Opinion ID: 4389469
Heading Depth: 3
Heading Rank: 1

Heading: Arm’s-length negotiation of contract terms

Text: When a service provider adheres to a specific contract term that is the product of arm’s-length negotiation, courts have held that the service provider is not a fiduciary. Schulist provides a useful example. 717 F.2d at 1132. In Schulist, a service provider won a contract to administer an employer’s health care plan by submitting the winning bid—the lowest premium price—in a competitive bidding process. Id. at 1129. During the first year of operating under the contract, premium payments resulted in a large surplus. Id. The parties agreed to a lower premium for the second year, but the surplus returned. In the third year, the parties negotiated a new contract whereby any surplus would be returned to the plan. Id. The employer’s trustees sued the service provider for breach of contract and breach of fiduciary duty. Id. at 1130. The Seventh Circuit concluded that the service provider was not a fiduciary because, during the initial auction and at every subsequent renewal, “[the insurer] entered into an arm’s length bargain presumably governed by competition in the marketplace.” Id. at 1132. A service provider similarly does not owe a fiduciary duty regarding its compensation when compensation is fixed during an arm’s-length negotiation. In Transamerica Life Insurance, for example, the Ninth Circuit held that the manager of an employee retirement plan was not an ERISA fiduciary as to its compensation because the plan contract set the manager’s compensation at a fixed percentage of the plan’s assets, and it also provided a specific schedule for fees the manager could collect. 883 F.3d at 18 836; see also F.H. Krear & Co. v. Nineteen Named Trs., 810 F.2d 1250, 1254-55, 1259 (2d Cir. 1987) (holding service provider was not a fiduciary when the contract that defined the amount of its compensation was the product of an arm’s-length negotiation). b. Unilateral decisions regarding plan or asset management When a service provider acts with authority or control beyond the contract’s specific terms, the service provider may be a fiduciary. And when the plan or the plan participants cannot reject the service provider’s action or terminate the contract without interference or penalty, the service provider is a functional fiduciary. See, e.g., Charters v. John Hancock Life Ins. Co., 583 F. Supp. 2d 189, 199 (D. Mass. 2008) (holding service provider was fiduciary where plan attempting to terminate contract faced “built-in” monetary penalties). Fiduciary status turns on whether the service provider can force plans or participants to accept its choices about plan management or assets. See, e.g., CBOE, 713 F.2d at 260 (finding fiduciary status where service provider “determined what type of investment the Plan must make”). The cases discussed in this section address whether plans faced impediments to rejecting service providers’ actions. In some cases, the service provider’s unilateral decision changes a term of the plan contract. For example, in CBOE, a service provider provided investment services for an employee retirement benefit plan. Id. at 255-56. Under the contract, contributions made on behalf of each plan participant were deposited into an individual account. Id. at 256. The service provider announced that it was going to restructure the investment options it provided to the plan by creating a new account for each participant and annually transferring 10 percent of the balance from the participant’s original account to the new 19 one, which was supposed to yield a higher rate of return. Id. This “unilateral” restructuring effectively amended the original terms of the contract. Id. If the plan disagreed with this approach and sought to terminate the contract and withdraw its participants’ funds to reinvest them elsewhere, the service provider could limit the plan’s withdrawal of funds to 10 percent of the total balance per year, effectively requiring 10 years to withdraw all of the funds. Id. The Seventh Circuit held that this restriction “lock[ed] [the plan] in” and made the service provider a functional fiduciary. Id. at 260. In other cases, the contract may “grant[] [a service provider] discretionary authority” over an aspect of plan or asset management. Ed Miniat, Inc. v. Globe Life Ins. Grp., Inc., 805 F.2d 732, 737 (7th Cir. 1986). In those cases, too, the service provider’s discretionary decision making—though authorized by contract—is “cabined by ERISA’s fiduciary duties” unless plans or participants can freely reject the service provider’s choices or terminate the contract. Edmonson v. Lincoln Nat’l Life Ins. Co., 725 F.3d 406, 422 (3d Cir. 2013). For example, in Ed Miniat, the service provider contracted with an employer to provide investment services for an employee insurance plan. Under the plan contract, the employer paid premiums to make life insurance available to employees upon their retirement. See 805 F.2d at 733-34. The service provider had the “apparent unilateral right to reduce the rate of return” it paid on the employer’s contributions. Id. at 734. Before it issued any insurance under the plan, the service provider reduced the rate of return from 10 percent to 4 percent (the lowest value allowed by the contract) and increased premiums. Id. When the employer sought to terminate the contract, the service provider refused to reimburse half of the premiums the employer had paid. The Seventh 20 Circuit held the service provider was a fiduciary, reasoning that it had the power to unilaterally amend the contract. Id. at 738. 12 In contrast to the foregoing cases holding a service provider to be a fiduciary, when plans and participants have a “meaningful opportunity” to reject a service provider’s unilateral decision, courts have held the service provider is not a fiduciary. Charters, 583 F. Supp. 2d at 199. For example, in Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), the Seventh Circuit declined to impose fiduciary duties on a fund manager that was retained to advise a plan on which investment options to include in the plan. Id. at 578, 584. It reasoned that the plan contract gave the plan, not the fund manager, “final say on which investment options [would] be included.” Id. at 583; see Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins. Co., 768 F.3d 284, 295 (3d Cir. 2014) (“John Hancock”) (holding no fiduciary relationship arose from service provider providing suggested list of funds where “trustees still exercised final authority over what funds would be included”). In Zang and Others Similarly Situated v. Paychex, Inc., the employee benefit plan selected mutual funds to offer its participants from a list composed by a service provider. 12 See also Midwest Cmty. Health Serv., Inc., 255 F.3d at 377 (holding that service provider was a fiduciary when it reserved the right to change terms without plan or participant approval and would assess a fee upon withdrawal of funds); Charters, 583 F. Supp. 2d at 198-99 (recognizing fiduciary duty where employee benefit plan sponsor faced “built-in penalties” for transferring assets to a different account or cancelling its contract if it was dissatisfied with how service provider exercised its contractual right to substitute investment options); Rosen v. Prudential Ret. Ins. & Annuity Co., 718 F. App’x 3, 5 (2d Cir. 2017) (“[F]iduciary status attaches to the party empowered to make unilateral changes to the investment menu by its contractual arrangement with the plan.”). 21 728 F. Supp. 2d 261, 263 (W.D.N.Y. 2010). The service provider “reserve[d] the right to modify” the list of mutual funds the plan selected. Id. The contract required at least 60 days’ notice of a proposed modification and an opportunity for the plan to reject the change or terminate the contract. Id. at 263-64. The court held that the service provider’s ability to amend the list of available mutual funds did not give rise to fiduciary status because the contract gave the plan the ultimate say over whether the change would take effect. Id. at 271 n.6 (“Paychex could not force the employer to accept any particular deletion or substitution.”). The foregoing analysis applies to determining whether a service provider’s control over its own compensation may make it a fiduciary. A contract might give a service provider “control over factors that determine the actual amount of its compensation.” Krear, 810 F.2d at 1259. If the service provider exercises unilateral control over those factors, it can be a fiduciary. In Pipefitters Local 636 Insurance Fund v. Blue Cross and Blue Shield of Michigan, the Sixth Circuit held an insurer was a fiduciary as to its compensation. 722 F.3d 861 (6th Cir. 2013). State law required the service provider to pay one percent of its total income to the state, and its contract with the plan entitled it to pass along that cost to the plan. Id. at 864 (detailing provision allowing “any cost transfer subsidies or surcharges ordered by the State Insurance Commissioner . . . [to] be reflected in the . . . Amounts Billed”). But “the state did not fix the rate that Defendant charged each customer, and crucially, neither did the [contract] between Plaintiff and Defendant.” Id. at 867 (emphasis added). Because the contract “in no way cabin[ed] [the provider’s] 22 discretion” to decide how much of the fee to collect from each plan, the court held the service provider was an ERISA fiduciary. Id. 13 District Court Ruling The district court evaluated whether Great-West is a fiduciary based upon its changes to the Credited Rate and control over its compensation. a. Change to the Credited Rate The district court held that Great-West is not a fiduciary when it sets the Credited Rate. It acknowledged that “in some sense,” Great-West “undoubtedly” exercises some control when it sets the Credited Rate. Aplt. App., Vol. I at 92. But the court recognized “a number of cases favoring the theory that a pre-announced rate of return prevents fiduciary status from attaching to the decision regarding the what [sic] rate to set, at least when the plan and/or its participants can ‘vote with their feet’ if they dislike the new rate.” Id. “Thus,” the court stated, “if the all the [sic] circumstances of the alleged ERISA-triggering decision show that the defendant does not have power to force its decision upon an unwilling objector, the defendant is not acting as an ERISA fiduciary 13 See also Abraha v. Colonial Parking, Inc., 243 F. Supp. 3d 179, 186 (D.D.C. 2017) (exercise of contractual authority to change from a flat per-participant fee to a percentage-of-contributions fee was an exercise of discretion over service provider’s own compensation and therefore subject to ERISA fiduciary obligations); Golden Star, Inc. v. Mass Mut. Life Ins. Co., 22 F. Supp. 3d 72, 80-82 (D. Mass. 2014) (insurer had discretion to set a “management fee” anywhere between zero and one percent and therefore was a fiduciary); Glass Dimensions, Inc. ex rel. Glass Dimensions, Inc. Profit Sharing Plan & Tr. v. State St. Bank & Tr. Co., 931 F. Supp. 2d 296, 304 (D. Mass. 2013) (bank had discretionary authority to set a “lending fee” anywhere from zero to 50 percent and was therefore a fiduciary). 23 with respect to that decision.” Id. at 98. The court discussed this issue separately as it concerned plans and participants. First, as to Great-West’s ability to bind plans to its Credited Rate decisions, the district court rejected Mr. Teets’s argument that plans cannot readily withdraw from the KGPF because Great-West has a right to impose a waiting period of up to one year. The court stated, “This is not an argument that the Court can consider in the present posture. The Contract does not mandate a one-year waiting period, so whether it would actually be imposed in any particular instance is speculative.” Id. at 99. Second, as to individual participants’ ability to reject the Credited Rate, the district court concluded that participants do have a “real ability” to reject Great-West’s choice of the Credited Rate by withdrawing their funds from the KGPF without fee or penalty. Id. Although it had “given serious thought to” the argument that participants cannot easily withdraw from the KGPF because Great-West prohibits plans from offering other comparable investment products, the court concluded that imposing a fiduciary duty on that basis would “introduce[] a host of other considerations individual to each participant.” Id. As a result, it would be “too attenuated” to say that a given participant could not reject the Credited Rate each quarter. Id.