Source: https://www.erisapracticecenter.com/page/2/
Timestamp: 2019-04-22 21:59:50+00:00

Document:
A federal district court in the District of Columbia dismissed ERISA fiduciary-breach claims by participants in Georgetown’s 403(b) retirement plans that were predicated on allegations that the trustees invested in funds that allegedly charged excessive fees and underperformed relative to alleged comparable funds, and that the fund paid excessive recordkeeping fees. To begin with, the court concluded that plaintiffs lacked Article III standing, i.e., they had not experienced any harm, as to three of the challenged funds because they failed to allege that: (i) they were invested in the challenged funds, (ii) the challenged funds outperformed plaintiffs’ alleged comparable investment fund, and/or (iii) that they had withdrawn, or planned to withdraw from, one of the funds that charged an allegedly excessive 2.5% early-withdrawal fee in exchange for a lump-sum payout. Next, the court rejected plaintiffs’ arguments that the plan’s fiduciaries acted imprudently by retaining a fund that allegedly had underperformed because: (i) a fiduciary is not required to select the best performing fund, and (ii) plaintiffs’ alleged comparable fund had a different underlying allocation of domestic investments. Lastly, the court rejected plaintiffs’ excessive recordkeeping fee claim because plaintiffs did not show that the fees were excessive relative to the services that were being offered. In so ruling, the court stated that since fiduciaries may structure their plans in different ways, the plaintiffs’ allegations that the funds could hypothetically be structured to charge a lower fee did not state a viable claim for an imprudent process with respect to the record-keeping fees. The case is Wilcox v. Georgetown University, 2019 WL 132281 (D.D.C. Jan. 8, 2019).
The Ninth Circuit unanimously concluded that a trustee and lawyer for certain multiemployer funds violated ERISA § 510 by unlawfully firing a whistleblower in the funds’ collections department, but, in a split decision, concluded that the retaliation did not amount to a breach of fiduciary duty. The whistleblower was cooperating with a DOL criminal investigation of one of the trustees and had raised concerns to another trustee and the funds’ third-party administrator that the trustee under investigation was actively hindering the funds’ efforts to collect contributions from certain contributing employers. After the trustee and the funds’ counsel, who were carrying on a romantic relationship, caught wind of the investigation, they set in motion votes by the full board of trustees to place the whistleblower on administrative leave and ultimately to terminate her employment. The Secretary of Labor filed a civil enforcement action against the trustee and the funds’ counsel, alleging that they engaged in unlawful retaliation under ERISA § 510 and a breach of fiduciary duty under ERISA § 404. The Secretary settled similar claims against the full board of trustees and other third-parties. Following a bench trial, the district court entered judgment in favor of the Secretary and against the trustee and funds’ counsel on both claims.
The Ninth Circuit unanimously affirmed the district court’s ruling that the trustee and counsel engaged in unlawful retaliation in violation of Section 510. The Court held that the whistleblower’s cooperation with the DOL was quintessential protected activity, and that defendants were liable because they arranged the vote by the full board of trustees that resulted in the whistleblower’s termination, they influenced the vote by recommending the whistleblower’s termination, and the trustee had the authority to remove other union trustees or have their positions with the union terminated.
However, the Ninth Circuit, in a split decision, reversed the district court’s ruling that the retaliation against the whistleblower constituted a breach of fiduciary duty. In so ruling, the Court concluded that the district court failed to address the threshold question of whether the union trustee was acting in a fiduciary capacity when he engaged in the challenged conduct, i.e., placing the whistleblower on leave or terminating her employment. The dissenting judge opined that the trustee’s effort to terminate the whistleblower was a fiduciary act because it was “inextricably intertwined” with management and administration of the funds, it was designed to shield the trustee’s role in the funds’ mismanagement from additional scrutiny, and a contrary result would subvert ERISA’s goal to safeguard plan assets.
The Second Circuit reinstated a claim for breach of fiduciary duty under ERISA brought by participants in IBM’s 401(k) plan who suffered losses from their investment in IBM stock. Jander v. Retirement Plans Committee of IBM, et al. 2018 WL 6441116 (2d Cir. Dec. 10, 2018). In so ruling, the Second Circuit became the first circuit court since the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), to allow such a claim to survive a motion to dismiss. According to media reports, this has sparked renewed hope within the ERISA plaintiffs’ bar in the viability of these claims. Below, we briefly review the Supreme Court and Circuit Court precedent leading up to the Second Circuit’s IBM decision, the IBM decision itself, and its potential implications going forward.
In Dudenhoeffer, a unanimous Supreme Court held that there are no unique pleading standards for employer stock claims under ERISA, but nevertheless provided more rigid criteria for satisfying these standards, particularly in claims alleging that insider fiduciaries breached their fiduciary duties by failing to act on non-public information to prevent losses from investments in allegedly overvalued employer stock. The Supreme Court held that, to satisfy the pleading requirements, the plaintiff must allege an alternative action that the plan fiduciary could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances could not have viewed as more likely to harm the fund than to help it. Three considerations informed the Court’s development of this standard: (1) fiduciaries are not required to break the law, (2) disclosures under ERISA could conflict with the letter and objectives of insider trading and other securities laws, and (3) acting on inside information could cause a drop in the stock price and do more harm than good to the stock already held by the plan.
The Supreme Court subsequently confirmed that the Dudenhoeffer standard sets a high bar. In Amgen Inc. v. Harris, 136 S. Ct. 758 (2016), the Court ruled that the Ninth Circuit erred by permitting a breach of fiduciary duty claim to proceed without first determining whether the complaint contained facts and allegations supporting a claim that removal of the Amgen stock fund was an alternative action that no prudent fiduciary could have concluded would cause more harm than good.
Following Amgen, four circuit courts—the Second, Fifth, Sixth, and Ninth Circuits—had occasion to consider whether a 401(k) plan participant satisfied the Dudenhoeffer standard by alleging an alternative action that a plan fiduciary could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances could not have viewed as more likely to harm the fund than to help it. All four circuits concluded that the participants had failed to satisfy this standard and affirmed the dismissal of the claims. In each case, the court held that a prudent fiduciary could have concluded that a premature disclosure of negative company information outside normal corporate channels of communication would do more harm than good to a plan. Laffen v. Hewlett-Packard Co., 721 F. App’x 642, 644–45 (9th Cir. 2018); Martone v. Robb, 902 F.3d 519, 526–27 (5th Cir. 2018); Graham v. Fearon, 721 F. App’x 429, 437 (6th Cir. 2018); Saumer v. Cliffs Nat’l Res. Inc., 853 F.3d 855, 861 (6th Cir. 2017); Loeza v. John Does 1-10, 659 F. App’x 44, 45–46 (2d Cir. 2016); Whitley v. BP, P.L.C., 838 F.3d 523, 529 (5th Cir. 2016); Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016). The courts reasoned that a prudent fiduciary could have concluded that an unusual disclosure of negative news by a plan fiduciary before the issues had been fully investigated would spook the market into believing that problems at the company were worse than they actually were and thus harm plan participants already invested in the company stock fund. The Ninth Circuit also concluded that public disclosure of allegations that are not yet fully investigated would be inconsistent with the objectives of the securities laws. In re HP, 2015 WL 3749565, at *7 (N.D. Cal. June 15, 2015), aff’d sub. nom Laffen, 721 F. App’x 642.
In IBM, the plaintiff alleged that the defendants knew of, and should have disclosed to plan participants, certain accounting irregularities—for which the defendants themselves were allegedly responsible. According to the complaint, the failure to disclose left IBM’s stock price artificially inflated and harmed participants when the irregularities were eventually disclosed and the price of the stock declined by more than $12 per share.
The district court had twice dismissed the participants’ claim based on its finding that the complaint lacked context-specific allegations as to why a prudent fiduciary could not have concluded that plaintiff’s proposed alternatives were more likely to do harm than good and therefore failed to satisfy the Dudenhoeffer pleading standard.
On appeal, the Second Circuit reversed and concluded that the plaintiff had pled a plausible claim. The Court first explained that the Supreme Court’s Dudenhoeffer test was not clear because it initially asked whether a prudent fiduciary in the same circumstances would not have viewed an alternative action as more likely to harm the fund than to help it, and then reframed the question as whether a prudent fiduciary could not have concluded that the action would do more harm than good by dropping the stock price. According to the Court, the use of the “would not have” phrase considers the conclusions that an “average prudent fiduciary” may reach, and the use of the “could not have” phrase suggests a more restrictive standard requiring consideration of whether “any prudent fiduciary” could conclude that the alleged alternative actions would do more harm than good.
The Court found it unnecessary to decide which formulation applies because, in the Court’s view, the Complaint’s allegations satisfied either standard. According to the Court, the plan participant pled a plausible fiduciary breach claim because: (i) the plan fiduciaries allegedly knew that company stock was artificially inflated; (ii) the defendants were “uniquely situated to fix [the accounting irregularities] inasmuch as they had primary responsibility for the public disclosures that had artificially inflated the stock price to begin with” and disclosure could have been made within IBM’s quarterly SEC filings; (iii) the failure to promptly disclose the truth allegedly caused reputational harm to the company that exacerbated the harm to the stock price; (iv) the stock traded on an efficient market and there was thus no need to fear that disclosure would result in an overreaction by the market; and (v) disclosure of the truth was inevitable. Accordingly, the Court reversed the district court’s judgment dismissing the complaint and remanded the case for further proceedings.
The Second Circuit’s ruling in IBM contrasts sharply with every other court that has considered this issue, even within the Second Circuit. Perhaps most significantly, the Court’s view that disclosure could have occurred within the securities laws’ normal reporting regime conflicts with earlier circuit court decisions (including the Second Circuit) clearly holding that public disclosures on behalf of a company, e.g., SEC filings, are made in a corporate, and not fiduciary, capacity and thus are not a basis for ERISA fiduciary liability.
IBM has since petitioned the Circuit for rehearing en banc. We are hopeful that the full circuit or, if necessary, the Supreme Court will ultimately reject the approach taken by the panel in IBM in much the same way that the Supreme Court ruled in Amgen that the Ninth Circuit erred by permitting a similar claim to proceed without first determining whether the complaint contained facts and allegations satisfying the Dudenhoeffer standard.
A federal district court in Florida granted Aetna’s motion to dismiss claims that it violated ERISA and the Mental Health Parity and Addiction Act of 2008 (MHPAA) by refusing to cover the cost of wilderness therapy programs in Colorado and Utah. The court determined that the plaintiffs failed to state a plausible claim under their respective plans because they did not allege facts sufficient to show that the wilderness therapy programs qualified for coverage under the terms of their plans.
One of the plans covered treatment performed at a “residential treatment facility” and listed detailed requirements a facility must meet to qualify for coverage. The court found that the complaint did not contain sufficient information to show that the wilderness program met those requirements; there were no allegations that the program had licensed behavioral providers on site at all hours, or that access to necessary medical services was always available, among other things. The other plan covered “residential treatment services,” defined in relevant part as services that are licensed in accordance with the laws of the “appropriate legally authorized agency.” The court dismissed the claims because the complaint alleged that the wilderness plan was licensed under Utah law as an “outdoor youth treatment program,” rather than as a “residential treatment service,” thus failing to meet the plan’s requirements.
The case is H.H. v. Aetna Insurance Co., 2018 WL 6614223 (S.D. Fla. Dec. 13, 2018).

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