The U.S. Supreme Court Dilutes ERISA’s Statute of Limitations Defense for Fiduciaries

Employee Benefits & Executive Compensation
March 2, 2020
 

In Intel Corp. Inv. Policy Comm. v. Sulyma, 589 U.S. __ (Feb. 26, 2020), the U.S. Supreme Court brought important – albeit generally employee-friendly – clarity to an oft-litigated statute of limitations issue in ERISA breach of fiduciary duty litigation. Below you will find a summary of the Supreme Court’s decision and our key takeaways.

ERISA’s Statute of Limitations for Breach of Fiduciary Duty

As relevant to the facts of Sulyma, the statute of limitations for breach of fiduciary duty in ERISA Section 413 gives plaintiffs a maximum of six years from the end of the fiduciary breach to bring suit. But in cases where plaintiffs acquire “actual knowledge” of the breach, Section 413 shortens the maximum six-year period to three years from when plaintiffs acquired “actual knowledge.”

Critically, ERISA does not define “actual knowledge.” So, the interpretation of this phrase – and the issue of precisely what fiduciaries must show that the plaintiff knew in order to trigger the shorter, three-year limitations period – has confounded and divided the lower federal courts. The U.S. Court of Appeals for the Sixth Circuit (which sits over Ohio’s federal trial courts), for example, has taken a fiduciary-friendly view, allowing actual knowledge to be established by merely showing that plaintiffs had the relevant information available to them, even if they did not read it. But other courts, including the Ninth Circuit, have taken an employee-friendly view, requiring concrete proof that plaintiffs had read documents or otherwise taken affirmative actions that should have alerted them to the alleged breach. In Sulyma, the Supreme Court conclusively resolved this split and adopted the latter, employee-friendly view.

The Facts

Mr. Sulyma worked for Intel from 2010 to 2012. He participated in Intel’s retirement plans, which offered two funds managed by Intel’s Investment Policy Committee as investment options. The funds were primarily comprised of stock and bonds. However, after the 2008 recession, the Committee increased the funds’ investments in alternative asset classes, such as hedge funds, private equity funds, and commodities. When the market rebounded, the performance of the Intel-managed funds lagged behind other, less expensive index funds. According to Mr. Sulyma, the high fees associated with the alternative investments caused the underperformance of the Intel-managed funds.

In 2015 – more than three years after Mr. Sulyma’s employment with Intel ended – he brought a putative class action lawsuit against the Intel plans’ fiduciaries. He alleged that the defendants breached their ERISA fiduciary duties by overinvesting the Intel funds in alternative assets.

Intel argued that Mr. Sulyma’s lawsuit was untimely because he acquired “actual knowledge” of the alleged fiduciary breach more than three years earlier. Intel was able to show that it had provided to Mr. Sulyma numerous ERISA-mandated plan disclosures (plan notices, summary plan descriptions, graphical depictions of asset allocations in the funds, etc.) highlighting the plan funds’ investments in alternative and more traditional assets. Intel also established that Mr. Sulyma repeatedly visited Intel’s benefits website throughout his employment. But Mr. Sulyma testified that he “did not remember reviewing” these documents and was “unaware” that his plan contributions were being invested in alternative investments. Thus, Mr. Sulyma argued that he did not have “actual knowledge” of the alleged breach.

The Lower Court Decisions

The trial court sided with Intel and dismissed Mr. Sulyma’s breach of fiduciary duty claims as untimely. The trial court observed that it would be “improper” to allow Mr. Sulyma to dodge the statute of limitations “merely because he did not look further into the disclosures made to him.”

The U.S. Court of Appeals for the Ninth Circuit reversed the trial court. The Ninth Circuit held that “actual knowledge” means “what it says: knowledge that is actual, not merely a possible inference from ambiguous circumstances.” Although Mr. Sulyma concededly “had sufficient information available to him to know about the allegedly imprudent investments” more than three years before suing, his testimony did not show that he had “actual knowledge” as conceptualized by the Ninth Circuit.

The U.S. Supreme Court Agrees With the Ninth Circuit’s Stringent “Actual Knowledge” Standard

The U.S. Supreme Court unanimously affirmed the Ninth Circuit. The Court held that “actual knowledge” means that the plaintiff “must in fact be aware of it;” it is not merely “constructive knowledge.” So, to trigger the shorter three-year limitations period, fiduciaries must establish that the plaintiff’s knowledge is “more than potential, possible, virtual, conceivable, theoretical, hypothetical, or nominal.” Though relevant to the inquiry, “evidence of disclosure alone” – via plan disclosure documents or otherwise – is not enough.

Importantly, although the Court adopted a fairly stringent rule, it did not make it impossible for fiduciaries to prove “actual knowledge” if they do not obtain an (unlikely) admission from plaintiffs themselves during litigation. The Court emphasized that actual knowledge can be established with circumstantial evidence, including evidence of disclosure, electronic records showing the plaintiff viewed the disclosures, and evidence that the plaintiff acted in response to information disclosed. In a similar vein, the Court also noted that when the case returns to the trial court, Intel is free to argue that evidence of “willful blindness” (which Intel did not argue on appeal and the Court did not analyze) supports a finding of actual knowledge.

Key Takeaways

To be sure, fiduciaries will not be jumping for joy about the Sulyma decision. But it at least brings clarity and guidance to fiduciaries on an oft-litigated and important issue. From our perspective, some of the key takeaways are:

  • Clear plan disclosures are as important as ever. Sulyma reinforces the importance of drafting ERISA plan disclosures in plain, layperson’s language. While the Court made clear that actual knowledge is not to be implied from the mere disclosure of plan documents, it made equally clear that understandable disclosures, coupled with other evidence, can establish actual knowledge. So, the clearer and simpler the disclosures, particularly on hot-button issues such as fund investment allocations and fees, the better.
  • Consider tweaking recordkeeping and disclosure processes. Because actual knowledge or even “willful blindness” can still be established through adequate circumstantial evidence, fiduciaries should consider whether their plans’ recordkeeping and disclosure processes and systems can be refined to help defend against claims by participants who, like Mr. Sulyma, simply plead ignorance. By way of limited example, asking participants to electronically acknowledge that they read and understood plan disclosures, ensuring disclosures remind participants to read carefully and invite them to ask questions, and ensuring that any electronic databases meticulously track participants’ access of important disclosure documents may all help develop an adequate evidentiary record should litigation later arise.
  • A potential obstacle to class certification? The stringent “actual knowledge” rule, though not generally fiduciary-friendly, could make it more difficult for plaintiffs to establish the commonality necessary to certify a class action. Time will tell how the lower courts see this issue. Now that Sulyma – which was brought as a class action – is returning to the trial court, it might turn out to be an important bellwether on this issue.

For additional information on this topic, please contact your Calfee attorney or the authors listed below:

 
 
 
 
 
 
 
 
 
 
 
 
 

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