Opinion analysis: Supreme Court protects defined-benefit plan fiduciaries from lawsuits
on Jun 1, 2020 at 6:31 pm
In a 5-4 decision, the Supreme Court held in Thole v. U.S. Bank that participants and beneficiaries in defined-benefit plans do not have the legal right, known as standing, to assert fiduciary breach claims, at least in the absence of catastrophic plan and sponsor failure. James Thole and Sherry Smith, retirees from U.S. Bank, alleged that plan fiduciaries breached their duties of loyalty and care, which caused the plan to lose more than $748 million. After the district court held that Thole and Smith had Article III standing to sue the fiduciaries, U.S. Bank made a substantial contribution to the plan, which increased the plan’s assets above the statutory minimum. The U.S. Court of Appeals for the 8th Circuit held that Thole and Smith lacked standing because they had received all the benefits to which they were entitled.
Justice Brett Kavanaugh, in a relatively short opinion joined by Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, agreed with the court of appeals that Thole and Smith lack Article III standing. The majority held that Thole and Smith do not have a sufficient stake in the outcome of the lawsuit because, win or lose, they would receive the same amount of monthly pension benefits from the plan.
First, the majority opinion distinguished defined-benefit plans, such as the one at issue, from defined-contribution plans and grantor trusts. In defined-contribution plans, participants and beneficiaries are entitled to the funds they accumulate in their plan accounts. The majority wrote that the rights in a defined-benefit plan are “more in the nature of … contract” rights than the trust-based equitable or property rights that flow from defined-contribution plans and grantor trusts. Therefore, Thole and Smith did not have any equitable or property interests in the U.S. Bank plan.
Second, the majority determined that Thole and Smith do not have standing as representatives of the plan itself because they have not suffered any injury in fact. Nor have Thole and Smith received any assignment of the plan’s potential fiduciary claims.
Third, Thole and Smith had pointed to language in the Employee Retirement Income Security Act that explicitly provides a cause of action for participants and beneficiaries, in addition to the Secretary of Labor or a fiduciary, to bring a claim for fiduciary breach. Here the majority looked to precedent establishing that the grant of a statutory right is not alone sufficient to establish Article III standing. A concrete injury is required. Because Thole and Smith have not suffered any financial injury, they do not meet that requirement. In a footnote, the majority recognized that the current case does not involve an alleged breach of the duty to provide plan information.
Finally, the majority rejected Thole and Smith’s contention that plaintiffs and beneficiaries need to be able to bring fiduciary breach claims because otherwise there would be insufficient constraints on fiduciary misconduct. According to the majority, employers and shareholders have an interest in ensuring fiduciary loyalty and prudence because, in defined-benefit plans, employers are obligated to make up for any deficit in plan funding. The Department of Labor has both the power and the incentive to enforce ERISA’s fiduciary obligations. The majority left open the question, raised in amicus briefs, whether standing would exist when “the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits.”
Thomas, joined by Gorsuch, concurred in the outcome and in the majority’s application of the court’s precedent. The concurrence, however, raised an argument that Thomas has made dating back at least to his 1995 dissent (joined by Justices Sandra Day O’Connor and Antonin Scalia) in Varity Corp v. Howe. His view, repeated in subsequent cases addressing the scope of ERISA remedies, is that the Supreme Court’s heavy reliance on the common law of trusts in ERISA cases is misplaced.
Justice Sonia Sotomayor authored a lengthy dissent, which Justices Ruth Bader Ginsburg, Stephen Breyer and Elena Kagan joined. The dissent disagreed with the majority’s decision to distinguish the rights of defined-benefit plan participants and beneficiaries from the rights of those entitled to benefits from defined-contribution plans or grantor trusts. ERISA requires that plan assets be held in trust. If, as the majority held, plan participants and beneficiaries are not entitled to the “equitable title in the plan’s assets, then no one would” hold that title. The dissent found the majority’s distinctions between defined-benefit trusts and grantor trusts unpersuasive. Most notably, the majority made much of the fact that employers must ensure that plans are funded sufficiently to pay full benefits. The dissent pointed out that traditional trust law recognizes that one need not hold the residual risk in order to possess an equitable interest in the trust.
The dissent also chided the majority for implying that a financial injury is necessary to establish Article III standing. The majority emphasized that Thole and Smith had received all of the pension benefits to which they are entitled and will continue to receive their benefits whether they win or lose the case. But, as noted above, the majority took pains in a footnote to distinguish this case from one alleging a failure to provide plan information. The dissent pointed out that it is well established in trust law that trust beneficiaries have standing to bring claims for a breach of loyalty even in the absence of any loss to the trust. Further, monetary injury is not required for standing. The dissent would find that participants in a plan have a right to loyal and prudent fiduciaries.
Even assuming that the majority were correct to characterize the defined-benefit plan as primarily contractual, the dissent went on to raise two contract-based arguments for standing. First, the plan document, which the majority did not analyze, creates a trust. Second, even under a contract analysis, Thole and Smith should have standing to bring a breach of contract claim for the fiduciaries’ alleged actions.
Finally, the dissent argued that Thole and Smith have standing as representatives of the plan. A plan cannot act on its own; like a corporation, it requires a person to act on its behalf. ERISA explicitly provides that a fiduciary, the Secretary of Labor, or participants and beneficiaries may assert a claim for fiduciary breach. In the circumstances of this case, the fiduciaries are unlikely to bring a claim against themselves, and the federal government in its amicus brief stated that the Secretary of Labor cannot ensure compliance by all ERISA fiduciaries. The dissent argued that the court’s existing precedent on representational standing supports standing for Thole and Smith in this suit. For example, trust law permits a beneficiary to sue as a trust representative when the trustee will not or cannot bring the claim.
Today’s decision illustrates the tension often seen in ERISA cases. The dissent emphasizes the protective purposes of the statute and worries that the risk of fiduciary misbehavior could imperil the benefits of the approximately 35 million people who have defined-benefit plans. In contrast, the majority views rights to defined-benefit plan pensions as largely contractual. In their view, participants and beneficiaries who receive their full benefits do not suffer any cognizable injury from fiduciary breaches that affect the plan’s assets.