On May 18, 2015, the United State Supreme Court, by a 9-0 vote, vacated and remanded the Ninth Circuit’s holding in Tibble, et al. v. Edison International, et al., 729 F.3d 1110 (9th Cir. 2013).
Tibble is an “excessive fee” case that had been brought under the Employee Retirement Income Security Act (ERISA) against the fiduciaries of a 401(k) plan. The fiduciaries had been accused of having allowed certain mutual fund companies to charge excessive fees, in breach of their fiduciary duty to the plan’s participants and beneficiaries, because those same mutual funds were being offered at a lower price to other “institutional” investors. Because tens of millions of Americans save for retirement through employer-sponsored 401(k) plans, and mutual funds routinely are among the investment options made available to them, the case had drawn considerable attention.
In Tibble, though, the Ninth Circuit Court of Appeals panel considering the case held that it was too late to sue the plan’s fiduciaries for a breach of fiduciary duty because ERISA’s six-year statute of limitations for fiduciary breaches virtually acts like a statute of repose, and generally runs from the date the plan fiduciary selects a particular mutual fund for investment unless a substantial change in circumstances can be shown. (Note: a shorter, three-year limitations period applies if a plaintiff can be shown to have actual knowledge of the fiduciary breach being challenged.) The decision in Tibble was widely seen as virtually shutting the door on any fiduciary decision to select a given mutual fund, if the decision had gone unchallenged for six or more years.
Associate Justice Breyer, writing for the entire court, rejected the use of an almost prophylactic application of ERISA’s breach-of-duty statute of limitations, holding instead that ERISA fiduciaries have a “continuing duty” to monitor plan investments (or here, investment choices), and all along have had an obligation to remove and replace investments that fail to measure up. (Notably, Breyer wrote the majority opinion in Fifth Third Bank v. Dudenhoeffer, 573 U.S. ____ (2014), the closely followed “stock drop” case from the 2014 term; in Dudenhoeffer, Breyer used a strict construction approach to construe ERISA’s fiduciary duty rules, and in the process, broadly reaffirmed the primacy of ERISA’s basic fiduciary duty principles and rejected the tendency to create special exceptions for (in that case) employee stock ownership plans.)
Taken alone, the decision in Tibble, and Breyer’s opinion, are not particularly remarkable. The continuing duty that an ERISA plan fiduciary has to monitor investments has long been recognized to be an essential tenet of trust law, and the Ninth Circuit’s decision was viewed by many as overreaching. The more intriguing – and problematic – aspect of Tibble involves what the Supreme Court did not say and what it did not decide, but instead left open for the lower courts to consider: At what point, and under what circumstances, will an ERISA plan fiduciary be considered to have violated that “continuing duty”? Obviously recognizing that the “devil is in the details,” by declining to provide guidance or guidelines, the Court in Tibble simply left it for the lower courts to examine – on their own – the details, and identify the devils. That can be a messy process. It also has the potential to be a time-consuming and expensive one, where each case will turn on its particular facts, and it will take time before reliable standards emerge.
When the Supreme Court’s decision in Tibble is considered in tandem with Dudenhoeffer (where the Court refused to temper ERISA’s fiduciary duty rules to take into account any “special circumstances” that a particular benefit plan may have), it becomes fairly easy to predict that:
- Lower courts will be far more likely, now, to take a longer and more cynical look at how – and, how often – 401(k) plan fiduciaries monitor the investment choices they make available to plan-covered individuals, and what standards they decide to apply when deciding whether (or not) to intervene and make a change on economic or other grounds, and
- Lower courts will be far more inclined to reject defendants’ attempts to dismiss or otherwise extinguish breach-of-fiduciary duty claims, and permit properly pled plaintiffs to engage at least some limited discovery, in order to discern whether plan fiduciaries have properly discharged their “continuing duty.”
Get ready, folks. Should be fun.