ERISA Litigation Update

Key Takeaway: The U.S. Supreme Court granted certiorari in a case that concerns what types of circumstantial allegations can state a plausible claim for breach of fiduciary duties in cases challenging a defined contribution plan investment line-up or the plan’s administrative expenses.

On July 2, 2021, the Supreme Court granted a petition for certiorari in Hughes v. Northwestern University, which presents an important question about the allegations necessary to state a plausible claim for breach of ERISA’s fiduciary duties. Hughes, captioned as Divane v. Northwestern University while the case was pending before the Seventh Circuit and in district court, challenges the investments and fees of Northwestern University’s 403(b) retirement plan. The Seventh Circuit affirmed dismissal of the complaint for failure to state a claim and the plaintiffs asked the Supreme Court for another look. The petition for certiorari was premised in part on the argument that different circuits have seemingly taken varying approaches to evaluating fiduciary breach claims premised on circumstantial allegations (e.g., allegations that funds in the plan line-up underperformed alternatives available in the market, or that the plan’s administrative fees exceeded the fees paid by other defined contribution plans).

Earlier this year, the Supreme Court had asked the Solicitor General to weigh in on whether it should grant certiorari in Hughes. The Solicitor General’s brief recommended that the Court do so, though it reframed the question more narrowly than the plaintiffs had framed it. Whereas the plaintiffs’ petition asked the Supreme Court to review “[w]hether allegations that a defined-contribution retirement plan . . . fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim . . . for breach of the duty of prudence,” the Solicitor General argued that certiorari should be granted to instead address “[w]hether participants in a defined-contribution ERISA plan state[_] a plausible claim for . . . breach of the duty of prudence by alleging that the fiduciaries caused the participants to pay investment-management or administrative fees higher than those available for other materially identical investment products or services.” Additionally, the Solicitor General’s brief made clear that the United States did not agree with the plaintiffs that “an ERISA plaintiff could state a claim for relief by alleging merely that alternative investment funds with lower management fees than those included in a plan were available in the marketplace.” Ultimately, the Supreme Court granted certiorari without adopting any particular framing of the question presented, so it will be up to the parties (and the United States, which is likely to continue to participate in the case) to advocate for their own positions about how courts should evaluate the barrage of excessive-fee complaints that have flooded federal courts over the last several years. This will be an important case to watch for the Supreme Court’s next term and will likely be argued in late fall or early winter.

Additionally, on June 28, 2021, the Supreme Court denied a petition for certiorari in PricewaterhouseCoopers LLP v. Laurent, the other ERISA petition that the Supreme Court had asked the Solicitor General to weigh in on this year. That case concerned a question about ERISA’s remedies provisions, and specifically whether two of ERISA’s separate remedial sections (Section 502(a)(1)(B) and Section 502(a)(3)) can effectively be combined to create a new remedy that is not expressly made available by ERISA. The Solicitor General’s brief had recommended that the Supreme Court deny that petition.

Key Takeaway: The defendant successfully prevailed at trial against allegations that it breached its duties by setting the rate of return of its stable value product too low, where the court found that stable value product investors’ interests extend beyond just increased rates of return and include “the safety and security of a soundly backed investment.”

On April 8, 2021, following a six-day bench trial, the Southern District of Iowa issued a full defense verdict in favor of Principal Life Insurance Company in a class action brought on behalf of individuals who had invested in the Principal Fixed Income Option (PFIO), a stable value product managed by Principal. The plaintiff alleged that Principal set the PFIO’s rate of return in order to “achieve . . . profit objectives rather than to pay maximum returns,” and therefore breached its duty of loyalty under ERISA to the PFIO’s investors and committed prohibited transactions. The plaintiff is appealing the ruling. 

The court rejected the plaintiff’s assertion that stable value product managers must set the rate of return for the product at the maximum rate possible, ruling that this takes too narrow a view of the interests of stable value investors. Instead, because investors are attracted to stable value products in part because of the low risk of such investments, the interests of investors in stable value products extend to minimizing the risk of the investment. Setting the rate of return too high, the court explained, could undermine this interest by threatening the long-term sustainability of the investment’s guarantees. The court held that Principal therefore acted loyally by setting the PFIO’s rate of return based on actuarially-sound assumptions that created an economically viable investment product with a guaranteed rate of return. Moreover, because the court found that the PFIO investors’ and Principal’s interests to minimize the PFIO’s risk aligned, it held that their interests did not conflict and therefore  rejected the plaintiff’s argument that Principal should have mitigated any conflict of interest by outsourcing the process to set the PFIO’s interest rate to an independent third party. Finally, the court rejected the plaintiff’s claim that Principal dealt with plan assets “in [its] own interest” when setting the PFIO’s interest rate and thereby committed a prohibited transaction, again citing the alignment of interests between Principal and PFIO investors.

This case is Rozo v. Principal Life Insurance Co., No. 14-00463, in the Southern District of Iowa. The decision is available here.

Key Takeaway: The Ninth Circuit Court of Appeals held that forum selection clauses in governing plan documents are enforceable under ERISA, even where the lawsuit challenges fiduciaries’ management of the plan.

On April 21, 2021, the Ninth Circuit Court of Appeals denied a writ of mandamus filed by a participant in a bank’s 401(k) plan that sought to overturn a district court decision holding that the participant’s lawsuit should be heard in the forum specified in the plan’s governing document. The plaintiff originally filed suit in the Northern District of California, alleging that the defendants violated their fiduciary duties by selecting the bank’s proprietary investments for the plan. Defendants moved to transfer the case to the District of Minnesota (where the plan was administered), invoking a forum selection clause in the plan’s governing document that specified that lawsuits regarding the plan would be heard in that venue. The district court granted that motion, and the plaintiff then filed a writ of mandamus in the Ninth Circuit Court of Appeals seeking to overturn it.

The Ninth Circuit Court of Appeals denied the writ of mandamus, rejecting the plaintiff’s argument that forum selection clauses are contrary to ERISA. The court reasoned that ERISA expressly allows an action to be brought in at least three categories of venues, one of which is where the plan is “administered,” and that the forum selection clause in the plan documents properly selected such a venue. The court further reasoned that forum selection clauses further ERISA’s goals of ensuring uniformity of decisions affecting a plan by funneling all cases involving a plan to a single jurisdiction. Although the plaintiff argued that forum selection clauses undermine ERISA’s goal of providing ready access to federal courts, the court disagreed, explaining that, to the contrary, the clause at-issue guaranteed that any controversy would be heard in a federal court.

The case is In re Yvonne Becker, No. 20-72805, in the United States Court of Appeals for the Ninth Circuit. The decision is available here.

Key Takeaway: The defendant successfully argued that class certification of a proposed class implicating thousands of health plans was not viable due to differences in those plans’ governing language.

On May 20, 2021, the District of Connecticut denied a motion to certify a class in a case in which the plaintiffs alleged that the defendant, Cigna Health and Life Insurance Company, overcharged participants in health plans for their prescriptions. The plaintiffs alleged that certain health plans administered or insured by Cigna required pharmacies to charge an excessive amount in co-pays for prescription drugs. The plaintiffs claimed that the health plans then “clawed back” some portions of the excessive co-pays by requiring that pharmacies send funds back to Cigna, rather than to plan participants. The plaintiffs sought to certify a class consisting of individual plan participants in health plans insured or administered by Cigna.

The court denied the motion to certify a class because it found that the proposed class consisted of participants in thousands of health plans, and that those plans’ governing documents had different methodologies for calculating co-payments. The court concluded that interpreting the terms of so many different health plans would require significant individualized determinations, rendering the claims unsuitable for class-wide resolution. In so ruling, the court rejected the plaintiffs’ argument that a class could be certified because many of the plans shared the same language. The court explained that not all of the plans impacted by the prospective class used the same language and that the variations in language from plan to plan were potentially material. This decision is one of several recent ERISA decisions in which plaintiffs have been unable to certify a class consisting of participants in different benefits plans. The litigation remains pending and the plaintiffs are now seeking to file an amended motion for class certification with a narrowed class definition.

The case is Negron v. Cigna Health and Life Ins. Co., No. 16-cv-01702, in the District of Connecticut. The decision is available here.

Key Takeaway: The defendant successfully moved to dismiss a lawsuit challenging its use of cross-plan offsetting where the District of Minnesota extended the Supreme Court’s 2020 Thole v. U.S. Bank N.A. decision regarding pension plans to the health plan context.

On May 20, 2021, the District of Minnesota granted, with leave to amend, United Health’s motion to dismiss a complaint challenging its use, as a third-party administrator of self-insured health plans, of cross-plan offsetting to recover alleged overpayments to healthcare providers. Cross-plan offsetting is a practice whereby health plan administrators recoup past overpayments to a provider by deducting the amount of such overpayments from future bills the provider submits, even if those future bills are in connection with services provided to a participant in a different plan. The plaintiffs alleged that cross-plan offsetting violates ERISA’s duty of loyalty and constitutes prohibited transactions because, by using the practice, United Health was able to use the overpayment—which plaintiffs asserted was a plan asset—to recoup its own losses and relieve itself from any penalties for making overpayments.

The court found, however, that the plaintiffs could not establish standing under Thole because they had not alleged that they had been denied any benefits to which they were entitled. Thole held that defined benefit pension plan participants who cannot allege injury to themselves, but rather only to the plan, lack standing to sue regarding management of their pension plans. The plaintiffs suing United Health similarly alleged that the practice caused harm to the plans in which they participated, but not to themselves. The court found that Thole was analogous and held as Thole did that plaintiffs who allege only injury to a plan lack standing. In doing so, it rejected the plaintiffs’ argument that it should follow cases regarding 401(k) plans that declined to extend Thole to that context, explaining that health plans are more like defined benefit pension plans than defined contribution 401(k) plans because, like pension plans, health plan participants are only entitled to their defined benefits regardless of the value of the plan’s underlying assets.

The case is Scott v. UnitedHealth Group, Inc., No. 20-1570, in the District of Minnesota. The decision is available here. 

• Goodwin Appellate Attorney Named a Law360 Rising Star for ERISA Litigation (June 2021)
  Sitting at the intersection of appellate law and ERISA litigation, we are excited to see Jaime Santos receive this well-deserved honor. Jaime led the firm in our success in the Second Circuit Court of Appeals for General Electric, which was discussed in our last ERISA Litigation Update.
• Attorney Article: Selecting Evaluating, and Monitoring Investments in DC Plans: A Legal Perspective (April 2021)
  In conjunction with T. Rowe Price, ERISA Litigation partner Alison Douglass and associate Christina Hennecken authored this whitepaper discussing defined contribution plan fiduciary processes.