ERISA contains a unique – and often confusing – statute of limitations provision. Someone suing the plan has six years in which to bring the lawsuit, but only three years if they have “actual knowledge” of the alleged breach. Plans often attempt to dismiss fiduciary breach claims under the shorter three-year statute of limitations, particularly for benefit claims that are deemed untimely. The question raised to the Supreme Court in Intel Corporation Investment Policy Committee v. Sulyma, is what constitutes “actual knowledge,” specifically whether the actual knowledge standard is met if the plan has sent adequate disclosures to participants that have been ignored or not read by the participant.
“Actual knowledge” is defined in §382.107 and means that an employer has knowledge that a driver has used alcohol or controlled substances based on the employer’s direct observation of the employee, information provided by the driver’s previous employer (s), a traffic citation for driving a CMV while under the influence of alcohol or controlled substances or an employee’s admission of alcohol or controlled substance use, except as provided in §382.121. Actual Knowledge means, (i) as it applies to the Owner Trustee or Indenture Trustee, as the case may be, actual knowledge of a Responsible Officer in the Trust Office of the Owner Trustee or in the Corporate Trust Office of the Indenture Trustee, as the case may be, and (ii) as it applies to the Owner Participant, actual knowledge of a vice president or other higher officer of the Owner Participant having responsibility for the transactions contemplated by the Operative Documents. On February 26, 2020, the United States Supreme Court unanimously held in Intel Corporation Investment Policy Committee v. Sulyma, 140 S.Ct. 768 (2020) that to meet the “actual knowledge” requirement triggering the three-year limitations period in Section 413(2) of the Employment Retirement Income Security Act. “Actual knowledge” is defined in 382.107 and means that an employer has knowledge that a driver has used alcohol or controlled substances based on the employer’s direct observation of the employee, information provided by the driver’s previous employer (s), a traffic citation for driving a CMV while under the influence of alcohol or controlled substances or an employee’s admission of alcohol or controlled substance use, except as provided in 382.121. Distinguishing actual knowledge from hypothetical knowledge, the Intel Court stated that the plain meaning of the phrase 'actual information' requires a plaintiff to 'be aware' of the alleged.
The Supreme Court ruled on February 26 that “actual knowledge” means subjective knowledge, not imputed knowledge from plan disclosures: that the shorter three-year actual knowledge limitations period does not apply if the participant has not read – even if they have received – plan disclosures. While the decision is unremarkable to the extent that the court enforced the plain meaning of the statute, the likely implication of this decision is that many benefit cases will now be more expensive to defend without the ability to enforce the shorter statute of limitations.
ERISA’s Statute of Limitations
Lawsuits under ERISA must be filed within one of three time periods, each with different triggering events. The first begins when the breach occurs. Specifically, under §1113(1) – considered a statute of repose – suit must be filed within six years of “the date of the last action which constituted a part of the breach or violation” or, in cases of breach by omission, “the latest date on which the fiduciary could have cured the breach or violation.” The second period – a statute of limitations – accelerates the filing deadline, beginning when the plaintiff gains “actual knowledge” of the breach. Under §1113(2), suit must be filed within three years of “the earliest date on which the plaintiff had actual knowledge of the breach or violation.” The third period, which applies “in the case of fraud or concealment,” begins when the plaintiff discovers the alleged breach. In such cases, suit must be filed within six years of “the date of discovery.”
The Intel Imprudent Investment Lawsuit
Sulyma was a participant in two Intel defined contribution plans maintained for employees of the company. Plan assets were invested by the Intel Corporation Investment Policy Committee. The participant filed on behalf of a putative class in October 2015, alleging primarily that the Intel committee and other plan administrators had breached their fiduciary duties by overinvesting in alternative assets, such as hedge funds, private equity, and commodities. These alternative investments carried higher fees, and the returns lagged the general stock market.
Sulyma received numerous disclosures while working at Intel, some explaining the extent to which his retirement plans were invested in alternative assets. These included emails from his employer, and the ERISA-required summary plan description – all of which described the alternative investments in the plan. Intel even submitted evidence that the Plaintiff had visited the plan website which was referred to in the various disclosures. Based on these disclosures, Intel moved to dismiss the lawsuit on the grounds that it was untimely under the three-year statute of limitations period in ERISA §1113(2). Although Sulyma filed it within six years of the alleged breaches, he filed it more than three years after the company had disclosed their investment decisions to him. Sulyma did not dispute the disclosure evidence, but stated that he still did not know about the alternative investments.
The District Court granted summary judgment to Intel under §1113(2), reasoning that “[i]t would be improper to allow Sulyma’s claims to survive merely because he did not look further into the disclosures made to him.”[i] The Ninth Circuit reversed. The court construed “actual knowledge” to mean “what it says: knowledge that is actual, not merely a possible inference from ambiguous circumstances.”[ii] Although Sulyma “had sufficient information available to him to know about the allegedly imprudent investments” more than three years before filing suit, the court held that his testimony created a dispute as to when he actually gained that knowledge.[iii] Several Circuits have likewise construed §1113(2) to require “knowledge that is actual,” but one circuit (the Sixth Circuit) has construed it to require only proof of sufficient disclosure.[iv] The Supreme Court granted certiorari to resolve whether the phrase “actual knowledge” can be imputed based on the receipt of disclosures, or whether it requires actual subjective knowledge of the participant.
The Intel Supreme Court Decision
Before the Supreme Court, Intel argued that a participant has the knowledge required under ERISA §1113(2) once they have disclosures of the plan investments. In other words, participants should be deemed to have the requisite knowledge if they could acquire the knowledge with reasonable effort.
Like the Ninth Circuit, the Court rejected Intel’s position. The Court held that the three-year shortened statute of limitations period in §1113(2) requires more than evidence of disclosure alone. That all relevant information was disclosed to the plaintiff is relevant in judging whether he gained knowledge of that information. But to meet §1113(2)’s “actual knowledge” requirement, however, the plaintiff must in fact have become aware of that information. The Court stated that “[i]f policy considerations suggest that the current scheme should be altered, Congress must be the one to do it.” Consequently, the Court ruled that, §1113(2) “actual knowledge” begins only when a plaintiff actually is aware of the relevant facts, not when he should be.
The Euclid Perspective
Given that the conservative majority of the Supreme Court prides itself on enforcing the plain text of governing statutes, the opinion holding that “actual knowledge” requires actual subjective knowledge of the plan participant is not surprising or remarkable. But it does have likely implications for ERISA litigation if Congress does not clarify ERISA’s three-year/six-year split statute of limitations.
Actual Knowledge Fmcsa
The most obvious result of the Sulyma decision is that it will now be almost impossible to dismiss a claim on statute of limitations grounds at the motion to dismiss stage. The most effective defense weapon to shorten and dismiss ERISA benefit lawsuits is now gone. Employers can longer rely on comprehensive disclosures of plan investments and fees to shorten the ERISA statute of limitations. This will lead to expensive discovery, including depositions of every plaintiff, to learn whether they have read and comprehended the disclosures from the plan. The cost of ERISA benefit litigation is now higher.
It will also further complicate class action certification for cases that fall in second half of the six-year statute of limitations. Plaintiffs will have to establish that every member of the class is in the same position as to whether they read required plan disclosures. While making it harder for plaintiffs to certify a class, it will make it more fact intensive, and further increase the cost of ERISA litigation. Class action certification will now be even more fact intensive, complicated, and expensive to defend. The court did indicate that plans should consider technology to prove whether participants have received and opened plan summary plan descriptions and other disclosures. But even opening a document will not prove subjective knowledge, so plans may need to consider requiring participants to acknowledge that they received and read disclosures.
In conclusion, the Intel decision has closed the common way to dismiss ERISA benefit lawsuits as untimely. The defense bar may find more silver linings in the opinion, but we think that ERISA benefit litigation just got more expensive. The decision may also lead to more excessive fee and imprudent investment litigation, which has already seen signs of increased frequency in the last three months.
[i] 2017 WL 1217185, *9 (ND Cal., Mar. 31, 2017).
[ii] 909 F. 3d 1069, 1076 (2018) (internal quotation marks omitted).
[iii] Id., at 1077.
[iv]Brown v. Owens Corning Inv. Review Committee, 622 F.3d 564 (6th Cir. 2010).
Euclid Specialty Managers specializes in fiduciary and other management liability insurance for multi-employer, governmental and other non-profit employee benefit plans. We are known for our expertise and thought leadership in protecting Insureds from complex liability. In addition to Fiduciary Liability Insurance Coverage, we also offer Directors & Officers Liability, Employment Practices Liability, Cyber Liability and Crime Insurance Coverages to employee benefit plans and plan officials.
Two Intel retirement plans have filed a writ of certiorari with the U.S. Supreme Court, asking the high court to step in and reconsider a decision handed down against the company in the 9th U.S. Circuit Court of Appeals late last year.
In their writ, the Intel plan fiduciaries suggest the late-2018 decision out of the 9th U.S. Circuit Court of Appeals to revive claims previously dismissed as untimely by a Northern California district court created a division among the appellate courts as to whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under the Employee Retirement Income Security Act (ERISA).
Michael Klenov, an experienced plaintiffs’ attorney with Korein Tillery, recently sat down with PLANSPONSOR to talk about the importance of this issue, and the need for industry stakeholders to grapple with the meanings of the different types of technical “knowledge” used to evaluate ERISA claims.
Fmcsa Actual Knowledge
The question of what creates “actual knowledge” plays directly into arguments of timeliness under ERISA, Klenov explained. In basic terms, this is because the timing of when “actual knowledge” of a potential fiduciary breach is established is used to define when one of several potential statues of limitations will start to run for a given fiduciary action or decision.
Klenov said that he actually had not been following the Intel litigation until the 9th Circuit turned in its verdict, which pretty strongly pushed back against the thinking of the district court judges assigned to the case. In the initial district court decision from 2017, the judge sided with the Intel retirement plans, essentially ruling that the plaintiffs waited too long to file claims because they had gained “actual knowledge” of the alleged breach more than three years before the claims were field. The main evidence used to show that participants had actual knowledge of the alleged wrongdoing was the fact that the plan had given regular printed and digital disclosures detailing its actions in terms of managing the plans’ investments. Case documents show these disclosures included “annual notices, quarterly fund fact sheets, targeted emails, and two separate websites.”
For his part as a plaintiffs’ attorney, Klenov soundly disagrees with the interpretation that the act of furnishing documents without also obtaining any proof of receipt or test of comprehension somehow proves actual knowledge of an alleged breach. Still, he acknowledges this is a complicated issue and that others may view the matter differently, given their vantage point.
“However, just as a philosophical matter, I think most people would agree with the circuit decision that says the bare provision of documents is not enough to prove actual knowledge, because the alternative is to force the plan participants to be the policemen and the lead overseers of their plans,” Klenov said. “If it is up to plan participants to be constantly monitoring their plan for potential mistakes, imprudence or disloyalty, that is taking the responsibility away from the named fiduciaries under ERISA. That was not the intention of the statues of ERISA.”
Zooming into the appellate court decision, Klenov observed that the appellate panel held that actual knowledge does not mean that a plaintiff had knowledge that the underlying action violated ERISA, nor does it merely mean that a plaintiff had knowledge that the underlying action occurred. Rather, the defendant must show that the plaintiff was “actually aware of the nature of the alleged breach” more than three years before the plaintiff action was filed.
Some have interpreted this stance to be in disagreement with the 6th Circuit, in that the 9th Circuit panel has effectively established that the plaintiff must have actual knowledge, rather than “constructive knowledge.”
Actual Knowledge Versus Best Of Knowledge
Explaining its thinking, the 9th Circuit decision points back to the establishment of ERISA.
“When Congress first enacted ERISA in 1974, Section 1113 contained two kinds of knowledge requirements, actual knowledge and constructive knowledge,” the appellate decision states. “The actual knowledge provision was identical to current section 1113(2), but the constructive knowledge provision provided that an action could not be commenced more than three years after the earliest date ‘on which a report from which the plaintiff could reasonably be expected to have obtained knowledge of such breach or violation was filed with the secretary under this title.’”
As the appellate decision explains, Congress repealed the constructive knowledge provision in 1987, leaving only the actual knowledge requirement.
“Since that time, the Supreme Court has not provided an authoritative construction for section 1113(2),” the appellate decision says. “Our own interpretations have likewise not always been straightforward, leading to some confusion in our district courts over what ‘actual knowledge’ entails.”
The decision continues: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred. ‘Actual knowledge’ must therefore mean something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”
This leads to the question of what this extra “something” must entail.
Actual Knowledge In Aml
“In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed,” the appellate decision concludes. “The exact knowledge required will thus vary depending on the plaintiff’s claim.”
Among other arguments presented in its writ to the Supreme Court, Intel argues that this standard makes it practically impossible to show that a plaintiff had actual knowledge at the motion-to-dismiss stage. Absent some sort of previously written or recorded admission by the plaintiff that such actual knowledge existed, meeting this standard would take at least one round of deposition or potentially even full discovery.
Stepping back from the specifics of the Intel case, Klenov said the U.S. Supreme Court’s influential decision in Tibble vs. Edisonhas driven significant change in the way retirement plans are run and structured—and in the way plaintiffs and defendants in ERISA cases make their arguments.
In its Tibble decision, the high court ruled there is a distinct and ongoing fiduciary duty to monitor investments in a 401(k) plan to ensure that the investments remain prudent, which applies even if there is no obvious intervening change in circumstances. Limited in size and scope—the text of the Tibble ruling covers just 10 pages—the decision from the Supreme Court still solidified the ongoing duty to monitor investments as a distinct fiduciary duty.
According to Klenov, what this has meant in practice is that an employer or other responsible fiduciary cannot avoid potential liability if it selects an imprudent investment for the 401(k) plan, but then successfully waits out the ERISA limitations period.
“Tibble established that an employer cannot just use silence as a defense against imprudent decisions under ERISA,” Klenov said. “Interestingly, rather than lead to more litigation, the Tibble decision has actually played a role in tamping down to some extent on the filing of certain types of cases.”
This is because, faced with the newly strengthened duty to monitor, plans have widely established much stronger policies around regularly reviewing and optimizing the investment menu. Plan fiduciaries can no longer just assume that decisions made longer ago than the ERISA statutes of limitations are thereby immune from being challenged in court.
“Some years ago we were seeing cases filed against plan sponsors offering investment options that everyone knows are inappropriate today, for example an S&P 500 index fund charging 15-times the industry average,” Klenov said. “There are far fewer examples of these plans out there today, especially in the large plan market where litigation tends to be focused.”