Recent Developments in ERISA

Editor

Kathleen Cahill Slaught (Chair)

Seyfarth Shaw LLP
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31st Floor
San Francisco, CA 94105
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Contributors

To Disclose Or Not During ERISA Administrative Review —

Jon Karelitz
Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

Stunning Development – The Ninth Circuit Enforces an ERISA Plan Arbitration and Class Action Waiver Provision

Michael W. Stevens
Jonathan A. Braunstein

Seyfarth Shaw LLP
560 Mission Street
31st Floor
San Francisco, CA 94105
(415) 397-2823
[email protected]
[email protected]
www.seyfarth.com

Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

ERISA Preemption – The Courts of Appeal Continue to Rule as They Await Further Supreme Court Attempts to Define, Once and For All, Its Limiting Principles

Mark Casciari
Ian Morrison

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

The Trump Administration Wants You to Know, Guidance is NOT Law!

Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

No Partnership, No Common Control, No Withdrawal Liability: Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability

Jessica Stricklin

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000

Alan Cabral
Ryan Tzeng

Seyfarth Shaw LLP
2029 Century Park East
Suite 3500
Los Angeles, California 90067-3021
(310) 277-7200
[email protected]
[email protected]
www.seyfarth.com

Beware of the “Overshare”: Construe Requests for ERISA Plan Documents Narrowly!

Mark Casciari
Sarah Touzalin

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

Supreme Court Remands Case Back Seeking Clarification of the Dudenhoeffer Pleading Standard

Jim Goodfellow

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

Kathleen Cahill Slaught

Seyfarth Shaw LLP
560 Mission Street
31st Floor
San Francisco, CA 94105
(415) 397-2823
[email protected]
www.seyfarth.com

Supreme Court’s Sulyma Ruling Toughens ERISA’s “Actual Knowledge” Standard & Makes Dismissal of Fiduciary Breach Actions More Unlikely

Ian Morrison

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

Will the ACA Case Now Before the Supreme Court Make it Harder for ERISA Fiduciary Breach Plaintiffs to Establish Standing?

Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

ERISA Fee Motions After COVID-19 — A Substantive and Procedural Review

Rebecca Bryant
Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

Whose Law? Where? When? — Risk Management for ERISA Plans in Uncertain Times

Richard Loebl

Seyfarth Shaw LLP
620 Eighth Avenue
New York, New York 10018-1405
(212) 218-3319
[email protected]
www.seyfarth.com

Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution

Michael W. Stevens

Seyfarth Shaw LLP
560 Mission Street
31st Floor
San Francisco, CA 94105
(415) 397-2823
[email protected]
www.seyfarth.com

Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

Limits To ERISA’s Equitable Remedies — What The Supreme Court’s Latest Securities Act Decision Tells Us

Michael W. Stevens

Seyfarth Shaw LLP
560 Mission Street
31st Floor
San Francisco, CA 94105
(415) 397-2823
[email protected]
www.seyfarth.com

Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

The 10th Circuit’s New Interpretation of What is Mandated under ERISA’s Notice Requirements May have Far Reaching Effects On Plan Administrator’s Duties

Rebecca K. Bryant
Ian H. Morrison
Sam M. Schwartz-Fenwick

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
[email protected]
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Transgender Patients Remain Protected: District Court Blocks HHS Rule From Taking Effect

Emily Miller

Seyfarth Shaw LLP
Seaport East
Two Seaport Lane, Suite 300
Boston, MA 02210-2028
(617) 946-4800
[email protected]
www.seyfarth.com

Ben Conley
Sam Schwartz-Fenwick

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]

Countdown to the Supreme Court’s ERISA Preemption Oral Argument in Rutledge — Two Noteworthy Case Developments

Jules Levenson
Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
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How to Minimize Judicial Review of ERISA Fiduciary Decisions

Ronald Kramer
Mark Casciari

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
[email protected]
www.seyfarth.com

First Circuit Rules That Private Equity Funds Are Not Responsible For Portfolio Company Withdrawal Liability

Bryan M. O’Keefe

Seyfarth Shaw LLP
975 F Street, N.W.
Washington, DC 20004-1454
(202) 463-2400
[email protected]
www.seyfarth.com

Ronald Kramer

Seyfarth Shaw LLP
233 South Wacker Drive
Suite 8000
Chicago, Illinois 60606-6448
(312) 460-5000
[email protected]
www.seyfarth.com

Samuel Rubinstein

Seyfarth Shaw LLP
620 Eighth Avenue
New York, New York 10018-1405
(212) 218-3340
[email protected]
www.seyfarth.com


Table of Contents hide

§1.1 To Disclose Or Not During ERISA Administrative Review — The Fourth Circuit Weighs In With An Affirmative Answer

In Odle vs. UMWA 1974 Pension Plan, the Court of Appeals for the Fourth Circuit reversed a district court’s decision on summary judgment in favor of a pension plan’s fiduciaries (in this case, the board of trustees for a coal industry multiemployer fund).  The case involved a dispute over service credit towards a deceased participant’s pension.  The plan fiduciaries had denied a claim by the participant’s surviving spouse, concluding that 13.5 years of the participant’s service was actually performed in a position that was not classified as eligible under an industry-wide union agreement.  The administrative record indicated that the fiduciaries based their denial, in part, on an audit of employer timesheet records that was not disclosed to the claimant.  The claimant alleged as well that she requested the audit records, and the plan refused to provide them.  The Fourth Circuit held that “by failing to disclose that audit during the administrative process, the Plan denied [the claimant] the ‘full and fair review’ of her claim that she was entitled to under ERISA.”

The regulations under ERISA Section 503 require that a claimant “be given reasonable access to documents relevant to her claim,” The regulations provide that documents, records and other information are “relevant” if they are “submitted, considered, or generated in the course of making the benefit determination.”

Under the Odle holding, a fiduciary should disclose all documents upon which a claim or appeal decision was based, unless there is a good reason not to.  Such disclosure should provide the claimant with an opportunity to consider all relevant information, and use that information in making arguments in support of the claim.  Of course, there may be compelling reasons not to disclose, under certain circumstances, and Odle does not address all possible arguments that cut against disclosure.

Jon Karelitz and Mark Casciari

§1.2 Stunning Development — The Ninth Circuit Enforces an ERISA Plan Arbitration and Class Action Waiver Provision

In Dorman v. Charles Schwab Corp., No. 18-15281, 934 F.3d 1107 and 2019 WL 3939644 (Aug. 20, 2019), the Ninth Circuit reversed course, overruled precedent, and enforced an arbitration provision in an ERISA 401(k) plan that mandated individual, and not class, arbitration of ERISA § 502(a)(2) and (3) claims.

In Dorman, a 401(k) participant brought suit on behalf of a putative class of plan participants and beneficiaries, alleging that the fiduciaries had breached their fiduciary duties by investing assets in the funds affiliated with the defendant.  However, nine months prior to the named plaintiff’s termination of employment and nearly a year before his account withdrawal, the plan was amended to expressly include an arbitration provision binding the plan to arbitration, and forbidding class actions.

The defendant moved to compel arbitration.  The district court denied the motion on multiple grounds, ruling that ERISA claims cannot be subject to mandatory arbitration; the arbitration provision was added after the named plaintiff’s participation in the plan began; and the plaintiff’s claims were brought on “behalf of the plan,” rather than as an individual, and thus could not be subject to the plan’s arbitration clause.

Thirty-five years ago, in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), the Ninth Circuit had held that ERISA claims were not subject to arbitration.  Amaro reasoned that an arbitral forum may “lack the competence of courts to interpret and apply statutes as Congress intended.” In Dorman, however, the Ninth Circuit recognized that later Supreme Court cases, including American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), had held that arbitrators were competent to interpret and apply federal statutes.  Thus, Dorman expressly overruled Amaro.

In an unpublished companion opinion, the Ninth Circuit addressed and reversed other holdings by the Dorman district court.  Although the Ninth Circuit had recently held, in Munro v. Univ. of S. Cal., 896 F.3d 1088 (9th Cir. 2018), that Section 502(a)(2) claims belong to the plan, rather than the individual, the critical difference in Dorman was that the plan had been amended to include an arbitration provision binding the plan.  Thus, the Ninth Circuit found, the plan “expressly agreed” that all ERISA claims should be arbitrated.  The Ninth Circuit also held, citing LaRue v. DeWolff Boberg & Assocs., Inc., 552 U.S. 48 (2008), that although a § 502(a)(2) claim may belong to the plan, losses are inherently individualized in the context of a defined contribution plan such as the one at issue.  The Ninth Circuit reversed and remanded with instructions to the district court to compel arbitration.

The Dorman plaintiff filed a petition for en banc review, so it remains to be seen whether the latest Dorman decisions will stand.  On October 2, 2019, the Ninth Circuit ordered the defendants to respond to Dorman’s Petition.  This indicates that the Ninth Circuit may agree to rehear its prior decision that sent Dorman’s claims to arbitration, on an individual basis.

The Ninth Circuit has been the most hostile to arbitration, so Dorman (unless vacated) is a monumental change that could be the start of trend favoring ERISA plan arbitration.  Arbitration in lieu of court litigation has pros and cons that need to be considered carefully before mandating arbitration and a class action waiver in ERISA plans, even though the court most hostile to forced arbitration now seems to allow it.

Michael W. Stevens, Jonathan A. Braunstein and Mark Casciari

§1.3 ERISA Preemption — The Courts of Appeal Continue to Rule As They Await Further Supreme Court Attempts To Define, Once and for All, Its Limiting Principles

The federal Employee Retirement Income Security Act (ERISA) has been effective, as a general matter, since 1974.  Its section 514 preempts state laws that “relate to” ERISA plans.  The United States Supreme Court has wrestled, in 18 cases, with how to define, and thus limit, “relate to,” as everything can be said to be related to everything else.  Compounding matters is that section 514 lists specific exceptions to “relate to” preemption.  It is our expectation that the Supreme Court will agree to hear more ERISA preemption cases in the future.

In the meantime, the Courts of Appeal continue to rule on the limits to ERISA preemption, often with opposite results.

In Rudel v. Hawai’i Management Alliance Ass’n, 2019 U.S. App. LEXIS 27371 (9th Cir. Sept. 11, 2019), an ERISA plan participant received ERISA medical plan benefits after a motorcycle accident.  Plan terms allowed it to seek reimbursement from a third party tortfeasor, to the extent the tortfeasor paid general damages, up to the amount of the plan payout.  The participant sued to clarify the plan’s reimbursement right, or lack thereof to be more precise, relying on a Hawai’i statute that invalidated general damage insurance reimbursement rights.  The Ninth Circuit said that the state law “related to” an ERISA plan, but found no preemption, relying on the statutory exemption to ERISA preemption in favor of state laws that regulate insurance.

The Ninth Circuit found that the Hawai’i statute regulated insurance because it was directed at insurance reimbursement rights.  The Court added that the state statute affected the risk pooling arrangement between the insurer and the insured by impacting the terms by which insurance providers must pay plan members.

In Dialysis Newco, Inc. v. Cmty. Health Sys. Grp. Health Plan, 2019 U.S. App. LEXIS 27418 (5th Cir. Sept. 11, 2019), however, the Court of Appeals for the Fifth Circuit found ERISA preemption.  The ERISA medical plan at issue contained a valid anti-claim assignment provision.  A third party health care provider sued to recover on what it claimed was a valid assignment of plan benefits, by relying on a state statute requiring plan administrators to honor assignments made to healthcare providers.

The Fifth Circuit found that the state statute “related to” the ERISA plan because it impacted a “central matter of plan administration” and interfered with “nationally uniform plan administration.” The Court said, because states could—and seemingly already do—impose different requirements on when such assignments would be honored, permitting one state law to govern the plan would interfere with nationally uniform plan administration.

These two cases show how the courts continue to grapple with the nearly infinite nuances of ERISA’s remarkably broad preemption provision.  Given the historic interest of the Supreme Court on ERISA preemption, it is likely only a matter of time until this or a related ERISA preemption question is again before that Court.  ERISA preemption is bound to get more interesting before it gets boring.

Mark Casciari and Ian Morrison

§1.4 The Trump Administration Wants You to Know, Guidance is NOT Law!

Employee benefit lawyers, including employee benefit litigators, have historically been inclined to rely on federal agency guidance that does not technically have the force of law.  Lawyers have followed this practice to appease the agency—the first line of potential opposition—and thus allow a client to re-focus quickly on business goals.  Another reason is that the federal courts have for years given deference to federal agencies.  So why not reflexively back away from a fight when the agency is likely to win in court anyway?

The difficulty with a “guidance-as-gospel” approach is that federal agency officials and regulators are not elected and thus cannot enact legislation.  Deference may operate as a shield for guidance that is outside what Congress has legislated, and is based on an executive-branch political agenda.

This is the view of the Trump administration.

One of the new executive orders attempts to stop reliance on guidance that goes beyond a statute, or notice and comment regulations (which have the force of law, if consistent with the governing statute).  The other order requires agencies to establish a single, searchable toolbar that links to all of the already issued guidance.  Additionally, the website must note that the guidance does not have the force and effect of law, unless as authorized by law or incorporated into a contract.  The new executive orders direct that enforcement action cannot be based only on guidance.  Enforcement must be based on the governing statute.

The force of the new executive orders may extend beyond the life of the Trump administration.

Federal courts increasingly question the wisdom of the historic deference given to guidance.  Noteworthy is Kisor v. Wilkie, 139 S. Ct. 2400 (2019), wherein a veteran sought PTSD disability benefits from the Department of Veterans Affairs.  The agency partially denied his claim and the Court of Appeals for the Federal Circuit affirmed by deferring to the agency’s interpretation of what it said was an ambiguous regulation.  The Supreme Court reversed and remanded the case back to the Court of Appeals.  Justice Elana Kagan wrote the majority opinion, and stated that a court should defer to the agency only after satisfying itself that the regulation is “genuinely” ambiguous, and if so, “reasonable.” The Court added that the agency’s interpretation must be an official position, as opposed to an ad hoc statement, must implicate its substantive expertise, and be otherwise “fair and considered.”

To be sure, Kisor does not involve guidance, but its holding—federal courts must not reflexively defer to agency action—applies with the same (or greater) force to guidance.  So, employers and fiduciaries should rely only on guidance they believe is fully consistent with a careful analysis of the governing statutory law.

Mark Casciari

§1.5 No Partnership, No Common Control, No Withdrawal Liability: Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability

In a 2013 decision, the District Court of Massachusetts found that the two Sun Capital PE funds were not only engaged in “trade or business,” but also were a partnership acting under “common control” with a bankrupt portfolio company, and therefore, liable for the portfolio company’s $4.5 million withdrawal liability to a multiemployer pension plan incurred upon its bankruptcy.  Under ERISA, the common control standard is met if there is an 80% ownership interest.  The district court found that even though the two PE funds had individual investment stakes in the portfolio company of only 70% and 30% respectively, they were acting as a partnership and so their ownership interests should be aggregated, thereby exceeding the 80% threshold.

The PE funds appealed the decision and the First Circuit reached its decision: no partnership, no common control, no withdrawal liability.  Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370 (1st Cir. Nov. 22, 20190.  The First Circuit applied factors derived from an old tax court case, Luna v. Commissioner, and concluded that the PE funds’ activities did not rise to the level of a partnership.  Among the factors considered, the PE funds were not acting in concert when making investments, conducted business under separate names, filed separate tax returns, kept separate books, and disclaimed any sort of partnership.  The court also noted the fact that the PE Funds were formed as LLCs further demonstrated an intent not to form a partnership.

Importantly, the court stated that it was reluctant to impose withdrawal liability on the PE funds when there was no clear congressional intent to do so, and no guidance from the PBGC.

But beware: While this is a significant victory for PE funds in general, the court’s decision was very fact specific, and it did not “reach other arguments that might have been available.” It will be interesting to see if other circuit courts follow this precedent.

Ryan Tzeng, Jessica Stricklin, and Alan Cabral

§1.6 Beware of the “Overshare”: Construe Requests for ERISA Plan Documents Narrowly!

Section 104(b)(4) of ERISA requires that plan administrators provide certain plan documents to a participant or beneficiary (or their authorized personal representative) upon written request, including copies of the summary plan description, plan document, annual report, trust agreement, contract and bargaining agreement, as well as documents that fall within a catch-all of “other instruments under which the plan is established or operated.” When document requests are received, it’s not at all uncommon for the request to include a long list of documents, often times repetitive, leaving the plan administrator to weed through the request and identify the documents that must be provided under ERISA.

In Theriot v. Building Trades United Pension Trust Fund, et al. (E.D. La. Nov. 4, 2019), plaintiff alleged that the defendants, a multi-employer pension fund and its trustees, failed to timely produce plan documents in violation of Section 104(b)(4), entitling the plaintiff to statutory penalties of up to $110 per day.

In 2017, the plaintiff requested “a complete copy of the plan agreement, including [her deceased mother’s] application and all other correspondence from her to the Fund.” The defendants provided a copy of the plan document, current through 2017.  The plaintiff alleged that the defendants should have known that she was also requesting other plan documents, including an outdated version of the plan document and summary plan description, even though she did not specifically request them.

In 2018, the plaintiff made a second request, also including a long list of additional plan documents.  The defendants provided only copies of the 2017 plan document, trust agreement and summary plan description in effect as of the dates specifically requested, as well as copies of Forms 5500 and attachments.  Plaintiff, however, alleged that the defendants failed to produce any of the other documents from the 2018 request.  The court determined that certain of the document requests were not sufficiently clear, some of the requested documents did not exist and some were not relevant to the plaintiff understanding her rights under the plan.  The court also determined that a reasonable plan administrator would not have known that the plaintiff was requesting other documents beyond the 2017 plan document.  And notably, the court agreed with the majority of other circuits that Section 104(b)(4) did not encompass the fidelity bonding policy, any errors and omissions insurance policy or any fiduciary insurance policy.

Takeaway: The Theriot case shows that narrowly construing Section 104(b)(4) can be defensible.  It also can be advisable.  Any lawsuit challenging fiduciary conduct must allege plausible facts to survive a motion to dismiss and enter into expensive discovery.  There is no sound reason to make the plaintiff’s task in this regard easier by over-producing documents under Section 104(b)(4).

Sarah Touzalin and Mark Casciari

§1.7 Supreme Court Remands Case Back Seeking Clarification of the Dudenhoeffer Pleading Standard

In Retirement Plans Committee of IBM v. Jander, the Supreme Court, in a unanimous opinion, clarified the its opinion in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), which set forth the duties that administrators of Employee Stock Ownership Plans (“ESOP”) owe to participants, and when they are required to act on inside information.

In this case, plaintiffs alleged that the IBM’s ESOP fiduciaries violated their duty of prudence under ERISA by continuing to invest the plan’s funds in IBM’s stock even though they knew the stock’s market price was artificially inflated.  Under Dudenhoeffer, a plaintiff bringing such a claim must allege that a fiduciary in the same position could not have concluded that taking a different action “would do more harm than good to the fund.” The question presented to the Court in Jander was whether the plaintiffs’ complaint can survive a motion to dismiss when they make only general allegations that the costs of undisclosed fraud grow over time.

Though the Court agreed to take the case, it ultimately declined to opine on the issue presented.  Rather, it remanded the matter to the Second Circuit for further consideration of the SEC’s position on whether an ERISA based duty to disclose inside information, that is not otherwise required to be disclosed by the securities laws, would otherwise conflict with the objectives of the insider trading and corporate disclosure requirements contained in the securities laws.  IBM argued that ERISA imposed no duty to act on inside information.

Thus, the Supreme Court left unresolved the question presented regarding the pleading standard.  It did, however, provide some helpful guidance to fiduciaries of ESOP plans in that it emphasized that ERISA’s duty of prudence does not require a fiduciary to break the law.  Thus, if taking an action on inside information would violate the securities law, there is no violation of ERISA for not taking that action.  But we will also wait to see how the SEC views ERISA’s duty of prudence in this context.

Jim Goodfellow and Kathleen Cahill Slaught

§1.8 Supreme Court’s Sulyma Ruling Toughens ERISA’s “Actual Knowledge” Standard & Makes Dismissal of Fiduciary Breach Actions More Unlikely

Plaintiff Christopher Sulyma filed a putative class action in October 2015, alleging that Intel’s investment committee and other plan administrators breached their fiduciary duties by utilizing “alternative investments” that lagged behind high-performing index funds.  The Northern District of California granted summary judgment to the committee based on plan disclosures that clearly revealed the disputed investments and were published more than three years before the plaintiff filed suit.  The Ninth Circuit reversed the ruling, finding that Sulyma’s deposition testimony that he did not recall reviewing plan disclosures created a dispute of fact as to his “actual knowledge” and precluded summary judgment.

Affirming the Ninth Circuit, the Supreme Court unanimously found in an opinion authored by Justice Alito that although ERISA does not define “actual knowledge,” it plainly requires awareness of the “relevant facts” provided in the plan’s disclosures.  In addition, Congress’s language in ERISA clearly identifies whether a particular statute of limitations is triggered by what a plaintiff actually knows or what he reasonably should know.  The language in § 1113(2), however, clearly notes that only a plaintiff’s “actual knowledge” triggers the 3-year limitations period for a fiduciary breach action, rather than what he should have known from disclosures provided to him.

Justice Alito, however, stressed that that a participant’s assertion that he did not know about the disclosed information related to the alleged breach might not be the end of the story.  “Actual knowledge” may be proved through inference from circumstantial evidence.  For instance, electronic records may show that a plaintiff reviewed plan disclosures and acted in response.  If a plaintiff’s denial of knowledge is “blatantly contradicted” by the factual record, the Supreme Court instructed trial courts to act accordingly.

The case provides succor to the plaintiffs’ bar because the Court could have found that mere delivery of plan disclosures triggers the three-year limitations period.  While disclosures are not an automatic shield, they form an important part of the defense in most cases.  To rebut claims of lack of knowledge, plans may wish to consider adopting electronic procedures to confirm that participants have reviewed disclosures, such as requiring participant acknowledgments.

Ian H. Morrison

§1.9 Will The ACA Case Now Before The Supreme Court Make It Harder For ERISA Fiduciary Breach Plaintiffs To Establish Standing?

On March 2, 2020, the United States Supreme Court granted certiorari in California v. Texas, No. 19-840, which appeals the decision of the Court of Appeals for the Fifth Circuit that struck down the individual mandate to the Affordable Care Act (ACA).

In Texas v. United States (as the case was styled previously), the Fifth Circuit held that the two individual plaintiffs who were self-employed residents of Texas had standing to challenge the ACA, despite not being subject to a financial penalty.  There was no penalty because the 2017 Tax Cuts and Jobs Act (TCJA) set the penalty for not maintaining individual health insurance at zero dollars.  According to the Fifth Circuit, the individual plaintiffs had standing because they demonstrated the “increased regulatory burden” that the individual mandate imposes.

The Supreme Court is keenly interested whether a federal court plaintiff has a sufficient injury to sue in a federal forum when she can show no other harm besides a technical statutory violation.  In Spokeo v. Robbins, the Supreme Court held that, although Congress can create federal claims, those claims can only be litigated in federal court as long as the plaintiff alleges a “concrete” injury (i) that affects the plaintiff in a personal and individual way, (ii) that is traceable to the defendant, and (iii) that is repressible by the federal judge.

It is possible that the Supreme Court may dismiss the individual plaintiffs in Texas v. United States for lack of standing, finding that they have not been harmed by a mere obligation to maintain individual health insurance without a corresponding penalty.  Such a ruling would seemingly comport with Spokeo, which suggests that private plaintiffs may not sue to enforce statutory obligations when they have not yet been harmed by violations of those obligations.  ERISA fiduciaries thus might expect a drop in class action filings, especially as all private claims for breaches of fiduciary duty under Section 502(a)(2) and (a)(3) may be brought only in federal court, and not in a state court.  A technical ERISA statutory violation may not be found “concrete and particularized,” or “actual or imminent,” and may instead be considered “conjectural” or “hypothetical,” buzz words used to determine the outcome of Spokeo arguments to dismiss.

Mark Casciari

§1.10 ERISA Fee Motions After COVID-19 — A Substantive and Procedural Review

Two interesting lower court decisions on attorney fee motions were recently issued from Judge Susan Brnovich of the federal District of Arizona and Judge Beau Miller in the District Court of Harris County, Texas of the 190th Judicial District.  One decision presents a refresher course on the merits of ERISA fee motions and the other used the novel procedural approach of conducting a Zoom video hearing in lieu of live appearances.

The first decision, United Air Ambulance LLC, v. Cerner Corporation, et al., Case No. CV-17-04016 (U.S. Dist. Ct. D. Ariz., Apr. 14, 2020), addressed when prevailing ERISA plaintiffs may recover fees as instructed by the Court of Appeals for the Ninth Circuit.  Judge Brnovich denied ERISA Section 502(g)(1) fees after carefully considering the following factors: (1) degree of the opposing party’s culpability or bad faith, (2) the ability of the opposing party to satisfy an award of fees, (3) whether an award of fees against the opposing party would deter others from acting under similar circumstances, (4) whether the party seeking fees sought to benefit all participants and beneficiaries under an ERISA plan or to resolve a significant ERISA legal question, and (5) the relative merits of the parties’ positions.  The Court found that these factors split evenly, save for two, which tipped the scales against an award of fees to the plaintiff.  The deterrence factor weighed against plaintiff because the case involved a unique set of facts, so no one else was likely to encounter the scenario at issue.  The resolution of the case was not a benefit to all participants under the plan and resolved no significant legal question about ERISA, as it focused on procedural shortcomings.  This decision is a reminder that, unlike the case with other federal statutes such as Title VII of the Civil Rights Act of 1964, ERISA fee motions by prevailing a plaintiff (or defendant) should not always be given a presumption of success.

In Ahmed v. Texas Fair Plan Assoc., Case No. 2016-09336, Judge Miller considered whether to grant a fee motion in an insurance case.  Following the Texas Supreme Court’s order mandating that all hearings be conducted remotely, the Court held a one-day bench trial via Zoom.

The post–COVID-19 world will present many new ways of doing business, and we can foresee federal judges experimenting with Zoom hearings in lieu of expensive and now unwelcome travel.  A good place to start may be with fee motions, as they are ancillary to the merits of the case.  Video hearings will present new challenges for lawyers and clients, not the least of which are video quality and reliability, and maintaining eye contact in a virtual world.  Savvy ERISA attorneys are likely to improve their command of video appearances and confront the unique challenges of video persuasion, as we enter the brave, new world of the e-trial attorney.

Rebecca Bryant & Mark Casciari

§1.11 Whose Law? Where? When? — Risk Management for ERISA Plans in Uncertain Times

The COVID-19 pandemic seems likely to spawn many claims for ERISA benefits, whether under health, retirement or disability plans, and now is the time to consider anew proactive risk management steps.  A recent decision from the Court of Appeals for the Tenth Circuit, Ellis v. Liberty Life, No. 19-1074 (10th Cir. May 13, 2020), illustrates the particular importance of the risk management tool of including a favorable choice of law provision in an ERISA long-term disability plan that provides benefits through an insurance policy.

The issue in Ellis was whether the federal district court’s review of the plan administrator’s denial of long-term disability benefits was subject to an abuse of discretion standard or subject to de novo review.  The lawsuit was filed in Colorado.  Colorado’s insurance regulations, like those in many states, forbid insurance policies from giving insurers, plan administrators or claims administrators discretion to interpret the policy’s terms in making benefits decisions.  Such laws have been challenged by relying on ERISA’s general preemption of state law that relates to an ERISA plan, but that preemption provision contains an exception for state laws regulating insurance.

However, the plan here contained a choice of law provision stating that if there was an issue of state law, then Pennsylvania law governed.  The employer was both incorporated and headquartered in Pennsylvania.  Unlike Colorado, Pennsylvania does not have an insurance law that prohibits discretionary clauses in insurance policies.  The question was whether the choice of law provision should be honored.

The Court held that such a clause should be enforced so long as the chosen state has a valid connection to the plan.  As the employer was both incorporated and headquartered in Pennsylvania, the Court found the choice of law provision applied and thus reviewed the claim for abuse of discretion.  Applying this standard, the Court affirmed the decision of the insurer.

Employers should take the opportunity now to review their ERISA plans to consider adding risk management provisions.  And such provisions may go beyond a choice of law.  For example, we cannot but wonder if the Ellis case would have proceeded more smoothly to its ultimate conclusion if there had been a forum selection clause mandating that the litigation be held in Pennsylvania.  In addition, the defendant likely could have avoided this entire inquiry if the plan sponsor had drafted a plan document, separate from the insurance certificate, that vested the insurer with discretion.  There are other plan-based risk management tools, such as plan limitations or arbitration provisions, which might be applied in other situations.

Richard Loebl and Mark Casciari

§1.12 The Supreme Court Further Narrows Federal Court Jurisdiction Over an ERISA Complaint, Relying on Article III of the Constitution

In Thole v. U.S. Bank et al., No. 17-1712 (June 1, 2020), the U.S. Supreme Court affirmed dismissal of ERISA claims brought on behalf of participants in a defined benefit pension plan.  The participants alleged financial mismanagement, but suffered no financial loss.  The question was the following: may the participants sue in federal court for monetary relief because of the alleged mismanagement?  The relief demanded by the participants in their complaint was substantial — $750 million and $31 million in lawyer’s fees.

In a 5-4 decision, the majority reasoned that the plaintiffs “would still receive the exact same monthly benefit” even if they won in court, and thus had no concrete injury under the Constitution’s Article III that would allow for the lawsuit (and consequent expensive discovery and possible settlement).  It thus is important to note these controlling preconditions to any lawsuit in federal court that were reiterated in Thole:  (1) a concrete injury, (2) caused by the defendant, that is (3) redressable by the requested judicial relief.

The Article III stakes are high, because the tougher the preconditions for establishing standing to sue in federal court, the harder it will be for class actions to proceed there.  ERISA makes the Thole holding even more consequential because state courts have no jurisdiction to resolve claims of fiduciary breach under ERISA.  That means that plaintiffs cannot resort to state court to avoid Thole when alleging claims to recover excessive 401(k) fees and claims of mere statutory violations.

The majority did say plan participants, in another case, might be able to establish Article III standing if they plausibly allege “that the alleged mismanagement of the plan substantially increased the risk” that benefits would not be paid.  The precise meaning of this proviso will need to be developed in later litigation.  The Court also emphasized that the plan at issue provided a defined benefit, and that a defined contribution plan participant alleging the same wrongdoing might attain Article III standing.

Of note as well is that Justice Thomas, joined by Justice Gorsuch, said that ERISA case law is too tightly bound to the common law of trusts.  This may portend a new line of analysis by the Court in future ERISA cases.  The Court may focus more on the plain reading of the statute, as opposed to traditional notions of trust law not grounded in that statutory language.  Also of note is that Thole represents another effort by the Court, and especially Chief Justice Roberts, to limit federal jurisdiction generally.

The decision is good news for ERISA plans and their sponsors, as it will be more difficult for participants to bring individual or class actions for mere statutory violations that have not impacted benefits.

Michael W. Stevens and Mark Casciari

§1.13 Limits To ERISA’s Equitable Remedies — What The Supreme Court’s Latest Securities Act Decision Tells Us

ERISA’s civil enforcement provisions generally allow the federal courts to award appropriate “equitable” relief.  A permissible equitable remedy is disgorgement, which, in the ERISA context, is restoration to the affected plan of fiduciary profits that were illegally earned with plan assets.

Not much has been written about disgorgement, but Liu v. SEC, 591 U.S. ___, No. 18-1501 (June 22, 2020), a Supreme Court decision interpreting the federal Securities and Exchange Act, offers some insight on its meaning.  (The Court has already ruled that ERISA equitable relief does not permit extra-contractual or punitive damages.  See Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).  So, a disgorgement remedy cannot include extra-contractual or punitive damages.)

In Liu, an 8-1 majority held that “disgorgement” is a permissible equitable remedy in securities’ cases.  The Court observed that disgorgement can be seen as imposing a constructive trust or an accounting, and is equitable in nature even if not specifically mentioned in a statute.  The Court added that disgorgement is not joint and several, and is not limited to cases involving fiduciary breaches.  The Court held that district courts thus may enter disgorgement awards as part of equitable relief, as long as they target net profits, after deducting legitimate expenses.

Justice Thomas dissented, writing that disgorgement is not a traditional form of equitable relief.  He added that a disgorgement remedy, if ordered, must go to the plan participants victimized by the breach, and not to the government.

Notably, Justice Thomas cited ERISA for the proposition that the Supreme Court has never considered general statutory grants of equitable authority as giving federal courts a freewheeling power to fashion new forms of equitable remedies.  He said that the contours of equitable relief were transplanted to our country from the English Court of Chancery in 1789, in contradistinction to remedies at law, which turn on the words used in statutes.

It thus is worth noting that the parameters of ERISA’s equitable relief provisions will continue to be defined by the federal courts.  But it is now clear that disgorgement is an equitable remedy, even if not specifically mentioned in the statute, as long as it is net of legitimate expenses.  Look for more litigation in an appropriate case on the meaning of “profits” and “legitimate expenses.”  And attorneys for plans and plan sponsors should expect the ERISA plaintiff bar to seek disgorgement whenever possible.  Finally, ERISA practitioners should continue to pay close attention to securities’ decisions from the Supreme Court, as the Court continues to address the overlap between the two statutes.  See Retirement Plans Committee of IBM v. Jander, 573 U.S. __, No. 18-1165 (Jan. 14, 2020) (ERISA stock drop decision).

Mark Casciari and Michael W. Stevens

§1.14 The 10th Circuit’s New Interpretation of What is Mandated under ERISA’s Notice Requirements May have Far Reaching Effects On Plan Administrator’s Duties

In ERISA benefit claim litigation, where there is a sufficient delegation of discretionary authority to an administrator in the governing plan document, a court reviewing an administrator’s decision will generally employ the highly deferential abuse of discretion standard of judicial review rather than the de novo standard of review.

In a recent mental health treatment case, the Tenth Circuit added additional requirements before a court will apply the abuse of discretion standard to analyze a benefit claim determination.  Lyn M.; David M., as Legal Guardians of L.M., a minor v. Premera Blue Cross, No. 18-4098, __ F.3d __.  The court ruled that despite a grant of discretion to the administrator in the governing plan document, the deferential standard of review could not apply in litigation as there was no evidence demonstrating plan participants knew that the employer’s plan document containing the discretionary authority clause existed.  Rather, the participants had received only an SPD, which was silent as to discretionary authority.  The Court determined that proper notice requires the plan administrator to either (1) actually disclose its discretionary authority or (2) explicitly disclose the existence of the plan document containing information about the discretionary authority.  The court found that the fact that the governing plan document was available to participants on request was insufficient this new disclosure requirement.

In a biting dissent, Judge Allison H. Eid reasoned that the SPD sufficiently alerted participants that other plan documents existed and were available.  Judge Eid criticized the majority for imposing a duty on plan administrators, found nowhere in ERISA or case law, “to specifically inform members that documents exist that could affect judicial review.”  The dissent correctly noted that while SPDs must be provided and include certain mandatory information regarding benefit eligibility and claim procedures, there is no duty under ERISA to specifically notify participants of documents that may affect the judicial standard of review should their claims be decided in court.

This decision is a significant departure from the standard principle that the standard of review employed by a reviewing court does not turn on whether the document containing that standard was provided to participants during the claim review process.  Only time will tell if other courts will adopt the Tenth Circuit’s position.  For now, benefit plans operating in the Tenth Circuit should evaluate their claim procedures in light of this decision.

Rebecca K. Bryant, Sam M. Schwartz-Fenwick, and Ian H. Morrison

§1.15 Transgender Patients Remain Protected: District Court Blocks HHS Rule From Taking Effect

A Federal Court has temporarily enjoined the Trump administration from putting into effect its recent rule that strips the Affordable Care Act of its gender identity protections.

The section of the final rule on Section 1557 of the Affordable Care Act that stripped the regulations of their gender identity protections was slated to take effect yesterday.  But it did not.

Rather, on August 17, 2020, a federal judge in the Eastern District of New York issued a stay that blocked that portion of the U.S. Department of Health and Human Services’ final rule from taking effect.  (Tanya Asapansa-Johnson Walker and Cecilia Gentili v. Azar M. Azar II, and the U.S. Dept. of Health and Human Services, Case No. 20-CV-2834, United States District Court, E.D. of NY, August 17, 2020).  The Court only addressed the final rule’s interpretation of “discrimination on the basis of sex” in its stay and did not address the other changes ushered in under the Department’s final rule.  Those other changes took effect on August 18, 2020.

Section 1557 of the ACA prohibits health programs and activities that receive federal financial assistance from discriminating on the basis of race, color, national origin, disability, age, or sex.  Section 1557 takes its prohibition against discrimination on the basis of sex from its reference to Title IX of the Education Amendments of 1972 (Title IX).  Since its inception, Section 1557 has prohibited discrimination on the basis of gender identity in healthcare through its prohibition against discrimination on the basis of sex.

On June 12, 2020, the Department issued its final rule on Section 1557 – explicitly removing protection from discrimination on the basis of gender identity from its prohibition against discrimination on the basis of sex.  This meant that, once the final rule took effect, covered entities could discriminate against transgender patients without violating Section 1557.

On June 15, 2020, in Bostock v. Clayton County, the Supreme Court held that Title VII’s prohibition against discrimination on the basis of sex captures within it a prohibition against discrimination on the bases of sexual orientation and gender identity.  Specifically, the Court held that “it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.”

And so, we found ourselves in an accordion-like quagmire where “on the basis of sex” included gender identity under Title VII and but was still interpreted by at least one executive branch agency to exclude gender identity under Section 1557 vis-à-vis Title IX.

The injunction signals that a resolution to this quagmire may be on the horizon.

In his ruling, Judge Frederic Block found the Department knew that the then-forthcoming decision in Bostock could have “ramifications” for its final rule given that both Title VII and Title IX prohibit discrimination “on the basis of sex” but “was apparently confident that the Supreme Court would endorse the Administration’s interpretation of sex discrimination…” The Court wryly noted that the Department’s “confidence was misplaced” and held that once the Supreme Court issued Bostock, the Department had to consider its implications for its final rule.  As Judge Block stated: “Instead it did nothing….  Since [the Department] has been unwilling to take that path voluntarily, the Court now imposes it.” The final rule cannot take effect until a court decides what the decision in Bostock means for Section 1557.

And so, the portion of the final rule that would have allowed for discrimination on the basis of gender identity in health programs and activities did not take effect yesterday, and transgender patients remain protected while the litigation challenging the final rule continues.  We will continue to follow this case with interest.

Emily Miller, Ben Conley, and Sam Schwartz-Fenwick

§1.16 Countdown to the Supreme Court’s ERISA Preemption Oral Argument in Rutledge — Two Noteworthy Case Developments

The Supreme Court has agreed to hear Arkansas’s challenge to a decision by the Court of Appeals for the Eighth Circuit holding that ERISA preempts an Arkansas law regulating prescription drug reimbursement.  Merits briefing is now complete and oral argument is set for October 6, 2020 in Rutledge v. Pharmaceutical Care Management Association, (No. 18-540).

The Supreme Court’s decision in Rutledge will have resounding implications on ERISA plans.  fiduciaries and administrators.  Not only are state laws regulating pharmaceutical benefits (the subject matter of Rutledge) widespread, states have also taken to regulating a host of other benefit matters, presenting high hurdles for multi-state employers, fiduciaries and administrators seeking to establish uniform nationwide procedures.

So the precise location of where the Supreme Court draws the line on preemption will likely cause ripple effects well beyond pharmaceutical benefits.  And the Court’s line-drawing reasoning is important given that the statute preempts all state laws “relating” to employee benefit plans regulated by ERISA.

Two recent case developments underscore Rutledge’s importance, both in the pharmaceutical benefits realm and beyond.

First, the Eighth Circuit held that a North Dakota law regulating pharmaceutical benefits is preempted by ERISA because the law’s “provisions apply to plans subject to ERISA regulation and therefore the law cannot function irrespective of any ERISA plan.” Pharm. Care Mgmt. Ass’n v. Tufte, No. 18-2926, 2020 WL 4554980, at *1 (8th Cir. Aug. 7, 2020) (internal quotation marks omitted).  The Court relied on its prior decisions (including Rutledge) striking down similar laws.

Additionally, in another case (filed in the U.S. District Court for the District of New Jersey), an employer trade association is alleging that New Jersey’s WARN Act expansion requiring mandatory severance payments for certain employees is preempted by ERISA.  The ERISA Industry Comm. v. Angelo, No. 20-cv-10094 (D.N.J. Aug. 6, 2020).  The plaintiff contends that the severance obligation requires the creation of a benefit plan that has ongoing administrative obligations and requires the use of discretion in determining benefit eligibility.  The plaintiff alleges that this sort of plan would be governed by ERISA and therefore that the New Jersey law impermissibly “relates” to an ERISA plan.  The plaintiff also alleges that the New Jersey law creates the sort of state-by-state regulatory patchwork that ERISA was designed to avoid.

Jules Levenson and Mark Casciari

§1.17 How to Minimize Judicial Review of ERISA Fiduciary Decisions

One of the enduring paradoxes of ERISA litigation is the judicial standard of review of fiduciary decisions.  The standard of review is important because an easier standard will uphold more fiduciary decisions in court and encourage more individuals to serve as fiduciaries.  No one who acts in good faith—as the vast majority of ERISA fiduciaries do—likes to make tough decisions and be sued or reversed.

On the one hand, the courts frame their review of fiduciary decisions in exacting terms.  For example, in Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982), the Court of Appeals for the Second Circuit said that the ERISA fiduciary’s duty of loyalty to plan participants and beneficiaries is “the highest known to the law.”

But, in Bator v. District Council 4, Graphic Communications Conf., No. 18-cv-1770 (7th Cir. Aug. 27, 2020), the court proffered another viewpoint.  It considered whether ERISA fiduciaries violated their duties by undercutting the financial health of the pension plan they managed.  The plaintiffs alleged that the fiduciaries breached their duties by not enforcing the contribution terms of the Trust Indenture when they allowed one participating local union’s members at one company to contribute to the plan at lower rates than other members form the same local at another company.  Notably, the case did not involve a review of a claim for benefits, and the court’s decision did not turn on claim review.

The Bator court upheld the fiduciary decision by reasoning that the fiduciary interpretation of the governing plan document “falls comfortably within the range of reasonable interpretations” and “is compatible with the language and the structure” of that document.  The Court did so even though it recognized that the plaintiffs’ interpretation of the Trust Indenture was equally reasonable.

So, how can these very different standards of judicial review be reconciled?

Yes, reconciliation is possible.  ERISA’s core focus is the governing plan documents.  If, as in Bator, they provide the fiduciary with broad discretion to interpret their terms, and provide that the fiduciary decision shall be final and binding, the court should give the fiduciary the benefit of the doubt.

One final point is worth noting.  Plaintiffs often argue that equitable principles should govern judicial review of fiduciary decisions.  However, as Justice Thomas said recently in his concurrence in Thole v. U.S. Bank, 140 S.Ct. 1615 (2020), the common law of trusts is not the starting point for interpreting ERISA.  The starting point is the statute itself, and the statute commands that the courts honor ERISA plan terms, including terms that give interpretative discretion to fiduciaries.

Our take away is—there is no substitute for good drafting of ERISA plan terms.

Mark Casciari and Ronald Kramer

§1.18 First Circuit Rules that Private Equity Funds Not Liable for Portfolio Company’s Multiemployer Plan Withdrawal Liability

In a decision published on November 22, 2019, the First Circuit reversed a district court’s prior decision and held two Sun Capital private equity funds were not liable for the withdrawal liability incurred when a jointly owned portfolio company declared bankruptcy and withdrew from a union pension fund.  Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 16-1376, 2019 WL 6243370 (1st Cir. Nov. 22, 2019).

The case arose after a brass manufacturing company, Scott Brass, Inc. (SBI), filed for bankruptcy following the decline of copper prices.  In connection with the bankruptcy, SBI withdrew from a multiemployer pension plan, incurring $4.5 million in withdrawal liability.  At the time of bankruptcy, SBI was a portfolio company owned by a holding company that itself was jointly owned by two private equity funds, Sun Capital Partners III, LP (Sun Fund III) and Sun Capital Partners IV, LP (“Sun Fund IV” and, collectively, the “Sun Funds”).  The Sun Funds were sponsored and managed by a private equity firm, Sun Capital Advisors, Inc.  The multiemployer pension plan assessed withdrawal liability against both SBI and the Sun Funds on the grounds that the Sun Funds were a partnership exercising common control over SBI.

Under ERISA, as amended by the Multiemployer Pension Plan Amendments Act of 1980, when an employer exits a multiemployer pension plan, the plan may assess withdrawal liability on the employer for the employer’s share of unfunded vested benefits.  ERISA provides that, when “trades or businesses” are under “common control,” they are treated as a single employer.  It follows, then, that trades or businesses under common control are jointly and severally responsible for any withdrawal liability incurred by one of the trades or businesses.  With respect to “common control,” for purposes of withdrawal liability, the Pension Benefit Guaranty Corporation (PBGC) adopted regulations that generally mirror IRS controlled group regulations: common control exists if there is individual or aggregated ownership of at least 80%.

In 2013 and 2016, the District Court of Massachusetts found that the Sun Funds were not only “trades or businesses,” but also a partnership-in-fact (i.e., a partnership under common law) acting under “common control” with SBI.  Sun Fund III and Sun Fund IV had individual investment stakes in the portfolio company of only 70% and 30%, respectively, so the strict common control ownership threshold was not met.  However, the critical partnership-in-fact finding meant those individual ownership stakes were nevertheless aggregated for determining common control.  Narrowly, those rulings meant the Sun Funds were jointly and severally liable for SBI’s withdrawal liability.  More broadly, those rulings threatened the fundamental way private equity funds are established, funded, and operated.

Because the First Circuit had previously ruled that Sun Fund III was a trade or business (and, on remand, the lower court found the same for Sun Fund IV), the outstanding issue on appeal was whether the Sun Funds had indeed formed a partnership-in-fact that caused the Sun Funds’ individual ownership stakes in SBI to be aggregated.  In the absence of formal guidance from the PBGC on determining when separate entities are considered to be a partnership-in-fact, the First Circuit turned to the partnership factors articulated in an old tax court case, Luna v. Commissioner1 for its analysis.  Those factors are:

  1. The agreement of the parties and their conduct in executing its terms;
  2. The contributions, if any, which each party has made to the venture;
  3. The parties’ control over income and capital and the right of each to make withdrawals;
  4. Whether each party was a principal and co-proprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income;
  5. Whether business was conducted in the joint names of the parties;
  6. Whether the parties filed Federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers;
  7. Whether separate books of account were maintained for the venture; and
  8. Whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.

Applying these Luna factors, the First Circuit noted that some facts supported a partnership-in-fact between the Sun Funds.  For instance, the Sun Funds scouted potential portfolio companies, and essentially the same two individuals ran both the Sun Funds.  However, the First Circuit found facts supporting the opposite finding more compelling.  That is, the Sun Funds expressly disclaimed any sort of partnership with each other in their respective limited partnership agreements and each was created as a separate LLC; they filed separate tax returns and maintained separate books and bank accounts; most of the 230 limited partners in Sun Fund IV were not also limited partners in Sun Fund III; and the Sun Funds did not invest in parallel in the same portfolio companies.

In the end, the First Circuit recognized conflicting policy goals—on the one hand, the need “to ensure the viability of existing pension funds,” and, on the other hand, the need “to encourage the private sector to invest in, or assume control of, struggling companies with pension plans[.]” The court also stated it was reluctant to impose withdrawal liability on the Sun Funds when there was neither clear congressional intent to do so nor formal guidance from the PBGC.

While this is certainly a positive outcome for private equity funds, the First Circuit’s decision was very narrow and fact specific—the court did not reverse the district court’s earlier decision that the Sun Funds were “trades or businesses,” and the court noted that it did not “reach other arguments that might have been available to the parties.” This suggests that had the facts been different, the court could have ruled the other way.

Bryan M. O’Keefe, Ronald Kramer, and Samuel Rubinstein

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