Breach of Fiduciary Duty under ERISA: Ninth Circuit Clarifies That Mere Disclosure of Plan Documents Is Insufficient “Actual Knowledge” to Trigger Statute of Limitations

In pension and savings plan cases, it can often take several years before an employee realizes that there has been a breach of fiduciary duty.  Typically, an employee’s financial loss triggers an investigation that later reveals the facts of the breach.  But how long does an employee have to bring a claim in court?  The answer depends on the employee’s “actual knowledge” of the facts of the breach or violation.  There is a conflict among federal circuit courts of appeal on whether an employee should be deemed to have knowledge of 401(k) prospectuses and fund information simply because the employer makes this information available to the employee.  In a recent decision by the Ninth Circuit, Sulyma v. Intel Corp. Investment Policy Comm., 909 F.3d 1069 (9th Cir. 2018), the court clarified that mere disclosure does not equate to actual knowledge of the employee sufficient to begin the statute of limitations.  The employee must actually be aware of the facts constituting the breach more than three years before filing suit.

The Employee Retirement Income Security Act of 1974 (“ERISA”) governs pension plans, including employer sponsored 401(k) retirement plans.  ERISA imposes duties of loyalty and care upon fiduciaries as well as liability for breach of those duties.  See 29 U.S.C §§ 1104 (duties) and 1109 (liability of breach).  Fiduciaries must act “solely in the interest of the participants and beneficiaries” and exercise “the care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use.”  Id. § 1104(a)(1).  Employees bringing a claim for breach of fiduciary duty must do so within three years of the “earliest date on which the employee has actual knowledge of the breach or violation,” and no more than six years after the last action which constituted a part of the breach or violation.  Id. § 1113.

In Sulyma, the Ninth Circuit clarified that an employee must be actually aware of the facts of the breach and not merely in possession of materials from which the employee could have discovered the breach.  Sylyma, 909 F.3d at 1076.  Like many employees, Plaintiff Christopher Sulyma did not pay too much attention to the lengthy disclosures and prospectuses associated with his employer’s 401(k) plan.  Sulyma worked for Intel between 2010 and 2012, during which time he was automatically enrolled in Intel’s Target Date 2045 Fund (“the Fund”).  The Fund was managed by an investment committee appointed by Intel’s Board of Directors.  Intel provided Sulyma with various disclosures about the Fund’s investments, which were also available on two websites.  These documents revealed that the Fund made allocations to alternative investments such as hedge funds and private equity funds, which charged higher than average fees and underperformed the market.  Although Sulyma accessed some of the disclosures during his employment, Sulyma testified that he did not know Intel had allocated the Fund’s portfolio in alternative investments, or that this was the reason for the Fund’s poor performance.

In 2015, Sulyma eventually learned of the Fund’s poor performance and brought claims against Intel’s oversight committees under § 1104 of ERISA on the basis that Intel made imprudent investments, failed to disclose those investments, failed to monitor the performance of those investments, and failed to remedy other defendants’ ERISA violations despite knowing about them. What followed was a battle over whether Sulyma’s claims were barred by ERISA’s three-year statute of limitations.

Intel moved to dismiss Sulyma’s complaint, arguing before the U.S. District Court for the Northern District of California that ERISA’s three-year statute of limitations barred Sulyma’s claims.  Sulyma filed his action against Intel on October 29, 2015, and Intel claimed Sulyma had actual knowledge of the alleged breach before October 2012 since he had access to the Fund documents as early as 2010.  The district court sided with Intel and imputed the knowledge of the Fund’s portfolio allocation to Sulyma, reasoning that had Sulyma read the Fund literature more than three years prior to filing his complaint, he would have known about the allegedly imprudent investments.  Construing Intel’s motion to dismiss as a motion for summary judgment, the district court granted summary judgment in favor of Intel holding that Sulyma’s claim was barred by ERISA’s three-year statute of limitations under 29 U.S.C. § 1113(2).

On appeal, the Ninth Circuit reviewed the district court’s grant of summary judgment de novo and employed a two-step process to determine whether Sulyma’s claim was barred by section 1113(2). First, the court isolated and defined the underlying violation on which plaintiff’s claim is founded. Second, the court inquired into whether plaintiff had “actual knowledge” of the alleged breach or violation. Sulyma, 909 F.3d at 1072-73. With respect to the first prong, the record showed that although the Fund did not always invest in alternative investments, the imprudent actions alleged by Sulyma occurred during his employment, as early as 2010. Id. at 1071. The primary issue on appeal was whether the district court correctly interpreted section 1113(2)’s requirement of “actual knowledge” sufficient to begin the three-year statute of limitations prior to October 2012.

First, looking to the statute itself, the Ninth Circuit acknowledged that neither “knowledge” nor “actual knowledge” is defined in ERISA.  Sulyma, 909 F.3d at 1073.  Examining the history of section 1104 and 1106 cases, the court noted that in 1987, Congress amended section 1113(2) to remove constructive knowledge from triggering the limitations period.  Id.  The Ninth Circuit found that the district court erred when it inferred that Sulyma had actual knowledge merely because he received Fund documents that disclosed its investment strategy.  Id.  Such an inference is akin to constructive not actual knowledge.  Id.  The court explained, “the statutory phrase ‘actual knowledge’ means what it says: knowledge that is actual, not merely a possible inference from ambiguous circumstances.”  Id. at 1076 (quoting Ventura Content, Ltd. v. Motherless, Inc., 885 F.3d 597, 609 (9th Cir. 2018), cert. denied.).  “Actual knowledge,” the court reasoned, “must mean something more than simply knowledge of the underlying transaction, which does not necessarily disclose the nature of the breach.”  Id. at 1076.  Therefore, Sulyma’s knowledge regarding the Fund’s allocations could not be inferred from Intel’s disclosures.

The court noted its split with the Sixth Circuit’s holding in Brown v. Owens Corning Investment Review Committee, 622 F.3d 564, 571 (6th Cir. 2010).  In Brown, the Sixth Circuit held that “when a plan participant is given specific instructions on how to access plan documents, their failure to read the documents will not shield them from having actual knowledge of the documents’ terms.”  Id.   The Ninth Circuit disagreed with this reasoning, stating that plan participants under Brown are charged with constructive knowledge, not actual knowledge.  Sulyma, 909 F.3d at 1076.  Constructive knowledge is insufficient to trigger the statute of limitations because Congress specifically amended ERISA to repeal it from section 1113(2). Id.

Finally, the court rejected Intel’s argument that there are “strong policy reasons” to concluding that the actual knowledge standard has a broader meaning.  Id.  The court disagreed, positing that Sulyma could just as easily argue policy reasons favoring a narrow interpretation of the actual knowledge standard to “promote fiduciary accountability.”  Id.  The court declined to insert itself in the policy debate, instead leaving it to Congress to decide.  Therefore, the Ninth Circuit held that for a defendant to prevail on a statute of limitations defense on a section 1104 claim, “[it]must show that there is no dispute of material fact that the plaintiff was actually aware that the defendant acted imprudently.”  Id.

The Sulyma decision is significant because it prevents fiduciaries from prematurely starting the statute of limitations by inundating an employee with lengthy plan disclosures and later arguing that the employee was on notice of potential ERISA violations.  While it is important to review documents impacting major financial decisions, employees may not know that a fiduciary has breached its duty of care until the consequences materialize.  This decision provides further clarity to ERISA litigants and levels the playing field for employees who discover a breach of fiduciary duty years after receiving plan documentation.

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