Supreme Court: State Need Only Rational Basis for Refusing to Subsidize Union Political Speech Through Payroll Deductions.

Yesterday, the United States Supreme Court reversed the Ninth Circuit and upheld an Idaho state law which precluded payroll deductions by state and local governments to support political speech and political activities by unions. (Payroll deductions for regular union wages were permitted). The unions sued, arguing that the prohibition violated their First Amendment rights. The Supreme Court noted that the state law did not prohibit the unions from engaging in political activities or speech; it merely refused to promote those activities through payroll deductions. Therefore, only a rational basis analysis applied; not strict scrutiny. Idaho's interest in avoiding the reality or appearance of government favoritism or entanglement with partisan politics was sufficiently rationale to support the legislative ban. Ysursa v. Pocatello Education Ass’n, No. 07-869.

As described by the Court, “[u]nder Idaho law, a public employee may elect to have a portion of his wages deducted by his employer and remitted to his union to pay union dues. He may not, however, choose to have an amount deducted and remitted to the union's political action committee, because Idaho law prohibits payroll deductions for political activities. In particular, “ Idaho's Right to Work Act declares that the ‘right to work shall not be infringed or restricted in any way based on membership in, affiliation with, or financial support of a labor organization or on refusal to join, affiliate with, or financially or otherwise support a labor organization.’ . . . “The First Amendment prohibits government from "abridging the freedom of speech"; it does not confer an affirmative right to use government payroll mechanisms for the purpose of obtaining funds for expression. Idaho's law does not restrict political speech, but rather declines to promote that speech by allowing public employee checkoffs for political activities. Such a decision is reasonable in light of the State's interest in avoiding the appearance that carrying out the public's business is tainted by partisan political activity. That interest extends to government at the local as well as state level, and nothing in the First Amendment prevents a State from determining that its political subdivisions may not provide payroll deductions for political activities.”

“Restrictions on speech based on its content are ‘presumptively invalid’ and subject to strict scrutiny . . . The First Amendment, however, protects the right to be free from government abridgment of speech. While in some contexts the government must accommodate expression, it is not required to assist others in funding the expression of particular ideas, including political ones. ‘[A] legislature's decision not to subsidize the exercise of a fundamental right does not infringe the right, and thus is not subject to strict scrutiny.’. . . Given that the State has not infringed the unions' First Amendment rights, the State need only demonstrate a rational basis to justify the ban on political payroll deductions. The prohibition is not ‘aim[ed] at the suppression of dangerous ideas,’ but is instead justified by the State's interest in avoiding the reality or appearance of government favoritism or entanglement with partisan politics. We have previously recognized such a purpose in upholding limitations on public employee political activities.”

“The question remains whether the ban is valid at the local level. The unions abandoned their challenge to the restriction at the state level, but contend that strict scrutiny is still warranted when the ban is applied to local government employers. In that context, the unions argue, the State is no longer declining to facilitate speech through its own payroll system, but is obstructing speech in the local governments' payroll systems. We find that distinction unpersuasive, and hold that the same deferential review applies whether the prohibition on payroll deductions for political speech is directed at state or local governmental entities. ‘Political subdivisions of States--counties, cities, or whatever--never were and never have been considered as sovereign entities.’ They are instead ‘subordinate governmental instrumentalities created by the State to assist in the carrying out of state governmental functions.’ State political subdivisions are ‘merely ... department[s] of the State, and the State may withhold, grant or withdraw powers and privileges as it sees fit. Here, the Idaho Legislature has elected to withhold from all public employers the power to provide payroll deductions for political activities.”

“The State's legislative action is of course subject to First Amendment and other constitutional scrutiny whether that action is applicable at the state level, the local level, both, or some subpart of either. But we are aware of no case suggesting that a different analysis applies under the First Amendment depending on the level of government affected, and the unions have cited none. The ban on political payroll deductions furthers Idaho's interest in separating the operation of government from partisan politics. That interest extends to all public employers at whatever level of government.”

Insomniacs can read the full opinion at http://www.supremecourtus.gov/opinions/08pdf/07-869.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.

Supreme Court: Answers Given During Employer’s Internal Investigation Can Constitute Protected Opposition under Title VII.

Today, a unanimous United States Supreme Court reversed a judgment affirmed by the Sixth Circuit Court of Appeals in Cincinnati in favor of a Tennessee school district which fired an employee (for alleged embezzlement) after she answered questions during an internal investigation into rumors of sexual harassment which revealed that she felt sexually harassed by the school’s employee relations director. Crawford v. Metropolitan Government of Nashville and Davidson County, Tennessee, No. 06-1595. The Court held that the protection of Title VII’s opposition clause “extends to an employee who speaks out about discrimination not on her own initiative, but in answering questions during an employer’s internal investigation.” In doing so, the Court rejected the employer’s argument that the employee’s passive response to questions during the internal investigation was not entitled to the same legal protection given to employees who affirmatively lodge a complaint of harassment with the employer or an agency because it would discourage employers from conducting internal investigations out of fear of creating new classes of protected employees. The Court concluded that “nothing in the statute requires a freakish rule protecting an employee who reports discrimination on her own initiative but not one who reports the same discrimination in the same words when her boss asks a question.”

According to the Court’s opinion, the employer “began looking into rumors of sexual harassment by [its] employee relations director” in 2002. When the investigator asked the plaintiff, “a 30-year Metro employee, whether she had witnessed ‘inappropriate behavior’ on the part of” the director, the plaintiff “described several instances of sexually harassing behavior: once, [the director] had answered her greeting, ‘Hey Dr. Hughes, what’s up?,’ by grabbing his crotch and saying ‘[Y]ou know what’s up’; he had repeatedly ‘put his crotch up to[her] window’; and on one occasion he had entered her office and ‘grabbed her head and pulled it to his crotch,’. . . Two other employees also reported being sexually harassed by [the director.]” Although the school district took no action against the director, it fired the plaintiff “and the two other accusers soon after finishing the investigation, saying in [the plaintiff’s] case that it was for embezzlement.” In turn, the plaintiff filed a charge of retaliation with the EEOC and ultimately filed suit in federal court.

“The Title VII antiretaliation provision has two clauses, making it “an unlawful employment practice for an employer to discriminate against any of his employees . . . [1] because he has opposed any practice made an unlawful employment practice by this subchapter, or [2] because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this subchapter.” 42 U. S. C. §2000e–3(a). The one is known as the “opposition clause,” the other as the “participation clause,” and [the plaintiff] accused [the school district] of violating both.” The district court granted summary judgment for the employer on the grounds that the plaintiff had failed to engage in activity protected under Title VII. The Sixth Circuit affirmed.

In reversing, the Court noted that “’Oppose’ goes beyond ‘active, consistent’ behavior in ordinary discourse, where we would naturally use the word to speak of someone who has taken no action at all to advance a position beyond disclosing it. Countless people were known to “oppose” slavery before Emancipation, or are said to “oppose” capital punishment today, without writing public letters, taking to the streets, or resisting the government. And we would call it “opposition” if an employee took a stand against an employer’s discriminatory practices not by “instigating” action, but by standing pat, say, by refusing to follow a supervisor’s order to fire a junior worker for discriminatory reasons. . . . There is, then, no reason to doubt that a person can “oppose” by responding to someone else’s question just as surely as by provoking the discussion.”

The Court was unconcerned with disincentives for an employer to conduct a thorough internal investigation because it felt that the affirmative defenses created in its Ellerth and Faragher decisions were sufficient incentive for an employer to conduct internal investigations of sexual harassment rumors and allegations. Indeed, it felt that a contrary decision in this case would undermine the structure it had created in those earlier cases: “If it were clear law that an employee who reported discrimination in answering an employer’s questions could be penalized with no remedy, prudent employees would have a good reason to keep quiet about Title VII offenses against themselves or against others. . . . The appeals court’s rule would thus create a real dilemma for any knowledgeable employee in a hostile work environment if the boss took steps to assure a defense under our cases. If the employee reported discrimination in response to the enquiries, the employer might well be free to penalize her for speaking up. But if she kept quiet about the discrimination and later filed a Title VII claim, the employer might well escape liability, arguing that it “exercised reasonable care to prevent and correct [any discrimination] promptly” but “the plaintiff employee unreasonably failed to take advantage of . . .preventive or corrective opportunities provided by the employer.”

Finally, the Court rejected any requirement that the plaintiff bring her own internal complaint before filing a Charge or lawsuit as indicated by the Court’s earlier discussions in Faragher and Ellerth of an employee’s obligation to exercise reasonable care to avoid and/or mitigate the harm. “But that mitigation requirement only applies to employees who are suffering discrimination and have the opportunity to fix it by ‘tak[ing] advantage of any preventive or corrective opportunities provided by the employer,’; it is based on the general principle “that a victim has a duty ‘to use such means as are reasonable under the circumstances to avoid or minimize . . . damages,’ . . . We have never suggested that employees have a legal obligation to report discrimination against others to their employer on their own initiative, let alone lose statutory protection by failing to speak. Extending the mitigation requirement so far would make no sense; employees will often face retaliation not for opposing discrimination they themselves face, but for reporting discrimination suffered by others. Thus, they are not “victims” of anything until they are retaliated against, and it would be absurd to require them to “mitigate” damages they may be unaware they will suffer.”

Nonetheless, the Court recognized that not every description of harassing behavior during an internal investigation will constitute protected conduct: “It is true that one can imagine exceptions, like an employee’s description of a supervisor’s racist joke as hilarious, but these will be eccentric cases, and this is not one of them” even though there was evidence (which could not be fully considered at the summary judgment stage of the litigation) that the plaintiff had told the director to “bite me” and “flip[ed] him a bird” because the plaintiff “gave no indication that [his] gross clowning was anything but offensive to her.”

Insomniacs can read the Supreme Court’s full opinion at

Supreme Court: Employer Bears Burden of Proving Disparate Impact of Facially Neutral Factors Was Based on a Reasonable Factor Other Than Age

On June 19, 2008, the Supreme Court held that the employer bears the both the burden of production and the burden of persuasion in raising as an affirmative defense to an ADEA disparate impact claim that its decision was based on a reasonable factor other than age (RFOA). Meacham v. Knolls Atomic Power Lab., No. 06-1505. In Meacham, the employer conducted a reduction in force (after more than 100 employees accepted voluntary buyouts) in which 30 of the 31 involuntarily reduced positions were held by an employee over the age of 40. Managers had been instructed to evaluate their staffs by four factors: years of service, "performance," "flexibility," and "critical skills." Twenty-eight of the involuntarily reduced employees sued, raising both disparate-treatment (i.e., intent) and disparate-impact (i.e., result) claims under the ADEA and state law, alleging that the defendant employer "designed and implemented its workforce reduction process to eliminate older employees and that, regardless of intent, the process had a discriminatory impact on ADEA-protected employees." In the ensuring class action, the plaintiffs’ expert opined “that results so skewed according to age could rarely occur by chance;4 and that the scores for "flexibility" and "criticality," over which managers had the most discretionary judgment, had the firmest statistical ties to the outcomes.”

In construing the ADEA statute, the Court recognized that the RFOA defense was listed along another affirmative defense for bona fide occupational qualification. The employer has always held the burden of proof and persuasion for the BFOQ defense. Similarly, under the FLSA and EPA, the employer has born the burden of proof and persuasion on the “reasonable factor other than sex” affirmative defense. While it might seem reasonable to assume a different interpretation of the burden in a disparate treatment case – since age is a factor in the prima facie case – and the RFOA defense seems superfluous, in the disparate treatment case (where age discrimination exists in fact when the unlawful treatment is not based on age), the RFOA defense is particularly applicable:

“[I]n the typical disparate-impact case, the employer's practice is "without respect to age" and its adverse impact (though "because of age") is "attributable to a nonage factor"; so action based on a "factor other than age" is the very premise for disparate-impact liability in the first place, not a negation of it or a defense to it. The RFOA defense in a disparate-impact case, then, is not focused on the asserted fact that a non-age factor was at work; we assume it was. The focus of the defense is that the factor relied upon was a "reasonable" one for the employer to be using. Reasonableness is a justification categorically distinct from the factual condition "because of age" and not necessarily correlated with it in any particular way: a reasonable factor may lean more heavily on older workers, as against younger ones, and an unreasonable factor might do just the opposite.”

“Here is what is so strange: as the Government says, "[i]f disparate-impact plaintiffs have already established that a challenged practice is a pretext for intentional age discrimination, it makes little sense then to ask whether the discriminatory practice is based on reasonable factors other than age." Brief for United States as Amicus Curiae 26 (emphasis in original). Conversely, proving the reasonableness defense would eliminate much of the point a plaintiff would have had for showing alternatives in the first place: why make the effort to show alternative practices with a less discriminatory effect (and besides, how would that prove pretext?), when everyone knows that the choice of a practice relying on a "reasonable" non-age factor is good enough to avoid liability?14 At the very least, developing the reasonableness defense would be substantially redundant with the direct contest over the force of the business justification, especially when both enquiries deal with the same, narrowly specified practice. It is not very fair to take the remark about Wards Cove in City of Jackson as requiring such a wasteful and confusing structure of proof.”

Regardless of the strangeness of the result, the Court reiterated that the plaintiff still bears the burden of producing enough evidence to show that age discrimination has resulted from a specific employment practice which is responsible for statistical disparities against older workers. In the final analysis, the Court acknowledges that “there is no denying that putting employers to the work of persuading factfinders that their choices are reasonable makes it harder and costlier to defend than if employers merely bore the burden of production; nor do we doubt that this will sometimes affect the way employers do business with their employees.” Moreover, “as the outcome for the employer in City of Jackson shows, "it is not surprising that certain employment criteria that are routinely used may be reasonable despite their adverse impact on older workers as a group."

Insomniacs can read the full decision at http://www.supremecourtus.gov/opinions/07pdf/06-1505.pdf. NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Divided Supreme Court: Does a Charge by Any Other Name Still Smell As Sweet?

On Wednesday, a divided Supreme Court ruled that the ADEA requirement for filing a Charge with the EEOC at least 60 days before initiating an ADEA lawsuit can be satisfied by the mere filing of an intake questionnaire and affidavit with the EEOC even when the EEOC never created a Charge form, never notified or served a Charge or other document with the Charging Party’s allegations to the employer and the plaintiff never signed or filed an actual Charge form with the EEOC. Federal Express Corp. v. Holowecki, No. 06-1322 (2/27/08).

The ADEA – at 29 U.S.C. § 626(d) – provides that “[n]o civil action may be commenced by an individual under this section until 60 days after a charge alleging unlawful discrimination has been filed with the” EEOC. The ADEA also requires the charge to be filed by the employee within so many days of the unlawful employment practice. Once the Charge has been filed, the ADEA requires the EEOC to “promptly notify all persons named in such charge as prospective defendants in the action and shall promptly seek to eliminate any alleged unlawful practice by informal methods of conciliation, conference, and persuasion." 29 U. S. C. §626(d). However, the ADEA does not define “charge.”

In this case, the plaintiff employee completed and submitted an Intake Questionnaire to the EEOC on December 11, 2001, along with a signed affidavit setting forth her allegations in more detail. The EEOC did not promptly process the Intake Questionnaire, prepare a formal Charge form or notify the employer of the plaintiff’s allegations or serve it with a Charge. Nonetheless, the plaintiff -- along with several other employees – filed her ADEA lawsuit on April 30, 2002. Only then did the EEOC prepare, file and serve a Charge on the employer. The trial court dismissed the plaintiff’s claims on the grounds that her Intake Questionnaire was not a “charge” as required by the ADEA. The Second Circuit Court of Appeals reversed and, recognizing a conflict among the various Circuits on this issue, the Supreme Court affirmed the appellate court.

The Court found that the EEOC regulatory definition of Charge was scattered among several regulations and was vague. For instance, “one of the regulations, 29 CFR §1626.3 . . . says: "charge shall mean a statement filed with the Commission by or on behalf of an aggrieved person which alleges that the named prospective defendant has engaged in or is about to engage in actions in violation of the Act." Another regulation – § 1626.8(a) indicates that a "charge should contain": (1)-(2) the names, addresses, and telephone numbers of the Charging Party and the Respondent; (3) a statement of facts describing the alleged discriminatory act; (4) the number of employees of the charged employer; and (5) a statement indicating whether the charging party has initiated state proceedings. Yet another regulation -- §1626.8(b) – limits the prior requirements “by stating that a charge is ‘sufficient’ if it meets the requirements of §1626.6--i.e., if it is ‘in writing and ... name[s] the prospective respondent and ... generally allege[s] the discriminatory act(s).’" The EEOC asserted on its own behalf that the regulations governed only the filing of a Charge and did not define Charge itself or what it must contain. While the EEOC asserted that the plaintiff’s document satisfied the requirement of a Charge, not all documents necessarily would or should do so. In particular, the EEOC expressed concern with interpreting all documents as Charges if they contain the name of an employer and allegations of discrimination because some employees merely want information from the EEOC and do not want their employer to be notified of the allegations.

While the Court recognized the EEOC’s deficiencies in administering the ADEA, it still deferred to the EEOC’s greater familiarity with the statute. The Court concluded “In addition to the information required by the regulations, i.e., an allegation and the name of the charged party, if a filing is to be deemed a charge it must be reasonably construed as a request for the agency to take remedial action to protect the employee's rights or otherwise settle a dispute between the employer and the employee.”

The Court refused to condition “charge” on being served on the employer and giving the employer the chance to conciliate or mediate the allegations before the employee gained the right to file an ADEA lawsuit. “The statute requires the aggrieved individual to file a charge before filing a lawsuit; it does not condition the individual's right to sue upon the agency taking any action.” Moreover, it would be impractical and unfair to the employee to condition a “charge” on the EEOC taking action after the employee has done everything he or she is required to do by the statute when the employee has no control over the EEOC.

Applying this new standard to the facts of the lawsuit, the Court found that the plaintiff’s Intake Questionnaire by itself did not satisfy the new test because, although it provided most of the necessary information, it did not request the EEOC to remedy the alleged discrimination. However, the affidavit which was attached to the Intake Questionnaire ended with the sentence: "[p]lease force Federal Express to end their age discrimination plan so we can finish out our careers absent the unfairness and hostile work environment created within their application of Best Practice/High-Velocity Culture Change." Taken together, the Court construed the Intake Questionnaire and attached affidavit as satisfying the “charge” requirement. The Court did so even though the plaintiff had specifically requested the EEOC to keep the affidavit confidential until formal proceedings were commenced because the plaintiff had also authorized the EEOC in the Intake Questionnaire to notify her employer.

Even though the Court deferred to the EEOC’s administration of the plaintiff’s claim, it also found that the EEOC gave “short shrift” to the employer’s interests as set forth in the ADEA because it was given no notice of the employee’s Charge before she filed suit. “The court that hears the merits of this litigation can attempt to remedy this deficiency by staying the proceedings to allow an opportunity for conciliation and settlement. True, that remedy would be imperfect. Once the adversary process has begun a dispute may be in a more rigid cast than if conciliation had been attempted at the outset.” Of course, that is an understatement since any employer faced with a lawsuit knows that it is much easier to resolve the dispute at the agency stage than after the employee’s attorney had taken control and has expended significant sums in preparing the lawsuit. The Court also encouraged the EEOC to improve its regulations to avoid similar miscommunications in the future.

Employers may find little consolation in the dissent:

“Today the Court decides that a “charge” of age discrimination under the Age Discrimination in Employment Act of 1967 (ADEA) is whatever the Equal Employment Opportunity Commission (EEOC) says it is. The filing at issue in this case did not state that it was a charge and did not include a charge form; to the contrary, it included a form that expressly stated it was for the purpose of ‘precharge’ counseling. What is more, the EEOC did not assign it a charge number, notify the employer of the complainant’s allegations, or commence enforcement proceedings. Notwithstanding these facts, the Court concludes, counterintuitively, that respondent’s filing is a charge because it manifests an intent for the EEOC to take ‘some action.’”

Insomniacs can read the full decision (and dissent by Justices Thomas and Scalia) at http://www.supremecourtus.gov/opinions/07pdf/06-1322.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Unanimous Supreme Court Punts Question of Admissibility of “Me-Too” Evidence to Trial Courts.

Yesterday, an unusually unanimous Supreme Court finally ruled in a case involving whether “me-too” evidence (i.e., testimony by a plaintiff’s co-workers that they also felt discriminated against) is admissible in an employment discrimination lawsuit. However, rather than establish clear rules about the relevance of this problematic evidence, the Court punted the entire question back to trial courts to rule how they see fit in their own discretion. Sprint/United Management Co. v. Mendelsohn, No. 06-1221 (2/26/08).

The particular case involved an age discrimination plaintiff who lost her job in a company-wide reduction in force. The plaintiff sought to buttress her case by introducing “me-too” testimony by other former employees who had lost their jobs in the same RIF that they too believed they had lost their jobs because of age discrimination even though they had different supervisors and decisionmakers. The plaintiff’s hope is that the jury will be more likely to attribute a decision to age discrimination if more employees make the same argument. However, in a mere two sentences, the trial court excluded the “me-too” evidence – presumably on the grounds (asserted by the defendant employer) that it was unfairly prejudicial to the employer and the witnesses were not sufficiently similarly- situated to the plaintiff to make their testimony particularly relevant or material. In other words, whether or not these employees were discriminated against by their supervisors was not relevant to whether the plaintiff’s supervisor discriminated against her in selecting her for the RIF. The court of appeals reversed on the grounds that it assumed that the trial court had made a per se rule that such “me-too” evidence is always inadmissible. While the appellate court agreed about the propriety of such a per se exclusionary rule in the run-of-the-mill discriminatory treatment case (i.e., discipline, termination for cause, etc.), the appellate court believed that in a company-wide RIF, the excluded testimony would be relevant to show that age discrimination pervaded the company to such an extent that it was more likely than not that many supervisors (not just the plaintiff’s supervisor) were influenced to use age as a factor in laying off employees. Following such an argument, such pervasive discrimination could have influenced the plaintiff’s supervisor to select her for the RIF on account of her age.

The Supreme Court reversed on the grounds that the appellate court should not have second-guessed the trial court’s discretion in making evidentiary rulings by assuming the basis for the trial court’s decision. Rather, the appellate court should have remanded the matter back to the trial court for further explanation before concluding that it had abused its discretion in excluding the evidence. The Court established no guidance for the trial court (or attorneys) as to the potential relevance of “me-too” testimony. Writing for an unusually unanimous Supreme Court, Justice Thomas concluded:

“We conclude that such evidence is neither per se admissible nor per se inadmissible. . . . . . We note that, had the District Court applied a per se rule excluding the evidence, the Court of Appeals would have been correct to conclude that it had abused its discretion. Relevance and prejudice under Rules 401 [making relevant evidence admissible] and 403 [excluding evidence that is unfairly prejudicial] are determined in the context of the facts and arguments in a particular case, and thus are generally not amenable to broad per se rules. . .. . The question whether evidence of discrimination by other supervisors is relevant in an individual ADEA case is fact based and depends on many factors, including how closely related the evidence is to the plai ntiff's circumstances and theory of the case. Applying Rule 403 to determine if evidence is prejudicial also requires a fact-intensive, context-specific inquiry.” (emphasis added).

With this in mind, employers should always remember that it is possible that disgruntled former employees may return to haunt them in a lawsuit brought by a former co-worker and that plaintiffs’ attorneys are more likely to seek discovery about these disgruntled co-workers in order to introduce possible “me-too” testimony. While courts may exclude such testimony on the grounds that it would unfairly influence the jury and shed little light on the ultimate question in the case (i.e., the legality of the plaintiff’s treatment), the trial court alternatively could find it relevant to the plaintiff’s theory of the case.

Insomniacs can read the full decision at http://www.supremecourtus.gov/opinions/07pdf/06-1221.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Supreme Court: Individual Participants Can Sue for Breaches of Fiduciary Duty in 401(k) Accounts.

Last week, the Supreme Court issued a much anticipated decision involving the right of an individual benefit plan participant (i.e., an employee) to sue the plan administrator (i.e., the plaintiff’s employer) for breaches of fiduciary duty involving the participant’s individual defined contribution plan – (i.e., 401(k) account). LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856 (2/20/08). In that case, the plaintiff employee alleged that the failure of the employer to follow the plaintiff’s investment instructions “depleted” (or caused a loss in) his 401(k) account of approximately $150,000 and that this failure constituted a breach of fiduciary duty under ERISA. The Supreme Court agreed that ERISA would govern the plaintiff’s claim and could provide him with a remedy if he were to ultimately prevail at trial.

In Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), the Court had previously indicated that § 502(a)(2) of ERISA does not provide a remedy for individual injuries apart from injuries to the benefit plan, although the statute authorized recovery for breaches of fiduciary duties which impair the value of plan assets in a participant’s individual account. However, the Russell case involved a disability plan -- defined benefit plan – which was typical at the time – and LaRue raised questions about a defined contribution plan. The Russell plaintiff also eventually received her full contractual benefits under the benefit plan and sought through her lawsuit only consequential damages for the delay in processing her claim. When faced with a defined benefit plan, the participants are promised a fixed benefit. Remedying any breach of fiduciary duty involving a defined benefit plan will not affect an individual’s entitlement to the fixed benefit since the remedy to the plan will benefit all participants equally. However, in a defined contribution plan, breaches of fiduciary duties could reduce an individual’s benefits without threatening the solvency of the entire plan. As observed by the Court:

“Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed. Defined contribution plans dominate the retirement plan scene today. In contrast, when ERISA was enacted, and when Russell was decided, ‘the [defined benefit] plan was the norm of American pension practice.’ . . . Unlike the defined contribution plan in this case, the disability plan at issue in Russell did not have individual accounts; it paid a fixed benefit based on a percentage of the employee’s salary. “

“For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of §409. Consequently, our references to the “entire plan” in Russell, which accurately reflect the operation of §409 in the defined benefit context, are beside the point in the defined contribution context.”

“We therefore hold that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

Insomniacs may read the decision in full at: http://www.supremecourtus.gov/opinions/07pdf/06-856.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.