Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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LEISTER v. DOVETAIL, INC.  (October 23, 2008)

Sandra Leister and Michelle and Evan Peterson worked together at a company that provided employee assistance programs to employers. In 1997, the Petersons purchased some of their employer’s program contracts and formed Dovetail to administer those contracts. They hired Leister, a psychologist, to work for Dovetail. As one of the benefits of employment, they agreed to deposit a percentage of her salary into a 401(k) account. They complied with their promise for about a year and then began diverting Leister’s money to their own benefit. They also refused to provide Leister with documentation of her rights under the plan. Leister brought this action under ERISA to recover the contributions that Dovetail was obligated to make to her account and for statutory penalties. The district court found a willful breach of the defendants’ fiduciary duties and awarded Leister $82,741 for the contributions not made. The court declined to impose statutory penalties for the Peterson’s failure to provide plan documents, relying on their dire financial circumstances. The defendants and Leister each appeal.

In their opinion, Judges Bauer, Posner, and Williams affirmed in part, reversed in part, and remanded. The Court first addressed two preliminary matters – whether there was enough of a writing to satisfy ERISA and the impact of Leister’s failure to name the plan as a defendant – and resolved each of them in Leister’s favor. It then proceeded to the statute of limitations issue. ERISA complaints are governed by two limitations provisions. Complaints for breach of a fiduciary duty under sections 1101 to 1114 must be brought within the shorter of six years from the breach or three years from the date when the plaintiff had actual knowledge of the breach. Complaints for benefits due under the plan pursuant to section 1132(a)(1)(b) are governed by the most analogous state limitations period, in this case Illinois’ ten-year statute for breach of a written contract. Leister sought relief under both sections 1104 and 1132(a)(1)(b), but the district court based its judgment only on section 1104. Since Leister’s complaint was filed more than six years after the defendants’ first breach, her recovery would be limited under 1104. The Court found that a) she was entitled to relief under both sections, b) she was entitled to more relief under section 1132(a)(1)(b), and c) she met the ten-year statute of limitations. Under 1132(a)(1)(b), Leister was entitled to the unpaid contributions as well as a reasonable estimate of their investment growth over time. The Court accepted Leister’s cross-appeal argument that the district court erred in not considering the tax-free status of the contributions. It directed the court to recalculate the benefits on remand.

Leister also “shoehorn[ed]” a claim for sales commissions into her ERISA claim. The Court found that the district court erred in treating it as an ERISA claim even though Leister alleged that she would have deposited the commissions into her 401(k) account. Nevertheless, the Court noted that the claim was also pleaded as a state law claim and would be considered in that context on remand. The Court offered guidance to the district court on the state law claim: a) it has a shorter limitations period than the ERISA claims because it is not a written contract, b) Leister cannot recover tax benefits as if she would have deposited the money into her 401(k), and c) an Illinois statute may allow for an award of attorneys’ fees. Lastly, the Court addressed Leister’s argument that the court erred in not awarding statutory penalties. The Court observed that penalties, in whatever form, are meant to deter. Although deterrence can be achieved with smaller awards against poorer defendants, an award of no penalties against a solvent defendant who commits a willful breach is unreasonable. The district court’s decision was an abuse of discretion.