Erisa Litigation Newsletter

In Adedipe v. U.S. Bank, N.A., No. 13-cv-2687 (D. Minn. Nov. 21, 2014), the case involved a defined benefit plan sponsored by a bank for its employees. In 2004, plan fiduciaries determined that an asset allocation strategy of investing all of the plan’s assets among various categories of domestic and international securities was appropriate. When the stock market crashed in late 2007 and 2008, the plan lost over $1 billion.

In 2013, Plan participants sued the fiduciaries in federal district court in Minnesota, alleging (among other claims) that the 100% equities strategy violated the duties of prudence, diversification, and loyalty imposed on the fiduciaries by ERISA Section 404(a), and constituted prohibited transactions under ERISA Section 406. In their complaint, the participants asserted that the strategy exposed the plan to inordinate risk, and was adopted by plan fiduciaries to benefit the bank by permitting it to assume a higher rate of return on plan assets, thereby reducing its contribution obligations to the plan and boosting its stock price.

The defendant plan fiduciaries moved to dismiss the complaint, arguing (among other things) that the participants lacked constitutional standing to bring their claims. Asserting that the participants had not demonstrated the “injury in fact” necessary for constitutional standing, the defendants pointed out (i) that the plan’s investment losses had not resulted in the failure to pay any benefits to plan participants, (ii) that the bank was fully capable of meeting its obligations to fund the plan, and (iii) that if for some reason in the future the bank could not meet those obligations, the participants’ benefits would be paid by the Pension Benefit Guaranty Corporation.

The court disagreed and held that the plaintiffs did have constitutional standing. The court observed that, while the plan was overfunded in 2007 by more than $850 million, by 2012 its liabilities exceeded its asset value by more than $1 billion. In light of this, the court concluded that the plaintiff participants had sufficiently demonstrated an “injury in fact” of an increased risk of the plan defaulting on its benefit obligations. The court also held that the participants had adequately alleged that this injury was caused by the defendants’ fiduciary breaches and would be redressed by the relief requested by the complaint (e.g., by requiring defendants to make the plan whole for its losses).

However, the court granted the defendants’ motion to dismiss the 100% equity strategy claims based on the six-year statute of limitations in ERISA Section 413(1). The court reasoned that the complaint indicated that the strategy had been adopted in 2004, more than six years before the filing of the complaint. Rejecting the plaintiffs’ argument that their claims were timely because the fiduciaries had caused the plan to purchase equity securities during the six-year period, the court noted that the complaint challenged only the fiduciaries’ decision to adopt and maintain the 100% equity strategy, not their decision to purchase any particular security.

Although the court dismissed the claims relating to the 100% equity strategy, certain other claims in the complaint survived the motion to dismiss (e.g., a claim that the defendant fiduciaries had improperly caused the plan to invest in mutual funds advised by an affiliate of the bank).

Nationwide Life Insurance Co. has agreed to settle ERISA fiduciary breach claims brought on behalf of a class of retirement plan trustees that purchased annuity contracts and/or services from Nationwide for their plans.

The plaintiffs in the case have submitted to the court an unopposed motion for preliminary approval of the settlement. The case was originally filed in 2001, and has been the subject of a number of reported decisions. See, e.g., Haddock v. Nationwide Financial Services, Inc., 293 F.R.D. 272 (2013).

The claims in Haddock allege principally that Nationwide breached ERISA fiduciary duties by receiving revenue sharing payments from mutual funds offered to plans through its investment platform menu. Under the proposed settlement, Nationwide would not admit any wrongdoing, but would make a settlement payment of $140 million to be allocated among class members (net of attorneys’ fees and other costs).

In addition, under the proposed settlement, Nationwide would make certain revisions to (i) its disclosures to plans regarding its investment products and (ii) its procedures for making changes to its investment platform menu.

Participants in two 401(k) plans that allowed investment in the employer’s publicly traded stock brought suit against the employer sponsoring the plan and a number of its related individuals and entities that allegedly served in a fiduciary capacity with respect to the plans’ investments. Each plan allowed participants to invest in a fund holding only shares of the publicly traded stock of the employer, or to choose from other investment options. Participants who invested in the employer stock fund sued when the value of the stock held in the plans declined by roughly one-third following revelations of safety concerns surrounding key drugs sold by their employer.

Plaintiffs’ Claims Addressed in the District Court

Participants alleged that defendants breached their fiduciary duties by allowing the plans to remain invested in the employer stock at a time when the value of the stock was artificially inflated as a result of material misstatements made by the company or its officers and directors regarding the efficacy of its products. A parallel securities suit was also filed by shareholders under Sections 10(b) and 20(a) of the Exchange Act of 1934 based on the same facts. Although the district court found that the securities case could survive a motion to dismiss, it nonetheless dismissed the ERISA action, holding that defendants in the ERISA suit were either protected by a presumption of prudence then applicable to the holding of employer stock in certain plans, or that, alternatively, plaintiffs did not state a claim for imprudence where discontinuing the plans’ holdings of employer stock would either cause losses to the plan or require defendants to violate the securities laws.

The Appellate Decision

The Ninth Circuit initially reversed the dismissal order, but the Supreme Court vacated that decision and remanded for further proceedings after it decided Fifth Third Bancorp v. Dudenhoeffer which, among other things, eliminated the presumption of prudence that had previously been relied upon by the district court. Dudenhoeffer is discussed at more length in the June 26, 2014 edition of the ERISA Litigation Update.

On remand after Dudenhoeffer, the Ninth Circuit again reversed the district court’s order dismissing the complaint. The court rejected the district court’s holding that a gradual decline in the price of a stock could not establish an ERISA breach of duty claim where the price of the stock was alleged to be artificially inflated. The survival of the parallel securities claims was relevant to the Ninth Circuit panel: “If the alleged misrepresentations and omissions, scienter, and resulting decline in share price in [the related securities case] were sufficient to state a claim that defendants violated their duties under Section 10(b), the alleged misrepresentations and omissions, scienter, and resulting decline in share price in this case are sufficient to state a claim that defendants violated their more stringent duty of care under ERISA.” The Ninth Circuit further rejected the defense that the complaint failed to allege that plaintiffs actually relied on any of the allegedly misleading statements or omissions, holding that the fraud-on-the-market theory applicable to securities claims should also apply under ERISA.

The Ninth Circuit Finds No Contrary Rationale in Dudenhoeffer

The Ninth Circuit also held that allowing the case to proceed would not run afoul of the Supreme Court’s guidance in Dudenhoeffer. It asserted that defendants could have removed the stock fund without causing harm to participants because defendants could have frozen the fund to new investments when the stock was artificially inflated; doing so would not likely “have had an appreciable negative impact on the stock price.” To the extent that such an action would have sent a negative signal to the market, the Ninth Circuit was unconcerned because, among other rationales, it believed that a decline in price would have been “no more than the amount by which the price was artificially inflated” and, furthermore, the removal of the fund itself “may well have caused” those individuals who made allegedly material misstatements or omissions to the market to comply with their securities law obligations. The Ninth Circuit also held that disclosing the allegedly concealed information to the market would have allowed defendants to simultaneously comply with their obligations under the securities laws and ERISA.

Defendants have sought en banc review of the panel’s decision, arguing that, if it stands, it “will have far reaching deleterious effects.”

In Smith v. Aegon Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014), the litigation was brought by a retiree who had been receiving pension benefits under a pension plan (the “Plan”) since his retirement in 2000. In 2007, the plan sponsor amended the Plan to add a venue provision that restricted participants and beneficiaries to bring claims concerning the Plan only in the federal district court in Cedar Rapids, Iowa.

In 2011, the Plan informed the plaintiff that he had been receiving an overpayment of pension benefits for the previous 11 years. The Plan reduced, and then eliminated, the plaintiff’s entire monthly benefit payments, stating that it would continue to do so until it had recouped the overpayment, or until the plaintiff remitted the overpayment to the Plan.

The plaintiff exhausted administrative remedies provided by the Plan, and filed suit against his former employer in Kentucky state court, asserting claims for breach of contract, wage and hour state statutory violations, estoppel, and breach of the duty of good faith and fair dealing. The employer removed the action to the U.S. District Court for the Western District of Kentucky, and successfully obtained dismissal of the claims on the ground that it was not a proper party defendant. The dismissal was affirmed on appeal, after which the plaintiff filed suit against the Plan in the same federal district court. The district court dismissed the plaintiff’s complaint without prejudice because of the Plan’s venue selection clause. The plaintiff appealed.

Appeals Court Decision

In a 2-1 decision, the Sixth Circuit affirmed dismissal of the claims on the ground that the venue selection clause was enforceable and applied to the plaintiff’s claims. Noting that ERISA’s “statutory scheme . . . is built around reliance on the face of written plan documents,” the court held that the venue selection clause added to the plan by amendment was presumptively valid and enforceable.

In so ruling, the court rejected the plaintiff’s argument that a venue selection clause could lead to an excessive burden on ERISA litigants were venues to lie only in remote locations. The court noted that a party may challenge the enforceability of a venue selection clause where the clause was obtained by fraud or duress, the designated forum would ineffectively handle the suit or would be prohibitively inconvenient, but found that the plaintiff had failed to make such showing here. The court also rejected the plaintiff’s argument that the plan document under which he retired should control his case because his pension claims accrued prior to the adoption of the venue selection clause. The court held that his claims did not accrue until the Plan informed him that it was reducing his payments, which occurred after the venue selection clause was added.

The court also rejected the argument advanced by the plaintiff and by the Secretary of Labor in an amicus brief that venue selection clauses are incompatible with ERISA, which provides for “ready access to the Federal courts.” ERISA § 2(b). The court declined to afford any deference to the Secretary’s “regulation by amicus,” because, among other reasons, “the Secretary is no more expert than [the] Court is in determining whether a statute proscribes venue selection.” It held that a venue provision does not inhibit ready access to federal courts when it provides for venue in a federal court, and that the costs of subjecting a plan to varying pronouncements of federal courts around the country would undermine ERISA’s goal of providing a low-cost administration of employee benefit plans.

The court also held that the plan’s venue selection clause was not inconsistent with ERISA’s venue provision, which permits suit to be brought in one of several districts, including where the plan is administered, where the breach took place, or where a defendant resides. The court further found that, by failing to make it below, the plaintiff had waived his argument that the venue selection clause violates ERISA § 410(a), which prohibits any provisions that purports to relieve a fiduciary from liability for its duties under ERISA.

In a dissenting opinion, Circuit Judge Clay argued that the preclusive venue selection clause should be deemed unenforceable as inconsistent with the purpose, policy, and text of ERISA.

Goodwin Procter attorneys are a frequent national presenter on ERISA and related topics. Our upcoming conferences and presentations include:

Western Pension & Benefits Council San Diego ERISA Litigation and Washington Update
January 20, 2015
San Diego, CA

SIFMA Compliance & Legal Society Annual Seminar 2015
March 15, 2015
Phoenix, AZ

ICI 2015 Mutual Funds and Investment Management Conference
March 15-18, 2015
Palm Desert, CA