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A recent Supreme Court ruling on Thole vs. US Bank passed under the radar of most Americans, but it is significant. On the one hand it limits the right of pension plan participants to sue plans; on the other, it protects fiduciaries from frivolous lawsuits. And no matter which side of the courtroom you're on, it will have an effect on future litigation.
"Fiduciary breach claims brought by participants in defined benefit pension plans will likely not be viable unless possibly the plan is severely underfunded, the plan is at or near termination and benefits payable are or will be less than amount guaranteed by the Pension Benefit Guaranty Corporation," said Paul Hastings partner Eric Heller. Heller is a member of the firm's Global Compensation, Benefits, and ERISA practice group and the Employment Law practice group.
And the ruling, with its examination of "standing," or the right to sue when there's no proof of injury to the plaintiff, "will likely carry over to defined contribution plan litigation where participant account balances are not reduced due to the alleged harm," Heller said.
This doesn't mean that no one can sue a corporate pension plan in the future. "Participants can still bring claims for benefits payable under the plan," Heller said. "The Department of Labor or a fiduciary could bring an action against another fiduciary for breach of fiduciary duty, and underfunded plans with uninsured benefits at or near termination may be vulnerable to fiduciary breach claims by participants."
In Thole v. U.S. Bank N.A., pension plan participants James Thole and Sherry Smith sued plan fiduciaries for mismanagement arising from the investment of plan assets in high-risk equities that resulted in a loss of $748 million. After they sued, US Bank contributed more funds to the pension paln, enough to make up for the lost amount and change the plan's status from under funded to funded.
A district court ruled that since U.S Bank had later contributed enough funds to mitigate any losses, there was no reason to have a case.The Eighth Circuit court affirmed the decision and dismissed the case, saying that Thole and Smith had no right to file a lawsuit because they could show no injury to themselves from the actions of the plan fiduciaries.
They lacked standing, a three-pronged requirement for filing a lawsuit in federal court, set forth in Article III of the Constitution. In the circuit court opinion, "plan participants who face no risk of actual injury from a purported breach of fiduciary duty lack statutory standing under 29 U.S.C. 1132(a)(3)."
The case was appealed and the Supreme Court agreed to hear it. They were not called on to decide whether the fiduciaries had mismanaged funds. They were to decide whether Thole and Smith had shown that they had standing to sue, and whether the Eight Circuit court had made a mistake in ruling that since they were not actually injured Thole and Smith had no right to sue.
The majority of the Supreme Court ruled that Thole and Smith had no standing to sue. The plaintiffs' argument that pension plan participants have an interest in the plan as a whole and that harm done to the plan harms them was rejected. The court said their benefits are fixed and how the plan is managed has no effect on the amount of money they will receive.
"The majority is foreclosing the ability of plaintiffs to bring lawsuits when any harm has no economic effect on the benefits received by participants," said Heller, "while the minority desired to allow such claims to police the enforcement of fiduciary duties even if the underlying benefits payable to the participant are not affected.
Judge Sotomayor in her dissent might have been thinking of this when she wrote, "The Court does not explain how the pension could satisfy its monthly obligation if, as petitioners allege, the plan fiduciaries drain the pool from which petitioners' fixed income streams flow."
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