Ninth Circuit Court of Appeals Reverses Two Decisions That Had Dismissed Lawsuits

Key Takeaway: The Ninth Circuit recently issued a pair of unpublished decisions that reversed district court dismissals of lawsuits alleging a failure to offer lower-cost share classes as plan investment options.

In April 2022, the Ninth Circuit Court of Appeals issued two decisions addressing the pleading standard for class actions alleging a violation of the duty of prudence. Both complaints—one filed against Trader Joe’s Company, and one filed against, Inc.—alleged that the defendants had acted imprudently by offering higher-cost share classes of mutual funds as plan investment options that, according to the plaintiffs, were materially identical to other, lower-cost share classes that the defendants should have offered instead. In the case against (filed in the District of Arizona), the plaintiffs identified two lower-cost share classes of a target-date suite of mutual funds offered by the plan, as well as various collective investment trusts that were allegedly superior options. Similarly, in the case against Trader Joe’s (filed in the Central District of California), the plaintiffs alleged that the plan options were overly weighted toward actively managed funds, and that the defendants should have offered R-share classes rather than A-share classes. The district courts in both cases granted the defendants’ motion to dismiss under Rule 12(b)(6). 

The Ninth Circuit Court of Appeals reversed both decisions. In both cases, the defendants argued that their plans’ revenue-sharing arrangements accounted for the cost difference between the share class options, meaning there was an obvious alternative explanation for the defendants’ investment choices. While both decisions from the Ninth Circuit recognized that this justification might ultimately prevail, the court concluded that the plaintiffs’ explanation was equally plausible, and that the defendants were therefore not entitled to dismissal under prior Ninth Circuit caselaw that had held that “if there are two alternative explanations, one advanced by defendant and the other advanced by plaintiff, both of which are plausible, plaintiff’s complaint survives a motion to dismiss.” The court thus remanded the cases to the district courts for further proceedings.

The two Ninth Circuit Court of Appeals decisions are Davis v., Inc., No. 21-15867 (available here), and Kong v. Trader Joe’s Co., No. 20-56415 (available here).