The New Landscape of Lawsuits Over Retiree Benefits
from
July/August 2005
by
Myles Callum
Howard Shapiro of Proskauer Rose’s New Orleans office has been defending companies such as EDS, Merck, Nortel, and UPS against lawsuits by retirees and employees for nearly 25 years. He has been named one of the top 40 benefits lawyers by the National Law Journal and is considered a dean of litigation cases involving ERISA, the Employee Retirement Income Security Act of 1974. In short, he protects you from people who say you’re not protecting them.
The changing nature of pension plans, says Shapiro, 54, has set the stage for many of today’s lawsuits. When he first began practicing his specialty, most of the suits he defended were claims for miscellaneous employee benefits, such as severance pay or health coverage. In those days, pension plans themselves were straightforward, with few surprises that would set off lawsuits. “They were what people think of as the old retirement or pension plan,” Shapiro says, “where when you retired, you got a certain monthly benefit depending on how long you’d worked for the company and how much you made times some type of coefficient. There are still a lot of those plans left, because it’s difficult to terminate them and wind them down. But if you were starting a new business today, you would almost certainly not start with the old-fashioned plan.”
Instead, he says, “you would put in a profit-sharing 401(k). They are easier to administer, and they’re less expensive for the employer.” But they’ve also been the target of a lot of recent litigation, because employees generally sink their 401(k) retirement-plan assets into the stock market and often into the stock of the company they work for. “As long as the stock market was doing well,” says Shapiro, “those employee investments kept going up and people were happy. But when the stock market suddenly went down, the value of those 401(k) plans was suddenly in decline. That causes people to sue.”
Then came the Enron scandal, which gutted the retirement accounts of thousands of the company’s employees whose plans were loaded with its stock. “There was alleged massive fraud,” Shapiro says, choosing his words with lawyerly care. “Allegedly, this massive fraud was concealed from the public. Also it’s alleged that the company encouraged employees to invest in the company stock. And then, of course, the company imploded into a bankruptcy. So that raised issues of whether employer stock was appropriate.”
Since Enron, 401(k) lawsuits have increased dramatically. In 2000, according to the Administrative Office of the U.S. Courts, 126 ERISA class-action cases were pending and 62 were in progress; by 2003 the numbers had grown to 183 cases pending and 119 under way. In the civil courts, individual lawsuits against ERISA plans rose from 9,124 filed in 2000 to 11,304 in 2003.
It used to be that directors were rarely named in the lawsuits. But now, Shapiro says, they’re targeted, with plaintiffs charging that board members have the duty to supervise a company’s administration of pension plans. “I don’t agree with that idea in any respect,” says Shapiro, but he adds that it is at the heart of most cases he defends now. Nevertheless, he says, “I think directors and officers are doing fine. These plaintiffs want to foist duties upon directors that are inappropriate and unnecessary. Whether courts will agree has yet to be decided.”
Employee plaintiffs aren’t all that Shapiro must contend with. There’s also the U.S. Department of Labor (DOL), which can intervene as a plaintiff itself in any of these cases or can act as a friend of the court. The Labor Department filed suit, for instance, in the Enron case. Like most plaintiffs in these cases, the department supports the idea that directors and officers have additional monitoring and supervisory responsibilities. And, Shapiro says, “most of the time the DOL is adverse to employer positions.”
Before joining Proskauer Rose last October, Shapiro was with Shook Hardy & Bacon in New Orleans. There he represented Sprint when the company was charged with improperly investing employee retirement funds. Its directors were alleged to have breached their fiduciary duties by failing to monitor the plan’s administrators, among other things. That case is still open. In fact, so far no court has decided whether directors and officers do indeed have the duty to monitor the administration of benefits plans. But, says Shapiro, the courts are mostly permitting the cases to go forward and allowing plaintiffs to make those claims against directors. Until the issue is resolved, he says, board members will “find themselves in an uncertain environment.”
What can directors do to protect themselves? “Mainly they need to be well advised and up-to-date,” says Shapiro. “They should be proactive in consulting with counsel about these latest litigation trends, so that they can ably protect themselves. And clearly the amount of insurance that the employer has, to cover directors for ERISA and D&O issues, is a matter of some concern.” The sums involved can be staggering, he notes. In a case involving Lucent, for instance, “the directors and other defendants were sued for, I think, $600 million. You would not want to be underinsured.”
