An extremely rare jury verdict in an ERISA fiduciary breach case has led to a Shakesperean-like quandary. “Could Have, or Would Have, That is the Question”.
In a brief to the Second Circuit on December 7, Yale University employees asked the Second Circuit to find that a new trial is needed in their lawsuit accusing the school of mismanaging their $5.5 billion retirement plan. A Connecticut jury had delivered a verdict for Yale on June 28, finding that although the class proved Yale breached its fiduciary duties under ERISA by allowing excessively high recordkeeping and administrative fees, but did not award any damages to the class. The employees blame this strange outcome on faulty jury instructions.
According to the class, the jury did not receive adequate guidance on how to assess loss and damages. The class claimed that the district court incorrectly instructed the jury that Yale and its fiduciary committee could avoid financial liability merely by showing that a prudent fiduciary “could have” made the same decisions, rather than requiring defendants to prove that a prudent fiduciary “would have” made the same decisions.
DOL’s Amicus Brief. The DOL filed an amicus brief on December 14 supporting the employees’ request for a new trial emphasizing that deficient jury instructions let Yale avoid responsibility for violating ERISA. The DOL said the ERISA standard the district court should have used is whether a prudent fiduciary "would have" more likely than not taken the same actions, a principle derived from the law of trusts and backed by circuit courts across the country. "The district court's jury instruction is inconsistent with ERISA's trust-law principles, its protective purposes, and the uniform circuit authority," said DOL. "Allowing a breaching fiduciary to escape liability based on the remote possibility that a prudent fiduciary 'could have' made the same decisions risks hollowing out ERISA's enforcement scheme."
In support of its arguments, the DOL cited Sacerdote v. New York University, 9 F.4th 95 (2nd Cir. 2021), cert. denied, 142 S. Ct. 1112 (2022), in which the Second Circuit held that once a plaintiff has established a fiduciary breach and related loss to an ERISA plan, the burden shifts to the fiduciary defendant to prove that their breach did not cause the loss. According to DOL, an ERISA fiduciary should be required to show its actions were in line with what a prudent fiduciary would do. However, by instructing jurors to decide whether Yale had proved that a prudent fiduciary "could have made the same decision as to recordkeeping and administrative fees," the district court “sets a dangerously low bar for breaching fiduciaries to clear that undermines ERISA's protective purposes."
The Fiduciary Breach
During the trial, Yale told the jury that funds offered in the retirement plan performed consistently with other university plans around the country. The jury concluded that the employees proved that Yale and its plan fiduciaries breached their duty of prudence by charging them unreasonable administrative fees and record-keeping costs. However, the jury was also convinced by Yale's argument that a prudent fiduciary “could have” made the same decisions that Yale made, and therefore the employees were not entitled to any compensation. On the other count —that Yale failed to appropriately monitor the investment options offered to plan participants — the jury also found in Yale's favor.
Plaintiffs’ Brief on Appeal to the Second Circuit
Plaintiffs’ primary argument on appeal is that they are entitled to a new trial on damages since the district court instructed the jury incorrectly.
The brief emphasizes that though the court correctly shifted the burden of proof to the defendants, it diluted that proof by providing the jury with a lower standard contrary to Second Circuit precedent and trust law as explained above. "The fundamental flaw in the 'could have' standard is that it simply does not answer the question of whether the defendant's imprudent conduct caused damages — it leaves the question unanswered."
Aside from the misleading instructions, the brief pointed out that the verdict form was generally confusing and did not adequately instruct the jury in assessing loss and damages. Also, the brief said the employees are entitled to a new trial because the court erred in instructing the jury that certain conduct could not establish a breach of fiduciary duty, made incorrect rulings regarding defendants’ fiduciary authority over investments and it excluded relevant testimony. For example, said the brief, the employees wanted their expert to testify on whether an investment lineup of over 100 funds is indicative of a prudent fiduciary process, but the court blocked the testimony. According to the brief, the overall structure of the plan’s investment lineup and the process used to assemble and maintain it were unquestionably among the relevant facts and circumstances for the jury to consider.
The Correct Question
Although it may not appear at first glance that the “could have” vs. “would have” analysis is crucial to correctly evaluate ERISA liabilities, plan participants nonetheless depend on the rigorous enforcement of ERISA to ensure the proper administration and investment of their plan assets. As the plaintiff and DOL briefs clearly point out, this can be accomplished if the Second Circuit recognizes, as they have in prior decisions, that the correct question is what likely “would have” occurred in the absence of the breach and grant a new trial.
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