ALI-ABA Course of Study ERISA Litigation. February 14-16, 2008 Scottsdale, Arizona. Litigation Against Plan Service Providers

Transcription

1 183 ALI-ABA Course of Study ERISA Litigation February 14-16, 2008 Scottsdale, Arizona Litigation Against Plan Service Providers By Thomas S. Gigot Groom Law Group Washington, D.C.

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3 185 Overview Since ERISA's enactment in 1974, employee benefit plans have grown in size, scope, number, cost and complexity. So too have the professional services needed to administer those plans. To meet these needs, plan sponsors and administrators hire actuaries, accountants, attorneys, recordkeepers, custodians, institutional trustees, investment managers, brokers, investment consultants, disability consultants and other kinds of service providers. Often, an outside service provider handles matters of sizable economic consequence for the plan's participants or sponsor. When something goes wrong, the service provider becomes a potential target for litigation. This outline summarizes issues and tactical considerations in litigation brought against plan service providers. I. POSSIBLE SOURCES OF GOVERNING LAW A. When, and how, does ERISA regulate a service provider's conduct? 1. Part 4 of Title I of ERISA imposes duties and standards of conduct on a person to the extent that the person functions as a plan "fiduciary" within the meaning of ERISA 3(21). In general, a person is a fiduciary to the extent that the person (i) manages plan assets, (ii) administers the plan, or (iii) gives investment advice for a fee. See 29 U.S.C. 1002(21). Labor Department Interpretive Bulletin 75-5 takes the position that "attorneys, accountants, actuaries and consultants performing their usual professional functions will ordinarily not be considered fiduciaries" unless the facts and circumstances show that the professional has undertaken one of the three functions or roles that can make someone an ERISA fiduciary. 29 C.F.R (D-1). Consistent with the Labor Department's Interpretive Bulletin, courts generally have declined to treat "licensed" professionals (e.g., attorneys, accountants, and actuaries) as ERISA fiduciaries, see, e.g., Custer v. Sweeney, 89 F.3d 1156 (4 th Cir. 1996) (affirming dismissal of fiduciary liability claims against attorney); Painters of Phila. v. Price Waterhouse, 879 F.2d 1146 (3d Cir. 1989) (affirming dismissal of fiduciary liability claims against accountant); Gallagher Corp. v. Mass. Mutual Life Ins. Co., 105 F. Supp (N.D. Ill. 2000) (actuary not an ERISA fiduciary), absent extraordinary circumstances tending to show that the professional usurped a fiduciary function. Martin v. Feilen, 965 F.2d 660, 669 (8 th Cir. 1992) (accountant functioned as fiduciary).

4 186 The fiduciary or non-fiduciary status of other kinds of service providers can be less clear. Directed Trustees: DOL Field Assistance Bulletin (Dec. 17, 2004) (directed trustee is an ERISA fiduciary, but with limited responsibilities); In re WorldCom ERISA Litigation, 263 F. Supp. 2d 745 (S.D.N.Y. 2003). Recordkeepers/TPAs: Haddock v. Nationwide Financial Services, Inc., 419 F. Supp.2d 156 (D. Ct. 2006) (individual account plans' record keeper that exercised discretion to select plans' investment options functioned as ERISA fiduciary); Health Cost Controls of Illinois v. Washington, 1999 WL (7 th Cir. 1999) (firm hired by plan administrator to administer plan's claims for reimbursement from participants held to be an ERISA fiduciary); Pohl v. National Benefits Consultants, Inc., 956 F.2d 126 (7 th Cir. 1992) (provision of ministerial claims administration services held to be non-fiduciary function); Harpole v. Entergy Arkansas, Inc. and T.Rowe Price, 197 F. Supp. 2d 1152 (E.D. Ark. 2002) (TPA can't be sued for payment to wrong beneficiary where plan committee, rather than TPA, approved beneficiary's claim); Smith v. Champion International Corp., 28 EBC 2847 (D. Conn. 2002) (long-term disability advisor hired to make non-binding recommendations concerning eligibility for benefits is not ERISA fiduciary); Flanagan Lieberman Hoffman & Swain v. TransAmerica Life Annuity Co., 228 F. Supp. 2d 830 (S.D. Ohio 2002) (TPA responsible for performing discrimination testing did not have fiduciary responsibility for determining whether plan contributions were proper). Bowling v. Chase Manhattan Bank, No. CV W-1 (W.D. Mo. Oct. 20, 2000) (acknowledging that provision of recordkeeping services to individual account plan was a non-fiduciary function); Brief of Secretary of Labor as Amicus Curiae in Tittle v. Enron Corp., No. H (S.D. Tex.) (where single firm provided both recordkeeping and custodial/directed trustee services, arguing that provider's role as directed trustee imposed fiduciary duties with respect to provider's actions as recordkeeper). See also DOL Amicus Brief to 5 th Circuit in Milofsky v. Amerian Airlines, Inc., 2003 WL (N.D. Tex. 2003), arguing that the question whether a recordkeeper can be sued as a fiduciary in connection with claims resulting from black-out needs further development before disposition. Investment Consultants: Bell v. Executive Committee, 191 F. Supp. 2d 10 (D.D.C. 2001) (assuming, for purposes of motion to dismiss,

5 187 that firm engaged to provide advice on asset allocation and investment manager selection was an ERISA fiduciary). Pharmacy Benefits Manager: Bickley v. Caremark RX, Inc., 416 F.3d 1325 (11 th Cir, 2006) (claim that PBM breached duty, as alleged fiduciary, by receiving undisclosed fees dismissed because plaintiff failed to exhaust administrative remedies under plan); Chicago Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463 (7 th Cir. 2007) (PBM not ERISA fiduciary for purposes of negotiating prices with drug retailers or for purposes of formulary and drug switching features of plan); Glanton v. AdvancePCP, Inc., 465 F.3d 1123 (9 th Cir. 2006) (plan participants, who suffered no judicially cognizable injury, lacked standing to sue PBM, as alleged fiduciary, under ERISA). 2. Regardless of whether a service provider functions as an ERISA fiduciary, the prohibited transaction rules under ERISA 406 and 408 can have the effect of indirectly regulating the compensation that may be paid to a service provider from plan assets. In particular, compensation paid to a party in interest from plan assets must be under a "reasonable arrangement" and in a "reasonable" amount. See 29 C.F.R b-2 (applying the general statutory exemption for services or office space). DOL has proposed a new regulation that would require, as a condition for the exemption, that the provider disclose the compensation it will receive, either directly or indirectly, and any conflicts of interest. 72 Fed. Reg (Dec. 13, 2007). 3. ERISA 103(a)(3) requires the administrator of a plan to engage an accountant to examine plan's financial statements, and ERISA 103(a)(4) requires the administrator of a defined benefit plan to engage an actuary to prepare the annual actuarial statement reported on Schedule B to Form ERISA (and parallel provisions in Internal Revenue Code) establish minimum funding standards for defined benefit plans, and those standards detail how actuarial statement is to be prepared. New ERISA 305 establishes additional reporting and certification requirements for multiemployer plan actuaries. 4. Where a violation of Title I occurs, ERISA's civil enforcement provisions allow courts to award appropriate equitable relief against a service provider, regardless of whether the provider functions as a ERISA fiduciary. Harris Trust & Savings Bank v. Salomon Smith