Plaintiffs in a case in which Putnam Investments was accused of engaging in self-dealing by including high-expense, underperforming proprietary funds in its own 401(k) plan have filed a brief in opposition of Putnam’s petition for the Supreme Court to review the case.
In addition to asking the high court to weigh in on whether the plaintiff or the defendant bears the burden of proof on loss causation under Employee Retirement Income Security Act (ERISA) Section 409(a), Putnam asked the court to determine “whether, as the First Circuit concluded, showing that particular investment options did not perform as well as a set of index funds selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish “losses to the plan.”
Regarding the question of burden of proof, the plaintiffs say this case is not a suitable vehicle for resolving the question presented, because, for one, a final decision has not been made in the case. The 1st U.S. Circuit Court of Appeals vacated certain decisions in the case and remanded it to a federal District Court for further consideration, especially concerning prohibited transactions. “It would put the cart before the horse to address the tertiary issue of causation before the district court makes definitive findings on the antecedent issues of breach and loss. In the event that either of those initial issues is resolved in [Putnam’s} favor, there will be no need to address the causation issue—and the question presented here will have no effect on the outcome of this case,” the plaintiffs argued.
The plaintiffs also contend that Putnam overstates the purported circuit split regarding the burden of proof, saying, “In 2015, the Solicitor General explained that “there [was] no clear circuit split” regarding who bears the burden of proving causation in ERISA fiduciary breach cases.” They say there is no clear disagreement among the circuits about who has the initial burden of producing the claim—the plaintiffs in a case, and they cite several other court cases that show that once a claim has been produced—such as in discrimination claims—the burden of “persuasion” that the loss was not caused by the alleged breach shifts to defendants in the case. “When the defendant is in a much better position to know vital facts on an issue, it is not unusual for the defendant to be assigned the burden of production while leaving the burden of persuasion with the plaintiff,” the brief says.
The plaintiffs also argue that the 1st Circuit’s decision was correct on the merits. They say Employee Retirement Income Security Act (ERISA) fiduciary duties are derived from the common law of trusts, which says “when a beneficiary has succeeded in proving that the trustee has committed a breach of trust and that a related loss has occurred, the burden shifts to the trustee to prove that the loss would have occurred in the absence of the breach.”
Regarding the fund comparison question, the plaintiffs say the selection of comparator funds is a “fact-intensive question” that depends on, among other things, “the nature of the breach involved, the availability of relevant data, and other facts and circumstances of the case.” They argue this fact-specific question is precisely the type of question that does not warrant certiorari review.
The plaintiffs say Putnam suggests no future case will bring the loss issue to the Supreme Court because the 1st Circuit’s decision will pressure defendants to settle. They say that argument is entirely unfounded, citing the case in which American Century defended a similar breach of fiduciary duty claim involving its 401(k) plan at trial and won.Previously, in an amicus curiae brief, the Investment Company Institute argued that letting the Appellate Court decision in the case stand will increase ERISA litigation, distort retirement plan fiduciary decisionmaking and ultimately harm plan participants.
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