From the CourtsAugust 1, 2015 | |
U.S. Supreme Court Says that Fiduciary’s Duty of Prudence Involved Continuing Obligation to Monitor Investments and Remove Imprudent Ones
In 2007, several individual beneficiaries of the Edison International 401(k) Savings Plan, a defined-contribution plan, filed a lawsuit on behalf of the plan and all similarly situated beneficiaries against Edison International and others. The plaintiffs sought to recover damages for alleged losses suffered by the plan, in addition to injunctive and other equitable relief based on alleged breaches of the defendants’ fiduciary duties.
The plaintiffs contended that the defendants had violated their fiduciary duties with respect to three mutual funds added to the plan in 1999 and three mutual funds added to the plan in 2002. The plaintiffs argued that the defendants had acted imprudently by offering six higher priced retail-class mutual funds as plan investments when materially identical lower priced institutional-class mutual funds were available; the lower price reflected lower administrative costs. Specifically, the plaintiffs claimed that a large institutional investor with billions of dollars, such as the plan, could obtain materially identical lower priced institutional-class mutual funds that were not available to a retail investor. The plaintiffs asked, how could the defendants have acted prudently in offering the six higher priced retail-class mutual funds when they could have offered them the same six mutual funds at the lower price offered to institutional investors such as the plan?
As to the three funds added to the plan in 2002, the district court agreed with the plaintiffs. It wrote that the defendants had “not offered any credible explanation” for offering retail-class, i.e., higher priced, mutual funds that cost the plan participants “wholly unnecessary [administrative] fees.” The district court concluded that, with respect to those mutual funds, the defendants had failed to exercise “the care, skill, prudence and diligence under the circumstances” required of fiduciaries by the Employee Retirement Income Security Act of 1974 (ERISA).
As to the three funds added to the plan in 1999, however, the district court held that the plaintiffs’ claims were untimely because, unlike the contested mutual funds added to the plan in 2002, these mutual funds were added to the plan more than six years before the complaint was filed in 2007. As a result, the district court ruled, the six year statutory period of limitations had run. (Under ERISA, to be timely, a breach of fiduciary duty complaint must be filed no more than six years after “the date of the last action which constituted a part of the breach or violation” or “in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.”)
The district court allowed the plaintiffs to argue that, despite the 1999 selection of the three mutual funds, their complaint nevertheless was timely because these funds underwent significant changes within the six year statutory period that should have prompted the defendants to undertake a full due-diligence review and convert the higher priced retail-class mutual funds to lower priced institutional-class mutual funds.
The district court concluded, however, that the plaintiffs had not met their burden of showing that a prudent fiduciary would have undertaken a full due-diligence review of these funds as a result of the alleged changed circumstances. According to the district court, the circumstances had not changed enough to place the defendants under an obligation to review the mutual funds and to convert them to lower priced institutional-class mutual funds.
The U.S. Court of Appeals for the Ninth Circuit affirmed the district court as to the six mutual funds. With respect to the three mutual funds added in 1999, the Ninth Circuit held that the plaintiffs’ claims were untimely because the plaintiffs had not established a change in circumstances that might trigger an obligation to review and to change investments within the six year statutory period.
The Ninth Circuit rejected the plaintiffs’ claims as untimely on the basis that the defendants had selected the three mutual funds more than six years before the plaintiffs had brought their action. The Ninth Circuit asked whether the “last action” that allegedly constituted a part of the breach or violation of the plaintiffs’ duty of prudence had occurred within the relevant six year period. It focused on the act of “designating an investment for inclusion” to start the six year period. The Ninth Circuit stated that, “[c]haracterizing the mere continued offering of a plan option, without more, as a subsequent breach would render” the statute meaningless and could even expose present fiduciaries to liability for decisions made decades ago. The circuit court concluded that only a significant change in circumstances could engender a new breach of a fiduciary duty, stating that the district court was “entirely correct” to have entertained the “possibility” that “significant changes” occurring “within the limitations period” might require “a full due diligence review of the funds,” equivalent to the diligence review that the defendants had conducted when adding new funds to the plan.
The dispute reached the U.S. Supreme Court, which reversed.
In its decision, the Supreme Court explained that, under trust law, a fiduciary was required to conduct a regular review of its investments with the nature and timing of the review contingent on the circumstances. A trustee, the Supreme Court added, had a “continuing duty to monitor trust investments and remove imprudent ones.” This continuing duty existed “separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset,” according to the Supreme Court.
Therefore, the Supreme Court said, a plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, it ruled, so long as the alleged breach of the continuing duty had occurred within six years of suit, the claim was timely. The Supreme Court ruled, therefore, that the Ninth Circuit had erred by applying a six year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.
The Court concluded by vacating the Ninth Circuit’s decision and remanding the case to the circuit court, for it to consider the plaintiffs’ claims that the defendants actually had breached their fiduciary duties within the relevant six year limitations period. [Tibble v. Edison Int’l, 135 S. Ct. 1823 (2015).]
Employee’s Personal Breakroom, Not His Alleged Disability, Led to His Firing, Court Rules
Atrium Medical Center, a full service hospital, had employed the plaintiff, a well-regarded general maintenance mechanic, for 42 years. In that role, he was responsible for the maintenance needs of the third floor of the hospital. The plaintiff’s employment was terminated in December 2012 allegedly for creating life safety violations.
In October 2012, a series of incidents with staff members burning food items in toasters or toaster ovens caused Atrium to ban all open-element cooking appliances from all areas of the hospital except for the cafeteria. The precipitating event was when a nurse burned a croissant in a toaster located in a third floor break room, causing smoke to disperse throughout much of the floor. Atrium thereafter considered open-element cooking devices to present a health and safety threat to its patients.
The hospital had a number of mechanical rooms it used to house electrical, computer and other equipment needed to operate the building. Each floor also had an air-handling room that contained equipment to circulate air throughout that floor. Due to a lack of space in the hospital, mechanics were permitted to use mechanical rooms to complete discrete projects, such as repairing furniture or building shelving units. Mechanics also were permitted to store their tools, work carts and some basic supplies in mechanical rooms. The hospital, however, prohibited employees from using mechanical rooms as a break area or personal work space. The hospital also prohibited employees from eating or storing food in mechanical rooms.
In November 2012, Atrium’s infection control coordinator conducted a routine inspection of the third floor to ensure compliance with infection control policies. When she entered to inspect the third floor air-handling room, she discovered that the plaintiff had set up his own personal workspace and break room in there. The plaintiff had moved a desk, a chair and a refrigerator into the room. He had raw eggs, pickles, orange juice, milk, bread, lunch meat, peanut butter, pistachio nuts, cooking oil and cooking spray in the refrigerator and elsewhere. There also was a toaster, a griddle, a hot plate and a skillet. Finally, there were cardboard boxes scattered about the floor, apparently because the plaintiff was assembling some shelves. The boxes were considered both a fire hazard and an insect attraction. The conditions in the air handling room presented a number of health and safety hazards and put the hospital in violation of several code provisions it needed to satisfy in order to maintain its accreditation.
The plaintiff entered the room while the infection control coordinator was still there. The plaintiff apologized for the condition of the room and stated that he knew that “it’s not supposed to be up here.” He also admitted that he moved the contraband items from the air handling room whenever he learned that outside agencies were coming to inspect the hospital.
Although the infection control coordinator did not expect disciplinary action to result from the condition of the air handling room, she did order it to be cleaned up and all of the prohibited items to be removed within two days.
In the meantime, the hospital conducted a separate investigation and concluded that the plaintiff had been cooking in the air handling room in violation of hospital policy. The hospital determined that the presence of the toaster, griddle and hot plate in that mechanical room presented a substantial threat to patient health and safety because smoke could have been inducted into air handling system and dispersed throughout the floor.
The plaintiff denied using the toaster and griddle in the air handling room, and that he ever had cooked anything in the skillet. He did admit, however, that he boiled eggs in the air handling room.
The hospital had a progressive discipline policy, ranging from an oral reprimand all the way through level 5 discipline, which was termination. The hospital eventually decided that the plaintiff’s conduct warranted level 5 discipline despite his long tenure and good work record. In reaching that decision, the hospital relied on the seriousness of the health hazard that the plaintiff’s conduct presented. Additionally, the hospital was concerned that the plaintiff did not appear to appreciate or understand the seriousness of his conduct. For instance, during a meeting with the director of plant services, the plaintiff downplayed the incident by telling the director that he always moved the contraband from the room before an outside inspection. In other words, the plaintiff seemed to indicate that, despite the health hazards it presented, his personal breakroom was not a problem because he was able to successfully conceal it from the inspectors. He also allegedly asked the director of plant services to “sweep the incident under the rug.”
The director of plant services decided that the plaintiff’s conduct justified termination instead of lesser discipline.
After his termination, the plaintiff filed a complaint of discrimination with the Equal Employment Opportunity Commission and received a right-to-sue letter. He then filed a complaint against Atrium alleging that Atrium had terminated him based on his disability – he had a massive heart attack in 2001 and a pacemaker implanted in 2012 – in violation of law.
Atrium moved for summary judgment, and the court granted its motion.
In its decision, the court rejected the plaintiff’s claim that Atrium had terminated his employment because of his disability. The court said that it was not clear that the plaintiff even had a disability. It noted that the plaintiff apparently did not have any significant work limitations as a result of his pacemaker and that he had not indicated that he had any limitations at all in his activities of daily living. The court acknowledged that the plaintiff was unable to enter certain areas of the hospital, such as the MRI and generator rooms, but said that that appeared to be the extent of any limitations created by his pacemaker. Therefore, the court said, the plaintiff arguably was not significantly limited in a major life activity and, therefore, was not disabled within the meaning of the Americans with Disabilities Act.
In any event, the court said that it did not have to proceed through a lengthy analysis of the plaintiff’s claim because evidence that the plaintiff’s disability (to the extent that he had established one) had played any part in his termination was “almost wholly lacking.”
Rather, the court ruled, the evidence was “compelling and nearly overwhelming” that Atrium had terminated the plaintiff “solely because of his misconduct and not for any other reason.”
Accordingly, the court concluded, Atrium was entitled to summary judgment on the plaintiff’s disability discrimination claims. [Allen v. Atrium Medical Center, 2015 U.S. Dist. Lexis 48955 (S.D. Ohio April 14, 2015).]
Unauthorized Workers May Recover Liquidated Damages under the FLSA, Arizona Court Rules
A federal district court in Arizona has ruled that unauthorized (i.e.,undocumented) workers with claims for unpaid wages and overtime were not precluded from recovering liquidated damages from their employers under the federal Fair Labor Standards Act (FLSA).
In its decision, the Arizona court explained that, under the FLSA, an employer that violated the minimum wage or overtime provisions of the FLSA could be held liable for the amount of the unpaid minimum wages or unpaid overtime compensation plus “an additional equal amount as liquidated damages.”
The Arizona court added that most courts that have addressed the issue have concluded that an employer that violated those FLSA provisions could be held liable to an unauthorized worker in the amount of unpaid minimum wages and/or unpaid overtime compensation for work actually and already performed, notwithstanding the policies underlying the federal immigration laws as reflected in the Immigration Reform and Control Act of 1986 (IRCA), which made battling the employment of unauthorized aliens central to the policy of immigration law. These courts have reasoned that requiring an employer to pay its unauthorized workers minimum wages prescribed by the FLSA for work already performed did not condone or continue an immigration law violation that already had occurred, but, rather, ensured that the employer did not take advantage of the immigration law violation. In other words, the Arizona court said, the FLSA’s coverage of unauthorized workers reduced the incentive to hire such workers and discouraged illegal immigration, consistent with the purposes of the IRCA.
By contrast, the Arizona court continued, other courts have acknowledged that the economic incentives underlying federal labor and immigration policy were in tension. For example, the court noted that although every remedy extended to undocumented workers under the federal labor laws provided a marginal incentive for those workers to come to the United States, every remedy denied to undocumented workers provided a marginal incentive for employers to hire those workers.
The Arizona court then decided that “several considerations” tipped the scale in favor of enforcing the FLSA in these circumstances. For one thing, the Arizona court said, enforcing the FLSA served the purpose of IRCA by removing the wage advantage of unauthorized workers who would work for less than the legal minimum. It added that there was “no unfairness to the employer in paying a legal wage for all work.” Therefore, the court concluded, unauthorized workers were not precluded, by that reason alone, from recovering unpaid and underpaid wages under the FLSA.
The Arizona court next decided that unauthorized workers also could recover liquidated damages as provided by the FLSA. Liquidated damages represented compensation for work actually and already performed and were not a penalty, the court explained. They compensated plaintiffs “for delay in receiving wages due caused by the employer’s violation of the FLSA.” The court also observed that Congress had mandated an award of liquidated damages for violations of the FLSA except where the employer established both subjective and objective good faith, adding that Congress had not granted courts discretion to limit liquidated damages under the FLSA for any other reason.
Therefore, the court concluded, an employer that violated the minimum wage or overtime provisions of the FLSA “may be held liable to an unauthorized employee for liquidated damages in an additional amount equal to the amount of unpaid minimum wages and/or unpaid overtime compensation.” [Vallejo v. Azteca Electrical Construction Inc., 2015 U.S. Dist. Lexis 11780 (D. Ariz. Feb. 2, 2015).]
Circuit Court Rules that Appeal Date Ending on Saturday Automatically Was Extended to Monday
In October 2008, the plaintiff in this case was seriously injured himself while working as a ramp transport driver for Federal Express Corporation (FedEx), a job he had held for 23 years. The plaintiff suffered a serious back injury that caused severe and sustained pain; subsequent surgeries did not correct the problem.
As an employee of FedEx, the plaintiff was a participant and beneficiary of FedEx’s long term disability plan (the LTD Plan), a plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). In May 2009, the plaintiff began receiving disability benefits under the LTD Plan. Subsequently, Aetna Life Insurance Company, the LTD Plan’s claims paying administrator, informed the plaintiff that his benefits would terminate on May 24, 2011 unless he could establish that his disability qualified as a “total disability” under the LTD Plan.
After the plaintiff attempted to make the required showing, Aetna sent him a letter explaining that the evidence he had submitted had not established that he suffered from a total disability. The plaintiff received the letter at 1:23 p.m. on April 18, 2011. The letter stated, “[i]f you disagree with the above determination, in whole or in part, you may file a request to appeal this decision within 180 days of receipt of this notice.”
The 180-day appeal period expired on October 15, 2011, a Saturday. The plaintiff mailed his appeal the following Monday.
On January 17, 2012, Aetna denied the plaintiff’s appeal as untimely.
The plaintiff then sued Aetna in the U.S. District Court for the Central District of California. In response, Aetna moved for judgment on the pleadings, arguing that the plaintiff had failed to exhaust his administrative remedies because he had mailed his appeal after the 180-day period specified in the April 18, 2011 denial letter had lapsed.
The district court granted Aetna’s motion, and the plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit.
The Ninth Circuit reversed. In its decision, the circuit court explained that the federal law governing claims procedures under ERISA required that “in accordance with regulations of the Secretary [of Labor], every employee benefit plan shall … afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.” The circuit court then noted that the regulation implementing that law stated that a “reasonable opportunity for a full and fair review” was “at least 180 days following receipt of a notification of an adverse benefit determination within which to appeal….”
Neither the governing statute, nor the implementing regulation, specified a “method of computing time,” the circuit court said. It observed that this left a number of unresolved ambiguities:
Did the 180 days begin on April 18, 2011, the day the plaintiff received the notice, or on the following day?
Did the final day end at 1:23 p.m., 5:00 p.m., or midnight?
If the final day landed on a weekend or holiday, was a participant in the LTD Plan permitted to file his or her appeal on the next business day?
The Ninth Circuit ruled that the third question – the issue in the case – was resolved by the “widespread understanding” that a deadline falling on a Saturday, Sunday, or holiday extended to the next business day.
In the circuit court’s view, incorporating this time-computation method into ERISA protected the interests of insureds, thereby effectuating the policy goals of ERISA. Therefore, the Ninth Circuit held that, where the deadline for an internal administrative appeal under an ERISA-governed insurance contract fell on a Saturday, Sunday, or legal holiday, the period continued to run until the next day that was not a Saturday, Sunday, or legal holiday.
The circuit court rejected Aetna’s contention that the 180-day period for appeal was set by contract and not by statute or regulation, reasoning that although the 180-day appeal period was imposed by the LTD Plan, the LTD Plan ultimately was governed by ERISA and that any ambiguity in calculating the 180 days “should be resolved to further the purposes and goals of ERISA.”
Accordingly, the circuit court concluded that although the 180-day appeal period specified in the April 18, 2011 denial letter had ended on Saturday, October 15, 2011, Aetna was required to accept the plaintiff’s appeal as timely as he mailed it on the first weekday following the weekend and it was error for Aetna and the district court to conclude that the plaintiff’s administrative appeal was untimely. [LeGras v. Aetna Life Ins. Co., 2015 U.S. App. Lexis 8824 (9th Cir. May 28, 2015).]
Reprinted with permission from the August 2015 issue of the Employee Benefit Plan Review – From the Courts. All rights reserved.