Predicting the Outcome of the Latest Challenge to the Affordable Care Act

By Joseph A. Garofolo

Since there have already been a number of thoughtful posts regarding the proposed ERISA fiduciary regulation that was issued by the Department of Labor on April 14, 2015, this blog strays from that subject to make a few observations about King v. Burwell—the latest challenge to the Patient Protection and Affordable Care Act (the “ACA”) pending before the Supreme Court.

King involves an interpretation of a section of the Internal Revenue Code (the “Code”) added by the ACA.  Code § 36B addresses the availability of premium tax credits for low to moderate income purchasers of insurance through health care exchanges established under the ACA.

Premium tax credits are made available for eligible taxpayers “enrolled through an Exchange established by the State under [section] 1311 [of the ACA].”  26 U.S.C. § 36B(b)(2)(A).  Exchanges under the ACA were to be established pursuant to one of three methods: i) by the state pursuant to ACA § 1311; ii) by the federal government and state partnering pursuant to ACA § 1321; and iii) by the federal government pursuant to ACA § 1321.  In 2012, the Internal Revenue Service (the “IRS”) promulgated a regulation that interpreted the relevant language of Code § 36B to include those “enrolled in one or more qualified health plans through an exchange,” meaning that the tax credits would be available to eligible taxpayers regardless of how an exchange was established in a particular state.  Thereafter, 34 states declined to establish exchanges and, as contemplated by the ACA, the Department of Health and Human Services set up exchanges in those states.

The question before the Supreme Court is whether the IRS’ interpretation is a permissible construction of Code § 36B.  An agency cannot interpret a statute contrary to the “unambiguously expressed intent of Congress.”  Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984).

Judging by the questions at oral argument, Justices Breyer, Ginsburg, Kagan, and Sotomayor appear to be in favor of upholding the IRS’ interpretation as a permissible construction of Code § 36B while Justices Alito and Scalia appear to be in the opposite camp.  Thus, the count appears to be four to three without a clear indication of where Chief Justice Roberts or Justice Kennedy will come out—this assumes that Justice Thomas is with the latter group since, as usual, he did not ask any questions at oral argument.

Of course, it is a dangerous exercise to attempt to predict the outcome of a case based on the questions asked by the Justices.  But, interestingly, Professor Ed Lee of ITT Chicago-Kent College of Law has applied a method of predicting the outcome of Supreme Court cases to King based on exactly that.  Simply put, “the party that receives the most questions from the Justices during oral argument is more likely to lose.”  Edward Lee, Ed Lee: Predicting the Winners, ITT Chicago-Kent College of Law SCOTUS Now,  Professor Lee credits Judge Richard Posner of the Seventh Circuit and Professors Lee Epstein of Washington University and William Landes of the University of Chicago Law School with having performed a statistical analysis of this method.  See Lee Epstein, William M. Landes, & Richard A. Posner, Inferring the Winning Party in the Supreme Court from the Pattern of Questioning at Oral Argument, 39 J. Legal Stud. 433 (2010).

According to Professor Lee, based on this method, King could go either way.  However, he predicts that the challengers of the IRS’ interpretation will prevail.  Edward Lee, Affordable Care Act, OT 2014, Predicting the Winners, Predicting the Winner in King v. Burwell—Will Obamacare Stand?, ITT Chicago-Kent College of Law SCOTUS Now, March 4, 2015,  With regard to Justice Kennedy, Professor Lee writes the following: “[I]n his questions, Kennedy floated a theory of constitutional doubt that would, if applied, favor the Solicitor General.  But if I stick to the question count method, Kennedy’s question count favors the Petitioner.”

A decision in King is expected in the next few months so we shall soon find out.

Latest Developments Regarding the Proposed Fiduciary Regulation

By Joseph A. Garofolo

March has already delivered several noteworthy developments regarding the proposed fiduciary rule.  By way of background, the Department of Labor sent a proposed rule regarding the definition of fiduciary to the Office of Management and Budget (“OMB”) on February 23, 2015.  Although the proposed rule has not been made public yet, the Department provided a glimpse of what it might look like in frequently asked questions available on the Department’s website.  For example, the Department indicates that it is seeking “a balanced approach that . . . ensures that [investment] advisers provide advice in their client’s best interest, and also minimizes any potential disruptions to all the good advice in the market.”  Further, the Department states that the proposed rule “will not prohibit common compensation practices, such as commissions and revenue sharing[,]” and will include proposed exemptions to restrictions under ERISA and the Internal Revenue Code (the “Code”).  Review by OMB is a first step and will be followed by the notice-and-comment process under the Administrative Procedure Act.

As to the new developments, first, nine Republican members of the U.S. Senate Committee on Health, Education, Labor, and Pensions signed a March 10, 2015 letter to the OMB Director generally expressing concern that the proposed rule will be similar to the 2010 proposed rule that was withdrawn by the Department in 2011.  The letter requests that OMB consider 11 specific concerns of the Senators.  Most of the concerns revolve around perceived failures of the Department to coordinate with the Securities and Exchange Commission (“SEC”) and other agencies and the possibility that the proposed rule could increase the cost of investment-related services or reduce the availability of such services to ERISA plans and individual retirement accounts (“IRAs”).  The letter is available here.

Second, Secretary of Labor Thomas Perez was questioned about the proposed fiduciary rule during a March 17, 2015 budget hearing before the U.S. House of Representatives Committee on Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies.  Republican Hal Rogers, the Chairman of the Committee on Appropriations, asked Secretary Perez “how ERISA gives DOL jurisdiction over an individual’s relationship with a personal investment advisor.”  In response, Secretary Perez briefly explained the roles of the Department and the SEC and referenced a letter that he had sent the previous day responding to an inquiry from the Chairman of the House Committee on Education and the Workforce.  Secretary Perez also stated that “the law gives DOL the authority to define a fiduciary under the tax laws in the same way as the ERISA definition.”  He further indicated that he has been involved in eight or nine meetings with SEC Chairwoman Mary Jo White relating to the proposed fiduciary rule.  A video of the hearing currently is available here (the dialogue between Chairman Rogers and Secretary Perez starts at approximately 1:21:52).

The discussion during the budget hearing highlights the potential scope of the proposed fiduciary rule and the impact that it could have not only on 401(k) and other employer-sponsored plans, but also IRAs.  The 2010 proposed regulation would have amended the definition of fiduciary for purposes of ERISA and the excise tax on prohibited transactions under Code § 4975.  Code § 4975 applies to IRAs and contains a definition of fiduciary parallel to the one found in ERISA § 3(21)(A).

Finally, several sources, including PLANSPONSOR and the American Retirement Association, are reporting that on March 17, 2015, Chairwoman White stated that the SEC will “implement a uniform fiduciary duty for broker-dealers and investment advisors where the standard is to act in the best interest of the investor.”

While the extent of further interaction between the Department of Labor and the SEC and the ultimate fate of the proposed fiduciary rule remain uncertain, it appears quite likely that the discourse surrounding the proposed rule will continue to be politically charged.

Is Williston on Contracts The Sacred Text for Interpretation of ERISA Plans?

By Joseph A. Garofolo

Earlier this year, the Supreme Court emphasized that collective bargaining agreements establishing ERISA welfare plans generally must be construed in accordance with ordinary principles of contract interpretation.  See M&G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015).   The Court rejected the Sixth Circuit’s inferences in favor of vesting of retiree health care benefits outlined in International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., 716 F.2d 1476, 1479 (6th Cir. 1983).  Counting the concurring opinion, the Court cited Williston on Contracts no less than seven times when describing ordinary principles of contract interpretation.  See Tackett, 135 S. Ct. at 933, 935-938 (citing R. Lord, Williston on Contracts (4th ed. 2008 & 2012)).  The majority also cited Williston on Contracts in US Airways, Inc. v. McCutchen, 133 S. Ct. 1537, 1549 (2013), and Justice Scalia cited the treatise in his concurrence in Cigna Corp. v. Amara, 131 S. Ct. 1866, 1884 (2011).

ERISA practitioners familiar with the Supreme Court’s interpretive history of the phrase “other appropriate equitable relief,” as used in ERISA § 502(a)(3), will recall the Court’s frequent references to the Restatement of Trusts, Bogert & Bogert’s Law of Trusts and Trustees, and Scott & Fratcher’s Law of Trusts (now Scott & Ascher on Trusts), sometimes referred to as The Sacred Texts.  See Jacklyn Willie, Attorneys Reflect on 40 Years of ERISA’s Biggest Rulings, Bloomberg BNA Pension & Benefits Daily, Sept. 9, 2014, at 2.

In light of the Court’s recent decisions, Williston on Contracts might be viewed as The Sacred Text when it comes to benefit plan interpretation.  But this is by no means a foregone conclusion.  The Supreme Court has characterized Corbin on Contracts as a “standard current work[].”  Great-West Life Annuity Ins. Co. v. Knudson, 534 U.S. 204, 217 (2002).  Indeed, in Tackett, 135 S. Ct. at 936, the Court also cited Corbin on Contracts.  Of course, Arthur Corbin and Samuel Williston famously disagreed on a number of fundamental principles relating to contractual interpretation, such as the proper application of the parol evidence rule.  See Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Interpretation, 146 U. Pa. L. Rev. 533, 568-69 (1998).  

Moreover, “for the last few decades the academic literature has not taken Williston’s jurisprudence all that seriously.”  Mark L. Movsesian, Rediscovering Williston, 62 Wash. & Lee L. Rev. 207, 209 (2005).  While Mark Movsesian, a contracts professor at St. John’s University School of Law, concluded in 2005—perhaps presciently in the case of the Supreme Court’s recent ERISA jurisprudence—that there had been a resurgence of interest in Williston’s work, he also explained the following:

The cite count is high, but scholars have tended to look to Williston only in passing, referencing him when they have needed a source for some black-letter proposition or some point of legal history.  In part, this indifference stems from the fact that most of Williston’s work is of a doctrinal and case-oriented style that has fallen out of vogue. . . . Over time, the conventional wisdom has lumped Williston together with the great villains of contemporary jurisprudence, the classical formalists, portraying him as a mindless reactionary obsessed with logic and conceptual abstraction.

Id. at 209-210.

Elaborating upon what some perceive to be failings of Williston’s work, Professor Movsesian pointed out that Harvard Law Professor Morton Horwitz has asserted that “Williston’s objective theory of contract acts to ‘disguise gross disparities of bargaining power under a facade of neutral and formal rules.'”  Id. at 226 (citation omitted).

Back to the realm of ERISA, in Tackett, the Supreme Court suggested that it would not be appropriate to apply ordinary contract law principles when such principles are “inconsistent with federal labor policy.”  135 S. Ct. at 933.  And, in addition to the fact that ERISA expressly states that one of its purposes is to protect the interests of participants and beneficiaries, some commentators have contended that ERISA plans are adhesion contracts.  See, e.g., John H. Langbein, Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials Under ERISA, 101 Nw. U. L. Rev. 1315, 1323 (2007) (“ERISA benefit plans are characteristic contracts of adhesion, offered on a take-the-plan-or-leave-the-job basis.”).

Thus, it is unclear whether all of the principles of contractual interpretation associated with Samuel Williston are consistent with the “special nature and purpose of employee benefit plans.”  Varity Corp. v. Howe, 516 U.S. 489, 497 (1997).

Because ERISA cases frequently involve disputes over benefit plan interpretation, we will likely have the opportunity to observe whether the Court will continue to rely upon Williston on Contracts to articulate ordinary principles of contract interpretation.  If this turns out to be the case, considering the fact that the treatise currently consists of 31 volumes, there is certainly plenty of material for the Court to draw from in framing the “ordinary contract principles” that must be applied to employee benefit plans.

Proposed $62 Million Settlement Submitted for Approval in Lockheed 401(k) Excessive Fee Litigation

By Joseph A. Garofolo

On February 20, 2015, the parties in Abbott, et al. v. Lockheed Martin Corporation, et al., No. 06-cv-701-MJR-DGW, filed their joint motion for preliminary approval of a class action settlement.  Plaintiffs’ counsel touted the proposed settlement as the “the largest ever for a case of this nature.”  (Plaintiffs’ Memorandum in Support of Joint Motion for Preliminary Approval of Settlement at 1).

The lawsuit, pending in the United States District Court for the Southern District of Illinois, alleges fiduciary breaches of ERISA and prohibited transactions relating to fees and expenses paid from assets of two 401(k) plans sponsored by Lockheed Martin.  The suit also asserts that plan fiduciaries improperly managed company stock funds and a stable value fund.

If approved by the court, defendants would pay $62 million into a settlement account.  In addition, defendants have agreed to, inter alia, implement competitive bidding for recordkeeping services provided to the plans and to offer plan participants investment share classes with the lowest expense ratio with certain caveats.

Based on the plaintiffs’ briefing in support of the joint motion, class counsel will request not more than one-third ($20,666,667) of the $62 million cash settlement fund and costs of not more than $1,850,000.

The terms of the proposed settlement will be reviewed by an independent fiduciary pursuant to Department of Labor Prohibited Transaction Class Exemption 2003-39.

The lawsuit was commenced more than eight years ago and decisions of the district court have been appealed multiple times.  The settlement agreement with its exhibits, including Exhibit 3 (the proposed notice to class members), can be reviewed here.

It is the author’s opinion that the proposed settlement is likely to be approved by the court.



Courts Continue to Permit Expert Testimony on a Variety of ERISA Issues

By Joseph A. Garofolo

In Abbott, et al. v. Lockheed Martin Corporation, et al.—the 401(k) plan excessive fee lawsuit in which a provisional settlement was recently reached—expert testimony was almost certain to play a critical role had the case proceeded to trial.  Just before the provisional settlement was reported, as a potential prelude to the clash between experts if the case had continued, the United States District Court for the Southern District of Illinois ruled that it would permit a supplemental expert report of one of the plaintiffs’ experts.  In his supplemental report, the plaintiffs’ expert opined that plan “fiduciaries’ attempts (or lack thereof) to explore alternative recordkeeping and administrative processes contributed to the excessive amount of fees assessed against Plan participants over the years.”  (Order dated December 14, 2014 at 1).

As evidenced by the Abbott litigation, expert testimony can take center stage in ERISA cases all the way up to trial.  But what is the basis for allowing such testimony and what issues have experts been permitted to opine upon in ERISA cases?

To begin with, Rule 702 of the Federal Rules of Evidence focuses on the expert’s qualifications, the reliability of the proffered testimony, and whether the testimony is helpful to the trier of fact.  And Rule 704 declares that “[a]n opinion is not objectionable just because it embraces an ultimate issue.”

In light of the guidance provided by Rules 702 and 704 of the Federal Rules of Evidence, it is not surprising that federal courts across the circuits have permitted expert testimony regarding a variety of ERISA issues.  See, e.g., Hans v. Tharaldson, 2011 U.S. Dist. LEXIS 151083, at *17 (D.N.D. Dec. 23, 2011) (expert “may testify about the duty to act prudently, the standard of care applicable to a fiduciary in this situation, how [defendant’s] actions deviated from the applicable standard of care, and/or why he believes [the] . . . analysis [of the other side’s expert] is flawed”); In re Iron Workers Local 25 Pension Fund, 2011 U.S. Dist. LEXIS 34505, *15-*16 (E.D. Mich. Mar. 31, 2011); Stinker Stores, Inc. v. Nationwide Agribusiness Ins. & Order Co., 2010 U.S. Dist. LEXIS 31643, at *11-*12 (D. Idaho Mar. 31, 2010) (expert opinions would be “helpful to the jury in understanding relevant issues of employee benefit administration and ERISA, and the application of relevant . . . policy language to the day-to-day practice of employee benefits administration”); In re Reliant Energy ERISA Litig., 2005 U.S. Dist. LEXIS 48034, at *8 (S.D. Tex. Aug. 18, 2005) (expert “opinions on specific issues, such as whether Defendants were ERISA fiduciaries for certain relevant purposes” could be helpful to the court); Engers v. AT&T (In re Engers), 2005 U.S. Dist. LEXIS 41693, at *3, *10 (D.N.J. Aug. 10, 2005); Stuart Park Assocs. Ltd. Partnership v. Ameritech Pension Trust, 51 F.3d 1319, 1327 (7th Cir. 1995).

In what might actually be an understatement, one court explained that the “interactions of ERISA, the [Internal Revenue Code], and their accompanying regulations were ‘sufficiently esoteric’ to the uninitiated factfinder to justify expert witness opinion testimony under Rule 702.”  Proujansky v. Blau, 2000 U.S. Dist. LEXIS 786, at *23 (S.D.N.Y. Jan. 27, 2000).

Moreover, since most ERISA cases are bench trials, in the author’s experience, the admissibility of expert testimony may remain unresolved at trial because a judge may be inclined to delay a ruling on challenged expert testimony until after trial.

Thus, it is likely that experts will continue to assume an important role in ERISA litigation, especially in cases involving complex issues or alleged breaches of fiduciary duty.

A Touch of Grey—ERISA Remains a Complex and Evolving Statute After 40 Years

By Joseph A. Garofolo

To celebrate ERISA’s 40th anniversary and for EES’s inaugural blog, here are 10 observations relating to the landmark statute:

1.  ERISA was signed into law by President Gerald Ford on September 2, 1974, but most of its provisions took effect on January 1, 1975.  After coming out of conference committee, the House of Representatives passed ERISA by a vote of 407-2 on August 20, 1974.

2.  As originally enacted, ERISA § 502 set forth six civil statutory causes of action.  See ERISA §§ 502(a)(1)-(6).  As amended, ERISA currently provides for ten civil statutory causes of action.  See ERISA §§ 502(a)(1)-(10).

3.  The Secretary of Labor has been a party to a number of seminal cases that contributed to the development of ERISA jurisprudence.  See, e.g., Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979); Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982); Donovan v. Mazzola, 716 F.2d 1226 (9th Cir. 1983); Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983).

4.  The Fifth Circuit has recognized that “a pure heart and empty head” are not enough to satisfy ERISA’s fiduciary duties.  Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983).

5.  According to the Fifth Circuit, ERISA’s prudence standard does not require a fiduciary to conduct himself or herself as a prudent expert: “Some commentators have suggested that the reference in Section 404 to a prudent man ‘familiar with such matters’ creates a ‘prudent expert’ standard under ERISA. . . . However, a review of the relevant history of Section 404 does not support this view; rather, it confirms that the emphasis of Section 404 is on flexibility.”  Donovan v. Cunningham, 715 F.2d 1455, 1467 n.26 (5th Cir. 1983) (citations omitted).

6.  In Donovan v. Bierwirth, the Second Circuit explained that a fiduciary’s decisions “must be made with an eye single to the interests of participants and beneficiaries.”  680 F.2d 263, 271 (2d Cir. 1982) (citations omitted).

7.  The Ninth Circuit has observed that ERISA’s prudence standard is derived from the common law of trusts, but that it must be interpreted “bearing in mind the special nature and purpose of employee benefit plans.”  Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983).

8.  The Supreme Court has described ERISA’s preemption clause as “conspicuous for its breadth,”  FMC Corp. v. Holliday, 498 U.S. 52, 58 (1990), and the Ninth Circuit has noted that “ERISA contains one of the broadest preemption clauses ever enacted by Congress.”  PM Group Life Ins. v. W. Growers Assur. Trust, 953 F.2d 543, 545 (9th Cir. 1992).

9.  Health and welfare plans covered by ERISA are not exempt from its fiduciary duty provisions.

10.  Since ERISA was enacted, there have been 14 Secretaries of Labor (not including Acting Secretaries): Peter J. Brennan (1973-1975/Nixon); John T. Dunlop (1975-76/Ford); W.J. Usery, Jr. (1976-77/Ford); Ray Marshall (1977-81/Carter); Raymond J. Donovan (1981-85/Reagan); William E. Brock (1985-87/Reagan); Ann Dore McLaughlin (1987-89/Reagan); Elizabeth Hanford Dole (1989-90/Bush); Lynn Morley Martin (1991-93/Bush); Robert B. Reich (1993-97/Clinton); Alexis M. Herman (1997-01/Clinton); Elaine L. Chao (2001-09/Bush); Hilda L. Solis (2009-13/Obama); and Thomas Perez (2013-present/Obama).