The Supreme Court may hear arguments this fall regarding whether former plan beneficiaries can bring ERISA claims against the plan’s investment adviser without pre-suit demands, and whether those same parties can bring claims under Sections 47(b) of the Investment Company Act.

The petitions for certiorari seek review of Santomenno v. John Hancock Life Insurance Company, decided by the Third Circuit in April (the full opinion can be found here). In that case, Ms. Santomenno and her fellow former plan beneficiaries brought claims against John Hancock under ERISA and the Investment Company Act (“ICA”), claiming that John Hancock charged their retirement plans excessive fees on annuity insurance contracts offered to plan participants.

In the District Court, Judge William Martini concluded that the claims under the ICA were not permissible as “only those maintaining an ownership interest in the funds in question could sue under the derivative suit provision enacted by Congress.”  Because the plaintiffs were no longer investors in the funds in question, they had no standing to bring suit.  The ERISA claims were dismissed because the plaintiffs had failed to bring a pre-suit demand upon the plan trustees and failed to join the trustees as parties.

The Third Circuit affirmed the District Court’s decision on the ICA claim under Section 36(b).  In so doing, the Circuit Court analogized such claims to derivative actions brought on behalf of the investment company, where continuous ownership is required.  The Circuit Court wrote: “Imposing a continuous ownership requirement throughout the pendency of the litigation assures that the plaintiff will adequately represent the interests of the security holders in obtaining a recovery for the benefit of the company. . . . As [the plaintiffs] no longer own John Hancock funds, they lack any real interest in securing a recovery.”  In addition, the plaintiffs sought to bring a claim under Section 47(b) of the ICA, but the Circuit Court concluded that that provision does not provide for a private right of action.

The Circuit Court, however, reversed on the ERISA claim, concluding that a pre-suit demand was not required.  First, the Circuit noted that the text of the statute is silent on whether such a demand is necessary.  It then explained, citing to its 2006 decision in Leuthner v. Blue Cross & Blue Shield of Northeastern Pennsylvania, 454 F.3d 120 (3d Cir. 2006), that “ERISA’s legislative history indicates that Congress intended the federal courts to construe the statutory standing requirement broadly in order to facilitate enforcement of its remedial provisions.”

The plaintiffs have petitioned for review of the dismissal of their ICA claim under Section 47(b), arguing that Supreme Court precedent finding a private right of action based on other statutes controls, and pointing out that the SEC has taken such a position in an amicus brief filed in this action.

John Hancock has also filed a petition for certiorari, asking for review of the holding that the plaintiffs’ ERISA claims do not require a pre-suit demand.  John Hancock notes that while the Third Circuit concluded no such demand was required, the Eleventh Circuit has held the opposite, and that the Circuit split deserves the Supreme Court’s attention.

(The plaintiffs’ petition can be found here; John Hancock’s petition can be found here).

Should the high court accept the case, the outcome could have a significant impact on the type and frequency of claims brought under the ICA and ERISA.  We will track the case closely and post again when a decision on the petitions is released by the Supreme Court.