Oliver Wendell Homes Jr., forefather of judicial restraint, famously interrupted a lawyer pleading for justice before the Supreme Court, reminding counsel that he was seeking relief before a court of law, not a court of justice.

Justice Holmes' tenure on the bench ended well before Congress enacted ERISA in 1974. Since then ERISA cases have routinely found their way before the Supreme Court, proving Congress' ability to write laws that are clear, except when they are not. Searching for trends in past rulings to predict how the high court may now interpret ERISA is an exercise in shoveling smoke, and a temptation Thomas Clark strongly recommends against.

In a former life Clark was an associate at Schlichter, Bogard and Denton, a St. Louis boutique labor law firm at the forefront of a raft of class action ERISA litigation that has either been settled or is now groping its way through the appellate process. After half a decade in the weeds of some of the most contentious ERISA litigation of this era, Clark left the courtroom for FRA PlanTools, a web-based provider of fiduciary risk management solutions, where he counsels plan sponsors and administrators hoping to avoid the crosshairs he once trained on noncompliant fiduciaries.

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"I've learned to not be a tea-leaf reader," warns Clark when prodded to assess the court's temperament on ERISA matters. That said, there's little doubt a real potential for precedent in fiduciary cases is currently gestating. "I think it's fair to say that going forward, if any party is doing something that is not in the best interest of a plan's participants, they are greatly increasing the chances that their conduct will be challenged by either the DOL, a plaintiffs attorney, or both."

Three cases of interest to the Supreme Court have the potential to move the needle in the direction of plaintiff's claims. Last week arguments were heard in Fifth Third Bankcorp v. Dudenhoeffer. Originally, participants in the bank's 401(k) plan claimed its fiduciaries violated their duties by continuing to offer bank stock through their retirement plan even after the fiduciaries knew the bank was exposed to serious subprime market risk, making their stock at the time of offering grievously overvalued. Fifth Third's stock ultimately tanked in the recession. At the end of January 2009 it closed at about two dollars. Earlier in the decade it traded in the high sixties.

ESOPs (employer stock ownership plans) have traditionally enjoyed a "presumption of prudence," meaning that fiduciaries are granted wide legal latitude in issuing company stock through retirement plans; in court it has meant they don't have to prove their prudence in issuing company stock, because it's presumed. This presumption has protected fiduciaries in other ESOP claims, often and successfully invoked at the motion-to-dismiss stage of a case. The upshot: ESOP claims are usually thrown out before any evidence is discovered.

The Fifth Third case was originally dismissed on such grounds. On appeal, the Sixth Circuit reversed the district court's decision, finding that fiduciaries of ESOPs should not have a greater protective standard than other ERISA fiduciaries, and that "all fiduciaries, including ESOP fiduciaries," are subject to "identical standards of prudence and loyalty."

This was bad news for Fifth Third. So it petitioned the Supreme Court, which agreed to hear the case after it requested an amicus brief from the Department of Labor. In its brief, the DOL supports the idea that ESOPs should not benefit from special protections, and that all retirement plans should have universal standards of prudence under ERISA. The Supreme Court will issue its decision no later than June.

If it doesn't reverse the Sixth Circuit's decision, which is to say that if the justices find in favor of the enrollees in Fifth Third's retirement plans, the ramifications are likely to be significant.

Circuit courts have tended to uphold the presumption of prudence standard since a 1993 case first developed the presumption. A blog post from Jones Day's website in 2011 went so far as to suggest the death knell of "stock drop" cases after an ESOP claim against Citigroup was dismissed under the presumption of prudence. If the court supports applying ERISA universally to ESOPs, that death knell may quickly go quiet.

As it did prior to the Fifth Third case, the court has asked the Solicitor General and the DOL to weigh in on Glenn Tibble et al. vs. Edison International. Supreme Court observers say that a request for a brief from the Solicitor General typically indicates the court's intent to hear a case. Tibble v. Edison originated in a California district court in 2007. Timing is an essential question in Tibble, as the case involves a six-year statute of limitation concerning a fiduciary's imprudent investment offering in a 401(k), and whether enrollees can claim a breech under ERISA after the statute has expired.

That sounds complicated because it is. In short, Edison was found to be in breach of ERISA's prudent investment standard when it offered its enrollees retail shares of certain mutual funds when they could have been enrolled in much less expensive institutional shares. So Edison was guilty of fiduciary breach. But only with respect to those funds that were added within a six-year window prior to the filing of the case.

For those funds included in the plan prior to the six-year window, but equally as imprudent as the court found liability with, the question is moot, because Edison is protected by a six-year statute of limitation. Translation: Under ERISA an investment option must be in the employees' best interest for the six years after it is first offered. After that, employees can't claim imprudence under ERISA, even if the same investment continues to be offered.

If the Supreme Court chooses to hear the case, it will have to determine whether imprudent investments still cause liability even after six years of being in a plan. The court siding with enrollees of Edison's plan would make for real consequences on how ERISA would be interpreted going forward.

Sometimes the Supreme Court speaks volumes when it says nothing at all, as it did last December when it denied to hear a petition from Lockheed Martin hoping to have a class action claiming breach of fiduciary duty thrown out. In refusing to hear the petition, the Supreme Court let stand a ruling by the 7th Circuit Court of Appeals. The case against Lockheed, originally filed in 2006, will go to trial.

Jerry Schlichter, founding partner of Schlichter, Bogard and Denton, originated the claims in the Edison and Lockheed cases, and has won settlements in six other major ERISA cases. Several other cases are outstanding. Asked what he would say to those who regard this area of claims as frivolous, and the man who has gone toe-to-toe with some of the biggest multinationals — on contingency — sounds tempered, perhaps a virtue earned from years of wringing justice from the law.

"Since we brought these cases fees have come down significantly," explains Schlichter. "Of course we're pleased by this. The courts are recognizing the critical importance of making sure that 401(k) fees are reasonable. That's a victory for all employees and retirees in those plans going forward. And that's especially important since those plans now dominate retirement in this country."

Still, there will be those that say Schlichter and other plaintiffs' attorneys are simply fishing for settlements and the big payouts in attorney's fees they reap. Several federal judges have been far less cynical of Schlichter's efforts, one writing that his firm has acted as a "private attorney general, risking breathtaking amounts of time and money while overcoming many obstacles for the benefit of employees and retirees."

The ambiguity around ERISA leaves one to wonder if it isn't time for aspects of the law to be rewritten. That would require productive action from one of history's more unproductive congresses. Schlichter and his firm will move their cases forward, and Clark will advise sponsors on their outcomes. As for productive ERISA improvements from Congress, Clark is advising against "any breath-holding on that one."

 

 

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.