John David Thompson | 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.”