Ignorance Is Bliss (If You Are an ERISA Plaintiff)
Ignorance Is Bliss (If You Are an ERISA Plaintiff)
On February 26, 2020, the Supreme Court ruled in Intel Corp. Investment Policy Committee v. Sulyma, 589 U.S. ___ (2020) (Sulyma) that an ERISA1 plaintiff’s admitted receipt of disclosures about his retirement plan investments was insufficient to prove he had “actual knowledge” of the information therein — the effect of which would have been to trigger a shorter three-year statute of limitations period that would have barred his lawsuit altogether. Sulyma is significant because it means that lawsuits challenging an ERISA fiduciary’s decision may be brought up to six years after the decision was made, unless the fiduciary can prove the plaintiff had actual knowledge of the decision at least three years prior to the filing of the lawsuit. Under this standard, it is not enough that information about a decision was provided to participants and, instead, fiduciaries will likely need to prove participants actually received and read the information, and understood what the information meant. In other words, ignorance — so long as it is not “willful ignorance” — is bliss if you happen to be an ERISA plaintiff.
Under ERISA, fiduciaries of an employer-sponsored retirement plan — such as a 401(k) plan — must manage the plan prudently and solely in the interest of the plan's participants and beneficiaries. And, participants (as well as co-fiduciaries and the Secretary of Labor!) may bring suits challenging fiduciary decisions as imprudent or as breaches of their fiduciary duties, including, for example, fiduciary decisions related to the selection, composition, and management of a plan’s investment options. ERISA, however, imposes time limits on when such suits must be brought, one of which states that suit must be brought within three years of “the earliest date on which the plaintiff had actual knowledge of the breach or violation.” Absent actual knowledge, a plaintiff has six years from the date of the last act giving rise to the breach or, in the case of breach by omission, the last date on which the breach could have been cured to bring suit. And, in cases involving “fraud or concealment,” a plaintiff must commence suit within six years of the “date of discovery” of the breach.
In Sulyma, the eponymous plaintiff (“Plaintiff”), a former employee of Intel Corporation (“Intel”) from 2010 through 2012, filed a class-action lawsuit in October 2015 against the investment committee (“Committee”) that managed two of Intel’s retirement plans (“Plans”) in which Plaintiff participated. Plaintiff asserted the Committee had breached their fiduciary duties and imprudently managed the “target date” funds in which Plaintiff was invested. Plaintiff asserted the funds were “overinvested” in various alternative investments, which carried relatively high fees and performed poorly relative to other index funds and the broader stock market.
The Committee moved for summary judgment on the ground Plaintiff’s claim was barred under ERISA’s statute of limitations because Plaintiff had “actual knowledge” of the Committee’s investment decisions more than three years before he filed suit. The district court ruled in the Committee’s favor, finding Plaintiff had “actual knowledge” of the information giving rise to his suit. This conclusion was based on the fact that the Committee had shown information about the Plans’ asset allocation and an overview of the logic behind the Plans’ investment strategies were set forth in disclosures and summary plan descriptions Plaintiff had received, and in “fund fact sheets” posted on Intel’s intranet that Plaintiff had repeatedly accessed. The district court rejected Plaintiff’s argument that he was “unaware” of the specific facts about the investment allocation and that his only actual knowledge was based on an account statement, which stated only that the Plans were invested in “short-term/other” assets, but did not identify the specific asset types or the corresponding fees.
On appeal, the Ninth Circuit reversed the district court and held that “actual knowledge” meant a plaintiff had to be actually aware of the facts constituting the breach and not merely that those facts that were disclosed or available to him. The Ninth Circuit acknowledged its decision conflicted with the Sixth Circuit’s holding that when a participant is given specific instructions on how to access plan documents, the participant’s failure to read them will not shield the participant from being deemed to have actual knowledge of the documents’ terms. The Supreme Court granted the Committee's petition for certiorari and affirmed the Ninth Circuit’s decision in a unanimous opinion authored by Justice Alito, thus resolving the Circuit split.
The Court began its analysis with the maxim that clear statutory language must be enforced and “[a]lthough ERISA does not define the phrase ‘actual knowledge’, its meaning is plain.” This is because the word “actual” meant the same thing today as it did when ERISA was passed: “existing in fact or reality.” And, the same was true of “knowledge,” which meant, and still means, “the fact or condition of being aware of something.” As such, to have “actual knowledge” of information, a person must “in fact[,] be aware of it,” and this interpretation found support in legal dictionaries which uniformly distinguished “actual knowledge” from “presumed or imputed knowledge.” Thus, in the instant case, the fact Plaintiff could not recall reading the disclosures provided to him necessarily meant the Committee was required to prove the Plaintiff was, in fact, aware of the investment allocations and fees on which his claims were based.
The Court next observed the law sometimes imputes knowledge (i.e., “constructive” knowledge) to a person who fails to learn something that a reasonably diligent person would have learned as was the case in Merck & Co. v. Reynolds, 559 U.S. 633, 648 (2010). In Merck & Co., the Court reasoned that the use of the word “discovery” when used in a statute of limitation without any qualification, “encompasses not only those facts the plaintiff actually knew, but also those facts a reasonably diligent plaintiff would have known.” Thus, the use of “actual” as a modifier of the “knowledge” required to trigger the three-year limitations period under ERISA signaled that the statutorily-required knowledge must be more than the potential or hypothetical knowledge that a reasonably diligent plaintiff would have. Moreover, and consistently, Congress had repeatedly drawn the same “linguistic distinction” between what a plaintiff actually knows and what he or she should know in the context of other ERISA provisions.
While sympathetic to the fact that heeding the plain meaning of “actual knowledge” would substantially diminish the protections the three-year statute of limitations period provides for ERISA fiduciaries, the Court flatly rejected the Committee’s proffered interpretations because they required the Court to construe “actual knowledge” as requiring something less than actual awareness of the relevant facts in contravention of its’ plain meaning.
The Court’s concluding remarks, however, threw fiduciaries the proverbial bone. The Court noted Sulyma should not be read to foreclose any of the “usual ways” for fiduciaries to prove actual knowledge or to preclude them from asserting that evidence of “willful blindness” supports a finding of actual knowledge. Perhaps, most notably, the Court specifically held that fiduciaries may still be able to prove actual knowledge through “inference from circumstantial evidence” and “evidence of disclosure would no doubt be relevant, as would electronic records showing that a plaintiff viewed the relevant disclosures and evidence suggesting that the plaintiff took action in response to the information contained in them.” The Court also noted that if a plaintiff’s denials of actual knowledge were “blatantly contradicted by the record,” “a court should not adopt that version of the facts for purposes of ruling on a motion for summary judgment.”
Impact of Sulyma
Sulyma undoubtedly makes it much harder for fiduciaries to establish that effective notice has been provided to participants.
As such, we expect there will be a groundswell of decisions involving fiduciary assertions of willful blindness. We also expect the courts will struggle to reconcile the tension inherent in the decision’s primary holding regarding “actual knowledge” with its secondary holding that fiduciaries may still be able to prove “actual knowledge” through “inference from circumstantial evidence.” This is especially so given the observation that the specific types of evidence identified by the Court as examples of potentially probative circumstantial evidence were, for-all-intents-and-purposes, the same evidence proffered by the fiduciaries in Sulyma to establish “actual knowledge.” Given this tension, we expect the courts will more closely scrutinize a plaintiff’s denials of actual knowledge in light of the circumstantial evidence to assess whether the denials are “blatantly contradicted by the record.” So, for example, a plaintiff’s proclamation of complete and unmitigated ignorance regarding the contents of plan disclosures may not wash where fiduciaries present a robust record of disclosures and can prove the plaintiff repeatedly accessed or interacted with them.
We also expect fiduciaries will experiment with various ways to obtain more specific validations that their disclosures were accessed by participants. For example, we suspect many fiduciaries (to the extent they have not done so already) will incorporate “clickwrap” or “clickthrough” agreements that require participants to certify they have “read and understand” the disclosures. Fiduciaries may also decide that certain changes that generate greater risk exposure should be identified more prominently in the disclosures or that those changes should be conveyed through additional mediums, such as on employer intranet sites, via email, or (gasp!) on paper. All that said, whether these types of changes will be sufficient to prove “actual knowledge” remains to be seen. We expect, however, the decisions on these issues will be very fact-specific and, as a result, potentially less persuasive as precedent in later cases.
1 “ERISA” refers to the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et. seq..