ERISA [Employee Retirement Income Security Act] counsel who are advising plan sponsors focus their efforts upon compliance to reduce the risk that plan participants will commence legal actions against the sponsors and the fiduciaries who are responsible for administering the plans. However, as counsel also remind plan sponsors, no guidance we provide can prevent you from being sued. The best we can do is structure your activities so that if the action is challenged, it can be summarily dismissed, thus avoiding the expenses of discovery and motion practice that result in high legal fees. However, in the context of litigation, the merits of a plaintiff’s cause of action are not the first issue that must be addressed. A plaintiff must first establish that he has standing under Article III of the Constitution. Q: What is Article III or constitutional standing?
Article III of the Constitution deals with the judiciary, and provides that this government branch has the authority to decide cases and controversies. For a participant to have a case heard by a federal district court, the courts in which most ERISA cases are adjudicated, a plaintiff must establish an injury in fact, fairly traceable to the conduct of the defendant and likely to be redressed by a favorable judicial decision.
Although each of these elements must be established, in the ERISA context, the one that most frequently presents an issue is the “injury in fact” requirement. A plaintiff must show that he suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical.
In a decision last year in the non-ERISA context—Spokeo v. Robins—the Supreme Court emphasized that “particularized” and “concrete” are two separate requirements, and both must be satisfied. To be concrete, the injury must be de facto, that is, an actual injury. Q: What is the significance of Article III constitutional standing in the ERISA context?
In the ERISA context, an allegation of a breach of fiduciary duty does not necessarily mean that a plan participant can bring a suit in federal district court. Section 502(a)(3) provides that a participant may bring a civil action to enjoin any act or practice that violates Title I of ERISA and to obtain other equitable relief to redress such violations. However, the participant would need to satisfy the requirements of ERISA Section 502(a)(3), i.e., as to whether he is a participant or beneficiary, or whether the relief he is seeking is appropriate equitable relief. But those considerations, which, in the past, courts sometimes referred to as “statutory standing,” are addressed only after it is determined whether a plaintiff has Article III or constitutional standing. Q: Can you provide some examples of ERISA cases in which a cause of action was dismissed for lack of constitutional standing?
In Lee v. Verizon Communications, the Court of Appeals for the Fifth Circuit, on remand from the U.S. Supreme Court in light of its decision in Spokeo v. Robins, reaffirmed its earlier decision that the plaintiffs lacked constitutional standing to maintain a claim. In a class action lawsuit, they had claimed that Verizon had breached its fiduciary duties and failed adequately to disclose information, in connection with the company’s purchase of a single premium group annuity contract, transferring to an insurer the obligation to provide $7.4 billion of plan benefits to retirees.
In its earlier opinion in the case, the Fifth Circuit had stated that “standing for defined benefit [DB] plan participants requires imminent risk of default by the plan, such that the participant’s benefits are adversely affected.” The court also rejected the plaintiffs’ argument that they had suffered a constitutionally cognizable injury through invasion of their ERISA rights to proper plan management. The Fifth Circuit disagreed, stating that violation of a statutory right does not automatically provide constitutional standing.
Upon remand from the Supreme Court, the Fifth Circuit reaffirmed its earlier decision. It noted that, even though the Supreme Court had recognized that the concrete harm might be intangible, a concrete intangible injury based upon a statutory violation must constitute a real harm to the individual. Also, it again concluded, “A bare allegation of improper defined-benefit-plan management under ERISA, without concomitant allegations that any defined benefits are even potentially at risk, does not meet the dictates of Article III.”
Last year, in a class action lawsuit brought in the Southern District of New York, Fletcher v. Convergex Group LLC, that court dismissed for lack of constitutional standing an action brought by a plan participant in the Central States Southeast and Southwest Area Pension Plan against brokers whose customers included asset managers of ERISA retirement plans, including the plan in which plaintiffs participated.
After extensive discovery, it was determined that the alleged misconduct produced additional profits of slightly less than $1,600, in a plan that, at the time the litigation commenced, was underfunded by approximately $16 billion. The court indicated that fiduciary misconduct in the context of a defined benefit pension plan will not affect an individual’s benefit unless it creates or enhances the risk of default by the entire plan. The court noted that the misappropriated funds amounted to less than 100 thousandths of 1%. Thus the extent to which that enhanced the possibility of default was so minute as to be imaginary or inconsequential rather than an injury in fact or actual or imminent.
The Central States Plan at the time had been submitted to the Internal Revenue Service (IRS) for a rescue plan under the Multiemployer Pension Reform Act of 2014; the rescue plan requested that the IRS approve a 28% reduction in participant benefits. However, the District Court concluded that such reduction in benefits would be attributable to the plan’s long running and multi-billion-dollar underfunding rather than the $1,600 overcharge. Finally, and most importantly from a general perspective, the District Court reaffirmed an earlier Second Circuit decision that a violation of statutory duties under ERISA is not in and of itself sufficient to establish constitutional standing. Q: Does the 2016 Supreme Court decision with respect to Article III standing mean that challenges to defined benefit plan mismanagement will be foreclosed unless a participant can establish that the mismanagement possibly will prevent him from receiving a benefit?
It is too soon after the 2016 Supreme Court decision to determine the manner in which its opinion will be interpreted by other courts. Plaintiffs will argue for standing based upon long-standing, common-law trust principles. Plaintiffs will also argue that Congress had expressed a concern in enacting ERISA to protect the interests of participants in employee benefit plans. Plaintiffs will also find an ally in the Department of Labor (DOL), which has filed an amicus brief in the appeal to the Second Circuit currently pending in Fletcher v. Convergex Group.
Stay tuned … the law is evolving … and you should be aware.