James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

Does the recent Sixth Circuit decision in Johnson v. Parker-Hannifin Corp.¹ (Parker-Hannifin) indicate a posssible 2025 trend in fiduciary litigation in favor of plan participants? Parker-Hannifin revisits the issue of pleading plausibility and the question of which party has the burden of proof in ERISA litigation. Combined with SCOTUS’ recent decision to hear the case of Cunningham v. Cornell² (Cornell}, and the liklihood that the Court will examine the burden of proof issue in deciding the Cornell case, 2025 could be a landmark year in fiduciary litigation, especially in terms of greater protection for plan particiapants as a result of standards promoting greater consistency in the legal system’s interpretation and enforcement of ERISA.

In reviewing the Parker-Hannifin decision, specifically the dissenting opinion filed by one of the three Sixth Circuit judges, I believe the majority opinion arguably carries even greater weight in supporting an emerging trend favoring more equitable treatment for plan participants, if handled properly by the plaintiffs’ bar. The basic issue in Parker-Hannifin was the typical pleading issues with regard to an alleged breach of fiduciary duty due to the original selection and a failure to properly monitor and remove funds that proved to be imprudent.

The Sixth Circuit’s majority decision stresses the fact that in ERISA actions alleging a breach of fiduciary prudence, the focus is on propriety of the process employed by the plan sponsor in both selectiong and monitoring the investment, not the ultimate performance of the investment itself.

The duty of prudence is a process-driven obligation.³ When we enforce the duty of prudence, we focus on the fiduciary’s “real-time decision-making process, not on whether any one investment performed well in hindsight.”⁴ . For an imprudent-retention claim, we ask whether the fiduciary, at the time it chose to retain an investment, “employed the appropriate methods to investigate the merits of the investment.” ⁵

The ultimate question is whether the fiduciary engaged in a reasoned decision-making process when it decided to retain the investment. (“This statutory duty of prudence establishes ‘an objective standard’ that focuses on ‘the process by which’ decisions are made, ‘rather than the results of those decisions.’”⁶

This is because “[n]o matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences. . . . If plaintiffs cannot state a claim without pleading facts which tend systemically to be in the sole possession of defendants, the remedial scheme of the statute will fail, and the crucial rights secured by ERISA will suffer.” “Plausibility requires the plaintiff to plead sufficient facts and law to allow ‘the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.. Because imprudence “is plausible, the Rules of Civil Procedure entitle” the plaintiffs “to pursue [their imprudence] claim . . . to the next stage.”⁷

This is exactly the same argument that both the Second Circuit’s Brotherston decision and the Solicitor General’s amicus brief made in connection with the Brotherston case..

This also the same argument that the Sixth Circuit made in the earlier TriHealth decision, with Chief Judge Sutton addressing the inequitability of dismissing ERISA actions without allowing some level of discovery:

Various court and judges, most notably Federal Judge Sidney H. Stein of the Southern District of New York, aka the federal court for Wall Street, have made the point that that at the pleading stage, it is too early to make these judgment calls. no basis for crediting one set of reasonable inferences over the other. Therefore, when either assessment is plausible, the Rules of Civil Procedure entitle [the three employees] to pursue [their imprudence] claim (at least with respect to this theory) to the next stage..discovery.

But at the pleading stage, it is too early to make these judgment calls. ‘In the absence of further development of the facts, we have no basis for crediting one set of reasonable inferences over the other. Because either assessment is plausible, the Rules of Civil Procedure entitle [the three employees] to pursue [their imprudence] claim (at least with respect to this theory) to the next stage….’⁵

This wait-and-see approach also makes sense given that discovery holds the promise of sharpening this process-based inquiry. Maybe TriHealth ‘investigated its alternatives and made a considered decision to offer retail shares rather than institutional shares’ because ‘the excess cost of the retail shares paid for the recordkeeping fees under [TriHealth’s] revenue-sharing model….’ Or maybe these considerations never entered the decision-making process. In the absence of discovery or some other explanation that would make an inference of imprudence implausible, we cannot dismiss the case on this ground. Nor is this an area in which the runaway costs of discovery necessarily cloud the picture. An attentive district court judge ought to be able to keep discovery within reasonable bounds given that the inquiry is narrow and ought to be readily answerable.⁶

To quote the famous Strother Martin, from the movie “Cool Hand Luke,” it seems that what we have here is a failure to communicate.” I say that because the dissenting opinion in Parker-Hannifin makes the following statements

That distinct question starts with the pleading rules in the ERISA context. But we must also account for Congress’s desire to encourage the formation of these plans. See Conkright, 559 U.S. at 517. And courts would undercut that goal if they oversaw ERISA cases in a way that generated high “litigation expenses” even for merit.⁷

Plan administrators in this circuit should be warned: if their plans are big enough and if they have not obtained the least-expensive shares, they should prepare for “expensive” discovery no matter the reasons for selecting the share classes that they did. That outcome upends Congress’s “careful” equilibrium between protecting beneficiaries and minimizing litigation costs^.8

The majority decision effectively rebuts the dissent opinion’s allegations by pointing out that :

The dissent would apply an inappropriately exacting standard, requiring that Johnson “plausibly establish” that Parker-Hannifin imprudently failed to obtain lower fees. See Dissenting Op. at 41. But Johnson need only plausibly allege facts supporting such an inference and need not establish anything at this stage.⁹

The dissent’s warning about “expensive” discovery is the typical “red herring” that the financial service industry throws out there to oppose any suggestion of equitable discovery. In this case, Judge Sutton already discounted that ruse in his TriHealth opinion. A court could control costs by simply requiring “controlled” discovery, where all discovery requests must be approved by the court.

Another option would be “limited” discovery. In ERISA actions, the discovery would be limited to materials used by the plan’s investment committee in selecting the investment options within a plan. This type of discovery request would typically involve documentation such as minutes from investment committee meeting and other documentaiton providing information as to the prudent process used by the plan in selecting and/or monitoring the plan’s investing options. Assuming that any such documentation exists at all, the costs incurred in providing such discovery would be the costs of copying same.

Based upon my experience, I submit the real reason that the plans oppose any type or amount of discovery is to conceal the fact that (1) the investment committee never developed a prudent process for managing the plan, but rather blindly accepted the recommendtions of the plan adviser or other conflicted, and (2) the fact that the plan never conducted the independent investigation and evaluation required under ERISA, but blindly accepted the recpommendations of others.

The courts have consistently held that the failure of a plan to conduct the required investigations and evaluations is a per se violation of their fiduciary duties under ERISA. GREGG and Liss “black letter law” quote. That would explain plans’ and the financial services’s vehement and consistent objection ro any suggestion of any amount of meaningful discovery.

The recognition by the Sixth Circuit of the inequiteable pleading requirements without allowing some amount of discovery is an example of theneeded fundamental fairness to ensure that ERISA cases are decided on the merits in furtherance of ERISA’s stated goals and guarantees, not on legal technicalities.

SCOTUS recently agreed to hear the Cunningham v. Cornell case, which also involves sufficiency of pleading and burden of proof issues. Hopefully, SCOTUS will seize the opportuitiy to provide much uniform guidance on these issues to ensure that that courts’ interpretations and enforcement of ERISA are more consistent and, thus, fundamentally fairer toward employees and the rights and protections guaranteed to them under ERISA.

Notes
1. Johnson v. Parker-Hannifin, No. 24-3014 (6th Cir.) 2024, at 8. (Parker-Hannifin)
2. Cunningham v. Cornell.
3. Parker-Hannifin, at 8.
4. Parker-Hannifin at 8.
5. Forman v. TriHealth, Inc. 40 F.4th, 443, 450 (6th Cir. 2022). (TriHealth)
6. TriHealth, 450.
7. Parker-Hannifin, at 33.
8. Parker-Hannifin, at 46.
9. Parker-Hannifin, at 21.

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