What's Happening?
A recent appeals court decision has made class certification in workplace benefit disputes under the Employee Retirement Income Security Act (ERISA) less straightforward, prompting attorneys to consider derivative actions as an alternative. Traditionally,
workers claiming retirement plan mismanagement file lawsuits as potential class actions, with a high success rate for class certification. However, the recent ruling, which reversed class certification in a case involving Genworth's retirement plan, may make it harder to certify some ERISA classes. Derivative actions, common in corporate shareholder lawsuits but rare under ERISA, allow plan participants to bring claims on behalf of the plan itself, bypassing the procedural requirements of Rule 23 class actions. While a few courts have approved the concept of ERISA derivative actions, there is limited guidance on their structure. Pending lawsuits against Penn State Health and Genworth Financial Inc. are being closely watched for potential roadmaps on how to pursue these types of claims.
Why It's Important?
This potential shift to derivative actions could significantly alter the landscape of ERISA litigation, potentially opening up new avenues for workers to challenge retirement plan mismanagement. If class certification becomes more difficult, derivative actions could provide a viable alternative for seeking plan-wide relief. This change could impact employers and plan fiduciaries by increasing the complexity and volume of lawsuits, as the barriers to litigation might be lowered for plaintiffs. For plaintiff-side attorneys, while derivative actions offer a new path, the standards for calculating reasonable compensation are less clear compared to class actions, where attorneys often receive up to one-third of the settlement. However, attorneys like Alec J. Berin believe that fee structures in ERISA derivative actions would likely mirror those in class actions, making them an attractive option if class certification remains challenging. The development could lead to more litigation and a need for clearer legal precedents regarding the implementation and safeguards for derivative actions under ERISA.
What's Next?
Attorneys are closely monitoring two key cases for guidance on how to structure plan-wide derivative lawsuits. In one instance, a federal judge allowed a former Penn State Health employee to pursue derivative claims on behalf of the plans, despite being blocked from leading a class action due to a release agreement. The specifics of this process are yet to be determined. In the Genworth case, following the Fourth Circuit's reversal of class certification, plaintiffs intend to file a new motion for class certification and/or derivative action certification, though Genworth does not consent. These cases are expected to provide crucial precedents for how courts and parties will handle ERISA derivative actions, particularly concerning safeguards for absent plan participants, as outlined in the 2006 Coan v. Kaufman ruling. The legal community will be looking for clarity on issues such as notification requirements and how to ensure due process for all affected plan members.
Beyond the Headlines
The emergence of derivative actions as a serious alternative in ERISA litigation highlights a deeper tension between established legal procedures and the evolving needs of justice for plan participants. The traditional class action framework, while familiar, is now facing scrutiny, pushing the legal system to explore less-trodden paths. This shift could lead to a more nuanced approach to fiduciary duty enforcement, potentially empowering individual participants to act as catalysts for broader plan reforms without the stringent requirements of class certification. However, it also raises questions about judicial efficiency and the potential for increased litigation if the procedural guidelines for derivative actions remain ambiguous. The long-term implications could include a re-evaluation of ERISA's enforcement mechanisms, potentially leading to legislative adjustments or new judicial interpretations that balance participant protection with the practicalities of litigation. This development could also influence how companies structure their retirement plans and manage fiduciary responsibilities, anticipating a broader range of legal challenges.
