Enter to open, tab to navigate, enter to select
Fourth Circuit Permits Common Fund Award in Addition to ERISA Attorney's Fees
Practical Law Legal Update w-019-6269 (Approx. 6 pages)
Fourth Circuit Permits Common Fund Award in Addition to ERISA Attorney's Fees
by Practical Law Employee Benefits & Executive Compensation
| Published on 26 Mar 2019 • USA (National/Federal) |
In litigation involving an employee stock ownership plan's (ESOP's) alleged overpayment for company stock, the Court of Appeals for the Fourth Circuit affirmed a district court's judgment against the ESOP's trustee, concluding that the trustee breached its fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). The Fourth Circuit also upheld the district court's decision to award attorney's fees to plaintiff's counsel under both ERISA's fee-shifting provision and the common fund doctrine.
Joining the Second, Eighth, and Ninth Circuits, the US Court of Appeals for the Fourth Circuit has concluded that a statutory fee-shifting provision (or an award of fees under such a provision) – in this case under the Employee Retirement Income Security Act of 1974 (ERISA) – does not necessarily prohibit recovery under the common fund doctrine (Brundle v. Wilmington Trust, N.A., (4th Cir. Mar. 21, 2019); see Practice Note, ERISA Litigation: Attorney's Fees: ERISA Attorney's Fees and the Common Fund Doctrine). The Fourth Circuit reached this conclusion in litigation involving an employee stock ownership plan's (ESOP's) alleged overpayment for company stock, in which a district court ruled that the ESOP's trustee breached its ERISA fiduciary duties (see Practice Note, ERISA Fiduciary Duties: Overview). After affirming the district court's conclusions on the ERISA fiduciary breach issues, the Fourth Circuit affirmed the district court's decision to award attorney's fees to plaintiff's counsel under ERISA's fee-shifting provision and the common fund doctrine.
Background
The plaintiff in this case participated in an ESOP established by his employer (see Practice Note, Employee Stock Ownership Plans (ESOPs)). The ESOP had a "unique structure" that allowed the employer's owners to sell the company stock to the ESOP while also retaining control over the company. Relying on its financial advisor's draft valuation of the stock, the ESOP's trustee authorized the purchase of the stock for more than $4,000 per share.
The plaintiff-participant sued the trustee and the employer, alleging that the trustee caused the ESOP to engage in a prohibited transaction, and therefore breached its fiduciary duties under ERISA (see Practice Notes, Prohibited Transactions and Exemptions Under ERISA and the Code and ERISA Fiduciary Duties: Overview: Avoiding Prohibited Transactions and ERISA Litigation Toolkit). Rejecting the trustee's adequate consideration affirmative defense, the district court held that the trustee breached its fiduciary duties and awarded well over $29 million in damages to the ESOP. The district court also awarded the participant's counsel:
- $1.8 million in attorney's fees under ERISA's fee-shifting provision (29 U.S.C. § 1132(g)(1); see Practice Note, ERISA Litigation: Attorney's Fees).
- $1.5 million in attorney's fees from the ESOP's damages award under the common fund doctrine.
The participant and defendants appealed.
Outcome on Appeal
On appeal, the Fourth Circuit rejected the trustee's challenges to the district court's findings and found no error with the court's damages award. The Fourth Circuit next addressed challenges from both sides to the district court's additional $1.5 million in attorney's fees under the common fund doctrine.
Recovery Under the Common Fund Doctrine
Under the common fund doctrine, a lawyer who recovers a common fund for the benefit of individuals other than his client is entitled to a reasonable attorney's fee from the fund as a whole. The doctrine is intended to prevent unjust enrichment that would otherwise occur if individuals benefit from a lawsuit without contributing to its costs. The circuit courts of appeal disagree as to whether the availability of an award under a fee-shifting statute prohibits a common fund award. (Compare Pierce v. Visteon Corp., 791 F.3d 782, 786-87 (7th Cir. 2015) (limiting the common fund approach to cases outside the scope of fee-shifting statutes) with McKeage v. TMBC, LLC, 847 F.3d 992, 1003 (8th Cir. 2017) (concluding that the presence of a fee-shifting statute does not necessarily preclude a common fund award), In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 941 (9th Cir. 2011) (same), and Cty. of Suffolk v. Long Island Lighting Co., 907 F.2d 1295, 1327 (2d Cir. 1990) (same).) For additional background on the common fund doctrine and the Pierce and McKeage decisions, see respectively Legal Updates, Counsel Denied Additional Attorneys' Fees from Class in ERISA Fee-shifting Case: Seventh Circuit and Court Has Discretion to Award Attorneys' Fees from Common Fund or Fee Shifting: Eighth Circuit.
Siding with the Second, Eighth, and Ninth Circuits, the Fourth Circuit held that the presence of a statutory fee-shifting provision does not automatically prohibit a common fund award. In reaching this conclusion, the court reasoned that statutory-fee awards and common fund awards:
- Place the costs of litigation on different parties.
- Serve different purposes and operate in different ways.
For example, whereas a fee-shifting statute places the cost of litigation on the losing party, a common fund recovery imposes this burden on the recovering beneficiaries of a lawsuit. The Fourth Circuit reasoned that scores of ESOP participants benefited substantially from the litigation at issue, but the plaintiff's counsel bore the entirety of the costs and risks. As a result, equity demanded that the enriched participants pay a proportional share of reasonable attorney's fees.
The Fourth Circuit also rejected the defendants' argument that a common fund award would violate ERISA's anti-alienation and exclusive benefit provisions (29 U.S.C. §§ 1056(d)(1) and 1103(c)(1); see Practice Note, ERISA Fiduciary Duties: Duty of Loyalty). The Fourth Circuit reasoned that because the district court had not yet distributed the funds to the ESOP, they were not plan assets. Accordingly, the district court retained jurisdiction over the funds and could award attorney's fees from the funds without violating the anti-alienation and exclusive benefit provisions.
The participant also challenged the common fund award, arguing that the district court should have awarded one-third of the judgment ($9.9 million) as attorney's fees in accordance with the contingent fee agreement he had with his counsel. In rejecting this argument, the Fourth Circuit noted that:
- The ESOP was not a party to the fee agreement, and therefore there was no contractual basis for awarding one-third of the common fund.
- 59 of 1,800 former participants objected to a one-third contingency fee award when notified of the proposed award.
- After denial of his motion for class certification, the participant did not pursue class certification, which would have provided safeguards to absent class members and possibly justified a higher fee award.
Practical Impact
Although, as noted, the Seventh Circuit has declined to award additional fees under a common fund theory, other courts have been more willing to apply the common fund doctrine in benefits litigation contexts. In US Airways, Inc. v. McCutchen, for example, the US Supreme Court concluded that the common fund doctrine could be used to interpret a health plan's subrogation/reimbursement provision where the plan was silent about allocating the costs of recovery (see Standard Document, SPD Language: Limits on Subrogation and Reimbursement Provisions: Common Fund Doctrine; 569 U.S. 88, 92 (2013)).