In an ERISA case causing consternation throughout the retirement and investment management industries, the federal government has announced support for a plaintiff in a dispute with a 401(k) plan sponsor.
In doing so, the government asked the U.S. Supreme Court to decline a review of a petition by Putnam Investments LLC, seeking to overturn a ruling by the 1st U.S. Circuit Court of Appeals in Boston, which favored John Brotherston, a participant in Putnam's 401(k) plan.
Mr. Brotherston sued Putnam in November 2015, alleging several breaches of fiduciary duty, including stocking the plan with proprietary products and failing to monitor the investment lineups' cost and performance.
A U.S. District Court judge in Boston dismissed two claims against Putnam in March 2017 and dismissed other complaints in June 2017 during a bench trial.
The appeals court reversed the ruling in October 2018, and sent the case back to the district court. The appeals court said it had rejected two reasons cited by the district court judge in dismissing the case. The appeals court subsequently ordered the case to be put on hold, pending resolution by the Supreme Court of Putnam's petition for review. The pro-plaintiff ruling by the appeals court has so alarmed the retirement and financial industries that nine trade groups filed separate or joint friend-of-the-court briefs with the Supreme Court. They warned that a broad pro-plaintiff decision by the Supreme Court would cause havoc among defined contribution plans, including more lawsuits, higher costs of defending lawsuits, fewer investment options and higher plan costs.
The groups include the American Benefits Council, the ERISA Industry Committee and the American Retirement Association.
The broader issue, cited by Putnam, is whether a plan participant must prove an alleged fiduciary breach led to financial loss or whether the defendant-sponsor must disprove the alleged breach caused a loss. Putnam also asked the court to rule on whether the returns of its plan's investments should be judged against returns of an index-fund portfolio to prove a loss.
Putnam maintained that proving a loss under ERISA is the participant's responsibility. It said federal appeals courts are split on this matter of loss causation, and it asked the Supreme Court to issue a uniform legal standard. It also said that using an index fund portfolio was an inappropriate comparison for the Putnam plan's investment returns.
However, the federal government says Putnam's petition represents a bad case for the Supreme Court to use for a broader discussion of loss causation.
In its friend-of-the-court brief filed Nov. 27, the government's position was narrowly drawn, focusing primarily on errors made by the federal court judge in Boston. These errors also were cited by the federal appeals court.
The appeals court "correctly decided" the law, said the government's brief filed by Noel Francisco, the solicitor general, and supported by Kate S. O'Scannlain, solicitor of labor for the Department of Labor.
"Although some disagreement exists among courts of appeals" about loss causation, "this case would be a poor vehicle in which to resolve that disagreement," Mr. Francisco wrote.
The problem was that the district court judge held a trial, but ordered a dismissal of certain allegations against Putnam before the trial was completed, he wrote.
"The facts have not been fully developed," Mr. Francisco wrote. "The antecedent determinations necessary to address whether (Putnam's) alleged breach caused a loss — and whether there was even a breach and a related loss — have not been decided."
He also agreed with the federal appeals court that using a "suitable" index fund portfolio was an appropriate comparison of the Putnam 401(k) fund performance.
The U.S. Supreme Court routinely asks the federal government, represented by the solicitor general, for its views. The court doesn't automatically follow the government's recommendations.
Putnam filed its petition to the Supreme Court in January. The justices asked the solicitor general for the government's views in April. The court will now consider whether to review the case.
According to Mr. Francisco, the Putnam case hinges on how courts interpret ERISA's rules. Although ERISA says a fiduciary is accountable for breaches of duty, it doesn't say who must prove or disprove if a breach and a loss occurred.
In "ordinary civil litigation," the Supreme Court has written that there is an "ordinary default rule" assigning the responsibility of proof to a plaintiff when a law is silent, Mr. Francisco wrote. However, there are exceptions — and one exception is the common law of trusts.
The Supreme Court has "repeatedly made clear that ERISA's fiduciary duties are 'derived from the common law of trusts,' " wrote Mr. Francisco, citing a standard text on trusts prepared by the American Law Institute.
According to trust law, he wrote, if a beneficiary proves a trustee breached terms of a trust resulting in a loss, then the trustee must prove that the loss would have occurred in the absence of the breach.
