It has been quite a year on the forum selection front as many on both sides of the “v” waited for the Delaware Supreme Court to rule on a stockholder’s challenge to the validity of corporate provisions restricting claims under the Securities Act of 1933 to federal court, even though the 1933 Act also allows investors to bring those claims in state court. Instead of providing clarity, however, the Delaware Supreme Court introduced more uncertainty when, in Salzberg v. Sciabacucchi, 227 A.3d 102 (2020), it reversed the Chancery Court’s ruling invalidating the provisions and found them a permissible exercise of corporate power. While the decision on its face deals with a narrow issue, it may open the door to further efforts to eviscerate the rights of stockholders.
At issue in Salzberg were federal forum provisions that three companies, Stitch Fix, Roku and Blue Apron, had included in their articles of incorporation, sometimes referred to as a corporate charter, before they went public. While the language differed slightly in the forum provisions, all required that any claims under the 1933 Act be litigated in federal court, despite concurrent state and federal jurisdiction.1 Matthew Sciabacucchi, who purchased shares in all three companies through the IPOs, or shortly thereafter, filed a class action in Delaware Chancery Court seeking to have the provisions declared invalid under Delaware law. The Chancery Court agreed, invalidating the provisions on a facial basis. Drawing a line between internal claims, which it said can be regulated by a company’s charter or bylaws, and external claims involving a company, which cannot, the Chancery Court concluded that the 1933 Act claims were external to the company. The Chancery Court reasoned that “[f]ederal law creates the claim, defines the elements of the claims, and specifies who can be a plaintiff or defendant.” Accordingly, the Chancery Court held that the provisions were invalid because the “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” Then, the Delaware Supreme Court reversed.
The Delaware Supreme Court held that the federal forum provisions did not violate Delaware law and were in fact facially valid under Section 102(b)(1) of the Delaware General Corporation Law. Section 102(b)(1) provides that articles of incorporation may contain “[a]ny provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders …, if such provisions are not contrary to the laws of this State.” The Court explained that, in making a facial challenge, the plaintiff had to demonstrate that the “charter provisions ‘do not address proper subject matters’ as defined by statute, ‘and can never operate consistently with the law.’” The Court reasoned that federal forum provisions fall within the categories of Section 102(b)(1) since the preparation and filing of a registration statement is an aspect of a “corporation’s management of its business and affairs and of its relationship with its stockholders,” and that “a bylaw that seeks to regulate the forum in which ‘such intra-corporate’ litigation can occur is a provision that addresses the ‘management of the business’ and ‘conduct of the affairs of the corporation.’”
The Delaware Supreme Court rejected the Chancery Court’s binary approach of internal versus external claims as well as its characterization of 1933 Act claims as external claims. Instead, the Court interjected a third category of claims into this analysis, “intra-corporate litigation,” which falls somewhere on the continuum between internal (affairs) claims and external claims. Building on this framework, the Court concluded that federal forum provisions are “intra-corporate” and, like internal claims, are within the statutory scope of Section 102(b)(1)—and, as such, are facially valid under Section 102(b)(1). Importantly, the Delaware Supreme Court also pointed out that federal forum provisions serve as a procedural mechanism and are not substantive, noting they “’regulate where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation.’”
Putting aside that the forum provisions at issue appeared in a charter and not a bylaw, Salzberg leaves open several questions about just how far such provisions can go. As commentators have noted, the decision has opened the door to uncertainties, including issues relating to federalism, mandatory arbitration, and the interests of other states in seeing their law apply to companies that are headquartered in their state but incorporated in Delaware.2 Regarding the latter, in In re Dropbox Securities Litigation, the plaintiffs in a California state class action asserting Section 11 claims against a California company incorporated in Delaware are currently litigating a motion to dismiss based on a federal forum provision similar to those at issue in Salzberg.
Further, the use of forum provisions to preclude litigation of federal derivative claims is also in play. Cohen Milstein is currently challenging The Boeing Company Board of Directors’ use of a forum selection bylaw to strip stockholders of their substantive right to bring derivative claims under the Securities Exchange Act of 1934. Boeing’s bylaw requires all derivative cases to be litigated in Delaware Chancery Court, which lacks jurisdiction over 1934 Act claims. In addition to appealing the federal district court’s dismissal of the derivative case based on the forum selection bylaw, Cohen Milstein has filed a declaratory class action in Delaware Chancery Court challenging the validity and enforceability of the bylaw because it eliminates stockholders’ rights to assert exclusively federal claims in a derivative action. This may be just the start. Other attempts to push the boundaries of corporate charters and bylaws may follow as the battle over forum selection provisions designed to curtail the rights of stockholders continues.
- Importantly, under the 1933 Act, Congress provided for both federal and state court jurisdiction over investors’ claims and a statutory right of non-removal from state to federal court. See 15 U.S.C. §77v(a); see also Cyan, Inc v. Beaver Cnty. Emps. Ret. Fund, 138 S. Ct. 1061, 1078 (2018) (holding that SLUSA did not strip state courts of jurisdiction to adjudicate class actions alleging 1933 Act claims, nor could such cases be removed to federal court.)
- See “Del. Federal Forum Ruling Could Open Door To Mischief,” Law360 (March 19, 2020); “So the Salzberg v. Sciabacucchi Decision is In!,” Ann Lipton, (March 21, 2020). See also Shareholder Advocate, Winter 2019, quoting James D. Cox, a Duke Law School professor “… the Constitution’s Supremacy Clause does not permit state law to eviscerate protections provided investors by the federal securities laws.”
Shareholders suing global auditing firm KPMG, LLC for its role in a massive fraud by Miller Energy, LLC cleared an important hurdle on June 29, 2020, when a federal magistrate judge granted their motion for class certification and appointment of lead plaintiffs and Cohen Milstein as co-lead counsel and denied defendant’s attempt to disqualify the shareholders’ expert. This ruling is a significant victory for investors. The extremely high legal standard for finding auditors liable for securities fraud makes it rare for auditor cases to withstand motions to dismiss, let alone achieve class certification.
The lawsuit accuses KPMG of violating the Securities Exchange Act of 1934 and the Securities Act of 1933 by allowing Miller Energy to enormously inflate the value of oil and gas reserves in Alaska it had purchased out of bankruptcy for less than $4 million. After Miller Energy claimed the assets it had purchased were worth over $480 million, its stock price soared by 982%.
A little over a year later, Miller Energy replaced its small auditing firm with national powerhouse KPMG. But KPMG failed to perform the required due diligence or force Miller Energy to come clean about its misstated valuations. Instead, KPMG committed a series of profound auditing failures, turning a blind eye to red flags about the asset valuation—including concerns raised by KPMG’s own internal valuation specialists.
The fraud began unraveling in December 2013, as it became clear that the assets’ valuation was significantly overvalued, eventually resulting in Miller Energy taking impairment charges exceeding $300 million. By the end of 2015, Miller Energy’s securities had been de-listed from the New York Stock Exchange and the SEC had assessed a $5 million civil penalty against the company and $125,000 civil money penalties against each of two senior executives and officers. The company went into bankruptcy and all its stock was ultimately voided.
On August 2, 2018, shareholders in this case overcame defendants’ motion to dismiss. Then, after extensive expert discovery, lengthy briefing, and a five-and-half-hour oral argument, on June 29, 2020 the federal magistrate judge issued a report and recommendation that shareholders’ motion to certify two classes of shareholders of common stock and two series of preferred stock be granted. In granting class certification, Magistrate Judge Debra C. Poplin found that the proposed class satisfied all requirements of Federal Rule of Civil Procedure 23, including the vigorously disputed issue of whether the market for Miller Energy’s stock was efficient.
Notably, while Magistrate Judge Poplin concluded that the number of days demonstrating a cause-and-effect relationship between earnings announcements and market reaction was not high, the court found that the evidence of a relationship, along with other evidence, weighed in favor of finding market efficiency. Magistrate Judge Poplin also denied defendant’s motion to exclude the testimony of plaintiffs’ expert witness, finding his opinion credible.
Magistrate Judge Poplin’s decision also reinforces that market efficiency may be demonstrated through multiple methods and that the cause-and-effect analysis is one factor to be considered but is not dispositive—something particularly noteworthy in this case since there are two separate series of preferred stock at issue in addition to common stock.
In the coming weeks, defendants may appeal the magistrate judge’s ruling to the district court. Cohen Milstein looks forward to defending the federal magistrate judge’s correct ruling and continuing to pursue a meaningful recovery for the class of injured investors.
There is an emerging trend of three-wheeled motorcycles, also known as motorized tricycles or motor trikes, proliferating on the roadways. Some may even offer the appearance of a car, yet with all the hazards of a motorcycle. Interestingly enough, three-wheeled ATVs were banned in the United States in 1988, due to a rash of injuries and death, leading to the now standard four-wheeled machines.
Yet, time and time again, three-wheeled vehicles demonstrate why they pose a serious danger due to their uneven weight distribution and ambiguous nature. This article addresses the liability concerns surrounding the Polaris Slingshot, whose 2015 model was its first edition into the U.S. market.
The Slingshot seeks to appeal to both the car and motorcycle markets. It is in this identity ambiguity that the liability issues for these motor trikes come about. While motorcycle advertising tends to focus on the entirety of the vehicle and experience, the three-wheeled vehicle marketing often focuses on the driver’s engagement with the steering wheel, akin to traditional car advertising.
The Slingshot is unique in that it seeks to emulate a car in most respects, except safety. The first concern that naturally arises is that users are being potentially misled into operating this vehicle like a car. In fact, deep in its owners’ manual is an admission that the Slingshot “handles differently than two-wheel motorcycles, other three-wheel vehicles and four-wheel vehicles.” In essence, it is a brand-new, street-legal driving experience for motorists. Almost forebodingly, Polaris itself lists out 14 distinct characteristics of this vehicle that are novel for motorists:
How does a Slingshot differ from a two-wheel motorcycle?
- Low center of gravity
- Steering wheel
- Foot controls (brake, clutch, accelerator)
- Front suspension and steering
- Side-by-side operator and passenger seats
- Seat belts for both riders
- Lighting
- One rear drive wheel and two front wheels
The murders of Breonna Taylor, Ahmaud Arbery and George Floyd, as well as others whose deaths have not been as publicly reported, have once again exposed serious flaws in our nation’s criminal justice system and systematic racism in this country. This bigotry is reprehensible and has no place in a civilized society. Equally unacceptable are the actions to intimidate and suppress peaceful protests against racially motivated conduct.
These tragedies serve as a grim reminder that features of our society still permit this gross inhumanity. It is incumbent on our firm and our entire legal community to do everything we can to ensure the most vulnerable in our society have meaningful access to justice.
We stand with, and fully support, those of us who have come together to express our sorrow and outrage and to demand prompt and permanent change.
Extraordinary times call for extraordinary measures. With the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the economic collapse caused by the coronavirus will be met with unprecedented levels of government fiscal intervention to restore and stabilize our nation’s ailing economy. Given its over $2 trillion dollar price tag, spending from the CARES Act will require close oversight to ensure these public funds are used for their intended purpose and are not diverted by unscrupulous companies or individuals. Injecting trillions of dollars into nearly every aspect of the nation’s economy holds great promise to cushion the devastation of this pandemic but carries with it the potential for fraud on a massive scale.
While the CARES Act provides for the creation of the Pandemic Response Accountability Committee to be chaired by an inspector general, government officials and committees are not the only mechanisms at our collective disposal to protect the integrity of government spending programs.
As lawyers for whistleblowers who report fraud against the government, we know well that every American has a role to play. Our laws embody the wisdom that ordinary Americans themselves are oftentimes best positioned to monitor and report on fraud.
Passed amid reports during The Civil War that public funds were being stolen when corrupt suppliers sold cardboard boots and sawdust instead of gunpowder, the False Claims Act makes it illegal to submit fraudulent claims to the government for payment and allows the government to recover three times its monetary damages. Over the last 150 years, the False Claims Act has become the government’s most potent arrow in its fraud prevention quiver as it was amended to empower and encourage individual Americans to blow the whistle on those who defraud the government by allowing them to bring lawsuits against fraudsters and providing monetary awards when these cases are successful.
In 2019, for instance, the Department of Justice recovered more than $3 billion dollars through False Claims Act enforcement and in keeping with recent history the vast majority of that recovery came from cases that were initiated by whistleblowers. During the 21st century alone, whistleblowers proceeding under the False Claims Act have protected government expenditures made in response to financial crises, natural disasters, and Medicare and Medicaid expansion, among other circumstances. The role of individual whistleblowers has been so integral to the success of this law that programs to empower and reward whistleblowers have been established at the Securities and Exchange Commission and the Internal Revenue Service to protect the integrity of our capital markets and tax system.
What kinds of fraud are likely to occur as the CARES Act is implemented? If history is any guide, manufacturers may knowingly sell defective or unsafe products—such as critically important personal protective equipment—to the government in its rush to supply hospitals with necessary supplies. Health care providers may take advantage of the current crisis to bill Medicare or Medicaid for treatments that are unnecessary and may even be harmful to patients. Companies that are not among those meeting the law’s criteria for federal loans or grants may falsify applications to claim this public money for themselves and deprive deserving businesses of liquidity to survive our nation’s lockdown. And public companies may not fairly disclose to their investors the impact of the coronavirus on their operations, weakening our newly fragile financial markets. Individuals that see, hear, or learn of these or other types of fraud on our government should contact a lawyer immediately to investigate and, where warranted, pursue whistleblower actions that can lead to substantial government recoveries and financial awards to the individuals that came forward.
During this crisis, many Americans are wondering what they can do to help our nation’s response to this deadly and devastating virus. For those who learn of fraud on the government, there is an important role to play in safeguarding public spending and helping government programs reach those in need. If each of us will blow the whistle when we believe our government is being defrauded, we can stand united in our efforts to make our response to this pandemic as effective as possible.
The spread of COVID-19 across the globe has created unprecedented challenges for businesses and individuals alike, and that is certainly true for the public pension plan community. Public pension plans do not have the ability to “hit the pause button” when it comes to performing their critical duties. Retirees and beneficiaries depend on the timely receipt of their pension checks and benefit payments that must continue to be processed and paid. Moreover, billions of dollars of pension fund assets have to be managed in a time of tremendous turmoil in the markets. The Shareholder Advocate turned to leaders at public pension plans to hear how they are managing to carry out their essential responsibilities during the pandemic.
Thinking Outside the Box
According to Karen Mazza, Deputy Executive Director for the New York City Employees’ Retirement System (NYCERS): “At times like this, pension systems need to think outside the box while carrying out their fiduciary responsibilities.” Such thinking proved critical to NYCERS as its information technology and security teams developed innovative ways to enable over 450 employees to work securely from home. The crisis highlighted the critical nature of essential support functions, such as mailroom and scanning staff, who receive and enter member documents such as retirement and loan applications and correspondence.
Interconnection and Essential Functions
Glen Grell, Executive Director of the Pennsylvania Public School Employees’ Retirement System (PSERS), agrees with Mazza’s observation that functions supporting the business units are on the front lines in times of crisis. “We realize how interconnected all of our bureaus and units are, and we have a new sense of what constitutes an ‘essential position’,” Grell said, noting that “the work can’t get done if the mail doesn’t get opened, sorted and scanned to start the queue of workflows.”
The rapid transition to teleworking forced PSERS to adopt new communications and technology models, largely on the fly. “We are now communicating among all senior managers every day,” Grell says. By deploying 230 laptop computers, in addition to 70already distributed under PSERS’ Continuity of Operations Program, PSERS enabled over 90% of staff to work from home. Mailroom, document imaging, print shop and facilities management were the only units requiring physical presence at PSERS headquarters. PSERS successfully processed and delivered member pension and healthcare benefits to 230,000 annuitants on schedule on March 31, and used technology to conduct retirement exit counseling remotely, so that retirement applications could be prioritized and processed without delay for the membership.
Grell says that the crisis has brought home how much their annuitant members count on PSERS to provide monthly member benefits timely and accurately, regardless of the circumstances. And there is at least one silver lining of the crisis. “All of this will position us well with enhanced capabilities once the immediate situation has passed,” he says.
Importance of Communication
“Now is the time for over-communicating,” says Carolina de Onis, General Counsel to the Teacher Retirement System of Texas (Texas TRS). As de Onis sees it, communication at this time is tied to three basic concepts: risk mitigation, accountability and well-being. She notes that when you aren’t seeing people on a daily or weekly basis, you lose bits of information that may be relevant to the issues you’re dealing with and that “legal issues are rarely one dimensional— you need people with different areas of expertise to identify issues you might not be aware of and to help you problem solve. You need to create a structure around those lines of communication when the normal mechanisms are no longer available.” As for accountability, de Onis says, while we trust our professionals to do their jobs, it’s not about trust. “It’s about ensuring that the work that needs to get done is being done (under difficult circumstances and with different resources),” she says, “and finding new ways to supervise work and to demonstrate to your clients, your organization and your board that you’re on top of the novel, pressing issues this situation has created.” Finally, de Onis notes that many people are feeling isolated and disconnected now: “Connecting with people who are a normal part of your everyday life is healthy,” she says. “People’s situations may change on a dime—perhaps they are home schooling, taking care of elderly relatives or feeling anxiety about a what is going on.” Repeated check-ins to make sure your teams are getting the help and resources they need is essential at this time.
Business Continuity and Disaster Recovery Plan
Gina Ratto, General Counsel to the Orange County Employees Retirement System (OCERS), says that OCERS’ detailed Business Continuity and Disaster Recovery Plan has guided them throughout the process. Like the others quoted here, Ratto highlights the importance of communication, noting that the OCERS Recovery Team had been meeting daily by conference call until they felt comfortable moving to meeting twice a week. In addition, the CEO conducts weekly “all hands” meetings by telephone, and personally telephoned all team members at home to see how they were faring. All employees were issued mobile devices and permitted to “check out” their desk chairs, computer monitors and other items as necessary to make their home offices ergonomically safe and comfortable. The phone system permits staff to receive and handle calls from OCERS members and the public with live operators responding from home. In addition, a very small team of about half a dozen staff work from the office to perform essential activities that cannot be performed from home. Significantly, Ratto notes that March is traditionally OCERS’ heaviest month of the year and that the Member Services team timely processed every retirement application from members seeking a retirement date of April 1 or earlier. Also helpful in allowing OCERS to move forward in conducting business is the that fact that in California, as in several other states, the governor acted by executive order to relax the state’s open meeting laws with respect to public meetings held via teleconference. OCERS held a board meeting and a meeting of its investment committee with some or all of the trustees telephoning into the meeting and the board room open to the public to observe and participate in the meeting. OCERS intends to hold its next board meeting using Zoom technology, which will alleviate the need to open the board room to the public. Finally, returning once again to the theme of communication, Ratto notes the importance of communicating with members at this incredibly stressful and uncertain time. Shortly after the offices were closed, the OCERS CEO posted a statement to assure members that their benefits were secure, noting: “the most important fact that you need to know is if you are retired, you will get your benefit, paid in full, paid on time. That’s a fact.”
Fiduciary Duty—the Bottom Line
As Brian Bartow, General Counsel to the California State Teachers’ Retirement System (CalSTRS) noted, CalSTRS, like all public pension funds, is a perpetual fund and will continue after this crisis, just as it has after prior crises. After reaffirming the importance of assuring members that they can continue to rely on CalSTRS during this time to pay their benefits on time, he succinctly summarized the bottom line: “We are stewards of that fund and will continue to exercise our duties to safeguard and grow that fund for the sole purpose of providing benefits to our members and beneficiaries—whether we’re in the office or working remotely.”
Just as the response to the COVID-19 pandemic has varied in timing and scope from state to state, so it is with the nation’s courts.
While state courts in 34 states have suspended all in-person proceedings, the remaining 16 states have left matters up to court officials at the local level. Likewise, the timing of federal court orders relating to court business, operating status and public employee safety have varied, thanks to the administrative discretion given the chief judge of each district. Still, there has been consistency among the federal circuits: all have limited public access to federal courthouses, postponed or continued jury trials, permitted hearings to be held by telephone or video, and either extended filing deadlines in March and April or conveyed a willingness to extend deadlines if proper motions are filed. As for the U.S. Supreme Court, it postponed 20 oral arguments scheduled for sessions in late March and April and announced on April 13 that it would hear oral arguments remotely in May for a limited number of the postponed cases.
But while courts have modified their operations to accommodate the special circumstances caused by the pandemic, some judges also have given clear instructions to counsel to move their cases forward to the extent possible. For example, on March 23, Chief Judge Waverly Crenshaw of the Middle District Court of Tennessee issued an order “for clarification [that] the Court emphasizes that all deadlines previously established in both civil and criminal cases remain in full force and effect, absent further order . . . [and] [t]he Judges unanimously expect that counsel for all parties will continue to diligently work on cases to comply with established deadlines.”
As brick-and-mortar law offices go quiet, home offices are buzzing—or at least click-clacking—as lawyers and support staff continue their work remotely. In the securities fraud and shareholder rights practice of law, new case filings and court rulings on pending matters continue without an appreciable decline, although a recent study across all practice areas showed that rulings are beginning to slow down as compared to prior years. Lawyers continue to initiate cases, file briefs, argue motions telephonically, take video depositions, and even participate in video mediations.
This “new normal” takes adaptation and patience on both sides—especially for cases in discovery with depositions. They must now be taken remotely, which requires additional logistical preparation to ensure that the deponent and all counsel are properly equipped. Everybody involved needs enough internet bandwidth, plus the computer, camera, and audio-video quality to allow the court reporter and videographers, also working remotely, to capture a clean record and to make sure the deponent and counsel can see any exhibits introduced and marked on the screen.
Technology aside, video depositions present some fundamental challenges. For counsel taking the deposition, it is much harder to develop a rhythm of questioning and assess witness credibility on a screen than face-to-face. For counsel defending the witness, meanwhile, it is tougher to assess how well the witness is tolerating the process and provide effective guidance during breaks that are not in-person but rather over the phone.
In general, counsel may also find it difficult to strike an appropriate balance between their duty to advance their client’s interests and their concern about how to best communicate with clients and judges who may have more pressing matters at hand.
Despite these and other challenges, effective advocacy continues amid these most uncertain and difficult times.
As we begin a new year, we are all no doubt grateful for the blessings in our lives, including the ability to achieve justice for our clients through the legal system. But, to be honest, aren’t you a little disappointed that it is now 2020 and there is no real prospect of traveling by flying car in sight? Many of us grew up believing 2020 was the year cars would take flight. Now some manufacturers estimate 2025 is the earliest commercial flying vehicles will hit the market, while analysts believe it could take much longer.
We may not have flying cars yet, but the age of the self-driving car has begun. To many, the idea of sitting passively in a car that does the hard work of navigating through traffic is appealing. But plaintiffs’ lawyers likely find the idea terrifying. We know how companies cut corners and send products to market too soon without adequate safety testing. We know how manufacturers have been willing to risk the safety of consumers in order to maximize profits by using cheaper tempered glass instead of laminated glass, and by using airbag inflators that were known to be ticking time bombs. And we know manufacturers have been all too willing to hide dangerous product defects from the public. One can easily imagine how self-driving vehicles that are not subject to human direction and control will lead to increased opportunity for the manifestation of product defects.
Truly self-driving cars will not only have the same potential for traditional product defects as other automobiles, like faulty seat belts, bad airbags, etc., but there will also be potential for defect in the cars’ “brains” — the artificial intelligence programming that will enable these vehicles to completely eliminate the need for a driver. Part of this programming must include a system of artificial ethics to guide a self-driving vehicle when making life and death decisions.
If you are interested in discussing any of the issues raised in this opinion piece, please contact us or reach out to Leslie directly at lkroeger@cohenmilstein.com or 561-515-1400.
Every day in Tallahassee, Florida lawmakers are being inundated with legislation that flies in the face of protecting the constituents they are elected to serve.
There’s an attack on consumer rights in Florida. The attack is happening in Tallahassee. While hard-working, tax-paying consumers go about their everyday lives, there are various attacks on consumer rights happening right now in the state Capitol that could severely limit access to medical care, prevent lower insurance rates, prohibit consumer protections after a storm, and even limit access to the courts.
Every day in Tallahassee, Florida lawmakers are being inundated with legislation that flies in the face of protecting the constituents they are elected to serve.
While consumer advocates are trying to protect the system that ensures a person can seek the care they need, the insurance industry is one step ahead trying to protect their bottom line.
Time and time again we see these heartbreaking stories.
Families who think their property insurance will cover damages related to natural disasters like a hurricane. Yet more than 15,000 Floridians are still trying to have claims resolved more than a year after Hurricane Michael impacted our state and sadly, over 20,000 have had their claims closed without receiving a single penny. Many are still not able to return to their homes because there is nothing left – only a concrete slab remains.
Florida drivers pay 81 percent more than the national average for auto insurance. The Sunshine State is one of only two states that does not require auto insurance coverage for bodily injury liability, putting it far behind the rest of the country when it comes to protecting its citizens from significant economic losses and higher insurance costs for all drivers.
Florida could join the 48 other states in the country which require their drivers to buy bodily injury liability insurance, providing coverage for injuries caused to others. This would help us return to responsible roadways and lower insurance rates for all drivers. But the insurance industry continues to block legislative proposals that ensure a safer Florida and are good for all consumers.
Other proposals would limit injured Floridians from receiving adequate care and compensation when they suffer injuries caused by another party. This means limited access to necessary and in some instances, life-saving health care because some providers will not treat out of fear of never getting paid for services. Patients will be increasingly limited to what doctors and specialists they can see.
In these cases, it’s not the consumers fault they are put into a position where they need to seek treatment or compensation for losses; however, the insurance industry and big business seek every opportunity to convince lawmakers to pass new laws that will further limit consumers ability to receive fair treatment, compensation, and care after individuals and their families have experienced a tragedy.
Florida consumers deserve the truth about what is happening and the roadblocks that are being created for them in Tallahassee. Lawmakers, it’s time to put a stop to these attacks on everyday Floridians and enact sensible legislation that truly protects Florida consumers.
It is important for Taft-Hartley plan trustees to be informed of developments related to ERISA fiduciary liability. Cohen Milstein continuously monitors ERISA lawsuits, and in this issue of the Shareholder Advocate, we summarize developments related to several lawsuits concerning actuarial equivalence rules found in certain ERISA provisions. Over the last year, there were nine class cases filed that allege pension plans are violating ERISA by paying less than actuarially equivalent benefits to defined benefit plan participants. Plaintiffs in these lawsuits generally allege that plan fiduciaries and sponsors of their defined benefit plans violate ERISA when a plan uses outdated mortality tables to calculate alternative forms of benefits or “form factors,” which are predetermined factors used to convert normal form benefits into alternative forms. The plans at issue in these lawsuits are those sponsored by household names, such as American Airlines, U.S. Bancorp, AT&T, Metropolitan Life Insurance Company, Anheuser-Busch, Raytheon Company, and Huntington Ingalls Industries.
A participant’s pension benefit is generally expressed as a monthly pension payment beginning at “normal retirement age” as defined by the plan (no later than age 65). This monthly payment is called a single life annuity because it pays a monthly benefit to the participant for her entire life (i.e., from the time she retires until her death). ERISA-governed pension plans may (and, in some circumstances, must) offer optional forms of benefits. Several provisions of ERISA require that when participants receive optional forms of benefits, the value of the optional forms must be actuarially equivalent to benefits expressed as a single life annuity commencing at normal retirement age.
“Actuarial equivalence” is a computation that is designed to ensure that, all else being equal, two alternative forms of benefit payments have the same present value as each other. Generally speaking, present value is calculated using two primary actuarial assumptions: (1) an interest rate and (2) a mortality table. The interest rate discounts to present value each future payment using an assumed rate of return that is based on current market conditions. The mortality table provides the expected duration of that future payment stream at the time the table is published based on statistical life expectancy of a person at a given age. ERISA’s actuarial equivalence requirements are summarized as follows:
- For defined benefit plans “if an employee’s accrued benefit is to be determined as an amount other than an annual benefit commencing at normal retirement age [of 65] … the employee’s accrued benefit … shall be the actuarial equivalent of such benefit[.]” ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3).
- ERISA’s non-forfeitability requirements provide that if a participant receives less than the actuarial equivalent value of her accrued benefit, this results in an illegal forfeiture of her benefits, and hence a violation of ERISA § 203(a), 29 U.S.C. § 1053(a).
- In addition, ERISA requires all defined benefit plans to provide Qualified Joint and Survivor Annuities, which are the “actuarial equivalent of a single annuity for the life of the participant.” ERISA § 205(a) & (d)(1)(B), 29 U.S.C. § 1055(a) & (d)(1)(B).
- Finally, if a plan offers early retirement benefits, ERISA requires that all participants receive no less than the actuarial equivalent of their benefit commencing at normal retirement age. ERISA § 206(a)(3), 29 U.S.C. § 1056(a)(3).
Whether the actuarial equivalence requirements have been met turns, in large part, on whether the actuarial assumptions used to calculate optional forms of benefits are reasonable and have been updated to reflect current trends in mortality and interest rates. In many of the cases where fiduciaries were sued, the mortality tables used to calculate optional forms of benefit were very outdated (with publication dates ranging from 1951-1984). If these allegations are true, the mortality tables used by several large plans have not been updated for decades—in some cases, for as much as 70 years. In other cases, the plans use form factors to convert benefits into optional forms and plaintiffs similarly allege that those form factors have not been updated for decades. These are the types of factual issues to be aware of if you are a trustee of an ERISA-governed plan.
While it is unclear how the lawsuits that have been filed to date will resolve, two of them have survived motions to dismiss and, in the one case that was originally dismissed, plaintiffs’ motion for reconsideration was granted. Given the likelihood of continued litigation in this area, trustees should consider taking some “belts and suspenders” actions to help defend against or avoid these types of lawsuits. For example, trustees could ask their plan’s actuary to periodically review the actuarial assumptions or form factors used to calculate the Qualified Joint and Survivor Annuities and early retirement benefits. The plan actuary could provide an opinion as to whether those assumptions or form factors are reasonable. Note, however, that if the plan actuary provides an opinion that the assumptions or form factors used by the plan to calculate benefits are unreasonable, the plan likely will need to revise its terms to employ reasonable actuarial assumptions. The revised terms may increase pension benefits obligations for the plan and negatively impact its funding status. Being proactive in working with the plan’s actuary to identify any potential issues related to actuarial equivalence should serve the plan well.