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JANUARY 22, 2007

On Friday, January 19, the Supreme Court granted certiorari in three cases of interest to the business community.

CERCLA—Right to Seek Contribution from Other Potentially Responsible Parties.  In Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004), the Supreme Court held that a party may seek contribution for clean-up costs under Section 113(f) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9613(f), only if the party seeking contribution had itself been sued under the act. The Court has now granted certiorari in United States v. Atlantic Research Corp., No. 06-562, to decide whether under Section 107(a) of CERCLA, 42 U.S.C. § 9607(a), a party may seek contribution for clean-up costs if the party seeking contribution incurred those costs voluntarily rather than as a result of having been held legally liable under the act.

Atlantic Research will resolve a circuit split over the issue. In the decision below, reported at 459 F.3d 827, the Eighth Circuit, like the Second Circuit in Consolidated Edison Co. of New York, Inc. v. UGI Utilities, Inc., 423 F.3d 90 (2d Cir. 2005), held that under Section 107(a) a party that is potentially responsible for clean-up costs under CERCLA may, even if it has not itself been sued under the act, sue another potentially responsible party for that other party’s share of the costs incurred in a voluntary clean-up undertaken by the first party. The Second and Eighth Circuits found that such suits were authorized by the text of Section 107(a)--which makes a potentially responsible party liable for “any * * * necessary costs of response incurred by any other person”--and consistent with CERCLA’s remedial purpose by encouraging polluters to initiate voluntary clean-ups without waiting to be sued. By contrast, in E.I. DuPont de Nemours & Co. v. United States, 460 F.3d 515 (3d Cir. 2005), the Third Circuit held that Section 113(f), which allows suits for contribution only after the party seeking contribution has itself been sued under CERCLA, provides the exclusive basis for potentially responsible parties to seek contribution from other potentially responsible parties. According to the Third Circuit, a potentially liable party may not seek contribution under Section 107(a) because the statutory phrase “any other person” excludes potentially liable parties from its scope. Moreover, according to the Third Circuit, allowing parties to seek contribution only after having been sued under CERCLA fulfills Congress’s desire to encourage polluters to enter legally enforceable, federally supervised settlements.

The question of when a potentially responsible party may seek contribution under CERCLA for clean-up costs is obviously of tremendous practical importance to all businesses that may face CERCLA liability. How the Supreme Court resolves the issue will have significant consequences for companies’ environmental policies and litigation strategies. Amicus briefs in support of the petitioner are due on March 5; amicus briefs in support of the respondents will be due 35 days after petitioner’s brief is filed. Any questions about the case should be directed to Tim Bishop (312-701-7829) in our Chicago office.

ERISAPlan TerminationExistence of a Fiduciary Duty to Consider Plan Merger Rather Than Purchase of an Annuity.  The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., requires employee benefit plan fiduciaries--i.e., those with discretionary authority or control over plan management, assets, or administration, see 29 U.S.C. § 1002(21)(A)(i) & (iii)--to discharge their duties solely in the interest of plan participants and beneficiaries. See 29 U.S.C. § 1104(a)(1)(A), (B) & (D). An employer may initiate termination of a single-employer defined benefit pension plan--one that entitles employees to fixed periodic payments upon retirement--“only” through the termination procedures established by Title IV of ERISA. See 29 U.S.C. § 1341(a)(1). Under a “standard termination,” a plan administrator must distribute assets to plan participants and beneficiaries either through the purchase of “irrevocable commitments [i.e., annuities] from an insurer to provide all benefit liabilities under the plan” or by otherwise fully providing all benefit liabilities under the plan “in accordance with the provisions of the plan and any applicable regulations.” 29 U.S.C. 1341(b)(3)(A); see also 29 C.F.R. 4041.28(c)(1). The Supreme Court granted certiorari in Beck v. Pace International Union, No. 05-1448, to determine whether a pension plan sponsor’s decision to terminate a plan by purchasing an annuity, rather than to merge the pension plan with another, is a plan sponsor decision not subject to ERISA’s fiduciary obligations.

In the decision below, the Ninth Circuit held that this is a fiduciary decision. In particular, the court held that (i) merger into a multi-employer plan is not a prohibited means of terminating a pension plan under ERISA and its regulations, and (ii) the sponsor of a single-employer defined-benefit pension plan could breach its fiduciary duties by failing to undertake an “intensive and scrupulous investigation” of a proposed merger as an alternative to the purchase of annuities. 427 F.3d 668 (9th Cir. 2005). The Ninth Circuit reasoned that because “the implementation of a decision to terminate [a pension plan] is discretionary in nature and subject to ERISA’s fiduciary obligations,” whether there is a fiduciary duty to investigate a proposed merger turns on whether merger is a permissible means of implementing the termination decision. Id. at 673-674. The Court determined that ERISA and its regulations permit merger by construing 29 U.S.C. 1341(b)(3)(A) and 29 C.F.R. 4041.28(c)(1) to permit any method of termination, including merger, that suffices “to cover plan liabilities.” 427 F.3d at 674-676.

Both the Third and Sixth Circuits have declined to impose ERISA’s fiduciary obligations on an employer’s decision to merge pension plans. See Malia v. Gen. Elec. Co., 23 F.3d 828, 833 (3d Cir. 1994); Sutter v. BASF Corp., 964 F.2d 556, 562 (6th Cir. 1992). There is also a potential conflict between the Ninth Circuit’s decision and Supreme Court decisions that—distinguishing between settlor and fiduciary function—have held that decisions about plan design, composition, and structure are settlor functions that are not subject to ERISA’s fiduciary requirements. See Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995); Lockheed Corp. v. Spink, 517 U.S. 882, 890-891 (1996); Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444-445 (1999).

This decision will have a significant impact on businesses that are sponsors of plans governed by ERISA. If the Ninth Circuit decision is upheld and employers have a fiduciary duty to consider merger as an alternative to plan termination with a concomitant distribution of annuities, employers may have to choose merger over termination (or maintain the status quo) even if termination makes business sense. In addition, although ERISA provides that an employer that terminates a plan may generally recover any residual assets upon the satisfaction of all obligations owed to beneficiaries and participants, see 29 U.S.C. § 1344(d)(1), no such residual-asset pool results from merger because all assets of the merged fund are transferred to the acquiring fund. Therefore, employers’ funding decisions may be affected by the risk that they will be precluded from recouping excess plan assets through termination. Amicus briefs in support of the petitioner are due on March 5; amicus briefs in support of the respondents will be due 35 days after petitioner’s brief is filed. Any questions about the case should be directed to appellate@mayerbrown.com.

Foreign Sovereign Immunity Act—Removal to Federal Court—Definition of “[A]gency or Instrumentality of a Foreign State”—Appellate Jurisdiction Over Remand Order.  Under the Foreign Sovereign Immunity Act (FSIA), 28 U.S.C. § 1602 et seq., a “foreign state” sued in a state court has the right to remove the suit to federal district court. 28 U.S.C. § 1441(d). The FSIA defines the term “foreign state” to include “an agency or instrumentality of a foreign state,” 28 U.S.C. § 1603(a), and in turn defines that term to include any entity (i) “which is an organ of a foreign state or political subdivision thereof,” or (ii) “a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof.” 28 U.S.C. § 1603(b)(2). The Supreme Court granted certiorari in Powerex Corp. v. Reliant Energy Services, Inc., No. 05-85, to determine the scope of the “organ of a foreign state” provision.

Powerex is a Canadian-based company that sells excess power generated in British Columbia. It is a wholly owned subsidiary of the British Columbia Power and Hydro Authority (BC Hydro), which is in turn wholly owned by the Canadian Province of British Columbia. Powerex, BC Hydro, and others were sued in California state court for allegedly manipulating the cost of electricity during the California energy crisis in 2000 and 2001, and subsequently removed the action to federal court. The district court held that BC Hydro could appropriately remove the litigation to federal court under the majority-ownership provision, and further held that BC Hydro was immune from suit under the FSIA. As to Powerex, the court held that it could not remove the litigation to federal court under either prong of Section 1603(b)(2) because (a) it did not qualify as an “organ of a foreign state,” and (b) in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), the Court interpreted the majority-ownership provision to require direct ownership by the foreign state or political subdivision. The district court thereafter remanded the litigation against Powerex to state court.

The Ninth Circuit affirmed. California v. NRG Energy Inc., 391 F.3d 1011 (9th Cir. 2004). The court held that it had jurisdiction to hear the appeal despite 28 U.S.C. § 1447(d), which ordinarily bars appellate review of remand orders, because the district court unquestionably had jurisdiction based on BC Hydro’s removal. On the merits of the remand order, the court held that Powerex does not qualify as an “organ of a foreign state” because it “was not run by government appointees, was not staffed with civil servants, was not wholly owned by the government, was not immune from suit, and did not exercise regulatory authority.” 391 F.3d at 1026.

As we noted in the April 19, 2006 Docket Report, the Supreme Court called for the views of the Solicitor General in this case. In his brief, the Solicitor General suggested that the Court grant certiorari, and opined that the Ninth Circuit’s construction of Section 1603(b)(2) conflicted with the views of several other federal circuits and failed to give adequate attention to the “ultimate question: whether the defendant is ‘an entity that engages in activity serving a national interest and does so on behalf of its national government.’” U.S. Br., at 9, quoting USX Corp. v. Adriatic Ins. Co., 345 F.3d 190, 209 (3d Cir. 2003). In granting certiorari, the Court ordered the parties to address both the construction of the “organ of a foreign state” provision and whether the Ninth Circuit had appellate jurisdiction notwithstanding Section 1447(d).

This case is of obvious interest not only to foreign governments and their instrumentalities but also to any company that does business with, or might have reason to pursue legal action against, a company that is affiliated with a foreign government. Additionally, the Court’s analysis of the appellate-jurisdiction question will be of interest to all companies that have cause to remove cases from state courts. Amicus briefs in support of the petitioner are due on March 5; amicus briefs in support of the respondents will be due 35 days after petitioner’s brief is filed. Any questions about the case should be directed to appellate@mayerbrown.com.

Mayer Brown Supreme Court Docket Reports provide information and comments on legal issues and developments of interest to our clients and friends. They are not a comprehensive treatment of the subject matter covered and are not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed.

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