Transcript

IN THE SUPREME COURT OF THE UNITED STATES

MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, ET AL., Petitioners v. DORIS RUSSELL

No. 84-9

April 24, 1985

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 1:00 o'clock p.m.

APPEARANCES:

JOHN E. NOLAN, JR., ESQ., Washington, D.C.; on behalf of Petitioners.

BRAD NALEY BAKER, ESQ., Hermosa Beach, Cal.; on behalf of Respondent.

PROCEEDINGS

CHIEF JUSTICE BURGER: Mr. Nolan, you may proceed whenever you're ready.

ORAL ARGUMENT OF JOHN E. NOLAN, JR., ESQ. ON BEHALF OF THE PETITIONERS

MR. NOLAN: Thank you. Mr. Chief Justice, and may it please the Court:

In presenting the reargument for Petitioner this afternoon, I would like to review briefly the facts and the law, to take some time to comment on those issues which were of interest to the Court on the argument of this case, and to comment briefly on the Lewick case which the Court decided last week and its relevance to this case.

This case presents two very important issues: the first, whether punitive damages are available under ERISA; and the second, whether consequential damages in this instance, including damages for emotional and mental distress, are available under ERISA.

The district court, going with the great weight of authority, held that they were not. The United States Court of Appeals for the Ninth Circuit reversed, holding they were, and this Court granted certiorari.

The Respondent Russell was an employee of Mass Mutual, a claims examiner in Los Angeles, when in May of 1979 she was disabled with a back condition. She began drawing benefits under the salary continuation plan and those benefits continued until October of 1979, when, on the basis of an examination that said that she was not physically disabled, the salary payments were discontinued.

When she was notified of that, she responded, saying that she wished to provide additional information and that she wished to appeal. She did provide that information in a letter under date of November 27th, 1979, and it included a psychiatrist's report which said that her disability was psychosomatic rather than orthopedic.

On the basis of that report -- that report and her letter of November 27th, was treated as a formal appeal, and on the basis of the report there was another psychiatric examination which reinforced the conclusions of the first. The second examination was dated February 15th of 1980.

On March 11th of 1980, the plan administrator acted, reversing the denial of the claim and restoring retroactively all of the salary payments that had been claimed by the Respondent. Subsequently she applied for long-term disability and that application was approved.

The Court of Appeals for the Ninth Circuit held, among other things, that the time of her appeal started from the date of her first letter, rather than the date when the operative information on which her claim was based was received, and on that basis that from then until her claim was granted ran 12 days over the 120-day period provided in the regulations, and they held that that was a breach of fiduciary duty.

As a result of that, we are here today, still embroiled in this litigation, more than five years after the date on which all of the benefits to which she was entitled, indeed all of the benefits that she claimed, were awarded to her.

Now, I know that this Court is very familiar with Section 502 of ERISA, but just to go through it again very briefly. Section 502(a)(1) provides for the individual rights of action for participants and beneficiaries, that they can recover benefits under the plan, enforce terms of the plan, or clarify terms to future benefits under the plan.

Section 502(a)(2), the section that is at issue here, provides a civil action for relief under Section 409 for the Secretary of Labor, participants, beneficiaries, and fiduciaries. And Section 503 provides for injunctions and other appropriate equitable relief for participants --

QUESTION: You mean 502(3)?

MR. NOLAN: I think it's 502(a)(3), Justice White.

QUESTION: Right.

MR. NOLAN: It provides for individual relief for participants and beneficiaries and fiduciaries, the right to injunctions, and other appropriate equitable relief.

QUESTION: Why isn't that section -- I suppose you could explain, consistent with your case, why that isn't redundant? If you can sue under 409, why do you need (3)?

MR. NOLAN: Well, it's fairly complex, Justice White. I guess that you could say also that it might be redundant with 502(a)(5), which provides substantially the same thing.

QUESTION: But this gives individual relief?

MR. NOLAN: Yes, and that gives it to the Secretary, with a --

QUESTION: And it gives it to the beneficiary, (a)(3) does.

MR. NOLAN: Yes.

QUESTION: And under 409, I suppose one of your arguments is that the relief goes only to the plan?

MR. NOLAN: That certainly is one of our arguments, yes.

Basically, the difference between 502(a)(2), the section at issue here, which provides for relief under 409, and 502(a)(1) and (a)(3), is that 502(a)(1) and (a)(3) quite plainly provide rights and remedies for beneficiaries, participants --

QUESTION: And a cause of action, and a cause of action.

MR. NOLAN: And a cause of action.

And 502(a)(2) does not, except in a derivative sense, that they are authorized to bring an action on behalf of the plan.

QUESTION: Under 409?

MR. NOLAN: Under 409, that's correct.

Section 409 deals with liability of fiduciaries, and it provides that fiduciaries shall be liable for breach of fiduciary duty, liable to make good to the plan any losses that the plan has suffered as a result of the breach, to restore --

QUESTION: What of 404 and its provision that the fiduciary must discharge his duties solely in the interest of the participants and beneficiaries?

MR. NOLAN: I think 404, Justice Brennan, is a continuing obligation of fiduciaries. It runs through everything in ERISA and every fiduciary duty. 409, to distinguish it, provides liabilities for breach of any fiduciary duty, and it provides that the fiduciary shall make good to the plan for losses, shall restore to the plan any profits made from the use of the plan assets, and for such other equitable and remedial relief as the court may find.

Now, when we talked --

QUESTION: Didn't the old law of trusts generally provide for compensatory damages to a beneficiary for breaches of fiduciary duties?

MR. NOLAN: I think quite clearly not, Justice Brennan. It did not. What the law of trusts provided -- and we'll talk more about this in the course of the argument today -- is that the plan or the trust would be restored. The loss to the estate in the event of a breach of fiduciary duty would be restored.

And the first area of questions that the Court raised was the question that Justice White referred to a moment ago, whether or not the recovery under 409 is limited to the plan and thus whether it excludes participants and beneficiaries; secondly, whether the recovery --

QUESTION: The beneficiary can sue on behalf of the plan?

MR. NOLAN: But cannot recover.

QUESTION: Himself or herself.

MR. NOLAN: That's correct. The recovery is to the plan.

And secondly, whether the relief provided by Section 409 includes legal, as well as equitable relief, or whether it is exclusively equitable; and thirdly, with regard to state rights, state tort action rights for example, were they preempted by ERISA, and if so is there any obligation or is there any provision in ERISA or elsewhere to replace them?

Going first to the issue of recovery by the plan, it is our position, of course, that recovery is limited to the plan, that the provision for individual recovery on the part of beneficiaries and participants is found exclusively in 502(a)(1) and 502(a)(3), that there are no individual rights to recovery under 409. The Court understands, of course, what that means, not just that punitive damages and consequential damages are not available, but no other relief is available either.

Now, why do we say that? We say that first because that's what the statute says. The statute talks about making good to the plan, restoring to the plan, such other equitable or remedial relief

QUESTION: As I recall it, the legislative history has a lot of references to "make whole." What's that?

MR. NOLAN: That's correct, Justice Brennan, the legislative history has a lot of references to restoring to the plan or restoring to the pension fund.

QUESTION: Only to the plan? You think "make whole" had reference only to the plan?

MR. NOLAN: There is a reference or maybe a couple to "make whole" in the legislative history. Those references refer to the plan, as distinguished from the beneficiary, and I think that the legislative history on this is absolutely conclusive. You cannot read the legislative history of Section 409 without concluding that Congress intended to limit recovery to the plan.

They talk about it over and over again and say a dozen times, maybe a score of times, about restoring to the plan. By contrast, there's not a single reference anyplace in the statute or the legislative history to recovery on the part of individual beneficiaries --

QUESTION: Under 409.

MR. NOLAN: -- in actions under 409.

QUESTION: Because there are plenty of remedies supplied to them elsewhere, as you have pointed out.

MR. NOLAN: There are many remedies supplied to them elsewhere, and particularly in this regard, for breach of fiduciary duty, in 502(a)(1) and 502(a)(3), by contrast.

We feel that this result is dictated also by the law of trusts, where actions by beneficiaries against trustees were in effect derivative actions to recover for the plan, as distinguished from individual recovery.

QUESTION: Was the argument made to the Court of Appeals that recovery under 409 was for the plan only? Because I don't see any discussion of it in the Court of Appeals' opinion.

MR. NOLAN: It was, I believe, made to the Court of Appeals. We were not counsel at that time.

QUESTION: Do you find any discussion of it in the Court of Appeals' opinion, about recovery to the plan?

MR. NOLAN: I don't believe that the Court of Appeals talked about recovery to the plan. I know they talked about the broad general purpose of ERISA, whether or not it applied to the claims procedure, and that it ought to be broad enough to reach this, and I think that there wasn't anything to the contrary in the statute, perhaps.

I think that this result is dictated also by common sense. I must say, if you look at the structure of the statute, it is not, I would suggest, reasonable to assume that the Secretary of Labor, with the kind of manifold, complex responsibilities he has, should be empowered to bring a suit for breach of fiduciary duty on behalf of individual beneficiaries, as distinguished from the plan.

Moreover, if there is a right to recovery or the part of beneficiaries and participants under 409 what beneficiary or participant would use 502(a)(1) or 502(a)(3), with the very specific limitations in those sections as against the relatively open authorization of Section 409?

The second question that we talked about before was whether the recovery under 409 is equitable and legal or whether it is exclusively equitable. We say it is exclusively equitable. We say that, again, primarily by reference to the statute itself. There is no reference to legal.

QUESTION: And when you say "exclusively equitable," you exclude damages, don't you?

MR. NOLAN: That would exclude damages, yes, Justice Brennan. It would also exclude --

QUESTION: Equitable relief does on occasion include damages, doesn't it?

MR. NOLAN: Well, it doesn't really. That is not to say that there are not cases that do. There are. But in the context of trust law, in the cases decided under trust law, there are not very many. Most of them are recent and most of them are California.

QUESTION: Well, incidentally, if ordinary law of trusts provided for damages in equitable relief, certainly there's nothing in the legislative history to suggest that Congress cut back on the remedies that were available to beneficiaries, is there?

MR. NOLAN: Congress tied relief under 409 pretty closely to equitable principles of trusts.

QUESTION: Would you say the same thing as to the provision in 502 -- what is it, 502(a)(3), where it talks about to obtain appropriate equitable relief?

MR. NOLAN: Yes.

QUESTION: You'd say the same thing?

MR. NOLAN: It is the same thing.

Incidentally, as the Court knows I'm sure, all three of those sections are regarded generally by courts as equitable. You do not, for example, have a right to a jury trial. Cases coming up under Section 502(a)(1), which looks like it might be legal, as well as 502(a)(3), which is plainly equitable, and 502(a)(2), which is what we're talking about here, have all been generally held by courts to be equitable and therefore a jury trial is not provided in them.

But not only does the statute not say "legal," but the term "legal" was in there in an earlier form of the bills that became ERISA and it was removed, and in the statute as finally enacted it doesn't say "legal." It says "equitable or remedial," and there's no reference to "legal" anyplace in the statute or anyplace in this legislative history.

That may be particularly significant here because ERISA was amended. ERISA was enacted in 1974, as you know, and it was amende in 1980, and the amendment that was inserted provided for legal or equitable relief, in that order. And in Section 502(g), I believe it deals with delinquent contributions, but it indicates very clearly that Congress knew exactly how to say what it wanted to say with regard to what part of the statute.

But that's not Section 409 and Section 409 does not say "legal."

QUESTION: Mr. Nolan, your reference before in response to a question about a money payment in an equity case, was it not true in terms of the common law of trusts that if money was to be awarded it was not as damages, but to compensate for something which should have been done initially?

That is, the failure of the trustee to pay payments due, when the decision went against the trustee, was that in terms of damages or merely giving the beneficiary what he or she had always been entitled to?

MR. NOLAN: It was not, Chief Justice, in terms of damages. It was always or substantially always in terms of restoring to the trust that which it had lost.

And the trust law also, with regard to the equitable or legal issue that we're talking about, is significant again, because Congress not only consigned ERISA to be interpreted through equitable principles of trust law, but Congress essentially codified -- and it's acknowledged that it did throughout the legislative history -- codified the trust law of fiduciary breach in Section 409.

And that law, of course, provided only for equitable and not legal relief, and there just isn't any place for punitive or compensatory or consequential damages under equitable relief.

With regard to the state remedies, state tort remedies that we talked about before and whether they're preempted or not, I think it's quite clear that to the extent that they existed they are preempted. There isn't any question about it here. This is one of the most sweeping preemption provisions that you can find. It says the the law, ERISA, supersedes any and all state laws not or hereafter enacted that relate to any employee benefit plan.

Congress knew at the time it considered and enacted ERISA that the employee benefit plans were becoming increasingly interstate, and that they were subject to the uncertain, arbitrary, inconsistent results of state law, and Congress wanted to provide a uniform law for ERISA, particularly where the law of fiduciary breach was at issue.

And that's why it very deliberately replaced the patchwork of inconsistent state regulation with ERISA itself. Now, there were great advantages to the employees who are protected by ERISA, the advantages of vesting, funding, reporting requirements, the disclosure requirements.

And, not least of all, and of greatest importance as far as this case is concerned, the statutorily mandated claims procedure of ERISA, expressly provided for by statute, requiring regulation by the Secretary of Labor, providing in the statute itself for full and fair review of any denial of an employee benefit claim.

And that is where we would suggest that your decision last week in the Lewick case is relevant. Now, Lewick of course was a preemption case, but it started out as a suit for damages, for punitive and compensatory damages for the alleged breach of a duty of good faith and fair dealing in connection with an employee disability claim.

This Court pointed out in the Lewick case the advantage and importance of having a uniform law of labor management relations, and it is of course no less important in the employee benefit area. But we would suggest that the real relevance of the Lewick case to this case is in the Court's comments about the arbitration process and the central role that arbitration plays in labor management relations, and that that is analogous to the central role that the statutory claim procedure plays here, because to hold that damages were available under ERISA would undercut and bypass the statutory claims procedure to the extent that it would effectively become a dead letter.

In the first instance, the existence of damages would interfere with the decisionmaking process under the claims procedure.

QUESTION: Why would that interfere with the claims procedure any more than suits, court suits under (a)(1) or (a)(3)?

MR. NOLAN: Court suits under (a)(1) or (a)(3) have consistently required exhaustion of the claims procedure remedies, and I think, Justice White, that that is actually the key question. If damages were available by suit under 502(a)(2) and 409 and were not available in the claims procedure, the claims procedure would not be an adequate remedy that would have to be exhausted before going to court.

So the suit could be filed, not after the claims procedure had been completed and exhausted, but it could be filed at any point along the way or even before the claims procedure would start. That really is the question that illustrates how the existence of damages would eliminate for all practical purposes the claims procedure.

QUESTION: Mr. Nolan, you said you're arguing three things. Now you've argued the three. Are you going to argue separately that in any event punitive damages is not available under 409, even if compensatory damages are?

MR. NOLAN: Well, I would argue, certainly --

QUESTION: I don't insist that you do.

MR. NOLAN: I think that that is an a fortiori case. I think that 409, if it is limited to recovery to the plan, if it is equitable, then there's no place --

QUESTION: For either, for compensatory?

MR. NOLAN: -- for either.

QUESTION: Yes. But what if we disagreed with you, that it isn't limited to equitable relief and it could be legal remedial relief? I see some arguments that damages are not remedial.

MR. NOLAN: I think that a decision that went that way would have to come to terms with trust law, I guess, because there is a lot of trust law that talks about restoration to the plan --

QUESTION: Well, you wouldn't have to come to terms with trust law if Congress had said expressly in here that beneficiaries may sue for damages. Congress would just have said it.

MR. NOLAN: Right. They didn't.

QUESTION: And if we disagree with you, it would be interpreting what Congress said, not trust law.

MR. NOLAN: Well, if Congress said that, Justice White, I wouldn't be standing here --

QUESTION: No, you wouldn't.

MR. NOLAN: -- arguing to you. The strength of our argument is that that wasn't what Congress said.

QUESTION: And one reason you say is because they had trust law in mind?

MR. NOLAN: Yes.

With that, I would like to respond to any questions that any member of the Court might have and reserve the remainder of my time for rebuttal.

CHIEF JUSTICE BURGER: Very well.

Mr. Baker.

ORAL ARGUMENT OF BRAD NALEY BAKER, ESQ. ON BEHALF OF RESPONDENT

MR. BAKER: Thank you, Mr. Chief Justice, and may it please the Court:

ERISA was a remedial statute that was created to expand the rights of participants and to protect participants, not, as Petitioners have contended, to limit the rights of participants. The purpose of ERISA was to protect the participants and provide appropriate relief and remedies, including sanctions and ready access to the federal courts.

We are not requesting that the Court imply new remedies to Section 409. We're asking the Court to interpret the language in 409 in light of the legislative intent and the purpose of the statute.

Now, I disagree wholeheartedly with Petitioner when he indicates that there is nothing in the legislative intent which indicates that legal damages are available. To the contrary, both the House and the Senate clearly indicated that they were specifically designing the enforcement provisions to provide broad remedies to not only redress violations of the Act, but to prevent violations of the Act.

They then go on to say that it is their intent to provide the full range of legal and equitable remedies available in both state and federal courts. This is not speaking only in terms of equitable remedies. This is a remedial statute that should be liberally construed.

In the 1970's when ERISA was passed, Congress knew full well that the full range of legal remedies included both compensatory and punitive damages. It would be especially effective, punitive damages would be effective, to prevent violations of the Act, which is one of the basic intents, one of the basic intents of both the House and the Senate.

Civil actions are authorized under Section 1132. It appears as those Section 1132 allows participants to collect damages -- not necessarily damages, but benefits, from the plan. It allows, however, participants under Section 409 to collect damages for breach of fiduciary duty.

Now, there is -- repeatedly, Petitioners have indicated that ERISA was patterned after the law of trusts. That is partially correct. It was patterned after the law of trusts with regards to how fiduciaries handled trust assets, and it is that relationship that is governed by the law of trusts.

However, traditionally a breach of fiduciary duty which establishes a relationship between the participant and the fiduciary, as opposed to a relationship of the trust assets and the fiduciary, is traditionally a tort, which is a legal wrong, and that is a very key distinction.

The state tort remedies that were available for breach of fiduciary duty have in fact been preempted by ERISA. There has been a void that has been created. It is the position of the Petitioners that they wish to seek the best of both worlds. They want the broad interpretation of Section 1144, which is the preemption, and then they want the narrow interpretation of Section 409, which will then create a vast void and deprive participants of rights that they had prior to the passage of ERISA.

The actual language under Section 1109, which is 409 of ERISA, is that "such equitable or remedial relief as the court deems appropriate" should be given for breaches of fiduciary duty. Now, they contend that the "remedial" means only equitable.

Now, assuming that that was correct for a moment, it's quite clear that under traditional equitable law that there is restitution and a make whole concept that runs throughout the traditional trust law concept. So to indicate that only benefits can be collected does not even uphold what traditional trust law allowed, whatever it takes to make the person whole.

With regards to -- well, we clearly contend -- we do not agree that "remedial" means only equitable. If you look at just the language of the statute, there is the connecting word "or". If "equitable or remedial" meant the same thing, then "remedial" would be mere surplusage. They would not set those two terms opposite each other.

Such a narrow interpretation would in essence immunize fiduciaries from any and all liability for even intentional and malicious acts that were perpetrated against participants and beneficiaries. There are many very good examples of real life situations that have been cited in the Steelworkers brief, which is amicus for the Respondent's position.

I would like to cite a typical example, where we have an employer who is a sole owner of a business, who has a self-funded, self-administered plan. He has an employee, a longstanding employee who he has disliked for years. He knows that the employee has got three children and a disabled wife. The employee becomes disabled himself.

The employer intentionally does not pay that person disability benefits, and specifically tells the person: I'm not going to pay you. By the time that the employee can get to court, he has lost his house, he has had a total mental breakdown.

If the Petitioners' position is to be held -- and let's assume also the court has found that that was an intentional, malicious act against the participant. Under the Petitioners' position, all the employer would have to pay to the participant would be just the benefits. He would also have to pay attorney's fees, but those attorney's fees would obviously go to the attorney.

There would be no possible recourse that the participant would have against an employer who did that type of thing to him. This clearly could not be the intent of Congress when they passed ERISA, which was passed to protect the participants, not to immunize fiduciaries. As the Ninth Circuit indicated, it would be anomalous to occupy the field without replacing the state remedies that were lost through preemption with federal remedies, substantive law.

Now, in the legislative history it indicated that there was going to be a substantive body of federal common law that was to be developed to assist in implementing the purposes of ERISA. This is the purpose of this Court today, is to delineate what that federal substantive law is.

And it also in the legislative history indicated that the courts could draw upon state laws in order to help form that federal substantive law, as long as it did not conflict with labor policy or any other federal policy.

QUESTION: What is your answer to the claim that, since Congress addressed specifically in (a)(1) and (a)(3) causes of action on behalf of the beneficiary and generally saying what remedies were available, why shouldn't that be the limit of the remedies available to the beneficiary?

MR. BAKER: That is the limit of the remedies available of the beneficiary towards the plan. We've got two separate entities working here. You've got the actual trust fund for the plan and you have the fiduciary.

QUESTION: Well, (a)(1) and (a)(3) do give specific remedies to the individual beneficiary.

MR. BAKER: To the individual beneficiary against the plan.

QUESTION: No, not (a)(1) and (a)(3) -- well, I know, but the recovery is for him.

MR. BAKER: The recovery is for him.

QUESTION: Sure.

MR. BAKER: But the recovery is only against the plan.

QUESTION: Well, I understand that.

MR. BAKER: And we have no problem with that construction of 502(a)(1) and (a)(3).

QUESTION: But that is where Congress specifically addressed recoveries by beneficiaries.

MR. BAKER: Also in (a)(2) it says "appropriate relief under Section 409." Now, to specifically indicate that you or any beneficiary has appropriate relief coming to them in another code section, it is a very strange interpretation to indicate that we're giving you rights under this other code section --

QUESTION: To bring a derivative action.

MR. BAKER: -- but you don't get anything else.

Well, to bring a derivative action? I think they could have easily said to bring a derivative action. If you look at the language of Section 409, it doesn't say only the plan may collect against the fiduciary. Clause one says to the plan, clause two says to the plan, but when you get to clause three, which is the "such other equitable or remedial relief as the court deems appropriate," there is no qualifier, "to the plan."

If in fact you -- number one, no court has ever supported Petitioners' position, no federal court. There is one district court case in New York, a state case. It hasn't even been discussed in any federal opinion that we have been able to find.

If in fact only the plan can collect under Section 409 --

QUESTION: Was that argument made to the Court of Appeals?

MR. BAKER: Yes, it was.

QUESTION: The Court of Appeals didn't take the trouble to reject it specifically.

MR. BAKER: No, they did not.

QUESTION: They apparently didn't think it was worth it. Is that what you suggest?

MR. BAKER: I would assume so. It would create the illogical situation where a self-funded, self-administered plan, the fiduciary would take the money out of his right pocket as the fiduciary and put it into his left pocket as the plan, and that would be the remedy for breaching a fiduciary duty against a participant. Such a solution would be ridiculous.

QUESTION: Why is that ridiculous? I don't quite follow you. Why wouldn't that give the beneficiary exactly what he's entitled to, to have the plan made whole?

MR. BAKER: If it's a self-funded plan, there is no separate trust fund. It's merely a general fund that is there. And let's assume that it is a solely owned company, by an individual, and he is acting as fiduciary.

QUESTION: And he diverted fiduciary assets, and the beneficiary sues and says, put them back in.

MR. BAKER: In that situation, it clearly says "to the plan." That's clause one.

QUESTION: Yes.

MR. BAKER: That is "to the plan." However, if the breach of fiduciary duty, which is traditionally a tort -- if there is a breach against an individual, why should the plan receive damages that were incurred by an individual participant for the breach of fiduciary duty?

QUESTION: I'm having a little trouble conceptualizing your actual case. I mean, what is it that your fiduciary hypothetically has done to the individual?

MR. BAKER: Let's say that the fiduciary has not paid any disability benefits for a year.

QUESTION: And under the text of the statute the beneficiary has a clear statutory right to sue for those benefits.

MR. BAKER: To sue for those benefits.

QUESTION: Right.

MR. BAKER: However, in the -- with regards to the breach that occurred, let's take it one step beyond, that this is an intentional, malicious action to ruin this individual and he has clearly stated, the fiduciary has clearly stated that, I'm going to ruin you, sir.

QUESTION: And he does, and the statute does provide a remedy for that situation, right.

MR. BAKER: It only provides that he gets his benefits, no matter how long they were held.

QUESTION: That's the extent of his harm.

MR. BAKER: Well, unless of course in the interim he has lost his house, he has had a mental breakdown, and all the other things that would be associated with being ruined.

QUESTION: That's somewhat like the Wisconsin case. They made the same sort of claim there.

MR. BAKER: I agree with the Court's ruling in that case. There should be an exhaustion of administrative remedies prior to entering into the court. We have no problem with the Allis Chalmers.

Let me hit once again the contention that if in fact only the plan can recover under Section 409, it appears as though there is no such thing as a breach of fiduciary duty against a participant, that the fiduciary be immune. There is nothing that the fiduciary could do to the participant that would ever give rise to any damages.

QUESTION: That's right, that the fiduciary's responsibilities are to the plan and the beneficiary's rights are against the plan. It seems to me it's all quite consistent.

MR. BAKER: Well, Section 404 indicates that the fiduciary's primary responsibility is to the participant, not to the plan. So --

QUESTION: Who is a participant?

MR. BAKER: A beneficiary or participant.

QUESTION: Why do they always mention both of them?

MR. BAKER: Well, because a participant is someone who is actually participating in the plan, where a beneficiary might be an heir, assignee, or after the person retires they may no longer be a participant but they may be a beneficiary.

QUESTION: See, even your third clause in 409, where you talk about the general language of remedial relief, is really relief that's beneficial to the plan, because it's removal of a faithless fiduciary and that would be also a benefit to the plan.

MR. BAKER: That is correct.

QUESTION: That's the specific example they give in that clause.

MR. BAKER: Including, but in no way limiting the remedies that are available to participants for a breach of fiduciary duty.

And it still comes back to the traditional concept that breach of fiduciary duty is a tort. It is not founded in law of trusts, as Petitioners have contended. That is a separate relationship with the fiduciary and the participant.

Thee is a law of trusts concept between the fiduciary and the plan assets, but the law of trusts does not govern the fiduciary relationship between the participant and the fiduciary. That is clearly a tort if in fact there is, let's say, a malicious intention against the participant by the fiduciary.

It would be the Petitioners' contention there is no way that a participant may collect any damages whatsoever against that fiduciary. And that's personal liability. As we discussed before, we are not seeking damages against the plan, just the fiduciary on a personal basis. We do not want to jeopardize the financial soundness of the trust fund or the pension plan.

If in fact also only the plan could collect under Section 409, this would go against the basic intent of Congress, which was to provide broad remedies, both legal and equitable, and it would not seem to be protecting the participants. The Petitioners have come forward and said, look at what the participants are getting, they're getting all these protections for funding and accrual and vesting. Of course they've got to give something up, is basically what they're saying.

I see nothing in the legislative history that indicates that the participants are giving up anything. In fact, all the language indicates they are receiving additional protections, and that's the purpose of ERISA, not to immunize fiduciaries. The fiduciaries are being held to a stricter standard.

There is one point also that the Petitioners make where they indicate that it is quite clear that legal remedies have now been removed from the civil enforcement provisions because an earlier Senate version included the word "legal" and that Senate version was not passed and therefore "legal" is out.

A true reconstruction of what happened at that time I believe is in order at this point. Both the House and the Senate had essentially identical intents, and that was to provide broad remedies to redress and prevent violations of the statute, to give the full range of legal and equitable remedies. At the time that that language was available, the Senate passed their version of what they wanted to do and the House passed their version.

The House's earliest version indicated that "such other and equitable" -- excuse me -- "such other equitable or remedial relief as the court deems appropriate." That language embodied the intent to redress and prevent violations of the Act. The Senate stated "appropriate relief, legal or equitable," to also embody the same intent, which was to prevent and redress violations of the Act and to provide the broadest types of remedies.

So you've got two sets, versions that are embodying the same concept. The House version was accepted 100 percent, without any compromise, without any discussion. There is no comment in the legislative history at all with regards to any conflict between the Senate version and the House version.

The only inference that I can draw from that is that the Senate felt that the House version was identical to its own. So rather than the Senate version refuting the "legal" concept, it actually sheds light upon what does "equitable or remedial" mean. "Equitable or remedial" could only mean equitable or legal, because the Senate and the House both stated versions that embodied the same intent.

It is like the old mathematical or logical theorem: If A equals B and A equals C, then B must equal C. The Senate version was exactly the same as the House version and the House version was accepted with no compromise, no comment.

The Senate, if in fact it was that important an issue, would not have just blindly accepted the House version with no comment. For the Petitioners now to come forward and say, because the Senate version was not accepted "legal" is clearly out, when both the House and the Senate indicated that legal and equitable remedies were available, this just doesn't make sense.

QUESTION: But they didn't. They didn't end up saying "legal and equitable."

MR. BAKER: No, they said "equitable or remedial," and what does "remedial" mean, "remedial," taken in context of the intent to provide the full range of legal and equitable remedies, which is what the Senate and the House both wanted, and they both drafted versions that supposedly embodied that concept. The Senate deferred to the House.

The only reason I can think of why they would defer to the House is the House's language covered what they wanted. They wanted legal or equitable. The Senate defers to the House.

QUESTION: Well, Mr. Baker, go back to (a)(3) again. You suggested to me that (a)(1) and (a)(3) both provide a remedy to the beneficiary as against the plan.

MR. BAKER: That is correct.

QUESTION: Well, (a)(3) simply says that a beneficiary may sue to enjoin any act or practice which violates any provision of the title. I would think the natural reading of that is that he could sue a fiduciary who is doing some act that is contrary to the trust agreement. And they say that he can get appropriate equitable relief.

Do you think he couldn't sue a fiduciary under (a)(3)?

MR. BAKER: Yes, he could sue a fiduciary under (a)(3).

QUESTION: So here is a specific Congressional consideration of what remedy should a beneficiary have against a fiduciary, and they said it.

MR. BAKER: They also repeated it in 409, that a fiduciary could be enjoined, removed, or --

QUESTION: That may be so, but they never mentioned any beneficiary in 409. They didn't mention that he could get any relief.

MR BAKER: Then I guess, if that is the position, then a breach of fiduciary duty, which is a tort from one individual to another, will in fact be immunized and will be preempted by ERISA and there will be no cause of action, if that is the reading of the statute that you have, that 409 does not provide for any ability of a participant to receive any damages for breach --

QUESTION: Do you think it's a general canon of trust law that a beneficiary could sue the fiduciary in tort?

MR. BAKER: Breach of fiduciary duty is a tort, yes, as opposed to the relationship between the fiduciary and the trust, which is the basic trust law. And that's what's embodied in the first --

QUESTION: Do you think that's a pretty general rule, not just a California rule?

MR. BAKER: We have found cases, yes, across the board. It was a -- the cite we gave in the brief was an American Juris., an AmJur cite which contained many cites from other jurisdictions besides California.

QUESTION: Are the remedies in such a tort recovery limited to recovery to the trust res?

MR. BAKER: I'm sorry, can you repeat that?

QUESTION: In the event of a common law tort action by a beneficiary against a fiduciary, are the remedies normally limited to a recovery to the trust fund or res?

MR. BAKER: No, that would be a personal remedy that would go to the beneficiary if there was a breach of fiduciary duty there. It's a personal cause of action for tort against the fiduciary.

QUESTION: I understood your opponent, Mr. Nolan, to take a different view of what the cases show.

MR. BAKER: He has made that statement, yes. I guess --

QUESTION: Twice, twice now.

MR. BAKER: That's right, he's been here twice.

(Laughter.)

QUESTION: Mr. Baker.

MR. BAKER: Yes.

QUESTION: May I ask you a question, too, about punitive damages. Do you agree with the Court of Appeals that the purpose of punitive damages is to punish and deter?

MR. BAKER: Yes, I do, Your Honor. I believe that.

QUESTION: What is the general purpose of the criminal law?

MR. BAKER: Criminal laws should also deter. However, they aren't being used in the context of ERISA.

QUESTION: Not under ERISA, but the general purpose of criminal law is to punish and deter; you agree with that, of course?

MR. BAKER: Well, that is one aspect, and there's also a rehabilitation aspect, that I'm not prepared to discuss at this particular point. But yes, I would agree with you.

QUESTION: Do you have any question about the constitutionality of punitive damages?

MR. BAKER: I believe -- no, I personally have no problem.

QUESTION: You have none?

MR. BAKER: Well, that argument has gone back and forth for decades now.

QUESTION: But we've never decided the question.

MR. BAKER: Smith versus Wade appears to indicate that punitive damages are available in our society.

QUESTION: Certainly in some circumstances, speaking generally. This statute, which you say authorizes punitive damages, has no limit whatever on the amount, unlike the antitrust laws, for example. If Congress had wanted to provide for punitive damages, don't you think it would have provided for treble damages or double damages or imposed some sort of limit?

MR. BAKER: Not necessarily. When there's a tort such as breach of fiduciary duty that is well established in common law, the amount of damages will be commensurate with the amount of punishment that should be imposed, and it's going to be imposed against the fiduciary as an individual, not against the plan. So in common law it's a case by case basis as to what is the amount of deterrence that should be made.

QUESTION: My understanding of the common law going back to the eighteenth century is that punitive damages were allowed in cases where compensatory damages could not be proved, in libel cases for example. But your client has received compensatory damages under the Act, and you're asking not only for extra-contractual damages but for punitive damages as well, and punitive damages are wanted, I would suggest, on a totally standardless basis, unlike the criminal law which requires due process procedure before you impose a heavy fine on a defendant.

MR. BAKER: That is getting into more of a constitutional argument at this particular point. It's not standardless. The Ninth Circuit in fact did create a standard, that it had to be willful, malicious, or wanton.

QUESTION: Does the statute say that?

MR. BAKER: No, that is the Ninth Circuit.

QUESTION: That's what the Ninth Circuit said.

MR. BAKER: That is the standardization.

QUESTION: Yes, but do you regard that as an adequate standard for the application of the criminal law, to punish a defendant for violating a criminal statute?

Well, put that aside for the moment. What do you understand to be the common law of England today?

MR. BAKER: I am not familiar with what the common law of England is today with regards to punitive damages, I am sorry.

QUESTION: I don't testify as an expert witness, but my understanding is that they have long since abandoned punitive damages in the sense that we use the term over here. There are statutory provisions for punitive damages in some situations.

And my suggestion is that there's grave doubt about the constitutionality of punitive damages in a case like this.

MR. BAKER: If in fact there is an individual tort against an individual, similar to Smith versus Wade, the standard in the Smith versus Wade case was whether or not a reckless standard would impose punitive damages. We're not even seeking such a minimal standard as reckless. We are seeking only a willful, malicious or wanton disregard of human rights standard, which is much higher than the standard this Court imposed.

QUESTION: What you are really seeking is a windfall for your client. Your client has been made whole. If punitive damages are allowed, why shouldn't they go to the state, to benefit the public at large? You'd have equal deterrence and you wouldn't provide a windfall on a standardless basis to a plaintiff who has already been made whole.

MR. BAKER: If in fact the Court wishes to place that limit upon where the punitive damages may be placed, the Court has the power to do that. The Court has not felt it necessary to do that at this particular point. I do not know if this is the particular case in which to impose that type of distribution of punitive damages.

Thank you very much.

CHIEF JUSTICE BURGER: Do you have anything further, Mr. Nolan?

REBUTTAL ARGUMENT OF JOHN E. NOLAN, JR., ESQ. ON BEHALF OF PETITIONER'S

MR. NOLAN: I have just a couple of comments, Mr. Chief Justice.

Justice O'Connor, with regard to the difference between Mr. Baker and me about tort suits by the beneficiary against the trustee, Mr. Scott has something to say about that. He says that: "Modern courts have not permitted the beneficiary of a trust to maintain an action at law for a tort against the trustee for a breach of trust."

So it is that by and large there are no such actions, so you don't have the question about whether it goes to the fund or to the individual beneficiary.

If I could respond to an earlier question of Justice White's about punitive damages, it is clear that if you take away all of the other aspects of our argument we would have still the same argument with regard to punitive damages under that statute.

Punitive damages are not equitable.

QUESTION: Nor remedial.

MR. NOLAN: They're not remedial, and they're not relief. So I don't think you get to punitive damages under ERISA under any concept without regard to whether there is exclusively recovery in the plan under 409 or not.

And I think that you do make -- you gut the claims procedure. You make a dead letter of the specific statutory provisions that provide for individual rights of action on the part of the participants and beneficiaries.

And you flood the federal courts with additional litigation, because there has to be a 409 count in every complaint brought by a participant or a beneficiary and there's no state court jurisdiction of those claims under those circumstances. So they all go on into the district courts aside from the claims procedure, and that's the result of finding damages under ERISA in the circumstances of this case.

Thank you.

CHIEF JUSTICE BURGER: Thank you, gentlemen.

The case is submitted.

(Whereupon, at 1:59 p.m., oral argument in the above-entitled case was submitted.)