ERISA Litigation Update

Key Takeaway: Petitioners, the plaintiffs in the underlying litigation, continue to ask the U.S. Supreme Court to recognize a liberal pleading standard, which would make it more difficult for defendants to dismiss claims challenging plan investments or administrative expenses at early stages of a litigation. 

In our previous ERISA Litigation Update, we highlighted that the Supreme Court had granted certiorari in Hughes v. Northwestern University, a case presenting an important question about the allegations necessary to state a plausible claim for breach of ERISA’s fiduciary duties in cases challenging a defined contribution plan’s investment line-up or the plan’s administrative expenses. The petitioners challenged the investments and fees of Northwestern University’s 403(b) retirement plan, and the Seventh Circuit previously affirmed the dismissal of their complaint for failure to state a claim. 

On September 3, 2021, the petitioners filed their opening brief to the Supreme Court. Unlike the more narrow approach taken by the U.S. Solicitor General in its May 25, 2021 brief to the Supreme Court in which the Solicitor General suggested that the underlying dismissal should be reversed as to a subset of the petitioners’ allegations regarding a failure to offer the cheapest share class of certain plan investments, the petitioners’ brief argued that the Supreme Court should vacate the Seventh Circuit’s entire ruling for several reasons. First, the petitioners characterized the Seventh Circuit’s decision as holding that plan fiduciaries satisfy their duties, and can prevail on a motion to dismiss, simply by arguing that they have offered a wide range of investment options. The petitioners argued that such a ruling runs contrary to the Supreme Court’s Tibble v. Edison International decision, which held that plan fiduciaries have a duty to monitor every investment on a plan’s investment menu. Second, in further reliance on Tibble, the petitioners also argued that their challenge to the plan’s inclusion of retail share classes should be allowed to proceed because the Tibble plaintiffs had challenged the same conduct. Third, the petitioners argued that the Seventh Circuit failed to draw reasonable inferences in the petitioners’ favor and improperly made a merits decision when it credited Northwestern University’s explanation for why it used the recordkeeper that it did. Fourth, and finally, the petitioners also argued that facts discovered while their motion to dismiss was pending substantiated their allegations of imprudence.

Several amici filed briefs in support of the petitioners, including the American Association for Justice, the Investment Law Scholars, and the AARP Foundation (which was joined by several other entities). The American Association for Justice argued that the Seventh Circuit had adopted too lenient a view of ERISA’s fiduciary duties, and the AARP’s brief similarly argued that the Seventh Circuit had imposed too stringent a pleading standard in affirming dismissal of the petitioners’ claims. The Investment Law Scholars’ amicus brief argued that large retirement plan menus are harmful to participants.

The defendants in the case below, the respondents before the Supreme Court, will file their brief by October 21, 2021, and any amici in support will file their briefs by October 28. The case is set for oral arguments on December 6, 2021. The petitioners’ brief is available here. 

Key Takeaway: The defendant successfully argued that the plaintiffs lacked standing to challenge the plan fiduciaries’ decision to offer a demand deposit fund as a capital preservation option rather than a stable value fund, where the fiduciaries later added a stable value fund to the plan and the plaintiffs chose to not invest in the fund.

On July 19, 2021, the Fifth Circuit Court of Appeals affirmed the Northern District of Texas’s grant of summary judgment in favor of the defendant on the grounds that the plaintiffs lacked standing to pursue their claims. The plaintiffs primarily challenged the plan fiduciaries’ decision to offer a demand deposit fund as the plan’s capital preservation option rather than a stable value fund. The plaintiffs alleged that a stable value fund should have been included as a plan investment option because such a fund would have offered higher rates of return than did the demand deposit fund, which was equivalent to an interest-bearing checking account. 

The Fifth Circuit Court of Appeals found that the plaintiffs lacked standing to pursue these claims because they elected not to invest in a stable value fund once one was added to the plan. In 2015, approximately five years into the putative class period, the plan’s fiduciaries added a stable value fund to the plan, but neither of the two named plaintiffs moved their plan account balances from the demand deposit fund to the stable value fund. Because of this, the Fifth Circuit found that the plaintiffs could not prove that any injury they suffered from not investing in the stable value fund was caused by the fiduciaries’ decision to not initially offer one, rather than by their own seeming preference for a demand deposit fund. This decision is notable because it is one of the strongest decisions in support of the principle that courts should look to the revealed preferences of the named plaintiffs or the plan participants as a whole in considering standing or merits issues. 

The case is Ortiz v. American Airlines, Inc., No. 20-10817, in the U.S. Court of Appeals for the Fifth Circuit. The decision is available here. 

Key Takeaway: The Second Circuit Court of Appeals agreed with plaintiffs that allegations that retail class shares were offered as retirement plan options instead of less expensive institutional class shares can be sufficient to overcome a motion to dismiss. This ruling may make it more difficult for defendants to prevail on a motion to dismiss in the Second Circuit where the plaintiffs make allegations regarding the availability of cheaper share classes.

On August 16, 2021, the Second Circuit Court of Appeals affirmed and reversed several rulings by the Southern District of New York in a case challenging the investments offered in — and recordkeeping fees paid in connection with — two of New York University’s 403(b) plans. As part of its decision, the Second Circuit affirmed the district court’s trial verdict in favor of the defendants, as well as its rulings in favor of the defendants on several post-trial motions. However, the Second Circuit’s most impactful ruling may be its reversal of the district court’s 2017 decision that had, in part, granted the defendants’ motion to dismiss with respect to allegations that the plan offered retail share classes of certain investments rather than less expensive institutional share classes. 

The plaintiffs alleged that the defendants included 63 retail share class options in two 403(b) plans when identical, less expensive institutional class shares of the same investments were available. The district court held, consistent with rulings by several other courts, that these allegations were not sufficient to state a claim because there are a number of valid reasons why a fiduciary might decide to include retail class shares as plan options. The Second Circuit disagreed. It ruled that such allegations state a claim for relief where the plaintiffs allege, as these plaintiffs had, that the fiduciaries were aware (or should have been aware) that cheaper share classes of the same investments were available, but failed to include them in the plan. The Second Court reasoned that, although there may be valid reasons for fiduciaries to make available retail share class options, such a determination should be made at a later stage of the proceedings. The case has been remanded to the district court for further proceedings. 

The case is Sacerdote v. N.Y. Univ., No. 18-2707, in the U.S. Court of Appeals for the Second Circuit. The decision is available here.

Key Takeaway: The Seventh Circuit Court of Appeals indicated that plans may require arbitration of fiduciary duty claims, but declined to enforce a plan’s arbitration clause because it barred participants from seeking or receiving relief that would benefit other plan participants.

On September 10, 2021, the Seventh Circuit Court of Appeals affirmed the Northern District of Illinois’s denial of a motion to compel arbitration of breach of fiduciary duty claims. In an earlier ERISA Litigation Update, we previewed the issue before the Seventh Circuit and noted that, had the Seventh Circuit ruled that plans could require arbitration of breach of fiduciary duty claims, it would be only the second court of appeals to rule as such after the Ninth Circuit.

In its decision, the Seventh Circuit found that plans may require participants to arbitrate fiduciary duty claims, and may preclude participants from asserting putative class claims in arbitration, but nonetheless held that the arbitration clause in the at-issue governing plan document was unenforceable because it prohibited relief that ERISA permits. The specific plan language that the Seventh Circuit found objectionable was that “[e]ach arbitration shall be limited solely to one Claimant’s Covered Claims, and that Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than the Claimant.” The Seventh Circuit reasoned that this language improperly prevented participants from seeking certain forms of plan-wide relief permitted by ERISA, including the removal of plan fiduciaries, which would necessarily affect all plan participants. Finally, although the Seventh Circuit indicated general support for plan arbitration clauses, it declined to rule on whether a participant must consent to the plan’s arbitration clause for it to be effective as to that individual. A ruling on that issue could greatly impact the administrability and enforceability of arbitration clauses in plan documents in the Seventh Circuit and potentially other jurisdictions. 

The case is Smith v. Bd of Dir. of Triad Mfg., Inc., No. 18-2707, in the U.S. Court of Appeals for the Seventh Circuit. The decision is available here. 

Recent Speaking Engagements 

• Webinar: Defined Contribution Litigation: What Plan Sponsors Need to Know Now (September 2021)

Goodwin ERISA Litigation partner Jamie Fleckner participated in a webinar with NEPC senior consultant Dan Beaton to discuss the current litigation environment in the Defined Contribution space, including the high volume of cases despite the COVID-19 pandemic, the primary focus of most cases, and why many cases have moved down market to smaller plans.

CLE Opportunities

• The Supreme Court, October Term 2021: Arguments from a Closed Courtroom 

This is a significant Supreme Court Term for ERISA litigation, with the Supreme Court set to decide Hughes v. Northwestern University, a case about the standard for pleading a claim of fiduciary breach in the context of challenges to plan line-ups and service-provider arrangements. Jaime Santos and Willy Jay from Goodwin’s Supreme Court and Appellate practice have developed an informative and entertaining CLE about this case and the upcoming Supreme Court Term more generally. They will discuss what the term might mean for business and for citizens who follow constitutional litigation. If you would like Jaime and Willy to present the CLE to your in-house legal department (either virtually or in person), please reach out to Ellie Cramton and she will help you schedule the presentation and tailor it to the interests of your legal team.

Amelie Hopkins was a contributing author to this edition.