March 9, 2015
- Sixth Circuit Court of Appeals Overturns Disgorgement of Profits Award Under ERISA in Rochow v. LINA
- Supreme Court Signals Interest in a Reverse Stock Drop Case
Sixth Circuit Court of Appeals Overturns Disgorgement of Profits Award Under ERISA in Rochow v. LINA
On March 5, a majority of the U.S. Sixth Circuit Court of Appeals, sitting en banc (all of the judges from the court), vacated a “disgorgement of profits” ERISA award and remanded the case back to the District Court for the Eastern District of Michigan to determine whether and how much prejudgment interest should be awarded. In this case, Rochow v. Life Insurance Company of North America (LINA), a majority of a three-judge panel of the Sixth Circuit previously upheld the district court award but the earlier dissenting judge wrote the overriding March 5 decision for the entire court.
Both the District Court for the Eastern District of Michigan and the Sixth Circuit Court of Appeals have consistently held that LINA wrongfully denied the plaintiff disability benefits owed to him, awarding the plaintiff $900,000 in benefits plus attorneys’ fees and costs. However, in a subsequent ruling, the same district court ruled that LINA also breached its fiduciary duty by denying benefits and thus additional “equitable” remedies were appropriate, awarding the plaintiff nearly $3.8 million in “disgorgement” of adjudged LINA “profits” under ERISA Section 502(a)(3), which allows a plan beneficiary "to obtain other appropriate equitable relief.” Two of the three judges in the three-judge panel of the Sixth Circuit upheld the “disgorgement” award in a December 6, 2013, decision.
In a March 28, 2014, amicus (“friend of the court”) brief, the Council, along with the American Council of Life Insurers, the U.S. Chamber of Commerce and America’s Health Insurance Plans, urged the full Sixth Circuit Court of Appeals to overturn the award. The brief asserted that the district court ruling (and three-judge panel appellate affirmation) should be overturned since it (1) dramatically increases the risk, expense and burden associated with providing and administering ERISA benefits, (2) conflicts with Sixth Circuit and U.S. Supreme Court precedent, permitting an impermissible windfall for the plaintiff under ERISA, and (3) represents a “punitive” disgorgement award and is therefore also impermissible under ERISA (see the April 1, 2014, Benefits Byte).
The March 5 opinion agreed with arguments from the Council’s amicus brief, holding that Rochow is made whole under Section 502(a)(1)(B) through his recovery of wrongfully denied benefits, attorney’s fees, and the potential recovery of prejudgment interest. The court also noted that “Rochow and our dissenting colleagues wholly fail to explain how his [ERISA Section] 502(a)(1)(B) remedies are inadequate to remedy his injury” [emphasis original].
For more information, contact Jan Jacobson, senior counsel, retirement policy, at 202-289-6700.
Supreme Court Signals Interest in a Reverse Stock Drop Case
The U.S. Supreme Court has asked the U.S. Solicitor General – the U.S. Department of Justice official responsible for arguing cases before the high court – to submit a brief in a case addressing potential fiduciary liability for selling “company stock” held in a qualified retirement plan under ERISA. Such a request is typically considered a prelude to possible consideration of a case by the U.S. Supreme Court. In this case, the “company stock” was stock in the company no longer affiliated with the plan sponsor due to a spinoff.
A three-judge panel of the U.S. Court of Appeals for the Fourth Circuit was the last court to rule on the case, Tatum v. R.J. Reynolds, finding in favor of the plaintiffs, a group of plan participants who claim that they were harmed when the plan sponsor eliminated the company stock investment option from the company’s 401(k) plans shortly after a spinoff. The stock price had been dropping but after the fund’s removal, the company’s stock rose significantly higher. This is commonly referred to as a “reverse stock drop” case.
As described more fully in the Council’s August 7 Benefits Byte story, the Fourth Circuit panel’s majority opinion accepted the arguments of the plaintiffs (and the U.S. Department of Labor, as outlined in its own amicus brief) that the district court applied an erroneous legal standard to determine whether the breach resulted in losses to the plan. The panel therefore remanded the case back to the district court level “to review the evidence to determine whether RJR has met its burden of proving … that a prudent fiduciary would have made the same decision.”
The Council (with the U.S. Chamber of Commerce) had filed an amicus (“friend of the court”) brief requesting a rehearing “en banc” of the full appeals court, but the full Fourth Circuit court declined to revisit the case.
Responding to a petition from R.J. Reynolds, the solicitor general has been “invited to file a brief” with the U.S. Supreme Court in this case. The high court will review the brief as part of its consideration of whether it will take up the case. It is expected that the Solicitor General will likely take the same position as the U.S. Department of Labor.
This is the second time in the past year that the U.S. Supreme Court has expressed an interest in benefit plan fiduciary issues. In this way, the Tatum case is reminiscent of 2014’s Fifth Third Bancorp v. Dudenhoeffer, in which the court rejected the prior law presumption that buying or holding employer stock in an Employee Stock Ownership Plan (ESOP) is prudent. Most importantly in that case, however, the Court also provided new rules that could significantly reduce successful claims simply based on the price of an employer stock dropping (often referred to as “stock drop” cases) or that the fiduciary should have taken an action based on “inside information.” (A summary of the case and an analysis of the Supreme Court’s decision, prepared by Davis & Harman, LLP, is now available on the Council website.)
For more information on this issue or the Council’s amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy, at (202) 289-6700.