On February 24, 2015, the Supreme Court heard oral arguments in Tibble v. Edison International which involves the application of ERISA’s six-year statute of limitations. The limitations period during which a retirement plan participant may bring a lawsuit alleging a breach of fiduciary duty generally ends on the sixth anniversary of the last act that constitutes the alleged fiduciary breach.
Tibble involves the claim that six retail class mutual funds selected by plan fiduciaries as plan investment options were imprudent, because they charged higher fees than identical institutional class funds that were allegedly available to large investors, such as the defendant Edison’s 401(k) plan. Three of the retail class funds were added as plan investment options in 1999 and three more were added in 2002, but the lawsuit claiming that selection of these funds was imprudent was not initiated by plan participants until 2007. By that time, the three funds that were added in 1999 had been on the plan menu for more than six years and the defendant successfully argued that ERISA’s statute of limitations barred the participants’ claim of imprudence with respect to those funds.
On the plaintiffs’ appeal of the district court’s summary judgment for the defendant on the issue of the 1999 funds, the Ninth Circuit Court of Appeals rejected the plaintiffs’ so-called continuing violation theory under which the continued offering of an imprudent plan investment option can constitute the commission of a second fiduciary breach that occurs within the six-year limitations period. The Ninth Circuit seemed to hold that in order for the plaintiffs’ claim with regard to the 1999 funds to go to trial, there needed to be a change in circumstances significant enough to make continued investment in those funds a new imprudent act. It is generally acknowledged, however, that ERISA’s fiduciary duties also include the duty to monitor a plan’s investments.
Questions over Scope of Ninth Circuit Opinion.
This is where we pick up the tale on oral argument before the Supreme Court, because a great deal of the justices’ questioning concerned the scope of the Ninth Circuit’s opinion. Justices Breyer and Kagan, in particular, took the view in their questioning of defendant’s counsel that the Ninth Circuit got it wrong if and to the extent its changed circumstances test applies to the duty to monitor investments, as opposed to the initial decision to offer the investment on the plan menu. The response of defendant’s counsel justifying dismissal was that the duty to monitor entails a different process than the duty of review on initial selection of an investment and that ultimately monitoring will look to whether there has been a change of circumstances and not require fiduciaries to scour the market for a cheaper investment alternative. In the defendant’s view, this more rigorous investigation of an investment that might apply when it is first considered for a place on the plan menu does not carry over to the duty to monitor.
Scope of Duty to Monitor.
On the other side, the petitioners’ counsel adamantly maintained that a change in circumstances, such as would be required by the Ninth Circuit’s decision, was not necessary to trigger periodic prudential reviews of investments, such as retail class funds. However, as soon as plaintiffs’ counsel referred to the duty to monitor, Justices Sotomayor and Scalia began a line of questioning as to what this duty might entail. The Court was clearly looking for a compromise position which would not place an undue burden on plan fiduciaries or require constant oversight by the Federal courts. On plaintiffs’ rebuttal, Justice Sotomayor continued to press this point, noting that fiduciaries cannot conduct a general market evaluation every three months as to whether an investment should or should not be selected. Plaintiffs’ counsel disavowed this position and stated that information on retail class and institutional class funds could have been found on the internet. It was pointed out, however, that the plaintiffs’ own expert would not commit to the position that the putative advantages of retail class funds would have necessarily been discovered on a review by plan fiduciaries.
At one point, Justice Scalia asked if an exception to the bar posed by the statute of limitations could be either changed circumstances or the manifest obviousness of the imprudence. Despite the plaintiffs’ focus on the lack of attention the defendant had paid to the difference between the pricing of retail and institutional class funds, their counsel failed to take up this offer. This may have signified a lack of confidence as to whether the plaintiffs could sustain their claim if this were the test for overcoming the statute of limitations.
The justices were receptive to the observations of the Assistant Solicitor General as friend of the court that the only issue actually before the Court was the timeliness of the plaintiffs’ claim that there was a duty to monitor plan investments. According to the Solicitor, whether there had been an actual breach of this duty within the limitations period was a separate question that would ultimately need to be answered but was not a matter before the Court. How often and how deep fiduciaries may need to look at plan investments in order to satisfy their monitoring duty could be worked out by the lower courts if the Supreme Court so chose.
The justices’ appeared to be uncomfortable with the Ninth Circuit’s change of circumstances test that, in the words of Justices Sotomayor and Scalia, was tantamount to selecting a new fund. As a result, it is unlikely that the defendant will get the dismissal it seeks. In all probability, the Court will confirm that the monitoring function is ongoing for all plan investments and either craft a new standard for how an investment is to be monitored or remand to the lower courts to develop a such a test. This, in turn, will determine whether the plaintiffs are allowed to take the matter of the 1999 funds to trial.
Despite the seeming narrowness of the statute of limitations issue, Tibble is important as a reminder to all plan fiduciaries that sitting on an investment without periodically reviewing it is not allowed. Moreover, Tibble’s resolution will likely result in significant guidance on how fiduciaries should carry out the monitoring function.