High Court Will Decide Whether “Continuing Violation Theory” Applies to Fiduciary Breaches

A case recently landed on the U.S. Supreme Court’s docket that may have significant consequences for corporations that offer 401(k) or other benefit plans to their employees. On October 2, 2014, the Court granted a petition for a writ of certiorari in which 401(k) plan participants asked the Court to determine whether a fiduciary’s “continuing violation” tolls the statute of limitations for claims of fiduciary breaches under the Employee Retirement Income Security Act (ERISA). If the Court holds that the continuing violation theory applies, it may expose corporations to an increased risk of ERISA litigation because plan participants could have an unlimited amount of time to file their claims if the fiduciary does not remove the allegedly imprudent investment from the plan.

The Supreme Court agreed to hear the participants’ appeal from the decision, Tibble v. Edison Intern., 729 F.3d 1110 (9th Cir. 2013), but limited its review to the statute of limitations issue.[1] In that case, the Ninth Circuit affirmed the lower court’s holding that it was imprudent for Edison International to include certain classes of mutual funds in its 401(k) plan without considering identical investments that had lower fees.  The Court determined that the plan participants could recover for the mutual funds that the fiduciary added to the plan less than six years ago but could not recover for the mutual funds that the fiduciary added to the plan more than six years ago. The Court rejected the plan participants’ argument that the fiduciary’s failure to remove the mutual funds from the plan’s menu was a continuing violation that prevented the six-year statute of limitations from starting or was a second breach that restarted the limitations period.

The Ninth Circuit explained that ERISA § 413 is the statute of limitations for claims of fiduciary breach. That section provides that a claim is time barred if the plaintiff files it “after the earlier of”:

(1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation, or

(2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation;

except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.[2]

The participant’s claim was for an act of commission—not omission—and, therefore, the relevant provision was § 413(1)(A).

The Court of Appeals (quoting and citing Justice O’Scannlain’s concurrence in Philips v. Alaska Hotel and Rest. Emps. Pension Fund, 944 F.2d 509 (9th Cir. 1991)) distinguished a “failure to remedy the alleged breach” from “the commission of an alleged second breach.” The Court said that the latter is “an overt act of its own [that] recommences the limitations period,” while the former is not. The six-year limitations period that § 413(1)(A) prescribes runs from the date that the fiduciary included the imprudent investment in the plan. Therefore, the participants’ claim in Tibble pertaining to the mutual funds that were added to the plan more than six years ago was time barred, and the failure to remove those mutual funds from the plan was not an additional breach that would turn back the clock.

If the Supreme Court overrules the Ninth Circuit’s decision, corporations that are fiduciaries for the plans that they sponsor may have greater exposure to liability, even if the individuals responsible for selecting the investments initially are no longer with the corporation. The Court of Appeals observed (quoting David v. Alphin, 817 F. Supp.2d 764 (W.D.N.C. 2011), aff’d, 704 F.3d 327 (4th Cir. 2013)):

Characterizing the mere continued offering of a plan option, without more, as a subsequent breach would render section 413(1)(A) ‘meaningless and [could] expose present plan fiduciaries to liability for decisions made by their predecessors—decisions which may have been made decades before and as to which institutional memory may no longer exist.’

However, the Supreme Court ruling in the defendants’ favor would not set a precedent that allows a fiduciary to escape liability whenever it retains an imprudent investment option as part of a 401(k) plan. If changed circumstances “should have prompted [the fiduciary to conduct] a diligence review” of the investment option, then the failure to do so is a second breach that restarts the statute of limitations. The duty of prudence is ongoing, and the Supreme Court’s holding would not diminish that duty.

Corporations that sponsor 401(k) plans should determine whether they are fiduciaries under ERISA and establish compliance procedures to ensure that they observe the prudence rules at all times, including when deciding whether a particular investment should remain in the plan.

If you have questions or concerns about ERISA liability and would like further information, please email Jim Ryan at jryan@cullenanddykman.com or call him at  516-357-3750.This article was written with Alissa Piccione, a Law Clerk with the firm.

[1] The other issue was whether “Firestone deference appl[ies] to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants.” Petition for Writ of Certiorari, Tibble v. Edison Intern., No. 13-550, (U.S. filed Oct. 30, 2013).

[2] 29 U.S.C. § 1113 (2014).