Damages and Remedies in ERISA...

Presenting a live 90‐minute webinar with interactive Q&A

Damages and Remedies in ERISA LitigationAssessing and Calculating Damages Given the Expanded Scope of Equitable and Monetary Relief

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, DECEMBER 15, 2011

Today s faculty features:

Todd D. Wozniak, Partner, Greenberg Traurig, Atlanta

Sara Pikofsky, Partner, Jones Day, Washington, D.C.

Ronald S. Kravitz, Partner, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, San Francisco

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Damages and Remedies in ERISA Litigation

Sara PikofskyJones DayJones Day

[email protected] 879 3781202.879.3781

ERISA’s Enforcement Scheme

• ERISA has 3 widely-used enforcement provisions.p

• In order to bring an action for an ERISA• In order to bring an action for an ERISA violation, you must use one of these enforcement provisionsenforcement provisions.

6

ERISA 502(a)(1)

ERISA 502( )(1) h t b t th• ERISA 502(a)(1) has two subparts – the widely used (B) and (A) which is not t i ll d i d d t f thtypically used independent of another allegation.

• ERISA 502(a)(1)(A) allows a participant to bring suit against a plan administrator who fails to provide required information upon request.

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ERISA 502(a)(1)(B)

• ERISA 502(a)(1)(B) allows a participant or beneficiary to bring a civil action “the y grecover benefits due to him under the terms of the plan, to enforce his rights under the p , gterms of the plan, or to clarify his rights to future benefits under the terms of the plan.”p

8

Parties to 502(a)(1)(B) suit

• Suit may be brought by participant or beneficiaryy

• Proper defendants may vary among the courts of appealscourts of appeals.• In some jurisdictions, suit may be

brought only against the plan or planbrought only against the plan or plan administrator

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Parties to 502(a)(1)(B) suits

• Other courts of appeals allow suits for benefits against entities other than the plan g pand the administrator.• See e g Cyr v Reliance Standard 642See e.g. Cyr v. Reliance Standard, 642

F.3d 1202 (9th Cir. 2011) holding that the insurer who denied the claim might be ainsurer who denied the claim might be a proper defendant in a benefits suit.

10

ERISA 502(a)(2)

• ERISA 502(a)(2) allows suits for relief under ERISA 409.

• ERISA 409 provides that any fiduciary who breaches any of the duties imposed uponbreaches any of the duties imposed upon fiduciaries by ERISA is personally liable to make good to the plan any losses caused bymake good to the plan any losses caused by the breach.

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ERISA 502(a)(2)

• Proper plaintiffs for ERISA 502(a)(2) action are: the Secretary of Labor, a participant, a y , p p ,beneficiary or a fiduciary.

• Proper defendants are plan fiduciaries.

12

ERISA 502(a)(3)

• ERISA 502(a)(3) allows for suits to “enjoin any act or practice which violates any y p yprovision of [ERISA] or the terms of the plan or to obtain other appropriate equitable p pp p qrelief (i) to redress such violations or (ii) to enforce any provisions of [ERISA] or the y p [ ]terms of the plan.”

13

ERISA 502(a)(3)

• Suit may be brought by participant, beneficiary or fiduciary.y y

• Proper defendants include plan fiduciaries• Proper defendants include plan fiduciaries.

14

Remedies for a 502(a)(1)(B) ClaimRemedies for a 502(a)(1)(B) Claim

• Typically the remedy for a claim underTypically the remedy for a claim under 502(a)(1)(B) is payment of the benefit that was allegedly deniedwas allegedly denied

If i i b i l i f d i l f• If a participant brings a claim for denial of long term disability benefits, the remedy

ld b h b fi h ld h bwould be the benefits that would have been paid if the claim had been approved.

15

Remedies for 502(a)(1)(B) ClaimRemedies for 502(a)(1)(B) Claim

• Similarly, if a pension benefit was miscalculated, the remedy would be the , ycorrectly calculated benefit going forward and payments for the missed benefits in the p ypast.

16

Remedies for 502(a)(1)(B) ClaimsRemedies for 502(a)(1)(B) Claims

• Is interest considered part of the appropriate• Is interest considered part of the appropriate remedy for a 502(a)(1)(B) claim?

Generally speaking if the interest is being sought at the same time as the unpaid benefit, it may be obtained under 502(a)(1)(B), although some courts simply award it without discussion of the statutory basis to do so. See w ou d scuss o o e s a u o y bas s o do so. Seee.g. Skretvedt v. E.I. DuPont De Nemours, 372 F.3d193 (3d Cir. 2004).

17


• If the interest is sought separately as a result of a delayed payment, then it typically will y p y , yp ynot be considered appropriate under 502(a)(1)(B) and instead must be sought ( )( )( ) gunder 502(a)(3). See Skretvedt; Clair v. Harris Trust & Sav. Bank, 190 F.3d 495 (7th, (Cir. 1999)

18


• Plaintiffs frequently bring class actions for• Plaintiffs frequently bring class actions for statutory violations of ERISA under 502(a)(1)(B)502(a)(1)(B).

• For example, many cases involving alleged problems with the structure of cash balance plans were brought under 502(a)(1)(B), including Cigna v. Amara.

19


• In Cigna v. Amara, the District Court found that Cigna had violated ERISA’s disclosure gprovisions requiring disclosure of future reductions in rates of benefit accrual, as ,well as the disclosure requirements governing the content of SPDs.g g

20


• The District Court in Amara found that it could reform the plan to actually provide p y pthe benefits it found Cigna had misleadingly suggested under the authority of gg y502(a)(1)(B) because it was effectively awarding benefits.g

21


• The Supreme Court, however, rejected the notion that 502(a)(1)(B) allowed the court ( )( )( )to change the terms of the plan rather than simply enforcing the terms as written.p y g

• It also rejected the Solicitor General’s argument that the plan terms include theargument that the plan terms include the terms of the SPD.

22


• What are the implications of the Supreme Court’s holding that a Court may not g ychange the plan terms when adjudicating a 502(a)(1)(B) claim?( )( )( )• Likely that more claims for statutory

violations will be brought underviolations will be brought under 502(a)(3).

23

Remedies for 502(a)(1)(B) Claims

Wh t th i li ti f th S

Remedies for 502(a)(1)(B) Claims

• What are the implications of the Supreme Court holding that the SPD should not be

id d l d t?considered a plan document?• How does this affect the general rule that if the

l d th SPD fli t th SPD ?plan and the SPD conflict, the SPD governs?• Does it affect statute of limitations arguments

defendants ma make based on receipt of thedefendants may make based on receipt of the SPD?

24

Damages and Remedies in ERISA Litigation

Ronald S. Kravitzrkravitz@linerlaw [email protected]

415.489.7761

25

ERISA DamagesERISA Damages• ERISA Section 502(a)(1)(B)( )( )( )

– Recover benefits– Enforce rights under plan terms– Clarify rights to future benefits

• ERISA Sections 502(a)(2) and 409(a)Restitution– Restitution

– Disgorge profits– Equitable or remedial reliefq

• ERISA Section 502(a)(3)– Appropriate equitable relief

26

ERISA Section 502(a)(2)ERISA Section 502(a)(2)

• Provides a cause of action forProvides a cause of action for– Secretary of Labor

plan participant– plan participant– beneficiary

fiduciary– fiduciary

27

ERISA Section 502(a)(2)ERISA Section 502(a)(2)

• May obtain “appropriate relief underMay obtain appropriate relief under Section 409 to redress violations of the ERISA fiduciary responsibility provisionsERISA fiduciary responsibility provisions defined in Title I”

• Provides relief on behalf of the plan• Provides relief on behalf of the planMass. Mut. Life Ins. Co. v. Russell, 473 U.S.

134 (1985)134 (1985)

28

Section 502(a)(2) StandingSection 502(a)(2) Standing

• 502(a)(2) authorizes participants in502(a)(2) authorizes participants in defined contribution plans to bring action for fiduciary breaches when the value offor fiduciary breaches when the value of their individual accounts is impaired because the breach results in harm to thebecause the breach results in harm to the plan itself

Larue v DeWolff Boberg & Assoc 552Larue v. DeWolff, Boberg & Assoc., 552 U.S. 248 (2008)

29

502(a)(2) Standing502(a)(2) Standing

• §§ 502(a)(2) and 409 may be used by a§§ 502(a)(2) and 409 may be used by a beneficiary of a defined contribution account that suffers a loss even thoughaccount that suffers a loss even though other participants are uninjured by the alleged fiduciary breachalleged fiduciary breach

Rogers v. Baxter Intil, Inc., 521 F.3d 702, 705 (7th Cir 2008)705 (7th Cir. 2008)

30

502(a)(2) Standing502(a)(2) Standing• Injury in fact required to establish standing even though claim is on behalf of

the plan and plan may have suffered a lossthe plan and plan may have suffered a loss

Harley v. Minnesota Min. and Mg. Co., 284 F.3d 901 (8th Cir. 2002) (no standing in case of alleged imprudent investment and loss to defined benefit plan)plan)

Glanton v. Advance PCS, Inc., 465 F.3d 1123, 1124 (9th Cir. 2006) (no standing where pharmacy benefits manager allegedly concealed spread with respect to drug purchases for welfare benefit plan)g p p )

Loren v. Blue Cross & Blue Shield, 2007 WL 2726704 (6th Cir. 2007) (no standing where claims administrator alleged improperly increased charges for self insured welfare benefit plans)

Molina v. Union Independiente Autentica de LA AAA, 750 F.Supp.2d 417 (D.P.R. 2010)

(no standing where fiduciary allegedly embezzled funds from health plan)

31

Section 502(a)(2) - StandingSection 502(a)(2) Standing

• No harm no foul?No harm no foul?• ERISA plan beneficiaries lacked standing to sue

employer for breaching fiduciary duties by failing p y g y y gto adequately investigate and monitor investment, if plan's surplus was sufficiently large that investment loss at issue did not cause actual injury to beneficiaries' interests in plan

H l Mi Mi d M C 284 F 3dHarley v. Minnesota Min. and Mg. Co., 284 F.3d 901 (8th Cir. 2002)

32

ERISA Section 409ERISA Section 409

• Make restitution to the plan of lossesMake restitution to the plan of losses resulting from the fiduciary breach

• Disgorge profits obtained by the fiduciary• Disgorge profits obtained by the fiduciary through the fiduciary breachOth it bl di l li f d d• Other equitable or remedial relief deemed appropriate by the court, including removal f th fid iof the fiduciary

33

Section 409 - CausationSection 409 Causation• Plasterer’s Local Union No. 96 Pension Plan v. Pepper

t l 2011 WL 6000580 (4th Ci 2011)et al., 2011 WL 6000580 (4th Cir. 2011)– “ERISA requires independent finding of causation of loss before

liability for a breach of fiduciary duty is incurred”

• Nelson v. Hodowal, 512 F.3d 347 (7th Cir. 2008)– applying securities law causation analysis to loss causation

under section 409(a)( )

• Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999), reh. denied, 189 F.3d 471, cert. denied, 528 U.S. 1116 (2000)(2000) – alleged failure of fiduciaries to conform ESOP to tax code did not

result in loss to plan; therefore no liability under section 409(a)

34

Section 409 - CausationSection 409 Causation

• Kuper v. Iovenko, 66 F.3d 1447, 1459 (6thKuper v. Iovenko, 66 F.3d 1447, 1459 (6Cir. 1995)– “a plaintiff must show a causal link between p

the [breach] and the harm suffered [to] the plan”

F i d S B k C lif i 3 F 3d• Friend v. Sanwa Bank California, 35 F.3d 466, 469 (9th Cir. 1994)

“ERISA h ld t t li bl f b h f– “ERISA holds a trustee liable for a breach of fiduciary duty only to the extent that losses to the plan result from the breach”

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the plan result from the breach

Section 409 - CausationSection 409 Causation

• Diduck v Kaszycki & Sons ContactorsDiduck v. Kaszycki & Sons Contactors, Inc., 974 F.2d 270, 279 (2d Cir. 1992)

“[P]roof of a causal connection is required– [P]roof of a causal connection…is required between a breach of fiduciary duty and the loss alleged”g

• Ironworkers Local No. 272 v. Bowen, 695 F 2d 531 536 (11th Cir 1983)F.2d 531, 536 (11 Cir. 1983)– loss existed but did not result from alleged

breach36

breach

Measure of LossMeasure of Loss

• Measurement of the loss requires court toMeasurement of the loss requires court to examine what was exactly earned on the challenged investment compared to whatchallenged investment compared to what would have been earned if the assets had been available for to other plan purposesbeen available for to other plan purposes

Donovan v. Bierwith, 754 F.2d 1049 (2d Cir. 1985)1985)

37


• “Where several alternative investmentWhere several alternative investment strategies were equally plausible, the court should presume that the funds would haveshould presume that the funds would have been used in the most profitable of these.”

Donovan 754 F 2d at 1056Donovan, 754 F.2d at 1056.

38

Measure of Loss - BurdenMeasure of Loss Burden• “The burden of proving the funds would have p g

earned less than that amount is on the fiduciaries found to be in breach of their duty. Any doubt or ambiguity should be resolvedAny doubt or ambiguity should be resolved against them...This is nothing more than application of the principle that, once a breach of pp p p ,trust is established, uncertainties in fixing damages be resolved against the wrongdoer. See Leigh v Engle 727 F 2d 138” McMerty vSee Leigh v. Engle, 727 F.2d 138 , McMerty v. Herzog, 710 F.2d 429, 431 (8th Cir. 1983)”

Donovan, 754 F.2d at 1056-1057.39

o o a , 5 d at 056 05

Measure of Loss – Valuation DateMeasure of Loss Valuation Date

• What date should the portfolios be valued? p– With an actual sale of the Grumann securities, the

amount realized on the sale should be compared with earnings, if any, that would have been realized through alternative investment over the same period of time

– If no sale, breaching fiduciaries may argue that they h ld b i i d fi it t i f ti t h ldshould be given indefinite extensions of time to hold

the improperly purchased property, because it might appreciate and reduce their liability. Such a rule would put control of the remedy in the hands of thewould put control of the remedy in the hands of the wrongdoing fiduciaries, an unacceptable result

Donovan, 756 F.3d at 1056-1058.

40

Measure of Loss – Valuation DateMeasure of Loss Valuation Date• The trial court, in its sound discretion, must pick a date on which the relative

performance of the plan and the improper investment may fairly beperformance of the plan and the improper investment may fairly be compared, considering the following factors:

• (1) market conditions and abnormalities affecting the price of the improperly purchased stock;purchased stock;

• (2) such conditions as the affect the price of other assets of the plan at issue;

• (3) the courts determination of the relative price advantages to the plan of selling or holding the stock; and

• (4) the interests of the beneficiaries of the plan.

Donovan, 756 F.3d at 1058.

41


• Leister v Dovetail 546 F 3d 875 991 (7thLeister v. Dovetail, 546 F.3d 875, 991 (7Cir. 2008)

criticized Donovan’s use of hindsight and– criticized Donovan s use of hindsight and suggestion to use the most profitable investments as such a methodology would gyyield a windfall given the uncertainty of investments

42


• Brown v. Medtronic, Inc. 619 F.Supp.2dBrown v. Medtronic, Inc. 619 F.Supp.2d 446, 651 (D. Minn. 2009)– casting doubt on Donovan’s most profitable g p

alternative investment method in stock manipulation cases

I B S i ifi C ERISA Li i• In re Boston Scientific Corp. ERISA Litig., 254 F.R.D. 24, 31 (D. Mass. 2008)

ti i t l if th l f– participants can only recover if the value of their investments would have been greater had the fiduciary fulfilled its duty

43

had the fiduciary fulfilled its duty


• California Ironworkers Field Pension TrustCalifornia Ironworkers Field Pension Trust v. Loomis Sayles & Co., 259 F.3d 1036 (9th Cir 2001)(9 Cir.2001)– fiduciary who commits multiple breaches

resulting in both losses/gains is liable for theresulting in both losses/gains is liable for the total aggregated loss of all breaches and may be permitted to balance losses and gains attributable to multiple breaches

44

Measure of LossMeasure of Loss• Where company’s fortunes declined precipitously over a p y p p y

five-year period for reasons that foretold future declines, damages would be calculated on basis that there was a prudential duty to reduce exposure to employer stock in p y p p yan orderly way that did not require the immediate divestiture even though stock became worthless

• To calculate damages it is reasonable to assume that aTo calculate damages, it is reasonable to assume that a quarter to a third of employer stock could be left in the account without an imprudence violation

Peabody v Davis 636 F 3d 368 378 (7th Cir 2011)Peabody v. Davis, 636 F.3d 368-378 (7th Cir. 2011)

45

Measure of Loss – Standard of R iReview

• Method of calculating damages underMethod of calculating damages under ERISA for breach of fiduciary duty is reviewed de novo calculations pursuant toreviewed de novo, calculations pursuant to the method are reviewed for clear error

Peabody v Davis 636 F 3d 368 373 (7th CirPeabody v. Davis, 636 F.3d 368-373 (7th Cir. 2011)

46

502(a)(2) Cases502(a)(2) Cases

• 401(k) Investments401(k) Investments

E i F• Excessive Fees

• ESOPs

47

401(k) Cases401(k) Cases

• Divest and redirect to alternativeDivest and redirect to alternative investment

• What is appropriate alternative• What is appropriate alternative investment?

Oth 401(k) f d il bl d i l– Other 401(k) funds available during class periodBest performing fund in plan? Market?– Best performing fund in plan? Market?

– Other stock or comparable company stock

48

401(k) Cases - Employer Stock401(k) Cases Employer Stock

• Imprudence of company stock in 401(k)Imprudence of company stock in 401(k) menu of investments

• Failure to disclose material information to l ti i t b t th l t kplan participants about the employer stock

49

Non-Disclosure Claims – Artificial I fl iInflation

• Analysis based on impact of correctiveAnalysis based on impact of corrective action

• Event study analysis

• Constant dollar methodology

• Constant percentage methodology

50

Alternative Investment M h d lMethodology

• Damages much larger than determinationDamages much larger than determination of alleged artificial inflation – Why?

• Alleged damages include ALL differences b t f f th t k f dbetween performance of the stock fund and the alternative investment

51

Section 502(a)(2) and Class A iActions

• Injury to a plaintiff may affect the plan as a whole even if j y p y pthe injury is not shared by any other participant ----- class treatment not appropriate

• If injury to plaintiff shared by other plaintiffs, class treatment may be appropriate

Spano v. Boeing Co., 633 F.3d 574, 582 (7th Cir. 2011)

D f d th k t l t ERISA S ti 502( )(2)– Does fraud on the market apply to ERISA Section 502(a)(2) claims?

Are there intraclass conflicts?

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– Are there intraclass conflicts?

401(k) - Excessive Fees401(k) Excessive Fees

• Defendants violated their duty of prudence y punder section 404(a) by choosing to invest in retail share class rather than institutional share class of the William Blair Small Cap Growthclass of the William Blair Small Cap Growth Fund, the MFS Total Return Fund, and the PIMCO (Allianz) RCM Global Tech Fund ( )

• Valuation date: the date the plan initially invested in the imprudent funds to the present

Tibble v. Edison International, 2010 WL 257153 (C.D. Cal. 2010)

53

Excessive Fees – Damages C l l iCalculation

• Methodology to calculate damagesgy g– Identify and measure difference in investment fees between the

retail share classes in the plan and the less expensive institutional share classes that were available and not selected

– Calculate the average asset levels for each year the plan was invested in the funds (using monthly asset balances for the months of the year in which the plan was invested in the retail share classes to calculate an average annual asset level for theshare classes to calculate an average annual asset level for the year)

– Multiply (a) the difference between the fees charged for the retail share classes actually offered in the plan and the fees charged y gfor the less expensive institutional share classes by (b) the average annual fund assets

Tibble v. Edison International, 2010 WL 257153 (C.D. Cal. 2010)

54

Excessive Fees – Damages C l l iCalculation

• Lost Investment OpportunityLost Investment Opportunity – To account for fact that had the plan fiduciaries not

invested in more expensive retail share classes, the participants would have had more money invested and would have earned more

– Plaintiffs should use the returns of the funds in whichPlaintiffs should use the returns of the funds in which the assets actually are (and have been invested) i.e. the institutional funds to which the retail funds were

dmappedTibble v. Edison International, 2010 WL 257153 (C.D.

Cal. 2010)

55

Cal. 2010)

ESOPsESOPs

• losses recoverable because of imprudentlosses recoverable because of imprudent purchase of stock by a leveraged ESOP equaled the total payments the ESOPequaled the total payments the ESOP made

Reich v. Valley National Bank of Arizona, 837 F S 1259 (S D N Y 1993)837 F.Supp. 1259 (S.D.N.Y. 1993)

56

How to Measure Damages in ESOPESOP cases

• Leveraged ESOP (where companyLeveraged ESOP (where company bankrupt/debt discharged)

– Amount actually paid for the shares

– Amount of the purchase price

57

Cap Losses by Amount Paid?Cap Losses by Amount Paid?

• Difference between the amount paid forDifference between the amount paid for the stock and its actual value at the time of purchasep

• Difference between the ESOP’s performance and hypothetical prudent p yp pinvestment

• Total loss due to improper investmentp p• Losses capped by amount actually paid by

the ESOP58

ESOPsESOPs• To determine loss to an ESOP for breach of fiduciary y

duty in connection with the purchase of the stock that was later rendered worthless due to company’s bankruptcy, the court may use the difference between p y ythe amount the plan actually earned on the investment and what would have been earned if the funds had been invested prudently, and damages would not be capped p y, g ppat the amount of cash paid by the ESOP but would include the debt incurred by the ESOP to effect the stock purchasep

Neil v. Zell et al., 767 F.Supp.2d 933 (N.D. Ill. 2011)

59

ESOPsESOPs

• To determine whether ESOP wasTo determine whether ESOP was overcharged depends on the purchase price and value of the shares at the time of ppurchase irrespective of whether the payment for the shares was in the form of d bt bli ti d d bt f idebt obligations and debt forgiveness rather than cash

H U S T t C 569 F 3d 96 (2d CiHenry v. U.S.Trust Co., 569 F.3d 96 (2d Cir. 2009)

60

ESOPsESOPs• If hypothetical investor paid for 20 shares with $100 of yp p

IOUs and later resold the shares to the original seller for cancellation of $25 of IOU’s, no one would deem the resale to have altered the original price so that no loss g pwas incurred

• Similarly, when the ESOP purchased CommutAir shares in 194 for $60 million financed by debt and then in 2006in 194 for $60 million, financed by debt, and then in 2006 sold the shares in exchange for forgiveness of $14.5 million in debt, the result was not a decrease in the price paid in 1994 but rather the realization of a substantialpaid in 1994 but rather the realization of a substantial loss

Henry v. U.S.Trust Co., 569 F.3d 96 (2d Cir. 2009)

61

Other RemediesOther Remedies

• Prejudgment InterestPrejudgment Interest– Discretionary with the court

See Diduck v Kaszycki & Sons Contactors– See Diduck v. Kaszycki & Sons Contactors, Inc. 974 F.2d 270, 286 (2d Cir. 1992)

62

RemediesRemedies

• Constructive TrustConstructive Trust– See Amalgamated Clothing & Textile Workers

Union v Murdock 861 F 2d 1406 (9th CirUnion v. Murdock, 861 F.2d 1406 (9 Cir. 1988)

63

RemediesRemedies

• Preliminary and Permanent InjunctionPreliminary and Permanent Injunction– Injunction to calculate future pension

payment using earlier adjusted service datepayment using earlier adjusted service date(Pell v. E.I. DuPont de Nemours & Co., 539

F.3d 292, 306 (3rd Cir. 2008)F.3d 292, 306 (3 Cir. 2008)– Permanent injunction against service as a

fiduciary or service provider (Reich v. y p (Lancaster, 843 F.Supp. 194 (N.D.Tex. 1993), aff’d, 55 F.3d 1034 (5th Cir. 1995)

64

RemediesRemedies

• Removal of Fiduciary/Appointment ofRemoval of Fiduciary/Appointment of Receiver

Serious misconduct that violates statutory– Serious misconduct that violates statutory obligations is sufficient grounds for a permanent injunction (Reich v. Lancaster, 55 p j ( ,F.3d 1034, 1054 (5th Cir. 1995)

– Receivership not warranted (Donovan v. p (Bierwith, 680 F.2d 263, 276 (2d Cir. 1982)

65

RemediesRemedies

• RescissionRescission– Illegal transactions (Eaves v. Penn, 587 F.2d

453 462 (10th Cir 1978)453, 462 (10 Cir. 1978)– Transaction would create an illegal prohibited

transaction (M & R Inv. Co. v. Fitzsimmons,transaction (M & R Inv. Co. v. Fitzsimmons, 685 F.2d 283, 287 (9th Cir. 1982)

66

R di A il bl Remedies Available Under ERISA § 502(a)(3)

Todd D. Wozniak(678) 553-7326

WozniakT@gtlaw com

GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM - 67 -

[email protected]

©2010, Greenberg Traurig, LLP. Attorneys at Law. All rights reserved.

Refresher

§ 502(a)(3) is the “catch-all” remedial provision of ERISA

§ 502( )(3) i ll t il bl if th l i tiff h d t § 502(a)(3) is generally not available if the plaintiff has an adequate remedy under a more specific remedial provision, such as § 502(a)(2) or § 502(a)(1)(B). See Varity Corp. v. Howe, 516 U.S. 489 (1996).

C t lit h th il bilit f d ( Courts are split on whether availability of any remedy (even an inadequate one) under 502(a)(2) or 502(a)(1)(B) will preclude relief under 502(a)(3). Compare Katz v. Comprehensive Plan Group Ins., 197 F.3d 1084, 1089-90 (11th Cir. 1999) (availability of a remedy under 502(a)(1)(B) precluded alternative count pled under 502(a)(3) even if remedy ultimately proved inadequate or non-existent) with Clark v. Feder, Semo & Bard, P.C., No. 07-0470, 2011 U.S. Dist. LEXIS 100268 (D D C Sept 7 2011) (post-Amara case holding plaintiff can choose (D. D.C. Sept. 7, 2011) (post Amara case holding plaintiff can choose to proceed under 502(a)(3) if she believes 502(a)(1)(B) remedy was inadequate, but she could not proceed under both); Sconiers v. First Unum Ins. Co., No. C 11-01798 WHA, 2011 U.S. Dist. LEXIS 133509 (N.D. C l N 18 2011) ( il bili f li f d 502( )(1)(B) did


Cal. Nov. 18, 2011) (availability of relief under 502(a)(1)(B) did not preclude additional claim for reformation of plan under 502(a)(3)).

Refresher

Courts are also split on whether it is appropriate for a Plaintiff to plead a 502(a)(3) claim in the alternative to a Plaintiff to plead a 502(a)(3) claim in the alternative to a 502(a)(2) or 502(a)(1)(B) claim. Compare Sentara Va. Beach Gen. Hosp. v. LeBean, 182 F. Supp. 2d 518 (E.D. V 2002) ( ll i g lt ti 502( )(3) t t b l d Va. 2002) (allowing alternative 502(a)(3) count to be pled at least until summary judgment) with Katz, 197 F.3d at 1089-90 (affirming dismissal of alternative count) and Clark, 2011 U.S. Dist. LEXIS 100268 (holding plaintiff could choose to proceed under 502(a)(3) or 502(a)(1)(B), but not both). See also Lipstein v. United Health Ins. but not both). See also Lipstein v. United Health Ins. Co., No. 11-1185 (FSH), 2011 U.S. Dist. LEXIS 135202 (Nov. 22, 2011) (noting the split in authority).


Most courts allow alternative counts, at least until summary judgment.

Refresher

Proper plaintiffs for § 502(a)(3) claim: Participants, beneficiaries, or fiduciaries

Proper defendants for § 502(a)(3) claim: § 502(a)(3) is only subparagraph of § 502(a) that does not define proper defendants. Courts have allowed claims against:

- Plan fiduciaries

- Non-fiduciary service providers, but primarily in the prohibited transaction context. See Harris Trust & Sav. Bank v. Solomon Smith Barney, Inc., 530 U.S. 238 (2000) (non-fiduciary who participated in prohibited transaction is subject to suit for equitable relief under 502(a)(3)). After Mertens v. Hewitt Assoc., 508 U S 248 (1993) questions remain as to whether liability can 508 U.S. 248 (1993), questions remain as to whether liability can be imposed on non-fiduciary service providers outside the prohibited transaction context.

- Plan participants or beneficiaries (e.g., in a restitution or


Plan participants or beneficiaries (e.g., in a restitution or subrogation claim). See Sereboff v. Mid Atlantic Med. Serv., 547 U.S. 356 (2006).

Refresher

Relief available under § 502(a)(3):

- Injunction of “any act or practice which violates any provision of [Title I of ERISA] or the terms of the plan”the terms of the plan”

- “Other appropriate equitable relief” to (i) redress violations of Title I of ERISA or the redress violations of Title I of ERISA or the terms of the plan; or (ii) enforce any provisions of Title I of ERISA or the terms of the plan

Common forms of equitable relief: restitution,


reformation, disgorgement, rescission, reinstatement, constructive trust.

“Other Appropriate Equitable Relief”

Until Cigna v. Amara, it was widely believed that only “traditional” forms of equitable relief, such as injunctions,

tit ti di t t il bl d 502( )(3) restitution, disgorgement, etc., were available under 502(a)(3), and “money damages” were unavailable. See, e.g., Mertens, 502 U.S. 248 (502(a)(3) relief is limited to relief “typically available in equity but not compensatory damages”)available in equity . . . but not compensatory damages”).

- It was also widely believed that make whole remedies were not necessarily available under 502(a)(3).y ( )( )

Although the DOL had argued in Circuit after Circuit that the equitable remedy of surcharge allows for money damages and h ld b il bl d 502( )(3) it iti h d b should be available under 502(a)(3), its position had been

rejected by nearly every Circuit Court.

The Fourth Circuit even rejected the DOL’s position on the day


The Fourth Circuit even rejected the DOL s position on the day Amara was decided. See McCravy v. Metro. Life Ins. Co., Nos. 10-1074 and 10-1131, 2011 WL 1833873 (May 16, 2011).

Facts of Cigna v. Amara

Cigna converted its DB plan to a cash balance plan and provided notice of the anticipated change pursuant to ERISA p p g p§ 204(h) and issued an SMM and SPD.

Plan participants and beneficiaries argued that the notice, SMM and SPD failed to explain harmful changes, including that benefits would be subject to “wear away” (i.e., no benefits accrue under new formula until accrued benefit benefits accrue under new formula until accrued benefit under new formula exceeds accrued benefit under old formula).

District court found that § 204(h) notice was deficient and SPD was intentionally misleading.



The district court certified a class of participants who suffered “likely harm” as a result of the misleading y gcommunications. The court subsequently ordered CIGNA to reform the Plan document to conform to the SPD and pay the more generous benefits under the reformed Planthe more generous benefits under the reformed Plan.

The district court based its authority to order reformation on § 502(a)(1)(B) which allows a participant to sue to on § 502(a)(1)(B) which allows a participant to sue to “recover benefits due . . . . under the terms of [the] plan.”



The district court expressly declined to consider the availability of relief under § 502(a)(3), noting that Mertens, y ( )( ), g ,Sereboff, and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) had limited the relief available under 502(a)(3) to traditional equitable remedies such as under 502(a)(3) to traditional equitable remedies such as restitution and injunction, but not damages or other relief historically awarded by courts at law.

The Second Circuit affirmed and the Supreme Court granted certiorari on the issue of whether “likely harm” was the

t t d d f f d ERISA correct standard of proof under ERISA.


Holding of Cigna v. Amara

The Court reversed and held (1) “actual harm” and not “likely harm” had to be proven for a plan participant to y p p p precover; (2) SPDs and SMMs are not part of Plan documents and may not be enforced as such; and (3) the

li f d d b th di t i t t ( f th Pl t relief ordered by the district court (reform the Plan to conform to the SPD and then administer the Plan as reformed) is not available under 502(a)(1)(B) but may be ) ( )( )( ) yavailable under 502(a)(3).

The majority then launched into a lengthy discussion, in dicta, of 502(a)(3) and the equitable theories that the district court’s remedies most resembled and which the district court might consider further on remand:


district court might consider further on remand: reformation, equitable estoppel, and surcharge.

Dicta of Cigna v. Amara

First, the Court noted that the district court’s remedy resembled reformation and noted that the power to reform pcontracts to prevent fraud or remedy mistake is a traditional power of an equity court and should be available under 502(a)(3).

Second, the Court stated that the district court’s order holding CIGNA to what it had promised resembled equitable estoppel, another form of relief traditionally available from courts of equity.equ ty.

Finally, the Court noted that the district court’s injunctions requiring CIGNA (as plan administrator) to pay retired beneficiaries money owed them under the reformed plan was y pequitable in nature even though it involved a monetary payment as it resembled the equitable remedy of surcharge.

- It is not clear why the Court discussed surcharge and


y gwhether it was expressing disapproval of the district court’s positive and negative injunctions.


The Court went on to note, in response to arguments made by CIGNA that the standard of injury that had to be proven by CIGNA, that the standard of injury that had to be proven for a participant to recover is not dictated by ERISA but depends on the nature of the claim and the remedy sought.

The Court stated that proof of “detrimental reliance” is not necessarily required in all cases before an equitable remedy may be awarded.

- Although “detrimental reliance” was traditionally an element of a claim for equitable estoppel, it was not t diti ll l t f f titraditionally an element of reformation.

- The Court also noted that proof of detrimental reliance is not always required prior to an order of surcharge,


is not always required prior to an order of surcharge, particularly if the harm alleged is the loss of a statutory right.


Lastly, the Court distinguished its prior precedent in Mertens in a passage that has already been widely cited by Mertens in a passage that has already been widely cited by plaintiffs’ counsel and the DOL:

- “Thus, insofar as an award of make-whole relief is concerned, the fact that the defendant in this case, unlike the defendant in Mertens, is analogous to a trustee makes a critical difference.”

Although the DOL and some plaintiffs’ counsel have argued that the Amara majority’s discussion of § 502(a)(3) is a h ldi th di t tl i t t th t it i t d holding, the dissent correctly points out that it is not and that it was unnecessary for the majority to even discuss the issues to reverse and remand the case.


- Nonetheless, the dicta appears to reflect the opinion of at least six justices.

Unresolved Questions After Amara

What is the limit to remedies available under § 502(a)(3) after Amara?

- As the Court noted in Mertens, courts of equity fashioned all manner of remedies to right perceived wrongs, many of which would more commonly be referred to as legal remedies today. Mertens, 508 U.S. at 257 (“Since all relief available for breach of trust could be obtained from a court of equity, limiting the sort of relief obtainable under §502(a)(3) to ‘equitable relief’ in the sense of ‘whatever 50 (a)(3) to equ table el e t e se se o w ateve relief a common-law court of equity could provide in such a case’ would limit the relief not at all.”) (emphasis in original).

Are “make whole” remedies now available under § 502(a)(3), at least against Plan fiduciaries?

If expanded remedies are available under § 502(a)(3), should


p ( )( )502(a)(3) now be completely unavailable if any remedy (even an inadequate remedy) is unavailable under the specific remedial sections of ERISA?

Fall Out of Cigna v. Amara

To date, most courts have held that the discussion of § 502(a)(3) in Amara is dicta. See North Cypress Med. Center Operating Co., v. yp p gCigna Healthcare, Inc., No. 4;09-cv-256, 2011 U.S. Dist. LEXIS 127526 (S.D. Tex. Nov. 3, 2011) (the Supreme Court's analysis of the remedies available under ERISA § 503(a)(3), including surcharge, is dicta and not binding on the court); Biglands v Ratheon Employee dicta and not binding on the court); Biglands v. Ratheon Employee Savings and Investment Plan, No. 1:10cv-351, 2011 U.S. Dist. LEXIS 75189, *14-15 (N.D. Ind. July 12, 2011) (same; court rejected plaintiff’s attempt to characterize her request for monetary damages as surcharge and found Amara distinguishable on the grounds that plaintiff can seek relief under 502(a)(1)(B), which bars her claim for relief under 502(a)(3)); Harris v. Ventyx Inc., No.S-11-308 FCD/GGH, 2011 U.S. Dist. LEXIS 89985 (E.D. Cal. Aug. 12, 2011) , ( g , )(Amara’s discussion of remedies under 502(a)(3) is dicta). But see Clark, 2011 U.S. Dist. LEXIS 100268 (D.D.C. Sept. 7, 2011) (denying motion for summary judgment notwithstanding defendants’ argument that plaintiffs are improperly seeking money damages


argument that plaintiffs are improperly seeking money damages under 502(a)(3)).


Does the availability of surcharge add much to a court’s ERISA remedies?

According to many of the authorities surcharge is a remedy that allows a According to many of the authorities, surcharge is a remedy that allows a court to charge a fiduciary for losses to a trust (in the ERISA context, to the Plan itself) caused by the fiduciary’s breach of duty. Surcharge may not be available as a remedy if the loss is to the beneficiary. See Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 604-05 (8th Cir. 1995) (“[I]f a breach of t t lt i l t th t t t t th t t i h bl ith th trust results in a loss to the trust estate, the trustee is chargeable with the amount of the loss” but the same is not true if the loss is to the beneficiaries) (quoting 3 William F. Fratcher, Scott on Trusts § 205 at 238-39 (4th ed. 1987)); In re Hyde, 845 N.Y.S.2d 833, 837 (N.Y. App. 2007) (“a surcharge is only warranted upon a showing that the trust’s losses are causally connected y p g yto the trustee’s imprudence”); In re Estate of Warden, 2 A.3d 565, 573 (Pa. Super. Ct. 2010) (“[t]he court must find the following before ordering a surcharge: (1) that the trustee breached a fiduciary duty and (2) that the trustee’s breach caused a loss to the trust.”); Princess Lida of Thurn & Taxis v Thompson 305 U S 456 464 (1939) (noting that a court has the power to v. Thompson, 305 U.S. 456, 464 (1939) (noting that a court has the power to surcharge the trustee with losses the trust incurred); F.J. Hanshaw Enters. Inc. v. Emerald River Dev. Inc., 244 F.3d 1128, 1142-43 (9th Cir. 2001) (where one party was harmed by the other and wanted to be reimbursed for his losses, the court held that “[t]he $200,000 transfer of assets from Frederick


to Gordon . . . cannot properly be characterized as a surcharge.”).


Is surcharge available if there is a statutory i l ti b t i l ?violation but no proven economic loss?

- Day v. Avery, 548 F.2d 1018 (D.C. Cir. 1976) (fi di h il bl d (finding surcharge was not available to remedy a fiduciary’s failure to disclose a possible merger since the merger would have occurred anyway g y yand the failure to inform caused no monetary loss).

Amara Court stated that ERISA plaintiffs seeking surcharge must still show “actual harm” and “ ti ” id t 1881 b t did t if h t


“causation,” id. at 1881, but did not specify what injuries will constitute “actual harm”.

Calculating Remedies Under § 502(a)(3)

Amara indicated that the measure of relief must be taken from the specific violation alleged and type of taken from the specific violation alleged and type of remedy sought.

Thus, to the extent monetary relief is available, issues relating to tracing of specific property or money, disgorgement of ill gotten gains, placing the participant in a position he was prior to an alleged misrepresentation, etc., will be dictated by the elements of the equitable remedy sought.

The courts have yet to flesh out the exact meaning of The courts have yet to flesh out the exact meaning of Amara on a number of these potential equitable remedies, but to the extent make whole relief will become available under various equitable theories one


become available under various equitable theories, one would expect the monetary remedies to be similar to the remedies currently available under § 502(a)(2).

Calculating Remedies Under § 502(a)(3)

Although the Amara Court did not discuss how damages under a surcharge theory are calculated, a number of authorities exist that discuss this issue. See Bogart & Bogart, The Law Of Trusts And Trustees § 862 (2d ed. rev. 1995) (“In suits to collect money from a trustee for breach of trust, the direct damages will usually be measured by the difference between the value of the beneficiary's rights to principal and income before and after the breach”); see also First Ala. Bank v. Spragins, 515 So.2d 962, 966 (Ala. 1987) (affirming court’s measure of surcharge which was the “differences in the principal values of the prudently and imprudently managed estates and the income earned on each estate, taking into consideration trust distributions”); Flagship Bank v. Reinman, Harrell, Silberhorn, Moule & Graham, P.A., 503 So.2d 913, 916 (Fla. Dist. Ct. App. 1987) (where the trustee of a land trust had negligently failed to protect the trust property from loss by tax sale, the court ruled that "[t]he beneficial interest holders are entitled to damages equaling the fair market value of the retained and lost property at the time of trial as that measure charges Flagship with


the loss in the value of the trust property resulting from [defendant’s] breach of its duty to protect from loss, property claimed by the trust.”).

Contribution and Indemnification

Th C t f A l lit h th• The Courts of Appeals are split on whether ERISA provides a cause of action for

t ib ticontribution.

• In this context, contribution typically means an action by a defendant against another y gparty to partially recoup damages found against the defendant.g

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S C t f A l fi d th t th i• Some Courts of Appeals find that there is no right to contribution because it is not

th i ht d di t f th iamong the rights and remedies set forth in ERISA.

• See e.g. Travelers Casualty and Surety Co. of Amer. v. IADA Services, Inc., 497 F.3d862 (8th Cir. 2007); Kim v. Fujikawa, 871 F.2d 1427 (9th Cir. 1989)

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Oth C t f A l h f d• Other Courts of Appeals have found a common law right to contribution.

• Free v. Briody, 132 F.3d 1331 (7th Cir. 1984) found that th fid i li bilit i i i ERISA 1105the co-fiduciary liability provision in ERISA 1105 provided a basis to find that a claim for contribution between fiduciaries would be an equitable apportionment of damages against wrongdoers.

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Ch C l T C S 939• Chemung Canal Trust Co. v. Sovran, 939 F.2d 12 (2d Cir. 1991) also finds that there i i ht t t ib ti b d t t lis a right to contribution based on trust law principles allowing equitable apportionment

f d i b t d t tiof wrongdoing, but does not mention ERISA 1105 at all. See also Smith v. T t L l 819 P i Pl 291Teamsters Local 819 Pension Plan, 291 F.3d 236 (2d Cir. 2002).

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V f t h dd d t t l• Very few courts have addressed contractual rights to indemnification.

• ERISA § 410 deems any provision which relieves a fiduciary of ERISA fiduciary responsibility void as against public policy.

• This provision does not preclude a plan or p p pfiduciary from purchasing fiduciary insurance.

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I J h C i 572 F 3d 1067 (9th• In Johnson v. Couturier, 572 F.3d 1067 (9th

Cir. 2009), the Ninth Circuit held that the i d ifi ti i i ( d th l t dindemnification provision (and the related advancement of defense costs) in the

t b t th l d thagreement between the employer and the trustees of the ESOP was void based on ERISA § 410ERISA § 410.

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• The Ninth Circuit compared the scope of the indemnification provision with the scope of ERISA’s fiduciary obligations and found that the indemnification provision was broad enough to absolve the defendants of ERISA violations.

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I di t th d f d t ’ t• In responding to the defendants’ argument that the indemnification provision should

t b bj t t ERISA § 410 b thnot be subject to ERISA § 410 because the costs would come from the company, the Ni th Ci it f d th t b th l tNinth Circuit found that because the plan at issue was an ESOP, any payment from the

ti i ff ti l t fcorporation is effectively a payment from the plan.

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A di t i t t i N Y k f ll d th• A district court in New York followed the reasoning in Johnson v. Couturier, in

j ti th f l t t l lrejecting the use of plan assets to pay legal fees in a case related to the Madoff debacle. R d B A i t M tRounds v. Beacon Associates Management Corp., 48 EBC 2237 (S.D.N.Y. 2009)

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