7th Circuit Opinion on Class Certification Issue

In today's posting at Jottings By an Employer's Lawyer, Michael Fox discusses a recent 7th Circuit opinion written by Judge Richard Posner on a procedural issue involving an ERISA section 510 case-In In Re: Allstate Insurance Company (7th Cir. 3/28/05)…

In today’s posting at Jottings By an Employer’s Lawyer, Michael Fox discusses a recent 7th Circuit opinion written by Judge Richard Posner on a procedural issue involving an ERISA section 510 case–In In Re: Allstate Insurance Company (7th Cir. 3/28/05) [pdf]. The plaintiffs in the case allege that the employer who had decided to replace its employee insurance agents with independent contractors harassed them so that they would quit so as not to qualify for severance benefits. The class seeks a judgment declaring that the members are entitled to the benefits they would have received under the employer’s ERISA severance plan “had they been fired rather than quitting.” The former employees allege that the employer harassed them by “extending office hours, imposing burdensome reporting requirements, reducing or eliminating reimbursement for office expenses, and setting unrealistic sales quotas.”

SAVE Introduced in the House and the Senate

Legislation designed to create "simplified" savings and retirement accounts has been introduced in both the House and the Senate. The bill introduced in the Senate on March 8, 2005 by Senator Craig Thomas (R-Wo) (press release is here) and in…

Legislation designed to create “simplified” savings and retirement accounts has been introduced in both the House and the Senate. The bill introduced in the Senate on March 8, 2005 by Senator Craig Thomas (R-Wo) (press release is here) and in the House by Rep. Sam Johnson (R-Tex) (press release is here) is called the “Savings Account Vehicle Enhancement”, or “SAVE” initiative (S. 545). The bill would create Lifetime Savings Accounts (“LSAs”), Retirement Savings Accounts (“RSAs”) and Employer Retirement Savings Accounts (“ERSAs”). Text of the proposed legislation is here (via Benefitslink.com and the American Benefits Council.)

From Bloomberg.com, “U.S. Lawmakers Revive Plan to Allow Tax-Free Savings Accounts.”

SAVE Introduced in the House and the Senate

Legislation designed to create "simplified" savings and retirement accounts has been introduced in both the House and the Senate. The bill introduced in the Senate on March 8, 2005 by Senator Craig Thomas (R-Wo) (press release is here) and in…

Legislation designed to create “simplified” savings and retirement accounts has been introduced in both the House and the Senate. The bill introduced in the Senate on March 8, 2005 by Senator Craig Thomas (R-Wo) (press release is here) and in the House by Rep. Sam Johnson (R-Tex) (press release is here) is called the “Savings Account Vehicle Enhancement”, or “SAVE” initiative (S. 547 and H.R. 1163). The bill would create Lifetime Savings Accounts (“LSAs”), Retirement Savings Accounts (“RSAs”) and Employer Retirement Savings Accounts (“ERSAs”). Text of the proposed legislation is here (via Benefitslink.com and the American Benefits Council.)

From Bloomberg.com, “U.S. Lawmakers Revive Plan to Allow Tax-Free Savings Accounts.”

Mutual Fund Redemption Fees

On March 3, 2005, the Securities and Exchange Commission voted to adopt a rule concerning mutual fund redemption fees. (Release 2005-28) The rule will require the boards of mutual funds that redeem shares within 7 days to adopt a redemption…

On March 3, 2005, the Securities and Exchange Commission voted to adopt a rule concerning mutual fund redemption fees. (Release 2005-28) The rule will require the boards of mutual funds that redeem shares within 7 days to adopt a redemption fee of no more than 2 percent of the amount of the shares redeemed or determine that a redemption fee is not necessary or appropriate for the fund. The rule is designed to permit (but not require) funds to impose a redemption fee if they determine that the fee is necessary or appropriate to recoup the costs that short term trading can impose on funds and their long term shareholders. Many funds have adopted redemption fees as a tool to combat market timing and other abusive short term trading in fund shares. The rule will not prevent funds from taking other steps to address abusive trading.

The rule also will require funds that redeem share within seven days to enter into agreements with their intermediaries (such as broker-dealers and retirement plan administrators) obligating them to provide funds with shareholder trading information. This information will permit funds to identify shareholders who violate the funds’ market timing policies, and oversee the intermediaries’ assessment of any redemption fees. Unlike the rule the Commission proposed last year, the rule will permit fund managers to determine how frequently the fund asks for this information, and will include a provision requiring that the agreement obligate the intermediary to respond to directions from the fund to enforce the fund’s market timing policies.

Access remarks about the rule by SEC Chairman William H. Donaldson and Paul Roye, Director, Division of Investment Management which were given before the Open Meeting held March 3, 2005.

Mutual Fund Redemption Fees

On March 3, 2005, the Securities and Exchange Commission voted to adopt a rule concerning mutual fund redemption fees. (Release 2005-28) The rule will require the boards of mutual funds that redeem shares within 7 days to adopt a redemption…

On March 3, 2005, the Securities and Exchange Commission voted to adopt a rule concerning mutual fund redemption fees. (Release 2005-28) The rule will require the boards of mutual funds that redeem shares within 7 days to adopt a redemption fee of no more than 2 percent of the amount of the shares redeemed or determine that a redemption fee is not necessary or appropriate for the fund. The rule is designed to permit (but not require) funds to impose a redemption fee if they determine that the fee is necessary or appropriate to recoup the costs that short term trading can impose on funds and their long term shareholders.

The rule also will require funds that redeem shares within seven days to enter into agreements with their intermediaries (such as broker-dealers and retirement plan administrators) obligating them to provide funds with shareholder trading information. This information will permit funds to identify shareholders who violate the funds’ market timing policies, and oversee the intermediaries’ assessment of any redemption fees. Unlike the rule the Commission proposed last year, the rule will permit fund managers to determine how frequently the fund asks for this information, and will include a provision requiring that the agreement obligate the intermediary to respond to directions from the fund to enforce the fund’s market timing policies.

See also remarks made about the rule by SEC Chairman William H. Donaldson and Paul Roye, Director, Division of Investment Management, before the Open Meeting held March 3, 2005.

Another Meeting of the President’s Advisory Panel on Federal Tax Reform

The President's Advisory Panel on Federal Tax Reform held its third meeting today. Access the agenda as well as statements and testimony here. A presentation by Jack S. Levin (Partner, Kirkland & Ellis LLP) entitled "All You Ever Wanted to…

The President’s Advisory Panel on Federal Tax Reform held its third meeting today. Access the agenda as well as statements and testimony here. A presentation by Jack S. Levin (Partner, Kirkland & Ellis LLP) entitled “All You Ever Wanted to Know About U.S. Income Taxation of Business Enterprises” calls the complexity and compliance costs of the Tax code as “our worst dismal failure.”

The TaxProfBlog reports here: The Supreme Court this morning issued its 7-2 opinion in favor of the taxpayers in Ballard v. Commissioner (and the companion Estate of Kanter v. Commissioner), holding that the Special Trial Judge's report must be included…

The TaxProfBlog reports here:

The Supreme Court this morning issued its 7-2 opinion in favor of the taxpayers in Ballard v. Commissioner (and the companion Estate of Kanter v. Commissioner), holding that the Special Trial Judge’s report must be included in the record on appeal. Justice Ginsburg wrote the majority opinion; Justice Kennedy concurred; Chief Justice Rehnquist and Justice Thomas dissented.

The issue as framed by the Court:

We granted certiorari, 541 U. S. 1009 (2004), to resolve the question whether the Tax Court may exclude from the record on appeal Rule 183(b) reports submitted by special trial judges. We now reverse the decisions of the Seventh and Eleventh Circuits upholding the exclusion.

Excerpts from the opinion:

The Tax Court’s practice of not disclosing the special trial judge’s original report, and of obscuring the Tax Court judge’s mode of reviewing that report, impedes fully informed appellate review of the Tax Court’s decision. In directing the Tax Court judge to give “due regard” to the special trial judge’s credibility determinations and to “presum[e] . . . correct” the special trial judge’s factfindings, Rule 183(c) recognizes a well-founded, commonly accepted understanding: The officer who hears witnesses and sifts through evidence in the first instance will have a comprehensive view of the case that cannot be conveyed full strength by a paper record. . .

The idiosyncratic procedure the Commissioner describes and defends, although not the system of adjudication that Rule 183 currently creates, is one the Tax Court might some day adopt. Were the Tax Court to amend its Rules to express the changed character of the Tax Court judge’s review of special trial judge reports, that change would, of course, be subject to appellate review for consistency with the relevant federal statutes and due process.

From the New York Times article on the case:

The decision was a posthumous victory for a prominent tax lawyer . . . who along with two other men was found liable for a $30 million tax deficiency in a case that dated to the 1970’s. Although the decision did not overturn the tax court’s 1999 judgment . . the court will now have to disclose the basis for its adverse finding and will have to change its procedures for future cases.

(Previous post on the case is here.)

UPDATE: From Law.com: “Supreme Court: Tax Court Must Make Proceedings Public.

Lessons On Outsourcing From a Federal District Court Case

While everyone knows that outsourcing is here to stay, and that there are legitimate business reasons and advantages to outsourcing, what I have tried to do here is simply to highlight some of the ERISA litigation that has grown out…

While everyone knows that outsourcing is here to stay, and that there are legitimate business reasons and advantages to outsourcing, what I have tried to do here is simply to highlight some of the ERISA litigation that has grown out of this trend in outsourcing. The reason I think it is important is that when employers contemplate outsourcing and hire advisers to help them through the process, many times they are not advised of the issues and risks that can arise in the benefits arena. (See previous posts: Outsourcing Can Lead To Costly ERISA Litigation and Outsourcing: Traps for the Unwary.) Another very recent case–Sheckley v. Lincoln National Corporation Employees’ Retirement Plan, Civil No. 04-109-P-C (D. Maine 2005)–provides some further insight into actions that can expose an employer to liability under ERISA in an outsourcing arrangement as well as actions that can, to some extent, reduce an employer’s exposure to liability under ERISA.

Facts: The employer in the case reorganized its information technology organization, and as a result, forty-nine positions were eliminated. In the course of various restructurings, the employer entered into outsourcing agreements. (The court defines outsourcing as “the practice of transferring job functions to third-party vendors who enter into contracts with the employer to provide the services formerly provided by employees.”) The employer notified twenty-six employees in the information technology department, including plaintiff, that their positions were being outsourced to another employer. Outsourced employees were required to apply for their position with the new employer. Apparently, in the process of outsourcing the employees, they were given a benefits summary which indicated that they would be vested in the prior employer’s retirement plan. However, after accepting the position, plaintiff was informed that his retirement account in the prior employer’s plan would not vest.

Section 510 Claims: When the employer responded to an inquiry from plaintiff about the benefits summary he received, the employer stated that it “contained an error about his pension” and that he was not entitled to vesting because his job was not eliminated, but rather “outsourced.” Plaintiff then made a claim and quasi-appealed the decision under the plan’s claims procedures, but to no avail, and then brought suit under ERISA section 510, claiming that the employer had characterized the action taken as “outsourcing” (versus “job elimination”) in order to deprive plaintiff of vesting under the employer’s pension.

A Magistrate Judge had found that, although the amended complaint alleged the necessary intent, the “mischaracterization of the job eliminations affecting [p]laintiff and the Class … [could not] reasonably be construed, even under the favorable standard applicable to motions to dismiss, to allege discrimination against plaintiff and other members of the putative class.” However, the federal district court in Maine disagreed, holding that the allegations were sufficient to state an ERISA section 510 claim, and denied the employer’s motion to dismiss.

Plan Limitation Period: There was another aspect of the case though which illustrates one technique that employers are seeking to use to reduce their exposure to liability under ERISA, and that was a six-month limitation period contained in the Summary Plan Description (“SPD”). The applicable portion of the SPD read as follows, describing a participant’s rights upon denial of a claim after appeal of the claim:

The decision upon review will be final. It will be communicated in writing and contain the specific reason(s) for the decision, will contain references to the pertinent Plan language upon which the decision was based, and will be written in a manner easily understood by the claimant. Claimants will not be entitled to challenge the LNC Benefits Appeals [and] Operations Committee’s determinations in judicial or administrative proceedings without first filing the written request for review and otherwise complying with the claim procedures. If any such judicial or administrative proceeding is undertaken, the evidence presented will be strictly limited to the evidence timely presented to the LNC Benefits Appeals and Operations Committee. In addition, any such judicial or administrative proceeding must be filed within six months after the Committee’s final decision.

The federal district court joined a number of other courts in holding that the plan’s six-month limitation was reasonable and should be enforced. The technique of including such a limitation in a plan document and SPD is normally utilized to seek to overrule statutes of limitation which would otherwise apply to lawsuits challenging a denial of a claim. A number of courts have recognized such limitation periods as being valid and enforceable under ERISA.

Failure to Adhere to Claims Procedures: Finally, an additional aspect of the fiduciaries’ actions in the case which fiduciaries in general should not emulate was the lackadaisical manner in which the claims procedures under the plan were implemented. The court found that the employer had failed to comply with DOL’s claims procedure regulations (29 C.F.R. § 2560.503-1(g) in two respects:

(1) The adverse benefit determination had failed to include a “statement that the claimant [was] entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits”; and

(2) It had also failed to include “a statement of the claimant’s right to bring an action under section 502(a) of the Act.”

Moreover, the court found that the claims procedures of the plan had contemplated a two-step process which involved the initial claim for benefits and then a right to appeal any denial of such claim. However, the fiduciaries had collapsed the process into a single review, in violation of the plan’s own written claims procedures. Even though the court recognized that, in general, failure of fiduciaries to follow the plan’s claims procedures can lead to “serious consequences”, the court surprisingly in this case held that there was no causal connection between the plan’s failure to follow the claims procedures laid out in the SPD and the plaintiff’s failure to file the action before expiration of the plan’s six-month limitation period had run.

No notification of Contractual Limitation: In addition, the court recognized a 9th Circuit case (Mogck v. Unum Life Ins. Co. of Am., 292 F.3d 1025, 1028-29 (9th Cir. 2002) which had held that a contractual time limitation on commencing legal proceedings under ERISA was not enforceable where the beneficiary was not informed in the claim denial, with the language used in the policy, that the contractual time limitation for legal proceedings would begin to run. Here there was no such notification, but again the court held surprisingly that there was no causal connection between a failure to notify the plaintiff of the contractual limitation and the plaintiff’s failure to file the action within the six-month time frame.

Tips for employers and fiduciaries from the case:

(1) Employers who outsource should seek to provide clear and accurate communications to affected employees.

(2) Employers and fiduciaries should make sure that the plan provides written claims procedures and that claims procedures are followed in the claims and appeals process.

(3) Employers should seek advice regarding whether they could utilize contractual limitation periods in their plan documents and SPDs. If they do so, employers and fiduciaries should bear in mind that a contractual limitation period may not be enforceable in a jurisdiction if claimants are not notified of the plan limitation period in an adverse benefit determination.

Lessons On Outsourcing From a Federal District Court Case

While everyone knows that outsourcing is here to stay, and that there are legitimate business reasons and advantages to outsourcing, what I have tried to do here is simply to highlight some of the ERISA litigation that has grown out…

While everyone knows that outsourcing is here to stay, and that there are legitimate business reasons and advantages to outsourcing, what I have tried to do here is simply to highlight some of the ERISA litigation that has grown out of this trend in outsourcing. The reason I think it is important is that when employers contemplate outsourcing and hire advisers to help them through the process, many times they are not advised of the issues and risks that can arise in the benefits arena. (See previous posts: Outsourcing Can Lead To Costly ERISA Litigation and Outsourcing: Traps for the Unwary.) Another very recent case–Sheckley v. Lincoln National Corporation Employees’ Retirement Plan, Civil No. 04-109-P-C (D. Maine 2005)–provides some further insight into actions that can expose an employer to liability under ERISA in an outsourcing arrangement as well as actions that can, to some extent, reduce an employer’s exposure to liability under ERISA.

Facts: The employer in the case reorganized its information technology organization, and as a result, forty-nine positions were eliminated. In the course of various restructurings, the employer entered into outsourcing agreements. (The court defines outsourcing as “the practice of transferring job functions to third-party vendors who enter into contracts with the employer to provide the services formerly provided by employees.”) The employer notified twenty-six employees in the information technology department, including plaintiff, that their positions were being outsourced to another employer. Outsourced employees were required to apply for their position with the new employer. Apparently, in the process of outsourcing the employees, they were given a benefits summary which indicated that they would be vested in the prior employer’s retirement plan. However, after accepting the position, plaintiff was informed that his retirement account in the prior employer’s plan would not vest.

Section 510 Claims: When the employer responded to an inquiry from plaintiff about the benefits summary he received, the employer stated that it “contained an error about his pension” and that he was not entitled to vesting because his job was not eliminated, but rather “outsourced.” Plaintiff then made a claim and quasi-appealed the decision under the plan’s claims procedures, but to no avail, and then brought suit under ERISA section 510, claiming that the employer had characterized the action taken as “outsourcing” (versus “job elimination”) in order to deprive plaintiff of vesting under the employer’s pension.

A Magistrate Judge had found that, although the amended complaint alleged the necessary intent, the “mischaracterization of the job eliminations affecting [p]laintiff and the Class … [could not] reasonably be construed, even under the favorable standard applicable to motions to dismiss, to allege discrimination against plaintiff and other members of the putative class.” However, the federal district court in Maine disagreed, holding that the allegations were sufficient to state an ERISA section 510 claim, and denied the employer’s motion to dismiss.

Plan Limitation Period: There was another aspect of the case though which illustrates one technique that employers are seeking to use to reduce their exposure to liability under ERISA, and that was a six-month limitation period contained in the Summary Plan Description (“SPD”). The applicable portion of the SPD read as follows, describing a participant’s rights upon denial of a claim after appeal of the claim:

The decision upon review will be final. It will be communicated in writing and contain the specific reason(s) for the decision, will contain references to the pertinent Plan language upon which the decision was based, and will be written in a manner easily understood by the claimant. Claimants will not be entitled to challenge the LNC Benefits Appeals [and] Operations Committee’s determinations in judicial or administrative proceedings without first filing the written request for review and otherwise complying with the claim procedures. If any such judicial or administrative proceeding is undertaken, the evidence presented will be strictly limited to the evidence timely presented to the LNC Benefits Appeals and Operations Committee. In addition, any such judicial or administrative proceeding must be filed within six months after the Committee’s final decision.

The federal district court joined a number of other courts in holding that the plan’s six-month limitation was reasonable and should be enforced. The technique of including such a limitation in a plan document and SPD is normally utilized to seek to overrule statutes of limitation which would otherwise apply to lawsuits challenging a denial of a claim. A number of courts have recognized such limitation periods as being valid and enforceable under ERISA.

Failure to Adhere to Claims Procedures: Finally, an additional aspect of the fiduciaries’ actions in the case which fiduciaries in general should not emulate was the lackadaisical manner in which the claims procedures under the plan were implemented. The court found that the employer had failed to comply with DOL’s claims procedure regulations (29 C.F.R. § 2560.503-1(g) in two respects:

(1) The adverse benefit determination had failed to include a “statement that the claimant [was] entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits”; and

(2) It had also failed to include “a statement of the claimant’s right to bring an action under section 502(a) of the Act.”

Moreover, the court found that the claims procedures of the plan had contemplated a two-step process which involved the initial claim for benefits and then a right to appeal any denial of such claim. However, the fiduciaries had collapsed the process into a single review, in violation of the plan’s own written claims procedures. Even though the court recognized that, in general, failure of fiduciaries to follow the plan’s claims procedures can lead to “serious consequences”, the court surprisingly in this case held that there was no causal connection between the plan’s failure to follow the claims procedures laid out in the SPD and the plaintiff’s failure to file the action before expiration of the plan’s six-month limitation period had run.

No notification of Contractual Limitation: In addition, the court recognized a 9th Circuit case (Mogck v. Unum Life Ins. Co. of Am., 292 F.3d 1025, 1028-29 (9th Cir. 2002) which had held that a contractual time limitation on commencing legal proceedings under ERISA was not enforceable where the beneficiary was not informed in the claim denial, with the language used in the policy, that the contractual time limitation for legal proceedings would begin to run. Here there was no such notification, but again the court held surprisingly that there was no causal connection between a failure to notify the plaintiff of the contractual limitation and the plaintiff’s failure to file the action within the six-month time frame.

Tips for employers and fiduciaries from the case:

(1) Employers who outsource should seek to provide clear and accurate communications to affected employees.

(2) Employers and fiduciaries should make sure that the plan provides written claims procedures and that claims procedures are followed in the claims and appeals process.

(3) Employers should seek advice regarding whether they could utilize contractual limitation periods in their plan documents and SPDs. If they do so, employers and fiduciaries should bear in mind that a contractual limitation period may not be enforceable in a jurisdiction if claimants are not notified of the plan limitation period in an adverse benefit determination.

Recommended Reading for Directors: Blogs

From Corporate Board Member–“Directors Who Blog (and How You Can Too)”:

What else should directors know about blogs? “I don’t see it as the role of the board member to be blogging,” says Dyson. But “it’s useful for board members to be reading the company blogs. They shouldn’t be discouraging blogs on principle.” Patrick agrees that directors should be conscious of what’s going on in the blogosphere—especially what employees are saying. “Board members need to be aware that this is a major new method of communication,” he says. “At the board level, companies should think about whether they have an acceptable-use policy for use of the Internet. Many do, but I’m sure many don’t.”