On June 1, 2020, the Supreme Court handed down its decision in Thole v. U.S. Bank. A divided (5-4) Court found for defendant defined benefit plan sponsor-fiduciaries, holding that plaintiff plan participants did not have standing to bring the lawsuit.
Justice Kavanaugh, who wrote the majority opinion, summarized the Court’s ruling as follows:
Courts sometimes make standing law more complicated than it needs to be. … [U]nder ordinary Article III [of the United States Constitution] standing analysis, the plaintiffs lack Article III standing for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs’ monthly pension benefits. The plaintiffs have no concrete stake in this dispute and therefore lack Article III standing.
In what follows we discuss the Court’s ruling and its significance for DB sponsor-fiduciaries.
Legal issue – the unique and difficult questions raised by a DB participant ERISA fiduciary lawsuit against a sponsor-fiduciary
Generally, under ERISA, certain persons, including, e.g., the Department of Labor, co-fiduciaries, and plan participants, may sue a retirement plan fiduciary for violations of ERISA’s fiduciary rules, e.g., ERISA’s prudence and prohibited transaction provisions. And, generally, whether that lawsuit may be brought does not depend on whether the plan is a DB plan or a DC plan.
Fiduciary lawsuits by DB plan participants, however, present a couple of basic questions. First – and this issue was extensively considered in the lower court decisions in Thole – where the DB plan is “overfunded,” there is no current possibility that the participant will suffer any damage. Indeed, even if the plan is underfunded, the participant – except in the extreme case of an employer-plan sponsor liquidation in bankruptcy – will still get the benefit she was promised. That is because, in a DB plan – and in contrast to the situation in a DC plan – the amount a participant is entitled to does not depend on the amount of assets in the plan.
Second, ERISA already imposes on employer-plan sponsors a relatively strict funding regime that requires them to make up any plan shortfall, regardless of whether that shortfall is the result of an ERISA fiduciary violation – their own or someone else’s – or contribution policy or asset or liability performance or simply because the Society of Actuaries published new mortality tables. Generally, the employer-plan sponsor can escape this obligation only under extreme circumstances, e.g., by fully liquidating in bankruptcy. Why should we create a separate and in nearly all cases redundant cause of action under ERISA’s fiduciary rules?
These issues take on more-than-academic significance when we consider the possibility that if – without regard to funded status or the sponsor’s ultimate obligation to make up funding shortfalls – the courts allow participant fiduciary lawsuits against DB sponsor-fiduciaries, we face the prospect of a new DB fiduciary litigation industry replicating the one that already exists for DC plans, driven largely by plaintiffs lawyers.
The majority Supreme Court opinion, in this regard, observed that plaintiffs’ claim of $31 million in attorney’s fees was “no small thing,” implying that attorney’s fee may be a significant financial motive for this sort of litigation (“[t]o be sure, [plaintiffs’] attorneys have a stake in the lawsuit”).
Let’s now turn to the specifics of Thole.
Fiduciaries of U.S. Bank’s DB plan for its own employees invested plan assets in mutual funds managed by a U.S. Bank subsidiary, FAF Advisors, Inc. Plaintiff-participants sued U.S. Bank, as a sponsor-fiduciary, claiming that those investments violated ERISA’s prohibited transaction rules.
When litigation commenced, the plan was underfunded. During litigation, however, the plan became overfunded. At that point, defendants moved for dismissal, arguing that, because participants had sustained no financial loss, they did not have standing to sue. The district court rejected that standing argument and instead dismissed plaintiffs’ case as “moot.”
The Eighth Circuit Court of Appeals rejected the district court’s standing theory but affirmed the judgment in favor of defendants on statutory grounds, holding that the relevant section of ERISA “does not permit a participant in a defined-benefit plan to bring suit claiming liability … for alleged breaches of fiduciary duties when the plan is overfunded.”
Supreme Court decision
As noted at the top, in its decision for defendants, the Supreme Court found that the plaintiffs “have been paid all of their monthly pension benefits so far, and they are legally and contractually entitled to receive those same monthly payments for the rest of their lives.” As a result, the Court ruled, broadly, that plaintiffs, as DB plan participants, “have no concrete stake in this lawsuit” and “possess no equitable or property interest in the plan.” Unlike beneficiaries under a traditional trust or a defined contribution plan, “a defined-benefit plan is more in the nature of a contract.” And, since the participants were still being paid their benefits, the contract had, in effect, not been breached.
In reaching this conclusion, the Court dismissed the lower courts’ focus on the issue of plan under- or overfunding, stating that “a bare allegation of plan underfunding does not itself demonstrate a substantially increased risk that the plan and the employer would both fail.”
The Court went on to reject plaintiffs’ alternative arguments for standing, finding that:
Plaintiffs could not sue as “representatives of the plan” because doing so still required “a sufficiently concrete interest in the outcome of the issue in dispute.”
ERISA’s “general cause of action to sue for restoration of plan losses and other equitable relief” did not override the general Article III requirement that a plaintiff sustain an “injury-in-fact.”
DB plan fiduciary misconduct could be “meaningfully regulated” without allowing this sort of participant lawsuit, by shareholders and sponsor management (who have a direct financial stake in plan funding) and by the Department of Labor.
Argument made in amicus curiae briefs
The Supreme Court also refused to consider an argument made in amicus curiae (friend of the court) briefs, that “plan participants in a defined-benefit plan have standing to sue if the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits.” The Court found that this argument for standing had not been asserted by plaintiffs and that “the plaintiffs’ complaint did not plausibly and clearly claim that the alleged mismanagement of the plan substantially increased the risk that the plan and the employer would fail and be unable to pay the plaintiffs’ future pension benefits.”
The Court’s failure to rule on this issue leaves open the possibility of a future lawsuit against DB plan fiduciaries that does “plausibly and clearly” make such a claim.
In a dissent, Justice Sotomayor (joined by Justices Ginsburg, Breyer, and Kagan) disagreed with the majority on every point, vigorously arguing that: (1) as beneficiaries of an ERISA retirement plan trust the participants did have a property interest in the plan; (2) they could under ERISA bring a suit as plan representatives; (3) they could bring a claim under ERISA’s general cause of action to sue for restoration of plan losses and other equitable relief; and (4) Congress clearly contemplated enforcement of ERISA’s fiduciary rules via participant lawsuits and not just by DOL.
What this decision means for plan sponsors
Had the Supreme Court allowed this sort of lawsuit against DB fiduciaries, it might very easily lead to the same sort of proliferation of participant fiduciary litigation that we have seen with respect to DC plans. That it did not is a very big win for sponsor fiduciaries.
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We will continue to follow this issue.