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High court seen likely to take ERISA fidicuary-breach case

Solicitor General Donald Verrilli Jr. asked the high court to decide on the fiduciary breach case, believing the appellate court ruling was wrong.

Chances have improved that the Supreme Court could rule on an ERISA fiduciary-breach case involving a dispute over how courts should interpret the law's statute of limitations on fiduciary-breach lawsuits, ERISA attorneys say.

The reason is that the U.S. solicitor general has filed an opinion supporting a Supreme Court appeal by plaintiffs in the case of Tibble et al. vs. Edison International et al. The plaintiffs, who are participants in a 401(k) plan, allege that decisions by a federal District Court and a federal appeals court improperly restricted their ability to file fiduciary-breach claims. Edison International is the parent of Southern California Edison, the sponsor of the $4 billion Edison 401(k) plan.

The opinion by Solicitor General Donald Verrilli Jr. was filed Aug. 20, in response to a request in March by the Supreme Court for his office to comment on the Tibble case. A formal request to the Supreme Court to hear the case was filed last October by the Tibble plaintiffs' lead attorney, Jerome J. Schlichter, the founding and managing partner of Schlichter, Bogard & Denton LLP, St. Louis.

Does ERISA's statute of limitations “immunize 401(k) plan fiduciaries for retaining imprudent investments that continue to cause the plan losses if the funds were first included in the plan more than six years ago?” Mr. Schlichter's petition to the Supreme Court said. District and appeals court rulings should be overturned because the Employee Retirement Income Security Act “incorporates the concept that a plan fiduciary's duty is a continuing duty that does not expire and immunize fiduciaries after six years,” he wrote.

The solicitor general agreed. “The court of appeals erred in finding such claims time-barred,” his opinion said. “ERISA imposes a continuing duty of prudence on plan fiduciaries, and (the Edison plan fiduciaries) breached that duty throughout the limitations period by continuing to offer higher-cost investment options when identical lower-cost options were available.”

Because the appeals court decision in the Tibble case “conflicts with the decisions of other courts of appeals, and (because) the statute of limitations issue is an important one,” the Supreme Court should accept the case for review, the solicitor general wrote.

Less protection

Several ERISA attorneys who represent DC plans say that if the Supreme Court agrees to hear the case and decides for the plaintiffs, the plans could have less protection from fiduciary-breach lawsuits. “This could be a problematic case for fiduciaries,” said James P. McElligott Jr., a Richmond, Va.-based partner with McGuireWoods LLP. ERISA attorneys also say a Supreme Court request for the solicitor general's opinion improves the likelihood the court will grant certiorari, or agree to review the case.

“While it is rare to have the Supreme Court grant certiorari in a case — less than 1% of the roughly 10,000 petitions received each year — your chances increase if the opinion of the solicitor general of the United States is requested,” said Thomas E. Clark Jr., a partner with The Lowenbaum Partnership LLC, St. Louis.

“Your chances increase even more if the solicitor general supports certiorari being granted,” he said. “Here, the participants in the Edison plan have a very good chance of having their case heard given the support of the solicitor general, but by no means is it a guarantee.“

The statute of limitations argument was only part of Mr. Schlichter's petition to the Supreme Court, seeking to overturn a 2013 decision by the 9th U.S. Circuit Court of Appeals in the Tibble case.

He also asked the justices to overturn another part of the appellate decision that dealt with the concept of judicial deference, which is essentially a benefit of the doubt granted to plan sponsors when their actions are challenged in court.

Mr. Schlichter said different federal appeals courts have issued different rulings on this standard. However, the solicitor general's opinion said this issue “does not warrant” a Supreme Court review.

Still, the court could decide to take up the deference issue despite the solicitor general's comments, said Andrew L. Oringer, a New York-based partner at Dechert LLP.

The Tibble case has followed a long and twisting path in the seven years since the original U.S. District Court lawsuit was filed. Along the way, most of the plaintiffs' arguments — including allegations of fiduciary breaches regarding revenue sharing and several types of investment options — were rejected by the District Court and the 9th U.S. Circuit Court of Appeals.

The plaintiffs' statute of limitations argument focused on some investment options that were added to the 401(k) plan between March 1999 and January 2001. Plaintiffs sued in August 2007 — more than six years after these options were offered. All district and appeals court rulings rejected claims alleging fiduciary breaches on these investments, saying the statute of limitations had expired.

Plaintiffs did win a partial victory when a District Court ruled — and the appeals court agreed — that Edison 401(k) plan fiduciaries didn't act prudently in offering retail shares of three mutual funds without having investigated institutional share classes. These three funds were added to the lineup in 2002, or within ERISA's six-year statute of limitations. Participants were awarded a total $370,000 in damages.However, for the broad statute of limitation claim, the plaintiffs' argument “would make hash out of ERISA's limitation period and lead to an unworkable result,” the appeals court wrote in August 2013. “We are unpersuaded by DOL's suggestion that our holding will give ERISA fiduciaries carte blanche to leave imprudent plan menus in place.”

But the solicitor general responded that the appellate court incorrectly applied ERISA's statute of limitations. Its ruling “effectively exempts plan fiduciaries from important ongoing fiduciary duties concerning investment options (that were) offered more than six years earlier,” he wrote.

The solicitor general added that the appellate court decision means “a participant who invested in the plan more than six years after the initial investment decision could never sue, even if the investment was an obviously imprudent one.”

No surprise

Several ERISA attorneys said the solicitor general's opinion wasn't a surprise because the Department of Labor had filed an amicus brief with the 9th U.S. Circuit Court supporting the plaintiffs.

“I think it is possible that the Supreme Court will be concerned that a possible result of the DOL's view could be that, for a host of alleged breaches, there could essentially be no statute of limitations, at least as to the last several years' worth of impact from the breach,” Mr. Oringer said.

The solicitor general's brief “disregards the rationale” for having a statute in ERISA, said James Fleckner, a partner in the Boston law firm of Goodwin Procter LLP. “ERISA's six-year period ... is designed so that people cannot be sued for their past actions if enough time has elapsed.”

The solicitor general takes the position “that a fiduciary can be liable for continuing a practice that had begun more than six years ago, even if nothing materially changed in the ensuing six years — or more — since the decision was first made,” Mr. Fleckner argued.

The solicitor general's opinion also received a thumbs-down from Thomas Greene, a Boston-based partner at Holland & Knight LLP. “The duty to monitor ongoing plan operations should not be confused with keeping open ad infinitum the question of whether a discrete act is prudent,” he said.

This article originally appeared in the September 1, 2014 print issue as, "High court seen likely to take ERISA fidicuary-breach case".