February 25, 2020

Intel Corp. Investment v. Sulyma

ERISA

Is ERISA’s Three-Year Limitation Period, Which Requires Actual Knowledge of a Breach of Fiduciary Duty, Met if the Plaintiff Has Access to Documents Needed to Determine that a Breach Has Occurred, but Has Not Read or Accessed Them?

CASE AT A GLANCE

Christopher Sulyma, a former employee of Intel, brought a putative class action against plan fiduciaries for overinvestment in hedge funds and private equity, which caused the actively managed portfolio to incur “massive losses and enormous excess fees.” Sulyma v. Intel Corporation Investment Policy Committee, 2017 WL 1217185 (N.D. Cal. Nov. 28, 2018). The district court granted summary judgment for Intel, holding that because the plaintiff had access to documents that described the plan investments, he had actual knowledge of the facts that formed the basis of the complaint more than three years before he filed suit. The Ninth Circuit then reversed, holding that the plaintiff did not have actual knowledge that his retirement funds were invested in this manner.

Intel Corp. Investment v. Sulyma
Docket No. 18-1116
Argument Date: December 4, 2019
From: The Ninth Circuit
by Jayne Zanglein
Western Carolina University, Cullowhee, NC

ISSUE

Does ERISA’s three-year limitation period begin to run when the plaintiff has access to documents needed to determine that a breach of fiduciary duty occurred but has no “actual knowledge” of the breach because the plaintiff has not read the documents?

FACTS

When Intel hired Christopher Sulyma in 2010, he was automatically enrolled in the Intel 401(k) plan and the Intel Retirement Contribution Plan. The 401(k) plan contributions were automatically invested in the Global Diversified Fund (Global Fund), which held private equity. Based on Intel’s recommendations, Sulyma invested his retirement plan contributions in the Target Date 2045 Fund (2045 Fund), which was a managed portfolio designed to meet the requirements of participants who would reach retirement age in 2045.

Sulyma sued the Intel plans, alleging that both plans overinvested in hedge funds and private equity investments as compared to other retirement portfolios. Intel countered that it heavily invested in these assets to stabilize the portfolio after the 2008 recession. Between 2011 and 2015, Intel increased its investments in hedge funds in the 2045 Fund by 1,300 percent to $3.5 billion, and in the Global Fund by tenfold to 2.4 billion. The rate of return on hedge-fund investments was 2.1 percent, less than the yield on Treasury bills. In comparison, targeted funds managed by Fidelity and Vanguard invested in index funds.

When Sulyma worked at Intel, he did not know what hedge funds and private equity were. Although he accessed Intel’s NetBenefits website on many occasions, and visited more than 1,000 web pages on the site, he did not recall reading the summary plan description or the Fact Sheets that indicated that the plans allocated a larger percentage of the funds to these higher-risk investments than comparable portfolios and that the downside of this strategy was potential underperformance when equity markets were rising. In particular, the 2045 Fund Fact Sheet disclosed that “the culprit in the [fund’s] recent relative underperformance” was its high exposure to hedge funds, which had “higher expense ratios” and would not benefit from a year-long stock rally. Similarly, the Global Fact Sheet warned that “the fund’s reduced market exposure [was] bound to serve as a drag when markets are experiencing rapid run-ups.” Sulyma learned that the Intel funds heavily invested in alternative investments when he read a newspaper account about Intel’s allegedly improper investment allocations and consulted with a financial adviser.

The Intel plans filed a motion to dismiss, which the district court converted into a motion for summary judgment and granted in favor of Intel.

ERISA has two limitations periods for breach-of-fiduciary-duty claims in the absence of fraud or concealment. The default is six years from “the date of the last act which constituted the breach or violation.” If the plaintiff has “actual knowledge of the breach or violation,” then a shorter limitation period applies and runs three years from the breach or violation.

Because Sulyma had actual knowledge of the investments more than three years before he filed suit, the district court held that the substantive claim was time-barred. Sulyma “had actual knowledge of the facts underlying his substantive claims because” the plan provided him with a link to the Qualified Default Investment Alternative Notice and summary plan description, and emails that provided information about the plan’s asset allocation, including hedge funds and private equity. The documents explained that the 2045 Fund invested 25 percent of its assets in hedge funds and 5 percent in private equity.

Account statements delivered to Sulyma’s house painted a different story. They did not mention hedge funds or private equity, but instead classified investments as stocks, bonds, and “short-term/other.” The statements did not mention fees. To understand that his contributions were being invested in hedge funds and private equity, Sulyma would have had to read the online documents. Also, the account statements did not direct Sulyma to the Fund Fact Sheets, a document that is not required by ERISA, and which explained the reason for the investment in alternative investments.

The court concluded that the online documents gave Sulyma actual notice, even though he did not bother to read them, and even though there were some inconsistencies between the online and paper documents as to the specific investment allocations.

On appeal, the Ninth Circuit reversed. The court noted that ERISA does not define “actual knowledge” and that the appellate courts differ on their interpretations. In Waller v. Blue Cross of California, 32 F.3d 1337 (9th Cir. 1994), the Ninth Circuit first addressed whether knowledge of an underlying transaction triggers the three-year limitations period. In Waller, plaintiffs sued the employer when it terminated the plan, purchased annuities to cover the remaining benefits due, and retained the balance of the plan assets. Because the plaintiffs alleged that the fiduciaries breached their duty when they purchased annuities to maximize the reversion of assets to the plan, the court held that the limitation period did not begin when the annuities were purchased, but instead started when the plaintiff realized that the purchase of the annuities was a breach. Where the transaction alone “does not disclose the nature of the breach,” something more than “bare knowledge of the underlying transaction” is needed: the plaintiff must be “actually aware of the nature of the alleged breach.” The court held that “the limitations period begins to run once the plaintiff has sufficient knowledge to be alerted to the particular claim.”

The Ninth Circuit differentiated “actual knowledge” from “constructive knowledge” and held that “‘actual knowledge’ means that the plaintiff is actually aware of the facts constituting the breach, not merely that those facts were available to the plaintiff.” The court held that Sulyma did not have actual knowledge because he did not read the documents. The court recognized that its interpretation is at odds with Brown v. Owens Corning Investment Review Committee, 622 F.3d 564 (6th Cir. 2010), which held that “[w]hen a plan participant is given specific instructions on how to access plan documents, [his] failure to read the documents will not shield [him] from having actual knowledge of the documents’ terms.” The Ninth Circuit held that, unlike Brown, where the Sixth Circuit equated actual knowledge with constructive knowledge, it was not willing to conflate two conflicting standards of knowledge, especially when ERISA was amended to repeal a constructive knowledge standard in 1987. The court concluded that ERISA means “what it says: to trigger the three-year limitations period, a plaintiff must have ‘actual knowledge of the breach or violation.’”

The appellate court held that Sulyma’s claim was not time-barred. Although Sulyma had actual knowledge that the plan invested in alternative investments, he did not have actual knowledge that his retirement assets were invested in this manner.

The Intel plans appealed to the Supreme Court.

CASE ANALYSIS

According to the legislative history, the purpose of ERISA’s disclosure requirements is to arm participants with enough information to effectively “police their plans.” Among the required disclosures is a Qualified Default Investment Alternative Notice that requires the administrator of a 401(k) plan to notify participants how the plan will invest their accounts if they elect not to choose their own investments. This document must be written in easily understood language and be supplemented with other annual disclosures that contain information about the fund’s performance and fees, also “written in a manner calculated to be understood by the average plan participant,” 29 U.S.C. § 2550.404a-5(e), and designed to offer “complete, but concise and user-friendly, information about their plan investment alternatives.” Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans, 75 Fed. Reg. 64,910, 64,915 (Oct. 20, 2010). Intel argues that the documents the 401(k) plan provided were easily understandable to Sulyma, who had a PhD in experimental physics, and gave Sulyma enough information to pursue ERISA’s remedies.

The Intel fiduciaries argue that the phrase “actual knowledge” must be interpreted with ERISA’s strict disclosure requirements in mind. These disclosure provisions “require plan administrators to ‘disclose’—to confer knowledge of—critical plan information to plan participants and to ensure that they actually have that knowledge in their possession.” ERISA’s disclosure obligations are “satisfied when the plaintiff receives mandatory disclosures that apprise the plaintiff of the facts that form the basis of his claim.”

In response, Sulyma gives a practical example of constructive knowledge and actual knowledge. A person who is given a book and reads it has actual knowledge of the contents of the book. If the person does not read the book, she does not have actual knowledge. If instead, she is told how to find the book at the library and does not look for it, she does not have actual knowledge. If she is sent a letter saying how to get the book, she still does not have actual knowledge: “Even if she should have tracked down the information, if she does not actually do so, she does not actually know what it says. Or to put the point in legal terms: She might be charged with having constructive knowledge, but no one would say that she has actual knowledge.” Such an interpretation would mean that a comatose plaintiff would have actual knowledge when the plan disclosures are delivered to her mailbox, even though it would be impossible for her to read them, an absurd consequence.

The Intel plans further argue that “a participant’s decision not to read the disclosures he has received should be treated as what it is: a willful decision to remain ignorant.” Intel contends that such blind ignorance is enough to satisfy the subjective knowledge requirement, or at least enough to suggest that the failure to learn the relevant fact is a product of ‘bad faith.’” See e.g., United States v. Zayyad, 741 F.3d 452 (4th Cir. 2014) (holding that subjective knowledge can be satisfied by willful blindness); Poffenberger v. Risser, 431 A.2d 677 (Md. 1981) (holding that the bad faith failure to learn a relevant fact can imply actual knowledge). Because Sulyma did not contest the fact that he received the relevant plan documents, Intel argues that he had actual knowledge of their content, regardless of whether he chose to read them.

In contrast, Sulyma argues that actual knowledge is a concept separate from willful blindness, which is often used in criminal statutes. It refers to the act of avoiding actual knowledge. Willful blindness is applicable if (1) the plaintiff subjectively believes “that there is a high probability that a fact exists” and (2) takes “deliberate actions to avoid learning of that fact.” Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011). If the Court adopts Intel’s interpretation of actual knowledge, then participants “who fail to read every line of every document sent by way of an emailed URL [will] not [be] said to be simply careless, or even reckless. Rather, they [will be] characterized as ‘willfully avoiding to learn the facts.’”

Finally, Intel argues that the Ninth Circuit incorrectly labeled the statute of limitations provision repealed in 1987 as a constructive knowledge requirement. Congress repealed a provision that triggered the three-year period if a report, such as an annual report (Form 5500), had been filed with the Secretary of Labor “from which [the plaintiff] could reasonably be expected to have obtained knowledge of such breach or violation.” Intel contends that this provision is not constructive knowledge, but rather, it imputes constructive knowledge only when the document is filed with the Secretary. In their amicus brief, National Association of Manufacturers and other groups argue that it would be bizarre for Congress to “charge[] plan participants with greater knowledge of hard-to-understand technical information reported to a third party (the Secretary) than of information disclosed to participants directly, ‘written in a manner calculated to be understood’ by them individually.”

Sulyma counters that Congress could have included language that allowed constructive knowledge by saying that the three-year limitations period begins when the plaintiff “acquired or should have acquired actual knowledge,” as it did for other ERISA violations. But Congress removed similar language in 1987. Sulyma charges Intel with ignoring the word “actual” in the phrase “actual knowledge,” which runs counter to the Supreme Court’s practice of “giv[ing] effect, if possible, to every clause and word of a statute.” Possession of a URL link to a document is not the same as actual knowledge of the contents of the document; it is merely constructive possession of documents. Sulyma points out that if the Court determines that Sulyma had actual knowledge, then every participant will be deemed to have “actual knowledge of every word of every document whose disclosure is mandated by ERISA the instant that it has been” properly disclosed, regardless of whether the participant has seen or read the document.

SIGNIFICANCE

The Intel fiduciaries claim that if the Supreme Court interprets “actual knowledge” to mean that the plaintiff has received and read the disclosing documents, then plaintiffs who “choose to ignore the very disclosures that are intended to enable participants to enforce their rights” will be rewarded. This construction will require defendants to rebut plaintiff’s claims that they did not read—or remember reading—the plan disclosures, an untenable burden. In effect, it would abolish the three-year limitations period and subject all claims, but those where the plaintiff admits actual knowledge, to the six-year limitation period that begins to run from “the last action which constituted a part of the breach or violation.” ERISA 413(2). More participants would bring breach-of-fiduciary cases against trustees of 401(k) plans, which are “particularly susceptible to claims of a fiduciary breach when investment funds do not perform as well as plan participants would like or when fees are higher than expected.” In its amicus brief, the National Association of Manufacturers argues that such an interpretation would give “participants a longer look-back period before deciding in hindsight whether to challenge the investment strategy.”

If the Supreme Court rules in favor of the plaintiff, then the costs of 401(k) plans will rise because “the need for individualized determinations of every plaintiff’s subjective state of mind will vastly increase the cost and burdens of litigation.” It also will make it impossible for a plan to dispose of the case on a motion for summary judgment, as courts would have to examine the plaintiff’s state of mind in each case. Plaintiffs would be able to “simply retreat behind the veil of ignorance, asserting that they did not read or do not specifically remember the relevant disclosures.” As a result, the six-year limitation period will apply, exposing the defendant to potential liability for longer periods.

In 2017, ERISA class action settlements reached almost $1 billion. If the Supreme Court doubles the limitations period, 401(k) plans will be exposed to greater damages by this “wait-and-see strategy [which] transfers all of the risk that an investment will underperform from the participant to the plan fiduciary”—the exact outcome plan sponsors tried to avoid en masse by terminating their defined benefit plans and offering defined contribution plans such as 401(k)s.

If the Court rules in favor of plaintiffs, then the participants—who are largely uneducated in investment strategies—will have a longer period in which to sue a defined contribution plan that does not clearly educate the participants about its investment strategies, and defined contribution plans will no longer provide the major benefit they offered plan sponsors: the transference of liability for underperformance to the participant.

Jayne Zanglein, a professor emeritus at Western Carolina University, specializes in pension and medical benefits, and authors ERISA Litigation, now in its seventh edition. She can be reached at 828.331.0866 and at jzanglein@wcu.edu.

PREVIEW of United States Supreme Court Cases 47, no. 3 (December 2, 2019): 19–22. © 2019 American Bar Association

ATTORNEYS FOR THE PARTIES

  • For Petitioner Intel Corporation Investment Policy Committee (Donald B. Verrilli Jr., 202.220.1100)
  • For Respondent Christopher M. Sulyma (Matthew W. H. Wessler, 202.888.1741)

AMICUS BRIEFS

In Support of Petitioner Intel Corporation Investment Policy Committee

  • National Association of Manufacturers (Mark Andrew Perry, 202.955.8500)

In Support of Respondent Christopher M. Sulyma

  • AARP and AARP Foundation (Dara Swartz Smith, 202.434.6280)
  • Pension Rights Center (Elizabeth Hopkins, 818.886.2525)
  • United States (Noel J. Francisco, Solicitor General, 202.514.2217)