This post addresses a fairly recent court decision, Guenther v. BP, which stands out as stunning, even in a litigation landscape littered with stunning court decisions. In brief, the court held that a plan disclosure made in 1989 – yes, 1989, not a typo – was unclear so the entire plan must be reformed to align with the most participant-friendly interpretation of that disclosure, costing the plan sponsor over $1 billion, even though that disclosure had no effect on participants or any election by any participants. Can you imagine the effects of this decision on other plans if the decision is upheld?
At this point, it is well known that many courts have stretched the rules of litigation when reviewing lawsuits brought against retirement plan sponsors by class-action plaintiffs. In recent years, for example, courts have been willing to entertain novel applications of ERISA’s fiduciary duties, draw unreasonable inferences about the decision-making process implemented by plan fiduciaries, and unfairly allow very expensive discovery without any reasonable basis to believe that there has been an ERISA violation.
Why is this happening? It isn’t exactly clear. Perhaps courts are willing to stretch the rules because workers and retirees are sympathetic plaintiffs. Perhaps it is because courts view multi-billion-dollar employers as unsympathetic defendants. And perhaps it is because, for some claims, courts do not believe that the normal rules of litigation and the text of ERISA, as written, sufficiently protect the interests of participants. No matter what the source of this problem is, this trend is very concerning, it is expanding, and it is dramatically altering the cost-benefit analysis that employers are performing when they consider the retirement and health benefit offerings that they will make available to their employees.
While judicial flexibility in favor of plaintiffs has been most apparent in how courts have applied the pleading standards to the wave of fee and performance claims that have plagued plan sponsors in recent years, this trend has also expanded into other areas of ERISA litigation involving both retirement and health plans, with dramatic consequences for impacted employers. As a consequence, employers are finding it much harder to have all sorts of claims dismissed.
As one particularly stark example of this phenomenon, last year, a federal court in Texas bent one important litigation rule – the Constitution’s “standing” requirement – and one important ERISA rule – ERISA’s statute of repose – in such a way that will, if not corrected, force a plan sponsor – in this case, BP – to reform a cash balance plan conversion that occurred in 1989. Yes, that’s right, for a lawful plan conversion that occurred in the same year that Rain Man won Best Picture at the Oscars, George Michael won Best Album at the Grammys, and the Berlin Wall came down, BP has recently been ordered to reform its already generous retirement offerings by adding up to $1.5 billion dollars in additional benefits for a group of plaintiffs. And the “great wrong” underlying the court’s decision? Disclosures alleged to be unclear but that had no impact on any participant election. This is, unfortunately, the type of jaw-dropping result that can occur when courts are willing to stretch the rules in favor of plaintiffs.
Although BP is currently appealing the lower court’s ruling to the Fifth Circuit Court of Appeals in an effort to correct and overturn the lower court’s mistakes, if that appeal is unsuccessful, the lower court’s decision could cost BP more than a billion dollars. In isolation, this is very concerning for plan sponsors considering the potential liabilities that may arise from their own plan offerings. But even more troubling, from a broader policy perspective, these mistakes are concerning for the retirement system as a whole because the BP litigation is only one recent example of a court ruling in favor of plaintiffs.
Key Point #1: Ignoring Standing Defects Increases Employer Risks
As the Fid Guru Blog has previously discussed in other contexts, “standing” is a litigation requirement that all plaintiffs – whether ERISA plaintiffs or otherwise – must establish before they can bring a lawsuit in court. In order to establish standing, plaintiffs must show each of the following elements: (1) they suffered an injury in fact, (2) the injury was caused by the defendant’s misconduct, and (3) the injury is likely to be redressed by a favorable judicial decision. Unless a plaintiff can establish each of these elements, their claims must be dismissed for lack of standing. Standing is an important hurdle that keeps improper claims out of court, and a standing challenge can be an important defense for a plan sponsor because it can be used to prevent plaintiffs from advancing claims when the plan sponsor’s purported misconduct did not actually cause any injuries.
Guenther v. BP. In order to examine how the standing requirements were improperly ignored in the BP case, we must first explain what the case was about. While Guenther v. BP included many different types of claims over nearly a decade of litigation, and many of those claims were dismissed, the district court eventually held BP liable based on what the court determined to be failures in how BP disclosed its 1989 conversion of a traditional final average pay pension plan into a cash balance plan for certain participants.
Pursuant to those changes, each participant’s benefit under the traditional pension plan was converted into a hypothetical account balance maintained under a new cash balance plan. Each account received annual interest credits that were generally tied to prevailing interest rates, but that could never fall below 5%. At the time of the conversion, the actuarial firm retained by BP projected that affected employees could expect to receive a benefit under the new plan that was between 90% and 150% of the benefit under their old plan. Following the conversion, and on an ongoing basis, participants could also accrue additional service and interest credits.
To inform participants about these changes, BP implemented an educational campaign providing written and in-person communications to employees. This included, for example, a post-conversion letter informing participants about how their initial account balances had been calculated and how their accounts might grow based on projected interest rates. These communications expressly cautioned employees that they “could receive a lower benefit than they would have under the prior benefit formula.” Each year thereafter, BP also sent annual statements to participants identifying their account balances and the applicable interest rates.
Notwithstanding these efforts, for a lawsuit filed against BP in 2016, the district court looked back nearly three decades to rule that, in connection with the conversion, BP violated ERISA Section 102 by failing to update its summary plan description (SPD) in a timely manner and failing to send a notice of significant reduction in future benefit accruals as required by ERISA Section 204(h). Furthermore, and more significant to the court’s overall findings, the court ruled that the employee communication campaign presented to BP’s employees amounted to a breach of ERISA’s fiduciary duties because it was misleading. In particular, the court narrowly focused on a single statement indicating that the cash balance plan benefit, which was based on BP’s reasonable projections at the time, would provide a benefit that is “comparable to – and, in most cases, better than” the benefits that the participants would have received under BP’s traditional pension plan.
When affected participants retired decades later and some participants received lower benefits through the cash balance plan than they would have received under the traditional pension plan, in the court’s view, BP’s incorrect statements from 1989 amounted to a fiduciary breach. The court even went so far as to say that those communications were a “fraud or similarly inequitable conduct.”
What is concerning from a factual standpoint is that, in deciding that BP’s communications amounted to bad faith, the court did not take into account (1) BP’s reasonable projections, which understandably failed to predict the historic drops in interest rates that have occurred since the 1980s, and (2) other individual circumstances that may have yielded lower than expected benefits, such as an individual’s years of service or their individual levels of compensation. Where was the bad faith? Also, the decision failed to appropriately recognize that BP’s communication campaign expressly cautioned employees that they “could receive a lower benefit than they would have under the prior benefit formula.”
Standing Rules Ignored. Even putting aside these factual issues, the district court’s ruling in favor of the plaintiffs is more broadly concerning because, to even reach any factual questions, the court had to ignore the Constitution’s standing requirements that are designed to keep unjustified claims out of court. That is, the court did not require the plaintiffs to prove that any of plaintiffs’ injuries, in the form of any pension shortfalls, were actually caused by or attributable to BP’s disclosure failures under ERISA. Thus, the court allowed the plaintiffs to advance their lawsuit, even though they couldn’t show all three elements required to establish standing.
Here was the problem: Even assuming for the sake of argument that BP’s disclosures were inadequate or misleading, and even if the participants received a lower benefit than what they expected based on those disclosures, in terms of judging BP’s liability under ERISA, none of the pension shortfalls were actually caused by BP’s disclosure-related ERISA violations. Rather, the actual cause of any such shortfalls was BP’s decision, as a settlor, to convert its traditional pension plan into a cash balance plan. As BP’s recent brief to the Fifth Circuit succinctly explained, “Had the communications been exactly as Plaintiffs preferred, Plaintiffs still would have received exactly the same benefit, defeating causation.”
Notwithstanding this defect, on multiple occasions, the district court rejected BP’s attempts to dismiss the plaintiffs’ claims on standing grounds. And yet, the court never provided any explanation as to how the plaintiffs established the causal link that is needed to establish standing. Especially when considering the extremely expensive remedy fashioned by the court, at the very least, BP should have received an explanation as to how the court viewed BP’s disclosure-related ERISA violations as having caused any pension shortfalls.
Unfortunately, this district court is not alone in turning a blind eye to this causation requirement. As discussed in a previous article on the Fid Guru Blog (“Two District Courts Allow Tobacco Surcharge Cases to Advance, Establishing Troubling Precedents for both Tobacco Surcharge Cases and Other ERISA Cases”), two other district courts have recently made similar errors in cases involving challenges to certain wellness programs that offer lower premiums to employees who do not use tobacco products, as well as to those who do but are willing to complete a smoking-cessation program or some other “reasonable alternative standard.” Those courts found the plaintiffs had standing to bring suit alleging technical violations of the wellness program requirements, even though they didn’t even try to satisfy any “reasonable alternative standard.”
As noted earlier, properly applied standing rules can protect fiduciaries from liability when they technically violate ERISA, but such violations do not actually cause injuries for participants. This is a fundamental matter of fairness. While any violations of ERISA are concerning and should be avoided, as the Supreme Court has explained, “There is no ERISA exception to Article III” – meaning there is no ERISA exception to the Constitution’s Article III standing requirement.
ERISA includes a very powerful private right of action to enforce statutory violations. That right, however, should only be available to private parties if a defendant’s ERISA violation actually causes their injuries. Otherwise, employers could be held liable for statutory violations that don’t actually cause harm and, as demonstrated by the BP case, courts could unwind decades-old settlor decisions when disclosures based on reasonable projections do not accurately predict the future. As discussed further below, the practical consequences of this are alarming.
Key Point #2: Ignoring ERISA’s Statute of Repose Increases Employer Risks
In addition to the district court’s mistaken decision to ignore crucial elements of standing, its 2024 ruling against BP also interpreted the rules of ERISA in favor of the plaintiffs by ignoring ERISA’s statute of repose. Otherwise, if the court had appropriately applied that time bar, it could not have considered the plaintiffs’ suit, which was remarkably based on actions and communications that were nearly three decades old when the plaintiffs filed their claims in 2016.
Because ERISA is intended to encourage employers to voluntarily offer retirement plans, it includes a series of rules that are intended to give employers predictability. One of these rules is ERISA’s statute of repose. Pursuant to that rule, which appears in section 413 of ERISA, plaintiffs cannot, except in the case of fraud or concealment, bring a suit for a fiduciary breach more the six years from “the last action which constituted a part of the breach.”
The purpose of this rule, like other statutes of limitation and statutes of repose, is to institute a legislative policy judgment that, after a certain period of time, possible defendants should be free from the threat of liability from outdated and stale claims. However, notwithstanding this clear policy judgment from Congress, the district court in the BP case incorrectly ruled that the plaintiffs’ claims brought in 2016, which were based on fiduciary actions taken in 1989, were not subject to ERISA’s statute of repose. And why was this the case? Because, in the court’s view, ERISA section 413 shouldn’t apply to claims for equitable relief, which is what the plaintiffs were requesting by seeking a reformation of BP’s retirement plans. Put differently, the court simply ignored ERISA’s statute of repose because it determined that it was wholly inapplicable. As a result, ERISA’s statute of repose did not work as it was intended to block a claim brought in 2016 for alleged misconduct that occurred in 1989.
Without any need to go into a detailed discussion about the differences between lawsuits that are seeking equitable, as opposed to legal, relief, it is clear that the district court’s decision to ignore ERISA’s six-year statute of repose was wrong based on a plain reading of the statute and the public policy reasons for including a time limit for fiduciary claims under ERISA.[1] ERISA section 413 says that “[n]o action may be commenced . . . with respect to a fiduciary’s breach” more than six years from the last action which constituted a part of the breach. It does not say, for example, that only legal actions are subject to these limits, and it does not provide an exception for actions only seeking equitable relief. You will not find those distinctions anywhere within ERISA’s statutory provisions. The district court simply rejected clear directions from Congress and this error should be corrected by the Fifth Circuit Court of Appeals.
As noted earlier, ERISA’s statute of repose does include exceptions for “fraud or concealment.” So, in considering the BP case, one might wonder, given the court’s ruling that BP’s disclosures amounted to “fraud or similarly inequitable conduct,” whether the court invoked those exceptions to justify the timeliness of the plaintiffs’ claims. It did not, and even if it had, in the absence of any predisposition to stretch the rules in favor of the plaintiffs, the court should not have been able to conclude that BP engaged in fraud or sought to conceal any purported misconduct.
It is not fraud when differences in projected interest rates and actual interest rates cause 30-year old communications to be incorrect. Those are simply projections (or assumptions) that turned out to be wrong; not fraud. In any event, because the court was so willing to stretch the rules in favor of the plaintiffs to the point of simply ignoring ERISA’s statute of repose, those factual questions were not appropriately considered or addressed in any court ruling.
Moreover, as BP’s brief to the Fifth Circuit explained, there is no evidence of concealment given all of the disclosures that BP has made to participants since 1989. Those disclosures have routinely and accurately informed participants about the terms of the plan, their annual account balances, and how benefits are calculated. With three decades of hindsight, BP may have incorrectly projected the impact of its conversion, but this was not concealment by any measure.
Key Point #3: Judicial Flexibility Is Altering the Careful Balance Struck by ERISA
Through ERISA, Congress struck a careful balance between two important interests: (1) promoting voluntary employee benefit plans; and (2) protecting plan participants. For example, while ERISA provides a powerful private right of action for wronged participants, it also bars stale claims and fails to provide for punitive or extracontractual damages. Furthermore, while ERISA imposes rigorous fiduciary duties for those responsible for plan management, it allows employers to act with “two hats” – as employers that can make settlor decisions about whether, and at what level, to offer benefits, and as fiduciaries that are responsible for implementing those settlor decisions. Similarly, although ERISA prescribes a series of disclosures and reporting requirements for plan sponsors, it also provides employers with uniformity and predictability by preempting state laws.
Very concerningly, for more than a decade, court rulings in ERISA cases have tipped the scales far too heavily against employers and in favor of class-action plaintiffs. In the BP case, an employer executed a lawful plan conversion, informed participants of that decision, and relied on its decision when assessing its benefit offerings for nearly thirty years. But, because BP’s projections did not accurately predict future interest rates, the plaintiffs are now remarkably being awarded a benefit that is greater than what they had been promised by the terms of the plan. In this regard, BP’s purported disclosures failures, which were fiduciary in nature, are somehow being used to circuitously reform BP’s plan design choices, which are settlor in nature.
The court’s decision, and its flexible approach to standing and ERISA’s statute of repose, is unfortunately just one example of a broader problem that is throwing ERISA’s careful balance out of whack. For example, as discussed in a previous article in the Fid Guru Blog (“Split Court Rulings Invite Pension Risk Transfer Claims Lacking Any Evidence of Wrongdoing or Harm”), at least one district court has taken a lax approach to the Constitution’s standing requirement by allowing a group of plaintiffs, who have received all benefits that they have been promised, to satisfy standing for their pension risk transfer (PRT)-related claims by raising highly speculative concerns about the solvency of a PRT insurer that is exhibiting no signs of distress. Although that case and the BP case are currently being appealed, and may be corrected, it is nevertheless alarming just how frequently and creatively courts have been stretching the rules like this in favor of ERISA plaintiffs.
What is also alarming is the impact that this consistent flexibility is having on employers making decisions about their benefit offerings. Similar to the ills (no pun intended) associated with defensive medicine, an aggressive plaintiffs bar and plaintiff-friendly courts are making it very difficult for plan fiduciaries and plan sponsors to focus exclusively on what is most beneficial for participants, as litigation risk must now be a central part of any decisions regarding benefits.
If rulings like the BP case persist, employers must not only worry about the fiduciary decisions that they will make in the future, they must also worry about every decision that they have made for decades. Given the tremendous dollar figures that employers have invested in their retirement offerings, and the potential liability that could accrue from small deviations from plan assumptions made many decades ago, it is not difficult to imagine why some employers may become reluctant to devote additional resources to expand or add benefits in the future. This is very troubling for plan sponsors and workers alike, and ERISA was not intended to operate this way.
[1] Very generally, a legal remedy is a court order for monetary damages, whereas an equitable remedy is a court order for a defendant to act or refrain from acting in a particular way. In BP’s case, the court viewed the plaintiffs’ requested remedy as equitable because they sought to have BP reform its retirement plans. This can, however, be viewed in this context as a distinction without a difference since the plaintiffs’ requested plan changes will effectively impose a significant monetary penalty on BP, if sustained on appeal. It clearly would not make sense if plaintiffs could avoid ERISA’s statute of repose by simply recasting their requested remedies as equitable, rather than legal.
