Monday, November 26, 2007
As Rick pointed out this past weekend, the highly-anticipated ERISA case of LaRue v. DeWolff, Boberg & Assoc. was argued today in front of the Supreme Court. This is a case which will help define a 401(k) pension plan holder's right to sue plan administrators for breach of fiduciary duty. More specifically, the case may shine much needed light on the scope of relief available to employees under Sections 502(a)(2) and 502(a)(3) of ERISA.
Below are my initial thoughts on the oral argument today in the case based upon an analysis of the oral transcript. (Full disclosure: I was one of eleven law professors who signed an amicus brief supporting LaRue's opposition to DeWolff's motion to dismiss. I hope, however, that this fact does not cloud my analysis of the oral argument).
1. Peter Stris, a law professor at Whittier, went first. He put forward his "straightforward" argument: "The plain meaning of 'any losses to the plan' includes any diminution in value of defined contribution plan assets, regardless of the number of participants ultimately affected." FWIW, that sounds right to me.
2. Justices Ginsburg, Roberts, and Scalia pressed Stris on why this suit could not be brought under Section 502(a)(1)(B) as a denial of benefit claim and wondered whether bringing the claim under (a)(2) defeated the claim exhaustion requirements under (a)(1)(B).
3. Justice Alito wonders whether LaRue properly preserved his (a)(2) claim, as the initial complaint was filed only under (a)(3).
4. Justice Scalia poses an interesting question to Stris about whether in a classic (a)(1)(B) case involving denial welfare benefits (e.g., health insurance), there is not a "loss to the plan" when the plan must provide those contested benefits to the beneficiary and "whereupon the plan would have a right of action against the fiduciary, I assume, for the fiduciary's failure to do what he was supposed to." Stris points out, however, that just because (a)(1)(B) may have been one route of proceeding, does not mean he was required to go that route and not bring an (a)(2) claim. I have to say that I am surprised by the amount of time spent on this point as most commentators did not even foresee the (a)(1)(B) angle.
5. Justices Alito and Ginsburg asks whether an (a)(3) finding is necessary if the Court finds for LaRue on the (a)(2) claim. This goes to language in Varity which suggests that recovery under (a)(3) is only "appropriate" if there is not relief available under (a)(1)(B) or (a)(2). Stris responds that since this case was decided by the lower courts at the pleading stage, direction on the (a)(3) claim is also necessary. And under (a)(3), Stris argues that "make whole" relief should be available to LaRue under the equitable theory of surcharge. This move is necessary under ERISA law because since Mertens in 1993 and Great-West Life in 2002, only claims for equitable restitution are available under (a)(3). Consequently, Stris seeks to make the argument that the make-whole remedy for loss of pension assets is really an "equitable claim for surcharge." Only in the world we call ERISA.
6. I have to say that I am shocked that the Court did not spend any time asking Stris whether a loss to an individual account plan is the same as "loss to the plan" under Section 409. Are strict constructionists of ERISA on the Court (Roberts, Scalia, Thomas, Alito, and Kennedy) conceding the argument? If so, this remedial approach to this case strikes one as more in line with the decisions in Varity in 1996 and Harris Trust in 2000.
7. Because the Solicitor General supports LaRue in this case, Matthew Roberts next speaks for the U.S on behalf of LaRue. Although there is some question of who has standing to bring an (a)(2) "loss to the plan" suit, Justice Scalia continues to advance his theory that (a)(1)(B) cases are really against the plan and that is the claim that LaRue should have brought. Here, I think Roberts has the past answer to this theory: "Petitioner's cause of action here arises under (a)(2) because he is seeking relief for the plan not relief from the plan."
8. Chief Justice Roberts continues to hammer away at his point that the "plan" is not attached to the pleadings, so how can their be a breach of fiduciary duty. Both Stris and Roberts explain that the case was decided on the pleadings so they have not yet had time to adduce those facts and in any event, the summary plan description (SPD) is attached to the complaint. Roberts points out that the SPD does not say administrators have to follow the investment directions of participants. Roberts also points out that, "the case comes to the Court on the assumption that there is a fiduciary breach."
9. Tom Gies of Crowell & Moring (Disclosure: I was at one time a legal assistant at CM) argues for DeWolff and advances a structural argument, suggesting that a reading of (a)(2) that allows individual 401(k) account holders to sue for losses to the plan is inconsistent with the remedial structure of ERISA. This tactic relies on ERISA as a "comprehensive reticulated statute."
10. Gies also believes that Russell (1985), not allowing compensatory and punitive damages under (a)(2), is applicable here because LaRue is basically seeking money damages. Justice Souter (speaking for the first time) and Justice Ginsburg (two of the remdialists) don't appear convinced by this argument and seem to be believe (a)(2) is the only vehicle by which LaRue can get his pension money back.
11. Gies resurrects the Scalia (a)(1)(B) theory, but seems unable to explain to Justice Souter, after a long dialogue, how LaRue could receive his pension money from the plan without "rob[bing] Peter to pay Paul."
12. Justice Breyer finally speaks (leaving Stevens, Kennedy, and Thomas as non-speakers thus far) and is apparently exasperated by Gies' argument that there cannot be an individual claim under (a)(2) because it is not for "losses to the plan" as a whole: Gies: "Well, we think that (a)(2), properly read, does not permit an individual claim . . . . Breyer: "Well, why? Why? That's the question, it seems to me, in the case. Why?"
13. Justice Breyer then goes on to use a hypothetical about a trustee who runs off to Martinique with 500 different diamonds: "Why isn't it available under (a)(2)? In both cases, the trustee took 500 diamonds that belonged to the plan and went to Martinique. Now, if you can sue him when the plans are all put in one big safe deposit box with the diamonds, why can't you sue him when they're put in 500 small safe deposit boxes?" Why indeed. Gies explains because there has not be a "loss to the plan" in an individual situation ("The words "losses to the plan" connotes something collective."), but even Justice Alito appears skeptical. And Gies must concede to Justice Souter that, "there can be no loss to the plan which is not a loss to an individual account, can there be?" Justice Stevens weighs in toward the end of the argument and seems to be siding with Ginsburg, Souter, and Breyer (I guess no surprise there, but I would be interested in hearing Stevens' thoughts on what he meant in his decision in Russell back in 1985 when he was then part of the strict constructionist block).
14. Per normal, Justice Scalia gets most of the laughs: "You're telling me it depends on how big the diamond is and -- and what kind of a breach it was. How can we write an opinion like that? (Laughter.)" Whoever knew this case would come down to the size of some hypothetical diamond stowed away on Martinique?
15. Unsurprisingly, and inevitably, Gies makes a floodgate of litigation argument about allowing individual claims under (a)(2), but does not seem to have a good answer to Justice Ginsburg's questions about what LaRue's remedy would be under (a)(1)(B) or (a)(3) without the (a)(2) remedy for breach of fiduciary duty.
16. Gies also maintains, under (a)(3), that this is not an equitable claim under surcharge, but one for unrecoverable compensatory damages under ERISA.
In all, I am fairly confident (hopefully, not famous last words) that LaRue will win his case under Section 502(a)(2); that is, be able to proceed with his case for breach of fiduciary duty against the fiduciaries in their personal capacities because of failure to follow investment instructions. I don't believe the Court will give any guidance on (a)(3) since it is not necessary to its holding and there may be some discussion as to the role of (a)(1)(B) in these cases, especially if Scalia files a dissent.
No guts, no glory, I predict a 6-3 decision for LaRue, with perhaps three separate opinions: Souter for the majority, Scalia, joined by Thomas, advancing an a(1)(B) alternative, and perhaps Roberts believing that the claim can not be brought without the plan being attached to the complaint or Alito, pressing the (a)(2) waiver argument. Of course, it is hard to predict Kennedy's vote because he did not speak, but as with many controversial cases, his vote will be key.