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Twenty-first century employers are facing a new litigation threat, class action ERISA [FOOTNOTE 1] litigation. With the recent economic downturn, fueled by the Enron publicity, the number of ERISA-based claims involving retirement plan employer stock investment losses has risen astronomically. But employers might have just been granted a reprieve from what has become the latest tidal wave of employee litigation. This reprieve came in the form of Milofsky v. American Airlines, Inc., [FOOTNOTE 2] which held that participants in a 401(k) plan do not have standing to sue under Section 502(a)(2) of ERISA for breach of fiduciary duty unless all plan participants would benefit from the litigation or the plaintiffs can otherwise establish that the alleged fiduciary breach targeted the plan as a whole rather than a subset of plan participants. This decision conflicts with an earlier decision by the 6th U.S. Circuit Court of Appeals and it remains to be seen whether other courts outside the 5th Circuit will adopt its reasoning, but American Airlines provides welcome ammunition to employers and plan fiduciaries defending ERISA fiduciary breach claims relating to defined contribution plans. Further, the decision should encourage employers to amend their defined contribution plans to address how planwide fiduciary breach recoveries will be allocated, which may itself provide material litigation protection or relief. FACTS American Eagle, Inc.’s parent acquired Business Express Inc., which sponsored the BEX Savings and Profit Sharing Plan (BEX Plan), an ERISA-governed retirement plan. As part of the acquisition process, American Airlines decided to transfer the BEX Plan account balances to the Super Saver Plan (Eagle Plan), American Eagle’s 401(k) plan. American Airlines informed participants of the dates during which their accounts would be transferred to the Eagle Plan and the dates they would be “blacked out” from making any investment elections (black outs are administratively necessary when merging two plans). THE CLAIMS Michael Milofsky — a pilot for Business Express Inc. and a participant in the BEX Plan — sued the Eagle Plan fiduciaries on behalf of himself and similarly situated participants, alleging breach of fiduciary duty. Milofsky claimed that the Eagle Plan fiduciaries allowed the transfers to take place too late, in some cases months after participants were notified that the transfers would take place. According to Milofsky, the delayed transfers constituted a breach of fiduciary duty because they allowed Eagle Plan assets to remain invested in declining BEX Plan investments too long, causing a loss to the Eagle Plan. Milofsky sought actual damages, which he asserted should be paid directly to the Eagle Plan and allocated to individual participant accounts proportionately to their losses. Milofsky brought his claims under ERISA Section 502(a)(2), which permits plan participants to sue fiduciaries for relief under ERISA Section 409. ERISA Section 409, in turn, provides that plan fiduciaries are personally liable to the plan for any losses resulting from a fiduciary breach. BREACH OF FIDUCIARY DUTY CLAIMS CANNOT SEEK INDIVIDUALIZED RELIEF Although ERISA Section 409 seems to provide for sweeping relief for fiduciary breaches, it is well-settled that these types of claims must seek relief on behalf of the plan, not individual participants. In 1985, the U.S. Supreme Court decided Massachusetts Mutual Life Ins. Co. v. Russell [FOOTNOTE 3], in which it held that ERISA Section 409 relief is limited to relief that benefits the plan as a whole and that ERISA Section 409 cannot be used to benefit individual participants. Attempting to end-run the Supreme Court’s Russell decision, Milofsky argued that his case would benefit the Eagle Plan as a whole because any monetary award would be to the Eagle Plan (and be deposited into individual accounts), thus increasing the Eagle Plan’s assets. In rejecting this facially-appealing argument, the 5th Circuit found that Milofsky actually sought impermissible individualized relief because the complaint sought to benefit only those participants who were harmed as a result of the alleged fiduciary breach and that although the total plan assets would increase as the result of any judgment, a recovery would not provide planwide relief. The 5th Circuit indicated that Milofsky could have brought suit under ERISA Section 502(a)(3), which permits suits for “equitable relief.” However, under recent Supreme Court guidance, ERISA Section 502(a)(3) suits cannot seek monetary relief. [FOOTNOTE 4] Recognizing this conundrum, the 5th Circuit recognized that such a claim “might deny the plaintiffs the particular remedy they desire.” WHAT IF MILOFSKY SOUGHT RECOVERY ONLY TO THE PLAN? Milofsky could have omitted from his complaint any assertions as to how monetary relief would be allocated, but it would have done him no good. The 5th Circuit effectively foreclosed this line of reasoning when it held that the 6th Circuit in Kuper v. Iovenko “went awry � in rejecting ‘ [d]efendants’ argument that a breach must harm the entire plan to give rise to liability under � 1109.” Likewise, the 5th Circuit stated that because “the claim does not otherwise seek to vindicate rights of the entire plan given that the alleged fiduciary breaches occurred only as to the members of the plaintiff class and were not directed to the whole plan membership this claim does not benefit the entire plan.” Accordingly, it is clear that the 5th Circuit would have dismissed Milofsky’s case even had he simply remained silent as to how any recovery should be allocated. POSSIBLE CIRCUIT SPLIT In Kuper, the 6th Circuit held that a subset of plan participants can sue to recover monetary damages under ERISA Section 502(a)(2) even when the alleged fiduciary breach did not harm all of the participants. [FOOTNOTE 5] To our knowledge, this is the only other federal circuit to have addressed this issue. We expect that this conflict will either be addressed by the circuits conforming their holdings or by the Supreme Court. POSSIBLE EMPLOYER UPSIDE TO BREACH OF FIDUCIARY DUTY LITIGATION A legitimate argument may exist that a court’s allocation of proceeds to just the harmed participants would violate the no-individualized relief requirement in Russell. If so, recovery in cases such as Milofsky would be allocated pursuant to plan terms or as directed by plan fiduciaries, in either case with results that the plaintiffs might not have expected. PRACTICAL EFFECT The 5th Circuit’s Milofsky decision provides a potentially powerful, if controversial weapon for defending breach of fiduciary duty cases. If claims can be fairly characterized as seeking to benefit just a subset of participants as opposed to the entire plan, a motion to dismiss likely would be in order. Few plans have provisions directing how ERISA Section 502 amounts should be allocated. In the absence of such a provision, a court might feel free to order how these types of proceeds should be allocated. However, employers might gain the ability to determine how such amounts should be used (potentially to offset future plan expenses or to provide additional plan benefits) by adopting a plan provision to the effect that: “If the plan receives or will receive proceeds attributable to an ERISA Section 502 claim the plan fiduciaries shall request that the company’s president adopt a written amendment directing how proceeds attributable to ERISA Section 502 claims will be allocated (which authority is hereby granted to the president). If the president fails to do so within a reasonable period of time, the plan fiduciaries shall determine how any such amounts should be allocated.” [FOOTNOTE 7] In considering such amendments, employers would be well-advised to amend defined contribution plans to make it clear that causes of action will be valued at zero until amounts are actually recovered, lest participants assert that it was a fiduciary breach not to take the value of, at the very least, asserted causes of action into account in determining their account values. Los Angeles based employment department partner Ethan Lipsig is chair of the Paul, Hastings, Janofsky & Walker Institutional Investment, Benefits and Compensation Practice Group. Stephen Harris and Eric Keller are employment associates in the Institutional Investment, Benefits and Compensation Practice Group in Los Angeles and Washington D.C., respectively. ::::FOOTNOTES:::: FN1 The Employee Retirement Income Security Act of 1974. FN2 —F.3d—, 2005 WL 605754 (5th Cir. 2005). FN3 473 U.S. 134 (1985). FN4 See, e.g., Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 212-216 (2002); Mertens v. Hewitt Assocs., 508 U.S. 248, 255-58 (1993). FN5 66 F.3d 1447 (6th Cir. 1995). FN6 Both the employer’s and president’s amendments should be immune from fiduciary breach attack, as fiduciary obligations generally do not attach to plan design and amendment. See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 443-44 (1999); Lockheed Corp. v. Spink, 517 U.S. 882, 890-91 (1996).

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