Yesterday, the U.S. Supreme Court ruled unanimously against the arguments of the Intel Corp. in the complex but significant lawsuit known as Intel Corporation Investment Policy Committee v. Sulyma.

The 14-page ruling clarifies what establishes “actual knowledge” of a potential fiduciary breach under the Employee Retirement Income Security Act (ERISA). In short, the Supreme Court has affirmed that actual knowledge is only established by genuine subjective awareness of the information being considered—not by the mere provision of documents or the theoretical availability of the information in plan disclosures sent to retirement plan participants and filed with the Department of Labor (DOL). 

As explained by David Levine and Kevin Walsh, both principals with Groom Law Group, this distinction matters because of the special three-year statute of limitations period which begins when plaintiffs can be shown to have gained “actual knowledge” of an alleged fiduciary breach. In other words, under ERISA, if the DOL or a private individual participant has “actual knowledge” of a potential fiduciary breach, they have three years to file a claim. On the other hand, if they don’t have that actual knowledge, there is a longer, six-year statute of limitations period in which they could first learn about and then challenge the decisions of fiduciaries in court.

“My view is that this ruling is a bigger deal in the short term, and potentially a less big deal in the long run, especially for private litigants,” Walsh suggests. “It’s potentially a bigger deal in the long run for the Department of Labor’s ability to bring lawsuits against plan fiduciaries.”

Walsh notes that the decision explicitly states that it would be unreasonable to assume that the DOL is able to review and digest—i.e., produce “actual knowledge” about—all the disclosures it receives. In effect, this new ruling gives the DOL a six-year lookback period to file fiduciary breach litigation.

“Why is it less of a big deal for private litigants over time? Simply, the potential impact of default electronic disclosures could perhaps help to maintain the shorter limitations period,” Walsh speculates. “With paper mailings, even if you have confirmation of receipt, you can’t really say if someone read something, nor if they understood it. If you sent it electronically, you can theoretically get them to confirm that they opened it, and you can even go so far as to ask whether someone understands something.”

Is E-Delivery the Answer?

Levine says the electronic delivery discussion is “interesting,” but he is less sure about whether e-delivery will really allow plan sponsors to rely on the shorter limitations period.

“As we move towards electronic disclosure, there will still be challenges,” Levine says. “You can have people acknowledge that they have opened documents, but what do you need to do to be able to show they have read something, let alone understood it? And what about if they understood something and then genuinely forgot it? If you look at recordkeeping technology today, it’s already pretty sophisticated in terms of analyzing participants’ behaviors online. A lot will depend on how the lower courts interpret all this.”

Walsh and Levine add that they have already heard frustrations voiced by plan sponsors and other industry stakeholders about this decision.

“Writing and sending disclosures is expensive,” Walsh explains. “The Supreme Court’s view is now clearly stated that they don’t believe people are reading or understanding these disclosures. The Supreme Court has stated that even the DOL can’t keep up with reading them, so there’s a sense that something’s got to give. Some are saying Congress should get involved and either reduce the disclosure burden, or just change the default rules to state that it is indeed reasonable to expect that people will read important disclosures.”

Another point where Levine and Walsh feel there is some uncertainty is in terms of this decision’s potential effect on class certification issues under ERISA.

“It will be interesting to see how courts apply this actual knowledge standard,” Walsh says. “One way they could look at this is to require an individualized inquiry and say that, before we’re willing to say that anyone didn’t have actual knowledge of an alleged breach, we’re going to need to ask everyone if they did or did not have such actual knowledge. If the lower courts interpret things that way, there’s a bit of a defense win hidden in here, I think, because that could theoretically make class certification a whole lot tougher. On the other hand, courts could just embrace a new default understanding and assume people haven’t read these disclosures.”

Levine likens the issue to what happens when defendants in fiduciary breach cases seek to have them dismissed based on the fact that the plaintiffs did not first seek a remedy through their plan’s normal administrative procedures.  

“Some courts, on this kind of question, tend to side with the plaintiffs, while others will side more often with the defendants,” Levine explains. “We’re in for another round of split decisions, in my view, and potentially even another eventual review from the Supreme Court.”

A ‘Medium-Impact’ Ruling

According to Michael Joyce, a partner at Saul Ewing, Supreme Court decisions can sometimes be relatively insignificant, while other times they can be truly groundbreaking. This latest ruling, in Joyce’s view, probably stands somewhere in the middle.

“Whenever the courts look at language in the federal statues—and ERISA is about as complex a statute as you get—they can go anywhere from making a very limited and strict interpretation to sometimes really adding in words or meanings that aren’t necessarily there,” Joyce explains. “In this case, the Supreme Court has taken a strict interpretation, and they have provided us with a short and relatively straightforward ruling, which is also refreshing.”

Joyce says there are three practical takeaways.

“First, I think this decision clearly expands the liability of fiduciaries,” Joyce says. “The other side will be able to effectively argue that they were not aware of key information or were unable to understand key information. Those sorts of subjective mindsets can be very hard to prove anything about outside of a full trial.”

Secondly, the Supreme Court was very clear in saying that circumstantial evidence is still relevant to the issue of proving actual knowledge, it’s just not dispositive anymore.

“That’s a really important distinction,” Joyce says.

Third, and in agreement with Levine and Walsh, Joyce says the ruling makes electronic delivery technology even more important.

“These technologies will be what provides the evidence that is used to determine whether a person seems to have actual knowledge or not,” Joyce says. “It’s not a perfect solution for fiduciaries, but being able to demonstrate that plan participants engaged with a given document or disclosure will be important. It will be up to courts to actually rule on this sort of thing, which also means that it’s going to be tough to get some of these cases dismissed on summary judgement based on timeliness.”

Something else to consider, Joyce says, is that the fiduciary insurance industry is heavily involved in ERISA litigation, so it will be important for industry stakeholders to track the eventual effects of this decision on that sector of the market.