ALI-ABA Course of Study ERISA Litigation. May 11-13, 2006 Boston, Massachusetts. Fiduciary Litigation Under ERISA. September 2005

Transcription

1 129 ALI-ABA Course of Study ERISA Litigation May 11-13, 2006 Boston, Massachusetts Fiduciary Litigation Under ERISA September 2005 By Robert N. Eccles Gary S. Tell Karen M. Wahle O'Melveny & Myers LLP Washington, D.C. O'Melveny & Myers LLP

2 2130

3 131 I. FIDUCIARY STATUS: WHO IS A FIDUCIARY A. The Statutory Provision 1. ERISA section 3(21)(A) provides that, except in the case of an investment company described in section 3(21)(B), a person is a plan fiduciary to the extent he (i) exercises discretionary authority or control over plan management or any authority or control over management or disposition of plan assets, (ii) renders investment advice regarding plan assets for a fee or other compensation or has authority or responsibility to do so, or (iii) has any discretionary authority or responsibility in plan administration. B. Fiduciary Positions 1. An early Department of Labor ( DOL ) regulation states that certain positions, such as plan trustee or plan administrator, by their very nature carry fiduciary status. 29 C.F.R at D-3. Some courts find fiduciary status simply from occupancy of one of these positions (which is merely a shorthand version of the functional test, described below, i.e., some positions inherently carry the authority to perform fiduciary functions). See NLRB v. Amax Coal Co., Div. of Amax, Inc., 453 U.S. 322 (1981) (Congress intended Taft-Hartley plan trustees to be fiduciaries and not representatives of bargaining parties); Donovan v. Mercer, 747 F.2d 304, 309 (5th Cir. 1984) (citing DOL regulation); Narda Inc. v Rhode Island Hosp. Trust Nat l Bank, 744 F. Supp. 685 (D. Md. 1990); Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, 635 (W.D. Wis. 1979) (same). 2. Certain positions are, without question, defined as fiduciary positions under the statute. For example, under section 402(a), a named fiduciary must be appointed with overall fiduciary responsibility for the plan. See 29 C.F.R at FR-3; see also In re ESCO Mfg. Co., 50 F.3d 315 (5th Cir. 1994) (discussing requirement); Confer v. Custom Eng'g Co., 952 F.2d 34, 36 (3d Cir. 1991) (same); Yeseta v. Baima, 837 F.2d 380, 384 (9th Cir. 1988); Birmingham v. SoGen-Swiss Int 1 Corn. Retirement Plan, 718 F.2d 515, (2d Cir. 1983); Arakelian v. National Western Life Ins. Co., 680 F. Supp. 400, 404 (D.D.C. 1987). However, ERISA also permits a plan document to name a fiduciary who has that status only for a particular function. See 29 C.F.R at D-4; Daniels v. National Employee Benefit Servs., Inc., 858 F. Supp. 684, 690 (N.D. Ohio 1994); but see Arakelian v. National Western Life Ins. Co., 680 F. Supp. 400, 404 (D.D.C. 1987) (in case involving only one named fiduciary, court stated that a named fiduciary is fiduciary for all purposes). An investment manager must, under section 3(38), acknowledge fiduciary status. Lowen v. Tower Asset Mgmt., 829 F.2d 1209, 1218 (2d Cir. 1987). See also Kenny v. Quigg, 820 F.2d 665 (4th Cir. 1987) (bank appointed as fiduciary under consent order is subject to judicial review of its compliance with ERISA s fiduciary obligations). C. Fiduciary Functions 1. More frequently, courts have described the test of determining fiduciary status as a functional one, i.e., does the person or firm have or exercise any of the functions described in section 3(21)(A). A number of courts have emphasized the broad sweep of this functional definition. Beddall v. State Street Bank & Trust Co., 137 F.3d 12 (1st Cir. 1998) ( the

4 132 statute also extends fiduciary liability to functional fiduciaries ); Olson v. E.F. Hutton & Co., 957 F.2d 622, 625 (8th Cir. 1992); Acosta v. Pacific Enter., 950 F.2d 611, 618 (9th Cir. 1991) (a person s actions, not the official designation of his role, determine whether he enjoys fiduciary status ); Sladek v. Bell Sys. Mgmt. Pension Plan, 880 F.2d 972, 976 (7th Cir. 1989); Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir. 1988); Blatt v. Marshall & Lassman, 812 F.2d 810, 812 (2d Cir. 1987); Donovan v. Mercer, 747 F.2d 304, 305 (5th Cir. 1984) ( If it Talks Like a Duck... ); Eaves v. Penn, 587 F.2d 453, (10th Cir. 1978); McKinnon v. Cairns, 698 F. Supp. 852, 860 (W.D. Okla. 1988); Brock v. Self, 632 F. Supp. 1509, 1521 (W.D. La. 1986); Eaton v. D Amato, 581 F. Supp. 743, (D.D.C. 1980); Brink v. DaLesio, 496 F. Supp. 1350, (D. Md. 1980), aff. din part and rev d in part, 667 F.2d 420 (4th Cir. 1981); Freund v. Marshall & Ilsley Bank, 485 F. Supp. 629, (W.D. Wis. 1979). Persons who carry out the basic fiduciary functions relating to asset management, plan administration, and provision of investment advice for a fee are routinely held to be fiduciaries. a. Asset Management: Donovan v. Mercer, 747 F.2d 304 (5th Cir. 1984); Trustees of Hotel Employees & Restaurant Employees Int 1 Union Welfare Pension Fund v. Amivest Corp., 733 F. Supp. 1180, 1184 (N.D. Ill. 1990); Procacci v. Drexel Burnham Lambert, Inc., 1989 U.S. Dist. LEXIS (E.D. Pa. 1989) (firm may still perform fiduciary functions even if not designated as investment manager); Whitfield v. Cohen, 9 EBC 1739 (S.D.N.Y. 1988). Most of the case law under sections 404 and 406, cited below, deals with fiduciaries who manage plan assets. b. Administration: Administrative Comm. v. Gauf, 188 F.3d 767 (7th Cir. 1999) (named plan administrator, who is given express authority to resolve all questions concerning the administration, interpretation, or application of the Plan, is fiduciary); IT Corp. v. General Am. Life Ins. Co., 107 F.3d 1415 (9th Cir. 1997) (third party administrator of health plan may be a fiduciary despite contract limiting it to ministerial duties), cert. denied, 522 U.S (1998); Brock v. Hendershott, 840 F.2d 339, 342 (6th Cir. 1988) (person who, through collective bargaining role, selects plan service provider thus becomes a plan fiduciary for selection purpose); Credit Managers Ass n v. Kennesaw Life & Accident Ins. Co., 809 F.2d 617, 626 (9th Cir. 1987); Brock v. Self, 632 F. Supp. 1509, 1521 (W.D. La. 1986); Sixty-Five Sec. Plan v. Blue Cross & Blue Shield, 583 F. Supp. 380, (S.D.N.Y. 1984); Eaton v. D Amato, 581 F. Supp. 743, (D.D.C. 1980). Where a person merely performs ministerial, rather than discretionary, administrative functions, no fiduciary status arises. See 29 C.F.R ; Harold Ives Trucking Co. v. Spradley & Coker, Inc., 178 F.3d 523 (8th Cir. 1999) (although contract of third party administrator specified that it would have no discretionary authority, and would provide only ministerial services, it nonetheless acted as a fiduciary when it assumed discretionary authority); Michigan Affiliated Healthcare v. CC Sys., 139 F.3d 546 (6th Cir. 1998) (claims administrator of health benefit plan is not a fiduciary since it had no discretion or decision-making authority); Klosterman v. Western Gen. Mgmt., 32 F.3d 1119 (7th Cir. 1994) (claims administration company s adjudication of claims for health insurance benefits did not involve discretionary authority and did not render company a fiduciary within meaning of ERISA); Pacificare v. Martin, 34 F.3d 834 (9th Cir. 1994) (third-party administrators are not fiduciaries if they merely perform ministerial functions, including the preparation of financial reports); Kerns v. Benefit Trust Life Ins. Co., 992 F.2d 214, 217 (8th Cir. 1993); Pohl v. National Ben. Consultants, 956 F.2d 126, 129 (7th Cir. 1992) (definition of fiduciary does not encompass insurance companies when they are engaged in the performance of 2

5 133 their normal contractual claims-handling responsibilities); Crocco v. Xerox Corn., 956 F. Supp. 129 (D. Conn. 1997) (firm that served as case management claims review administrator for employer s medical benefit plan was not ERISA fiduciary and, therefore, not liable as fiduciary for its alleged failure to pay benefits to plan participant; benefit determinations were advisory only and all final determinations are solely the independent responsibility of the employer), aff'd on other grounds, 137 F.3d 105 (2d Cir. 1998); Protocare of Metro. N.Y., Inc. v. Mutual Assoc. Adm r, Inc., 866 F. Supp. 757, 762 (S.D.N.Y. 1994) (claims administrator was not a fiduciary because it merely applied the rules determining eligibility for benefits and had no power to set plan policies or procedures). c. Investment Advice: Dudley Supermarket, Inc. v. Transamerica Life Ins. & Annuity Co., No , 2002 U.S. App. LEXIS (1st Cir. Aug. 30, 2002) (financial services firm that provided individualized investment advice and recommended level of employer contributions deemed to be a fiduciary); Thomas Head & Greisen Employees Trust v. Buster, 24 F.3d 1114 (9th Cir. 1994) (person who sold trust deeds to plan as investments acquired fiduciary status as investment advisor), cert. denied, 513 U.S (1995); Daniels v. National Employee Benefit Servs., 858 F. Supp. 684, 691 (N.D. Ohio 1994) (brokers were fiduciaries by virtue of regularly giving investment advice to plan trustees, where trustees always followed advice and did not seek advice from others); Schetter v. Prudential Bache-Sec., Inc., 695 F. Supp. 1077, 1083 (E.D. Cal. 1988) (concluding, without analysis, that stock brokers who recommend securities are fiduciaries); but see Cottrill v. Sparrow. Johnson & Ursillo, Inc., 74 F.3d 20 (1st Cir. 1996) (partner in investment firm which invested plan s assets was not a fiduciary, despite facts that he both recommended the investment in question and executed the transaction); Schloegel v. Boswell, 994 F.2d 266, 273 (5th Cir.) (facts showing that insurance agent worked closely with plan sponsor falls far short of the type of relationship described in the DOL Regulation ), cert. denied, 510 U.S. 964 (1993); Farm King Supply Inc. Integrated Profit Sharing Plan & Trust v. Edward D. Jones & Co., 884 F.2d 288 (7th Cir. 1989) (applying DOL regulation on investment advice to hold that stock brokers were not, under facts of case, fiduciaries even where virtually all of plan s assets consisted of stocks purchased at brokers suggestion); American Fed n of Unions, Local 102 Health & Welfare Fund v. Equitable Life Assurance Soc., 841 F.2d 658, (5th Cir. 1988) (holding that provision of investment advice did not reach level sufficient to confer fiduciary status); Eaves v. Penn 587 F.2d 453, (10th Cir. 1978); Harris Trust & Sav. Bank v. Salomon Bros. Realty Corp., 20 EBC 1449 (N.D. Ill. 1996) ( influence over the trustees investment decisions does not amount to effective control over plan assets ); Reich v. McManus, 883 F. Supp. 1144, 1149 (N.D. Ill. 1995) (summary judgment inappropriate where plan trustee had stated that all investment decisions were based exclusively on broker s advice and broker had told at least one trustee that the trustees had to follow his advice or find anew consultant); Brown v. Roth, 729 F. Supp. 391, 397 (D.N.J. 1990) ( provision of advice on two occasions is too infrequent to raise the inference that advice was provided on a regular basis ); Brink v. DaLesio, 496 F. Supp. 1350, (D. Md. 1980), aff d and rev d in part on other grounds, 667 F.2d 420 (4th Cir. 1981). 2. The appointment of plan fiduciaries is itself a fiduciary function. 29 C.F.R at D-4; Hickman v. Tosco Corn., 840 F.2d 564, 566 (8th Cir. 1988); Ed Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, (7th Cir. 1986); Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1325 (9th Cir. 1985); Leigh v. Engle, 727 F.2d 113, 116 (7th Cir. 1984); see also Birmingham v. SoGen-Swiss Int 1 Com. Retirement Plan, 718 F.2d 515, 3