Wednesday, February 20, 2008

Reflections on the LaRue Decision

401k_2 Now that I have had a chance to read in some detail the Supreme Court's decision in LaRue v. DeWolff, Boberg & Associates, I am more convinced than ever that this case will go down as one of the more important ERISA remedies cases in recent memory; more important than merely its essential holding that, "that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account." Nevertheless, many additional issues that could have been decided were avoided or not addressed by the full court and still need to be considered in the future.

Here are my reflections on the ERISA case of the day:

1.    Justice Stevens was the perfect person to write the majority opinion (joined by Souter, Breyer, Ginsburg, and Alito) because twenty-three years earlier he wrote the decision in the Russell case, which found that consequential damages were not permitted under a Section 502(a)(2) breach of fiduciary duty claim. His understanding that Russell applied to the the meaning of a plan loss in the defined benefit plan context as opposed to the defined contribution plan (401(k)) context of this case, carries considerable weight in trying to decide the relationship between LaRue and Russell.  In fact, and this is rank speculation on my part, I wonder if Alito joined the progressives because he was particularly swayed by the meaning of that case given to it by its original author.

2.    This was some thought that the Court would also decide whether LaRue could bring his breach of fiduciary claim under the catch-all provision of Section 502(a)(3) for "appropriate equitable relief."  Although that was the provision LaRue filed his case under, the Court decided that it was not necessary to address issues about whether make whole relief is available under (a)(3) in order to come to a decision in this case. So the issue of make whole relief under (a)(3), aptly highlighted by Justice Ginsburg in her 2004 concurrence in Davila will have to await another day.

3.     A point not only stressed by the majority, but bought into by Justices Thomas and Scalia, in their textualist concurring opinion in the result, is that a loss is a loss is a loss when considered what is a plan loss under Section 409 in the defined contribution context.  As Stevens put it: "Although record does not reveal the relative size of petitioner's account, the legal issue under Section 502(a)(2) is the same whether his account includes 1% or 99% of the total assets of the plan.

4. I could not agree less with the concurrence written by Chief Justice Roberts, and joined by everybody's favorite swing vote, Justice Kennedy, that this case is really not a fiduciary breach case under 502(a)(2), but rather a denial of benefit case under 502(a)(1)(B), subject to exhaustion and Firestone discretion.  I think it is interesting that Justice Scalia did not join Roberts opinion since he asked most of the questions in the oral argument about (a)(1)(B) alternative, but it seems clear that he and Thomas believed this was a fiduciary case and not a benefits case being mischievously recast.

5. Justice Roberts concurrence has the potential to completely undermine the holding of the LaRue majority.  Roberts writes that lower federal courts in the future should consider whether 502(a)(1)(B) applies in a case like this and if so, whether there must be exhaustion of internal remedies before the 502(a)(2) issue is reached, if at all.  There is the argument under Varity that if appropriate relief is available under (a)(1)(B), there is no need to consider an (a)(2) remedy. This would be disastrous for ERISA participants because the (a)(1)(B) remedy would not provide any meaningful remedy to make up their losses from their individual accounts.

6.  Indeed, even the majority leaves open in footnote 3 of its opinion the possibility that LaRue may still lose the case on the merits, including because there is still the question open of "whether he was required to exhaust remedies set forth in the Plan before seeking relief in federal court pursuant to Section 502(a)(2).  That being said, I think there is an important difference between recharacterizing this case as an (a)(1)(B) case (Robert's view, mistaken I believe), and whether one must exhaust internal remedies under (a)(2) like one must under (a)(1)(B).

7.    Justice Stevens also seems to approve of the loss of profit point under Section 409 in footnote 4 of the opinion.  Since at least 1985's Bierwirth decision by the Second Circuit, loss of the plan does not go to whether the plan made money or lost money, but whether the plan could have made more profit if fiduciary duties had not been breached. From my own recollection, this is the first type that the Supreme Court has sanctioned the Bierwirth formulation in this context.

8.  Kudos to Susan Stabile, Bruce Wolk, and John Langbein for having their employee benefit case book relied upon by Justice Stevens in his opinion.

9.    Double kudos to Ed Zelinky, "Mr. ERISA," for not only having his Yale Law Journal piece relied upon twice by the majority, but for apparently providing the necessary distinction between Russell and LaRue that the Court relied upon!!!

10. Also kudos to Radha Pathak for organizing the amicus brief of eleven law professors that I joined which opposed the motion to dismiss on mootness grounds filed by DeWolff in this case. Justice Stevens mentioned in footnote 6 of the majority opinion why he agreed with us and others that the case was not moot: simply because a participant as defined by ERISA includes a former employee with a colorable claim to benefits.


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One of the common themes of many of my posts, as well as of many of the judicial opinions, concerning fiduciary obligations of companies sponsoring 401(k) plans is the need to bring in outside expertise to manage the plans, particularly... [Read More]

Tracked on Feb 27, 2008 7:35:47 AM


Some are predicting a "slew of meritless litigation" arising from LaRue in light of the declining stock market and the opening of an additional avenue to sue retirement plans. If these suits are filed do you think employers can effectivelly limit their fiduciary responsibility by hiring and monitoring competent experts? What is your take on fiduciary liabilty based on LaRue particularly as it relates to contracts with service providers? Does an employer breach its fiduciary responsibilty by executing a contract with a provider that limits the nonfiduciary provider's liability to gross negligence?

Posted by: Michael Moore | Feb 21, 2008 8:51:36 AM

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