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ML BeneBits

EXAMINING A RANGE OF EMPLOYEE BENEFITS
AND EXECUTIVE COMPENSATION ISSUES

In a 5-4 decision in Thole v. U.S. Bank N.A., the US Supreme Court has ruled that defined benefit plan participants lack Article III standing to sue for fiduciary breaches that do not harm the individual participants. As the Court noted, “[u]nder ordinary Article III standing analysis, the plaintiffs lack Article III standing for a simple, common-sense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs’ monthly pension benefits.”

Article III requires a plaintiff to demonstrate (1) that he or she suffered an injury in fact that is concrete, particularized, and actual or imminent, (2) that the injury was caused by the defendant, and (3) that the injury would likely be redressed by the requested judicial relief. The plaintiffs in Thole were two participants in U.S. Bancorp’s defined benefit pension plan. They alleged that prior to the 2008 financial crisis, plan fiduciaries invested 100% of the plan’s assets in equities in violation of ERISA’s diversification requirements, and that this investment strategy caused the plan to lose almost $750 million. Despite the plan’s investment losses, the parties agreed that plaintiffs had received, and would continue to receive, their full pension. The district court dismissed the plaintiffs’ claims for lack of standing; the US Court of Appeals for the Eighth Circuit affirmed, reasoning that the plaintiffs could not challenge the fiduciaries’ investment decisions because they suffered no injury and thus lacked standing under both Article III and ERISA. The Supreme Court upheld the Eight Circuit’s decision on Article III standing grounds.

The plaintiffs advanced four arguments on appeal, none of which the Supreme Court found persuasive. First, analogizing to trust law, they argued that an ERISA defined benefit plan participants possess an equitable or property interest in the plan, and injuries to the plan by definition injure the plan participants. However, the Court held that participants in a defined benefit plan “are not similarly situated to the beneficiaries of a private trust or to the participants in a defined contribution plan.” In those contexts, the value of trust property and the benefit received by the beneficiaries typically depends on prudent trust management, and beneficiaries bear the risk of every gain or loss. But defined benefit plan benefits are fixed, “regardless of how well or poorly the plan is managed.”

Second, plaintiffs argued they had standing to sue as representa­tives of the plan itself, and the plan had suffered an injury. But the Court held that in order to pursue “the interests of others, the litigants themselves still must have suffered an injury in fact.” The Thole plaintiffs had not personally suffered an “injury in fact” and thus failed to satisfy this requirement.

Third, the plaintiffs argued that ERISA Section 502(a) affords participants a general cause of action to sue for res­toration of plan losses and other equitable relief. The Court noted it had previously rejected the argument that “a plaintiff automatically satisfies the injury-in-fact require­ment whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” In other words, Article III requires a “concrete injury” even in the face of a statutory violation.

Fourth, plaintiffs argued that if defined benefit plan participants cannot sue for fiduciary breaches, then plan fiduci­aries would not face meaningful regulation. The Court noted that this argument rested on a “faulty premise” because defined benefit plans are regulated and monitored in multiple ways, including through enforcement actions by the Department of Labor and through lawsuits by other fiduciaries.

The Court also rejected the argument by plaintiffs’ amici that participants in a defined benefit plan have standing to sue if the purported breach substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits. The plaintiffs did not assert that theory of standing, and “a bare allegation of plan underfunding does not itself demonstrate a substantially increased risk that the plan and the employer would both fail.” Among other things, the Court noted that PBGC insurance could well cover any shortfall in a participant’s benefit even if the plan terminated without sufficient assets to cover the entire benefit.

In short, the Court’s decision in Thole effectively bars the courthouse doors to ordinary-course challenges by defined benefit plan participants to plan investment decisions. Given the proliferation of ERISA class-action litigation over the last decade, this decision is welcome news for plan sponsors and plan fiduciaries.