Court Report

Summaries of recent court cases that affect HR.

By Ilana Pearlman, John B. Flood and Karen Rhodes Oct 23, 2014

1114-Cover.gifERISA Fiduciaries Liable Absent ‘Objective Prudence’

Tatum v. RJR Pension Inv. Comm., 4th Cir., No. 13-1360.

Under the Employee Retirement Income Security Act (ERISA), fiduciaries may be liable for the losses caused by their imprudent investment decisions unless they prove that a prudent fiduciary would have made the same decision after a proper investigation, according to the 4th U.S. Circuit Court of Appeals.

In 1999, the RJR Nabisco Co. decided to spin off its tobacco business, R.J. Reynolds, from its food business, Nabisco (collectively, “RJR”). Prior to the spinoff, RJR had sponsored a 401(k) plan for its employees, which was governed by ERISA. This plan allowed participants to invest in any combination of eight investment funds, including two funds that held exclusively RJR stock, the “Nabisco funds.” A new plan was created on June 14, 1999, the date of the spinoff, by amendment to the existing plan.

It expressly required that the Nabisco funds be maintained to permit participants to continue their existing investments in RJR stock.

In violation of this plan requirement, a working group of RJR employees decided to eliminate the Nabisco funds from the plan. The working group made this decision after less than an hour of discussion and without hiring any financial consultants, outside counsel or independent fiduciaries. The working group had no authority under the plan, and the decision was never properly ratified by the investment committee, which, according to the plan documentation, was responsible for the plan investments.

Professional Pointer

The ERISA fiduciaries could have shielded themselves from liability by following the procedures provided in the plan for investment decisions. If they had done so, the liability analysis may not have reached the question of whether “objectively prudent” fiduciaries would have made the same decision after a proper investigation.

In October 1999, a letter was sent to the plan participants informing them that the plan would eliminate the Nabisco funds as of January 2000. The letter erroneously stated that the plan did not permit the funds to be maintained.

Between June 15, 1999, the day after the spinoff, and Jan. 31, 2000, when the RJR stock in the Nabisco funds was sold, the value of the funds dropped by over half. The sale therefore resulted in significant losses. By December 2000, however, the RJR stock had more than fully recovered.

In May 2002, a plan participant filed a class-action lawsuit against RJR and the plan benefit and investment committees. The lawsuit alleged that they had breached their duties as fiduciaries under ERISA by eliminating RJR stock from the plan on an arbitrary timeline; by not conducting a thorough investigation; and by forcing the sale of the stock at an all-time low, despite the strong likelihood that the stock prices would soon rebound. The lawsuit alleged that this caused substantial losses.

At trial, the district court found that the ERISA plan fiduciaries were not liable for the losses because a reasonable and prudent fiduciary could have made the same investment decision after performing a proper investigation.

On appeal, the 4th Circuit disagreed, holding that the trial court had not applied a high enough standard of care to the plan fiduciaries. The appellate court held that the standard of care for ERISA fiduciaries was not merely whether the fiduciaries had made an investment decision that a reasonable and prudent fiduciary could have made, but was instead whether the fiduciaries had made a decision that a reasonable and prudent fiduciary would have made.

Accordingly, to avoid liability, the fiduciaries would have to prove that despite their imprudent decision-making process, their ultimate investment decision was “objectively prudent.” Under this “objectively prudent” standard, a plaintiff who has proved the defendant-fiduciary’s procedural imprudence and resulting losses will prevail unless the defendant-fiduciary shows that a prudent fiduciary would have made the same decision after a proper investigation.

“A decision is objectively prudent if a hypothetical prudent fiduciary would have made the same decision anyway,” the court said. “A plan fiduciary carries its burden by demonstrating it would have reached the same decision had it undertaken a proper investigation.”

By Ilana Pearlman, an attorney with Foster Employment Law, the Worklaw® Network member firm in Oakland, Calif.

Worker Denied Flexible Schedule May Pursue Claim

Solomon v. Vilsack, D.C. Cir., No. 12-5123.

An employee who was denied the ability to work a flexible schedule as a reasonable accommodation for her disability may proceed with her claim to trial, the U.S. Court of Appeals for the D.C. Circuit ruled.

Linda Solomon, a budget analyst for the U.S. Department of Agriculture, had chronic depression. Solomon encountered problems when she asked to work a flexible schedule as an accommodation for her ongoing depression. More specifically, Solomon asked to use a “maxiflex” schedule, which would allow her to work a schedule that could vary from day to day in terms of the number of hours worked and when those hours were worked.

Professional Pointer

Employers cannot assume, without a careful factual analysis, that a request for accommodation is unreasonable. Additionally, company policies, truly essential job duties and the consistent treatment of similarly situated employees must be considered when evaluating requests for reasonable accommodation.

Solomon submitted a doctor’s note that supported her request for a flexible work schedule due to her ongoing depression, although it did not state in precise detail the proposed schedule she should be able to work.

Agency personnel denied Solomon’s request. They took the position that Solomon needed to provide more medical documentation to justify her requested accommodation.

Solomon eventually filed a lawsuit, alleging in relevant part that the agency violated the Rehabilitation Act by failing to provide her with a reasonable accommodation when it denied her the ability to work a flexible schedule. The trial court granted summary judgment in favor of the employer, but the D.C. Circuit reversed.

The D.C. Circuit explained that “determining whether a particular type of accommodation is reasonable is commonly a contextual and fact-specific inquiry,” and that it is “rare” that any particular type of accommodation will be categorically unreasonable.

By John B. Flood, a shareholder in the Washington, D.C., office of Ogletree Deakins.

Penalty Proper for Failure to Provide COBRA Notice

Evans v. Books-A-Million, 11th Cir., No. 13-10054.

A trial court properly relied on a provision of the Employee Retirement Income Security Act (ERISA) in assessing a $75-per-day penalty against an employer found to have intentionally failed to provide a COBRA notice, according to the 11th U.S. Circuit Court of Appeals.

Books-A-Million, a national book retailer, had employed Tondalaya Evans for nine years when, in January 2006, Evans advised the company she was pregnant. At the time, Evans—then the company’s payroll and insurance manager—was involved in the implementation of a new payroll system set to “go live” just prior to her due date.

Professional Pointer

Employers must be scrupulous in ensuring that employees receive the notices required under COBRA after termination or other qualifying events.

According to Evans’ allegations, her supervisor advised her that rather than going on leave, she would need to work from home. Again according to Evans, she was sent work assignments throughout the time she had requested leave and then upon her return to work was treated coldly by her supervisor and almost immediately reassigned to work in a different position not involving payroll. Evans refused to accept the new position, and her employment was accordingly terminated. Following her termination, Evans did not receive a COBRA notice relating to continuation of her dental insurance.

Evans thereafter sued Books-A-Million. After a bench trial, the trial court concluded that the bookseller had intentionally violated COBRA and assessed a statutory penalty against Books-A-Million of $75 per day throughout the COBRA coverage period, along with attorney fees totaling over $42,000.

The 11th Circuit upheld the trial court’s finding that Books-A-Million intentionally violated COBRA in failing to provide Evans a COBRA notice following her termination. The appellate court further upheld the trial court’s decision to award Evans, in light of the violation, a $75-per-day statutory penalty under an ERISA statute that authorizes penalties of up to $100 per day for COBRA violations.

By Karen Rhodes, an attorney with Swerdlow Florence Sanchez Swerdlow & Wimmer, the Worklaw® Network member firm in Beverly Hills, Calif.

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