In Thole v. U.S. Bank N.A., No. 17-1712, 2020 U.S. LEXIS 3030 (June 1, 2020), the U.S. Supreme Court ruled, 5-4, that defined pension plan participants lacked constitutional standing to sue over a $750 million loss to their plan because they had not yet missed a benefit payment. Justice Kavanaugh, writing for the majority, brought a new approach.  He analyzed the dispute as if it were a simple contractual matter involving an un-breached contract– i.e., no damages at present, no case at present. This might strike some ERISA practitioners as unusual since the last three decades of ERISA jurisprudence has focused on analyzing fiduciary actions under the law of equity. Under an equitable analysis, a fiduciary would, arguably, have a duty to protect a trust fund, like a pension fund, from preventable erosion.

Justice Clarence Thomas’ Concurrence was, perhaps, the most honest assessment of the Court’s ruling where he wrote, effectively, ‘did we really want to spend so much time in the law of equity?’ Thomas has been on the Court for 30 years – about two-thirds of ERISA’s statutory existence.

Now the Court’s newest members, Justices Kavanaugh and Gorsuch, are giving ERISA a look through new legal eyes. Justice Kavanaugh wrote that a pension shortfall, alleged to be the result of fiduciary mismanagement, was not an actual case because:

“Win or lose, they would still receive the exact same monthly benefits they are already entitled to receive.”

Given the Court’s broad ruling, it may be that pension funds have to be squandered and lost before there is a “case or controversy” under Article III of the U.S. Constitution.  The opinion details several of ERISA’s regulatory protections and discusses the backup insurance provided by the Pension Benefit Guaranty Company as a potential safety net to retirees.  (Although it should be noted that the PBGC has announced it will be insolvent by 2025).

In the dissent, Justice Sonia Sotomayor said:

“The Court holds that the Constitution prevents millions of pensioners from enforcing their rights to prudent and loyal management of their retirement trusts. Indeed, the Court determines that pensioners may not bring a federal lawsuit to stop or cure retirement-plan mismanagement until their pensions are on the verge of default. This conclusion conflicts with common sense and longstanding precedent.”

One fact that was obscured from the Court’s majority opinion, that figured prominently in the lower court decisions, was the important and operative fact that U.S. Bank transferred money into the plan to effectively overfund it during the litigation.  U.S. Bank’s self-corrective measure seemed persuasive to the judges below.  The move, which a healthy plan sponsor can pull off, may be more challenging for struggling plans. For those plans, the pensions may erode, and there is seemingly little that can be done under ERISA to remedy this after Thole.  The Court’s holding of the case is considerably broader than what was happening factually in Thole.

As the Court’s majority continues to emphasize texts, not the history behind the texts, it was not thinking about the Studebaker Automobile Company bankruptcy or other abuses that led to ERISA’s passage.  (ERISA took nearly ten years to pass after Studebaker went bankrupt and its workers lost everything in their retirement).  The Court, at least for the moment, seems content to let the federal government mop up any pension plan problems through its taxpayer supported pension insurance program.

It appears questions raised by the Ninth Circuit’s decision in Dorman v. Charles Schwab Corp., Case No. 18-15281 (9th Cir., Aug. 20, 2019), may move towards resolution sooner than anticipated, with the plaintiff filing an en banc petition last week.

Arguments within the statement and supporting memorandum center on the Dorman court’s application of the Supreme Court’s Epic Systems Corp. v. Lewis precedent, chiefly that its applicability is limited in relation to ERISA claims brought in a representative capacity:

Epic Systems “did not address whether ERISA, an entirely different statute, creates a right to bring a representative action.  Mass. Mutual, LaRue and Munro, by contrast, have all ruled that fiduciary breach claims under ERISA are inherently representative.”  En Banc Petition Brief, p. 12, n.5.

The petition also claims that

the panel’s decision crashes head-on with the Supreme Court’s concern about arbitration-related waivers eliminating the enforcement of federal rights; namely, when they purport to eliminate the right to pursue a remedy guaranteed by statute.

EP Brief, p. 13. The petition argues that if an ERISA plaintiff brings claims subject to a valid arbitration clause, under the Dorman court’s ruling, any relief sought would be limited to individual relief, and fiduciary defendants “would be relieved of virtually all of their liability under  § 1109, except to the extent that liability relates to an individual’s account.” EP Brief, pp. 12-13.

The Dorman court distinguished the case from those in Munro v. University of Southern California, No. 16-cv-06191, 2018 WL 3542996 (9th Cir., Jul. 24, 2018) on two separate fronts.

The first obvious factual difference is that the Dorman plans contained an arbitration agreement (as opposed to the clause appearing in an employment agreement in Munro).  The second difference was the scope of the agreements at issue.  In Dorman, the plaintiff’s relief could, conceptually at least, be resolved as an individual claim – ultimately the recovery of losses sustained on his individual retirement account(s) owing to alleged fiduciary breach.

The larger issue is, hypothetically, somewhere between both Dorman and Munro – a class of plaintiffs seeking to litigate claims clearly brought on behalf of their plan (removal of breaching fiduciaries and reformation) yet faced with an arbitration provision contained within the relevant plan itself and barring class-wide arbitration.  Consistent with the Munro holding, an ERISA plaintiff seeking judicial remedy which exists for the benefit of a plan may not alone settle a claim.  Munro, Slip Op. at 11.  If arbitration were compelled, would a plan-appointed representative step in or is that not the position already occupied by a plaintiff bringing a derivative action? Would a split of the individual claims and the ‘clear’ plan-relief claims be compelled, resulting in the possibility of two distinct resolutions on fact?

While these specific questions may not be directly answered even through an en banc rehearing, the hope is that clarity in some form regarding protection guaranteed to ERISA plans of a right to representational adjudication of plan-wide relief, in the context of an (arguably) otherwise valid arbitration clause, may emerge.[1]

[1] The Dorman plaintiff’s brief also argues that “§ 1110(a) renders void the arbitration provision’s prohibition on seeking plan-wide relief under § 1109 in a representative capacity.”  EB Brief, p. 15.  ERISA Section 410, 29 U.S.C. § 1110(a), bars any contractual provision which would relieve a fiduciary from liability.  In this sense, clarification of the general rights guaranteed to an ERISA plan, as a whole, for a “deputized” plan-appointed representative may hold the answers toward the validity of broad ERISA arbitration clauses, such as that at issue in Dorman.