Summary

The US Court of Appeals for the First Circuit has solidified a circuit split on who has burden of proving loss causation in ERISA breach of fiduciary duty cases. The First Circuit joined the Fourth, Fifth and Eighth Circuits holding that once a plaintiff demonstrates a fiduciary breach, the defendant has the burden to negate loss causation. Other circuits, including the Sixth, Ninth, Tenth and Eleventh Circuits, have held that a plaintiff bears to burden to establish loss causation. This issue is ripe for Supreme Court review.

In Depth

The US Court of Appeals for the First Circuit Court of Appeal’s decision in Brotherston v. Putnam Investments, LLC, No 17-1711 (Oct. 15, 2018) solidifies a circuit split on whether an ERISA fiduciary has the burden to affirmatively negate loss causation when the plaintiff has established a breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA). The First Circuit sided with the Fourth, Fifth and Eighth Circuits, holding that once a plaintiff demonstrates that a fiduciary breach under ERISA, the burden shifts to the fiduciary to demonstrate that the breach did not cause the plaintiffs’ claims loss. The Court of Appeal’s decision has wide ranging implications and may garner the attention of the Supreme Court given the circuit split on this issue.

In this case, the plaintiffs were two former employees of Putnam Investments, LLC (Putnam) who participated in Putnam’s 401(k) plan. The plaintiffs asserted that Putnam and the other named plan fiduciaries breached their fiduciary duties by offering plan participants investment options that included all of Putnam’s mutual funds, irrespective of whether those funds were prudent investment options. 

The plaintiffs further alleged that Putnam structured fees and rebates in the plan in a manner that was unreasonable and treated plan participants worse than other investors who invested in Putnam funds. Based upon those allegations, the plaintiffs asserted claims under ERISA for breach of fiduciary duty and also asserted that defendants engaged in prohibited transactions under ERISA.

According to the trial court, the plaintiffs’ claims fundamentally asserted that by failing to implement or follow a prudent objective process for investigating and monitoring the individual merits of each of the plan's investments in terms of costs, redundancy or performance, the defendants breached their fiduciary duties under ERISA. During a seven-day bench trial, the trial court concluded that there was sufficient evidence presented to conclude that there was a failure to monitor plan investments independently, and therefore a failure to exercise the prudence required under ERISA. Nevertheless, the trial court granted defendants’ motion for judgment on the breach of the duty of prudence claim mid-trial, concluding that plaintiffs’ failed to offer any evidence that the breach caused plaintiffs to suffer a loss.

The court of appeals focused much of its analysis on the plaintiffs’ breach of fiduciary duty claims. In particular, the court of appeals considered whether the plaintiffs were required to present evidence that the defendants’ fiduciary breach caused the alleged harm or, conversely, whether the burden shifts to defendants to negate any causal link between the fiduciary breach and the alleged harm.

Before turning to the burden of proof, the court of appeals first analyzed plaintiffs’ theory of loss. The plaintiffs did not allege that the value of their investments decreased over time. Instead, the plaintiffs fundamentally alleged that their investments would have performed better had other funds been available as investment options.

To evaluate the plaintiffs’ theory, the court of appeals first noted that a claim for breach of the duty to act prudently has three fundamental elements: breach, loss and causation. Having made that baseline observation, the court of appeals then turned to analyzing what constitutes a loss from an investor’s perspective.

The court noted that if an investment increases in dollar value over time, many would not consider the investor to have suffered a loss. Nevertheless, the court of appeals stated that a “more sophisticated” view of loss would also recognize that when there is a choice among a number of investment vehicles, the decision to pick one investment over another may result in a measurable “loss of opportunity.” The court of appeals stated that this broader view of loss aligns with the Restatement (Third) of Trusts, which states in determining whether a breach of a duty results in a loss, one must look to what the results “‘would have been if the portion of the trust affected by the breach had been properly administered.’”

The court of appeals then turned to ERISA. The court noted that ERISA provides that a breaching fiduciary shall be liable to the plan for “any losses to the plan resulting from each such breach.” 29 USC § 1109(a). According to the court of appeals, ERISA is thus broad enough to accommodate the “total return” principle recognized in the Restatement. The court of appeals then concluded, relying on the Restatement, that an ERISA trustee that imprudently performs its discretionary investment obligations, including the design of a portfolio of funds to offer as investment options in a defined contribution plan, “is chargeable with . . . the amount required to restore the values of the trust estate and trust distributions to what they would have been if the portion of the trust affected by the breach had been properly administered.”

Having concluded that the plaintiffs presented a viable theory of loss under ERISA, the court of appeals turned to the issue of which party has the burden to prove that the fiduciary’s breach caused the loss in question once there is sufficient evidence of a breach of such a duty. In conducting its analysis, the First Circuit recognized a split among the circuits on this issue. The Fourth, Fifth and Eighth Circuits have all found that once a fiduciary is found to have breached its fiduciary duty, the burden shifts to the fiduciary to establish that the breach did not cause the loss in question. On the other hand, the Sixth, Ninth, Tenth and Eleventh Circuits have each held that it is the plaintiffs’ burden to establish the causal link between the fiduciary’s breach and the harm suffered by the plan.

After recognizing the split among the circuits, the First Circuit joined the circuits that shift the burden to the defendants to negate a causal link between the fiduciary’s breach and the alleged harm to the plan once a breach of a fiduciary duty is established. The court based its decision in no small part on its view that the information regarding the fiduciary’s investment decisions lies within the fiduciary’s hands and, in the court’s view, common sense and principals of trust law support the position that fiduciaries should therefore have the burden to negate causation.

The First Circuit’s decision in this case is notable because it appears to adopt an expansive view of what may constitute a loss under ERISA and clearly holds that when a plaintiff establishes that a fiduciary has breached a fiduciary duty under ERISA, the fiduciary bears the burden to negate the causal link between its conduct and the plaintiff’s alleged harm. Given the potential impact of the court’s decision and the growing split in the circuits on this critical issue, it is reasonable to conclude that the Supreme Court will soon weigh in on this issue.