Shifting Responsibility: Who Bears the Burden of Proving or Disproving Causation in ERISA Actions?

Background

The Employee Retirement Income Security Act (ERISA) imposes stringent fiduciary duties upon the trustees of employee benefit plans, essentially regulating the relationship between employer and employee. To recover losses under ERISA, a plaintiff must prove that the loss resulted from the fiduciary’s breach. In Brotherston v. Putnam Investments, LLC (2018), the plaintiffs in a class action, sued their former employer, Putnam Investments, for breach of fiduciary duties. The members of the class participated in Putnam’s defined-contribution 401(k) retirement plan. The plaintiffs alleged that Putnam “breached its fiduciary duties by blindly stocking the Plan with Putnam-affiliated investment options merely because they were proprietary,” a clear violation of ERISA. The First Circuit ruled for the plaintiffs, vacating the district court’s judgment in favor of the defendants.

The Issue

Three elements must be proven for a successful ERISA claim: breach, loss, and causation. The split among the circuits specifically revolves around the third element of causation. Once a plaintiff has established loss under ERISA, do they also bear the burden of proving causation between the breach and loss, or rather does the defendant bear the burden of disproving any causal link?

The Split

The circuit courts are split on the issue of whether the plaintiff bears the burden of proving, or the defendant bears the burden of disproving, causation once a plaintiff has established loss “in the wake of an imprudent investment decision.” In Brotherston, the First Circuit joined the Fourth, Fifth, and Eighth Circuits, by handing down a ruling that favors employees, holding that “once an ERISA plaintiff has shown a breach of fiduciary duty and loss to the plan, the burden shifts to the fiduciary to prove that such loss was not caused by its breach, that is, to prove that the resulting investment decision was objectively prudent.”

The First Circuit’s reasoning for adopting the burden-shifting approach was two-fold. First, in the past, the Supreme Court has generally allowed for many exceptions to what is called the “ordinary default rule.” This rule allows courts to presume that the burden rests on plaintiffs to prove the critical aspects of their claims. As a matter of fairness, the ordinary default rule does not apply when the presumption would ultimately force the litigant to “establish facts peculiarly within the knowledge of his adversary.” In Brotherston, the fiduciary possessed the knowledge of the retirement plan and was found to be in a better position, when compared with the beneficiaries, to bear the burden. Second, it is common practice for the Supreme Court to look to the common law of trusts for interpretive guidance in the absence of “explicit textual direction” from the ERISA statute. “The common law of trusts – like ERISA – classifies causation as an element of a claim for breach of fiduciary duty. It also places the burden of disproving causation on the fiduciary once the beneficiary has established that there is a loss associated with the fiduciary’s breach. This burden allocation has long been the rule in trust law.”

In contrast, the Sixth, Ninth, Tenth, and Eleventh Circuits’ standard favors the fiduciary. In these circuits, the burden does not shift to the defendant to prove that the investment decision was “objectively prudent.” Rather, the plaintiff bears the responsibility of proving that the defendant fiduciary’s alleged breach caused the plaintiff’s loss. Thus, unlike in circuits that adopt a more plaintiff-friendly approach, the defendant has no obligation to disprove the alleged causation. These circuits hold firm in the belief that the beneficiary bears the burden because the party alleging the loss should be responsible for proving the causation.

Moving Forward

Not surprisingly, members of the business community, such as the Investment Company Institute, the American Council of Life Insurers, and the U.S. Chamber of Commerce support Putnam Investment LLC in the case of Brotherston. These organizations have submitted petitions for writ of certiorari, urging the Supreme Court to take on the case. For more general information on fiduciary duties under ERISA, see “ERISA Compliance FAQs: Fiduciary Responsibilities.”

The Proof is in the Pleading: When is Admissible Evidence Required to Support Class Certification?

BACKGROUND

Rule 23 of the Federal Rules of Civil Procedure requires plaintiffs in a class action suit to prove to a court that “questions of law or fact common to class members predominate over any questions affecting only individual members” to proceed in a class action lawsuit. Although the Supreme Court has never explicitly held that the plaintiff must do so using admissible evidence, in Wal-Mart Stores, Inc. v. Dukes (2011), the Court said it “doubt[ed]” that Daubert does not “apply to expert testimony at the certification stage of class-action proceedings.” Daubert governs the admissibility of an expert witness’s testimony in federal court.

In Sail v. Corona Regional Medical Center (2018), the Central District of California refused to grant certification to a class because it would not consider evidence that would not be admissible at trial during the class certification proceedings. In May, the Ninth Circuit reversed, holding that a court may consider inadmissible evidence when deciding whether to grant a class certification. The Ninth Circuit reached this decision because of the challenges a plaintiff faces in obtaining admissible evidence. The Ninth Circuit explained that “the evidence needed to prove a class’s case often lies in a defendant’s possession and may be obtained only through discovery.” In other words, requiring that a plaintiff provide evidence—prior to discovery—that is in the defendant’s possession would be an unreasonable standard.

On November 1, the Ninth Circuit refused a petition for a rehearing en banc. Judge Carlos Bea, along with four other judges, dissented. In a sharply worded dissent, Judge Bea wrote that the Ninth Circuit fell “on the short side of a lopsided circuit split,” noting that only one other circuit agreed with the Ninth Circuit’s decision.

THE ISSUE

Must the evidence presented during class certification proceedings be admissible at trial?

THE SPLIT

The Eighth Circuit and now the Ninth Circuit allow courts to consider inadmissible evidence at the class certification stage. Conversely, the Second, Third, Fifth, and Seventh Circuits require admissible evidence for class certification. Additionally, the Sixth Circuit and the Eleventh Circuits held that they require admissible evidence, but did so in unpublished opinions.

The Eighth Circuit, in In re Zurn Pex Plumbing Products Liability Litigation (2011), held that evidence for class certification does not have to be admissible at trial. However, the Eighth Circuit noted that a class’s status could change after discovery, writing that “exhaustive and conclusive Daubert inquiry before the completion of merits discovery cannot be reconciled with the inherently preliminary nature of pretrial evidentiary and class certification rulings.” Additionally, the district court in this case allowed the evidence only after a “focused Daubert analysis which scrutinized the reliability of the expert testimony in light of the criteria for class certification and the current state of the evidence.” This rule, according to Judge Bea, is more stringent than the Ninth Circuit’s new standard.

The Second, Third, Fifth, Seventh Circuits require admissible evidence during the class certification stage. The Third Circuit explained that a party cannot meet the standard articulated in Rule 23 through potentially inadmissible evidence  In re Blood Reagents Antitrust Litig, (2015). Similarly, these other circuits also require that a district court determine whether or not evidence is admissible at the certification stage. To support this opinion, these Circuits often cited the Supreme Court case Comcast Corporation v. Behrend (2013) which held that a plaintiff must have “evidentiary proof” to satisfy Rule 23.

LOOKING FORWARD

Although the Supreme Court has not explicitly ruled on this issue, now that the gap between the circuits has widened, they might have reason to do so. Until then, a plaintiff should be thoughtful when selecting a forum in which to bring a class action lawsuit.