Judges don’t bite on DB defense applying to DC in ERISA cases

Seeking to defeat ERISA complaints, some defined contribution sponsors are using a 13-month-old, pro-sponsor ruling by the U.S. Supreme Court that addressed defined benefits plans.

However, at the federal District Court level so far, most judges have rejected this DC legal defense, citing the Supreme Court's 5-4 ruling as making a distinction between DC and DB.

The key issue was whether DB participants had standing to sue if they weren't hurt by a sponsor's plan management. Because the DB plan was overfunded in the case of Thole et al. vs. U.S. Bank, NA, the Supreme Court said plaintiffs weren't harmed and thus lacked standing.

If DC sponsors could successfully use this "no harm, no foul" ruling, then they could persuade judges to dismiss complaints, thus reducing the costs of going to trial.

Since the Thole decision, at least a baker's dozen of federal court judges have said what's good for a sponsor's DB defense isn't acceptable in a DC setting. "Standing is the first rung on the ladder," said Nancy Ross, a Chicago-based partner for Mayer Brown LLP who represents some DC sponsors that have attempted to use the Thole decision as part of their defense. Like others interviewed for this article, she declined to discuss clients' cases.

"There is no quicker or easier way to knock out a case than with standing," Ms. Ross said. "If they don't have standing, it's done."

Just as plaintiffs' attorneys often file multiple allegations, sponsors' attorneys erect multiple defenses. The Thole strategy "is an additional way to make the argument," said Jerome Schlichter, founding and managing partner of Schlichter Bogard & Denton LP, St. Louis. He represents plaintiffs in ERISA cases, including some in which sponsors cited the Thole decision to claim participants lack standing to sue.

Despite the trend in lower court rulings, ERISA attorneys said they believe there is some wiggle room in the Supreme Court decision.

If the justices had wanted to exclude defined contribution plans from their opinion, "they could have been more clear," said Samuel Levin, of counsel for Groom Law Group, Washington, who has cited the Thole decision in representing some DC clients in ERISA lawsuits.

Still, the Supreme Court's ruling makes it "very difficult" for DC sponsors to win a dismissal by citing the Thole decision, said Joseph Torres, a Chicago-based partner for Jenner & Block LLP and chairman of the firm's ERISA litigation practice.

DC attorneys "need to be cautious about Thole as a defense," said Mr. Torres, who represents sponsors in ERISA complaints but who hasn't used the Thole decision as a defense. "It's very difficult because there is a material difference between the DC context and the DB context."

Like other attorneys interviewed for this article, Mr. Torres predicted it will take a while to establish what role, if any, the Thole decision might play in DC ERISA cases assuming various District Court judges' rulings are appealed.

The Supreme Court justices "distinguished" between DB and DC "but they didn't explain it a lot," said Karen Handorf, a Washington-based partner in Cohen Milstein Sellers & Toll PLLC. She represented James J. Thole in his suit against U.S. Bank, although another law firm argued his case before the Supreme Court.

Because she believes there's room for differing lower court interpretations, "you will need several appeals court decisions to nail this down," she said. "ERISA is full of questions."

The Supreme Court's ruling, written by Justice Brett Kavanaugh, has provoked debate among ERISA attorneys because of several passages about DC vs. DB. "Of decisive importance to this case, the plaintiffs' retirement plan is a defined-benefit plan, not a defined-contribution plan," said the second paragraph in the Supreme Court's June 1, 2020, opinion.

DB participants receive fixed monthly payments that "do not fluctuate with the value of the plan or because of the plan fiduciaries' good or bad investment decisions," he wrote. By contrast, in DC plans, "the retirees' benefits are typically tied to the value of their accounts, and the benefits can turn on the plan fiduciaries' particular investment decisions."

Mr. Kavanaugh concluded that "the plaintiffs have no concrete stake in this dispute" and no standing to sue, adding that "winning or losing this suit would not change the plaintiffs' monthly pension benefits."

Plaintiffs' attorneys said the court's opinion was clear. "Efforts to extend the scope of Thole to DC plans are a major overreach and have generally been dead on arrival," said Kai Richter, who represents participants in ERISA cases and is a partner at Nichols Kaster PLLP, Minneapolis, in an email.

Ms. Ross, the sponsor's attorney, uses "reach" in a different way. District court judges who rejected the Thole defense by DC plans "really reached far to justify their position," she said.

However, many U.S. district court judges have ruled that the distinctions between DC and DB plans are clear.

For example, a federal court judge in Detroit on March 31 rejected a motion to dismiss in the case of Davis et al vs. Magna International of America Inc. et al., in which participants alleged a series of ERISA violations related to alleged poor-performing investments and plan costs. "This court declines to extend Thole to defined contribution plans," wrote U.S. District Court Judge Nancy G. Edmunds.

Plaintiffs have standing to sue "because they allege actual injury to their own plan accounts and they allege injury in fact that is causally related to the conduct they challenge on behalf of the plan," she wrote.

A federal judge in Charlotte, N.C., rebuffed a Thole-based request on March 31 for dismissal in the case of Jones et al. vs. Coca-Cola Consolidated Inc. et al. in which current and former participants alleged ERISA violations for record-keeping fees and high target-date costs in the company's 401(k) plan.

For DC plans "where future benefit payments would be affected by the outcome of a lawsuit, courts are more likely to find an injury-in-fact sufficient" to permit standing to sue, wrote U.S. District Court Judge Frank D. Whitney. The plaintiffs "have properly alleged they suffered an injury-in-fact."

A federal court judge in Newark, N.J., rejected a motion to dismiss on April 13 in the case of McGowan et al. vs. Barnabas Health Inc. et al., in which retirement plan participants alleged ERISA violations tied to high-cost investments and allowing high record-keeping fees.

Writing that defendants' arguments stretched Thole "too far," U.S. District Court Judge Kevin McNulty wrote that the Supreme Court "explicitly distinguished the case of a defined contribution plan like this one here."

Mr. Whitney pointed out that "courts post-Thole have generally rejected the argument that a plaintiff's ERISA challenge must be confined to the individual funds in which he or she invested."

Sponsors' attorneys point to a rare DC-plan victory in which a federal District Court judge cited the Thole decision and other Supreme Court and federal court rulings in granting summary judgment in August 2020 against plaintiffs in the case of Ortiz et al. vs American Airlines Inc. et al.

Two months earlier, U.S. District Judge John McBryde, Fort Worth, Texas, informed both parties about the Thole decision and asked plaintiffs to provide "their theories of damages" caused by the defendants.

"Their alleged injuries are at best speculative, not concrete," he wrote. "Plaintiffs have not established standing to pursue the claim regarding an alternative capital preservation option."

Attorneys also point to another case, now before the 3rd Circuit Court of Appeals, Philadelphia, that could elevate the debate over whether the Thole decision applies to DC plans.

On May 18, the court agreed to hear an appeal by Universal Health Services Inc. challenging class certification granted by a Philadelphia federal court judge in an ERISA complaint filed by participants in the company's 401(k) plan.

In October 2020, U.S. District Court Judge Mark Kearney rejected Universal's motion for partial dismissal in the case based on its claim that participants lacked standing to sue regarding plan menu options in which they didn't invest.

"The Supreme Court in Thole and the Constitution require plaintiffs demonstrate a concrete stake in the outcome of each of their claims — the employees have done so here," he wrote.

The judge also granted class certification for some 60,000 participants. Universal's appeals court petition challenged class certification because the three plaintiffs invested only in seven of 37 menu options cited in their original complaint.