Home » Columns »
David Johanson's ESOP Forum
The LaRue Decision: A Mountain of Individual ERISA Lawsuits or Not?
David Johanson and Michael Pasahow
March 2008
The United States Supreme Court (the "Supreme Court") issued its much-anticipated decision on February 20, 2008, in LaRue v. DeWolff, Boberg & Associates. LaRue involves a former consulting firm employee who claims that he gave instructions to the plan sponsor's 401(k) plan administrator to change his investment mix, however, through the administrator's alleged negligence, the changes were not implemented. When Mr. LaRue sued his employer to recoup his alleged losses, the United States District Court originally dismissed his lawsuit as being barred by the strict limits on recovery authorized under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The District Court and the United States Court of Appeals for the Fourth Circuit reasoned that because Mr. LaRue's loss was personal and limited to his account, it was not a loss "to the [401(k)] plan" within the meaning of ERISA. Mr. LaRue petitioned the Supreme Court to review the case and the Supreme Court granted certiorari after being urged to accept the case by the United States Department of Labor (the "DOL"), among others. In a unanimous verdict, the Supreme Court held that Mr. LaRue's claim could be deemed a "loss to the plan" recoverable under ERISA and that his lawsuit could go forward. The opinion of the Supreme Court and Chief Justice Roberts' concurring opinion differ on the scope of the decision and lay the groundwork for subsequent decisions to substantially limit the effect of LaRue on future cases.As submitted to the Supreme Court, the case presented two questions: (1) whether, pursuant to Section 502(a)(2) of ERISA, a participant in a defined contribution pension plan may sue to recover losses to the plan caused by a breach of fiduciary duty, even when those losses affected only the participant's individual account; and (2) whether an action by a plan participant against an ERISA fiduciary to recover losses caused by a breach of fiduciary duty seeks "equitable relief" for purposes of Section 502(a)(3) of ERISA. The Supreme Court restricted its decision to answering the former, leaving the latter (the ERISA § 502(a)(3) claim) for further factual and legal development at the lower court levels.
Procedural History
Plaintiff James LaRue is a former employee of the consulting firm DeWolff, Boberg & Associates ("DeWolff"). Mr. LaRue participated in DeWolff's 401(k) plan while he was an employee. Typical of "defined contribution" plans today, the DeWolff 401(k) plan allowed participants to choose between a range of investment alternatives. Mr. LaRue claims that he gave instructions in 2002 to the plan administrator to shift his assets under the plan from equity investments to safer investments shortly before a market downturn. Mr. LaRue claims that the plan administrator never followed his instructions, and Mr. LaRue claims that he lost over $150,000 in "profits" (capital appreciation) before he discovered that the plan administrator did not follow his instructions.Subsequently, Mr. LaRue filed suit against DeWolff in United States District Court (the Federal trial court), alleging that DeWolff's agent's negligence in processing his instructions was the cause of his "loss." DeWolff successfully petitioned the trial court (the United States District Court) to throw out the case, arguing that, because Mr. LaRue's cause of action was limited to perceived monetary losses, it was not authorized by ERISA § 502(a)(3), which limits recovery to equitable remedies. On appeal, the United States Court of Appeals for the Fourth Circuit affirmed the District Court's judgment, stating that Mr. LaRue's "loss" could not be made whole through equity as pled. Mr. LaRue's requested relief was that the money lost through the alleged negligence be "surcharged" to the 401(k) plan trustee, added back into the 401(k) plan assets, and then directed into Mr. LaRue's personal account under the plan. The Fourth Circuit held that this remedy was not a remedy in equity as authorized by ERISA; instead, the payment of money was characterized by the Fourth Circuit as a remedy strictly at law and unavailable under ERISA § 502(a)(3). Furthermore, Mr. LaRue argued for the first time on appeal that he should be made whole through ERISA § 502(a)(2), which authorizes claims for losses "to the plan." The Fourth Circuit, looking past the procedural hurdle of adding a claim on appeal, decided on the merits that the claim should fail, as Mr. LaRue's losses could not be ascribed to the collective 401(k) plan and, thus, were not recoverable under ERISA.
Mr. LaRue appealed both of the Fourth Circuit's findings to the Supreme Court by writ of certiorari, supported by several amicus curiae (friends of the court), including the DOL. The Supreme Court granted a writ of certiorari and heard oral argument on November 26, 2007, issuing its opinion on February 20, 2008.
Analysis
The Supreme Court unanimously reversed the Fourth Circuit, holding that the rationale of its earlier precedent, set in Massachusetts Life Ins. Co. v. Russell, 473 U.S. 134 (1985) (hereinafter "Russell"), requires that an individual account's loss in a defined contribution plan be cognizable as an ERISA § 502(a)(2) "loss to the plan" as a whole, despite language in Russell to the contrary in the defined benefit universe (LaRue, Slip Op. at 2). The Supreme Court reviewed the context of the statute and the changed circumstances from defined benefit plans to defined contribution plans and found that, in the defined contribution plan universe, "although § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account" (id. at 8).In so finding, the Supreme Court finds itself required to reach beyond the words of the Russell decision to find that the language of the decision that limited suit to losses "to the plan" found its basis not in ERISA statutory language but in the risk of default to defined benefit plans that prompted ERISA's drafters (id. at 7). In the case of a defined contribution plan, the requirement that a loss be to the plan is "beside the point," as any loss to a defined contribution plan triggered by fiduciary misconduct is the sort of loss that ERISA's drafters were concerned with (id.). Thus, despite Mr. LaRue's losses being personal rather than systemic, his suit encompasses the harms that ERISA is drafted to avoid and should be allowed to proceed (id. at 7-8).
The Supreme Court's opinion stops at this point, though, and does not address any of the ERISA § 502(a)(3) issues that were raised at the trial court level and formed the original basis for Mr. LaRue's appeal to the Fourth Circuit. Furthermore, the Supreme Court's opinion explicitly declines to review many of the subsidiary issues raised by the parties and amici, noting, "We do not decide whether petitioner [Mr. LaRue] made the alleged investment decisions in accordance with the requirements specified by the Plan [DeWolff's 401(k) plan], whether he was required to exhaust remedies set forth in the Plan before seeking relief in federal court pursuant to § 502(a)(2), or whether he asserted his rights in a timely fashion" (id. at 4). By doing so, it seems that the Supreme Court is laying out a road map for lower courts to follow in limiting the scope of its decision in LaRue, as any and all of these issues could end Mr. LaRue's case or present formidable barriers to plaintiffs emboldened by the Supreme Court's decision.
Regardless of limiting dicta, though, under this new interpretation of ERISA § 502(a)(2), 401(k) plan administrators and service providers face the potential for monetary liability in individual lawsuits for errors or omissions in carrying out plan beneficiaries' instructions. As commentators have noted, potential plaintiffs such as Mr. LaRue effectively may have their cake and eat it too. If a plan administrator or service provider makes an error or omission in processing a plan participant's instructions, the participant may now wait and see what happens to the incorrectly-held investment. If it appreciates in value, the participant will reap the benefits. If it depreciates in value, the participant may sue his or her employer (or former employer) or the plan service provider to recoup any losses.
It is not likely that employers will be dealing with the same rounds of class-action litigation that have typified stock-drop suits, as the Supreme Court explicitly did not rule on the ERISA § 502(a)(3) question of the nature of the relief available to successful plaintiffs. Furthermore, both the Supreme Court's opinion and Chief Justice Roberts' opinion concurring in part and concurring in the judgment seem to go out of the way to map out statutory roadblocks for the lower courts to use in denying Mr. LaRue recovery under ERISA, as noted above. However, Chief Justice Roberts goes a step further and writes in dicta on the possibility that Mr. LaRue's claim is properly sited in Section 501(a)(1)(B) of ERISA, an interpretation that might also deny Mr. LaRue an ERISA § 502(a)(2) lawsuit and the potential of substantial monetary relief altogether (id. at 2 (Roberts, C.J., concurring)). Perhaps in further nudges to the lower courts, Chief Justice Roberts notes that "If LaRue may bring his claim under § 502(a)(1)(B), it is not clear that he may do so under § 502(a)(2) as well. Section 502(a)(2) provides for 'appropriate' relief. Construing the same term in a parallel ERISA provision, we have held that relief is not "appropriate" under § 502(a)(3) if another provision, such as § 502(a)(1)(B), offers an adequate remedy" (id.). Chief Justice Roberts concludes that "I see nothing in today's opinion precluding the lower courts on remand, if they determine that the argument is properly before them, from considering the contention that LaRue's claim may proceed only under § 502(a)(1)(B)" (id. at 4 (Roberts, C.J., concurring)). If the Fourth Circuit or the trial court follows this dictum on remand, it is possible that Mr. LaRue's success at the Supreme Court will have been short-lived and that future lawsuits of this nature will be sharply limited by the outcome of this litigation.
Concluding Remarks
The Supreme Court has held, at least for the time being, that a 401(k) plan sponsor is potentially responsible for an individual participant's alleged loss of profits under ERISA § 502(a)(2) for its plan administrator's errors or omissions in processing investment instructions. Despite this unanimous core holding, the Supreme Court's majority and concurring opinions do not contain much comfort for plaintiffs such as Mr. LaRue in pursuing these lawsuits, as the Supreme Court was careful to pass on the crucial question of the nature of the recovery available in this manner of lawsuit. Furthermore, each opinion drips with skepticism that this core holding is necessarily applicable to Mr. LaRue's claims on the facts, suggesting several routes to sharply limit the Supreme Court's holding in the ultimate resolution of Mr. LaRue's case on the merits. Given that Mr. LaRue faces an equally skeptical trial court and Fourth Circuit on remand, both of which have previously rejected his claims, Mr. LaRue's case does not seem to have a very bright future.More importantly for plan sponsors, though, the Supreme Court has been careful to avoid creating a potential new "hot topic" for plaintiffs' law firms by refusing to rule on an ERISA § 502(a)(3) cash windfall to participants in Mr. LaRue's shoes. While this restraint is of some comfort to potential defendants, the limitations of the Supreme Court's holding and the apparent further limitations expressed in dicta have left both potential plaintiffs and defendants in doubt as to the future viability of these lawsuits. It is likely that the next several years will see a round of ERISA § 502(a)(2) lawsuits filed on behalf of 401(k) plan participants as plaintiffs take advantage of LaRue's core holding; however, it is also likely that future decisions will limit the causes of action and the remedies available to successful plaintiffs past the comfort level of all but the most determined of litigants.
Michael A. Pasahow is an associate attorney with the firm of Johanson Berenson LLP.
