Appealed from: United States Court of Appeals, 4th Circuit (June 19, 2006)
Oral argument: Nov. 26
ERISA, REMEDIES, EQUITABLE RELIEF, 401(k), FIDUCIARY BREACH, DEFINED CONTRIBUTION PLAN, RETIREMENT
James LaRue, an employee of the management consulting firm DeWolff, Bobert & Associates, sued his employer for improper management of his 401(k) pension plan. Under DeWolff's pension plan, LaRue could choose among a variety of investment options for his individual account. In his suit, LaRue alleged that DeWolff failed to follow his investment instructions. LaRue sued under sections 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (ERISA). The Fourth Circuit held that neither section authorized LaRue's claim because it was an individual claim and because LaRue sought compensatory damages. LaRue argues that his claim benefits the plan as a whole rather than himself individually, and that he seeks equitable relief rather than compensatory damages. The outcome of this case will determine whether an individual can use these provisions to sue an employer for improper management of a pension fund.
1. Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. 1132(a)(2), provides that a "civil action may be brought ... by a participant ... for appropriate relief under section 1109 of this title." 29 U.S.C. 1109 states that "a fiduciary with respect to a plan who breaches any ... duties imposed upon fiduciaries ... shall be personally liable to make good to such plan any losses to the plan resulting from each such breach."
The First Question Presented is:
Does ? 502(a)(2) of ERISA permit a participant to bring an action to recover losses attributable to his account in a "defined contribution plan" that were caused by a fiduciary breach? Hereinafter, this will be referred to as the "502(a)(2) Question."
2. Section 502(a)(3) of ERISA, 29 U.S.C. 1132(a)(3), provides that a "civil action may be brought ... by a participant ... to obtain other appropriate equitable relief ... to redress ... violations" of the statute.
The Second Question Presented is:
Does ? 502(a)(3) permit a participant to bring an action for monetary "make-whole" relief to compensate for losses directly caused by fiduciary breach (known in pre-merger courts of equity as "surcharge")? Hereinafter, this will be referred to as the "502(a)(3) Question."
1. May an individual bring a claim on behalf of the plan under ERISA section 502(a)(2) for failure to follow the individual's investment instructions, where the only recovery would be to the individual's personal account?
2. When ERISA section 502(a)(3) limits a participant to suing for equitable relief, does that include reimbursement by a fiduciary for lost profits to a 401(k) retirement plan?
James LaRue, an employee of the management consulting firm DeWolff, Boberg & Associates ("DeWolff"), brought suit against his employer and his employer's 401(k) plan for breach of fiduciary duty with respect to administration of the plan, in which LaRue was a participant. See LaRue v. DeWolff, Boberg & Assoc., Inc. et al., 450 F.3d 570, 572 (4th Cir. 2006). Fiduciary duty refers to the legal and ethical responsibility of a person or company (the fiduciary) for the administration of property owned by others, such as benefit plan participants like LaRue.
DeWolff's 401(k) plan allowed employees to select from a range of pre-set investment portfolios. Id. LaRue alleged that he instructed DeWolff to invest his assets in a certain plan and that DeWolff failed to follow these instructions. Id. LaRue further alleged that this failure amounted to a breach of fiduciary duty and resulted in a net loss to his retirement account of approximately $150,000 from the time of original instruction in 2001 until the time LaRue filed suit in 2004. Id.
In the United States District Court for the District of South Carolina, LaRue sought recovery under 29 U.S.C. ? 1132(a)(3), commonly known as the Employee Retirement Income Security Act of 1974 ("ERISA") ? 502(a)(3). See id. at 573. ERISA is a federal statute that seeks to uniformly regulate employee benefit plans, such as LaRue's 401(k). Id. at 572. It provides an exclusive list of civil remedies a plaintiff may use to enforce his or her rights under such a plan. Id. However, Section 502(a)(3) provides for equitable relief only, which traditionally excludes claims for monetary compensation. See id. at 575. Equitable relief would typically include an injunction to remove the breaching fiduciary or an order compelling the fiduciary to comply with the investment instructions. See Brief in Opposition at 9. To get around this, LaRue characterized the $150,000 as "make whole" relief seeking money that would have been in his account if not for DeWolff's breach. See id. at 572, 74.
The District Court held that LaRue's complaint did not request a type of relief available under ERISA ? 502(a)(3) and granted DeWolff's motion for judgment on the pleadings. Id. at 572. On appeal, the United States Court of Appeals for the Fourth Circuit agreed with the District Court, holding that LaRue's requested relief falls outside the scope of ? 502(a)(3). See LaRue, 450 F.3d at 575.
On appeal, LaRue added a distinct claim for relief under ERISA ? 502(a)(2) (29 U.S.C. ? 1132(a)(2)). See id. at 573. Section 502(a)(2) makes the fiduciary personally liable to the plan for plan losses due to breach. See id.; 29 U.S.C. ? 1132(a)(2). The circuit court concluded that section 502(a)(2) requires any loss to affect the whole plan, not just one participant, such as LaRue. See id. (citing Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146 (1985)).
The Fourth Circuit denied LaRue's subsequent petition for rehearing and rehearing en banc, LaRue v. DeWolff, Boberg & Associates, Inc., 458 F.3d 359, and the Supreme Court granted certiorari on both questions after soliciting the views of the United States, Merits Brief for the United States as Amicus Curiae. Overcoming a last procedural hurdle, the Court denied DeWolff's motion to dismiss the writ of certiorari in which DeWolff argued the case was moot due to LaRue's withdrawal from the plan. See Brief for Respondents at 6.
This case will provide an updated reading of ERISA in the context of contemporary employee benefit plans. Defined contribution plans currently predominate, affecting ever more assets and Americans in a trend that seems likely to continue. The Pension Protection Act passed in 2006 allows employers to automatically enroll employees, and may bring total enrollment to as high as 90% of those eligible. See Emily Brandon, New Rules Push Workers Into 401(k)s, U.S. News and World Report, November 1, 2007.
401(k) retirement plans allow employees, employers or both to contribute funds to an employee's individual retirement account under the employer's plan. See United States Department of Labor: Types of Retirement Plans ("DOL"). These funds are then invested, sometimes at the employee's discretion. See id. 401(k)s are a type of defined contribution plan -- at retirement the employee is entitled to the account balance, which represents funds invested plus any gains or losses due to investments made. See id. All assets in a 401(k) are owned and controlled by the plan until withdrawn by the beneficiary, although assets are allocated to individual accounts. See Brief for Petitioner at 12. In the years since ERISA's passage in 1974, many employers have moved to offer such plans instead of defined benefit plans, which promised a specific monthly benefit at retirement. See DOL.
Unlike other federal regulations, ERISA preempts (overrides) state law and common law causes of action with few exceptions, while offering fairly limited remedies. This means that the 3.2 trillion dollars currently in defined contribution plans, see Merits Brief for the United States as Amicus Curiae (hereinafter, "U.S. Merits Brief") at 10, representing 51% of the private sector workforce, are protected by a single federal statute. See Brief of the Chamber of Commerce of the United States of America and the Financial Services Roundtable (collectively, the "Chamber") as Amici Curiae at 15.
ERISA is truly an "area of preemption that consistently affects broad numbers of everyday, real life people." See Boston ERISA & Insurance Litigation Blog, September 13, 2007. In addition to pension benefit plans, ERISA also covers employee welfare benefit plans that include medical, surgical, hospital care, sickness, accident, disability, death, unemployment, vacation, and day care benefits. Brief for the Chamber as Amici Curiae at 16. Most health insurance is employer-provided and thus subject to ERISA as well. Petition for Cert. at 4 n. 8.
Should the Court find against LaRue on both arguments, there will be repercussions for employees in all of these plan areas. Due to ERISA's preemption of other legal remedies, a plaintiff would not be able to bring an employer to court, even if the employer admits that a breach of fiduciary duty occurred. Brief for Petitioner at 9.
A Circuit Split Over Section 502(a)(2)?
Twenty years ago, the Supreme Court ruled in Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985) that no remedy was available under ERISA section 502(a)(2) to a plaintiff suing as an individual rather than on behalf of her employee benefit plan. However, the Third, Fifth, Sixth and Seventh Circuits have established that subsets of plan participants may sue fiduciaries on behalf of their plan. Petition Brief for the United States as Amicus Curiae (hereinafter, "U.S. Petition Brief") at 8. While any money LaRue might recover would be allocated to his individual account, LaRue argues that the decision below created a circuit split, since he sued on behalf of his plan. Id. at 16. DeWolff disagrees, seeing no conflict, since the circuit decisions involved factual scenarios in which a "considerable segment" of plan participants were affected. See Brief for Respondents at 5, 7. Thus, the question remains whether a subset consisting of an individual may bring suit under section 502(a)(2) on behalf of the plan.
A decision for LaRue on this question will expand the meaning of plan losses to include losses to an individual retirement account in the plan. 29 U.S.C. ? 1109(a); Brief for Petitioner at 17-18. The AARP has argued that this in turn would encourage employees to use 401(k)s to save for retirement, since recourse to the courts would be available if plan fiduciaries cause them to lose all of part of their retirement savings. See Brief for the AARP as Amicus Curiae at 5.
However, supporters of DeWolff fear that a decision for LaRue will open the floodgates to litigation, requiring a greater percentage of plan resources to be devoted to escalating litigation costs. See Brief of the ERISA Industry Committee as Amicus Curiae at 2. Such a result would arguably circumvent Congress's limited remedies scheme by allowing benefit claims to be recast as claims of fiduciary breach. Id. Although many are brought as class actions, a holding for DeWolff would also stop in their tracks any lawsuits brought by individuals resulting from the stock market downturn of 2001-2002, where plan participants sued plan fiduciaries for breach when stock prices plummeted. See Supreme Court Roundup by Adam M. Streett, March 3, 2007; see also Christopher J. Rillo, Erisa Stock Drop Litigation: A Primer for Prevention and Litigation.
If the Court closes off individual claims under ERISA section 502(a)(2), it may still allow plan participants to sue under section 502(a)(3). See Brief of the AARP as Amicus Curiae at 4. The Court could do this by recognizing that the term "equitable" includes monetary claims. This is important, according to the AARP, because injunctive relief is inadequate as it does not restore monetary losses, but merely "removes the hand from the cookie jar . . . [doing] nothing to replenish the cookies." See id. at 5 n. 3. However, DeWolff counters that it would also open the door to allowing consequential damages in welfare benefit cases and expose plan sponsors to limitless damages claims. See Brief for Respondents at 13. Employers, it is feared, overwhelmed with claims, would be less likely to even offer these kinds of plans.
Impact on Fiduciaries
A decision for DeWolff might effectively immunize fiduciaries from suit, since individuals and the Government alike would be unable to sue plan fiduciaries who fail to forward employee contributions to their plans. See U.S. Petition Brief at 11.
However, DeWolff argues that such immunization is necessary to control the prices of fiduciary insurance and administration costs. Brief for Respondents at 14. Such cost control is good for participants, since it ensures that existing employer-provided plans will continue to function, the level of benefits will remain constant, and employers will continue to create new ones. See Brief for the Chamber at 5. ERISA plans are completely voluntary, and the worry is that increased exposure might limit employer willingness to provide such plans. Id.
No Longer a Participant?
The Court may rule that cashed-out plan participants cannot sue under ERISA, since LaRue has withdrawn from the DeWolff plan and may no longer be a "plan participant." See Brief for Respondents at 2. Withdrawing is not uncommon, since the Bureau of Labor Statistics reports that the average employee surveyed in 2006 had held the same job for only around four years. See Employee Tenure in 2006, Bureau of Labor Statistics, September 6, 2006. Given the mobility of the labor force, many current plan participants will be interested to know whether ERISA will provide a remedy for these types of problems even after they have found a new job with a different employer.
The Section 502(a)(2) Question
Section 502(a)(2) of ERISA permits a benefit plan participant to sue for "appropriate relief" under ERISA section 409(a). See 29 U.S.C. ?? 1109(a), 1132(a)(2). LaRue sued under the first clause of section 409(a), which requires a breaching fiduciary to make good to the plan any losses the plan suffers due to the breach of fiduciary duty. See Brief for Petitioner at 11; 29 U.S.C. ? 1109(a).
In Mass. Mut. Life Ins. Co. v. Russell, the Supreme Court articulated that any recovery under section 409(a) must benefit the plan as a whole. See 473 U.S. 134, 140 (1985). The Court stated that in enacting ERISA, Congress was "primarily concerned with . . . remedies that would protect the entire plan, rather than with the rights of an individual beneficiary." Id. at 142. In Russell, a beneficiary receiving disability benefits under an ERISA welfare plan brought suit against the fiduciary for a delay in payments. See id. at 136-37. Although she had already received retroactive payments, she sought compensatory, pain and suffering, and punitive damages. See id. She argued that the third clause of section 409(a), which subjects fiduciaries "to other equitable or remedial relief as the court may deem appropriate," included such relief. See id. at 138. The Court disagreed and held that section 502(a)(2) did not authorize her claim.
Based on Russell's standard of benefiting the plan as a whole, the Fourth Circuit held that section 502(a)(2) did not authorize LaRue's claim for two reasons. First, LaRue sought a personal remedy -- any money awarded would benefit him individually rather than "the plan." See LaRue v. DeWolff, 450 F.3d 570, 574 (4th Cir. 2006). Second, any breach of fiduciary duty was a breach of duty owed to LaRue individually rather than to the plan. See id. The court emphasized that any loss resulted from a failure to follow LaRue's instructions and the loss was suffered by him alone. See id. It distinguished the case from cases which permit an individual to sue on behalf of the plan as a whole or a class of similarly-situated beneficiaries, where the remedy would benefit many. See id.
LaRue distinguishes his claim from the claim in Russell. The plaintiff in Russell sought pain and suffering and punitive damages, which LaRue does not. See Brief for Petitioner at 15. Also, Russell sued under the third clause of section 409(a), while LaRue sued under the first. LaRue claims that the Supreme Court only addressed the language of the third clause and that Russell is therefore irrelevant. See id. at 16. Finally, he notes that Russell involved an ERISA welfare plan, which entails reimbursement for medical expenses/disability benefits. Unlike LaRue's 401(k), the plan in Russell did not involve loss of plan assets and was thus unrelated to Congress' intent in passing ERISA. See id. at 15 n. 17.
LaRue refutes the Fourth Circuit's individual benefit argument by claiming that the text of sections 502(a)(2) and 409(a) does not indicate that the breach of fiduciary duty must affect multiple beneficiaries. He emphasizes that the text of section 409(a) says "any losses to the plan." See Brief for Petitioner at 13. In addition, he contends the Supreme Court has historically recognized the expansive meaning of "any." See id. at 17 n. 16. Similarly, LaRue refutes the individual duty theory by citing section 409(a)'s text, which targets "breach of any of the responsibilities, obligations or duties." See id. at 14. According to LaRue, a duty to follow individual instructions is a duty to the plan. See id. Otherwise, fiduciaries could mismanage accounts as long as their actions affect only one individual. See id.
LaRue further argues that due to the nature of 401(k) plans, any loss to an individual account is automatically a loss to the plan. See id. Similarly, any reimbursements awarded in this case would be given to the plan rather than to LaRue. See id. at 13. He asserts that it is irrelevant that the money would then be allocated to his individual account. See id.
According to DeWolff, LaRue's argument merely "imagin[es] a kind of straw transaction where the recovery would be funneled through the Plan and then immediately into LaRue's pocket." See Brief for Respondents at 14. The true nature of LaRue's claim is individual, DeWolff insists, for it was not brought in a representative capacity or to financially improve the plan overall. See id. Finally, DeWolff argues that there is no indication in the text or legislative history of ERISA that Congress intended section 502(a)(2) to provide a remedy for individuals. See id. at 12.
The Section 502(a)(3) Question
Section 502(a)(3) of ERISA allows a participant suing for fiduciary breach "to obtain other appropriate equitable relief" not offered under section 502(a)(2). See 29 U.S.C. ? 1132(a)(3). To recover under Section 502(a)(3), LaRue must seek equitable relief as opposed to a legal remedy.
Historically, plaintiffs could sue in courts of law or courts of equity. Courts of law typically granted monetary relief, such as compensation, damages for pain and suffering, and punitive damages. Equity courts typically ordered someone to act or to refrain from acting. Remedies at equity included injunctive relief and restitution. Courts of equity could occasionally award legal remedies in cases which could not be heard in courts of law. In the United States, the two courts have merged, so both kinds of relief are available from any court. See Legal Information Institute: Wex: Equity. However, the pre-merger distinction between equitable and legal relief persists in statutes such as ERISA.
The Supreme Court first reviewed the meaning of section 502(a)(3)'s equitable relief provision in Mertens et al. v. Hewitt Assocs. and held that "equitable relief" only includes "those categories of relief that were typically available in equity." 508 U.S. 248 at 256 (1993). It held that compensatory damages were not typically available in equity. See id. at 256.
The Fourth Circuit held that LaRue's claim for reimbursement was for compensatory damages and thus did not fall under section 502(a)(3). Relying on Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the circuit court stated that LaRue was seeking to impose personal liability on DeWolff rather than seeking to recover money wrongfully in DeWolff's possession. See LaRue v. DeWolff, 450 F.3d at p 576-76. DeWolff echoes the Fourth Circuit's reasoning on appeal to the Supreme Court. See Brief for Respondents at 19.
LaRue argues that his claim falls under section 502(a)(3) because it satisfies Knudson's two-prong test. See Brief for Petitioner at 32. In Knudson, the Supreme Court held that relief was typically available in equity if 1) the basis for the claim was equitable and 2) the remedy sought would have been available for the case in traditional courts of equity. See Knudson 534 U.S. at 213.
LaRue states that similar claims were historically equitable. See Brief for Petitioner at 32-33. The United States elaborates on this argument by analogizing LaRue's claim to a lawsuit by a trust beneficiary against a trustee for a breach of trust. See Merits Brief for the United States as Amicus Curiae (hereinafter "U.S. Merits Brief") at 16. Before the courts of equity and law merged, only courts of equity could hear trust cases. See id. at 16. In a trust, the trustee holds the legal title. See id. at 16. The beneficiary thus has only an equitable interest in the trust. See id. at 16. As courts of law did not recognize equitable interests, claims against a trustee for breach of fiduciary duty could only be heard in equity courts. See id. at 16-17. As a 401(k) plan is a trust, the fiduciaries of a 401(k) plan have the legal title to the plan's assets, and the beneficiaries only have an equitable interest. See id. at 2. Therefore, the United States maintains that LaRue's claim would traditionally have been brought in a court of equity. See id. at 16-17.
LaRue argues that the damages he seeks would typically have been awarded in equity courts because they are analogous to the equitable concept of surcharge. See Brief for Petitioner at 34-40. Historically, when a beneficiary sued a trustee for breach of trust, any monetary recovery was called surcharge. U.S. Merits Brief at 17. LaRue distinguishes surcharge from compensatory damages, claiming surcharge imposes personal liability upon the trustee and does not include damages for pain and suffering, nominal damages or punitive damages. See Brief for Petitioner at 37-38.
The Fourth Circuit rejected LaRue's surcharge argument, stating that "typically available in courts of equity" has a narrower meaning. See LaRue v. DeWolff, 450 F.3d at 576-77. It held that a typically available remedy must be available for more than one type of case. See id. Since surcharge was only a remedy for breaches of trust, it could not be a "typically available in courts of equity. See id. On appeal, DeWolff reiterates this reasoning, claiming that surcharge was merely an exception to the usual remedies given by equity courts. See Brief for Respondents at 22. The United States insists that this narrow reading is incorrect and that the Supreme Court in Mertens meant to exclude remedies typically available in courts of law rather than remedies only available in atypical equity cases. See U.S. Merits Brief at 26.
The Supreme Court held in City News & Novelty, Inc. v. City of Waukesha that when a petitioner voluntarily changes their status during litigation, the change may eliminate the petitioner's legal interest in his claim and thus render the matter moot. 531 U.S. 278 (2001); Motion to Dismiss at 5. The Supreme Court may not decide a moot issue. See U.S. Constitution Article III; Heitmuller v. Stokes, 256 U.S. 359, 362 (1921). Thus, if the Supreme Court finds the issue to be moot, it cannot decide the sections 502(a)(2) and 502(a)(3) questions, although it can state what it would have decided in dicta.
DeWolff argues that LaRue is no longer a participant for the purposes of ERISA because he left the plan. See Motion to Dismiss at 3. ERISA only authorizes claims by participants, beneficiaries, or fiduciaries, and no courts have held that this language includes former participants. See id. Furthermore, DeWolff claims that LaRue, as a former participant, has no legal interest in whether the plan is reimbursed. See id. at 4. Therefore, DeWolff insists that the issue is moot.
LaRue argues that he is a participant. He cites definition of "participant" in ERISA section 3(7), which includes former employees who may become eligible to receive a benefit. See Brief in Opposition to Motion to Dismiss at 6. LaRue insists that he may benefit from the plan if he recovers in these proceedings. See id. LaRue further proposes that a former employee does not lose interest in the plan when his account balance is zero, particularly where the account assets were altered due to a breach of fiduciary duty. See id. at 8-9. He asserts that it is irrelevant that he voluntarily withdrew his assets. See id. at 9. LaRue states that a dispute over whether he is a participant does not render his claims moot. See id. at 10. Finally, LaRue insists his status as a participant is a defense on the merits and thus need not be decided before the sections 502(a)(2) and 502(a)(3) issues. See id. at 14.
In determining whether or not LaRue can sue for breach of fiduciary duty under ERISA sections 502(a)(2) and 502(a)(3), the Court will rule on whether Congress intended to allow suits for individual recovery. In making its decision, the Court will consider how to best uphold the integrity of the employee benefit plan system in light of the trend towards individual retirement accounts. The Court will weigh competing factors such as the need for updated recovery options and the heightened litigation costs that would result from allowing such claims.
Edited by: Molly Curren Rowles
The authors would like to thank Professors Davidson Douglas and Emily Sherwin for their insights into LaRue v. DeWolff.
- U.S. Department of Labor Guide to Pension Plans, Benefits & Savings
- U.S. Department of Labor Guide to ERISA
- U.S. Department of Labor Guide to Fiduciary Responsibilities
- Pension Protection Act
- Boston ERISA & Insurance Litigation Blog
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