Fifth Circuit Affirms in Part and Reverses in Part PSTF Appointments Clause Ruling

On June 21, 2024, a unanimous panel of the U.S. Court of Appeals for the Fifth Circuit issued a decision in Braidwood Management Inc. v. Becerra, No 4:20-cv-283 (5th Cir. June 21, 2024), that significantly limits the lower court's ruling impacting the Affordable Care Act's (ACA) preventive services mandate. As previously reported, in March 2023, a Texas district court enjoined the federal government from enforcing the preventative care recommendations of the U.S. Preventive Services Task Force (PSTF), finding the appointment of task force members constitutionally defective, and vacated all federal agency action taken to implement and enforce those recommendations. Those rulings were stayed pending appeals. On appeal, the Fifth Circuit affirmed the district court's holding that the PSTF members were not properly appointed but reversed the district court's vacatur and nationwide injunction, and thereby limited relief to only the plaintiffs who filed the case.

In the government's appeal, the Fifth Circuit, like the district court, held that the PSTF members were "principal officers" of the U.S. and, as a result, under the Constitution's Appointments Clause, had to be both nominated by the president and confirmed by the Senate, which did not occur. It reached this ruling after recognizing that the task force members had some attributes of "inferior officers" and that the Secretary of the Department of Health and Human Services (HHS) had the authority to remove task force members at-will. However, the court observed that

the Task Force can, and does, issue legally binding decisions without any review by a higher-ranking officer. Private insurers are legally required to cover its preventive care recommendation, and there is no way for the HHS Secretary (or anyone else) to review, revise, or otherwise reject those recommendations.

According to the court, PSTF's "substantial power" and the "absence of any supervision over this power" rendered them principal officers. The court further held that the Secretary's attempt to cure the constitutional defect in the task force members' appointment through ratification was ineffective under the ACA's statutory scheme that provided independence and autonomy to the PSTF.

The Fifth Circuit reversed the district court's vacatur order issued under Administrative Procedure Act (APA) § 706(2), citing circuit precedent that allows such relief only when a case involves an APA claim, which the Braidwood plaintiffs did not assert. Because the Fifth Circuit did not find any support for the district court's decision to vacate all agency actions taken to enforce the PSTF's recommendations, it also did not find any support for the district court's nationwide injunction. After commenting that nationwide injunctions are not required or even the norm and that several Supreme Court justices, sister circuit court judges, and scholars view them "with conspicuous skepticism," the court held that it had "no reason to uphold relief broader than what is necessary to redress the plaintiffs' injuries."

In their cross-appeal, the plaintiffs urged the Fifth Circuit to reverse the district court's ruling that the appointments of members of the Advisory Committee on Immunization Practices (ACIP) and the Health Resources and Services Administration (HRSA), two bodies with roles similar to the PSTF, did not violate the Appointments Clause. The Secretary purported to ratify the recommendations of ACIP and HRSA to cure any constitutional defects with these appointments and the district court ruled that those ratifications were proper. However, the plaintiffs argued those ratifications suffered from APA problems, which the Fifth Circuit found were questions of law that no court had yet fully addressed. The court remanded those issues and arguments back to the district court for further proceedings.

The limited reach of the ordered relief to only the plaintiffs in the case answers questions from group health plans and issuers about the scope of the ACA's preventative service mandate for now, but the Fifth Circuit's central ruling that the PSTF violates the Constitution and the court's remand of the Secretary's ratification of ACIP's and HRSA's recommendations means the ACA's preventative services mandate will continue to be litigated.

Court Dismisses Claims Against HP Alleging Misuse of Forfeitures With Leave to Amend Complaint

On June 17, 2024, the U.S. District Court for the Northern District of California granted a motion to dismiss filed by HP Inc. and its 401(k) plan committee (collectively, HP) in a purported class action that alleged ERISA violations against HP for using forfeited employer contributions to reduce its contributions rather than to pay plan administrative costs. Hutchins v. HP Inc., et al., No. 23-cv-05875-BLF (N.D. Cal. June 17, 2024). The victory for HP may be short-lived, however, because the court found that "the decision to allocate forfeited amounts is a fiduciary, as opposed to a settlor, function" and granted the plaintiff leave to amend the complaint on all counts.

To reach its ruling, the court considered Supreme Court precedent discussing the difference between fiduciary and settlor activities and stated that the defendants were correct that the decision to include a term in a plan that forfeited amounts may be used to reduce employer contributions was not a fiduciary act. However, the court stated that the plaintiff's claim did not attack the decision to include this type of plan term, but the defendants' implementation of that decision – "that is, Defendants exercised discretion and control over Plan assets and thus were making decisions of Plan administration rather than Plan design" when using the forfeitures to reduce HP's contributions. According to the court, these allegations were sufficient to allege that the defendants were acting as fiduciaries when they determined how to allocate the forfeited amounts.

The court nonetheless found the complaint deficient because plaintiff's theory of liability was that when given an option to use forfeited funds to pay administrative costs or to reduce employer contributions, a fiduciary is always required to choose to pay administrative costs. This theory is flawed, according to the court, because "it is not limited to any particular circumstances that may be present in this case." The court stated that the absence of allegations regarding the context in which the decision was made, together with the fact that Department of the Treasury rules and proposed regulations allow forfeitures to be used to reduce employer contributions, makes the plaintiff's claims overly broad and implausible. The plaintiff will have another chance to "plausibly allege disloyalty or imprudence based on more particularized facts or special circumstances present in this case."

The court also gave the plaintiff another opportunity to replead their ERISA anti-inurement, prohibited transaction, and failure to monitor violations. ERISA's anti-inurement provision states that, with enumerated exceptions, "the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits . . . and defraying reasonable expenses of administering the plan." On the anti-inurement claim, the court parted ways with its sister court that recently held in Perez-Cruet v. Qualcomm, Inc., No. 23-cv-1890 (S.D. Cal. May 24, 2024), that the plaintiff in Perez-Cruet had plausibly alleged that the defendants violated the anti-inurement provision by utilizing forfeited contributions as a substitute for the company's own future contributions. The Hutchins court concluded that plan assets did not inure to HP from its use of the forfeitures and the benefit it received was incidental because the those "plan assets" did not leave the plan and were used to pay pension benefits to participants. The plaintiff has another chance, however, to plead that "the forfeited amounts were reverted or diverted to HP and/or that forfeited amounts were used to offset outstanding and unpaid obligations," which the court indicated could state a viable anti-inurement claim.

Court Denies Summary Judgment to American Airlines on All Issues in ESG Litigation

On June 20, 2024, the U.S. District Court for the Northern District of Texas denied America Airlines' motion for summary judgment on class claims that allege the company and its employee benefits committee violated ERISA's duties of loyalty and prudence by mismanaging the company's 401(k) plans to include funds managed by investment managers such as BlackRock that "pursue non-financial and nonpecuniary [environmental, social, and governance (ESG)] policy goals through proxy voting and shareholder activism." Spence v. American Airlines, Inc., No. 4:23-cv-00552-O (N.D. Tex. June 20, 2024). The defendants conceded that they are ERISA fiduciaries but argued in their motion that they did not commit a fiduciary breach and, even if a breach did occur, no losses resulted. The court held issues of material fact precluded summary judgment on all issues raised in the motion.

On the prudence claim, the court found that the record could support a finding that the "Defendants breached their duty of prudence by failing to monitor managers and failing to address the facts and circumstances of ESG proxy voting and shareholder activism present within the Plan." The court referenced, among other things, witness testimony that the defendants never reviewed, discussed, or monitored proxy voting by the plans' investment managers, as well as factual issues related to whether the defendants relied on external and internal experts. In response to the defendants' argument that the plaintiffs failed to identify alternative funds that could have been selected consistent with ERISA's fiduciary obligations, the court held that it may prove true that no other managers would have invested or voted differently, but "this alone does not automatically insulate Defendants from breach of prudence claims at this stage," noting that the Fifth Circuit has not imposed a performance benchmark pleading requirement. 

On the loyalty claims, the court cited communications between the company's Director of Sustainability and plan officials expressing support for BlackRock's ESG objectives, which the court said could be construed as evidence of corporate goals influencing plan administration. The court also referenced a potential conflict posed by the relationship between the company and BlackRock, stating that BlackRock owns a "substantial amount of AA stock and fixed income debt at the same time it pursues ESG objectives as an investment manager" for the plan. In addition, the court held that whether the defendants' alleged conduct caused losses and the loss-causation burden are additional issues properly reserved for trial.

In the News

In Law360, Joanne comments on an important ERISA case to watch in the second half of 2024 that involves a Johnson & Johnson employee in New Jersey alleging that her employer's health plan paid excessive costs and fees for benefits, prompting concerns among employer-side benefits attorneys.

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