Bland is the only Seventh Circuit case directly construing the fiduciary exception to the attorney client privilege, but Bland looked to other ERISA cases for explanation of what kinds of acts are fiduciary in nature. This court has done so as well, and concludes that the creation of the 401(K) Committee was not a plan management function.

Beesley v. Int’l Paper Co., 2008 U.S. Dist. LEXIS 43258 (S.D. Ill. June 2, 2008)

Exceptions to the attorney client privilege rank along side inadvertent loss of the privilege as anxious topics for defense counsel. ERISA presents a variant on a trust law exception to the privilege which has been given discussion in two recent cases.

In the case noted in the except above, the district court reviewed the Seventh Circuit’s view [Bland v. Fiatallis North America, Inc., 401 F.3d 779 (7th Cir. 2005)],  on the exception, stating:

Bland is the only Seventh Circuit case directly construing the fiduciary exception to the attorney client privilege, but Bland looked to other ERISA cases for explanation of what kinds of acts are fiduciary in nature. This court has done so as well, and concludes that the creation of the 401(K) Committee was not a plan management function.

The court quoted the following from Bland:

“ERISA fiduciaries are allowed to wear more than one hat, and when employers make design changes in plans, they are not wearing their fiduciary hats.” Ames v. American National Can Company, 170 F.3d 751, 757 (7th Cir. 1999), citing Lockheed Corp. v. Spink, 517 U.S. 882, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996). The design of a plan is not a fiduciary function. King v. National Human Resource Committee, Inc., 218 F.3d 719, 723-724 (7th Cir. 2000). [*8] In both Ames and King, the Seventh Circuit held that setting up a new plan as part of a sale of the employer’s assets was not a fiduciary function. Ames, 170 F.3d at 757; King, 218 F.3d at 723. On the other hand, decisions about the investment of plan money and the exercise of control over the management or disposition of plan assets do constitute administration of a plan. King, 218 F.3d at 724. Fiduciary standards do not apply when an employer “decides to establish, amend, or terminate a benefits plan, as opposed to managing any assets of the plan and administering the plan in accordance with its terms.” Fletcher v. Kroger Company, 942 F.2d 1137, 1139 (7th Cir. 1991)[internal citation omitted]. In Fletcher, the Seventh Circuit held that an employer’s “decision to provide Special Retirement Benefits to employees at specified locations was a design decision that did not implicate [employer’s] fiduciary duties under ERISA. Fletcher, 942 F.2d at 1139.

On the facts, presented the district court held that the information sought pertained to a plan amendment which in turn was a settlor function and thus not a fiduciary concern. As such, the fiduciary exception did not apply.

Hat tip to Rob Hoskins, Esq. for calling attention to yet another recent district court decision on, Fortier v. Principal Life Ins. Co., 2008 U.S. Dist. LEXIS 43108 (June 3, 2008), where the district court analyzed a fiduciary exception argument, noting:

A fiduciary exception to both privileges has been recognized in some circuits. Tatum v. R.J. Reynolds Tobacco Company, 247 F.R.D. 488, 493 (M.D.N.C. 2008)(collecting various circuit opinions)(internal citations and quotations omitted). “In the context of ERISA, courts have found that an ERISA plan fiduciary generally may not assert the attorney-client privilege against plan participants with regard to matters of plan administration.” Id. (internal citations omitted). “The fiduciary exception is grounded in the identity of interests between the fiduciary and beneficiary, and the fact that the beneficiary is the ‘real client’ of legal advice concerning plan administration.” Id. at 498. However, courts have limited the fiduciary exception by “permitting assertion of attorney client privilege where the communications between the plan administrator and its attorneys relate to non-fiduciary matters such as . . . legal advice for the plan administrator’s personal protection against plan beneficiaries.” Id. at 495.

The Fourth Circuit has not weighed in on the issue. As the magistrate judge noted:

The Fourth Circuit has not specifically recognized the fiduciary exception in the ERISA context. Id. at 494. District courts within the Fourth Circuit, however, have analyzed the fiduciary exception in relation to ERISA. In Coffman v. Metropolitan Life Insurance Co., a district court stated that the fiduciary exception is inapplicable “when an administrator is required to justify or to defend against a beneficiary’s claims made because of an act of plan administration. . . .” Coffman, 204 F.R.D. 296, 299 (S.D.W.Va. 2001)(internal quotations omitted). Likewise, in Tatum v. R.J. Reynolds Tobacco Company, another district court observed that the grounding for the fiduciary exception “vanishes where the fiduciary is faced with a threat of litigation and seeks legal advice for its own protection against plan beneficiaries . . .” Tatum, 247 F.R.D. at 498 (internal [*5] citations omitted).

The judge held the exception inapplicable, however, given the context of threatened litigation, stating that

Here, Defendant is an insurance company providing contractual claims administration services to a fully insured long term disability (”LTD”) plan. It reviews and decides LTD benefit claims and then pays benefits on approved claims from its own assets. Moreover, Defendant contends that “all of the challenged communications on the privilege log occurred after [Defendant] denied Plaintiff’s claim . . . , and after Plaintiff threatened [Defendant] with litigation.” (Def. Mem., 9). In response to Plaintiff’s threat of litigation Defendant “began requesting and receiving counsel from its legal department on its legal rights and responsibilities with respect to Plaintiff’s LTD claim.” Id. at 2. All of the communications to which Plaintiff seeks to apply the fiduciary exception related to the threatened litigation. Id. at 9. Based on these circumstances, the undersigned finds that the fiduciary exception does not apply. Accordingly, Plaintiff’s motion to compel is DENIED in all respects.

Note: Should the context of threatened litigation affect the applicability of the fiduciary exception? That seems at odds with the basis for the exception in the first place. The status of the defendant, not the context of litigation, should control, though one may arguably affect the other.

Third Circuit – Noted by the magistrate judge was a Third Circuit opinion –

In addition, the Third Circuit has indicated that the fiduciary exception does not apply with equal force to all ERISA fiduciaries. Wachtel v. Health Net, Inc., 482 F.3d 225, 233-234 (3rd Cir. 2007). Specifically, the Wachtel Court held that “significant differences exist between insurance companies fiduciaries . . . and other ERISA fiduciaries . . . “, such as an employer who acts as a plan fiduciary. Id. at 234. Ultimately, the Watchel Court determined that it would be “paradox[ical]” to apply the fiduciary exception “to an insurer which is acting as a fiduciary in deciding claims under an ERISA plan.” Id. at 237-238. In reaching this decision, the Third Circuit also noted that the fiduciary exception typically did not apply when a fiduciary sought the advice of counsel for its own personal defense in contemplation of adversarial proceedings against its beneficiaries. Id. at 233.

For more discussion of this topic and the Third Circuit case noted above, see Wachtel v. Health Net, Inc., — F.3d —-, 2007 WL 958572 (C.A.3 (N.J.)) (April 2, 2007), discussed here:

History Of The Exception – See, Donovan v. Fitzsimmons, 90 F.R.D. 583, 585 (N.D.Ill.1981). In that case, the district court held that, where beneficiaries sue their fiduciaries alleging breaches of fiduciary duty, the attorney-client privilege does not attach to legal advice rendered to the fiduciaries for assistance in the performance of fiduciary duties.

The Donovan court found an analogy between trust law and ERISA. The Third Circuit noted that this analogy was apt inasmuch as the Supreme Court has recognized that fiduciary duties under ERISA “draw much of their content from the common law of trusts, the law that governed most benefit plans before ERISA’s enactment.” (citing Varity Corp. v. Howe, 516 U.S. 489, 496 (1996)). See also Washington-Baltimore Newspaper Guild, Local 35 v. The Washington Star Co., 543 F.Supp. 906 (D.D.C.1982).

More On Fourth Circuit View – Rob notes:

although the Fourth Circuit has never directly addressed the issue it has been touched upon at least once in my Colucci case. Although I never argued that it did the panel gratuitously stated: “Moreover, Colucci fundamentally misconstrues Butash’s participation in the Administrative Committee’s consideration of his appeal. An attorney who advises his clients of their fiduciary obligations does not constructively become the beneficiary’s representative.” Here is the link: