Category Archives: ERISA Litigation Index

Victory for Plaintiffs: 7th Circuit Allows Class Certifications for Excessive Fee Cases

Back in May, we previously discussed the oral argument held in the 7th Circuit case Abbott v. Lockheed Martin Corporation. At issue was the district court’s denial of class certification in an excessive fee case. Today, August 7, the 7th Circuit issued a plan participant/plaintiff friendly opinion reversing the district court’s denial of class certification and providing much needed clarification of the previous 7th Circuit case Spano v. Boeing Corp. In Spano, the 7th Circuit rejected an overly broad class definition that generically included all past, current, and future plan participants, and instead required certain limitations, as discussed below.

Before we dive into the decision, it is worth noting that this opinion is written by Circuit Judge Diane Pamela Wood, who previously wrote the decisions in Spano and Hecker v. Deere. In my previous blog post, I hinted that at oral arguments, Circuit Judge Wood showed a sympathy towards the plan participants/plaintiffs that I had not previously seen from the court. Whether this decision is evidence of a long term change in tone and jurisprudence of the 7th Circuit (which is generally known as the most plan sponsor friendly), remains to be seen. Now to the decision.

The plaintiffs in Abbott allege a number of different claims that are discussed in greater detail in our previous blog post and the case page on the ERISA Litigation Index. Only the class certification of one claim was at issue on this appeal, which the 7th Circuit summarizes nicely:

Plaintiffs allege that the [Stable Value Fund] that Lockheed offered through its Plan failed to conform to [the general description of a SVF]. Rather than containing a mix of short- and intermediate-term investments, Lockheed’s SVF was heavily invested in short-term money market investments. This resulted in a low rate of return, such that in Lockheed’s own words, the SVF did “not beat inflation by a sufficient margin to provide a meaningful retirement asset.” Plaintiffs contend that structuring the SVF in this manner amounted to imprudent management and violated Lockheed’s duty to manage the Plan “with [] care, skill, prudence, and diligence under the circumstances.” 29 U.S.C. § 1104(a)(1)(B).

Slip op. at 9.

After the 7th Circuit vacated the previous granting of class certification in Abbott that mimicked the rejected definition in Spano, the Abbott plaintiffs moved to amend. To conform to the statement in Spano that “a class representative in a defined-contribution case would at a minimum need to have invested in the same funds as the class members,” plaintiffs proposed separate classes for each claim, including one just for the SVF claim, with class membership limited to those plan participants who invested in the SVF during the class period. To conform to Spano’s warning that the class must not be “defined so broadly that some members will actually be harmed” by the relief sought, plaintiffs limited their definition of the SVF class to those who suffered damages as a result of Lockheed’s purportedly imprudent management of the fund. To achieve this latter result, Plaintiffs proposed to use as a benchmark for class certification purposes the Hueler FirstSource Universe index (Hueler Index).

The district court rejected this more limited definition, because in it’s view, including the Hueler Index in the class definition was an improper attempt to “use class certification to ‘back door’ a resolution of this contested issue [i.e., the proper measure of loss] in [Plaintiffs’] favor,” which the district court argued could only be decided at the merit’s stage.

In reversing, the 7th Circuit first addresses Lockheed Martin’s argument that the plaintiffs lacked Article III standing to bring the SVF claim because only one plaintiff was invested in the fund during the class period and was not necessarily injured when the performance of his account is compared to the performance of the Hueler Index. Drawing upon previous circuit decisions, the opinion makes quite clear that the Abbott plaintiffs always had standing because “[i]njury-in-fact for standing purposes is not the same thing as the ultimate measure of recovery. The fact that a plaintiff may have difficulty proving damages does not mean that he cannot have been harmed.” Slip op. at 9. Instead, if the plaintiff later loses on the merits, their case is just dismissed. The court does not go back in time and dismiss for lack of standing. Slip op. at 9-10.

The 7th Circuit next addresses the issue of whether it is proper to include the Hueler Index, or any benchmark of damages, in a class definition, in order to determine “who the adversaries are,” allow “the defendant to gauge the extent of its exposure to liability,” and to alert “excluded parties to consider whether they need to undertake separate actions in order to protect their rights.” Slip op. at 13. The court resoundingly rejects the position of Lockheed Martin, and the district court, and finds that including such a benchmark is perfectly acceptable:

Plaintiffs are not arguing that the SVF was imprudently managed in violation of ERISA because it did not match or outperform the Hueler Index; rather, Plaintiffs allege that the SVF was imprudently managed because its mix of investments was not structured to allow the fund to beat inflation and therefore that it could not serve as a prudent retirement investment for Lockheed employees. If Plaintiffs prevail on this theory, they may offer the Hueler Index as one basis for calculating damages. For now, however, the reference to the Hueler Index in the class definition in no way binds the district court to the use of the Hueler Index as the damages measure should Plaintiffs prevail. If the court concludes that a different measure would be better, it is free to use one.

Slip op. at 12-13.

Next, addressing the merits of the plaintiffs’ SVF claim, the decision rejects Lockheed Martin’s argument that plaintiffs are really arguing a “misrepresentation through omission: namely, that Lockheed allegedly inadequately disclosed the nature of the SVF to Plan participants.” Slip op. at 14. The court finds that Lockheed distorts the plaintiffs’ claim “when it characterizes their theory as one in which the SVF was imprudently managed because it deviated from the mix of investments held by other funds bearing the “stable value” label.” Id. Instead, the court concludes that plaintiffs “aim to show that the SVF was not structured to beat inflation, that it did not conform to its own Plan documents, and that Lockheed failed to alter the SVF’s investment portfolio even after members of its own pension committee voiced concerns that the SVF was not structured to provide a suitable retirement asset. The fact that the SVF’s investment mix apparently deviated from that of other, similarly named funds may be relevant evidence on which Plaintiffs will rely, but it does not exhaust their theory of imprudence.” Id.

Finally, addressing the the last 2+ years of upheaval since the Spano decision (and its sister case Beesley v. Int’l Paper Co. decided in the same decision), the court states:

The combination of exceedingly broad class definitions and murky claims made it difficult to assess the district court’s certification orders…Against that background, we were certain only that the particular classes before us could not stand. While we may have offered some guidance for how to approach class certification in actions under Section 502(a)(2), we emphasized that we were deciding only the cases before us…this court has never held, and Spano did not imply, that the mere possibility that a trivial level of intra-class conflict may materialize as the litigation progresses forecloses class certification entirely.

The appropriateness of class treatment in a Section 502(a)(2) case (as in other class actions) depends on the claims for which certification is sought. Here, the specifics of the SVF claim make it unlikely that the sorts of conflicts that concerned us in Spano will arise. Plaintiffs emphasize that a Section 502(a)(2) action seeks only to make the fiduciary refund to the Plan any losses caused by the breach. 29 U.S.C. § 1109(a) (“Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach … .”). There appears to be no risk that any SVF investor who benefited from Lockheed’s imprudent management would have her Plan assets reduced as a result of this lawsuit. Moreover, unlike many imprudent management claims—in which the allegation is that fraud or undue risk inflated the value of a fund and then caused it to crash, see, e.g., In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 592 (3d Cir. 2009)—Plaintiffs’ allegation is that the SVF was so low-risk that its growth was insufficient for a retirement asset. A very low-risk fund is by nature not subject to the wide swings in value that would enable some investors to reap a windfall from a fund’s mismanagement. Finally, the fact that the SVF underperformed relative to the Hueler Index for all but a very brief portion of the class period reinforces the intuition that few, if any, SVF investors profited from Lockheed’s conduct. Should any of these statements turn out to be wrong, the district court can make further adjustments to the class definition later.

Slip op. at 20-21.

So what are my immediate thoughts following this decision? A few. First, this is a resounding victory for the Abbott plaintiffs in winning on every single litigated issue. This will no doubt provide wind in the sails of additional plan participants to file cases against plan sponsors over under-performing funds. Second, there are a number of other cases in district courts in the 7th Circuit that have been held up waiting for this decision. With this decision, those cases will most likely move forward with plan participant friendly class certifications being granted on at least some of the alleged claims. Third, this decision may be seen on a similar plane as the Tussey and Tibble decisions as a watershed moment for fiduciaries to understand their duties regarding the requirement to prudently select funds, even “conservative” funds, such as SVFs. Although the Abbott plaintiffs have yet to prove their case, the fact that the plaintiffs have come this far strongly suggests at least some viability to their claims.

So what’s next? It’s possible that Lockheed Martin will try to take this to the Supreme Court, although I find it doubtful that certiorari would be granted based upon my previous experience in such endeavors, but anything’s possible. Most likely, this will go the normal route, back to the district court, where it is likely a class will be granted for the SVF claim. If/once that happens, this case is scheduled to go to trial as soon as the court’s calendar allows.

Breaking: 9th Circuit Amends Tibble v Edison Opinion on Rehearing

As we previously wrote about, the Plaintiffs in Tibble v. Edison Int’l filed a Petition for Rehearing to both the three judge panel and all active 9th Circuit judges at large. Today, August 1, the three judge panel amended their opinion and explicitly rejected any further attempts by the Plaintiffs to seek redress in the 9th Circuit. Although, as explained below, the judges tweaked their opinion regarding the application of Firestone deference, the opinion remains effectively unchanged.

In their Petition, Plaintiffs raised two primary questions to be reheard:

[list type=”dot”]
[list_item]Does the statute of limitations in ERISA, 29 U.S.C. § 1113(1), bar a plan participant from bringing suit against a fiduciary who persists in maintaining imprudent funds on the menu of a 401(k) plan if such funds were initially included more than six years beforehand and had always been unlawful in the same way they are currently unlawful (the “Limitations Question”)?[/list_item]
[list_item]Are ERISA fiduciaries entitled to have their interpretation of plan documents reviewed under the deferential standard established in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), in a lawsuit seeking relief under 29 U.S.C. § 1132(a)(2) where the fiduciary is alleged to have, in violation of 29 U.S.C. § 1104, ignored the valid interests of beneficiaries in favor of non- beneficiaries (the “Deference Question”)?[/list_item]

As to the first question, the judges did not even address it in their amended opinion and state that no active judge of the 9th Circuit voted to have the issue reheard. Thus, the plan sponsor friendly interpretation of the 6 year statute of limitations remains the law.

As to the second, the judges deleted two plus pages of their previous opinion and replaced it with new language. The judges have backed down from their very broad decision that Firestone deference to a plan administrator applies equally when violations of fiduciary duties under ERISA sections 404 and 502(a)(2) have been alleged, as when a benefits claim is filed under section 502(a)(1)(B). Instead, they now attempt to harmonize their finding that Edison is entitled to deference with cases such as the John Blair decision from the 2nd Circuit, by arguing that John Blair rejected Firestone deference only when a plan administrator is attempting to replace the prudent man standard under ERISA section 404(a)(1)(B) with the plan interpretation provision under 404(a)(1)(D). The judges here find no such scenario finding that the Plaintiffs “have not pursued this challenge as a violation of the prudent person standard; instead, their contention rises or falls exclusively on what Plan section 19.02 allows. As to issues of plan interpretation that do not implicate ERISA’s statutory duties, they are subject to Firestone.” Slip op. at 9.

My immediate reaction is three-fold:

[list type=”dot”]
[list_item]First, the judge’s amended opinion still appears to conflict with the John Blair decision which held that Firestone deference should not apply when a plan administrator has “sacrificed valid interests [of beneficiaries] to advance the interests of non-beneficiaries.” 26 F.3d 360, 369-70. It’s pretty clear that the Plaintiffs here have alleged that Edison advanced its own interest by interpreting the plan provision that stated that Edison must pay all administrative costs, as one that states that the Edison can use revenue sharing to offset Edison’s bills rather than reimburse the money back to plan participants.[/list_item]
[list_item]Second, it’s also somewhat unbelievable for the 9th Circuit to state that Plaintiffs failed to argue that Edison’s actions were an independent violation of ERISA’s statutory duties, when in a footnote in their opinion cited to that very sentence, they acknowledge a claim under ERISA section 406(b)(3) for the improper receipt of consideration, but the judges are rejecting that claim. So does this mean deference only applies where the court finds no separate breach of another provision? (Compare John Blair: prudent man violation = no deference with Edison: no 406(b)(3) violation = deference applies) Doesn’t this mean then that the arbitrary and capricious standard that the 9th Circuit wants to benefit the plan administrator with is really just masquerading as the fiduciary duty test of other ERISA provisions such as 404(a)(1)(B) or 406?[/list_item]
[list_item]Third, the panel also appears to have failed to read 404(a)(1)(D) when they stated “[w]hile subsection (a)(1)(B) codifies the statutory prudent-person standard, subsection (a)(1)(D) simply requires that actions be in line with the plan documents.” Slip op. at 8. In fact, the language at (a)(1)(D) must be read with the intro language at (a)(1): “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and…in accordance with the documents and instruments governing the plan…” It’s simply hard for me to reconcile their reading of (a)(1)(D) with the actual language of the statute. This provision is supposed to have teeth and the three judge panel just neutered it. Especially in a situation where a fiduciary is being given deference to interpret a plan document to benefit a non-beneficiary that is itself.[/list_item]

With the three judge panel explicitly stating that “[n]o further petitions for panel rehearing or for rehearing en banc will be entertained,” it remains to be seen whether the Plaintiffs take this all the way to the Supreme Court. If they do, we will report on it first.



Breaking – Cigna and Prudential Settle Excessive Fee Lawsuit for $35 Million

Today, June 21, 2013, the parties in Nolte v. Cigna Corp. filed papers indicating they have settled their lawsuit and are now seeking approval of the district court. Key defendants in the case are Cigna Corp. and Prudential Retirement Insurance And Annuity Company (PRIAC). In total, they have agreed to pay to plaintiffs $35 million and have agreed to substantive affirmative relief. A copy of the motion seeking settlement can be found here. The settlement agreement is attached to the motion as Exhibit A.

The Nolte case was filed in March of 2007 by current and former participants in Cigna’s own in-house 401(k) plan and was stayed pending the outcome of the 7th Circuit decision in Hecker v. Deere. The judge allowed the case to move forward and in September 2011, the plaintiffs filed their fourth amended complaint. The following quote from the plaintiffs’ class certification motion gives a good overview of plaintiffs’ allegations:

Broadly, Plaintiffs contend that their employer CIGNA Corporation and its officers, employees, and subsidiaries operated Plaintiffs’ 401(k) Plan not for the exclusive benefit of Plan participants as ERISA requires, but instead as a profit center for CIGNA’s business by taking unreasonable fees from participant accounts, using its own funds, never putting Plan services out for competitive bids, and engaging in prohibited transactions with Plan assets. Indeed, Plaintiff’s 401(k) Plan was the flagship and largest 401(k) plan in CIGNA’s Retirement Division, which it sold in April 2004 to Prudential Financial Inc. for over $2 billion. Despite their retirement assets providing seed capital for CIGNA’s retirement business, Plan participants received none of the profit CIGNA received from the sale. A vital component of that sale was a secret “gentlemen’s agreement” between CIGNA and Prudential under which CIGNA secretly committed to keep Prudential on as the fee-earning fiduciary of the Plan for at least three years after the sale, to get a higher sale price for itself and to ensure Prudential would benefit from the profits generated by the unreasonable 401(k) Plan fees paid by participants. Even though CIGNA remained a Plan fiduciary, it allowed Prudential to continue taking unreasonable and prohibited fees from Plan assets. Prudential, which became a fiduciary to the Plan upon closing the sale, commenced doing the same thing CIGNA had done—using its own funds, not putting services out for bids, taking grossly excessive fees, determining what its own fees are, and engaging in prohibited transactions with Plan assets.

A significant part of plaintiffs’ claims had to do with an investment of over $1 billion in stable value assets invested in Cigna’s general account, a practice the plaintiffs alleged was imprudent and self-serving. Generally, the allegations here resemble those in other cases that have previously settled, such as Kanawi v. Bechtel Corp., Martin v. Caterpillar, Inc., and Will v. General Dynamics Corp, which all involved in-house plans and self dealing.

In settling a case such as this, the parties seek to have the case certified as a class action for purposes of the settlement. Here, the proposed settlement class is defined as:

All persons who, at any time between April 1, 1999 and May 31, 2013, inclusive, had an account in the Cigna 401(k) Plan, as well as their beneficiaries, alternative payees or attorneys-in-fact who are or become entitled to any portion of such an account; provided, however, that the Class shall not include; (a) any Defendant, or member of the Investment Committee or the Administrative Committee betweenApril 1, 1999, and May 31, 2013, and as to each person within the scope of clause (a), his/her immediate family members, beneficiaries, alternate payees or attorneys-in-fact.

Plaintiffs were represented by Schlichter, Bogard & Denton, which will seek to have $11,666,667 in fees and $1.2 million in costs approved by the district court and taken from the gross settlement fund. This is the largest settlement, by nearly double, that has ever been obtained in an excessive fee lawsuit by the firm, although the judgment in Tussey v. ABB, Inc. was slightly higher.

Cigna was represented by Morgan Lewis & Bockius, LLP and Prudential was represented by O’Melveny & Myers, LLP.

Motions to Dismiss Filed in Two Church Plan Exemption Cases

On June 17, 2013, defendants in Chavies v. Catholic Health East and Rollins v. Dignity Health each filed motions to dismiss the lawsuits against them. A copy of the motion in Chavies is available here. A copy of the motion in Rollins is available here.

Each motion makes two broad arguments: (1) the defined benefit pension plan is a proper church plan and (2) the church plan exemption does not violate the Establishment Clause.

Each motion is highly factual in arguing how each hospital association is closely connected with and controlled by the Roman Catholic Church. This is not a surprise, as the issue of control is going to be the key to resolution of these cases. For example, the motion in Chavies attaches a comprehensive affidavit from a nun/adminstrator that spends significant pages explaining canon law of the Catholic church. The Chavies motion also lays out what appears to be a complete, or nearly complete, listing of every court case to ever address the church plan exemption.

Of interest, both motions were filed by the law firm Morgan Lewis & Bockius, LLP, although by different groups of attorneys within the firm, many of whom I’ve had the pleasure of previously litigating cases against.


Fidelity Files a Motion to Dismiss the Lawsuit Regarding Its Own In-House Plan

Today, June 3, 2013, Fidelity filed a motion to dismiss the complaint in Bilewicz v. FMR, LLC. As previous readers will know, a former participant in the Fidelity in-house 401(k) profit sharing plan filed a lawsuit on March 19, 2013 alleging various violations of ERISA because Fidelity only uses its own proprietary products in the plan. A previous post about the lawsuit (and others) can be found here: Fidelity is Targeted Again and This Time Regarding Its Own In House Plan (April 16, 2013).

The Motion to Dismiss filed by Fidelity, IMO, is one of the better briefs I’ve read recently and draws heavily on previous employer successes such as Hecker v. Deere & Co., Loomis v. Exelon Corp., Renfro v. Unisys Corp, and to a large extent, Tibble v. Edison Int’l. A copy of the motion to dismiss can be found here: Bilewicz v. FMR LLC – 13-10636 – (Doc. 24) Motion to Dismiss.

Fidelity makes the following non-exhaustive list of legal and factual arguments:

  1. Plaintiff lacks constitutional standing to bring her claims because she was only invested in a small sub-set of a much larger group of Fidelity funds in the plan.
  2. The claims are barred under ERISA’s 3-year and 6-year statute of limitations. Only a very limited number of the funds in the plan were added during those time periods.
  3. Fidelity offered free advice to all participants to help them pick from the plan’s lineup.
  4. Between 2007 and 2011, Fidelity contributed $2.1 billion in employer contributions, which purportedly amounts to 10 times the alleged amount of excessive fees paid back to Fidelity from the plan’s investments.
  5. Prohibited Transaction Exemption 77-3 expressly allows a company like Fidelity to use its own mutual funds.
  6. FMR, LLC is not a fiduciary.
  7. The plaintiff has no right to a jury trial.

From here, a couple of things may happen. The plaintiff may amend their complaint which would then start the process over again, with Fidelity (almost definitely) filing another motion to dismiss. Or the plaintiff may go ahead and stick with the complaint they have, file a response, then Fidelity files a reply, then oral argument before the district court judge, and then a ruling.

Stay tuned.


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