The Supreme Court’s recent decision in Tibble v. Edison Int’l, et al., --- S.Ct. ---, Case No. 13-550, 2015 WL 2340845 (May 18, 2015), is perhaps more interesting for what the Court did not decide than for what it did. Practitioners anxiously awaited the Court’s guidance as to whether ERISA recognizes a continuing violation exception to a statute of limitations defense in a claim for breach of fiduciary duty against an ERISA fiduciary. It is not entirely clear within the Court’s 10-page opinion, however, whether it reached a conclusion on the issue.

The Court framed the question quite broadly when it granted certiorari:

Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U.S.C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.

But the Court ultimately remanded the matter back to the Ninth Circuit Court of Appeals with instruction to “consider petitioners’ claims that respondents breached their duties within the relevant 6-year period under §1113….”

Background
Several beneficiaries of respondent’s 401(k) plan filed suit on behalf of the plan and similarly situated plan beneficiaries, seeking to recover damages for losses incurred by the plan allegedly as a result of breaches of respondents’ fiduciary duties. Specifically, petitioners argued that respondents acted imprudently by offering high priced retail-class mutual funds as plan investments when identical, lower-priced funds were available.

Of the six mutual funds at issue, three of them were added to the plan in 1999, which was more than six years before the lawsuit was filed. This is significant because Section 1113 of the Employee Retirement Income Security Act of 1974 (ERISA) prohibits actions for breaches of fiduciary duties six years after “the date of the last action which constituted a part of the breach or violation.” 29 U.S.C. § 1113(1). Petitioners argued that their claims were timely because the funds continuously experienced changes throughout the six-year statutory period and that these changes should have prompted respondents to review the plan and exchange the higher-priced funds for lower-priced funds. Put differently, petitioners urged the district court to find that ERISA recognizes a “continuing violation” exception to a statute of limitations defense.

The district court allowed petitioners to put on evidence demonstrating the changes that petitioners believed should have prompted a review, but the court ultimately determined that petitioners failed to meet their burden of showing that enough changes had occurred and granted judgment for defendants as to the 1999 funds. The Ninth Circuit affirmed. The Supreme Court agreed to consider the question, as framed above.

The Supreme Court’s Analysis
Section 1113, the Court recognized, only requires a “breach or violation” to start the six-year limitations period. It agreed with the Ninth Circuit that the correct question to consider was whether the “last action which constituted a part of the breach or violation … occurred within the relevant 6-year period.” The Court faulted the Ninth Circuit, however, for focusing only on the act of “designating an investment for inclusion” to start the 6-year period. The Court found that the Ninth Circuit, by only considering the initial act of designation, failed to consider the importance of trust law in its analysis.

Under trust law, which is often used to interpret an ERISA fiduciary’s duties, a trustee has a continuing duty to “monitor trust investments and remove imprudent ones.” Accordingly, the Court held that as long as the alleged breach of the continuing duty to monitor and remove occurred within six years of the lawsuit, such a claim is timely. Remanding the case back to the Ninth Circuit, the Court instructed that it consider petitioners’ claim that a breach occurred within the relevant limitations period, “recognizing the import of analogous trust law.”

What Does this Mean for Practitioners?
Though the Court’s truncated opinion could be viewed as avoiding the original question posed—namely, whether ERISA recognizes a continuing violation exception to a limitations defense—it seems that Justice Breyer signaled where the Court may ultimately arrive. Clearly, a similarly situated trustee does have a continuing obligation under trust law to monitor her portfolio and divest the trust of imprudent investments. Assuming that obligation is the same for an ERISA fiduciary, as Justice Breyer recognized, then conceivably any failure to remove a bad investment during the life of an ERISA plan would restart the limitations period.

What is the impact of the statute of limitations analysis on a damages calculation?
A six-year limitations period is lengthy under any analysis—indeed it is longer than the limitations period for virtually every tort action and breach of contract claim in most jurisdictions. Allowing a “continuing obligation” exception to a limitations defense effectively extends that six-year period even further. The statute does not, on its face, permit such an exception, and it is difficult to fathom that Congress, when it created a six-year limitations period, anticipated an interpretation of the statute that would somehow further extend that time.

It is immediately unclear how such an interpretation impacts damages recoverable for the breach. Recognizing that there is a continuing duty to monitor investments (or investment options), and assuming that a failure of that duty to monitor occurred within the last six years, how far back should a court look to determine damages from this breach? To illustrate, assume a scenario where an initial investment in a particular fund was made over 20 years ago, but within the last six years a plaintiff can show that a fiduciary failed to recognize that this fund was not suitable for plan participants. Assuming that plaintiffs could not have discovered the improvidence of this investment on their own,[1] from what point should a court calculate damages? Is it from the point when the investment “became” unsuitable? If the investment was always unsuitable under plaintiffs’ theory, are damages then calculated from the date of the initial investment—in our illustration, 20 years before suit was filed? The Supreme Court does not assist in this analysis, and it will be important to watch how this issue develops in lower courts.

An affirmative breach, or an omission?
Another issue not addressed by the Supreme Court is whether the alleged breach before it in Tibble was an affirmative breach, or rather an omission by the fiduciary. Section 1113 speaks to a statute of limitations for two discrete violations: (i) a “breach or a violation” and, (ii) an “omission.” Interestingly, it appears that the plaintiffs here treated their case as one of an affirmative breach during the course of proceedings. Both the Ninth Circuit and the Supreme Court seemed to view it as such and that was seemingly the reason both courts looked to the “initial act of designation” in their respective statute of limitations’ analyses.

But the Supreme Court’s discussion, although never drawing a distinction, seems to morph into an omission-based one as it focuses on what could be characterized as the fiduciaries’ failure to act when certain things came to light that should have suggested the funds were no longer suitable. Critically, it is not clear whether the distinction impacted the statute of limitations analysis and, if so, in what way. Might this encourage potential plaintiffs to frame their cases as omissions in all events, so as to muddy the waters on the issue of when the statute of limitations began to run and ensure that they are not tied to the “initial act of designation”? Defense practitioners should be cognizant of how a breach is characterized in the initial pleading and, if it is not clear, efforts should be made to frame the breach as an affirmative one to the court.

What Does this Mean for ERISA Fiduciaries?
Finally, the Supreme Court’s decision may influence the actions of ERISA fiduciaries. Specifically, treating the statute of limitations as a moving target that might not begin to run until an investment is deemed to have turned stale in some manner might encourage greater divestment of securities and reinvestment in others. Even though this might not be consistent with the appropriate investment strategy for a particular plan, fiduciaries—fearing litigation—may do this to avoid the appearance of allowing investments to stagnate.

[1] The statute follows a “3/6 rule,” meaning that a plaintiff must bring his action within the sooner of six years from the date of the breach or three years from which he had actual knowledge of the breach.