requirement for investments in the stock of an employer. 

In Amgen, the Ninth Circuit expanded on a previous ruling, Quan v. Computer Sciences Corp., identifying circumstances under which the “presumption of prudence” does not apply. Hazlehurst notes that Amgen is important in defining the limits of the protections afforded by the “presumption of prudence.”

The case clarifies that a company is not protected from liability as a plan fiduciary unless the company exclusively delegates its investment authority under the plan and expressly disclaims that authority.

Without that delegation and disclaimer, Hazlehurst continues, the company may be liable for plan losses as a fiduciary.

Thus Amgen illustrates why companies should not only be concerned with running afoul of securities law for material misrepresentations and omissions in connection with the sale of their stock. Those same activities may expose the company to liability for pension plan losses where the company has not adequately delegated and disclaimed its investment authority under the plan and is not otherwise protected by the “presumption of prudence.”


The Ninth Circuit Revisits - and Limits - the "Presumption of Prudence" For ERISA Fiduciaries

Earlier this week, the Ninth Circuit Court of Appeals ruled in Harris v. Amgen that an ERISA pension plan fiduciary is not protected from liability under the “presumption of prudence” for company stock investments where the plan offers – but does not require – investment in company stock and places restrictions on company stock purchases. 

In 2007, Amgen’s stock lost significant value due to safety concerns over drugs it developed for the treatment of anemia. Before 2007, Amgen allegedly knew or should have known that its stock price was artificially inflated due to material misrepresentations and omissions in connection with the anemia drugs and illegal sales of the drugs. Following the stock’s decline, participants in Amgen’s ERISA-governed pension plans sued for violations of the plan administrator’s fiduciary duties. Defendants filed a motion to dismiss, which the district court granted.   

Under the “presumption of prudence,” an ERISA fiduciary is entitled to a presumption that it has been a prudent investor with respect to company stock when the plan terms require or encourage investment primarily in company stock. See Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010). 

The Ninth Circuit reversed the district court’s ruling that this presumption applied in Amgen. While the plan allowed fiduciaries to offer company stock as an investment choice, it did not require or encourage investment in company stock. To the contrary, the plan terms could be read to discourage investment in company stock by restricting the amount that could be purchased and by limiting the frequency and timing of sales. 

The court also reversed the district court’s ruling that Amgen could not be sued as a fiduciary. Although Amgen delegated investment authority to trustees and investment managers, the grant of authority was not exclusive, and Amgen still retained control over investment decisions. Therefore, without an exclusive grant of authority, Amgen could still be sued as a plan fiduciary. 

Insurers That Fund ERISA Plans and Administer Claims Are Proper Defendants in Lawsuits for Benefits

Martin E. Rosen and Misty A. Murray

In Cyr v. Reliance Standard Ins. Co., 2011 U.S. App. LEXIS 12601  (9th Cir. 2011), an en banc panel of the Ninth Circuit Court of Appeals was presented with the issue of whether ERISA authorizes actions to recover plan benefits against a third-party insurer that funds the plan and administers claims for the plan. The specific statute involved, 29 U.S.C. § 1132(a)(1)(B), provides:

A civil action may be brought . . . by a 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.

Prior Ninth Circuit precedent held that such suits may only be brought against the plan, or in some cases the plan administrator, but that an ERISA participant or beneficiary could not sue a plan’s insurer for benefits. See, e.g., Ford v. MCI Communications Corp. Health and Welfare Plan, 399 F.3d 1076, 108 (9th Cir. 2005); Everhart v. Allmerica Financial Life Ins. Co., 275 F.3d 751, 754 (9th Cir. 2001); Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1324 (9th Cir. 1985).

In Cyr, the Ninth Circuit overruled these prior decisions. 

The Court reasoned that in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000), the Supreme Court had addressed the question of who can be sued under a different subsection of Section 1132(a), specifically subsection 1132(a)(3). Section 1132(a)(3) permits civil actions:

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.”  

The en banc panel noted that the Harris Court “rejected the suggestion that there was a limitation contained within § 1132(a)(3) itself on who could be a proper defendant in a lawsuit under that subsection,” reasoning as follows:

[Section 1132(a)(3)] makes no mention at all of which parties may be proper defendants--the focus, instead, is on redressing the "act or practice which violates any provision of [ERISA Title I]." 29 U.S.C. § 1132(a)(3) (emphasis added).

Other provisions of ERISA, by contrast, do expressly address who may be a defendant. See, e.g., § 409(a), 29 U.S.C. § 1109(a) (stating that "[a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable" (emphasis added)); § 502(l), 29 U.S.C. § 1132(l) (authorizing imposition of civil penalties only against a "fiduciary" who violates part 4 of Title I or "any other person" who knowingly participates in such a violation). And § 502(a) itself demonstrates Congress' care in delineating the universe of plaintiffs who may bring certain civil actions. See, e.g., §502(a)(3), 29 U.S.C. § 1132(a)(3) ("A civil action may be brought . . . by a participant, beneficiary, or fiduciary . . ." (emphasis added)); ("A civil action may be brought . . . by the Secretary . . ." [Harris, supra at 246-47; emphasis added]

Thus, the Ninth Circuit saw “no reason to read a limitation into § 1132(a)(1)(B) that the Supreme Court did not perceive in § 1132(a)(3).” 

The Ninth Circuit further noted that Section 1132(d)(2) also supported its conclusion. Section 1132(d)(2) provides that:

[a]ny money judgment under this subchapter against an employee benefit plan shall be enforceable only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity under this subchapter.” [Emphasis added.] 

The Ninth Circuit reasoned that the “‘unless’ clause [of Section 132(d)(2)] necessarily indicates that parties other than plans can be sued for money damages under other provisions of ERISA, such as § 1132(a)(1)(B), as long as that party's individual liability is established.”

The Ninth Circuit’s ruling in Cyr is not likely to have any significant impact. That is because often times third-party insurers that fund ERISA plans and administer claims were named as defendants in lawsuits involving disputes over ERISA benefits, notwithstanding prior case law. And even when the plans themselves were named as defendants, the insurers would often defend the litigation.

Plan Participant Who Withdrew All Assets from Retirement Plan Still has Standing to Sue for Breach of Fiduciary Duty

Recently, in Harris v. Amgen, Inc., ___ F.3d ___, 2009 WL 202758 (9th Cir. July 14, 2009), the Ninth Circuit Court of Appeals held that a former employee who withdrew his assets from an ERISA-governed retirement contribution plan still had standing to assert a breach of fiduciary claim against the plan fiduciaries, on the grounds that his retirement account might have been worth more at the time of the withdrawal had there been no breach of fiduciary duty.

Initially, Steve Harris, a former employee of Amgen, who withdrew his assets from his retirement account in July 2007, and Dennis Ramos, another former Amgen employee who still maintained assets in his retirement account, sued Amgen and several officers and directors for breach of fiduciary duty, alleging that the fiduciaries improperly allowed the plan to purchase and hold Amgen stock despite knowledge that the stock price was artificially inflated because of improper off-label drug marketing and sales. The district court dismissed Harris’ claims, finding that because he had withdrawn his assets from the Plan, he did not have standing to sue the Plan. The district court dismissed Ramos’ claims because he failed to identify the proper defendants. Both Harris and Ramos were denied leave to amend the complaint.

In order to bring a suit under ERISA, a plaintiff must have standing as a plan participant, defined as “an employee or former employee of an employer … who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer.” 29 U.S.C. § 1002(7). In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117 (1989), the United States Supreme Court expanded the definition of plan participant to include “former employees who have … a colorable claim to vested benefits.” In reversing the dismissal of Harris’ claims, the Ninth Circuit found that even though he previously cashed out his plan account, he still had standing to assert a claim under ERISA Section 502(a)(2). Specifically, the Ninth Circuit observed that “when employees withdraw their funds from a benefit plan, but claim that they would have had more to withdraw absent breach of fiduciary duty by those managing the plan, it is not difficult to see a common sense loss of benefits in their plan caused by the alleged breach of fiduciary duty.” Accordingly, “former” plan participants still have standing to recover losses caused by an alleged breach of fiduciary duty. The Ninth Circuit further explained that it agreed with the First and Third Circuits “in holding that an ERISA plan participant who no longer has assets in the plan has statutory standing to assert a fiduciary claims under Section 502(a)(2), even when relief is available under Section 502(a)(1)(B).”

Finally, the Ninth Circuit ruled that both Harris and Ramos were improperly denied the right to amend their pleadings, as courts “should normally permit at least one amendment of a complex ERISA complaint that has failed to state a claim where, as here, the Plaintiffs might be expected to have less than complete information about the defendants’ organization and ERISA responsibilities, where there is no meaningful evidence of bad faith on the part of the plaintiffs, and where there is not significant prejudice to defendants.”

ERISA Authorizes a Participant to Sue for Misconduct when it Impairs Plan Assets in Participant's Individual Account

James LaRue  v. DeWolff, Boberg & Associates Inc., 128 S. Ct. 1020 (2008).

LaRuefiled an action under ERISA alleging that his employer (also the plan administrator) breached its fiduciary duty with regards to an ERISA-regulated 401(k) retirement savings plan by failing to follow his investment instructions.  Relying on the Supreme Court’s ruling in Massachusetts Mutual Life Insurance Co. v. Russell that a participant could not bring a suit to recover consequential damages resulting from the processing of a claim under a plan that paid a fixed level of benefits, the Fourth Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of the plan on the grounds that § 502(a)(2) did not provide a remedy for LaRue’s “individual injury.”  The Supreme Court disagreed. 

In an opinion written by Justice Stevens, the Court held that “although § 502(a)(2)  does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of the plan assets in a participant’s individual account.”  The Court reasoned that in the context of defined contribution plans, the misconduct did not need to threaten the solvency of the entire plan in order for § 409 (which provides remedies for breach of fiduciary duty) to apply.  Rather, the legislative history and plain language of the statute authorizes a participant to enforce fiduciary obligations under ERISA, and the administrator’s failure to follow the LaRue’sinvestment instructions could qualify as a breach of those duties. 

Participant Cannot Sue on Behalf of the Plan Without an Attorney

Simon v. Hartford Life, Inc., 546 F.3d 661 (9th Cir. 2008).

Acting pro se, a plan participant filed suit on behalf of the group long-term disability plan, claiming breach of fiduciary duty under 29 U.S.C. Section 1109. The plan administrator filed a motion to dismiss on the ground that the participant must be represented by a licensed attorney in order to proceed with this claim. The district court granted the motion and dismissed the action without prejudice so that the participant could obtain counsel. The district court reasoned that because the plan is a separate entity, the participant was not entitled to bring a suit on the plan’s behalf. The participant appealed.

In upholding the district court’s order granting the motion to dismiss, the Court of Appeals ruled that, under ERISA and 29 U.S.C. Section 1132(a)(2), a participant is not authorized to pursue a claim in a representative capacity on behalf the plan without counsel. The Ninth Circuit explained that any judgment would have significant impact on the plan and the other beneficiaries, and those entities are entitled to representation by a licensed attorney. While, 28 U.S.C. Section 1654, states that “parties may plead and conduct their own cases personally or by counsel.” the court noted that the participant was not representing his own rights, but rather the rights and interests of the employee benefit plan. By proceeding pro se, the participant was improperly attempting to represent a party other than himself. Therefore, absent specific Congressional authorization, only one licensed to practice law may conduct proceedings in court for anyone other than themselves.

Read Judicial Opinion Here