Hodgson Russ LLP

Arbitration Clause in Employee Handbook Requires Participant to Arbitrate Fiduciary Breach Claims Against Investment Advisor

Cooper v. Ruane Cunniff & Goldfarb Inc. (S.D.N.Y. 2017)

In a major victory for an investment management company defending a class action ERISA fiduciary breach lawsuit, a federal judge in the Southern District of New York has compelled plaintiffs to arbitrate their claims, although the investment manager was not a party to the agreement requiring arbitration of employment-related claims.

Clive Cooper participated in the DST Systems, Inc. 401(k) Profit Sharing Plan (“Plan”). The Plan consisted of a participant-directed 401(k) account, and a profit sharing account (“PSA”) with investments managed by Ruane Cunniff & Goldfarb Inc. Participants were automatically enrolled in the PSA, paid the associated investment management fees, and could not transfer assets until they separated from employment. Cooper accused DST and Ruane of fiduciary breaches under ERISA, alleging losses exceeding $100 million arising from imprudent investments, failure to monitor, self-dealing, and excessive fees.

As a DST employee, Cooper received an Associate Handbook containing an Arbitration Program and Agreement covering “all legal claims arising out of or relating to employment.” Cooper was permitted to opt out of the arbitration provision within 30 days, but he did not elect to do so. The Arbitration Agreement expressly excluded from the requirement to arbitrate, claims associated with “ERISA-related benefits provided under a Company sponsored benefit plan.” The court found this carve-out did not apply to Cooper’s claims, as none were claims for Plan benefits. Instead, they were claims to make the Plan whole for alleged fiduciary breaches.

The district court found that Cooper’s claims for alleged mismanagement of Plan assets “arose out of” and “related to” his employment with DST and, hence, were subject to arbitration. Specifically, Cooper’s allegations that Ruane and DST failed to prudently manage Plan assets involved a component of Cooper’s compensation. The court rejected the notion that Cooper’s claims arose from a breach of the Investment Management Agreement, which was “akin to an engagement letter.” Instead, the judge found that Ruane’s fiduciary status and duties were determined under ERISA, by virtue of the authority Ruane exercised over the Plan’s assets.

The court also rejected Cooper’s argument that the summary plan description permitted his lawsuit to proceed. The summary plan description for the PSA contained the standard ERISA language stating that if “Plan fiduciaries misuse the Plan’s money…[he] may file suit in a federal court.” The judge stated that the summary plan description had no “contractual force” and was superseded by the parties’ agreement to arbitrate. Finding the carve-out of ERISA benefit claims from the purview of the Arbitration Agreement did not apply to Cooper’s claims, the court also found that the Arbitration Agreement encompassed “other statutory” employee benefit claims, and required arbitration of Cooper’s breach of fiduciary duty claims.

Next, the judge addressed whether Ruane as a non-signatory to the arbitration agreement could enforce its terms. Earlier in the lawsuit, Cooper voluntarily dismissed his claims against DST to seek private mediation. Regardless, the judge held that Ruane could compel arbitration because there was a “close relationship” among DST, Cooper and Ruane, and the fiduciary breach claims were “founded and intertwined” with the underlying Arbitration Agreement.

The court found “substantial overlap” in Cooper’s claims against DST and Ruane: “While DST and Ruane may each have served different roles with respect to the Plan assets, the primary issue is the same, whether their actions breached their fiduciary duty to the Plan.” Thus, the judge foreclosed Cooper’s attempt to evade arbitration by dismissing DST from the case, leaving Ruane as the sole defendant. Rather, the Arbitration Agreement governed as it was broadly written to encompass statutory claims arising under ERISA that were the core of Cooper’s complaint against Ruane, and were closely related to Cooper’s employment and, hence, the Arbitration Agreement.

The result of the case is surprising given the recent scrutiny and disfavor displayed by the bench towards arbitration clauses used by retirement plans and advisors to deflect large scale ERISA class action litigation. The case is a reminder of the potential advantages for employers who adopt a mandatory arbitration program. Companies with large retirement plans may wish to discuss with legal counsel the possible implementation of an arbitration agreement to encompass ERISA fiduciary breach claims, where alleged damages may soar into the tens and even hundreds of million dollars. Cooper v. Ruane Cunniff & Goldfarb Inc. (S.D.N.Y. 2017).



Court Determines Insurance Agents are Employees

Jammal v. Am. Family Ins. Co. (N.D. Ohio 2017)

Contrary to several other court decisions regarding the proper classification of insurance agents, the U.S. District Court for the Northern District of Ohio recently ruled that insurance agents for American Family Insurance should have been classified as employees, rather than independent contractors. Determining whether a worker should be classified as an employee or independent contractor is relevant for a number or important reasons, including eligibility for employee benefits. Properly classifying a worker as either an employee or independent contractor is often a difficult task because there are many factors that must be considered. In Nationwide Mut. Ins. Co. v. Darden, 503 U.S. (1992), the US Supreme Court looked at the degree to which a hiring party retains the right to control the manner and means by which service is rendered to determine employment status. In Darden, the Court outlined eleven factors that must be considered. Further noting that, “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.” In this case, the District Court considered each Darden factor relating to the employment relationship, and found that the factors were almost evenly split. Ultimately, the District Court concluded that the degree of control the company exercised over the agents was inconsistent with independent contractor status and more akin to the type of control a manager would expect to exert over an employee. Determining worker classification issues is always a fact specific exercise and the existence of an agreement identifying the worker’s status is only one factor to consider. Employers who use independent contractors should carefully consider the nature of the relationship to ensure the worker is properly classified. In addition, employers should review their benefit plan documents to confirm the documents contain language designed to mitigate damages associated with any workers who are later found to have been misclassified. Jammal v. Am. Family Ins. Co. (N.D. Ohio 2017).


Decedent’s Sister Must Repay Health Fund for Medical Claims

Mackey v. Johnson (8th Cir. 2017)

A sister brought a wrongful death action against a medical clinic claiming that the clinic was negligent in treating of her deceased brother’s lung cancer. The brother was a participant in a union health and welfare fund, and the fund paid for his medical treatment. The sister settled her claim with the clinic and the fund sued her, her legal counsel and the clinic, alleging that the fund had a right to a portion of the settlement that was attributable to medical expenses the fund had paid which was almost $237,000. The Court of Appeals for the Eighth Circuit upheld the lower court’s decision that the fund could assert its right of subrogation against the settlement. The defendants argued that the medical claims were not part of the settlement paid by the clinic. However, citing the determinations made by the lower court, the Eight Circuit found that the original claim made against the clinic included medical claims and the settlement agreements were ambiguous as to whether medical claims were part of the settlement. The opinion also rejected that the defense claim that medical expenses should be limited to the additional expenses caused by the clinic’s alleged negligence. The Eighth Circuit found that the subrogation interest applied to any recovery for medical expenses. Mackey v. Johnson (8th Cir. 2017).


First Circuit Rules “Follow-On” Federal Suit May Proceed Against Alleged Alter Ego

Groden v. N&D Trans. Co. (1st Cir. 2017)

In 2012, a multiemployer pension fund (the “Fund”) secured a default judgment against D&N Transportation, Inc. (D&N”) for unpaid withdrawal liability that was triggered when D&N ceased operations. When no withdrawal liability payments were made within the first eighteen months of the Fund securing the judgment, the Fund filed a follow-on suit against N&D Transportation, Inc. (“N&D”), among others, seeking to hold N&D liable for the withdrawal liability. N&D was owned by the children of the two former D&N shareholders. The Fund alleged that N&D was the alter ego of D&N. In support of its contention, the Fund alleged that D&N and N&D shared office space and the same telephone number, had joint insurance coverage and linked bank accounts, and shared employees.

The district court initially dismissed the Fund’s complaint on the basis that the complaint failed to sufficiently allege that N&D was an alter ego of D&N at the time of D&N’s withdrawal from the Fund. The Fund filed a post-judgment motion to amend its complaint, but the district court denied the Fund’s motion. In this regard, the court ruled that, even if the complaint was amended to include the necessary temporal connection, the district court would still lack subject matter jurisdiction due to the fact that there is no basis in ERISA for holding D&N liable. The district court’s ruling relied on the Supreme Court’s decision in Peacock v. Thomas, where the Supreme Court held that federal courts lacked subject matter jurisdiction in a follow-on suit alleging that the defendant had siphoned off assets in order to avoid a prior judgment in an earlier ERISA action.

On review, the First Circuit Court of Appeals reversed the district court. In doing so, the First Circuit reasoned that, unlike the Peacock case where the alleged bad conduct arose after the ERISA violation, the Fund’s allegations were that D&N and N&D were alter egos at the time of D&N’s withdrawal and, therefore, D&N and N&D should collectively be treated as the “employer” withdrawing from the Fund. As a result, the First Circuit ruled that the Fund’s allegations were grounded in ERISA and the federal courts have subject matter jurisdiction over the case.

To the extent the Fund’s alter ego allegations prove to be true, the case serves as just the latest example on the importance of observing corporate formalities. Groden v. N&D Trans. Co. (1st Cir. 2017).



Participants Must Repay Excess Benefits They Received

Ret. Comm. of DAK Ams. LLC v. Brewer (4th Cir. 2017)

DAK Americas LLC (DAK) decided to close one if its work locations. In connection with the closing, DAK amended its defined benefit plan to add an additional benefit option to be available for those participants whose employment terminated due to the plant closure. The amendment provided for an unsubsidized lump-sum early retirement option. As drafted, the lump sum benefit was to be calculated based on the benefit at the participant’s normal retirement date. Transamerica Retirement Solutions Corporation prepared calculations of the lump sum benefit amounts. These calculations were in error because they calculated the benefit at early retirement which provided for a subsidized benefit. The error was discovered two months after the initial calculations were provided, and less than a month and a half after the participants received the incorrect lump sum distributions. Participants that received the incorrect information and incorrect benefit payments, were informed about the mistake and were offered the option to return the incorrect amount and to choose annuity options benefits, either at that time or in the future. Some of the participants did not return the disputed funds and did not elect to receive an annuity currently or in the future. The retirement plan filed suit to recover these excess amounts. The participants filed counter claims to retain the amounts alleging breach of fiduciary duties, constructive fraud, and equitable estoppel. The Court of Appeals for the Fourth Circuit confirmed that the terms of the plan amendment did not provide that calculation of the lump-sum option includes the subsidized early retirement benefit. The Fourth Circuit upheld the lower court’s decision for summary judgement in favor of the plan against all but one of the 15 plaintiffs. One plaintiff alleged that he had conversations regarding the calculations and was advised that his lump sum would be equal to a non-reduced early retirement benefit and, relying on the alleged misrepresentation, the participant declined an offered job at another facility. For this participant, the Circuit Court remanded the claim to the district court for further proceedings on that participant’s claim for surcharge as a remedy to retain all funds. Ret. Comm. of DAK Ams. LLC v. Brewer (4th Cir. 2017).


Plan Contribution Recommendations Are Not Fiduciary Investment Advice

(DOL Conflict of Interest FAQs, August 2017)

While the long-term future of the Department of Labor’s final rule defining fiduciary investment advice and related prohibited transaction exemptions is less than clear, the final rule is applicable, and has been since June 9, 2017. (Please note that delays currently in effect or pending relate to the related prohibited transaction exemptions only.)

Because the rule is now applicable, it sets the standard for what constitutes fiduciary investment advice. To briefly summarize, under the rule, a communication to a plan, plan participant, or beneficiary constitutes fiduciary investment advice if it is:

  1. A “recommendation” regarding specific investment transactions or investment management, including advice related to roll-overs;
  2. Made for a fee or other compensation, direct or indirect; and
  3. Made by a person who acknowledges fiduciary status or otherwise targets the recommendation to a specific recipient or recipients

The rule defines a “recommendation” as “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” An objective analysis must be applied when determining if a communication is fiduciary investment advice.

The rule specifies the following four categories of communications that will not generally constitute investment advice under the rule: (1) plan information, (2) general retirement-related information, (3) asset allocation models, and (4) interactive investment materials. Additionally, the following categories of communications and transactions are explicitly excluded from the rule: (1) transactions between advisers and certain independent plan fiduciaries, (2) certain swap and security-based swap transactions, and (3) most communications by plan sponsor employees.   For more details regarding the rule, related exemptions, and related procedural history, please see our previous articles on the subject here, here, and here .

Recently, DOL issued FAQs in which it clarified that, under the new rule, an investment adviser’s recommendations to plan participants regarding specific plan contribution amounts would not constitute fiduciary investment advice - provided they are not accompanied by recommendations for specific investment products or investment management of specific investments. The FAQs include the following examples of contribution-related recommendations that would not constitute fiduciary investment advice under the new rule:

  • A plan enrollment brochure sent to participants that recommends a target percentage of pay to save for retirement (e.g., 15%) and a strategy for contributing to the plan to reach that target (e.g., begin with 2% deferrals and increase by 1% each year until reaching 15%).
  • A targeted email to a participant around her participation anniversary date, recommending a specific increase in her contributions to work toward a particular savings goal.
  • A targeted email to a participant on his birthday suggesting a specific contribution amount and goal based on his current savings in the plan and his age.
  • A call-center call to a participant that includes recommendations for a specific overall retirement savings goal (e.g., 15% of pay, taking into account employee and employer contributions) and a specific increase in the participant’s contributions to take advantage of employer matching contributions to help reach the goal.

The FAQs also state that recommendations to plan administrators or other plan fiduciaries regarding methods to increase employee participation in or contributions to plans are not fiduciary investment advice, provided they are not accompanied by recommendations for specific investment products or investment management of specific investments.

Again, it is important to remember that the final fiduciary rule is applicable now. Plan sponsors should continue to carefully examine and monitor their investment adviser relationships to ensure compliance with the rule. (DOL Conflict of Interest FAQs, August 2017)



Second Circuit Upholds Dismissal of Lawsuit Involving Punitive ERISA Penalties

Brown v. Rawlings Financial Services, LLC (2nd Circuit 2017)

Following a motor vehicle accident, a participant in a hospital’s health insurance plan covered by the Employee Retirement Income Security Act of 1974 (“ERISA”) made repeated requests for documents pertaining to her plan beginning in 2012. She did not receive all the requested documents until sometime in 2015, which is well after the 30-day period within which a plan administrator generally must satisfy requests for ERISA plan documents. In a lawsuit filed by the participant, she alleged that the hospital and third-party administrators for the plan (the defendants) should be subject to ERISA-prescribed penalties for failing to timely comply with her requests for plan documents. A Federal district court in Connecticut, however, dismissed her suit on motion, concluding that it was time-barred under Connecticut’s one-year statute of limitations for actions to recover civil forfeitures – the lawsuit was commenced approximately 14 months after the participant’s claim accrued in 2014. The participant appealed the decision of the district court to the Court of Appeals for the Second Circuit, and the Second Circuit has upheld the district court’s ruling that dismissed the lawsuit.

Because ERISA does not prescribe a limitations period for the ERISA claim brought by the participant in this case, the applicable limitations period is the one specified in the most analogous state limitations statute. On appeal to the Second Circuit, the participant argued that the district court’s reliance on Connecticut’s one-year statute of limitations for actions to recover civil forfeitures was not proper, and that the proper statute of limitations was either Connecticut’s six-year statute of limitations for breach of contract or the three-year statute of limitations for unfair trade practice violations in Connecticut. The Second Circuit disagreed, holding that the most analogous state statute of limitations in Connecticut is indeed the one-year statute of limitations for actions to recover civil forfeitures. The Second Circuit noted that claims based on breach of contract or unfair trade practice violations in Connecticut, unlike the claim for the ERISA penalty for late disclosure, require a showing of actual damages. In making its decision, the Second Circuit agreed with the Department of Labor and several other Circuit Courts of Appeal, and expressly ruled for the first time that the relevant ERISA penalty the participant was seeking was punitive (rather than remedial) in nature because the participant was not required to demonstrate actual damages stemming from the late delivery of plan documents, and because the amount of the fine under ERISA is discretionary and “is meant to punish an administrator’s failure to follow statutory duties.”

Despite the favorable outcome for the plan sponsor and the third-party administrators, this case highlights the fact that timely responses to requests for ERISA plan documents is an important facet of plan administration and can avoid ERISA penalties and undesirable litigation. Brown v. Rawlings Financial Services, LLC (2nd Circuit 2017).