Supreme Court Asked to Answer ‘Actual Knowledge’ ERISA Question

Two Intel retirement plans have filed a writ of certiorari with the U.S. Supreme Court, asking the high court to step in and reconsider a decision handed down against the company in the 9th U.S. Circuit Court of Appeals late last year.

In their writ, the Intel plan fiduciaries suggest the late-2018 decision out of the 9th U.S. Circuit Court of Appeals to revive claims previously dismissed as untimely by a Northern California district court created a division among the appellate courts as to whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under the Employee Retirement Income Security Act (ERISA).

Michael Klenov, an experienced plaintiffs’ attorney with Korein Tillery, recently sat down with PLANADVISER to talk about the importance of this issue, and the need for industry stakeholders to grapple with the meanings of the different types of technical “knowledge” used to evaluate ERISA claims.

The question of what creates “actual knowledge” plays directly into arguments of timeliness under ERISA, Klenov explained. In basic terms, this is because the timing of when “actual knowledge” of a potential fiduciary breach is established is used to define when one of several potential statues of limitations will start to run for a given fiduciary action or decision.

Klenov said that he actually had not been following the Intel litigation until the 9th Circuit turned in its verdict, which pretty strongly pushed back against the thinking of the district court judges assigned to the case. In the initial district court decision from 2017, the judge sided with the Intel retirement plans, essentially ruling that the plaintiffs waited too long to file claims because they had gained “actual knowledge” of the alleged breach more than three years before the claims were field. The main evidence used to show that participants had actual knowledge of the alleged wrongdoing was the fact that the plan had given regular printed and digital disclosures detailing its actions in terms of managing the plans’ investments. Case documents show these disclosures included “annual notices, quarterly fund fact sheets, targeted emails, and two separate websites.”

For his part as a plaintiffs’ attorney, Klenov soundly disagrees with the interpretation that the act of furnishing documents without also obtaining any proof of receipt or test of comprehension somehow proves actual knowledge of an alleged breach. Still, he acknowledges this is a complicated issue and that others may view the matter differently, given their vantage point.

“However, just as a philosophical matter, I think most people would agree with the circuit decision that says the bare provision of documents is not enough to prove actual knowledge, because the alternative is to force the plan participants to be the policemen and the lead overseers of their plans,” Klenov said. “If it is up to plan participants to be constantly monitoring their plan for potential mistakes, imprudence or disloyalty, that is taking the responsibility away from the named fiduciaries under ERISA. That was not the intention of the statues of ERISA.”

Zooming into the appellate court decision, Klenov observed that the appellate panel held that actual knowledge does not mean that a plaintiff had knowledge that the underlying action violated ERISA, nor does it merely mean that a plaintiff had knowledge that the underlying action occurred. Rather, the defendant must show that the plaintiff was “actually aware of the nature of the alleged breach” more than three years before the plaintiff action was filed.

Some have interpreted this stance to be in disagreement with the 6th Circuit, in that the 9th Circuit panel has effectively established that the plaintiff must have actual knowledge, rather than “constructive knowledge.”

Explaining its thinking, the 9th Circuit decision points back to the establishment of ERISA.

“When Congress first enacted ERISA in 1974, Section 1113 contained two kinds of knowledge requirements, actual knowledge and constructive knowledge,” the appellate decision states. “The actual knowledge provision was identical to current section 1113(2), but the constructive knowledge provision provided that an action could not be commenced more than three years after the earliest date ‘on which a report from which the plaintiff could reasonably be expected to have obtained knowledge of such breach or violation was filed with the secretary under this title.’”

As the appellate decision explains, Congress repealed the constructive knowledge provision in 1987, leaving only the actual knowledge requirement.

“Since that time, the Supreme Court has not provided an authoritative construction for section 1113(2),” the appellate decision says. “Our own interpretations have likewise not always been straightforward, leading to some confusion in our district courts over what ‘actual knowledge’ entails.”

The decision continues: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred. ‘Actual knowledge’ must therefore mean something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”

This leads to the question of what this extra “something” must entail.

“In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed,” the appellate decision concludes. “The exact knowledge required will thus vary depending on the plaintiff’s claim.”

Among other arguments presented in its writ to the Supreme Court, Intel argues that this standard makes it practically impossible to show that a plaintiff had actual knowledge at the motion-to-dismiss stage. Absent some sort of previously written or recorded admission by the plaintiff that such actual knowledge existed, meeting this standard would take at least one round of deposition or potentially even full discovery.

Stepping back from the specifics of the Intel case, Klenov said the U.S. Supreme Court’s influential decision in Tibble vs. Edison has driven significant change in the way retirement plans are run and structured—and in the way plaintiffs and defendants in ERISA cases make their arguments.

In its Tibble decision, the high court ruled there is a distinct and ongoing fiduciary duty to monitor investments in a 401(k) plan to ensure that the investments remain prudent, which applies even if there is no obvious intervening change in circumstances. Limited in size and scope—the text of the Tibble ruling covers just 10 pages—the decision from the Supreme Court still solidified the ongoing duty to monitor investments as a distinct fiduciary duty.

According to Klenov, what this has meant in practice is that an employer or other responsible fiduciary cannot avoid potential liability if it selects an imprudent investment for the 401(k) plan, but then successfully waits out the ERISA limitations period.

“Tibble established that an employer cannot just use silence as a defense against imprudent decisions under ERISA,” Klenov said. “Interestingly, rather than lead to more litigation, the Tibble decision has actually played a role in tamping down to some extent on the filing of certain types of cases.”

This is because, faced with the newly strengthened duty to monitor, plans have widely established much stronger policies around regularly reviewing and optimizing the investment menu. Plan fiduciaries can no longer just assume that decisions made longer ago than the ERISA statutes of limitations are thereby immune from being challenged in court. 

“Some years ago we were seeing cases filed against plan sponsors offering investment options that everyone knows are inappropriate today, for example an S&P 500 index fund charging 15-times the industry average,” Klenov said. “There are far fewer examples of these plans out there today, especially in the large plan market where litigation tends to be focused.”