Medill Comments on LaRue ERISA Case Oral Argument: Against the (a)(1)(B) Approach

Colleen Medill (CM) (Nebraska), one of the preeminent scholars in the field of American employee benefits law, is a sometime guest blogger on these pages. Her thoughts on the LaRue case follow:

    Paul’s great summary of yesterday’s oral argument in the LaRue case concerning ERISA claims and remedies was intriguing enough to induce me to read the entire transcript. The tenor of the questions from Chief Justice Roberts (explicit reference to the “deference standard” of Firestone) and Justice Scalia (why not require the claim be first brought under Section 502(a)(1)(B)) suggests that some of the Justices are toying with the idea of requiring that all ERISA claims must be “funneled” first through Section 502(a)(1)(B) as denial of benefits claims. This approach is problematic for multiple reasons.

    First, the Firestone decision itself was wrongly decided as a matter of fiduciary law, see John H. Langbein, The Supreme Court Flunks Trusts, 1990 Supreme Ct Rev. 207.

 Second, it is well-documented that all fiduciaries are cognizant of, and some intentionally are abusing, the “shelter” provided by the Firestone deferential standard of judicial review in the context of welfare benefit plans, where the standard historically has applied. See John H. Langbein, Trust Law As Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials Under ERISA, 101 Nw. Univ. L. Rev.1315 (2007). Does the Supreme Court really want to expand the problem to include 401(k) and other defined contribution plans?

    Third, Firestone’s deference standard applies when the trustee has the explicit authority to exercise discretion to interpret the terms of the plan concerning whether or not the participant is entitled to the requested benefit. The federal courts to date have never applied a deferential standard of judicial review (Firestone’s “abuse of discretion” standard) to determine whether the trustee has engaged in a breach of fiduciary duty under Section 404 or 405 of ERISA. Indeed, de novo judicial review of an alleged breach of fiduciary duty was the norm at common law and, until yesterday’s oral argument, believed to be the norm under ERISA. 

    Some of the Justices appear to be confused on this point because the fiduciary duty to follow the terms of the plan under Section 404(a)(1)(D) sounds a lot like exercising discretionary authority to interpret the terms of the plan, but the two situations are distinctly distinct. Bottom line, in close calls involving interpretation of what benefit the participant is to receive, Firestone deference gives the nod to the fiduciary making the call. Firestone deference does not apply when the fiduciary fails to follow the express terms of the plan (here, executing a trading instruction). See Colleen E. Medill, Resolving the Judicial Paradox of “Equitable” Relief Under ERISA Section 502(a)(3), 39 John Marshall L. Rev. 827, 955 (2007).

 Fourth, to follow the Roberts/Scalia logic to its conclusion, if such a prerequisite claim under Section 502(a)(1)(B) against a defined contribution plan succeeds, ERISA itself would prohibit the plan’s trustee from taking assets out of the other participant accounts to restore the benefits due to the plaintiff participant. Once allocated to accounts, those assets represent the “accrued benefit” of each account owner, see ERISA Section 3(23)(B), which cannot be forfeited unless and until the account owner terminates employment without being fully vested under the plan’s vesting schedule, see ERISA Sections 204(a), 204 (b)(2). Cf. ERISA Section 204(h) (prohibiting cutbacks of accrued benefits by plan amendment). Unfortunately, no one could give the Supreme Court a direct, statutory-based reason why Justice Scalia’s hypothetical approach was illegal. 

    Moreover, ERISA Section 204 is duplicated as Code Section 411, which is a requirement for the plan to remain tax-qualified. Consequently, the Scalia scenario would result in a federal court remedy (“robbing Peter [other participants] to pay Paul [the plaintiff participant]”) that itself disqualifies the plan and results in immediate taxation of the vested accrued benefits for all of the plan’s participants. Hardly the sort of scenario Congress intended to promote retirement income security and encourage employers to sponsor qualified retirement plans. The alternative? The plaintiff participant “wins,” but only gets his money if: (1) the plan itself decides to sue the breaching fiduciary; (2) the plan wins in its lawsuit against the breaching fiduciary; and (3) the breaching fiduciary has the money to pay and does in fact pay. Now we have two drawn-out lawsuits in federal court to resolve what, before yesterday’s oral argument, ERISA experts believed could be resolved directly in a single lawsuit brought under Section 502(a)(2).

 Let’s hope the Justices carefully think through the Section 502(a)(1)(B) approach and then jettison it in favor of a “clean” opinion validating the Section 502(a)(2) claim and saving the more difficult issues surrounding equitable relief under Section 502(a)(3) for another day. As a 502(a)(2) claim, legal relief is available, and lost appreciation in asset value is clearly a “loss.” See Donovan v. Bierwirth, 754 F.2d 1049 (2d Cir. 1985). Although the law professors would love it, the last thing that lower federal court judges (and ERISA practitioners who are counseling employers) need in the area of ERISA claims and remedies is more tea-leaf-like dicta to read, parse, and discern.

Colleen Medill (CM)