INSIGHT: The Impact of Thole on Pension Plan Litigation—A Conversation

In Thole v. U.S Bank N.A., the U.S. Supreme Court held that participants receiving benefits from a defined benefit pension plan did not have Article III standing to sue for self-dealing and imprudence in the management of plan assets.

Susan Katz Hoffman and Marc I. Machiz, principals of Justican Mediation LLC, spent their careers on the defense and plaintiffs’ side respectively of employee benefits disputes like this one. Below, they air their disagreement on whether the 5-4 decision by the court got it right.

Hoffman: Two plaintiffs receiving benefits fully insured by the PBGC sought $750 million for the plan. Their attorneys requested at least $31 million in fees.

Federal courts have jurisdiction only in an actual controversy, so plaintiffs had to be at risk. Since their benefits are guaranteed, the majority found no Article III standing. A claim for attorneys’ fees doesn’t count. They’re right. ERISA didn’t grant participants the right to sue to enrich plaintiffs’ lawyers—rather, to make injured plan participants whole. No injury, no case.

Machiz: Plaintiffs allege looting of a pension plan, and this case is about attorneys’ fees? The defense bar and conservative jurists seem perpetually enraged because someone, somewhere might be making a better living than them. For plaintiffs’ lawyers, putting your livelihood at the mercy of those same jurists requires the complete inability to assess risk. You wouldn’t have liked it much.

Key here is whether plan participants have an equitable interest in pension plan assets, a right to prudent and loyal conduct by plan fiduciaries or an assignment of plan claims. Per the dissent, the reference to attorneys’ fees “is about optics, not law.”

Hoffman: OK, the case isn’t technically about fees, but it’s relevant to standing when the plaintiffs have no financial interest. In a reasonably well-funded DB plan, management worries about plan investment performance, because underfunding and volatility immediately affect the company’s financials. Better performance reduces the employer’s funding burden. The interests of management and the board do more to incentivize supervision of lousy fiduciaries than the threat of private litigation.

DOL looks closely at self-dealing (often investigators’ key focus), and clearly has jurisdiction to sue.
Finally, given diminishing DB plan coverage (almost all private sector plans have been frozen or terminated), some immunization from lawsuits encourages maintenance of DB plans.

Congressional Intent

Machiz: Why doesn’t congressional intent count? Section 502(a)(2) granted a cause of action, without limitation, for precisely the conduct alleged here. This is the sort of judicial activism that conservatives supposedly hate.
The decision is bad for plans. An employer won’t police its plan when the very misconduct at issue is that employer’s incompetence or self-dealing. The dissent so argues, but I’ll go further. You can’t count on employers to pursue claims against incompetent or corrupt service providers either because service provider misconduct exposes them to liability.

Bad service providers are replaced, but monetary remedies are neglected, and mistakes buried.

DOL told the court it can’t do the job. The department has 450 investigators to police every benefit plan. There’s no worse way to lighten regulatory burdens than to declare defined benefit plans to be the wild west overseen by a solitary, saddle-sore U.S. Marshall backed by an insolvent insurer. You mentioned funding, but rather than rattle on, I’ll ask, is that really what you want to hang your hat on?

Hoffman: Congressional intent doesn’t matter for Constitutional standing. The majority ignored trust law doctrines that Justice Sonia Sotomayor so eloquently delineated. Her persuasiveness maybe led Justices Clarence Thomas and Neil Gorsuch to say trust law is irrelevant, but none of that matters for standing. So I still say this decision is largely a slam on the plaintiffs’ bar, because the majority thinks DB participants don’t care whether fiduciaries use proprietary investment funds, as long as benefits continue.

Is private litigation over DB plan investment really dead? Injunctive relief for the plan? Do plaintiffs have to allege that the plan faces insufficiency (soon enough that it would affect the plaintiffs) and that the PBGC would not be required to or able to cover the shortfall?

Machiz: I agree that congressional intent alone doesn’t satisfy Article III. But where Congress’s intent apply trust law is clear, it’s a travesty to dismiss ERISA’s framework as a mere analogy to the law of trusts. ERISA requires that plan assets be held in an actual, not an analogical trust for participants and beneficiaries who have an actual equitable interest in that trust.

I’ll grant you this. Most plan participants don’t care about self-dealing in a defined benefit plan, if they even understand it. But what happens when there is no solvent plan sponsor or organized crime runs a multiemployer plan?

The opinion leaves no opening for plaintiffs. The court held an allegation of underfunding insufficient to create standing and that a participant whose benefit was fully insured had no standing. Also, most violations that might lead to default will be lost to the statute of limitations before dire conditions appear. The lower courts’ link of standing to underfunding had already eviscerated private litigation.

What about a legislative fix? Suppose Congress granted DB participants a stake (as in qui tam), perhaps one percent of any recovery and a tenth of one percent of assets affected by non-monetary relief. Would that restore private enforcement?

Hoffman: You may have something there. Justice Brett Kavanaugh cites Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 529 U.S. 765 (1999) where the False Claims Act assigns the federal government’s claim, giving the plaintiff Article III standing in a qui tam action. So, is he inviting an amendment to ERISA to assign participants a share of the plan’s recovery?

While qui tam standing is attacked on other constitutional grounds (appointments power, separation of powers, due process), those seem limited to assignment of a governmental right of recovery, not a private one. The amendment should be carefully drafted to assign another fiduciary’s standing (rather than the DOL’s).

Shouldn’t the amount the successful plaintiff can recover be capped? Will fiduciary liability insurance policies exclude this recovery, and how will that affect settlement negotiations?

I’m skeptical of ERISA amendments—too often they result in unintended adverse consequences. Won’t happen before November.

Machiz: We agree, wait ‘til next year. Help me draft to address your concerns, and I promise to tell no one.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Susan Katz Hoffman and Marc I. Machiz are the principals of Justican Mediation LLC, an entity formed to provide ERISA mediation and expert witness services using a team approach to reconcile plaintiff’s and defendant’s perspectives on employee benefits disputes.

Hoffman recently retired as leader of the employee benefits practice groups at Littler Mendelson P.C. and is a former management co-chair of the ABA Labor and Employment Section’s Employee Benefits Committee.

Machiz previously served as the associate solicitor of labor for the Plan Benefits Security Division (with responsibility for all ERISA legal matters for the Department of Labor) and spent over a decade in private practice as a class action plaintiff’s lawyer before returning to the Department of Labor to head the Philadelphia region of the Employee Benefits Security Administration (EBSA) and advise EBSA’s National Office on Enforcement Strategy, departing in December of 2016.