The fiduciary exception to the attorney client privilege can pose significant problems for plan fiduciaries who operate under the misconception that their communications with either in-house or outside counsel are protected by the attorney-client privilege. This misconception could lead to awkward situations for both fiduciaries and their attorneys, and in some instances may even jeopardize the outcome of a litigation. With a significant amount of recent litigation focusing on who can be considered a fiduciary and what is considered a fiduciary activity, this article provides guidance regarding what communications with counsel may or may not be protected as privileged.
In an ERISA plan, plan fiduciaries owe a duty of loyalty to the plan participants and beneficiaries similar to that of a trustee to its beneficiaries and a board of directors to its shareholders.
A person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. 1002(21)(A).
Courts have relied on two different theories for applying the fiduciary exception in the ERISA context. The first theory is based on the duty of disclosure, requiring a fiduciary to disclose material information, including matters communicated by a fiduciary with its attorney, to all plan participants. The second theory is premised on the notion that because the fiduciary acts for the ultimate benefit of the plan participants, the participants are the "real" clients. Thus, any advice concerning the administration and management of the plan is ultimately advice for the benefit of the plan participants, which the participants are entitled to know.
Settlor Function vs. Plan Administration
When a fiduciary is said to be exercising its settlor function, any advice fiduciaries may receive in relation to this function has been held to be privileged and thus not subject to the fiduciary exception. The Supreme Court has held that "employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans," and that "when the employers undertake those action, they do not act as fiduciaries, but are analogous to the settlors of a trust." Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 443-44
(1999); see also Lockheed Corp. v. Spink, 517 U.S. 882, 891 (1996). As explained by the Supreme Court in Jacobson, the rationale behind limiting the exception in the settlor context is based on trust law, in that the fiduciary who creates, adopts, and modifies the plan is acting as a settlor of a trust and its actions are not considered to be taken for the benefit of the plan participants.
In contrast, actions relating to the administration of the plan, specifically, how to invest and allocate plan assets, are subject to the fiduciary exception. United States v. Mett, 178 F.3d 1063, 1065 (9th Cir. 1999) (explaining that the trustee is not the real client and is not entitled to the privilege when it seeks advice regarding plan administration). In a more recent case concerning allegations of breach of fiduciary duties resulting from investing in mutual funds with high investment management fees and inferior returns, the plaintiffs sought discovery of all documents relating to the investment of the plan funds, including communications with counsel. David v. Alphin et. al., 2010 U.S. Dist. LEXIS 102278 (D.N.C. 2010). The court there held the fiduciary exception applied and required the fiduciary to produce all documents concerning plan administration, including communications with counsel regarding investment of plan assets.
With the increase in challenges to plan's investment decisions, plan fiduciaries are well advised to keep the above concepts in mind when seeking advice regarding initial investment selection and modifications, and choosing investment managers.
UNITED STATES SUPREME COURT UPDATE
Cigna Corp. v. Amara, No. 09-804 (argued November 30, 2010)
The United States Supreme Court is expected to issue its decision before the end of the term in a case concerning the standard for measuring harm to ERISA plan participants and beneficiaries resulting from alleged inconsistencies between a summary plan description and the full plan document. A ruling here will resolve a split in the circuits as to what standard should be applied to determine whether the SPD or the plan should control. For example, the Sixth Circuit holds that the SPD controls where there is a conflict between the two documents. See, Haus v. Bechtel Jacobs Co., 491 F.3d 557 (6th Cir 2007). However, in the Second Circuit, a plaintiff must show that he or she was "likely to have been harmed" due to the inconsistent SPD. See, Burke v. Kodak Ret. Income Plan, 336 F.3d 103 (2nd Cir 2003). The Amara plaintiffs argued in favor of the "likely harm" standard; whereas the defendants argued that detrimental reliance was required. The Court's decision will determine the burden of proof applicable in ERISA benefit class action suits as well as have an impact on the level and type of information included in a summary plan descriptions. Stay tuned for further developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
