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.

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