Supreme Court: Defined Benefit Plan Participants Lack Standing for Fiduciary Breach Lawsuit in Thole v. US Bank

Practical Law Legal Update w-025-8170 (Approx. 6 pages)

Supreme Court: Defined Benefit Plan Participants Lack Standing for Fiduciary Breach Lawsuit in Thole v. US Bank

by Practical Law Employee Benefits & Executive Compensation

Background

The plaintiffs in Thole are retired participants in a defined benefit plan sponsored by US Bank. Both plaintiffs are currently receiving benefits from the plan, and they:

Have been paid all of their monthly pension benefits so far.
Are legally and contractually entitled to receive those same monthly payments for the rest of their lives.

The plaintiffs filed a putative class action lawsuit against US Bank and other defendants (US Bank) under ERISA Sections 409, 502(a)(2), and 502(a)(3) (29 U.S.C. §§ 1109, 1132(a)(2), and 1132(a)(3)) claiming that the plan sponsor and the other defendants violated ERISA's fiduciary duties of loyalty, diversification of plan assets, and prudence by poorly investing the plan's assets from 2007 to 2010 (see Practice Notes, ERISA Litigation: Causes of Action and Remedies Under ERISA Section 502 and ERISA Fiduciary Duties: Overview). Specifically, they alleged that the defendants failed to properly diversify the plan's portfolio, which resulted in large losses to the plan during the 2008 financial crisis and its aftermath. Additionally, they alleged that the plan's fiduciaries invested the pension plan's assets in the bank's own mutual funds, which caused the plan to pay excessive management fees (see Practice Note, Prohibited Transactions and Exemptions Under ERISA and the Code).

To redress the alleged harm to the plan, the plaintiffs requested:

That US Bank repay the plan approximately $750 million in losses that the plan allegedly suffered.
Injunctive relief, including replacement of the plan's fiduciaries.
At least $31 million in attorneys' fees.

The US District Court for the District of Minnesota dismissed the case, and the US Court of Appeals for the Eighth Circuit affirmed the district court on the ground that the plaintiffs lack statutory standing (873 F.3d 617 (D. Minn. 2017); see Practice Note, ERISA Litigation: Causes of Action and Remedies Under ERISA Section 502: Who May Bring Suit Under Section 502(a)(3)). The plaintiffs petitioned the US Supreme Court for a writ of certiorari, which the Court granted.

Outcome

In a 5-4 decision, the Court affirmed the judgment of the Eighth Circuit, on the ground that the plaintiffs lack Article III standing.

According to the Court, the plaintiffs lacked Article III standing because whether they win or lose the lawsuit, they would receive the same monthly pension benefit as they currently do. They did not suffer an injury from the defendants' alleged breach of fiduciary duties, and therefore they lack a concrete stake in the lawsuit (see Practice Note, Non-Statutory Grounds for Challenging Class Actions: Standing and Ascertainability: Standing). The Court rejected each of the four arguments raised by the plaintiffs in favor of Article III standing.

The plaintiffs' first argument was based on the law of trusts. Specifically, they argued that a defined benefit plan participant has an equitable or property interest in the plan, and he or she is harmed by a plan fiduciary's breach of a trust law duty of prudence or loyalty, even if the participant does not suffer monetary harm. The Court rejected this argument because the participants in a defined benefit plan are not similarly situated to the beneficiaries of a private trust or the participants in a defined contribution plan. According to the Court, a defined benefit plan is more in the nature of a contract than a trust because:

The plan participants' benefits are fixed and will not change, regardless of how well or poorly the plan is managed.
The benefits paid to the participants in a defined benefit plan are not tied to the value of the plan.
The plan sponsor (the employer), not the plan participants, receives any surplus left over after all of the benefits are paid, and the employer, not plan participants, must cover plan shortfalls.

The Court rejected the plaintiffs' second argument, that they have standing as representatives of the plan, because they did not suffer an injury in fact and were not legally or contractually appointed to represent the plan.

The plaintiffs' failure to assert a concrete injury also led the Court to reject the plaintiffs' third argument: that they have standing to sue the plan under ERISA Sections 502(a)(2) and (3), which authorizes plan participants and beneficiaries, the Department of Labor (DOL), and other specified parties to bring claims for the civil enforcement of ERISA's substantive requirements and the violations of plan terms. The Court emphasized that Article III standing requires a concrete injury even in the context of a statutory violation. In a footnote, the Court stated that its decision does not concern lawsuits to obtain plan information.

The plaintiffs' fourth and final argument was that if defined benefit plan participants may not sue to remedy the misconduct of plan fiduciaries, no one will meaningfully regulate plan fiduciaries. Therefore, defined benefit plan participants must have standing to sue. The Court, however, rejected this argument because:

It has long rejected that kind of argument for Article III standing (see Valley Forge Christian Coll. v. Ams. United for Separation of Church & State, Inc., 454 U.S. 464, 489 (1982)).
Defined benefit plans are heavily regulated by the federal government, including the DOL and the PBGC, and employers that sponsor defined benefit plans have incentives to properly manage their plans.
State and federal criminal law may apply, depending on the type of fiduciary misconduct.

Finally, the Court observed that the plaintiffs' complaint did not claim that the alleged mismanagement of the plan substantially increased the risk that the plan and the employer would fail and be unable to pay the plaintiffs' future pension benefits, although this argument was raised in the briefs filed by the plaintiffs' amici curiae. That is, the bare allegation of plan underfunding did not demonstrate an increased risk that the plan would fail. In a footnote, the Court stated that any increased-risk-of-harm theory of standing might not be available for plan participants whose benefits are guaranteed in full by the PBGC, although it chose not to answer that question in this decision.

Concurrence

In his concurring opinion, which was joined by Justice Gorsuch, Justice Thomas agreed with the Court's holding but objected to using the common law of trusts as the "starting point" for interpreting ERISA, and recommended that the Court should, in an appropriate case in the future, reconsider this aspect of its ERISA jurisprudence.

Dissent

In a dissenting opinion, Justice Sotomayor (joined by Justice Ginsburg, Justice Breyer, and Justice Kagan) argued that the plan participants in this case had a "concrete" injury to support their standing to sue, for three reasons:

The participants have an interest in their retirement plan's financial integrity, like private trust beneficiaries have in protecting their trust. The participants established their standing by alleging a $750 million injury to the plan.
A breach of fiduciary duty is a cognizable injury, regardless of whether that breach caused financial harm or an increased risk of nonpayment of plan benefits.
The plan participants have standing to sue on behalf of the plan. Regardless of whether the participants have a suable interest in their plan's financial integrity or its competent supervision, the plan itself would. Someone has to sue on the plan's behalf, and since the fiduciaries in this case refuse to sue because they themselves would be the defendants, the plan participants and beneficiaries may sue in a representative capacity on behalf of the plan under ERISA Sections 502(a)(2) and (a)(3). The dissent also cited the DOL's amicus brief in support of the participants, which stated that the federal government cannot monitor every ERISA plan in the country.

Practical Implications

Sponsors and other fiduciaries of defined benefit plans should be aware of the Supreme Court's decision in Thole, which provides that defined benefit plan participants and beneficiaries will not have standing to sue for fiduciary breaches where they have received full benefits under the plan and the outcome of litigation would not affect those benefits. According to the Court in Thole, if winning or losing an ERISA Section 502 suit would not change whether the participant or beneficiary receives their full defined benefit plan benefits, they will lack a concrete stake in the lawsuit and standing to bring it.

It is important to note the Court's decision was made in the context of a defined benefit plan and not a defined contribution plan. Sponsors and fiduciaries should keep an eye toward how the case is applied in the lower courts, particularly in cases where litigants allege that fiduciary misconduct puts a plan's ability to pay future benefits at risk.

Supreme Court: Defined Benefit Plan Participants Lack Standing for Fiduciary Breach Lawsuit in Thole v. US Bank | Practical Law