Labor and employment law.

• Author: Seeley, Heidi A.

Distinction Between Damages and Benefits Allowed for Past Employees Under ERISA Claim for Fiduciary Breaches--Evans v. Akers, 534 F.3d 65 (1st Cir. 2008)

Congress passed the Employee Retirement Income Security Act (ERISA) as a means to govern employee-benefit plans. (1) ERISA provides a cause of action to plan participants whose vested benefits were miscalculated or reduced by alleged employer misconduct. (2) In Evans v. Akers, (3) the Court of Appeals for the First Circuit considered whether former employees have standing to sue their employer under ERISA for alleged fiduciary breaches that decreased the value of their retirement benefits account. (4) The court determined that the former employees had standing to sue under ERISA because their claim was for benefits, not extra contractual damages. (5)

While employed at W.R. Grace Co. (Grace), Keri Evans and Timothy Whipps individually participated in Grace's defined contribution retirement plan (Plan) into which both the employees and Grace made contributions. (6) Grace policy allowed employees to direct the investments made from their contributions; however, all company contributions were automatically invested in the Grace Common Stock Fund (Fund). (7) In January 2001, Plan administrators stopped investing employer contributions into the Fund due to mounting financial pressures and falling Grace stock prices. (8) In April 2003, the Fund stopped accepting new contributions from any source; however, Grace did not redirect past Fund contributions into other investments unless the participants specifically changed their investment preferences. (9) Approximately one year later, Plan administrators, acting in their fiduciary capacity, announced that any further investment in Grace stock was "clearly imprudent," and they subsequently dissolved the Fund. (10)

Evans and Whipps terminated their employment with Grace in 2001 and 2002, respectively, each receiving lump-sum distributions from their Plan accounts. (11) When the Fund dissolved, Evans and Whipps filed a class-action suit (the Evans Action) against the Plan administrators, alleging that they had breached their duties of loyalty and care, particularly with regard to the Plan's significant holding of Grace stock. (12) Evans and Whipps claimed that the large investment in Grace stock caused the value of their individual accounts to be less than it would have been had the administrators invested in more prudent funds. (13) The employees based their claim on ERISA, which permits retirement-fund participants to sue plan administrators for any breach of fiduciary duty. (14)

The district court dismissed the Evans action, finding the plaintiffs were not "participants" with standing to bring suit. (15) The court determined that Evans and Whipps were not "participants" under Firestone Tire & Rubber Co. v. Bruch (16) because they were bringing a claim for damages, as opposed to vested benefits; therefore, they had no standing under ERISA. (17) The First Circuit, however, concluded that Evans and Whipps were participants with standing to sue under ERISA and remanded the case for further proceedings. (18) The First Circuit held that former employees who allege that fiduciary breaches reduced their retirement plan lump-sum distributions retain standing to sue as "participants" under ERISA. (19)

Congress passed ERISA to protect the interests of participants in employment benefit plans by codifying traditional fiduciary standards of conduct for plan administrators and by providing a remedial structure for breaches of those standards. (20) In order to combat previous abuses of discretion by plan administrators, Congress instituted three specific fiduciary duties: the duty of loyalty, the duty to act for the "exclusive purpose" of providing benefits to plan beneficiaries, and the duty to exercise the "care, skill, prudence and diligence" of a "prudent man acting in a like capacity." (21) ERISA empowers the Secretary of Labor, plan participants, plan beneficiaries, and plan fiduciaries to bring a civil class-action suit in the name of the plan for breach of any of these fiduciary responsibilities. (22)

Close to ten years after Congress passed ERISA, the Supreme Court decided Massachusetts Mutual Life Insurance v. Russell, (23) where it clarified the scope of lawsuits that participants could bring against plan fiduciaries. (24) The Court concluded that ERISA was not designed as a means for plaintiffs to sue for damages above and beyond what was articulated by their plan as a benefit, reasoning that the statute contains its own comprehensive and integrated scheme for relief. (25) In the pivotal case of Firestone Tire & Rubber Co. v. Bruch, (26) the Supreme Court expanded the scope of eligible plaintiffs by determining that a "participant" includes those "former employees who have ... a colorable claim to vested benefits." (27) Even after Firestone, (28) many jurisdictions held that once an employee had received a lump-sum distribution of benefits, he or she no longer had a colorable claim and therefore no longer had standing to sue as a participant. (29) Exceptions to this rationale emerged, such as in Vartanian v. Monsanto (30) wherein the First Circuit determined that an employee who was deliberately misinformed by his employer regarding his retirement plan had standing to sue under ERISA even though he had already taken a lump-sum distribution of his benefits. (31) The court reasoned that employees have participant status if they can prove that they would have been entitled to greater benefits had the employer not breached its fiduciary duty. (32)

The federal circuit courts are currently considering whether recovery for fiduciary breaches in cases where a participant has already taken a lump-sum distribution of his defined contribution plan can be considered a "vested benefit" as defined in Firestone. (33) As discussed above, plaintiffs can seek restitution for vested benefits they should be entitled to under their retirement plan, but cannot use ERISA as a framework for seeking other damages such as extra-contractual relief. (34) Three jurisdictions, including the Sixth Circuit in Bridges v. American Electric, the Third Circuit in Graden v. Coexant, and the Seventh Circuit in Harzewski v. Guidant, (37) have concluded that these former employees have standing to sue as participants because they are making a colorable claim for vested benefits. (38)

In Evans v. Akers, the First Circuit concurred with its sister circuits, determining that a participant who took a lump-sum distribution of his or her defined contribution benefit plan may sue for benefits he or she would have received had the administrators of the plan not breached their fiduciary duties. (39) While the district court agreed with Grace's argument that Evans and Whipps were stating a claim for damages instead of benefits, the First Circuit concluded that legislative intent allows claims for additional plan benefits even though monetary damages for extra-contractual relief are not supported under ERISA. (40) The First Circuit reasoned that the full benefit Evans and Whipps were entitled to was the value of their accounts "unencumbered by any fiduciary impropriety" and that their participant status was therefore based on the plan administrator's failure to remove plan assets from the failing Fund which allegedly reduced their account values. (41)

The First Circuit rejected Grace's four arguments supporting the district court's conclusion that Evans and Whipps were making a claim for damages as...