Eleventh Circuit Rejects Burden Shift on Loss Causation in 401(k) Plan Dispute

On August 8, 2024, the U.S. Court of Appeals for the Eleventh Circuit affirmed summary judgment in favor of The Home Depot, Inc., and two of its 401(k) plan committees (collectively, Home Depot) and in doing so declined to adopt a burden-shifting framework in ERISA cases on the issue of loss causation as the plaintiffs urged the court to do. Pizarro v. The Home Depot, Inc., No. 22-13643 (11th Cir. Aug. 2, 2024). This decision amplifies the circuit split on the burden-shifting rule for loss causation, with the First, Fourth, Fifth, and Eighth Circuits adopting the rule and the Tenth and Eleventh Circuits rejecting it.

The plan participants who brought the lawsuit alleged that Home Depot failed to adequately monitor fees charged by the plan's financial advisors for investment advisory and managed account services and did not prudently evaluate and remove certain investment options in the plan they contend had subpar performance. The plaintiffs asserted that these alleged fiduciary breaches resulted in increased costs and investment losses for plan participants. The district court granted summary judgment to Home Depot, holding that while there were genuine disputes of material fact as to whether the defendants complied with the ERISA duty of prudence, the plaintiffs failed to show that any such imprudence caused a financial loss. 

On appeal, the plaintiffs, supported by the Secretary of Labor as amicus curiae, argued that once a plaintiff shows that a fiduciary breached the ERISA duty of prudence and that the plan suffered a loss, the burden shifts to the fiduciary to prove that the loss was not caused by its breach. In support of this argument, they rely on a burden-shifting principle in the common law of trusts, rooted in a trustee's superior access to trust information and activities, and contend that it should apply in ERISA cases.

The Eleventh Circuit rejected the plaintiffs' argument, finding ERISA imposes no such burden-shifting requirements and holding that plaintiffs bear the burden of proof on all elements of their ERISA claims, including loss causation. In this holding, the court stated that this issue of who bears the burden on loss causation was already decided in the circuit in Willett v. Blue Cross & Blue Shield of Alabama, 953 F. 2d 1335, 1343 (11th Cir. 1992), described as holding that the burden of proof on the issue of causations rests on health plan beneficiaries seeking to recover under ERISA for alleged fiduciary breaches. The court reasoned that when enacting ERISA, which it emphasized is not part of the common law and contains comprehensive and mandatory reporting and disclosure obligations giving participants and the public access to plan information, Congress did not legislate against the "ordinary default rule" that "the burden of persuasion lies... upon the party seeking relief." 

The court also addressed what a plaintiff needs to establish to meet its burden of proving loss causation. Noting both that an imprudent process can sometimes yield prudent investments and prudent investment choices can sometimes turn out to be losers, the court stated that losses are only compensable when they are caused by a fiduciary's bad decisions rather than "the usual vagaries of the market." Citing Hughes v. Nw. Univ., 595 U.S. 170, 177 (2022), the court held that to recover damages, plaintiffs must show that the investments made were not "objectively prudent" – i.e., "a hypothetical prudent fiduciary in the same circumstances as the defendant, armed with the information that a proper evaluation would have yielded, would not (or could not) have made the same choice." 
On the merits, the court found that the plaintiffs' effort to show the plan's advisory fees were excessive compared to what other advisors charged was flawed, because the plaintiffs' comparators differed in key respects in terms of size and services offered. It also found that the plaintiffs failed to establish that the plan's advisors charged Home Depot more than they charged other comparable clients. With respect to the plan's challenged funds, the court held that "ERISA does not require fiduciaries choose the maximally aggressive option in each investment class [and] the plaintiffs cannot show that a prudent fiduciary would not have also retained these funds in light of Home Depot's investment objectives."

ERISA Health Plan Proposed Rules We're Watching

With less than six months left of the Biden-Harris administration, a handful of proposed regulations impacting ERISA-covered health plans are in the final rule stage but remain pending at the Department of Labor (DOL) and its sister agencies, which may be finalized in the coming weeks and months:

• Requirements Related to the Mental Health Parity and Addiction Equity Act (RIN 1210-AC11): This rule would finalize proposed amendments to the 2014 final rules implementing the Mental Health Parity and Addiction Equity Act (MHPAEA) and finalize new regulations implementing amendments to MHPAEA enacted as part of the Consolidated Appropriations Act, 2021 (CAA). A draft of the final rule is undergoing review by the Office of Management and Budget (OMB) and is expected soon.
• Federal Independent Dispute Resolution Operations (RIN 1210-AC17): This rule would set forth new requirements relating to the disclosure of information that group health plans and health insurance issuers must include along with the initial payment or notice of denial of payment for certain items and services subject to the surprise billing provisions in the No Surprises Act (NSA). The rule would require use of claim adjustment reason codes (CARCs) and remittance advice remark codes (RARCs) and amend certain requirements related to the IDR process and batched and bundled items and services. OMB reports a projected final rule date of November 2024.
• Coverage of Certain Preventive Services Under the Affordable Care Act (RIN 1210-AC13): This rule would finalize proposed amendments to the final rules regarding religious and moral exemptions and accommodations regarding coverage of certain preventive services under Title I of the Patient Protection and Affordable Care Act (ACA). OMB reports a projected final rule date of December 2024.

According to OMB, the proposed rule on "Requirements Related to Air Ambulance Services, Agent and Broker Disclosures, and Provider Enforcement" (RIN 1210-AC08) is not expected to be finalized before March 2025. Among other things, this proposal requires group health plans and health insurance issuers in the group and individual markets and Federal Employees Health Benefits (FEHB) program carriers to submit certain information about air ambulance services to the federal government. The rule also requires issuers offering individual health coverage or short-term limited duration insurance (STLDI) to make disclosures and reports regarding agent and broker compensation.

ERISA Advisory Council September Meeting Announced

The ERISA Advisory Council announced that it will be holding a three-day open meeting on September 10-12, 2024, focused on (1) making the welfare plans claims and appeals procedure more accessible to participants and (2) lifetime income and qualified defined investment alternative (QDIAs). The meeting announcement contains instructions for how to submit written statements to the Council and how to make a request to address the Council at the meeting. The meeting will be accessible via teleconference for those who wish to attend virtually.

Recent Speaking Engagements and Upcoming Events

Joanne and Tax Member Rob Kovacev presented "Perspectives Post-Chevron: What to Expect and How to Navigate the New Regulatory Landscape" on August 1. Listen to a recording of the webinar here.

The firm is sponsoring the ERISA 50th Anniversary Symposium and Gala on September 12.

In the News

Joanne commented on the impact of ERISA on Oklahoma's efforts to regulate pharmacy benefit managers in Stateline.

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