ERISA Litigation Update

Key Takeaway: The defendant successfully moved to dismiss a lawsuit alleging excessive recordkeeping fees, among other allegations, where the plaintiff had compared the plan’s fees to industry averages that did not take into account differences in recordkeeping services provided in exchange for the fees.

On February 9, 2021, the Northern District of California granted Genentech, Inc.’s motion to dismiss, with leave to amend, in a case challenging the administrative fees paid and investment options made available in Genentech’s 401(k) plan. The plaintiff asserted that the defendants breached their ERISA duties of loyalty and prudence by imposing excessive administrative fees and investment management fees on plan participants, as well as by selecting certain allegedly underperforming and excessively expensive investments. The plaintiff filed an amended complaint on March 1, 2021.

The Genentech decision is notable because the court found that the plaintiff’s comparison of the plan’s fees and investments to industry averages — a common trend that we have seen in many complaints filed in 2020 and 2021 — was insufficient to show a breach of fiduciary duty with respect to the plan at issue. Specifically, the court held that the plaintiff’s comparison of the plan’s recordkeeping fees and investment management fees to industry averages was invalid because they were apples-to-oranges comparisons. For example, the court rejected the plaintiff’s comparison of the plan’s administrative fees to average administrative fees published in an industry publication because the cited fees did not speak to the value of the specific services provided to the plan at issue. Similarly, although the plaintiff alleged that the plan’s total costs exceeded an average plan cost cited by the plaintiff, the district court found those allegations deficient because the plaintiff failed to compare the plan’s costs to that of any specific comparable plans. Finally, the court rejected the allegations that the defendants breached their duties with respect to the selection of certain investments, ruling that the plaintiff failed to compare the at-issue investments to appropriate comparators.

This case is Wehner v. Genentech, Inc., No. 20-6894, in the Northern District of California. The decision is available here.

Key Takeaway: The defendant successfully moved to dismiss an excessive fees lawsuit where the plaintiffs had failed to plead sufficient facts to demonstrate that the comparators that the plaintiffs chose for the plan’s investments were appropriate comparators for those investments.

On January 21, 2021, the Northern District of California granted, with leave to amend, Intel’s motion to dismiss a complaint challenging the investment options made available to two Intel defined contribution plans. This is the latest development in a case that has already been heard by the Supreme Court. In 2020, the Supreme Court affirmed the Ninth Circuit’s decision overruling the district court’s grant of summary judgment, ruling that the case was not time-barred under ERISA’s statute of limitations and remanding the case to the district court to evaluate other arguments raised by Intel in its motion to dismiss. Plaintiffs in the case are former employees of Intel who participated in the two plans at issue. They principally alleged that the defendants breached ERISA’s duty of loyalty and prudence in selecting, monitoring, and managing the investments made available in the plans, which the plaintiffs had alleged improperly included target date portfolios that invested in significant amounts in hedge funds and private equity investments, along with other ancillary or derivative claims. Plaintiffs filed an amended complaint on March 22, 2021.

The district court found that the plaintiffs’ claims failed because the plaintiffs did not plead sufficient factual allegations to establish that the plaintiffs had compared the at-issue funds to appropriate benchmarks. For example, although the plaintiffs alleged that the funds in the Intel plans had poor performance or high fees compared to investments identified by the plaintiffs as alternative investments, the court found these allegations deficient where the plaintiffs had failed to provide adequate information to support their argument that the comparators chosen were adequate benchmarks for the at-issue funds. In addition, the district court rejected the plaintiffs’ arguments that it was imprudent or disloyal for Intel to offer investment options not commonly made available in 401(k) plans, ruling that ERISA does not require fiduciaries to all make the same decisions. Finally, the district court rejected the plaintiffs’ arguments of disloyal or self-interested conduct as conclusory.

This case is Sulyma v. Intel Corp. Inv. Policy Comm., No. 19-4618, in the Northern District of California. The decision is available here.

Key Takeaway: The Department of Labor announced that it will not enforce its “Financial Factors in Selecting Plan Investments” final rule, the so-called “ESG Rule,” which had amended prior rulemaking to require plan fiduciaries to select investments for plans based solely on pecuniary factors, rather than based on environmental, social, and governance (ESG) considerations, and had made further changes to generally-understood interpretations of ERISA’s duty of prudence.

On March 10, 2021, the Department of Labor announced that it would not seek to enforce the ESG Rule, “or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with” the rule, until the Department issues further guidance. The final ESG Rule was published on November 13, 2020, purportedly to address when and how ESG considerations could factor into fiduciary decision-making. To that end, it had amended the Department’s prior “Investment Duties” regulation to require plan fiduciaries to select investments “based only on pecuniary factors” unless the fiduciary was “unable to distinguish [between investments] on the basis of pecuniary factors alone.” “Pecuniary factors” were defined to be factors that have a “material effect on the risk and/or return of an investment.” The regulation therefore foreclosed fiduciaries from taking into account ESG considerations unless those considerations materially impacted an investment’s risk or return, or as a tie-breaker if the investments had similar so-called non-pecuniary factors. But the ESG Rule had also swept even broader, beyond ESG considerations or ESG investments, to interpret ERISA’s duties of prudence to require fiduciaries to compare all plan investments to “reasonably available alternatives with similar risks.” That portion of the rule was inconsistent with the Department’s prior guidance suggesting that the duty of prudence was a flexible standard, requiring only that fiduciaries give “adequate consideration” to the relevant “facts and circumstances,” and to court decisions that had similarly interpreted the duty of prudence as not requiring any specific conduct.

The Department “intends to revisit the” ESG Rule, and further rulemaking on this issue is therefore likely forthcoming. The Department’s announcement is here. Goodwin’s ERISA counselling practice issued a client alert regarding the Department’s announcement to offer further insights.

Key Takeaway: The Eighth Circuit recently ruled that a third-party administrator was not a fiduciary to a health plan where it made recommendations regarding payments, but the plan sponsor retained final authority to approve or deny the recommendation and then make the payments.

On February 1, 2021, the Eighth Circuit Court of Appeals affirmed a decision that had granted summary judgment in favor of the defendants on the ground that the defendants, third-party administrators of a health plan, were not ERISA fiduciaries with respect to the conduct at-issue. The plaintiff, a health plan’s sponsor, had alleged that third-party plan administrators of the sponsor’s self-funded health care plan had breached their fiduciary duties under ERISA. The sponsor alleged that the third-party administrators, which were responsible for reviewing medical bills and making recommendations to the sponsor regarding the amount to pay the medical providers, overcharged the sponsor and received undisclosed “kickback” payments for these services in breach of their fiduciary duties.

The Eighth Circuit affirmed the district court’s decision that the defendants were not fiduciaries, finding that they did not exercise control over the plan’s assets. Instead, the sponsor retained the final authority regarding whether to accept the recommendations from the administrators concerning the payment amount. Indeed, out of all of the defendants, only one was a fiduciary in any capacity, and that was limited to making benefit determinations — which none of the allegations in the case even addressed.

This case is Cent. Valley Ag. Coop. v. Daniel Leonard, No. 19-3044, in the U.S. Court of Appeals for the Eight Circuit. The decision is available here.

Key Takeaway: As plan sponsors more frequently begin to add, or consider adding, arbitration clauses to their plans’ governing documents, the Seventh Circuit is poised to decide whether adding mandatory arbitration clauses to plan documents enables the sponsor to compel arbitration of fiduciary breach claims.

On March 30, 2021, the Seventh Circuit heard oral argument regarding whether ERISA-governed plans can require individual arbitration of breach of fiduciary duty claims by plan participants. The appeal concerns whether participants must individually consent to an arbitration provision, and, if so, whether implied consent is sufficient. Defendants in the case have argued that, because breach of fiduciary duty claims belong to a plan, a plan’s consent to the arbitration provision is sufficient to bind all plan participants. They have further argued that even if individual consent is necessary, a participant’s continued participation in the plan after the plan is amended to add an arbitration provision constitutes implied consent to the arbitration provision. By contrast, the plaintiffs in the case have argued not only that individual consent to the arbitration provision is required, but that consent can only be inferred when participants are given notice of the provision and an opportunity to reject it. A decision is expected later this year.

If the Seventh Circuit rules that ERISA-governed plans can require individual arbitration of breach of fiduciary duty claims, it would become only the second circuit court of appeals, after the Ninth Circuit, to so rule. However, the Second Circuit recently ruled on March 4, 2021 in a different circumstance, involving arbitration agreements with employees outside of governing plan documents, that the defendant-employer could not compel arbitration of ERISA fiduciary duty claims through the arbitration agreements because mandatory individual arbitration ran contrary to the “public spirit” of ERISA. That holding may give some insight into how the Second Circuit would rule if presented with a similar fact pattern as that which is now before the Seventh Circuit. And, finally, even if plan sponsors can compel arbitration, plan sponsors should carefully consider whether to do so. In Cooper v. DST Sys., Inc. (No. 16-1900 (S.D.N.Y.)), DST successfully compelled arbitration and then had to defend itself against more than 800 individual arbitration suits. DST is now attempting to settle those claims in federal court on a class-wide basis.

The Seventh Circuit case is Smith v. Bd of Dir. of Triad Mfg., Inc., No. 20-2708. The Ninth Circuit’s decision on a similar issue was in Dorman v. Charles Schwab & Co., No. 18-15281, and is available here, and the Second Circuit decision referenced above was in Cooper v. DST Systems, Inc., No. 17-02805, and is available here.

• The Code Breaker: What to Expect when you’re Expecting (Litigation)? (May 6, 2021)
  Please join Goodwin’s Alison Douglass for a discussion about pertinent issues for plan sponsors to consider in the current ERISA litigation environment as a part of DCIIA’s second annual Public Policy Series collaboration with SPARK. You can register on DCIIA’s event website.
  
  
• Enrolled Actuaries Conference – “How NOT to Become a Fiduciary” (May 7, 2021)
  Please join Goodwin’s Dave Rosenberg at the Enrolled Actuaries Conference for a discussion about the basic roles and responsibilities of key players with respect to an ERISA plan as well as concerning litigation involving service providers to ERISA plans. To register and learn more about this session, visit the Conference of Consulting Actuaries (CCA) website.