The ERISA Litigation Newsletter - September 2011

Editor's Overview

This month, we examine the requirements of the equitable surcharge remedy, recently recognized by the Supreme Court in CIGNA v. Amara as an appropriate vehicle for the recovery of monetary relief for breach of fiduciary duty. We also review the decision in Bacon v. Stiefel Laboratories, denying class certification because recovery depended on an individualized showing of reliance. The Florida district court's decision in Stiefel provides a roadmap for defending against class claims.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

"Surcharge" as Monetary Relief after Amara1

Contributed by Myron Rumeld and Kara L. Lincoln

In CIGNA Corporation v. Amara, 131 S. Ct. 1866 (U.S. 2011), the Supreme Court held that ERISA plaintiffs who seek anything other than benefits pursuant to the governing plan document cannot assert their claims under ERISA Section 502(a)(1)(B). The Court held that claims seeking individual relief for breach of fiduciary duty or other ERISA violations must be brought under ERISA Section 502(a)(3). The Court reaffirmed that the only relief available under Section 502(a)(3) is "appropriate equitable relief" that was "typically available in equity," but indicated that such relief could include monetary relief if the elements of a claim for such relief were satisfied. One vehicle for recovering monetary relief identified by the Court was a claim for equitable "surcharge" to remedy a fiduciary's breach of duty.2

The Supreme Court's approval of monetary relief for breaches of fiduciary duties and other statutory violations has been viewed as a victory by the ERISA plaintiffs' bar because, until now, there was considerable doubt as to whether such relief was available. The practical extent of that "victory" remains to be seen, however, given the stringent requirements for recovery under a theory of equitable surcharge.

In Amara, the Supreme Court stated that, to recover under a theory of equitable surcharge, plaintiffs must establish actual harm and causation as required under trust law. Additionally, plaintiffs seeking surcharge would presumably have to satisfy the requirement previously imposed by the Court for Section 502(a)(3) recovery – that such relief is not available under the plan terms or under one of the other available causes of action under ERISA.

Although the Court did not provide much guidance as to the circumstances in which the conditions for surcharge would be satisfied in the ERISA context, it directed us to traditional theories of equity for guidance. Accordingly, we examine below what traditional trust law may teach us about the scope of surcharge relief under ERISA. Although we will know little for certain until the courts interpret and apply Amara, a review of applicable trust law principles suggests that the door to monetary relief that was cracked opened in Amara may not be as wide as plaintiffs think.

Limitations on Surcharge in Traditional Courts of Equity

According to the authorities cited by the Supreme Court in Amara, it appears that surcharge was "typically available in equity" only from a trustee. In fact, liability was imposed personally on the breaching trustee; recovery was never obtained from the trust.3 Furthermore, surcharge was available only to compensate for the loss of trust benefits (or to disgorge profits) that resulted from a trustee's breach of duty. For example, the forthcoming Restatement (Third) of Trusts provides that the trustee whose "breach of trust causes a loss" may be "surcharged" for "the amount of any profit made" or the lost trust benefits, i.e., "the amount required to restore the values of the trust estate and trust distributions to what they would have been if the portion of the trust affected by the breach had been properly administered."4

ERISA Surcharge Potentially Limited to Recovery from Breaching Fiduciaries

In light of the first condition cited above, it would appear that, in ERISA lawsuits, surcharge would not be available in circumstances where relief is sought from the plan, rather than the plan's fiduciaries. The Supreme Court in Amara appears to have explicitly embraced this limitation. First, the Court limited recovery from the plan under Section 502(a)(1)(B) to claims based on the terms of the plan document, thus precluding any recovery against the plan for compensatory relief such as surcharge. Second, the Court distinguished Mertens v. Hewitt Associates, 508 U.S. 248 (1993), which held that monetary relief is not available from non-fiduciaries, and noted that the fiduciary status of the Amara defendant "makes a critical difference." The Court's distinction was consistent with the position of the Department of Labor, which has long maintained that monetary relief should be available from ERISA fiduciaries, even if not available from non-fiduciaries, because it was available from trustees under equitable trust law.5

ERISA Surcharge Potentially Limited to "Actual Harm" Resulting from an ERISA Violation

In light of the second condition identified above, it appears that surcharge would not be available to compensate for any harm other than a loss of benefits that would have been available if the breach had not occurred. The Supreme Court in Amara appears to have specifically embraced this limitation in that the Court stated that ERISA plaintiffs seeking surcharge must show "actual harm" and causation. A trust law treatise cited by the Supreme Court in Amara provides that surcharge is not available for a trustee's breach "that results in no loss to the trust estate," and, where the loss would have occurred even absent the breach, the trustee is not generally liable.6 For example, in Day v. Avery, 548 F.2d 1018 (D.C. Cir. 1976), the court concluded that surcharge was not available to remedy a fiduciary's failure to inform of a merger, since the court found the merger would have occurred anyway and the failure to inform caused no loss.

As we recently noted in Bloomberg Law Reports, CIGNA Corp. v. Amara: Changing the Landscape of ERISA Litigation (published June 6, 2011), the Supreme Court provided mixed messages as to the circumstances in which surcharge would be an appropriate remedy in the context of statutory claims arising from improper plan communications. The Court in fact acknowledged that "it is far from clear what evidence would sustain a showing of actual harm." The Court noted "[t]hat actual harm may sometimes consist of detrimental reliance, but it might also come from the loss of a right protected by ERISA or its trust-law antecedents." The Court opined that the Amara plaintiffs could have been harmed by the faulty plan-wide communications even if they did not read them or act in reliance on them because they might have expected to learn about the plan conversion from other employees or through other informal means. The Court did not specifically state that plaintiffs must show a loss of plan benefits to justify surcharge to represent those benefits, only that the violation caused injury. But, in light of traditional trust law, it is unclear how harm other than a loss of benefits due to the breach could entitle plaintiffs to surcharge. This concern appears to be reflected in Justice Scalia's concurrence in Amara, in which he noted that a remedy for the harm shown, "stemming from reliance on the SPD or the lost opportunity to contest or react to the switch," would be "far different" from the remedy of additional benefits that was awarded by the district court.

Thus, plaintiffs seeking to recover additional plan benefits via a surcharge claim may be required to show they lost those plan benefits due to the ERISA violation. In other words, for surcharge to replace plan benefits otherwise unavailable, the participant may be required to show that the benefits would have been available under the plan if the ERISA violation had not occurred. In some situations, plan benefits would obviously have been available absent the violation. For example, where, in violation of ERISA, participants are wrongfully removed or never enrolled in a plan, and they otherwise qualify for plan benefits, it is clear they would have received the benefits but for the wrongful removal or lack of enrollment.7

In other situations, however, it is not apparent that the fiduciary's breach caused a loss of plan benefits. For example, in Amara, the plaintiffs claimed that they were inadequately informed of the plan conversion and lost the opportunity to contest it. The plan conversion occurred anyway, and the participants received the benefits to which they were entitled under the written plan terms. Did they "lose" plan benefits due to the inadequate information? It seems they did not; rather, they became entitled to additional benefits only because the district court awarded to them the benefits to which the participants believed they were entitled.8 Similar situations arise when ERISA plan participants are inadequately informed of eligibility requirements, but could not meet those requirements even if properly informed.9 The participants may have been harmed, but it is not evident that the harm caused a loss of plan benefits, as opposed to some other form of incidental harm. In such cases, plaintiffs could conceivably seek to recover monetary relief via one of the other equitable remedies identified by the Supreme Court – estoppel or reformation – but one could logically challenge their entitlement to relief under a claim of equitable surcharge.

On a related note, it is unlikely that surcharge under ERISA could encompass damages that are punitive or extracontractual, i.e., not representative of benefits potentially available from the plan, since surcharge is limited under trust law to the value of lost trust benefits (or the trustee's profits). The Court in Amara did not purport to abrogate its prior statement in Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134...