The 9th U.S. Circuit Court of Appeals has ruled in favor of plaintiffs in an Employee Retirement Income Security Act (ERISA) lawsuit that was previously dismissed as untimely by the U.S. District Court for the Northern District of California.
The revived lawsuit says Intel invested participant assets in custom-built target-date funds (TDFs) that have underperformed peer funds by approximately 400 basis points annually. The lawsuit claims automatic enrollment and a re-enrollment of existing participants resulted in more than two-thirds of participants being allocated to custom-built investments. The text of the complaint goes into great detail about why the plaintiffs believe hedge funds and private equity funds are inappropriate investments for ERISA retirement plans.
Asked by plaintiffs to review the district court’s dismissal decision from April 2017, the appellate panel held that a two-step process should be followed in determining whether a claim of this nature should be barred as untimely by section 1113(2) of ERISA. First, the court isolates and defines the underlying violation on which the plaintiff’s claim is founded. Second, the court inquires whether the plaintiff had “actual knowledge” of the alleged breach or violation.
The appellate panel held that actual knowledge “does not mean that a plaintiff had knowledge that the underlying action violated ERISA, nor does it merely mean that a plaintiff had knowledge that the underlying action occurred.” Rather, the defendant “must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action was filed.”
In an ERISA section 1104 case of this nature, the appellate court explains, a plaintiff must have been aware that the defendant had acted and that those acts were imprudent. Disagreeing with the 6th Circuit, the 9th Circuit panel holds that the plaintiff “must have actual knowledge, rather than constructive knowledge.”
In applying this standard to the Intel case, the panel concluded that disputes of material fact as to the timing of plaintiff’s actual knowledge preclude summary judgment. It thus remanded the case to the district court for further proceedings.
The text of the appellate decision highlights how the district court converted the defense’s motion to dismiss into a motion for summary judgment and ordered discovery limited to statute of limitations issues. After discovery, the district court ruled that there was no dispute of material fact that the plaintiff had actual knowledge of the alternative investments more than three years before filing the action, and entered summary judgment in favor of Intel.
The lead plaintiff appealed, arguing that the district court applied the wrong standard of “actual knowledge” to his imprudent investing and derivative liability claims. The 9th Circuit agreed after reviewing the district court findings de novo. By way of background, the appellate decision notes that ERISA does not actually define “knowledge” or “actual knowledge.”
“But when Congress first enacted ERISA in 1974, section 1113 contained two kinds of knowledge requirements, actual knowledge and constructive knowledge,” the appellate decision states. “The actual knowledge provision was identical to current section 1113(2), but the constructive knowledge provision provided that an action could not be commenced more than three years after the earliest date ‘on which a report from which the plaintiff could reasonably be expected to have obtained knowledge of such breach or violation was filed with the secretary under this title.’”
As the appellate decision explains, Congress repealed the constructive knowledge provision in 1987, leaving only the actual knowledge requirement.
“Since that time, the Supreme Court has not provided an authoritative construction for section 1113(2),” the appellate decision says. “Our own interpretations have likewise not always been straightforward, leading to some confusion in our district courts over what ‘actual knowledge’ entails.”
The decision continues: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred. ‘Actual knowledge’ must therefore mean something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”
This leads to the question of what this extra “something” must entail.
“In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed,” the appellate decision concludes. “The exact knowledge required will thus vary depending on the plaintiff’s claim.”
The full text of the lawsuit is here.
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