ERISA Litigation Update

ERISA Litigation Update 2008 Western Benefits Conference Lynn L. Sarko, Esq. Keller Rohrback L.L.P. 1201 Third Avenue, Suite 3200 Seattle, WA 98101 lsarko@kellerrohrback.com Nicholas J. White Reish Luftman Reicher & Cohen 11755 Wilshire Boulevard 10th Floor Los Angeles, CA 90025

Types of ERISA Litigation • ERISA Company Stock Cases • Cash Balance Pension Plan Cases • 401(k) Excessive Fee Cases • 403(b) Annuity

Types of Employer Stock Cases • Fraud or illegal activities • Enron, WorldCom, Countrywide, Merrill Lynch • Failing business/industry downturn/aging business • Delphi, Ford, GM • Stock drop/bad investment • Avaya, IPALCO

Significant 2007-08 Employer Stock Cases • LaRue v. DeWolff, Boberg & Assoc.,128 S. Ct. 1020 (2008) • In re Syncor ERISA Litig.,516 F.3d 1095 (9th Cir. 2008) • Kirschbaum v. Reliant Energy, Inc., --- F.3d ----, 2008 WL 1838324 (5th Cir. 2008) • Harzewski v. Guidant Corp., 489 F. 3d 799 (7th Cir. 2007) • Langbecker v. EDS Corp., 476 F.3d 299 (5th Cir. 2007) • Lively v. Dynegy,2007 WL 685861 (S.D. Ill. 2007) • DOL Amicus Curiae Brief in Lively v. Dynegy on Appeal in 7th Cir.

LaRue v. DeWolff, 128 S. Ct. 1020 (2008) • Supreme Court holds that an individual plan participant may bring an action under ERISA § 502(a)(2) for breach of fiduciary duty that affect only one participant’s individual plan account. • The Court found that such an action is still an action brought on behalf of the plan, even though the breach affected only one plan account. Id. at 1026. • Former participants have standing for fiduciary breach claims. Id. at 1026 n.6.

In re Syncor ERISA Litig., 516 F.3d 1095 (9th Cir. 2008) • Ninth Circuit reverses district court’s summary judgment award in favor of defendants. • Not a duty to diversify case. • Ninth Circuit declines to adopt the “‘Moench presumption,’ under which fiduciaries of ESOPs are presumed to have acted consistently with ERISA in their decisions to invest assets in employer stock.” Id. at 1102. • A company need not be on the brink of collapse in order for plaintiff to state a claim for imprudent investment of plan assets.

Kirschbaum v. Reliant Energy, Inc.,--- F.3d ----, 2008 WL 1838324 (5th Cir. 2008) • Fifth Circuit affirms district court’s summary judgment award in favor of defendants. • Court rejects failure to diversify claim. • Negligent misrepresentation claim by fiduciary communications • Court holds there is insufficient evidence to overcome the Moench presumption

Rogers v. Baxter Int’l. Inc., 521 F.3d 702 (7th Cir. 2008) • Seventh Circuit affirms denial of motion to dismiss. • Court rejects defense argument that participants not be allowed to use ERISA to get around limits added to the securities laws by the PSLRA, as (1) this is not a securities suit, and (2) the PSLRA does not amend or supersede ERISA. Id.

Pugh v. Tribune Co., 521 F.3d 686 (7th Cir. 2008) • Seventh Circuit affirms securities fraud and ERISA motions to dismiss in favor of defendants. • On the ERISA case, the $90-$95 million charge against earnings due to circulation fraud, which represented less than 2 percent of one year’s revenues for Tribune, “would not cause a reasonable fiduciary to believe that the plan’s drafters would have intended that he cease compliance with the ESOP’s direction to invest exclusively in Tribune securities.” Id. at 702.

Nelson v. Hodowal (IPALCO), 512 F.3d 347 (7th Cir. 2007) • Following partial grant of summary judgment, the district court entered judgment in favor of defendants after bench trial. Plaintiffs appealed only one issue – that the management fiduciaries had an obligation to disclose that they were going to, and did, dump their own stock in company. • Seventh Circuit affirmed.

Edgar v. Avaya, Inc., 503 F. 3d 340 (3d Cir. 2007) • Third Circuit Affirms Motion to Dismiss • Because one of the purposes of EIAP’s is to promote investment in employer securities, they are subject to many (but not all) of the same exceptions that apply to ESOPs. Id. at 347. • Holds that Moench v. Robertson, 62 F.3d 553 (3rd Cir. 1995) and the ESOP abuse of discretion standard applies in the case. Id. • Missed Earnings Forecast; Employer Stock declines 20% from $10.69 to $8.01 per share. Minor drop in stock price alleged in complaint doesn’t satisfy Moench. Id. at 348.

DiFelice v. U.S. Airways, Inc.497 F.3d 410 (4th Cir. 2007) • The district court had certified a class and after a bench trial granted judgment to U.S. Airways. Fourth Circuit affirms but misfires. • Court finds that section 404(c) safe harbor provision does not apply to a fiduciary’s decisions to select and maintain certain investment options within a participant-driven 401(k) plan. Id. at 418 n.3.

Harzewski v. Guidant Corp.,489 F.3d 799 (7th Cir. 2007) • Seventh Circuit held that ERISA standing includes “participant” that are former employees who have cashed out their plan benefits, as the named plaintiffs in this case did, if they may become eligible to receive a benefit of any type from the plan. • In regards to Constitutional standing, Seventh Circuit holds that “[o]bviously the named plaintiffs have standing to sue in the sense of being entitled to ask for an exercise of the judicial power of the United States as that term in Article III of the Constitution has been interpreted, because if they win they will obtain a tangible benefit.” Id. at 803.

Langbecker v. EDS Corp., 476 F.3d 299(5th Cir. 2007) • Fifth Circuit reverses class certification; significant holding on ERISA § 404(c). • Method of attacking the class focused on participant investment choices and the inability to determine what date constituted a breach of fiduciary duty.

Lively v. Dynegy,2007 WL 685861 (S.D. Ill. 2007) • Court finds unpersuasive seller/purchaser conflict theory. • Court certifies class post-EDS. Individual investment histories are irrelevant and do not defeat typicality. • Court finds ERISA § 404(c) irrelevant, citing DOL position that selecting the investment options in a plan is not a function in the exercise of which plan fiduciaries are shielded from liability by the statute. Id. at n.5.

DOL Amicus Curiae Brief inLively v. Dynegy on Appeal in 7th Cir. • Plaintiffs’ Claim Alleging That The Defs’ Imprudence With Regard To The Co. Stock Fund Caused Plan Losses Is A Derivative Claim On Behalf Of The Plan Under ERISA Sections 409 and 502(a)(2) • Purported Intra-Class Conflicts Do Not Defeat Class Certification • ERISA Section 404(c) Does Not Provide A Defense To Pls’ Allegations That The Fiduciaries Imprudently Maintained The Dynegy Stock Fund

Cash Balance Plan Litigation • Cash Balance Plans are Defined Benefit Plans that Mimic Elements of Defined Contribution Plans in terms of having a purported individual account balance. • In the 1980’s, conversion to Cash Balance Plans caused a reduction to the rate of future benefit accrual for participants • Reduction to accrued benefit correlated to age. • Purported benefits of Cash Balance Plans: Lump Sum payments and Portability, both of which could be achieved without age being a factor in the equation.

Age Discrimination Test • Issue for Courts is whether to apply ERISA test for age discrimination under the ERISA section for defined benefit plan (“rate of an employee’s benefit accrual”, i.e. age 65 annuity), or ERISA section for defined contribution plan (“the rate at which amounts are allocated, i.e. pay credits”).

Age Discrimination Circuit Courts finding no age discrimination claim: • Cooper v. IBM (7th Cir. 2006) • Register v. PNC (3d Cir. 2007) • Drutis v. Rand McNally & Co. (6th Cir. 2007)

Age Discrimination District Courts upholding Age Discrimination Claim: • In re JP Morgan Chase Cash Balance Litig., 460 F. Supp. 2d 479 (S.D.N.Y. 2006) • In re Citigroup Pension Plan ERISA Litig., 470 F. Supp. 2d 323 (S.D.N.Y. 2006) • Richards v. FleetBoston, 427 F. Supp. 2d 150 (D. Conn. 2006) District Courts rejecting Age Discrimination Claim • Buus v. WaMu, WL 4510311 (W. D. Wa. 2007)

Age Discrimination Cases on Appeal: • Hurlic v. Southern Cal. Gas Co., Ninth Circuit – oral argument Feb. 15, 2008

Other types of Cash Balance Plan Litigation • Notice Claims: • ERISA § 204(h) • SPD & SMM claims • ERISA §§ 104(b) & 105(a) • District Courts upholding notice claims include: Buus v. WaMu Pension Plan, 2007 WL 4510311 (W.D. Wash. Dec. 18, 2007); Amara v. CIGNA Corp., 2008 WL 450421 (D. Conn. Feb. 15, 2008). • Backloading: • 133 1/3 % rule, ERISA § 204(b)(1)(B): Only rule with which cash balance plans can comply, because they are “career average” plans • Plan Benefit Calculation Cases

Excessive Fee Litigation • In general, plaintiffs in Excessive Fee cases allege that pursuant to ERISA §§ 502(a)(2) and 502(a)(3), defendants breached their fiduciary duties to the plan by: (1) imprudently causing the plan to pay fees that were excessive and not incurred solely for the benefit of the participants and beneficiaries; and (2) failing to communicate honestly, clearly and accurately with participants concerning the fees and to disclose to participants and to the other fiduciaries (or discovery themselves) how much the plan paid in fees and expenses and who receives the compensation and for what services through revenue sharing.

DOL Amicus Curiae Brief inHecker v. Deere & Co., on Appeal in 7th Cir. • District Court dismissed this excessive fee case. • Plaintiffs appealed to Seventh Circuit and the DOL filed an amicus stating: • As articulated previously, e.g., DOL Amicus Curiae Brief in Lively v. Dynegy supra, ERISA section 404(c) does not provide a defense to Plaintiffs’ allegations that the Defendants imprudently and disloyally selected investment choices with excessive fees, and EDS was wrongly decided; • A fiduciary’s duty to disclose material information can arise from his core statutory duty of prudence and loyalty, not just from specific reporting and disclosure requirements; and • District Court erred in holding that the Fidelity Defendants were not fiduciaries with respect to the selection of funds based solely on the plan documents, without regard to the Fidelity Defendants’ actions.

Section 403(b) Annuity Plan Litigation • Cutting edge ERISA litigation • Cases allege employee associations and insurance companies “established or maintained” a “plan,” and therefore governed by ERISA • Complaints allege that teacher unions and insurance companies that offer annuities to school district employees breached fiduciary duties under ERISA

Kennedy v. Plan Administrator for DuPont Savings and Investment Plan (5th Cir. 497 F.3d 426) • QDROs: Are They the Only Way a Divorcing Spouse Can Waive The Right to Receive the Other Spouse’s Pension Benefits? • In Kennedy, the U.S. Court of appeals answered yes to this question. That is, a QDRO is required to cut off a divorcing spouse’s right to receive the other spouse’s pension benefits.

Kennedy, continued • The issue for the Firth Circuit was whether Liv’s (ex-wife) divorce decree constituted a waiver of her rights as a savings and investment plan (SIP) beneficiary. To this question, the appeals court answered a resounding no! How did the Fifth Circuit arrive at this conclusion? Simply put, by finding that ERISA's anti-alienation provision applied, rather than federal common law, and therefore a QDRO was required to eliminate Liv’s ERISA rights under the SIP. • In reaching its conclusion that the anti-alienation provision controlled, the appeals court had to dispense with the two key arguments raised by the Estate. The first was that a “waiver” is different from an “assignment” or “alienation,” and therefore Liv’s waiver was not prohibited by the anti-alienation provision.

Kennedy, continued • The Estate’s second argument was that the facts of this case satisfied either of two exceptions to the anti-alienation rule, established by Fifth Circuit case law. Specifically, the Estate argued that the anti-alienation rule does not apply where there has been (i) a knowing and voluntary waiver of benefits or (ii) a “settlement” regarding benefits.

Kennedy, continued • The Fifth Circuit rejected the Estate’s arguments regarding the applicability of these case law exceptions to the anti-alienation rule. In so doing, it highlighted the fact that the cases cited did not involve divorce decrees and, therefore, did not involve ERISA’s QDRO rules. The appeals court noted that the QDRO rules constitute ERISA’s mechanism for eliminating a spouse’s interest in a pension plan, and that Congress intended that only that mechanism be used. • So, there you have it. The only means by which a divorcing spouse can waive his or her right to receive the other spouse’s pension benefits is through a domestic relations order meeting all the rules necessary to make the order a QDRO, right? Well, maybe. That is, keep in mind that this is a Fifth Circuit ruling only. So, strictly speaking, it is controlling only in the Firth Circuit. More important, on February 19, 2008, the U.S. Supreme Court agreed to review the Firth Circuit’s decision in Kennedy.

Pappas v. Watson Wyatt & Company, D. Conn. No. 3:04CV304 (EBB), 11/20/07) • Wrongful Termination: Can Plaintiffs Recover for Lost Appreciation & Earnings In Their Retirement Plan Accounts? • Plaintiffs in wrongful termination cases often seek recovery for "missed" contributions, the taxes and penalties they pay for early distributions, and loss of appreciation and earnings on the amounts withdrawn from their retirement accounts. Are all of these types of losses recoverable? Do any limitations apply? • Recovery is generally available for missed contributions, taxes and penalties — assuming the amounts claimed can be substantiated through plan and related accounting records. However, the answers are far less clear when it comes to the issue of recovering for loss of appreciation and earnings on investments, because the right to recover depends on the results of a complex analysis of causation.

Pappas, continued • The District Court disagreed with Watson Wyatt’s contention that Title VII did not permit recovery of the types of expenses and losses at issue in Pappas’s claim for additional damages. In so doing, it cited to numerous cases in which courts had awarded damages under Title VII involving a wide range of past and future pecuniary and nonpecuniary losses incurred by “victims of Title VII violations” after they had left employment. These awards covered, for example, moving expenses, job search expenses, medical and psychiatric expenses, emotional pain and suffering, inconvenience (including costs associated with excess commuting time for a plaintiff who had to drive a longer distance to a new job) and “loss of enjoyment of life.”

Pappas, continued • Notwithstanding the District Court’s fairly lengthy discussion of the broad range of injuries compensable under Title VII, it explained that there are important limits on a plaintiff’s right to recovery in this instance, and these limits are based on the principle of “proximate cause.” Specifically, the District Court cited to EEOC Guidance instructing that “[c]ompensatory damages may be had for any proximate consequences which can be established with requisite certainty.” The principle of proximate cause has traditionally been used to limit a plaintiff’s recovery in a negligence case. And, as the District Court acknowledged, proximate cause is an “elusive concept.” In essence, under the principle of “proximate cause” a defendant will be liable for all damages resulting from his unlawful actions only to the extent those actions were a “substantial factor” in a sequence of events leading to the injury, and the injury was “reasonably foreseeable or anticipated” as a natural consequence of the defendant’s actions.

Pappas, continued • As benefits professionals, we often seek In my practice, I often have occasion to advise plan sponsors ─ as well as their professional advisors ─ regarding benefit claims. This type of work requires close analysis of a plan’s written terms and, if there are any ambiguities, it may require the plan’s ERISA Administrator to interpret the plan; hopefully, the plan document confers absolute discretion on the Administrator in this regard. • Benefit claim cases that “go wrong” often highlight a mix of drafting and administrative errors that could have been relatively easily avoided through better drafting and attentiveness to plan’s benefit claim procedures. An excellent example of this is found in Strom.

Livick v. Gillette Company, D. Mass., (No. 05-11094-JLT, 6/12/07) • Detrimental Reliance on Inaccurate Estimate of Benefits ─ Do Plan Participants Have a Remedy? • A plan participant was provided with a substantially overstated estimate of his benefits, which ─ arguably ─ he relied on to his detriment. The mistake was identified and communicated to the participant before the benefit could be paid to him. By that time, however, the participant had relied on the estimate in making decisions about when and on what basis to retire. What are a participant’s legal options in this instance, if any?

Livick, continued • Livick alleged that Gillette’s negligence amounted to a breach of their fiduciary duty to him. Livick asked the court to remedy the alleged breach under ERISA § 502(a)(3), by using its equitable power to issue an injunction ordering Gillette to pay him the benefits originally quoted to him. He also argued (although not specifically) that, in the alternative, the court should equitably estop Gillette from paying benefits in a manner inconsistent with their previous representations. • To gain anything by his lawsuit, Livick had to come up with something more than a traditional benefits claim. This is because a benefits claim would only give him what he was entitled to under the Plan, and he wanted the greater benefits indicated to him by Brundige and the Pension Estimator. For this reason, Livick endeavored to make a couple of arguments outside the Plan document, based on notions of “justice” and “fairness.” That is, Livick sought equitable relief based on either or both of two legal theories.

Livick, continued • Breach of Fiduciary Duty under ERISA §502(a)(30: Gillette was negligent in hiring and maintaining Brundige in his position, because he did not possess the proper experience and Gillette did not provide him with adequate training and supervision. Livick further alleged that Brundige was negligent in providing him with inaccurate benefit information, and that his negligence was imputed to Gillette. Livick asserted that these negligent acts amounted to breaches of fiduciary duty, and that in this instance ERISA §502(a)(3) provides for the type of relief he was seeking. • The District Court found that Brundige acted as nothing more than a conduit for information that was readily available to Livick, and not beyond his understanding. And, for those reasons, Brundige was performing a ministerial task ─ and not carrying out a fiduciary function. Therefore, Brundige’s actions could not amount to a breach of fiduciary duty.

Livick, continued • Estoppel: Livick asserted that, aside from the provisions of ERISA, the court should draw upon its equitable powers “to estop Defendants from paying him less that the full amount Brundige assured Plaintiff than he would have received.” In short, Livick argued that he relied on a promise from Gillette to his detriment. And, to make him whole, justice requires Gillette to make good on its promise. • Specifically, the District Court found that “the plan contains no ambiguity such that a reasonable person could disagree. It is not disputed that the controlling language of the plan explains that Plaintiff will only receive a benefit for his time at Gillette.” Livick’s estoppel argument was a nice try from the perspective of a legal theory, but without a showing of ambiguity it was dead in the water.

Strom v. Siegel Fenchel & Peddy, P.C. Profit Sharing Plan, 2nd Cir., No. 06-3107-cv, 8/15/07) • As benefits professionals, we often have occasion to advise plan sponsors ─ as well as their professional advisors ─ regarding benefit claims. This type of work requires close analysis of a plan’s written terms and, if there are any ambiguities, it may require the plan’s ERISA Administrator to interpret the plan; hopefully, the plan document confers absolute discretion on the Administrator in this regard. • Benefit claim cases that “go wrong” often highlight a mix of drafting and administrative errors that could have been relatively easily avoided through better drafting and attentiveness to plan’s benefit claim procedures. An excellent example of this is found in Strom v. Siegel Fenchel & Peddy, P.C. Profit Sharing Plan, 2nd Cir., No. 06-3107-cv, 8/15/07).

Strom, continued • “ERISA regulations 29 C.F.R. § 2560.503-1(g)(1) require that notice to the claimant of an adverse benefit determination “shall set forth, in a manner calculated to be understood by the claimant . . . [a] description of the plan’s review procedures and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action.” In the absence of such a description, the court found that there was no evidence that “Strom forewent her Cash Plan claims ‘knowingly and voluntarily,’ (Laniok v. Advisory Comm. of Brainerd Mfg. Co. Pension Plan, 935 F.2d 1360, 1367 (2d Cir. 1991), as would be required for her to waive those claims . . .”

Strom, continued • The Strom case highlights, once again, the importance of carefully and precisely drafting plan documents with an eye to the particular facts and circumstances of the plan sponsor’s business ─ simply capturing all the tax-qualification rules is often far from being enough. If SFP had drafted the Plans and any amendments to (i) adequately define the terms “partner” and “officer,” as used by the firm, and (ii) precisely indicate the benefits to which they were entitled, SFP likely would have avoided the expenditure of an enormous amount of time, effort and money.

Strom, continued • In addition, the Strom case is an excellent example of how important it is to thoroughly understand and apply a plan’s administrative provisions ─ and particularly those having to do with benefit claims. Again, SFP likely could have saved itself a ton of grief if it had simply responded to Strom’s claim with the same level of careful reasoning it undoubtedly had to employ in representing its clients. That is, SFP’s Decision should have cited to the Plans’ documents and any relevant corporate documents, as authority, and specifically explained how those documents precluded Strom from accruing benefits under the increased contribution formula. SFP did not even attempt to address Strom’s claim in this fashion ─ this is absolutely astounding considering that SFP is a law firm and, thus, in the business of addressing problems in this fashion! Admittedly, even if SFP had responded to Strom on this basis, it would have had a significant challenge, due to the fact that the Plans were not well drafted when came to explaining who was entitled to what. Thus, in Strom, it all started with poorly drafted plan documents, and things just went downhill from there. It didn’t have to go there!

Thurman v. Pfizer Inc., 6th Cir., No. 06-1571, 5/8/07 • Second Circuit Ruling Involving ERISA Preemption Gives Employers Even More Reason to be Careful About “Promising” Benefits During Employment Negotiations • In explaining the basis for its ruling, the Sixth Circuit primarily focused on two key issues: • ERISA Does Not Preempt Pre-Employment Benefit Promises • ERISA Preempts Expectation Damages, But Not Reliance Damages

Thurman, continued • In summarizing its conclusion in Thurman, the Sixth Circuit chose its words carefully to make clear the limits and desired impact of its decision. Specifically, the court stated as follows: We stress that our holding is a narrow one, constrained to the particular scenario presented in the case at bar. What we have here is simply a case of a person who left his old employer based on promises made by his new employer. These promises could have concerned anything — for example, an increase in wages, more vacation days, or free parking. Here, these promises just so happened to concern retirement benefits. We see no reason to bind employers to some promises used to induce acceptance of an employment offer, but give them a ‘get out of jail free card’ when their promises concern the scope of a plan governed by ERISA. Notably, allowing Thurman to proceed on his state-law claims does not threaten any of ERISA’s objectives. We are not creating an additional enforcement mechanism under which individuals in Thurman’s situation may collect ERISA plan benefits. SeeLeBlanc, 153 F.3d at 147-48. Rather, they may bring state-law claims for losses that are so far attenuated from an ERISA plan that preemption is simply unwarranted. As explained above, those who are already participants or beneficiaries under an ERISA plan when a misrepresentation is made must still bring a claim for breach of fiduciary duty under § 1132. Further, our ruling in no way alters the methods by which plans are administered, or how the actions of plan administrators are regulated. Id. Nor does our ruling create conflicts between state law and federal law. Id.

Thurman, continued • What Is The Impact of Thurman? Thurman makes it clear that breach of fiduciary duty claims under ERISA § 1132(a) are limited to plan participants and beneficiaries. Previously, some defendants had been successful in arguing that state-law claims relating to a retirement plan and arising out of pre-employment negotiations were preempted by this civil-enforcement section of ERISA. Thurman also draws a distinction between “expectation” and “reliance” damages when it comes to a state-law claim of misrepresentation with respect to participation in a retirement plan. While expectation damages are preempted under ERISA § 1144(a), reliance damages are not. This is because those type of damages are “too tenuous, remote, or peripheral” to “relate to” an ERISA-governed retirement plan.

2008 Western Benefits Conference ERISA Litigation Update Lynn L. Sarko, Esq. Erin Riley, Esq. Amy Williams-Derry, Esq. Jennifer Tuato’o Keller Rohrback L.L.P. 1201 Third Avenue, Suite 3200 Seattle, WA 98101 lsarko@kellerrohrback.com

ERISA Litigation Update