Rules/Regs | Published in July 1996

Court Improvement, Plan Peril?

A bill to ease federal judges' workload would keep ERISA lawsuits in state courts, undermining uniform national administration, critics say.

By Elayne Demby | July 1996

A bill to ease federal judges' workload would keep ERISA lawsuits in state courts, undermining uniform national administration, critics say.

The Federal Courts Improvement Act is now working its way through Congress, and supporters say the popular measure stands a good chance of passing sometime next year. But pension advocates warn that it holds some serious dangers for plan sponsors in its present form.

The bill's sponsors, Senators Orrin Hatch (R-Utah) and Howell Heflin (D-Alabama), say its overall aim is to reduce the federal judiciary's workload. But critics say one disputed section could lead to increased benefit plan lawsuits and undermine the national uniformity in administration that ERISA plans now enjoy.

Section 303 of the act would amend ERISA to prevent suits brought in state courts-where, it is believed, ERISA expertise is lacking-from being removed to federal court. Under current law, if a participant or beneficiary files a benefit claim in a state court, ERISA allows the defendant-usually the plan sponsor-to remove the case to a federal court. "If the provision is included in the legislation, it will subject companies to uncertain and conflicting interpretations of ERISA in state courts," says David Wray, president of the Profit-Sharing/401(k) Council of America.

Proponents of the bill suggest that Section 303 would help reduce the number of cases on the federal docket. Currently, almost all ERISA cases brought in state courts end up being removed to federal courts. But Section 303 could have a disastrous effect on benefits plans administration, say some experts, most importantly by undermining the uniform national federal common law that has developed under ERISA. Wray fears that confining ERISA cases to 50 different state court systems would subject the law to as many as 50 varying interpretations, making plan administration extremely difficult.

"ERISA enforcement is a federal issue," he says, "and logistical concerns should not have an impact on what is fundamentally a federal judicial responsibility." He also notes that in some state court jurisdictions, suits against deep-pocket defendants have been known to result in very large awards against the defendants, even when the claims are ludicrous.

Before ERISA, federal and state regulation of employee benefits plans coexisted. Problems arose especially for multi-state plans, when it was not clear whether any one state could regulate a plan. It was also unclear how a plan could comply with conflicting directives from multiple jurisdictions, and whether a state could get jurisdiction over out-of-state parties to implement its directives with respect to a multi-state plan. ERISA addressed these problems by creating comprehensive federal regulation of employee benefit plans, and by broadly preempting virtually all state laws relating to employee benefit plans.

Arguably, Section 303 does not change the uniformity of the law-just who interprets it. But opponents say state courts have a natural tendency to rely on their own state-law principles and invoke their own state-law remedies in ERISA cases. Some state courts would develop their own versions of federal common law under ERISA, critics fear, even where this is at odds with federal court decisions.

Benefits plan sponsors and service providers have protested loudly against Section 303, and some are optimistic that their fears will be addressed. The ERISA Industry Committe, which represents plan sponsors and providers, has already released a position paper against it.

A Hatch spokesperson says Section 303 was originally inserted to please a group of federal judges, and that the senator will push for it to be dropped in the next version of the bill, expected sometime early next year. With the presidential election coming up, Wray says, the bipartisan courts bill will most likely be pushed aside until then in favor of sexier "hot button" political legislation. But when the matter is picked up again, observers will be looking anxiously to see that Section 303 is dropped. The Supreme Court's decision in Howe v. Varity "expanded the right to sue," Wray warns, "and with Section 303, you have dynamite."