Private litigants look for the "deep pocket." When an injured plaintiff searches for a source of compensation, "whoever can afford it" suffices.

Our government has a higher obligation. It must act fairly and in the public interest. Yet too often, government litigators, bent on winning cases and collecting awards, abdicate that responsibility.

And when the courts reject their expansive theories, government agents do what few private litigants can: They turn to Congress to change the law.

A recent Supreme Court decision limiting recovery in some lawsuits brought on behalf of employee benefit plan participants threatens to derail certain of the Department of Labor's litigation.

New Class of Defendants

In response, the department has enlisted Sen. Howard Metzenbaum of Ohio to push through a bill that not only would undo the Supreme Court's decision, but would create whole new classes of defendants.

The proposed legislation is a reflexive response to a perceived need that does not exist. Worse, the bill is anticompetitive and certain to drive up the cost of services provided to employee benefit plans, to the long-term detriment of plan participants.

Under the Employee Retirement Income Security Act of 1974, those who exercise discretion over the funds in an employee benefit plan are fiduciaries of the plan and held to a strict duty of care. Those who breach that duty are liable to make up to the plan all resulting economic loss.

Common-Law Twist

In recent years, some courts have read into Erisa a common-law theory that persons who are not fiduciaries but who actively assist in a fiduciary breach, may share liability.

In Mertens v. Hewitt Associates, the Supreme Court held that recovery in such "knowing participation" suits is limited to plan asset that the nonfiduciary may have obtained as a result of participating in the breach.

Unlike fiduciaries, nonfiduciaries are not liable for all economic loss to the plan resulting from the fiduciary's misconduct. The Mertens court also questioned whether Erisa supports a claim against nonfiduciaries at all, though the court reserved judgment on that issue.

The Department of Labor reacted quickly. Fearing that the limitation on relief in knowing-participation suits would hinder its efforts to collect money from unwitting deep pockets, the department drafted new legislation to overturn the result of Mertens.

Out of Control

That fact is unhappy enough, for there is little reason to believe that the Mertens decision will be a detriment to employee benefit plans. But those whose job it is to enforce the law, given this opportunity to write it, could not control themselves.

As originally drafted, the department's bill not only would establish with certainty a claim for knowing participation by a nonfiduciary, but would have enlarged available damages for all Erisa claims to include not only lost benefits, but compensation for nonmonetary loss and punitive damages.

The department also took a little for itself. The bill mandated a 5% civil penalty to be paid to the government every time a private plaintiff succeeded in an Erisa suit.

Foiled at the Last Minute

Sen. Metzenbaum attempted to append the bill to the Senate's version of the budget, quietly and without hearings. The business community lobbied hard and, with the assistance of Sen. Nancy Kassebaum of Kansas was able to prevent this last-minute amendment. The resulting compromise is a narrower bill that will be the subject of future hearings.

Unfortunately, the new bill is almost as bad as the original. Gone are the punitive damages and damages is excess of lost benefits, but the bill remains vague and poorly drafted, and, in one sense, revolutionary in its expansion of liability. The department continues to seek its pound of flesh.

The bill outlaws knowing participants in a fiduciary breach. The bill does not define "knowing." Unlike the common-law cause of action, which required an active furtherance of the breach, the Department of Labor in its litigation has sought liability against those whose only involvement is being in the vicinity of the breach and having significant financial resources.

Thus, the department has gone after the providers of medical and dental services on the theory that their prices were too high. According to the department, these doctors and dentists participated in a breach of duty by selling services to plan fiduciaries who overpaid with plan funds.

The participation was "knowing" because the providers knew what price they were charging. This is a remarkable reading, and an incredibly inefficient way to achieve cost control over medical and dental services.

Perhaps we can rely on the courts to reject the department's interpretation of "knowing participation" But department's legislation has a fallback provision to achieve the same result.

Under Erisa, anyone who provides services to a plan is a "party in interest." Erisa currently prevents a plan fiduciary from purchasing services from a party in interest for more than "reasonable compensation."

Erisa imposes no liability on the party in interest in such a situation. The new bill would enforce a party in interest to disgorge all profits from a transaction with a plan if the party in interest charged the plan more than "reasonable compensation." The reasonableness of a service provider's fees are to be determined after the fact, in court.

To aid service providers in conforming their behavior to the law, the Department of Labor's regulations offer this gem: Reasonableness "depend on the particular facts and circumstances of each case."

The real danger in the new provision goes well beyond the vagueness of "reasonable compensation" The party-in-interest rule, should it become law, would make every benefit plan service provider a guarantor of fiduciary conduct.

A service provider would be liable even if the provider charged the plan its customary rate for such services, and even if the provider was unaware that someone else charged less.

A service provider -- such as a doctor, lawyer, or accountant -- ordinarily deals at arm's length with those to whom services are provided; the provider is not the protector of its customers when setting fees.

If the Department of Labor has its way, this way of doing business no longer will suffice when providing services to an employee benefit plan. Service providers will have an affirmative obligation to ensure that the plan is not paying "too much" for services.

Unwelcome Consequences

This new rule is sure to have several pernicious consequences. Many service providers simply will cease doing business with benefit plans; the marginal cost of the potential liability will not be worth it.

Other providers will be forced to raise their prices or reduce the quality of services to offset the costs of dealing with plans. Ironically, the brunt of price increases will be felt by the provider's nonplan customers, as raising prices to benefit plans only increases the chance of liability.

Finally, some service providers may try to reduce their risk of liability by engaging in anti-competitive behavior. Once a service provider sets a low price for services, other providers realistically must fear that any higher price will be deemed unreasonable.

Threat of Collusion

To prevent the inevitable race to the bottom, many providers may be induced into collusion. In the end, all of this behavior will cost employees and retirees, both in and out of plants.

The Department of Labor appears to care little about these long-term consequences. Doctors, lawyers, and accountants have money, and employee benefit plans need it.

And so the Department instigates legislation that will add to its redistributive arsenal. This kind of short-sighted self-interested thinking is to be expected from hired-gun litigators. Our government should know better.

Mr. Kilberg, former solicitor of the Department of Labor, is managing partner in the Washington office of the law firm of Gibson, Dunn & Crutcher. Mr. Snyderman is an associate with the firm.

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