Supreme Court: Plan Fiduciaries Have a Continuing Obligation to Monitor Investment Prudence

WARNING: Do not read this while operating machinery or driving, if you are pregnant, or might become pregnant.   Yes, it's an ERISA case.  But it will keep your plan administrator up at night.

The Supreme Court considered whether claims against a retirement plan's fiduciaries were time barred. The plaintiffs claimed that the value of their retirement plan accounts decreased because the plan purchased "retail" mutual funds, rather than "institutional" class funds, which have lower expense ratios.

The Ninth Circuit held that the claims were untimely under ERISA's six-year statute of limitations.  The court of appeals believed the statute of limitations ran because the administrator selected the more expensive funds more than six years before the plaintiffs filed the lawsuit.

The Supreme Court, unanimously, reversed.  The high Court found that the claims were timely because they implicated whether the trustees prudently managed the funds during the limitations period, by monitoring whether the investments were adequate, or by failing to do so.  As such, the Court decided that regardless of the timing of the selection of the funds, the failure to adequately monitor the investments could form the basis of a timely claim.  Here's the money quote:

The Ninth Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances. Of course, after the Ninth Circuit considers trust-law principles, it is possible that it will conclude that respondents did indeed conduct the sort of review that a prudent fiduciary would have conducted absent a significant change in circumstances. 

An ERISA fiduciary must discharge his responsibility “with the care, skill, prudence, and diligence” that a pru- dent person “acting in a like capacity and familiar with such matters” would use. §1104(a)(1); see also Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. ___ (2014). We have often noted that an ERISA fiduciary’s duty is “derived from the common law of trusts.” Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U. S. 559, 570 (1985). In determining the con- tours of an ERISA fiduciary’s duty, courts often must look to the law of trusts. We are aware of no reason why the Ninth Circuit should not do so here.

Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.

So, employers must ensure that the plan administrators are adequately monitoring investment options to satisfy their fiduciary duties.  Poor management and supervision claims likely will not grow stale over time given this ruling.

The case is Tibble v. Edison International and the opinion is here.

Court of Appeal Holds Truckers Entitled to Hearing on Whether Federal Arbitration Act Applies

The Federal Arbitration Act preempts state law that would preclude arbitration of claims. California has such a law, which prohibits arbitration of wage claims.  See Lab. Code section 229.  So, if the FAA applies, it preempts that law. The U.S. Supreme Court has so held. 

The FAA contains an exemption, however.  Per the court of appeal:

Specifically, section 1 provides (in relevant part) that nothing in the FAA “shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” (9 U.S.C. § 1.) The United States Supreme Court interpreted this language in Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105 [121 S.Ct. 1302, 149 L.Ed.2d 234], reversing the lower court’s ruling that had held the section 1 exemption from the FAA applicable to all contracts of employment. The better reading of the law, the Supreme Court held, is that Section 1 exempts only “contracts of employment of transportation workers”—meaning “workers actually engaged in the movement of goods in interstate commerce.” (Id. at pp. 106, 112, 119.)

In this case, the plaintiffs are truckers, who claimed they were mis-classified as independent contractors.  The trial court did not hold a hearing on whether the FAA applied to them.  The plaintiffs argued they had "contracts of employment" and were "transportation workers" in interstate commerce.

To have  "contracts of employment," possibly falling outside the FAA's coverage, the truckers would have to be "employees," not independent contractors.  But the trial court would not consider that argument, and instead focused on whether the agreements were unconscionable.

The court of appeal decided that the trial court should have held a hearing regarding the applicability of the FAA, because if it did not apply, the truckers could not be compelled to arbitrate their wage-hour claims.

Petitioners were (and are) entitled to the court’s determination whether their agreements are contracts of employment for transportation workers engaged in interstate commerce, within the meaning of the FAA’s section 1 exemption as interpreted by the Supreme Court in Circuit City Stores, Inc. v. Adams, supra, 532 U.S. 105. That law, if it applies, would exempt their agreements from the FAA’s requirement that their arbitration agreements must be enforced. There is a strong policy in favor of enforcing agreements to arbitrate, and under the FAA. “‘Questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.’” (Armijo v. Prudential Ins. Co. of America (10th Cir. 1995) 72 F.3d 793, 797, quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) 473 U.S. 614, 626 [105 S.Ct. 3346, 87 L.Ed.2d 444]; see also Moses H. Cone Memorial Hospital v. Mercury Construction Corp., supra, 460 U.S. at p. 25 [103 S.Ct. 927, 74 L.Ed.2d 765].) Nevertheless, “there is no policy compelling persons to accept arbitration of controversies . . . which no statute has made arbitrable.” (Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, 481.)

This case applies only to transportation workers.  However, it also reminds us to ensure that one cannot take the applicability of the FAA for granted when filing Petitions to compel arbitration. 

This case is Garcia v. Superior Court and the opinion is here.

Court of Appeal Explains Limits on Discovery of Third Party Employees' Information in PAGA Claim

The plaintiff in a "representative action" asserted under the Private Attorney General Act (PAGA) claimed Marshall's (the retailer) denied him meal and rest breaks, accurate wage statements, etc.  That's when you are making an individual claim for your own damages, but will try to recover PAGA-authorized penalties on behalf of others whom you prove were wronged.

Based on his complaint alone, the plaintiff sought the names and other contact information about all employees statewide.  The trial court granted an order allowing a store-wide roster. The plaintiffs sought a writ from the court of appeal to obtain the statewide information.

The court of appeal denied the writ and issued an opinion. The court explained two reasons why the plaintiff was not entitled to contact information of everyone based only on the allegations in the complaint.

First, there was no showing that the plaintiff had any knowledge of practices occurring at other stores.  The plaintiff therefore could not argue, "I need the names to see if there's anything unlawful going on in other stores so I can expand my case."

Here are some important excerpts from that discussion:

A party seeking to compel discovery must therefore “set forth specific facts showing good cause justifying the discovery sought . . . .” (Code Civ. Proc., § 2031.310, subd. (b)(1); see Calcor Space Facility, Inc. v. Superior Court, supra, 53 at p. 223.) To establish good cause, a discovery proponent must identify a disputed fact that is of consequence in the action and explain how the discovery sought will tend in reason to prove or disprove that fact or lead to other evidence that will tend to prove or disprove the fact.

* * *
Plaintiff’s proposed procedure, which contemplates jumping into extensive statewide discovery based only on the bare allegations of one local individual having no knowledge of the defendant’s statewide practices would be a classic use of discovery tools to wage litigation rather than facilitate it. We conclude bare allegations unsupported by any reason to believe a defendant’s conduct extends statewide furnishes no good cause for statewide discovery.

So, yes, discovery is broader than admissibility at trial. But the information one seeks in discovery should bear a reasonable relationship to the facts one is seeking to prove as part of the case.  

The second reason the court denied the information is because of employees' right to privacy.  The plaintiff argued it would use an "opt-out" procedure, where all employees would be sent a letter and be allowed to opt-out of having their contact information shared.  The Court of Appeal was not having it, in part because the plaintiff had no good cause to seek the informant in the first place:

we conclude Marshalls’ employees’ privacy interests outweigh plaintiff’s need to discover their identity at this time. Those interests begin with the employees’ right to be free from unwanted attention and perhaps fear of retaliation from an employer. On the other hand, plaintiff’s need for the discovery at this time is practically nonexistent. His first task will be to establish he was himself subjected to violations of the Labor Code. As he has not yet sat for deposition, this task remains unfulfilled. The trial court could reasonably conclude that the second task will be to establish Marshalls’ employment practices are uniform throughout the company, which might be accomplished by reference to a policy manual or perhaps deposition of a corporate officer. The trial court could reasonably conclude that only then will plaintiff be able to set forth facts justifying statewide discovery.

The courts will not lightly bestow statewide discovery power to a litigant who has only a parochial claim. Here, the trial court’s measured approach to discovery was reasonable. Therefore, plaintiff’s petition is denied.

For those readers who are lawyers, there's a nice summary of discovery standards and privacy law in this opinion. But I didn't want to make the post too long.  Trust me. If this one stays on the books, you can update your form files.

This case is Williams v. Superior Court and the opinion is here.  

Ninth Circuit Upholds Dispute Resolution Policy in Handbook As Enforceable Arbitration Agreement

Especially in California, an arbitration agreement practically has to be written in pencil. Getting an arbitration agreement to conform with all the new court decisions feels like nailing jello to a wall. Herding cats.  Hitting a moving target.  You get the picture.

So, from an administrative standpoint, it's much easier to have an arbitration agreement that can be amended from time to time and simply distributed via handbook revision, along with an acknowledgment of receipt.  There are limits on doing so, such as adequate notice of a change and the implied covenant of good faith and fair dealing that would apply to any contract. 

But some may question whether a policy in a handbook is an enforceable "agreement" to arbitrate at all.  The Ninth Circuit thought so in Ashbey v. Archstone Prop. Mgmt.  Opinion here.

Ashbey signed the following acknowledgement (at least twice) during his employment.

I acknowledge that I have received directions as to how I may access the Archstone Company Policy Manual, including the Dispute Resolution Policy. I understand that Archstone can administer, interpret, discontinue, supplement, amend or withdraw any of the employment and personnel policies and procedures set forth in this Company Policy Manual. I understand that it is my responsibility to understand the Archstone Company Policy Manual, including the Dispute Resolution Policy, and to adhere to all of the policies contained herein.

The Dispute Resolution Policy stated:

This Policy is governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. . . . Except as it otherwise provides, this Policy is intended to apply to the resolution of disputes that otherwise would be resolved in a court of law, and therefore this Policy requires all such disputes between Employee and the Company to be resolved only by an arbitrator through final and binding arbitration and not by way of court or jury trial. . . . This Policy also applies, without limitation, to disputes arising out of the employment relationship or the termination thereof including, without limitation, disputes over . . . harassment and claims arising under the . . . Civil Rights Act of 1964 . . . and all other state statutory and common law claims. 

Ashley argued that the acknowledgment and policy were ineffective to waive his right to a jury trial on his federal Title VII claim and analogous state law claim for discrimination. He claimed that his waiver was not knowing and voluntary because the receipt did not contain the Dispute Resolution policy. The court of appeals disagreed:

the Acknowledgment here explicitly notified Ashbey the Manual contained a Dispute Resolution Policy, and it did so in two places. And Ashbey expressly agreed “to adhere” to the Manual and the Dispute Resolution Policy. That the Acknowledgment did not list the terms of the Policy is not fatal to the Policy’s enforcement. The full text of the Policy was at Ashbey’s fingertips; he acknowledged he had received directions on how to access both the Manual and the Dispute Resolution Policy contained in the Manual. Anyone who reviewed the Dispute Resolution Policy would immediately realize he was “entering into an agreement to waive a specific statutory remedy afforded him by a civil rights statute.” Nelson, 119 F.3d at 762. The Dispute Resolution Policy was not ambiguous on that point: (1) the policy stated it “is governed by the Federal Arbitration Act”; (2) the policy stated that “all . . . disputes between Employee and the Company [are] to be resolved only by an arbitrator through final and binding arbitration and not by way of court or jury trial”; and (3) the policy stated it “applies, without limitation, to disputes arising out of the employment relationship . . . including, without limitation, disputes over . . . harassment and claims arising under the . . . Civil Rights Act of 1964.”

So, the Court held that the policy was knowing and voluntary.  

In a companion, unpublished decision, the court also held that the policy contained in the handbook was enforceable as an agreement under California unconscionability law.  The court noted that policies can be enforceable as contracts, even when incorporated into the signed acknowledgment.  The court also found that the attorney's fees and other provisions were satisfactory. 

The analysis relies on California opinions and is useful for crafting these types of arbitration agreements. So, although unpublished, it will be useful.  That unpublished opinion is here. 

California Supreme Court: Winning Employers in Discrimination Lawsuits Lose Automatic Right to Recover Costs of Suit

The general rule is that a winning litigant is entitled to recover costs of suit. These can include deposition transcripts, filing fees, witness fees, subpoena fees, and more.  I know this because it says so right here in Civil Procedure Code section 1032:

(b) Except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.

But attorney's fees are not considered costs and are not recoverable unless a statute so provides.

The Fair Employment and Housing Act contains a provision in Govt Code section 12965(b) allowing prevailing parties to recover attorney's fees and costs:

In civil actions brought under this section, the court, in its discretion, may award to the prevailing party, including the department, reasonable attorney's fees and costs, including expert witness fees.

The courts have long interpreted this section to say that employees normally are entitled to attorney's fees if they win their lawsuit. But, employers do not recover attorney's fees unless the plaintiff's case was frivolous, groundless, or without foundation.  I know, the statute does not make that distinction. But that's been the rule since the 1970's, at least under federal law.  California courts have followed this rule for many years.  The theory is that allowing employer-defendants to recover attorney's fees in all cases would dissuade people from suing for discrimination, harassment and retaliation.

But what of litigation costs?  Does Govt Code section 12965(b), quoted above, "expressly provide"  for an exception to the general rule set forth in Civil Proc. Code section 1032? 

Yes.  Yes it does.  That's what the California Supreme Court unanimously held in Williams v. Chino Valley Ind. Fire Dist., opinion here.  In a nutshell, the Court held:

We conclude Government Code section 12965, subdivision (b), governs cost awards in FEHA actions, allowing trial courts discretion in awards of both attorney fees and costs to prevailing FEHA parties. We further conclude that in awarding attorney fees and costs, the trial court‘s discretion is bounded by the rule of Christiansburg; an unsuccessful FEHA plaintiff should not be ordered to pay the defendant‘s fees or costs unless the plaintiff brought or continued litigating the action without an objective basis for believing it had potential merit. 

Many cases do not go to trial or get resolved via motion for summary judgment.  Therefore, there are only a small percentage of cases in which the defendant is entitled to recover its "costs." 

But this case has wider implications.  The potential for an award of costs is an incentive to plaintiffs to settle weak cases.  This holding guts that incentive.  Courts now must apply the same standard to costs as they do to attorney's fees.  It's not easy to persuade a court to award attorney's fees.  Plaintiffs and their lawyers will take into account that the employer will have a tough time obtaining an award of costs. Therefore, they may hold out for larger settlements or refuse to settle altogether. 

This case also makes it less likely that a weak case will be dismissed for a waiver of costs, which is a way for a plaintiff to settle a bad case.  The offer of a waiver of costs can have real consequences if costs are recoverable as a matter of right. For example, if an employer wins summary judgment, it may offer to settle for a waiver of costs if the plaintiff forgoes appeal. Now, that offer is less valuable. 

Finally, this case will make it more burdensome and expensive for defendants who prevail and then seek costs. It also will cause new burdens for trial courts.  Defendants no longer will be able to file a simple memorandum of costs at the end of a case.  Instead, they will have to file a motion to convince the court that the plaintiff's case was frivolous, unreasonable or without foundation.  Presumably, that motion will have to be based on evidence, such as deposition transcripts.  Those motions cost money to prepare, creating a further disincentive to filing them.  The trial court will then have to take the time to review these motions and make rulings. And then the courts of appeal may have to review the orders on appeal.

This ruling is great for plaintiffs with weak cases.  But not so great for employers facing huge defense costs that wish to pay a settlement rather than risk losing at trial or incurring further legal bills.

Again, the opinion in Williams v. Chino Valley Ind. Fire Dist. is here.  

Have a nice day!