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Tibble v. Edison International

United States Court of Appeals, Ninth Circuit

March 21, 2013

Glenn Tibble; William Bauer; William Izral; Henry Runowiecki; Frederick Suhadolc; Hugh Tinman, Jr., as representatives of a class of similarly situated persons, and on behalf of the Plan, Plaintiffs-Appellants,
v.
Edison International; The Edison International Benefits Committee, FKA The Southern California Edison Benefits Committee; Edison International Trust Investment Committee; Secretary of the Edison International Benefits Committee; Southern California Edison's Vice President of Human Resources; Manager of Southern California Edison's HR Service Center, Defendants-Appellees. Glenn Tibble; William Bauer; William Izral; Henry Runowiecki; Frederick Suhadolc; Hugh Tinman, Jr., as representatives of a class of similarly situated persons, and on behalf of the Plan, Plaintiffs-Appellees,
v.
Edison International; The Southern California Edison Benefits Committee, incorrectly named The Edison International Benefits Committee; Edison International Trust Investment Committee; Secretary of the Southern California Edison Company Benefits Committee, incorrectly named Secretary of the Edison International Benefits Committee; Southern California Edison's Vice President of Human Resources; Manager of Southern California Edison's HR Service Center, Defendants-Appellants.

Argued and Submitted November 6, 2012—Pasadena, California

Amended August 1, 2013

Appeal from the United States District Court for the Central District of California Stephen V. Wilson, District Judge, Presiding D.C.No. 2:07-cv-05359- SVW-AGR D.C. No. 2:07-cv-05359-SVW-AGR

COUNSEL

Michael A. Wolff, Schlichter, Bogard & Denton, LLP, St. Louis, MO, argued the cause and filed the briefs for the plaintiffs-appellants. With him on the briefs were Jerome J. Schlichter, Nelson G. Wolff, and Jason P. Kelly, Schlichter, Bogard & Denton, LLP, St. Louis, MO.

Jonathan D. Hacker, O'Melveny & Myers LLP, Washington, DC, argued the cause and filed the briefs for the defendants-appellees/cross-appellants. With him on the briefs were Walter Dellinger, Robert N. Eccles, Gary S. Tell, O'Melveny & Myers LLP, Washington, D.C., as well as Matthew Eastus, and China Rosas, O'Melveny & Myers LLP, Los Angeles, CA.

Elizabeth Hopkins, U.S. Department of Labor, Washington, DC, argued the cause and filed the brief for the Secretary of Labor as amicus curiae in support of plaintiffs-appellants. With her on the brief were Stacey E. Elias, M. Patricia Smith, and Timothy D. Hauser.

Jay E. Sushelsky, AARP Foundation Litigation, Washington, DC, filed the brief for the AARP as amicus curiae in support of plaintiffs-appellants. With him on the brief was Melvin Radowitz, AARP, Washington, D.C.

Nicole A. Diller, Alison B. Willard, and Abbey M. Glenn, Morgan, Lewis & Bockius LLP, San Francisco, CA, filed the brief for the California Employment Law Council as amicus curiae in support of defendants-appellees/cross-appellants.

Thomas L. Cubbage III, Covington & Burling LLP, Washington, DC, filed the brief for the Investment Company Institute as amicus curiae in support of defendants-appellees/cross-appellants. With him on the brief was S. Michael Chittenden, Covington & Burling LLP, Washington, DC.

Before: Alfred T. Goodwin, and Diarmuid F. O'Scannlain, Circuit Judges, and Jack Zouhary, District Judge.[*]

SUMMARY[**]

ERISA

The panel affirmed the district court's judgment in a class action brought under the Employee Retirement Income Security Act by beneficiaries who alleged that their pension plan was managed imprudently and in a self-interested fashion.

Rejecting a continuing violation theory, the panel held that under ERISA's six-year statute of limitations, the district court correctly measured the timeliness of claims alleging imprudence in plan design from when the decision to include those investments in the plan was initially made. The panel held that the beneficiaries did not have actual knowledge of conduct concerning retail-class mutual funds, and so the three-year statute of limitations set forth in ERISA § 413(2) did not apply.

The panel held that ERISA § 404(c), a safe harbor that can apply to a pension plan that "provides for individual accounts and permits a participant or beneficiary to exercise control over the assets in his account, " did not apply. Disagreeing with the Fifth Circuit, the panel applied Chevron deference to the Department of Labor's final rule interpreting § 404(c).

The panel declined to consider for the first time on appeal defendants' arguments concerning class certification.

The panel affirmed the district court's grant of summary judgment to defendants on the beneficiaries' claim that revenue sharing between mutual funds and the administrative service provider violated the pension plan's governing document and was a conflict of interest. Agreeing with the Third and Sixth Circuits, and disagreeing with the Second Circuit, the panel held that, as in cases challenging denials of benefits, an abuse of discretion standard of review applied in this fiduciary duty and conflict-of-interest suit because the plan granted interpretive authority to the administrator.

The panel held that the defendants did not violate their duty of prudence under ERISA by including in the plan menu mutual funds, a short-term investment fund akin to a money market, and a unitized fund for employees' investment in the company's stock.

The panel affirmed the district court's holding, after a bench trial, that the defendants were imprudent in deciding to include retail-class shares of three specific mutual funds in the plan menu because they failed to investigate the possibility of institutional-share class alternatives.

ORDER

I

The opinion filed March 21, 2013, and published at 711 F.3d 1061, is amended as follows:

Beginning on slip opinion page 28 delete the text from < At least one court has held that in cases implicating ERISA § 404 fiduciary duties, > through slip opinion 31 < difficulties with John Blair impel us to apply Firestone, and so we do. >. In place of the deletion substitute the following:

< The Second Circuit has declined to apply the arbitrary and capricious standard from Firestone outside of the benefits context. See John Blair Commc'ns, Inc. Profit Sharing Plan v. Telemundo Grp., Inc. Profit Sharing Plan, 26 F.3d 360, 369–70 (2d Cir.1994). Other circuits have read Firestone more broadly, stating that its deference can reach beyond ERISA actions that arise under section 1132(a)(1). See, e.g., Hunter v. Caliber Sys., Inc., 220 F.3d 702, 711 (6th Cir. 2000) ("[W]e find no barrier to application of the arbitrary and capricious standard in a case such as this not involving a typical review of denial of benefits."); Moench v. Robertson, 62 F.3d 553, 565 (3d Cir.1995) ("[W]e believe that after Firestone, trust law should guide the standard of review over claims, such as those here, not only under section 1132(a)(1)(B) but also over claims filed pursuant to 29 U.S.C. § 1132(a)(2) based on violations of the fiduciary duties set forth in [ERISA § 404].").

In relevant part, John Blair involved a challenge under ERISA § 404 to how assets had been allocated. 26 F.3d at 370. The plaintiffs argued that the defendant had breached its fiduciary duty by retaining surplus income generated by virtue of a lag between when plan members elected to move assets and the actual transfer of the funds. Id. at 362, 368. As a defense, the fiduciary argued that the terms of the Plan authorized it to allocate the assets as it had, and that because the Plan "gave the plan committee discretion to interpret the provisions of the [P]lan" the court was bound to approve of its allocation unless it determined that the decision to do so had been "arbitrary and capricious" under Firestone. Id. at 369.

Rejecting that framework, the Second Circuit instead decided to evaluate the claim under the "prudent person standard articulated in § 404 of ERISA." Id. As support for this approach, the court cited a pre-Firestone authority from the Third Circuit and a pair of district court decisions from within the Second Circuit. See Struble v. N.J. Brewery Emps. Welfare Trust Fund, 732 F.2d 325, 333–34 (3d Cir. 1984); Ches v. Archer, 827 F.Supp. 159, 165–66 (W.D.N.Y. 1993); Trapani v. Consol. Edison Emps.' Mut. Aid Soc'y, Inc., 693 F.Supp. 1509, 1515 (S.D.N.Y. 1988). Relying on John Blair and Struble, beneficiaries argue that their claim is similarly exempt from Firestone. We disagree.

As noted above, this specific challenge by beneficiaries has been brought under 29 U.S.C. § 1104(a)(1)(D), which is part of ERISA § 404. See Tibble, 639 F.Supp.2d at 1096 (explaining that beneficiaries "move[d] for summary judgment on the basis that [Edison] violated the terms of the Plan by failing to pay the full extent of Hewitt's recordkeeping costs"). While subsection (a)(1)(B) codifies the statutory prudent-person standard, subsection (a)(1)(D) simply requires that actions be in line with the plan documents. See 29 U.S.C. § 1104(a)(1). John Blair was an attempt by a fiduciary to escape from otherwise applicable duties on the basis of a plan interpretation. The Second Circuit declined to apply Firestone deference because of a concern about bootstrapping. See John Blair, 26 F.3d at 369. Similarly, the district court decisions it favorably cited were examples of fiduciaries trying to weaken or evade the statutory standard of prudence. See Ches, 827 F.Supp. at 165 (rejecting defendants' argument that "they cannot be found to have breached their fiduciary duties in the absence of an allegation and a showing that their determinations had been arbitrary and capricious"); Trapani, 693 F.Supp. at 1514 ("Defendants argue that the court must apply an arbitrary and capricious standard, rather than the prudent man standard specifically set forth in the statute.").[1]

Edison is not making any such argument here, as beneficiaries have not pursued this challenge as a violation of the prudent person standard; instead, their contention rises or falls exclusively on what Plan section 19.02 allows.[2] As to issues of plan interpretation that do not implicate ERISA's statutory duties, they are subject to Firestone.

At least three considerations prompt us to hold that the Firestone framework can govern issues of plan interpretation even when they arise outside the benefits context. First, while the Firestone case did not announce a holding beyond benefits, its rationale did not stem from an interpretive gloss on the welfare-benefits provision of ERISA. See 489 U.S. at 108, 109 ("ERISA does not set out the appropriate standard of review for actions under § 1132(a)(1)(B) challenging benefit eligibility determinations."). Instead, because

"ERISA abounds with the language and terminology of trust law" and because of legislative history to that effect, that body of law—not a discrete provision—dictated "the appropriate standard of review." Id. at 110–11 ("Trust principles make a deferential standard of review appropriate when a trustee exercises discretionary powers."). The law of trusts was the basis for the dual-track standard whereby, absent a contrary designation, de novo review applies. See id. at 111. The Supreme Court's most recent analysis of Firestone reenforces that the deference underlying that case is a product of what trust law has to say about matters of interpretation. See Conkright, 130 S.Ct. at 1646 ("[U]nder trust law, the proper standard of review of a trustee's decision depends on the language of the instrument creating the trust. If the trust documents give the trustee power to construe disputed or doubtful terms, . . . the trustee's interpretation will not be disturbed if reasonable." (alterations in original) (internal citation and quotation marks omitted)).

Second, one reason the Court in Conkright rejected an exception the Second Circuit had carved out from Firestone deference was its potential to create "uniformity problems." 130 S.Ct. at 1650. The concern was that if de novo review sometimes applied, fiduciaries would be in the "impossible situation" of being subject to different plan interpretations by courts depending on the particular facts of the cases where the interpretive issue had arisen. Id. Not applying Firestone deference in this case would risk similar difficulties, as parts of a plan could be assigned one meaning when litigated under section 1132(a)(1)(B) and another meaning when litigated, like here, under section 1104(a)(1)(D).

Third, we observe that consistently applying Firestone to the question of what a plan means, "by permitting an employer to grant primary interpretive authority over an ERISA plan to the plan administrator, " has the virtue of "preserv[ing] the 'careful balancing' on which ERISA is based." Id. at 1649. In particular, it helps keep administrative and litigation expenses under control, which otherwise could "discourage employers from offering [ERISA] plans in the first place." Id. (alteration in original). >.

An amended opinion is filed concurrently with this order.

II

With these amendments, the panel has voted unanimously to deny the petition for rehearing. Judge O'Scannlain has voted to deny the petition for rehearing en banc, and Judges Goodwin and Zouhary have so recommended.

The full court has been advised of the petition for rehearing en banc, and no judge has requested a vote on whether to rehear the matter en banc. Fed. R. App. P. 35. The petition for rehearing and petition for rehearing en banc is DENIED.

No further petitions for panel rehearing or for rehearing en banc will be entertained.

OPINION

O’SCANNLAIN, Circuit Judge:

Current and former beneficiaries sued their employer's benefit plan administrator under the Employee Retirement Income Security Act charging that their pension plan had been managed imprudently and in a self-interested fashion. We must decide, among other issues, whether the Act's limitations period or its safe harbor provision are obstacles to their suit.

I

A

Edison International is a holding company for various electric utilities and other energy interests including Southern California Edison Company and the Edison Mission Group (collectively "Edison"), which itself consists of the Chicago-based Midwest Generation. Like most employer-organizations offering pensions today, Edison sponsors a 401(k) retirement plan for its workforce. During litigation, the total valuation of the "Edison 401(k) Savings Plan" was $3.8 billion, and it served approximately 20, 000 employee-beneficiaries across the entire Edison International workforce. Unlike the guaranteed benefit pension plans of yesteryear, this kind of defined-contribution plan entitles retirees only to the value of their own individual investment accounts. See 29 U.S.C. § 1002(34). That value is a function of the inputs, here a portion of the employee's salary and a partial match by Edison, as well as of the market performance of the investments selected.

To assist their decision making, Edison employees are provided a menu of possible investment options. Originally they had six choices. In response to a study and union negotiations, in 1999 the Plan grew to contain ten institutional or commingled pools, forty mutual fund-type investments, and an indirect investment in Edison stock known as a unitized fund. The mutual funds were similar to those offered to the general investing public, so-called retail-class mutual funds, which had higher administrative fees than alternatives available only to institutional investors. The addition of a wider array of mutual funds also introduced a practice known as revenue sharing into the mix. Under this, certain mutual funds collected fees out of fund assets and disbursed them to the Plan's service provider. Edison, in turn, received a credit on its invoices from that provider.

Past and present Midwest Generation employees Glenn Tibble, William Bauer, William Izral, Henry Runowiecki, Frederick Suhadolc, and Hugh Tinman, Jr. ("beneficiaries") sued under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001, et seq., which governs the 401(k) Plan, and obtained certification as a class action representing the whole of Edison's eligible workforce.[1]Beneficiaries objected to the inclusion of the retail-class mutual funds, specifically claiming that their inclusion had been imprudent, and that the practice of revenue sharing had violated both the Plan document and a conflict-of-interest provision. Beneficiaries also claimed that offering a unitized stock fund, money market-style investments, and mutual funds, had been imprudent.

B

The district court granted summary judgment to Edison on virtually all these claims. See Tibble v. Edison Int'l, 639 F.Supp.2d 1074 (C.D. Cal. 2009). The court also determined that ERISA's limitations period barred recovery for claims arising out of investments included in the Plan more than six years before beneficiaries had initiated suit. Id. at 1086; see 29 U.S.C. § 1113(1)(A).

Remaining for trial after these rulings was beneficiaries' claim that the inclusion of specific retail-class mutual funds had been imprudent. Without retreating from an earlier decision—at summary judgment—that retail mutual funds were not categorically imprudent, the court agreed with beneficiaries that Edison had been imprudent in failing to investigate the possibility of institutional-class alternatives. See Tibble v. Edison Int'l, No. CV 07-5359, 2010 WL 2757153, at *30 (C.D. Cal. July 8, 2010). It awarded damages of $370, 000.

Beneficiaries timely appeal the district court's partial grant of summary judgment to Edison.[2] Edison timely cross appeals, chiefly contesting the post-trial judgment.

II

Beneficiaries' first contention on appeal is that the district court incorrectly applied ERISA's six-year limitations period to bar certain of their claims. Edison argues for application of the shorter three-year ...


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