Andrew S. Williams
Much has been written about excess fee claims involving 401(k) and 403(b) retirement plans. In fact, a St. Louis law firm has specialized in filing class action excess fee cases around the country. So, the personal risk to retirement plan fiduciaries has been well documented.
But what about the fiduciaries (employers, the employees involved in plan administration, and plan trustees) of a non-retirement (”welfare”) plan, like a group health plan? Isn’t that a different kettle of fish? Well, recent U.S. Department of Labor (DOL) claims against welfare plan fiduciaries shed some light on that.
The group health plan world is divided into two camps: (1) self-insured plans that are subject to ERISA (and DOL oversight), and (2) fully-insured plans that are subject to regulation by state insurance commissioners. Most larger employers have adopted self-insured plans so the fiduciaries of those plans need to be mindful of DOL enforcement activities.
In Acosta v. Chimes District of Columbia, Inc. et al. (DC. Md. 2019), the DOL sued fiduciaries of a plan that provided group health coverage to its employees as well as other welfare benefits. The DOL alleged that the plan fiduciaries generally failed to properly select and supervise plan service providers, which resulted in excess fees being charged to the plan. The court agreed with the DOL’s premise that welfare plan fiduciaries generally had the same duty to select and monitor the performance (and fees) of plan service providers as the fiduciaries of defined contribution retirement plans. However, on the facts presented at trial, the court found that the defendant fiduciaries had properly discharged their duties to the plan because, among other things, the fees charged to the plan were in fact “reasonable.”
Although the DOL lost the Chimes case, welfare plan fiduciaries should take little comfort. Absent an indication that the DOL has changed its enforcement posture, it follows that welfare plan fiduciaries are now exposed to claims that the performance of their fiduciary duties has been inadequate and that they are personally liable for any resulting plan losses. Also, if the DOL is successful with these kinds of claims, private attorneys may not be far behind in seeking similar relief on behalf of plan participants.
Group health plan fiduciaries may also want to consider alternative measures to reduce health claim expenses on a long-term basis. For example, consider the program offered by Inspera Health (a respected, long-time personal client), which is described on the Employee Benefits Research Institute website in a webinar titled The Problem with a One-Size-Fits-All Approach to Health Care Claims.
Welfare plan fiduciaries need to review plan operations and fees incurred on a periodic basis, and document their review process. Like any fiduciary conduct, the first line of defense is to have a documented compliance process in place. Although not required of fiduciaries by the court in Chimes, a good way to check on service provider performance and fees is a competitive bidding process with a formal request for proposal (RFP) or otherwise. This approach is recommended but not required by the DOL. Other protective measures, including maintaining fiduciary insurance, may also be warranted.
Beverly A. Berneman
In the U.S., each side usually pays their own attorney’s fees. This is called the American Rule. Until about six years ago, that rule applied to appeals from USPTO decisions. So, if an applicant appealed the USPTO’s decision not to issue a patent or register a trademark, the applicant paid the applicant’s attorney’s fees and the USPTO paid its staff attorneys their salaries. Then about 6 years ago, the USPTO decided anyone who appealed an adverse ruling should have to pay the USPTO’s attorneys’ fees as well as their own.
It all started when the USPTO filed a request for an award of more than $36,000 in attorney's fees in a little-known trademark appeal filed by a man named Milo Shammas. The USPTO justified this request by pointing to language in the statute that applicants who file an appeal to the district court have to pay the USPTO “expenses”. The USPTO argued that “expenses” includes attorneys’ fees. To the horror of the Intellectual Property bar, the request was granted. Then the sluices opened and the USPTO started demanding attorney’s fees left and right.
This state of affairs lasted just this last December 2019 when the U.S. Supreme Court ruled against the USPTO. In Peter v. Nanktwest, Inc., the applicant appealed the USPTO’s rejection of a patent application for a method of treading cancer. The district court denied the USPTO’s motion to recover its legal fees as expenses but granted the request for recovery of expert fees. The Deputy Director of the USPTO appealed to the Federal Circuit Court of Appeals. Federal Circuit affirmed. So the Deputy Director appealed to the U.S. Supreme Court.
Justice Sotomayor, writing of the Court, didn’t pull any punches. Justice Sotomayor called the “American Rule” the bedrock principal that each party pays its own attorney’s fees, win or lose. The only exceptions are when a contract or statute provides otherwise. Statutes that provide for an award of attorney’s fees say so explicitly. Nothing in the Patent Act suggests that the USPTO can send an attorney’s fee bill to an opposing appellant. As a factual matter, history was on the appellant’s side as well. Up until 2013, the USPTO never paid its personnel from sums collected from adverse parties. So the USPTO has to pay its own attorney’s fees.
WHY YOU SHOULD KNOW THIS. Certainly, this is a victory for patent and trademark applicants. The process of protecting these types of Intellectual Property can be quite costly. The added burden of the USPTO’s attorney’s fees would have changed the value proposition for rejected applications and damaged the rights of the applicant/appellants. But there’s something else to note here. Often, when parties are gearing up for a dispute, the client asks the attorney, “Can I make the other guy pay your fees”. The answer is spelled out in Justice Sotomayor’s opinion. The answer is “yes” if a statute or contract has a fee shifting clause. But, even then, how the clause is phrased can taketh away from anything that had been giveth. For instance, in a statute, the attorney’s fees recovery may only be available only in “exceptional cases”. In a contract, attorney’s fees recovery may only be available to the “prevailing party”. So devil is in the attorney’s fees clause details.
Beverly A. Berneman
We’ve covered denial of insurance coverage for trade secret misappropriation and affirming insurance coverage for copyright infringement. Now we turn our attention to the newer kid on the insurance block, cyber insurance.
AIG Commercial Insurance Co. offered a “Specialty Risk Protector” insurance policy. Larger companies could bundle a number of coverages in one policy such as coverage for specialty errors and omissions, network security and privacy, event management, crisis fund, network interruption, cyber extortion, media for publishers and broadcasters, media content, and employed lawyers’ professional liability.
SS&C Technologies Holdings, provides business process services fund administration to the financial industry all over the world. SS&C had a Specialty Risk Protector insurance policy from AIG. While providing fund managing services to one its clients, Tillage Commodities Fund LP, SS&C received six instructions to transfer Tillage’s funds totaling $5.9 million to bank accounts in Hong Kong. The problem? SS&C was the victim of spoofing. That’s where nefarious persons or entities mimic an email address and even the look of an email to fool someone into transferring money or property that evaporates into the pocket of the nefarious.
A few days after the transfers, SS&C discovered that it had been the victim of a spoofing. It immediately notified Hong Kong’s police and its insurer, AIG, of a potential lawsuit.
Sure, enough, Tillage filed suit against SS&C. AIG agreed to defend the suit but reserved the right to deny coverage and the cost of defense if the loss resulted from one of the insurance policy’s exclusions, including a “fraud” exclusion. The “fraud” exclusion flag had been raised because Tillage alleged in its complaint that an employee of SS&C had participated in the spoofing scheme. After the case was settled without an admissions, AIG denied coverage.
SS&C sued AIG for breach of contract and breach of the implied covenant of good faith hand fair dealing (a/k/a “bad faith”). The court denied AIG’s motion to dismiss. AIG’s chief argument was that it could deny coverage when fraud is involved, whether or not the insured committed the fraud. The court rejected that argument. Moving on the lack of good faith count, the court used the policy’s language and AIG’s reservation of rights letter against it. It was clear that AIG could only deny coverage if there was an adjudication that an employee had been involved in the fraud. Since the case was settled without admissions, AIG could tie a SS&C employee to the Tillage loss. So denying coverage could be considered bad faith.
WHY YOU SHOULD KNOW THIS. The court was able to interpret the policy exclusions in favor of the policy holder. That makes sense. SS&C had a reasonable expectation of coverage a fraud was committed by a third party. The bottom line is that an insurance policy is a contract. It should be interpreted like any other contract. Insurance companies who contort policy language to deny coverage can find themselves defending a bad faith claim.
Beverly A. Berneman
Last week’s blog covered a situation where an insurance company wasn’t required to cover the costs of defending a misappropriation of trade secrets case. This week’s blog covers a situation where the insurance company was required to cover the cost of defense of an Intellectual Property dispute.
Photographers and stock photo owners filed 35 separate copyright suits against McGraw-Hill Education Inc. McGraw-Hill had paid for the right to use the images in textbooks and other publications. But the plaintiffs alleged that the images were used “in ways not completed by the parties”. McGraw-Hill settled 27 suits and 8 are still pending. McGraw-Hill’s attorney’s fees up to this point are estimated to be over $45 million.
McGraw-Hill tendered the defense of these claims to its insurer, Illinois National Insurance, an AIG subsidiary. AIG covered claims for about 3 years and then denied coverage on a going forward basis. McGraw-Hill brought a declaratory judgment action asking the court to affirm that AIG had to defend the cases.
The trial court denied both McGraw-Hill and AIG’s motion for summary judgment. On appeal, the denial of McGraw-Hill’s motion for summary was overturned. The Appellate Court looked at the relevant policy provision regarding copyright infringement. The policy barred coverage only where it is “judicially determined” that copyright infringement was intentional and was carried out by a senior vice president, or someone more senior. AIG hadn’t sought or obtained the required judicial determination. AIG tried to use the “fortuity doctrine” to deny coverage. According to AIG, the “fortuity doctrine” allows an insurance company to deny coverage for “losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur”. The Appellate Court rejected AIG’s defense holding that it would render the insurance policy illusory.
So, for now, AIG must cover McGraw-Hill’s hefty copyright infringement defense bills.
WHY YOU SHOULD KNOW THIS. An illusory contract is one where the promise of performance by one party is so insubstantial that it really isn’t a promise of performance at all. Exclusions in insurance policies are common. But exclusions that basically deny coverage for everything, don’t give the insured anything and so are illusory. Most courts will strictly interpret exclusions. And, usually, this ends up in the insurance company’s favor. However, in this case, AIG went a little too far in trying to exclude coverage.
This is all well and good. But what happens when you have cyber-insurance and there’s a multi-million loss? We’ll see in my next blog post.
Beverly A. Berneman
If you like Sour Jacks and/or Welch’s Fruit Snacks, a lot goes on behind the scenes for your sugar pleasure. Promotion In Motion, Inc. or PIM holds the formulas and manufacturing process for the sugary snacks as trade secrets. PIM also owns the design of the packaging. Ferrara Pan Candy Co. manufactured and sold the sugar bombs for PIM from 1990 to 2014 pursuant to a confidentiality agreement and license.
In 2014, Ferrara merged with another company and formed the current iteration of Ferrara. The new Ferrara signed a new confidentiality agreement with PIM for the formulas and manufacturing process of the sugar delivery systems.
In connection with the merger, Ferrara cancelled its primary insurance policy with Liberty Mutual Fire Insurance Company, and its umbrella general liability insurance with Liberty Insurance Corp.
In 2015, PIM sued Ferrara alleging that Ferrara had stolen trade secrets to produce and market competing sugar fix enablers named Market Pantry, Black Forest and Sour Buddies. PIM also alleged that Ferrara’s packaging infringed on PIM’s trade dress. Ferrara tendered its defense to Liberty. Liberty agreed to take on the defense with a reservation of rights. Liberty brought a declaratory judgment action to determine if Liberty was obligated to cover the defense.
Then Ferrara came down from its insurance coverage sugar high. First, after discovery closed, Liberty withdrew from the defense of all but the trade dress infringement count. Liberty argued that trade secret misappropriation and breach of a confidentiality agreement weren’t covered by insurance. Then, Liberty obtained a judgment that it wasn’t obligated to cover the trade dress infringement count. The judgment was affirmed on appeal. The appellate court held that the alleged infringing acts took place post-merger. And there was no coverage post-merger because Ferrara had cancelled the policies. Ferrara now has to pay back all of the fees Liberty paid in defense of the PIM litigation.
WHY YOU SHOULD KNOW THIS. Most business insurance policies will cover claims for advertising injury. Advertising injury is very limited. Trade secret misappropriation is not an advertising injury. Breach of a confidentiality agreement is not advertising injury either. So Liberty didn’t have to cover the defense of those claims. Trade dress infringement can fall into the category of advertising injury. But Ferrara cancelled the policies. Was this an oversight during the merger process? Could be. But, the bottom line is that by cancelling the policies after the merger and not obtaining new insurance, Ferrara lost the ability to reach into the insurance sugar bowl for the defense of PIM’s claims.