The U. S. Court of Appeals for the Seventh Circuit has issued an important decision clarifying the standards for federal class certification procedure in ERISA cases involving claims of “excessive fees” and other fiduciary breaches. In Spano, et al. v. The Boeing Company, et al., No. 09-3001, and Beesley, et al. v. International Paper Company, et al., No. 09-3018 (both issued January 21, 2011, in a consolidated opinion), the circuit court vacated and remanded the trial court’s class certification in each case for further proceedings.

In Spano, plaintiffs’ counsel sought to certify a class in which participants in the Boeing Company’s Voluntary Investment Plan (the “Boeing Plan”) alleged violations of ERISA. The participants alleged that the Boeing Plan charged excessive fees for management of the defined contribution plan and thereby violated its fiduciary duties to the participants. The participants also alleged that the plan fiduciaries included imprudent investment options in the Boeing Plan and concealed material information from the participants regarding fees and expenses. Beesley involved substantially similar facts. Plaintiffs in Beesley likewise sought to certify a class based on excessive fees paid in connection with two defined contribution plans offered by International Paper Company (“International Paper Plans”).

The Seventh Circuit’s Spano and Beesley decision focused principally on whether the trial court’s certified class was overbroad, and failed to satisfy the federal test for certification of a plaintiff class, pursuant to Rule 23 of the Federal Rules of Civil Procedure.

As a procedural matter, class certification permits a plaintiff or group of plaintiffs to bring claims on behalf of a much larger group of persons, provided that the certified class meets certain requirements under Rule 23:

  • The class must be so numerous that it would be impracticable to join all of the affected members in the lawsuit (“numerosity”);
  • The case must have questions of law or fact common to all members of the class (“commonality”);
  • The parties seeking class certification must have claims or defenses that are typical of the claims or defenses of the other members of the class (“typicality”); and
  • The parties seeking class certification must fairly and adequately protect the interests of the other members of the class – they must be “representative” of those other members.

In Spano and Beesley, the Seventh Circuit found serious problems with the proposed classes arising from the nature of the defined contribution plans at issue.

The U. S. Supreme Court’s decision in LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008), recognized the distinction between the ERISA requirements for defined benefit plans (the most common type of retirement plan when ERISA was enacted in 1974) and defined contribution plans that have become the most common form of retirement plan. For defined benefit plans, where all participants draw benefits from a single fund of money, violations of fiduciary duties threaten the integrity of the entire plan and affect all participants. However, for defined contribution plans, where each participant has an individual account, and the funds in those accounts may differ as participants choose different investments, a fiduciary breach with respect to some participants may not necessarily affect the entire class of participants. Thus, there is an important difference between the two types of plans affecting the appropriateness of class certification.

Acknowledging LaRue, the Seventh Circuit ultimately agreed that the class certifications in Spano and Beesley met the Rule 23 requirements of numerosity and commonality. However, the court ruled that the proposed classes failed to satisfy the typicality requirement. The court held that “typicality” required that “there must be congruence between the investments held by the named plaintiff and those held by members of the class he or she wishes to represent.” The lower court had certified classes that might embrace members with no common interests; in fact, those members might have widely diverging investment positions in the defined contribution plans at issue. As a consequence, the typicality requirement was not met. For similar reasons, the “representative” requirement was not met; the plaintiffs could not show that, by protecting their own interests, they would fairly and adequately protect the interests of other class members in the certified classes.

In remanding the cases to the lower court, the Seventh Circuit did not rule that no classes could possibly be certified. However, the circuit court clearly indicated that, in order to satisfy the requirements of Rule 23, appropriate classes would need to be drawn more narrowly. This opinion also suggests that the problems that arise in defined contribution plans can more easily be isolated to identifiable participants, such that there may be less risk of class action certification.