When the Supreme Court hears arguments in Tibble vs. Edison International this winter, it will consider a case with the potential of redefining the Employee Retirement Income Security Act’s six-year statute of limitations.
It is a considerably stripped down iteration of the lawsuit that started it all.
Many of the fiduciary-duty claims against Edison – 25 were listed in the plaintiffs’ amended complaint – related to the poor performance of actively managed funds selected by Edison’s fiduciaries. Others related to revenue-sharing agreements with Edison’s record keeper, Hewitt Associates.
In July 2009, however, U.S. District Court Judge Stefan Wilson issued a summary judgment tossing out most of the claims against the utility company, the sponsor of a $4 billion 401(k) plan.
But two issues remained for trial: whether Edison violated its duty of loyalty under ERISA by selecting retail mutual funds that charged higher fees and provided “favorable revenue-sharing agreements”; and whether Edison violated its duty of prudence in selecting a money market fund that allegedly charged excessive fees.
After a three-day trial, Wilson ruled Edison breached its duty of prudence by offering retail-class shares when identical, lower-cost institutional-class shares of same funds were available. Edison had added three mutual funds to the plan in 2002.
Edison didn’t offer “any credible reason why the plan fiduciaries chose the retail share classes,” Wilson wrote in his ruling.
He also found “no evidence that defendants even considered or evaluated the different share classes when the funds were added to the plan.”
The trial revealed that in 2003, Edison did in fact switch one retail fund for an institutional fund, on the basis that doing so would be better for participants. Still, had Edison done its due diligence with respect to the funds added in 2002, plan participants would have saved “thousands of dollars in fees,” wrote Wilson.
For as damning as that ruling was, Wilson chose not to extend the same reasoning to three other retail-share mutual funds Edison added before 2001. That’s because those funds were added more than six years before the plaintiffs filed their complaint.
Neither the plaintiffs nor Edison was satisfied. Each side challenged aspects of Wilson’s ruling in an appeal before the 9th Circuit Court.
The appellate court, as it turned out, had “little difficulty” upholding the lower court’s finding, finding that Edison’s lack of due diligence regarding institutional-share funds was “startling.”
The plaintiffs wanted the fiduciary standard applied to the three funds that were added before 2001. But the appellate court didn’t budge on that aspect of the lower court’s ruling, because, it said, ERISA doesn’t permit “a continuing violation theory.”
Under ERISA’s statut
e of limitations, a claim can’t be brought six years after the date of the last instance of a breach or violation, or in the case of an omission, six years after the latest date on which the fiduciaries could have corrected the violation.
When the plaintiffs in Tibble vs. Edison go before the Supreme Court, they will argue that both lower courts misapplied ERISA’s statute of limitations.
What follows is a closer look at their arguments, as outlined in papers filed with the Supreme Court.
The question of what’s ‘timely’
According to the plaintiffs, under ERISA’s duty of prudence, Edison was obligated to periodically review the prudence of investments offered in its plan and to remove any imprudent investment. Each failure to do so constitutes a “breach or violation” of the law, and triggers a new six-year period in which participants can bring a claim. Edison, the plaintiffs say, conducted periodic reviews of its investment menu but failed to remove, as it should have, the institutional share funds “multiple times within the six years preceding the filing of this action.”
The lower courts determined Edison did not have a duty to remove the institutional funds in question because the funds didn’t experience “significant changes” in performance. Plaintiffs will argue that standard is too narrow to apply.