More Outsiders Facing Fiduciary Liability, Says DOL Official

Individuals not named as fiduciaries in plan documents--but who assert functional control or authority over employee benefits plans--are increasingly being held accountable as fiduciaries, according to Sherwin Kaplan, deputy associate solicitor in the Department of Labor's Plan Benefits Security Division. Kaplan discussed current litigation trends on fiduciary responsibility and other ERISA issues at a recent luncheon by the Employee Benefits Committee, Labor Section of the District of Columbia Bar.

Fiduciary Responsibility Trends

Kaplan noted that the DOL believes courts are not just looking to the plan documents that designate or name a particular individual as a fiduciary. Rather, they are increasingly expanding the definition of fiduciary to include persons who are making fiduciary decisions that concern plans.

Courts are looking at the functional role that an individual plays, according to Kaplan. If the individual has taken an action that either looks fiduciary in nature or asserts control or authority over a plan, courts appear willing to expand the definition of a fiduciary to cover that individual. The trend toward a functional approach to assigning fiduciary responsibility means a broader category of persons could face breach-of-fiduciary duty claims, Kaplan contended.

Trend Surprises DOL

In light of the U.S. Supreme Court decision in Mertens V. Hewitt Assocs., 113 S. Ct. 2063 (1993), the DOL did not anticipate this trend. Kaplan noted that the Mertens case found no cause of action against an individual who knowingly participated in a fiduciary breach. This narrower interpretation precluded a claim against someone who was not a fiduciary even if the person participated in a fiduciary breach. However, some language in Mertens defined a fiduciary in broader terms. Apparently, that language has allowed suits against a larger category of individuals as fiduciaries, based on the action individuals take.

Cases Cited as Examples

Kaplan pointed to Reich V. Lancaster, 55 F.3d 1034 (5th Cir. 1995), in which a third-party administrator (TPA) that sold insurance to plans was found to have engaged in a prohibited transaction. Kaplan noted that the DOL had alleged in Lancaster that the TPA had been a knowing participant in a fiduciary breach. However, after Mertens was decided the DOL amended its allegations to assert that the TPA played a role that was functionally the role of a fiduciary. The DOL won that case (which was later upheld by the 5th Circuit).

Kaplan also cited Reich V. Compton, 57 F.3d 270(3rd Cir. 1995), which interpreted ERISA's prohibited transaction provision (§406(a)(1)(D)). That provision prohibits certain transfers between a plan and a 'party-in-interest" (who is usually a fiduciary). The 3rd Circuit interpreted this provision to allow a cause of action if the transaction was undertaken for the benefit of a party-in-interest, even if that party was not involved in the transaction. In other words, even though the individual engaging in the transaction is not formally a fiduciary or party-in-interest, the prohibited transaction rules permit a cause of action because of the individual's functional or fiduciary-like role.

Also, as evidence of this new trend, Kaplan referred to the discount cases being brought against large insurance companies for failing to pass along hospital and provider discounts to plans. Five or 10 years ago, he said, these cases held that the insurers were not fiduciaries, but the current case law goes counter to those decisions, he noted.

DOL Following Other Litigation Trends

The DOL has been-carefully watching the scope of ERISA preemption ever since the New York Conference of Blue Cross & Blue Shield Plans V. Travelers Insurance Co., 115 S. Ct 1671(1995). In the DOL's view, the Travelers case signaled a reversal in the ever broadening way courts were looking at ERISA. Kaplan said that presently, courts are not reading "relate to" so broadly, and the only state laws that will be preempted are those: (1) that directly affect an employee benefit plan, or (2) in which the economic effect of a state action is so great that it might be preempted. According to Kaplan, the DOL views on ERISA preemption were adopted in a recent case decided by the Utah Supreme Court, Harmon City Inc. v. Nielsen & Senior, 1995 Utah LEXIS 84 Dec. 6, 1995), in which the DOL participated as a friend of the court.

In addition, the DOL is looking to become a friend of the court in cases that limit standing to sue under ERISA, limit the scope of remedies available under ERISA, and expand the preemption of remedies under state law.

[Reprinted with permission from the January 1996 issue of Employer's Health Benefits Bulletin , published by Thompson Publishing Group Inc. Copyright 1996.]