Over the past two years, numerous putative class actions have been filed challenging alleged revenue- sharing practices in connection with 401(k) plans and other types of pension plans. Some of the complaints have been directed primarily against plan sponsors and have sought to certify a class of the plan participants. Other complaints have been directed against financial services providers and have sought to certify a class of plans served by the provider or a class of the sponsors or trustees of such plans. Recently, class certification was denied in one ERISA revenue-sharing case directed against a financial service provider but granted in two such cases directed against plan sponsors. In a third plan sponsor case, a motion to dismiss was denied. Below is a summary of the decisions and a brief summary of the current state of the litigation.

Class Certifications

Class Certification Denied - Ruppert v. Principal

On August 27, 2008, the U.S. District Court for the Southern District of Iowa denied the plaintiff’s motion for class certification in Ruppert v. Principal Life Insurance Co., case no. 4:07-cv-0344-JAJ (S.D. Iowa). To view the complaint, click here. The court ruled that the plaintiff could not maintain the action on behalf of a class involving more than 24,000 401(k) retirement plans.

The plaintiff, Joseph Ruppert (“Ruppert”), is a trustee of the Fairmount Park, Inc. Retirement Saving Plan. The defendant, a national retirement plan service provider, was the service provider for the plan. Ruppert asserted three counts in his complaint. The first count alleged that the defendant breached fiduciary duties under ERISA section 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A) by failing to adequately disclose the existence or amount of alleged revenue sharing payments negotiated with mutual funds, failing to use the payments for plan expenses and failing to act with the requisite care, skill, prudence and diligence. The second count alleged that the defendant engaged in prohibited “self-dealing” under ERISA sections 406(b)(1) and (3), 29 U.S.C. § 1106(b)(1) and (3) by using plan assets to generate revenue-sharing payments that it retained for its own purpose. The third count alleged that defendant both breached its fiduciary duty under ERISA and engaged in prohibited “self-dealing” by keeping one day’s interest income contributions it received prior to their being invested in the chosen investment options and by failing to adequately disclose this practice to plan participants.

Ruppert filed a motion to certify class on April 21, 2008, on behalf of a group of retirement plans to which the defendant was a service provider. The court denied Ruppert’s motion to certify class on commonality and typicality grounds. Ruppert relied, in large part, on the defendant’s use of templates as part of its business model to show commonality and typicality. The court cited at length, however, evidence that the defendant’s templates were varied and customized on a plan-by-plan basis. Similarly, the court found evidence that the mutual funds offered to plan sponsors varied from plan to plan, as did the delivery and use of marketing materials.

Ruppert has filed a petition to appeal to the 8th Circuit under Rule 23(f).

Class Certification Granted – Spano & Beesley

Judge David R. Herndon of the U.S. District Court for the Southern District of Illinois granted the plaintiffs’ motions for class certification in both Gary Spano, et al.v.The Boeing Company, et al., case no. 06-0743-DRH (S.D. Ill.) (click here for the opinion) and Pat Beesley, et al.v. International Paper Company, et al., case no. 06-00703-DRH (S.D. Ill.) (click here for the opinion). The cases involve similar claims under ERISA, and the class in each case was certified on similar grounds.

Spano

The plaintiffs, participants in the company’s voluntary retirement plan, allege that the defendants have violated fiduciary duties under ERISA by causing or allowing unreasonable fees and expenses (in the form of “Hard Dollar payments” and “hidden Revenue Sharing transfers”) to be charged against the assets of the plan, by failing to ensure that the plan’s assets were used solely for the exclusive purposes of providing benefits to participants, by failing to disclose material information regarding plan fees and expenses, and by selecting mutual funds as plan investment options which charged excessive fees.

The class is defined as:

All persons, excluding the Defendants and/or other individuals who are or may be liable for the conduct described in this Complaint, who are or were participants or beneficiaries of the Plan and who are, were or may have been affected by the conduct set forth in this Complaint, as well as those who will become participants or beneficiaries of the Plan in the future.

The plaintiffs estimate that the class will number approximately 190,000 members.

The defendants opposed class certification on numerous grounds, including that the proposed class failed to distinguish between participants of different investment funds and improperly included future and past participants. The court rejected these objections, stating that “it is the Defendants’ conduct that is at issue and not the Plaintiffs’ conduct.” The inclusion of future class members was deemed appropriate because the plaintiffs sought injunctive relief that, if granted, would affect future as well as current participants. The court found that past participants could have a “colorable claim” to benefits so their inclusion was proper.

The defendants also objected to certification on commonality and typicality grounds, arguing that the court would be required to conduct specific, fund-by-fund analysis as to whether fees were unreasonable and excessive and as to the specific facts of each participant. The court, citing the recent district court decision in Lively v. Dynegy, Inc., 2007 WL 685861 (S.D. Ill. March 2, 2007), rejected these objections. The court found that the defendants’ conduct and decisions regarding the plan amount to a common course of conduct vis-à-vis the putative class, and that the plaintiffs had demonstrated that their claims arise from a common nucleus of operative facts. The defendants’ argument that the plaintiffs’ disclosure claims would require individual inquiries was also rejected by the court, which found that because the alleged misrepresentations were to class members on a plan-wide basis rather than individually, typicality was present.

Beesley

The plaintiffs, participants in the company’s two 401(k) plans, allege that the defendants have violated fiduciary duties under ERISA by causing unreasonable and excessive administrative fees and expenses to be charged against the assets of the plans, by maintaining the company’s stock fund as an imprudent investment option, by concealing and misleading participants regarding the fees charged and the risk posed by investments in the company’s stock fund and by assigning little priority to the management of the plans.

The court certified a class defined as:

All persons, excluding the Defendants and/or other individuals who are or may be liable for the conduct described in this Complaint, who are or were participants or beneficiaries of the Salaried Plan or the Hourly Plan and who are, were or may have been affected by the conduct set forth in this Complaint, as well as those who will become participants or beneficiaries of either Plan in the future.

The plaintiffs estimate that the class will number approximately 71,000 members.

The defendants objected that the class was not sufficiently defined and that the class period should begin no earlier than April 1, 2002. The court rejected this objection as premature, noting that ERISA’s six-year statute of limitations can be tolled in cases where a plaintiff demonstrates misrepresentation, and holding further that the statute of limitations defense is an affirmative defense, which requires an examination of the merits of the case, rendering its consideration inappropriate at the class certification stage. As in Spano, the court rejected the defendants’ objections to the inclusion of future participants because the plaintiffs sought injunctive relief that, if granted, would affect future as well as current participants.

The defendants also objected to certification on commonality and typicality grounds. The defendants argued that the claims lack commonality because each participant’s claim depends on individual investment decisions. The court rejected these arguments on the same grounds that it did in Spano.

The court also rejected an argument by the defendants that, under the seller-purchaser theory, conflicts among class members would make it nearly impossible to maintain a class action in an ERISA suit, on typicality and adequacy of representation grounds. Judge Herndon stated that this argument has been rejected in the context of securities fraud class actions, again citing Lively v. Dynegy.

Both Spano and Beesley were certified under Rule 23(b)(1), and, in both cases, the same firm was appointed class counsel by the court. At this time, courts have considered class certification in seven of these cases; a class has been certified in six cases and rejected in only two cases (in addition to Ruppert v. Principal, see In re Northrop Grumman Corp. ERISA Litig., currently on appeal to the U.S. Court of Appeals for the 9th Circuit).

Motion to Dismiss

Last week, the U.S. District Court for the Central District of Illinois denied the defendants’ motion to dismiss in Steve Martin, et al. v. Caterpillar Inc. et al., case number 1:07-cv-1009 (C.D. Ill.). To view the court’s opinion, click here. The plaintiffs, participants in an employer-sponsored 401(k) plan, allege that the defendants have breached their fiduciary duties under ERISA by charging excessive fees, by collecting fees to manage the funds, and by collecting other fees in order to participate in “revenue- sharing” arrangements.

In their motion to dismiss, the defendants argued that they had made all the disclosures required under ERISA, that ERISA’s safe harbor provisions relieved them of any liability with respect to the plaintiffs’ claims and that these claims had not been pled with the detail required by Federal Rule of Civil Procedure 8(a).

While denying the defendants’ motion to dismiss, the court agreed that the defendants did not breach their fiduciary duties by failing to make disclosures regarding revenue sharing, citing the recent decision in Hecker v. Deere & Co., 496 F.Supp.2d 967 (W.D. Wis. 2007) (currently on appeal to the U.S. Court of Appeals for the 7th Circuit). The court found, however, that because inadequacy of disclosures was only one aspect of the plaintiffs’ claims, this deficiency did not necessitate granting the defendants’ motion. The court held that the safe harbor provisions contained in ERISA § 404(c) provide an affirmative defense that the plaintiffs had no obligation to negate at the motion to dismiss stage. The court also found that the complaint gave the defendants sufficient notice of the claims against them so that it complied with Rule 8(a)’s requirements.

Finally, the court denied as moot the plaintiffs’ motion to strike various reporting documents that the defendants had attached to their motion to dismiss. Because the plaintiffs questioned the veracity of these documents, and because the court was not convinced that they were central to the plaintiffs’ breach of fiduciary claims, the court ruled the documents excluded for purposes of the motion to dismiss. The court has referred the matter to a magistrate judge for further pre-trial proceedings.

This is the eleventh ERISA revenue-sharing case that a district court has declined to dismiss on the pleadings. Motions to dismiss have been granted in the following cases:

  • Hecker v. Deere & Co., case no. 3:06-cv-0719-JCS (W.D. Wis. filed 12/8/06) (dismissed on merits; currently on appeal to 7th Circuit);
  • Young v. General Motors Investment Management Corp., case no. 1:07-cv-01994-BSJ-FM (S.D.N.Y. filed 3/8/07) (claims dismissed as time-barred; currently on appeal to the 2nd Circuit);
  • Daniels-Hall v. National Education Association, case no. 3:07-cv-05339-RBL (W.D. Wash. filed 7/11/2007) (dismissed on basis that ERISA is inapplicable to section 403(b) plan for public school employees; currently on appeal to the 9th Circuit);
  • Beary v. ING Life Insurance and Annuity Co., case no. 3:07-cv-00035-MRK (D.Conn. filed 1/8/2007); Beary v. Nationwide Life Insurance Co., case no. 2:06-cv-00967-EAS-MRA (S.D. Ohio filed 11/15/2006) (dismissed on SLUSA preemption grounds);
  • In re Northrop Grumman Corp. ERISA Litig., case no. 2:06-cv-6213-R-JC (C.D. Cal. filed 9/28/2006) (dismissed as to the company and the director defendants).