Defense Strategies for ERISA Class Actions
By Jeffrey D. Gardner – August 28, 2014
Entering the world of ERISA class actions, even for the most experienced class action practitioner, can feel a bit like waking up in the Land of Oz. ERISA is an acronym for the Employee Retirement Income Security Act of 1974. See 29 U.S.C. § 1001 et seq. These laws were designed to provide protections for employee pensions and other benefits. ERISA identifies multiple causes of action, but plaintiffs routinely bring claims alleging breach of fiduciary duties under section 502(a)(2), claims for benefits due to plan participants or beneficiaries under section 502(a)(1)(B), claims for penalties under section 502(a)(1)(A), and equitable relief claims under section 502(a)(3)’s “catchall” provision. The laws are broad, the theories of liability are varied, significant inconsistencies and gaps exist in case authority, and traditional approaches to defending class actions do not necessarily fit—or fit in the same way—in ERISA class actions. Defense practitioners should consider the following blend of traditional and ERISA-specific strategies in defending against these unique class actions.
Class Certification after Dukes and Behrend
The trend in class actions is unmistakable: Plaintiffs must bring more evidence, including expert evidence, to the class certification stage, and courts must be prepared to probe plaintiffs’ evidence and determine that Rule 23 of the Federal Rules of Civil Procedure has been satisfied. The court must deny class certification if any one of the requirements of Rule 23 is not met. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613–15 (1997).
The certification of a class is “an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.” Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013). Rule 23 does not set forth a mere pleading standard; to come within the exception, a party seeking class certification “must affirmatively demonstrate compliance” with Rule 23. Id.; see also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551–52 (2011). Before certifying a class, a court must conduct a “rigorous analysis” to determine whether the party seeking certification has met all requirements of Rule 23. Id. at 1429.
A motion for class certification involves a two-part analysis. First, the party seeking certification must provide facts sufficient to satisfy the requirements of Rule 23(a): (1) The members of the proposed class must be so numerous that joinder of all claims would be impracticable; (2) there must be questions of law and fact common to the class; (3) the claims or defenses of the representative party must be typical of the claims or defenses of absent class members; and (4) the representative party must fairly and adequately protect the interests of the class.
Most often, class certification is opposed in ERISA actions on Rule 23(a) grounds of commonality, typicality, and adequacy. After Dukes, which reversed class certification on Rule 23(a)(2) commonality grounds, what matters is not the raising of common questions. Rather, it is the capacity of a class-wide proceeding to generate common answers apt to drive the resolution of litigation. The Court indicated lower courts should evaluate evidence at the certification stage, including expert evidence, to determine whether Rule 23 is satisfied.
The Supreme Court explained that commonality and typicality tend to merge with the adequacy of representation requirement, although the latter raises additional concerns about conflicts of interest and the competency of class counsel. To meet Rule 23(a)(3)’s typicality requirement, the class representative must stand in the same position as the unnamed members of the class. Spano v. Boeing Co., 633 F.3d 574, 591 (7th Cir. 2011). The class representative is not adequate under Rule 23(a)(4) and class certification “should not be granted if there is a danger that absent class members will suffer if their representative is preoccupied with defenses unique to it.” Hannon v. Dataproducts Corp., 976 F.2d 497, 508–9 (9th Cir. 1992).
Second, a plaintiff must establish at least one subsection of Rule 23(b): (1) The prosecution of separate actions would create a risk of (a) inconsistent or varying adjudications that would establish incompatible standards of conduct for the party opposing the class, or (b) individual adjudications would be dispositive of the interests of other class members not party to those adjudications; (2) the defendant acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or (3) questions of law or fact common to class members predominate over any questions affecting only individual members, and a class action is superior to other methods for fairly and efficiently adjudicating the controversy. Fed. R. Civ. P. 23(b); Comcast, 133 S. Ct. at 1432.
Plaintiffs in ERISA class actions often seek to certify the class under Rule 23(b)(1)(a) or 23(b)(2). The argument is that ERISA’s unique statutory framework is ideally suited for class certification with regard to ERISA benefit and fiduciary claims because such claims often require uniform treatment of similarly situated plan participants.
The Dukes court indicated that under Rule 23(b)(2), certification for an injunctive relief class is inappropriate where the monetary relief is not incidental to the injunctive or declaratory relief. Further, the Court noted that claims for individual relief were best addressed by Rule 23(b)(3), which provides for greater notification to absent class members and opt-out features that are not available under 23(b)(1) or (b)(2). The Supreme Court in Behrend found that the plaintiffs failed to satisfy the predominance requirements of Rule 23(b)(3) because the plaintiffs failed to show damages capable of class-wide proof. The Court noted that Rule 23(b)(3)’s predominance requirement is even more demanding that Rule 23(a)’s commonality requirement. Therefore, defense counsel should focus on whether the relief pursued in ERISA actions is truly injunctive or, alternatively, whether it is damages that the plaintiff is pursuing. If it is the latter, defendants should aggressively attack Rule 23(b)(3) certification.
ERISA Defenses Out of the Gate or in Opposition to Class Certification
From the start of ERISA class actions, defense counsel should analyze whether (1) there is an applicable arbitration agreement with a class action waiver that would require arbitration to resolve disputes, (2) the named representative has standing or members of the proposed class have standing, (3) the named representative or anyone within the proposed class has exhausted administrative procedures on issues raised in the class complaint, and (4) the plan addresses statute of limitations requirements. The answers to these issues may provide the basis for a motion that can derail an ERISA class action, including a defendant’s opposition to class certification under Rule 23(a)’s commonality, typicality, and adequacy requirements and Rule 23(b)(3)’s superiority and predominance requirements.
1. Class Action Waivers
Generally, district courts have exclusive jurisdiction over ERISA claims (as a limited exception, ERISA section 502(a) provides for concurrent jurisdiction in state and federal district court for actions brought under sections 502(a)(1)(b) and 502(a)(7)). But some plans contain mandatory arbitration clauses for pension plan benefit disputes that also contain a class action waiver. After the Supreme Court’s rulings in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1751–53 (2011), and then American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2311–12 (2013), it is irrefutable that carefully crafted arbitration clauses containing class action waivers are enforceable. Other circuit and district courts have continued the trend and held—to varying degrees—that arbitration agreements and class waivers are enforceable. Even the California Supreme Court recently overruled its earlier decision in Gentry v. Superior Court, 165 P.3d 556 (2007), and held that arbitration agreements with class action waiver provisions are generally enforceable. See Iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129, 137 (Cal. 2014).
Defense counsel should examine plan documents and determine whether there is a mandatory arbitration provision and class action waiver. The trend is that such provisions will be enforced—thus potentially thwarting the ERISA class action.
A plaintiff must have standing under ERISA and Article III of the United States Constitution. The party invoking federal jurisdiction has the burden of establishing Article III standing, and as noted above, federal courts have jurisdiction over ERISA claims. Therefore, the plaintiff must establish that (1) he or she has suffered an injury in fact that is concrete and particularized, (2) there is a causal connection between the injury and the defendant’s actions, and (3) it is likely that the injury can be redressed by a favorable decision for the plaintiff. Often, defendants will challenge standing out of the box through a motion to dismiss or, perhaps, a motion to strike. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). An equally effective strategy may be to gather relevant information during early class discovery and challenge class certification on Rule 23(a)’s adequacy and typicality grounds, based on a failure by the named class representative or representatives to satisfy standing. See, e.g., L’Oreal Wrinkle Cream Mktg. & Sales Practices Litig., 2013 WL 6450701 (D.N.J. Dec. 9, 2013); Brown v. Hain Celestial Grp., Inc., 2012 WL 2990766, at *1 (N.D. Cal. July 20, 2012). Defendants should also challenge whether absent members of the proposed class have standing. Even if the standing challenge fails, defendants may succeed in further limiting the scope of the class.
Depending on the nature of the claims raised in the ERISA class action, the defendant might be able to attack the named class representative or even members of the proposed class based on a failure to exhaust administrative remedies. Often, where administrative procedures have been instituted for the resolution of disputes between parties to a collectively bargained or other agreement, courts will require the exhaustion of those procedures before exercising the jurisdiction they might otherwise have over disputes subject to resolution through the administrative procedures. Amato v. Bernard, 618 F.2d 559, 568 (9th Cir. 1980) (upholding district court’s ruling that there was no jurisdiction over plaintiff’s claims in the litigation because the plaintiff failed to pursue the plan’s administrative remedies). Some employee claims for plan benefits are purely statutory in nature, and must be decided by the district court. “But that prospect does not give a [plaintiff] the license to attach a ‘statutory violation’ sticker to his or her claim and then use that label as an asserted justification for the total failure to pursue the congressionally mandated internal appeal procedures.” Diaz v. United Agric. Emp. Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).
As with the standing arguments discussed above, there may be room for a defendant to challenge exhaustion through a motion to dismiss or a motion for summary judgment, as well as in opposition to class certification under Rule 23(a) commonality, typicality, and adequacy grounds if the named representative failed to exhaust administrative procedures. The named plaintiff will often raise a demand futility defense in response to an exhaustion argument. In essence, the plaintiff will argue that it would have been futile to demand administrative review ; therefore, the requirement of exhaustion should not be applied. However, bare assertions of futility are insufficient to bring a claim within the exception to the requirement of exhaustion. Drinkwater v. Metro. Life Ins. Co., 846 F.2d 821, 826 (1st Cir. 1998); Commc’ns Workers of Am. v. AT&T, 40 F.3d 426, 432–34 (D.C. Cir. 1994); Springer v. Wal-Mart Assocs. Grp. Health Plan, 908 F.2d 897, 901 (11th Cir. 1990). Defense counsel should be sure to assert failure to exhaust as an affirmative defense in any answer to an ERISA class complaint and to attack failures to exhaust when advantageous.
4. Statute of Limitations
Under the federal discovery rule, a cause of action accrues when the plaintiff discovers or should reasonably discover the injury on which the litigation is based. For ERISA claims, this generally means that the cause of action accrues when a plan clearly repudiates a plaintiff’s claim for benefits. See, e.g., Miller v. Fortis Benefits Co., 475 F.3d 516, 520 (3d Cir. 2007); Carey v. Int’l Bd. of Elec. Workers Local 363 Pension Plan, 201 F.2d 44, 46–47 (2d Cir. 1999). While federal law determines when the statute of limitations begins to run, state law determines the relevant statute of limitations period for benefit claims; often the limitations period that governs written contracts in the forum state is applied. Withrow v. Halsey, 655 F.3d 1031, 1036 (9th Cir. 2011).
Defense counsel should examine the relevant plan claim procedures to determine whether there is a provision that governs the statute of limitations. The Supreme Court, in Heimeshoff v. Hartford Life & Accident Ins. Co., recently affirmed that a court must give effect to a plan’s specified limitations period so long as the period is not unreasonably short or in direct contravention of a relevant statute. In addition, the plan can provide that the limitations period begins to run before a participant fully exhausts the plan’s mandatory administrative review process (before a final determination on appeal is made). Regardless of whether there is a specific statute of limitation provision in the plan documents, defense counsel should evaluate whether the affirmative defense applies and, in addition, consider whether it is appropriate to oppose class certification because the proposed class or named class representative may be susceptible to attack on Rule 23(a) commonality, typicality, or adequacy grounds, as well as Rule 23(b)(3) superiority and predominance grounds.
Recent Supreme Court Decisions in ERISA Stock-Drop Cases
A frequent focus in ERISA class actions is the “stock drop” case. In such cases, a company may have a large percentage of its 401(k) or employee stock ownership plan (ESOP) invested in the company’s stock. When the value of the stock drops, a class action is filed and a plaintiff alleges that plan fiduciaries failed to diversify investments to avoid the risk of potential loss and misled or failed to adequately disclose investment risks to participants.
In federal securities fraud claims, a plaintiff normally is required to establish reliance on a material misrepresentation made in connection with the purchase of a security. In Basic v. Levinson, 485 U.S. 224 (1998), the Supreme Court recognized a rebuttable presumption of class-wide reliance, which became known as the “fraud on the market” theory. The theory presumed that in an efficient market, all publicly available information about a stock is reflected in the stock’s price and, therefore, purchases made at that price are made in reliance on information known to the market. The presumption removed a significant hurdle to certification of securities fraud classes because if reliance on the material misrepresentation or omission required proof on an individual basis, then individual questions would predominate and Rule 23(b)(3) likely could not be met.
TheSupreme Court recently issued its highly anticipated decision in Halliburton Co. v. Erica P. John Fund, 134 S. Ct. 2398 (2014). Some anticipated that the “fraud on the market” presumption would be laid to rest. It was not. However, class certification once again was a focus of the decision. In securities fraud class actions, defendants are now able to rebut the fraud on the market presumption by introducing evidence during class certification that there was no price impact—in other words, that the misrepresentation alleged in the class action did not affect stock price. In summary, it appears that the securities fraud class action landscape, which includes ERISA stock-drop class actions, was not radically altered. But, consistent with Dukes and Behrend, defendants have an additional tool at the class-certification stage that courts must consider in evaluating whether the plaintiff meets his or her Rule 23 burden.
After Halliburton, the Supreme Court issued its opinion in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), which was an ERISA stock-drop case. Prior to Dudenhoeffer, defendants attacked ESOP stock-drop cases by advancing another judicially crafted presumption—the Moench presumption of prudence—which contemplated that plan fiduciaries’ decisions with respect to company stock are presumptively prudent. The presumption required plaintiffs to plead facts sufficient to overcome the presumption. The Supreme Court held that the presumption of prudence is not supported by the text of ERISA. Instead, fiduciaries are subject to the same duty that applies generally to ERISA fiduciaries, except that fiduciaries are not subject to the requirement of diversification. Id. at 2467
At first glance, this appeared to be a victory for ERISA plaintiffs. The Moench presumption is no more. However, the Supreme Court effectively adopted a new pleading standard and intensified scrutiny on the allegations contained in the class complaint. Id. at 2471–72. A fiduciary is now entitled—absent special circumstances—to rely on stock market price; allegations that a fiduciary should have recognized from public information alone that the market was overvaluing or undervaluing the stock are “implausible as a general rule.” To state a fiduciary breach claim based on nonpublic information, a plaintiff must allege a plausible alternative course of action the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed that course of action as more likely to harm the fund than to help it. Id. Thus, the opinion equips defendants with additional grounds to defend stock-drop cases and increases the burden on plaintiffs to plead specific facts to avoid dismissal.
Developments in the case law provide opportunities for plans and their counsel to curtail or potentially even eliminate ERISA class actions—such as through well-crafted arbitration provisions with class action waivers or provisions that properly address the triggering of statutes of limitation. As a practice pointer, plan documents should be studied and, where appropriate, adjusted to enhance employer protections in accordance with the law. At present, however, ERISA class actions remain a viable and hotly contested area of class action law. Practitioners would be wise to study ERISA claims and consider when and how to employ these and other strategies in defense of clients.
Keywords: litigation, class actions, ERISA, employee stock ownership plans, ESOPS, fiduciary liability, stock drop, class action waiver, arbitration clause, Moench presumption