- First Circuit Joins Sister Circuits Approving Burden-Shifting Approach to Proving Causation in ERISA Fiduciary-Breach Claims
- November 13, 2018 | Author: Johanna L. Matloff
- Law Firm: Conn Kavanaugh Rosenthal Peisch & Ford, LLP - Boston Office
Ordinarily, the burden of proof rests with the plaintiff. However, in Brotherston v. Putnam Investments, LLC, the First Circuit joined three of its sister circuit courts and held that the burden of proof in an ERISA fiduciary-breach case shifts to the defendant fiduciary to prove that its breach did not cause a loss to an employee benefit plan. 2018 WL 4958829 (1st Cir. Oct. 15, 2018). Brotherston involved a class action claim brought by participants in Putnam’s defined-contribution 401(k) retirement plan (the “Plan”). The plaintiffs alleged that Putnam and other Plan fiduciaries breached their fiduciary duties by offering mutual fund investments consisting primarily of Putnam’s own proprietary funds without regard to whether such funds were prudent investment options. Specifically, the plaintiffs claimed that Putnam had acted imprudently in selecting the Plan’s investment options.
The Elements of a Fiduciary-Breach Claim
The First Circuit recognized that a claim for breach of fiduciary duty requires proof of three elements: breach, loss, and causation. In evaluating whether the Plan fiduciaries had breached their duty of care, the First Circuit reviewed a fiduciary’s duty of care under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. (“ERISA”). Under ERISA, a plan fiduciary must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use. . . .” 29 U.S.C. § 1104(a)(1)(B). A fiduciary who breaches this duty must “make good” to the plan “any losses to the plan resulting from each such breach.” Id. at § 1109(a). With respect to the element of breach, the parties in Brotherston did not appeal the district court’s finding that the Plan fiduciaries had breached their fiduciary duties by failing to monitor the Plan investments independently. Therefore, the First Circuit’s analysis focused on the elements of loss and causation.
a. Evidence of Loss
The First Circuit recognized that the existence of a loss may not be as simple and straightforward as it may seem. “To the extent that the investor had a choice of investments, the decision to pick one investment over another might result in a measurable loss of opportunity.” 2018 WL 4958829 at * 8. Accordingly, the First Circuit held that it was appropriate to use a benchmark in determining whether the plan fiduciary’s investment decisions were prudent. Specifically, the First Circuit held that in determining whether there is a loss, it is reasonable to compare the performance of the allegedly imprudent investments with the performance of a prudently invested portfolio. Id. at *10. Because the plaintiffs’ expert had done precisely that and calculated which funds had generated a loss relative to benchmark funds, the First Circuit held that the plaintiff’s evidence was at least sufficient to support a finding of loss to the plan. (The First Circuit remanded to the district court questions as to whether the benchmark funds selected by plaintiffs’ expert were in fact appropriate.)
Recognizing evidence of both a breach of duty and a loss, the First Circuit next focused on whether the breach had caused the loss. To answer this question, the First Circuit first addressed the issue of who bears the burden of proving (or disproving) causation. ERISA is silent on the burden of proof issue, stating only that a breaching fiduciary shall be liable for any losses to the plan “resulting from” its breach. Id. at *12 (citing 29 U.S.C. § 1109(a)). In the absence of explicit direction in the text of the ERISA statute, the First Circuit looked to guiding principals. The “ordinary default rule” presumes that the burden of proving the essential elements of a claim rests with the plaintiff. Id. at * 12 (citing Schaffer ex rel. Schaffer v. Weast, 546 U.S. 49, 56 (2005)). However, the First Circuit noted exceptions to the “ordinary default rule,” particularly where it would be unfair to place on the plaintiff the burden of proving facts peculiarly within the knowledge of a defendant. Id. Since fiduciaries typically possess or have better access to information relevant to fund performance, placing the burden of proof on plan fiduciaries would be consistent with this recognized exception to the “ordinary default rule.” Id. at *14. In addition, the First Circuit looked to the common law of trusts, noting that the Supreme Court has frequently looked to trust law principals for guidance in construing ERISA, particularly where, as here, ERISA is silent on the issue. Under the Restatement, it has long been the rule that a plan fiduciary has the burden of disproving causation once the beneficiary has established that there is a loss associated with the fiduciary’s breach. Id. at *12 (citing Restatement (Third) of Trusts, § 100 cmt. e).
Furthermore, the First Circuit weighed the underlying purposes of ERISA, noting that “Congress sought to offer beneficiaries, not fiduciaries, more protection than they had at common law, albeit while still paying heed to the counterproductive effects of complexity and litigation risk.” Id. at *13 (citing Varity Corp. v. Howe, 516 U.S. 489, 497 (1996)). Although Congress also sought to reduce the cost of litigation for employers so as not to dissuade them from establishing plans, the First Circuit commented that it “would be strange to reject trust law’s rules on burden allocation in favor of an attempt to reduce employer costs, especially where the benefit of such a reduction would flow exclusively to employers whose breaches were followed by losses to the plan.” Id. For all of these reasons, the First Circuit joined the Fourth, Fifth, and Eighth Circuits in holding that once a plan participant has established a breach of fiduciary duty and loss to the plan, the burden shifts to the plan fiduciary to prove that such loss was not caused by its breach – i.e. that the resulting investment decision was objectively prudent. Id.; see Tatum v. RJR Pension Inv. Comm., 761 F.3d 346, 363 (4th Cir. 2014); McDonald v. Provident Indem. Life Ins. Co., 60 F.3d 234, 237 (5th Cir. 1995); Martin v. Feilen, 965 F.2d 660, 671 (8th Cir. 1992).
Will the Supreme Court Take up the Issue?
The First Circuit has weighed in on this burden-shifting question at a time when the circuit courts are almost evenly split on the issue. Four circuits (the Sixth, Ninth, Tenth, and Eleventh) have reached a conclusion opposite to that reached by the First Circuit, holding that the burden remains on the plaintiff to prove that a plan loss resulted from the alleged fiduciary breach. See Pioneer Centres Holding Co. Emp. Stock Ownership Plan & Tr. v. Alerus Fin., N.A., 858 F.3d 1324, 1337 (10th Cir. 2017), cert. dismissed per stipulation, No. 17-667, ___U.S. ___, 2018 WL 4496523 (U.S. Sept. 20, 2018); Saumer v. Cliffs Natural Resources Inc., 853 F.3d 855, 863 (6th Cir. 2017); Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1099 (9th Cir. 2004); Willett v. Blue Cross & Blue Shield of Ala., 953 F.2d 1335, 1343-44 (11th Cir. 1992). The Second Circuit seems to have adopted trust law principals, but it has not consistently held that the burden of proving causation falls to defendants in fiduciary-breach claims. Compare New York State Teamsters Council Health and Hosp. Fund v. Estate of DePerno, 18 F.3d 179, 182-3 (2d Cir. 1994) (once plaintiff has established a breach, burden of proving damages shifts to defendant) with Silverman v. Mutual Ben. Life Ins. Co., 138 F.3d 98, 104 (1998) (co-fiduciary plaintiff had the burden of proving that loss resulted from co-fiduciary defendant’s breach). The Supreme Court was considering a writ of certiorari in the Pioneer Centres case and had signaled interest in the case by inviting the Solicitor General to file a brief. (see here) However, the Pioneer Centres case settled before the Supreme Court had a chance to act on the petition. In Brotherston, Putnam has signaled its intent to seek Supreme Court review of the burden of proof issue. (see here) If the Supreme Court is interested in taking it up, the time would seem ripe to do so now.