Despite the novel coronavirus pandemic, with courts around the country closed, there continues to be daily activity related to Employee Retirement Income Security Act (ERISA) cases.
Jamie Fleckner, partner at Goodwin Procter in Boston, says, typically, trials are held in person, but with courts on lockdown, judges are not taking live testimony and not doing trials. However, much activity happens before trial.
He says that beginning 10 or 15 years ago, the federal courts at different stages started allowing parties to a case to file complaints, motions—anything to get the attention of judges—in an electronic filing system called ECF, and this has continued. “Many judges, even before the outbreak, were sometimes deciding motions what they call ‘on the papers’ without lawyers coming in to present oral argument. They are doing so exclusively now,” Fleckner adds.
“A month ago, we filed a motion to dismiss a case, and I was supposed to be in Green Bay, Wisconsin, yesterday for that. However, a few weeks ago, the judge canceled oral argument and said he would make a tentative ruling based on paper evidence and we could make written submissions in response to that,” Fleckner offers as an example.
He says judges are either coming up with creative ways to keep cases moving or are continuing their own practice of not seeing lawyers until trial. Before the coronavirus outbreak, many things would happen before trial by paper or telephonically.
“I participated in a telephonic hearing right around the time the outbreak started, but that was that judge’s typical way of hearing from parties. We can continue calling from our home office rather than our regular office,” Fleckner says.
While at a trial, an expert witness would need to be in-person, much of what an expert does happens before trial. “Just Wednesday, in one of my cases, the other side filed a written report of an expert’s opinion. That can keep happening even though courts aren’t holding trials,” he notes.
Still Important to Pay Attention
Fleckner says ERISA plan fiduciaries should continue to pay attention to litigation. “I appreciate that it is difficult right now because so much of the workplace has changed and there are undoubtedly more immediate concerns plan sponsors have on their plates. But, unfortunately, litigation is continuing,” he states.
While Fleckner hasn’t seen litigation trends emerge yet as a result of the coronavirus pandemic, he does think new trends may emerge. “We might see suits scrutinizing target-date funds [TDFs] as we started to after the 2008/2009 recession when TDFs had higher equity allocations as participants approached retirement than participants otherwise thought,” he says. “Before this event, there was discussion about holding higher equity levels in the near-retirement TDFs because participants could possibly live into their 90s. Now, of course, we have a situation in which a participant who was approaching retirement—even perhaps retiring this year—may have thought he had more stability in his account balance with more fixed income investments but instead might have had higher equity levels resulting in more losses.” Fleckner adds that such scenarios could create a mini-wave of litigation.
He suggests that as always, plan fiduciaries should be attentive to their plans, what investments are offered and how participants are investing. And they should continue to appreciate that—notwithstanding what is happening in the world—what is happening in the ERISA space is continuing.
On the topic of company stock investments in defined contribution (DC) plans, Fleckner notes that there were waves of so-called “stock drop” cases following previous financial crises. However, he says the legal framework has changed, which might protect plan sponsors against a mini-wave of stock drop suits related to the coronavirus pandemic. Specifically, the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer made it harder for participants to bring stock drop suits “because the Supreme Court realized the tension between market movements and ongoing duties of prudence,” Fleckner says.
But he adds as a caveat that a 2nd U.S. Circuit Court of Appeals decision in Jander v. Retirement Plans Committee of IBM may have eroded that protection a little. In that case, a district court found that alternatives to keeping company stock in IBM’s plan put forth by participants did not satisfy the Supreme Court standard to show a prudent fiduciary would have considered the actions to not do more harm than good. However, the appellate court disagreed and indicated that Dudenhoeffer’s “more harm than good” pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.
Fleckner says the question of whether plaintiffs could effectively present a case that a plan fiduciary failed in its ERISA duties during the coronavirus pandemic raises an interesting point. During the 2008/2009 financial crisis, there was a tremendous drop in stock prices for some industries, particularly the financial services industry, he notes. Stock drop lawsuits alleged that financial services companies knew or should have known that, for example, failures of mortgage loans would have affected their stock prices. “I would think it would be difficult to prove that an airline knew or should have known to take steps to protect itself from countries banning travel,” Fleckner says. “It’s hard to think how plaintiffs’ attorneys would frame a suit like that. And I would like to think they wouldn’t.”
Fleckner adds that he thinks plaintiffs’ lawyers don’t appreciate the difficulties in managing a retirement plan. “No plan sponsor can foresee what will happen in the market. The days we are living in is a perfect example of how events can overtake even the best of planning,” he says.
He also notes that lawsuits have tended to contradict each other, making it even harder for plan fiduciaries to discern what is right to do. For example, there have been cases in which plan sponsors have been sued for offering a money market fund rather than a stable value fund, and there have been cases that have sued for just the opposite.
“Many cases imply that index funds are the most prudent choice in retirement plans, but index funds will fall in value with the market. So will we see cases alleging index funds were imprudent?” he queries.
“These are the choices that are hard for plan sponsors but easy for plaintiffs’ lawyers because they have the advantage of hindsight. With hindsight any investment can be found improper. But that shouldn’t be the basis for litigation,” Fleckner says.
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