Jeffrey Cohen Joins Bailey & Ehrenberg PLLC

We are pleased to announce that Jeffrey B. Cohen, former Chief Counsel to the Pension Benefit Guaranty Corp. has joined our firm as a Partner in Washington, DC. Jeffrey's thirty year career has been split almost evenly between the private sector and government. The one constant has been his singular focus on employee benefits litigation. His distinguished tenure at the federal Pension Benefit Guaranty Corporation culminated in his appointment as Chief Counsel, where he led the legal staff in representing the agency in ERISA litigation and in bankruptcy proceedings, including the largest, most complex, and highest profile corporate reorganizations of that era. He has litigated a wide range of employee benefit disputes at all levels of the federal judicial system, as well as in arbitrations and state courts. He is also a nationally recognized expert on employee benefits issues in bankruptcy. He earned his law degree from Georgetown University Law Center in 1980 and his Bachelor of Arts from the State University of New York at Binghamton in 1977. Mr. Cohen is a Fellow of the American College of Employee Benefits Counsel and was named as a “Dealmaker of the Year” by the American Lawyer in 2006. He has been recognized in the 2010 edition of Best Lawyers in America and as a DC Superlawyer. He is admitted to practice in the District of Columbia, New York, and Virginia, as well as the Supreme Court of the United States and a number of federal courts of appeals and district courts.

Stormy Weather for CBS News

The Wallstreet Journal reported today that longtime CBS News weatherman George Cullen has filed suite against CBS in federal court alleging that he was terminated due to his age (Cullen is 58). The lawsuit alleges that CBS terminated Cullen (after 29 years with the network) in favor of a younger, less experienced staffer. The lawsuit also alleges that CBS purportedly terminated Cullen for failing to show up for a mandatory training session. This should be an interesting case, which will turn on whether Cullen and his legal team can prove that CBS's reason for his termination - his alleged failing to attend the training session - was merely a pretext. The fact that Cullen has been replaced with a younger, less experienced staffer will help his case, but is not dispositive. Cullen will need to marshal additional evidence to prove that he was terminated solely, or predominantly, because of his age. The Journal reports that Cullen appeared on The CBS Evening News, The CBS Early Show, and The CBS NFL Today over the years. Cullen was CBS's chief meteorologist. (see www.wsj.com for more)

Yet Another "Stock Drop" Decision...

In yet another “stock-drop” decision, the United States District Court for the Northern District of Illinois denied on Thursday a company’s motion to dismiss an ERISA lawsuit stemming from the offering of company stock in its 401(k) plan.

The facts of In re General Growth Properties Inc. ERISA Litigation, Case No. 08cv6680 (N.D. Ill.) are all too familiar. General Growth is a self-administered real estate investment trust that conducts most business through its operating partnership GGP Limited Partnership. General Growth and GGP both filed for bankruptcy protection in April 2009. In 2008 and 2009, General Growth was one of many U.S. companies devastated by the subprime lending crisis. During the relevant time period -- running from April 30, 2007, to April 16, 2009 -- General Growth's stock lost 99 percent of its value, falling from high of $65.81 per share to a low of $.49 per share. The participants alleged in their lawsuit that the General Growth and its top officials breached fiduciary duties by continuing to offer General Growth's stock in the Company's 401(k) plan during a time when they knew or should have known that the subprime lending crisis and declines in consumer spending made expansion of the company's real estate holdings “an ill-advised business plan.” The participants also alleged that the Company breached its fiduciary duties by failing to disclose to participants the adverse effect of the real estate market's collapse on the Company's real estate holdings.

The defendants filed a motion to dismiss, requesting the court to dismiss the entire lawsuit. In denying the defendants' motion to dismiss part of the participants' claims, the District Court refused to use the “presumption of prudence” analysis that many courts have applied in the context of stock-drop cases (the “presumption of prudence” analysis generally weighs in favor of company’s that offer company stock in their retirement plans). The Court determined that presumption would not apply here because the Company’s 401(k) plan did not mandate that Company stock be offered under the 401(k) plan. Further, the District Court determined that the participants had asserted sufficient facts that to allow a potential finding that it was imprudent for the fiduciaries to continue offering company stock in the Company’s 401(k) plan after the stock had lost nearly 99 percent of its value. The Court granted the motion to dismiss as to claims alleging that the defendants breached fiduciary duties by failing to tell participants about the company's financial struggles during the subprime mortgage meltdown and by incorporating misleading and inaccurate Securities and Exchange Commission filings in the plan documents. According to the court, “[w]hile Plaintiff is correct that some courts have found that incorporated SEC filings do constitute fiduciary speech, recent jurisprudence has declined to hold ERISA fiduciaries liable for SEC filings.” The Court further noted that any allegedly misleading statements made by the defendants to the participants were made in their corporate capacities, not in their plan fiduciary capacities.

Interesting "Stock Drop" Decision

The United States District Court for the Northern District of Illinois held on Monday that Baxter International Inc. did not breach its fiduciary duties when it offered its stock in the company's tax code Section 401(k) plan at a time when the stock price was dropping (due to the company's failure to meet earnings projections). The Court's decision in Rogers v. Baxter International Inc., N.D. Ill., No. 04 C 6476 (N.D. Ill.) is significant because unlike other “stock-drop” cases -- where courts applied a “presumption of prudence” standard -- to dismiss fiduciary breach claims, the Court here based its decision (for the most part) on the safe harbor provision of ERISA Section 404(c) of the Employee Retirement Income Security Act.

The case history is quite long. The action, brought by a Baxter employee and plan participant, stems from Baxter's announcement in July 2002 that it had inflated its expected earnings, which caused Baxter's stock price to drop sharply. The employee sued Baxter, the plan's administrative and investment committees, and several individuals including two chief financial officers and two former chief executive officers. In his lawsuit, the employee alleged that the defendants breached their fiduciary duties by: (1) failing to diversify investments and by selecting Baxter stock as an investment option when the defendants knew or should have known the price was inflated, (2) imprudently investing in Baxter common stock and wrongfully presenting Baxter stock as an investment alternative, (3) making material misrepresentations and nondisclosures, and (4) “dividing loyalty” by engaging in a scheme to artificially inflate the price of Baxter's stock so as to allow executives to benefit in the form of higher stock options. The defendants filed a motion to dismiss, which the Court denied in February 2006. The Court subsequently certified the relevant claims as class action claims. The defendants filed an interlocutory appeal to the United States Court of Appeals for the Seventh Circuit, which appeal was denied, and the Seventh Circuit sent the case back to the district court.

The defendants subsequently filed a motion for summary judgment, arguing that their 401(k) plan qualified as an ERISA Section 404(c) plan, thus relieving the plan's fiduciaries of liability. Section 404(c) exempts defined contribution pension plan fiduciaries from liability if the plan meets five requirements. Those requirements are that the plan (1) provide for individual accounts, (2) allow participants the opportunity to exercise control over their accounts, (3) provide participants with the opportunity to choose from a broad range of investment alternatives, (4) give participants sufficient information to make informed investment decisions, and (5) provide additional safeguards if the plan offers qualifying employer securities. The Court determined that Baxter's tax code Section 401(k) plan met the requirements of an ERISA Section 404(c) plan, thus exempting the plan's fiduciaries from liability. In granting Baxter's motion for summary judgment, the court found that Baxter had satisfied Section 404(c) by providing participants with sufficient information to allow them to make informed decisions about their investment in Baxter stock. The court also found significant the fact that, plan participants, and not the plan fiduciaries, directed investment of plan assets. According to the Court, “[b]y providing Plan participants and beneficiaries with the requisite control over their accounts (in addition to the requisite information and range of investment alternatives) to satisfy the safe harbor defense, defendant fiduciaries ceded control over the assets in each individual Plan participant's account to each participants." In so doing, the Court noted, the defendant fiduciaries ceded responsibility for decisions regarding how those assets would be invested and agreed to follow participants' investment instructions.

The Court also disposed of the employee's argument that ERISA Section 404(c) did not absolve the defendants from liability with respect to his claim that the plan violated ERISA by acquiring and holding more than 10 percent of the plan assets in Baxter stock. According to the Court, the "10 percent claim" and the applicability of the safe harbor defense hinged on who “caused” the plan to hold more than 10 percent of its assets in Baxter stock. The court found it was the participants, and not the Baxter defendants, who caused the plan to hold more than 10 percent of its assets in company stock because the investments were made by the participants. The Court noted that "[b]ecause the fiduciary is obligated to comply with investment instructions, the Department of Labor has determined that the safe harbor shields a fiduciary from an individual participant's concentration of all of his account assets in a single stock, ... even though that concentration of assets in a single stock might be imprudent if the fiduciary had chosen to do so in exercise of its discretion." The Court further noted that "[t]here is no indication that the Department of Labor interprets the safe harbor differently if several participants decide to make the same non-diversified investment so that a large percentage of plan assets would be invested in a single stock.”

Federal District Court Dismisses Fiduciary Breach Lawsuit Brought Against Fidelity and Unysis Corp.

The United States District Court for the Eastern District of Pennsylvania dismissed an ERISA fiduciary breach lawsuit brought against Unisys Corp, and Fidelity on Monday of this week. In Renfro v. Unisys Corp. (E.D. Pa., No. 07-2098, 4/26/10), the plaintiff's alleged that Unisys's Section 401(k) plan held $2 billion in assets between 2000 and 2007. The plan had 30,000 participants, placing it in the top 1 percent of all Section 401(k) plans in the United States. The plan offered participants 70 investment options, including mutual funds, index funds, commingled pools, fixed income funds, and a money market fund. The Plaintiff's alleged that the investment funds offered fees ranging from as little as 0.10 percent to as high as 1.21 percent. It was alleged that nearly $1.9 billion of the plan's assets were held in Fidelity-branded retail mutual funds and all of the assets were held in vehicles managed or operated to some extent by a Fidelity affiliate, the court said. A group of Unysis 401(k) plan participants participants filed a lawsuit against Unisys, the plan fiduciaries, and the Fidelity companies. They claimed that the defendants breached their ERISA fiduciary duties by causing plan participants and beneficiaries to pay excessive administrative and investment management fees. In particular, the participants asserted that Unisys should have taken advantage of the plan's large size to negotiate lower fees or increased services for the plan's participants and beneficiaries.

In granting Unisys's motion to dismiss, the District Court found that there was nothing in ERISA that would have required the fiduciaries of Unisys's Section 401(k) plan “to get the best deal imaginable.” Rather, the Court found, ERISA merely requires fiduciaries “to act carefully, skillfully, prudently, diligently, and solely in the interest of participants and beneficiaries." According to the Court, "[w]hile this is not a light duty, it does not support a lawsuit that simply claims the fiduciaries could have done better had they worked harder to leverage their market power.” The Court further noted that “[t]here is nothing about the slate of investment options the Plan offered that suggests the Unisys Defendants did not meet the requisite standard of care. The Plan offered participants a number of investment options with varying fees, risks, and potential rewards...." The Court also commented found that even if Unisys selected overly expensive funds for the plan, it would still be entitled to summary judgment because its plan met the safe harbor provisions of ERISA Section 404(c). In so ruling, the court rejected the plaintiffs' reliance on Department of Labor regulations indicating fiduciaries will not be shielded by Section 404(c) when they select imprudent investments for the plan. The court said it would not defer to the Department of Labor's interpretation of Section 404(c).

The District Court also dismissed fiduciary breach claims that had been brought against the 401 (k) plan's service and investment providers Fidelity Management Trust Co., Fidelity Investments Institutional Operations Co., and Fidelity Management & Research Co. The Court held that none of the Fidelity defendants acted as fiduciaries of Unisys's Section 401(k) plan. In rejecting the plaintiffs' contention that Fidelity Management had “veto power” over the selection of plan investment options and as such it had the requisite discretionary authority or responsibility that would render it a plan fiduciary. The court said Fidelity Management had no “veto power” because at all times it was Unisys's fiduciaries that had authority to decide which investments would be offered under the plan. The court also rejected the plaintiffs' allegation that Fidelity Management was a fiduciary because it exercised discretion over “float interest” on plan contributions. [Float interest is the interest earned on plan contributions from the time that they were received by Fidelity Management until the time they were credited to participant accounts.] The Court noted that, “[e]ven if FMTC is a fiduciary with respect to float interest, that does not render it a fiduciary with respect to investment selections,” the court said.

Big Blow To Wal-Mart

CNN reports that the U.S. Court of Appeals for the Ninth Circuit has certified the largest class-action employment lawsuit in U.S. history, in a long-standing dispute against retailer Wal-Mart Stores Inc. over alleged gender bias in pay and promotions. According to CNN, the Ninth Circuit ruled Monday that the combined multiparty litigation can move ahead to trial, where a decision against the company could result in billions in damages. At issue in the case is whether more than a million current and former Wal-Mart employees can band together in their claims of discrimination, which they say has occurred over the past decade, at least. The plaintiffs allege that women were paid less than, and were given fewer opportunities for promotion than, their male counterparts. They seek back pay and punitive damages against the world's largest retailer. (See http://www.cnn.com/ for more on this case).

Supreme Court Rejects "One Strike And You're Out Approach" To Review Of Plan Administrators' Decisions

The Supreme Court handed down a significant - and, quite frankly, obvious and unnecessary - benefits decision yesterday. In Conkright v. Frommert, No. 08–810, participants in an ERISA pension benefit plan, who had left the employment of Xerox Corp., received lump-sum distributions and later been rehired by Xerox, sued Xerox and others for improper calculation of their benefits. Following a partial grant of Xerox's motion to dismiss, the United States District Court for the Western District of New York granted summary judgment for Xerox, and the participants appealed. The Second Circuit Court of Appeals, affirmed in part, vacated in part and remanded. On remand, following the recalculation of benefits by Xerox, the District Court declined to afford Xerox's determination any deference based on Xerox's earlier error, and entered order from which the defendants appealed. The Court of Appeals affirmed in part, vacated in part and remanded. Certiorari was granted by the Supreme Court.

The Supreme Court held that the District Court should have applied a deferential standard of review to the Plan Administrator's interpretation of the Plan on remand. The Supreme Court noted that its earlier decision in Firestone Tire & Rubber Co. v. Bruch looked to “principles of trust law” for guidance, and that under trust law, the appropriate standard depends on the language of the instrument creating the trust. When a trust instrument gives the trustee “power to construe disputed or doubtful terms, ... the trustee's interpretation will not be disturbed if reasonable." Under Firestone and the Xerox Plan's terms, the Plan Administrator should have been entitled to deference when interpreting the Plan. The Supreme Court noted, however, that the Court of Appeals below had crafted an exception to Firestone deference, when it held that a court need not apply a deferential standard when a plan administrator's previous construction of the same plan terms was found to violate ERISA. The Supreme Court noted that the Second Circuit's “one-strike-and-you're-out” approach had no basis in Firestone, which set out a broad standard of deference with no suggestion that it was susceptible to ad hoc exceptions. The Supreme Court also noted that it had recently held in Metropolitan Life Ins. Co v. Glenn, that a plan administrator operating under a systemic conflict of interest is nonetheless still entitled to deferential review. In light of that ruling, the Court found it difficult to see why a single honest mistake should require a different result. The Court also noted that ERISA represents a “ ‘careful balancing’ between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans,” and that Firestone deference preserves this “careful balancing” and protects the statute's interests in efficiency, predictability, and uniformity.