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Supreme Court Amicus Brief Shows How High the Stakes Really are for the Future of ERISA’s “Actual Knowledge” Requirement

On Behalf of | Sep 11, 2019 |

The battle over what constitutes “actual knowledge” of an ERISA fiduciary breach or violation ratcheted up a notch with the filing of an amicus brief in Sulyma v. Intel Corporation Investment Policy Committee, on behalf of several of the largest trade associations in the retirement investment advisory and employee benefits industry. The Intel amicus brief, filed on behalf of large trade associations including the National Association of Manufacturers, Chamber of Commerce, Securities Industry and Financial Markets Association, American Benefits Council, ERISA Industry Committee, and American Retirement Association, urged the Court to adopt Intel’s interpretation of “actual knowledge” under ERISA 29 U.S.C. § 1113(2), which would shorten the statute of limitations from six to three years and bar Plaintiff’s breach of fiduciary duty claims. The brief set forth additional arguments concerning the legislative history of ERISA that the Court could utilize to reverse the Ninth Circuit’s decision.

The trade associations filed the amicus brief because the Intel case has the potential to create a paradigm shift for ERISA litigants. Plan fiduciaries routinely employ the statute of limitations “actual knowledge” defense to defeat breach of fiduciary claims that are not brought within three years of such knowledge; therefore, to extend or limit the availability of the defense could have significant implications for the future viability of tardy ERISA suits. The general rule is that the statute of limitations for ERISA breach of fiduciary claims is six years. If an ERISA defendant can show a plaintiff possessed actual knowledge of his claims for more than three years, however, those claims will be dismissed. Because the term “actual knowledge” is not defined in ERISA, courts have attempted to define its meaning and have arrived at differing interpretations. This has been particularly the case where plan administrator disclosures inform participants of the performance, fees, strategy, and other characteristics of a plan investment option and that investment option is challenged as imprudent because it is overly expensive or has underperformed.

For example, the Sixth Circuit, in Brown v. Owens Corning Inv. Review Committee, 622 F.3d 564 (6th Cir. 2010) concluded that a plan participant might have “actual knowledge” of a breach of fiduciary claim when the participant was provided documents or was given instructions on how to access documents that provided information that formed the basis of the claims. But that decision is squarely at odds with the Ninth Circuit’s decision in Intel that plan documents might not provide actual knowledge of ERISA excessive fee and performance claims – merely by relaying the performance and fee data to an ERISA claimant.

The differences between Brown and Intel are significant and have major practical implications for future of ERISA litigation. If, on the one hand, the Court were to adopt the Ninth Circuit’s Intel approach, it might encourage a groundswell of litigation relating to excessive fee and investment performance relayed in plan disclosures – if on the other hand, the Court adopts the Brown holding, however, it would foreclose many of those claims as untimely. These are the stakes for ERISA litigants.

The facts of Intel are similar to other excessive fee and underperformance cases alleging that plan fiduciaries have breached their fiduciary duties. The plaintiff in Intel claimed that the plan offered investment options that were imprudently risky because they were exposed to alternative investments, resulting in higher fees and poor performance in comparison to other investments the plan fiduciaries could have selected at the time.

In response, Intel employed the “actual knowledge” statute of limitations defense, arguing that it expressly disclosed the exposure to alternative investments in communications and disclosures to plaintiff before October 29, 2012 – three years before the filing of his complaint in (i) Fund Fact Sheets; (ii) Qualified Default Investment Alternative Notices; (iii) the Summary Plan Description; and (iv) Intel’s website. Intel specifically argued that because these disclosures informed plaintiff of the mix of investments, the costs and benefits of the investments, and the investment strategy, plaintiff possessed the actual knowledge under ERISA requisite to trigger the statue of limitations.

The Ninth Circuit, however, disagreed with Intel and reasoned that a Plaintiff must not just have access to, or received plan disclosures, he must have knowledge of the nature of the alleged fiduciary breach. The Court laid out its actual knowledge test as: actual knowledge must “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…In light of the statutory text and our case law we conclude that the defendant must show the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action was filed.”

Importantly, the Court, in citing the statutory history of ERISA, emphasized that the plaintiff must have actual knowledge, as opposed to constructive knowledge, of the nature of the alleged breach. And in applying this test, the Ninth Circuit found it was a dispute of material fact whether plaintiff had the requisite actual knowledge of the alleged breach.

The Defendants petitioned the Supreme Court for certiorari on February 26, 2019. The certiorari petition focused on the Ninth Circuit’s express disagreement with the Sixth Circuit’s decision in Brown, explaining that “the limitations defense would have barred this suit if it had been brought there… the conflict between the two decisions is undeniable.” Defendants also argued that under ERISA, plan administrators are compelled to provide disclosure requirements that Congress designed in order to give each participant adequate knowledge to enforce their rights under the plan. As a result, to apply the Ninth Circuit’s reading of the actual knowledge standard, no amount of disclosure by plan fiduciaries could possibly ensure that plan participants will possess actual knowledge of the facts disclosed by the plan.

The Supreme Court accepted the certiorari petition on June 10, 2019. The trade associations’ amicus brief filed with the Court on August 28, 2019 echoed Defendants’ policy points about the importance of plan disclosures, but also analyzed the legislative history of ERISA – particularly the constructive knowledge requirement that was repealed by Congress in 1987. Constructive knowledge was indeed once defined in ERISA. The constructive knowledge provision stated 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.” 29 U.S.C. § 1113(a)(2)(B) (1976). Congress repealed the constructive knowledge provision in 1987, leaving only the actual knowledge requirement but without an adequate definition of what actual knowledge means. Since 1987, the Supreme Court has not provided any clarity on what actual knowledge and constructive knowledge means under ERISA.

The Intel case obviously presents the Court with the opportunity to provide such clarity. Intel’s certiorari petition latched on to this fact in stating that the Ninth Circuit “appears to have thought its unduly narrow interpretation was required because Section 1113 at one time contained a ‘constructive knowledge’ provision that Congress later repealed.”

The trade associations’ amicus brief discussed the legislative history of the constructive knowledge requirement but made a compelling point that the repealed constructive knowledge provision only dealt with reporting requirements to the Secretary of the Department of Labor not required ERISA disclosures to plan participants – making its relevance to the facts in Intel tenuous at best. It argued that this resulted in an error of law because the “Ninth Circuit focused on the repeal of the provision that charged plaintiffs with knowledge of reports filed with the Secretary.” While it might be a stretch to frame that the repeal of the 1987 constructive knowledge requirement formed the entire basis of the Ninth Circuit’s opinion, it could be something that the Supreme Court latches on to if it decides to reverse the Intel holding as an error of law.

From a policy perspective, the Court will have to walk a tightrope in adopting an actual knowledge standard that makes all the ERISA mandated plan sponsor disclosure requirements irrelevant and, therefore, prevent compliant fiduciaries from invoking the limitations defense, and also, not unduly harsh to plan participants who might lack the sophistication to understand when an ERISA fiduciary breach or violation has occurred.

The Court could tie its opinion to the facts of the claim and guide courts to deal with actual knowledge on a case by case basis rather than formulating a bright line definition that might prejudice either side. As a pertinent example, where ERISA plaintiffs have alleged imprudence based upon a deficient selection process or fees that are excessive in comparison to a stated benchmark, courts in multiple jurisdictions have decided discovery is necessary to show what the plaintiff knew and when he or she knew it. See, e.g., Wildman v. Am. Century Servs., LLC, , 237 F.Supp. 3d 902 (W.D. Mo. 2017) ; Moreno v. Deutsche Bank Americas Holding Corp., No. 15 Civ. 9936 (LGS), 2016 WL 5957307 (S.D.N.Y. Oct. 13, 2016). In comparison, where there are material facts showing that an ERISA fiduciary may have breached his or her duty and that the breach was disclosed to the participant, courts have allowed the statute of limitations defense to foreclose such an action. In Young v. General Motors, for example, the Southern District of New York reasoned that plaintiff possessed actual knowledge at the motion to dismiss stage because “it is undisputed that Plaintiffs had actual knowledge that the Plans offered the Fidelity Funds as investment options and the quarterly performance summaries provided to Plan participants clearly disclosed the fees and expenses associated with the Fidelity Funds, including the fact that the expense ratios for some of the Fidelity Funds were higher than those for alternative investment options.” Young v. Gen. Motors Inv. Mgmt. Corp., 550 F. Supp. 2d 416, 420 (S.D.N.Y. 2008), aff’d, 325 F. App’x 31 (2d Cir. 2009).

In the end, no matter the result of Intel, it is imperative that Plan administrators provide detailed and comprehensive information to comply with all of the ERISA mandated disclosures to plan participants, including U.S.C. 1025(a)(2)(B)(i), which requires plan administrators to disclose to participants “the value of each investment to which assets in the individual account have been allocated” and 29 U.S.C. 1021, 1023 and 1024, which require plan administrators to disclose to participants a summary plan description and an annual report containing financial accounting and actuarial statements, as well as comprehensive statements of individuals rights under the plan. The strength of these disclosures could have the potential to protect plan fiduciaries from potential claims beyond a three year window. Plan administrators should consult their ERISA counsel for guidance on this issue.