Month: January 2005

A good article from the Oklahoma Bar Journal discusses the interplay of bankruptcy laws, ERISA, the Internal Revenue Code and COBRA: “Employee Benefits in Bankruptcy: The Employer’s Perspective and the Employee’s Perspective.” The article written by Kenni Merritt begins with some humor:

. . . This article will discuss the interplay of these laws as they relate to employee benefit issues that typically arise in a Chapter 11 bankruptcy of the employer who sponsors a benefit plan, and in a bankruptcy filing by the employee who participates in a retirement plan.

At the outset, it is important to understand that bankruptcy attorneys are from Mars and employee benefits attorneys are from Venus. It is unusual to find a bankruptcy attorney with expertise in ERISA or a benefits attorney with expertise in bankruptcy. Although bankruptcy attorneys and employee benefits attorneys often use the same key words (i.e., Plan, Trustee, Code, priority categories), these terms have very different meanings in the bankruptcy context than they do in the ERISA/employee benefits context. Let me hasten to add that I am from Venus, though I have had spent several summers on Mars. . .

The end of 2004 brought an important development in the ERISA employer stock litigation arena. A federal appellate court granted a discretionary petition on December 29, 2004 to consider some critical questions, including whether such cases may be maintained as class actions under Fed.R.Civ. P. 23. In the case of In re Electronic Data Systems Corp. ERISA Litig, Case No. 6:03-MD-1512 (filed March 14, 2003, E.D.Tex), plaintiffs filed a class action against EDS after its stock fell from 36.46 to $17.20 a share in a day following an earnings warning. Plaintiffs asserted claims that it was imprudent for the fiduciaries to permit participants to invest any funds in EDS stock and that the fiduciaries misrepresented certain information regarding the company and its stock to participants.

Following the district court’s denial of defendants’ motions to dismiss, plaintiffs moved for class certification. The district court granted the motion in part, holding that the prudence claims could be maintained by the plan as a class action, but refusing to certify the misrepresentation claims. The district court reasoned that the misrepresentation claims could not be certified because the class representatives lacked commonality and typicality. It also reasoned that the investments were made by investors in their individual capacity and that section 404 of ERISA, 29 U.S.C. sec. 1104(c) provided fiduciaries with a defense against such claims arising from participants’ investment election.

Defendants filed a petition to review the district court’s decision on class certification and the United States Court of Appeals for the Fifth Circuit granted the discretionary petition on December 29, 2004. EDS is arguing that the claims are not certifiable under Rule 23 because they are not held by the plan, but are really asserted by participants. If so, defendants argue that the claims are for individualized relief under section 502(a)(3) of ERISA, 29 U.S.C. sec 1102(a)(3) and that section does not allow for monetary damages, only equitable relief. Defendants also assert that the class representatives continued to invest their retirement savings into EDS stock, which has somewhat recovered and are therefore estopped from complaining about the fiduciaries conduct.

Courts have recently struggled with ERISA’s civil enforcement provisions and plaintiffs’ ability to recover for such claims under them. A district court in New Jersey held that plaintiffs could not recover damages for defendants’ alleged breaches of fiduciary duty because such recovery was really for individual participants rather than the plan. In re Schering-Plough Corp. ERISA Litig., 2004 WL 1774760 at 6 (D.N.J. June 28, 2004). Most courts have held that plaintiffs are seeking such recovery for the plan which is authorized to file actions for breach of fiduciary duty and recover damages on such claims. The fact that the Fifth Circuit granted discretionary petition to review these claims is extremely noteworthy. If the Fifth Circuit, in fact, decides the case, it will shed considerable light on whether these claims may be maintained as class actions.

Read more about employer stock litigation at the Jenner & Block website entitled “ERISA Fiduciary and Company Stock Update Center.”

The ABA Law Practice Management Section has published its annual rundown on the highs and lows of the legal services market here. “Red Hot” areas of practice are listed as employment law, intellectual property, and contingency litigation.

Source: MyShingle.com.

Broc Romanek has an interesting post (“General Counsels Pay Up“) discussing SEC enforcement actions involving lawyers serving as general counsels. Of particular interest is this link here to a speech given in December of 2004 by Stephen Cutler, Director, Division of Enforcement for the SEC, in which he made the following remarks:

That brings me to the lawyers. And I’m reminded of Judge Sporkin’s question, in the context of another scandal, the S&L crisis: “Where were the lawyers?” Lawyers to funds, their independent directors, and investment management firms also have a critical role to play in helping to prevent violations of the law. So we’re looking at them closely. What are we looking for, exactly? Intentional, knowing misconduct, for one. But we are also looking hard at situations in which lawyer misconduct meets statutory scienter requirements that are short of actual knowledge. Having said that, I do want to be clear that we are not in the business of enforcing malpractice rules or sanctioning lawyers for providing negligent advice.

We all know that the business and professional pressures on lawyers to accede to clients’ wishes are greater than ever. But it is equally true that it is more important than ever (and, as a result of the Sarbanes-Oxley Act, sometimes even legally required) for lawyers to remain firm and stand up against a proposed action or course of conduct that would be inconsistent with the letter or intent of the law. And in advising clients, it is critical that lawyers take a sufficiently broad perspective in evaluating a client’s proposed course of conduct so as to understand not just what the client wants to do, in the most narrow sense, but why the client wants to do it – in order to be able to fully evaluate the legal implications of the client’s course of conduct. By following these principles, lawyers, and particularly in-house counsel, can play an integral role in fostering a culture of compliance within a firm.

The Club for Growth has launched a new blog called Social Security Choice–Because Every American Should Have Their Own NestEgg. The Blog is “dedicated to bringing pro-growth experts together to advocate Social Security reform, by creating personal accounts.” Authors for the new blog are: Pat Toomey, Larry Kudlow, Herman Cain, Brian Wesbury, Donald Luskin, Kerry Kerstetter (the “opinionated CPA” as he calls himself), David Keating, Andrew Roth, Carrie Lukas, Louis Woodhill, and Adam Doverspike.

The IRS has issued final regulations pertaining to when and how certain forms of distribution previously available are permitted to be eliminated from qualified defined contribution plans. The regulations are effective January 25, 2005. Excerpt from the “Explanation of Provisions”:

These final regulations retain the general structure and much of the substance of the proposed regulations, including an example illustrating the provisions. Some changes have been made in connection with a specific recommendation for modification and clarification. . .

The regulations retain the rules under which a defined contribution plan may be amended to eliminate or restrict a participant’s right to receive payment of accrued benefits under a particular optional form of benefit without violating the section 411(d)(6) anti-cutback rules if, once the plan amendment takes effect for a participant, the alternative forms of payment that remain available to the participant include payment in a single-sum distribution. The regulations clarify that such an amendment can apply only to distributions with annuity starting dates after the amendment is adopted and, therefore, cannot apply to distributions that have already commenced. However, these final regulations remove the 90-day notice condition previously applicable to these plan amendments.

The Treasury’s press release is here. You can access a previous post on the proposed regulations here.

Those who handle litigation that involves the need to obtain patient information from healthcare providers may be interested to know that the federal Department of Health & Human Services has issued new Frequently Asked Questions for HIPAA Privacy addressing the permissible use and disclosure of PHI (protected health information) in the context of litigation. The new FAQs can be found here and answer the following important questions:

• May a covered entity that is a plaintiff or defendant in a legal proceeding use or disclose protected health information for the litigation?
• May a covered entity that is not a party to a legal proceeding disclose protected health information in response to a subpoena, discovery request, or other lawful process that is not accompanied by a court order?
• May a covered entity use or disclose protected health information for litigation?
• What “satisfactory assurances” must a covered entity that is not a party to the litigation receive before it may respond to a subpoena without a court order?
• When must a covered entity account for disclosures of protected health information made during the course of litigation?
• For disclosures for judicial and administrative proceedings, when is a copy of the subpoena itself sufficient satisfactory assurance of notice to the individual?
• For disclosures for judicial and administrative proceedings, can notice be provided to the individual’s lawyer instead of the individual?
• May a covered entity disclose protected health information in response to a court order?
• In providing legal services to a covered entity, must a lawyer who is a business associate require that those persons to whom it discloses protected health information agree to abide by the privacy restrictions and conditions that apply to the lawyer?

The New York Times is reporting: “Schwarzenegger Aims at State Pension System.” According to the article, the Governor contends that California can no longer afford a generous traditional pension plan for state employees and teachers and should instead adopt a 401(k)-style plan of individual accounts. The article states that Californians could be asked to vote on the proposed changes as early as this summer. Pension experts and political analysts are predicting that the outcome of the vote will not only have an impact on the state pension system, but also could provide impetus for proposed changes to Social Security. Excerpt:

Mr. Schwarzenegger, in his State of the State address earlier this month, described California’s pension system as “another government program out of control,” careering toward fiscal ruin. He cited the state’s obligation to inject $2.6 billion into the system this year to keep it actuarially sound, compared with $160 million four years ago.

. . . Although Mr. Schwarzenegger described the plans as a looming train wreck, even advocates of privatization in his own administration say the system is currently sound. The plans, taken together, are nearly 90 percent funded, a level that most experts consider quite healthy.

“We’re not warning of imminent collapse,” said Tom Campbell, an economist and former member of Congress who is the state’s new budget director. “There is a potential danger for the state to have a defined benefit system, and to the extent we can move away from it, as many private employers in America have done, we should do that.”

The article reports that opponents of the plan include “almost all Democrats in the Legislature, state employee unions and the trustees of the pension plans themselves” who say that the plans have been well managed and provide a “critical source of income security to workers who sacrifice pay in their working years to toil in the public sector.”

While such action by California to oust its traditional defined benefit public pension sytem in favor of a 401(k)-style plan could impact the national debate over Social Security, the development might have an even great ripple effect on other states which might decide to follow suit.

UPDATE: CALPERS has set up a special website called “The Pension Debate Information Center” and states that the website’s purpose is as follows:

We have created this Information Center in the interest of educating our members, employers, and stakeholders, and correcting misinformation that has permeated public discussions on this issue. This Information Center is also intended to add to the marketplace of ideas the pros and cons of defined benefit and defined contribution plans.

There is a lot of good information on the website which includes this page with links to “research and analysis of defined benefit and defined contribution plans – their effectiveness, employee preferences, and more.”

(Thanks to Benefitslink.com for the pointer.)