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Thelen Reid Brown Raysman & Steiner LLP
Last Tuesday, the Supreme Court, in Varity Corporation v. Howe, ruled for the first time that ERISA authorizes plan participants to obtain individual relief for a breach of fiduciary duty. Prior to this decision, most courts had denied individual relief and had permitted participants claiming a fiduciary breach to sue only on behalf of a plan. The Court also found that Varity was acting as an ERISA plan fiduciary in circumstances that might not previously have been thought to involve ERISA plan administration. As a consequence, employers should review the allocation of their benefit plan duties and should consider preventive maintenance to reduce potential liabilities.
Varity and its subsidiary Massey-Ferguson, Inc. (which the Court treated as one entity) transferred certain divisions to Massey Combines Corporation, a newly incorporated subsidiary. Varity encouraged employees to transfer to Combines by describing its bright future and emphasizing the security of the medical and other welfare benefits. 1,500 employees transferred; Combines went into receivership; the employees who transferred lost their welfare benefits; and the employees sued Varity.
The District Court found that Varity was acting as a plan fiduciary when it induced employees to transfer by emphasizing the security of their benefits and that Varity had violated its fiduciary duty by deliberately misleading employees. The District Court ordered "restitution" for lost benefits and ordered the employees reinstated to Varity's plan. The Eighth Circuit Court of Appeals affirmed. The Supreme Court affirmed, holding that (a) Varity had acted both as employer and as plan administrator and therefore owed a fiduciary duty to the employees, (b) Varity violated its fiduciary duty by intentionally misleading employees, and (c) ERISA allows the employees to sue Varity directly.
In recent years, the courts have tended to favor the interests of plan sponsors and of streamlined plan administration over the interests of employees. For example, (1) an employer was allowed to amend a medical plan to eliminate coverage for AIDS, even as applied to an employee who had previously contracted AIDS; (2) employees were denied a remedy against a nonfiduciary who knowingly participated in a fiduciary breach; (3) money damages have been severely limited; and (4) state law remedies have been held to be preempted, even in cases where ERISA provides no remedy. The old approach is reflected in Massachusetts Mut. Life Ins. Co. v. Russell, a 1985 decision discussed at length in Varity, in which the Supreme Court held that participants could not recover compensatory or punitive damages against an administrator who had wrongfully delayed payment of benefit claims.
With the Supreme Court's decision in Varity, the pendulum appears to be swinging back, with more attention paid to the interests of employees. As a technical matter, the Supreme Court distinguished Russell on the ground that the employee sued under a different subsection of ERISA. The Court noted that Russell still bars claims under the other subsection and that plaintiffs could not have sued Varity's plan directly because they were no longer participants in that plan. Faced with the choice between finding a remedy or leaving plaintiffs without one, the Supreme Court chose to find one. In so doing, it may send a message encouraging lower courts also to find a remedy in appropriate circumstances.
To find a remedy, the Supreme Court had to expand the concept of fiduciary duties. While discussing the creation of Combines, Varity clearly acted in its capacity as an employer, a nonfiduciary capacity. The District Court concluded, however, that Varity was also exercising discretionary authority in connection with the management of its benefit plans and was therefore also acting in a fiduciary capacity. Thus, the Court ruled that Varity had breached its fiduciary duties by misrepresenting the effect of a transfer of employment on plaintiff's employee benefits. The Court's decision has made it extremely important (and extremely difficult) for employers to distinguish sharply between their capacity as plan sponsors and their capacity as plan administrators.
Without question, the Varity opinion reflects the Court's attempt to deal with behavior it felt was knowing and deceitful. Unfortunately for other employers, the result has implications for everyone. The new remedies and new duties described in Varity now apply to every fiduciary of every employee benefit plan subject to ERISA.
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For more information about the issues covered in this report, please contact David S. Foster in our San Francisco office at 415-369-7020 or at dsfoster@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©1996 Thelen Reid Brown Raysman & Steiner LLP
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