Compliance December 28, 2017

Princeton University Lawsuit Stayed While 3rd Circuit Deliberates

On the motion for reconsideration of its previous choice to rule against summary dismissal, the court is quite skeptical. It has agreed, on the other hand, to stay the proceedings ahead of a 3rd U.S. Circuit Court of Appeals decision.

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Among the final decisions handed down in 2017 by the U.S. District Court for the District of New Jersey was a complicated ruling on the Employee Retirement Income Security Act (ERISA) lawsuit filed against the retirement plans of Princeton University.

The initial lawsuit charged the university with failing to leverage its retirement plans’ collective and massive bargaining power to benefit participants and beneficiaries. Defendants were also accused of inappropriately contracting with two recordkeepers instead of one; and with failing to investigate, examine and understand the real cost to participants for administrative services, thereby causing the plans to pay unreasonable and excessive fees for recordkeeping and investments.

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Plaintiffs suggested Princeton inappropriately agreed to pay an asset-based fee for administrative services that increased as the value of his participant account rose, even though no additional services were being provided. Further, the suit contended, Princeton “selected and retained investment options for the plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees, as well as share classes that were more expensive than other share classes readily available to qualified retirement plans that provided plan investors with the identical investment at a lower cost.”

Since the initial lawsuit was filed, both the plaintiffs and defendants have raised and countered numerous cross motions and procedural challenges. Next in the timeline, on August 7, 2017, Princeton filed a motion to dismiss and for summary judgment against the would-be class of plaintiffs. On September 19, the court granted in part and denied in part Princeton’s various motions.

The court explained its decision in an amended opinion filed on September 25, 2017. The amended opinion dismissed the first two counts of the plaintiffs’ complaint with respect to the duty of loyalty and also dismissed the third count of the plaintiffs’ complaint in its entirety, granting plaintiffs leave to amend on all counts. At that juncture, the court further denied Princeton’s alternative motion for summary dismissal on statute of limitations grounds.

Moving ahead in the timeline, with court approval, the parties agreed to a revised briefing schedule for Princeton to file a motion for reconsideration and for plaintiffs to file an amended complaint. On October 31, 2017, Princeton filed its motion for reconsideration and simultaneously filed a motion to stay, in view of the docketed appeal to the 3rd U.S. Circuit Court of Appeals in the similar but unrelated matter of Sweda v. University of Pennsylvania. In response, the plaintiffs opposed both motions, leading to the current decision. 

What does it all mean?

On the motion for reconsideration of its previous choice to rule against summary dismissal, the court is quite skeptical: “Reconsideration is not an opportunity to raise new matters or arguments that could have been raised before the original decision was made. See Bowers v. NCAA. Nor is a motion for reconsideration an opportunity to ask the court to rethink what it has already thought through. See Oritani Sav. & Loan Ass ‘n v. Fidelity & Deposit Co. of Md. Rather, a motion for reconsideration may be granted only if there is a dispositive factual or legal matter that was presented but not considered that would have reasonably resulted in a different conclusion by the court. Mere disagreement with a court’s decision should be raised through the appellate process and is inappropriate on a motion for reconsideration.”

However the discussion of the successful motion to stay is far more nuanced and sets out important details in terms of the way the district court views its obligation to follow and potentially respond to similar cases in different districts within its appellate circuit.

The decision explains as follows: “Defendant has brought to the court’s attention an appeal pending before the Third Circuit Court of Appeals in Sweda v. University of Pennsylvania. In that case, a plaintiff brought a putative class action claiming fiduciary breaches of ERISA by the University of Pennsylvania, on the basis of substantially overlapping factual allegations as those alleged by plaintiff here. Two days after this court granted in part and denied in part defendant’s motion to dismiss, Judge Gene Pratter of the Eastern District of Pennsylvania granted the University of Pennsylvania’s motion to dismiss on all claims, finding that Sweda’s complaint failed to create a plausible inference of fiduciary breach sufficient to survive a motion to dismiss. Sweda appealed.”

With this process unfolding in the background, Princeton sought a stay of its own case until that appeal is decided, asserting that the ERISA claims against each university defendant are “strikingly similar and disposition of the appeal will clarify the controlling law, conserve judicial resources, and be highly instructive in this action going forward.”

Naturally, the plaintiffs asserted that Princeton is “engaging in litigation gamesmanship and delaying tactics.” Of all the cases brought to the court’s attention, however, the only other case decided in the 3rd Circuit and governed by the law of this circuit is Sweda, and the appeal of that case alone directly bears on the prior and future rulings of this court.

With this ruling, the New Jersey district court agrees that a stay would simplify issues and promote judicial economy to some extent: “While plaintiff disputes defendant’s characterization of the overlaps between Sweda and the instant action, it is undoubtedly true that a Third Circuit ruling on the viability of claims raised in both lawsuits will create a more definite roadmap for this court in applying controlling law. Should the Third Circuit affirm the Sweda decision, which dismissed the complaint in its entirety for failing to state a plausible claim to relief, this court would need to revisit its earlier opinion allowing certain of plaintiffs’ claims to proceed under the same standard. The court finds that a stay would promote judicial economy by preventing needless back-and-forth in discovery or motion practice on disputed legal standards in the Third Circuit’s law on fiduciary breaches under ERISA, streamlining discovery and guiding future proceedings. This weighs heavily in favor of granting a stay.”

The full text of the Princeton decision includes additional considerations weighing ultimately in favor of granting the stay.

Compliance December 28, 2017

Great-West Wins Suit Over Key Guaranteed Portfolio Fund

A judge ultimately found that Great-West Life & Annuity Insurance Company was not a fiduciary with respect to the fund and the plaintiff did not show that, as a party-in-interest, the company knew its actions violated ERISA.

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A federal district court judge has granted summary judgment to Great-West Life & Annuity Insurance Company in a lawsuit that alleges it breached its fiduciary duty of loyalty under the Employee Retirement Income Security Act (ERISA) Sections 502(a)(2) and (3)—namely by setting predetermined interest rates artificially low and charging excessive fees in order to increase its own profits from the sale and servicing of the Great-West Key Guaranteed Portfolio Fund.

The investment relationship between Great-West and the plan is governed by a group annuity contract which, among other provisions, provides for a participant’s investment to accrue interest at a rate set prior to each quarter and guaranteed never to be less than 0%. Money invested in the fund is not kept in a segregated account, but rather is deposited into defendant’s general account, and Great-West retains the investment returns of the general account above the crediting rate applied to the fund in the plan. Notable to the court’s decision is that the contract also allows plan participants to move money out of the fund at any time without any fees or charges.

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U.S. District Judge William J. Martinez of the U.S. District Court for the District of Colorado notes in his opinion that at the center of plaintiff’s claims one and two is the allegation that Great-West failed to comply with ERISA’s requirements for fiduciaries of plan assets, so it must first be determined whether Great-West is a fiduciary.

Great-West’s primary summary judgment argument is that it is not a fiduciary with respect to the fund because ERISA contains an exemption for a “guaranteed benefit policy” (GBP), meaning “an insurance policy or contract to the extent that such policy or contract provides for benefits the amount of which is guaranteed by the insurer.” According to the opinion, the GBP exemption itself reads as follows: “In the case of a plan to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall be deemed to include such policy, but shall not, solely by reason of the issuance of such policy, be deemed to include any assets of such insurer.”

Upon analysis, Martinez found Great-West is correct that the fund is a GBP; however, it vastly overstates the scope of the GBP exemption. Thus, the fund’s status as a GBP turns out to be irrelevant.

Martinez said the plaintiff claims, correctly, that regardless of the GBP exception, the contract is still part of the plan and Great-West may have fiduciary responsibilities when it makes discretionary decisions regarding the contract, such as setting the credited rate. However, Great-West argues that the decision to set the credited rate is not an instance of “discretionary authority,” “discretionary control,” or “discretionary responsibility” that would trigger ERISA fiduciary status because it does not have “the ‘final say’” on whether the credited rate will actually apply given that participants can withdraw their money from the fund at any time without fees or charges.

Martinez found that Great-West presented a number of other cases “favoring the theory that a pre-announced rate of return prevents fiduciary status from attaching to the decision regarding what rate to set, at least when the plan and/or its participants can ‘vote with their feet’ if they dislike the new rate.”

While the plaintiff argued none of those cases specifically discuss individual plan participants’ ability to reject the insurance company’s decision, but focused on the plan sponsor’s ability to reject the decision, Martinez did not perceive a meaningful distinction. “ERISA does not impose obligations on retirement plans purely for those plans’ sake, but because Congress was concerned with plan participants’ welfare. Plan participants’ ‘veto’ authority is therefore as relevant as plan sponsors’ authority,” he wrote.

In addition, Martinez agreed with Great-West that it is not an ERISA fiduciary as to its own compensation because it does not control what its plan-related compensation will be. “To be sure, by determining what Credited Rates to offer, [Defendant] can influence its possible margins if plans and their participants invest in the Fund at those guaranteed rates. But its compensation (if any) depends on participants investing their accounts at those Credited Rates, and—because the Credited Rates are stated in advance and participants are free to withdraw their investments at any time without penalty—participants can reject a Credited Rate before it ever applies,” the opinion says.

Martinez granted summary judgment to Great-West on counts one and two.

Party-in-interest liability

The plaintiff’s third claim alleges that Great-West can still be liable as a party-in-interest for essentially all the relief he seeks under claims one and two. The opinion notes that ERISA establishes that “[a] fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect … use by or for the benefit of a party in interest of any assets of the plan.”

The opinion also notes that the Supreme Court held in Harris Trust & Savings Bank v. Salomon Smith Barney, Inc. that the party-in-interest on the receiving end of such a transaction may be liable under ERISA if it “had actual or constructive knowledge of the circumstances that rendered the transaction unlawful.”

Great-West argues that the plaintiff has not made out a claim for nonfiduciary liability under the standard established in Salomon. Proving it “had actual or constructive knowledge of the circumstances that rendered the transaction unlawful” requires “a showing that the plan fiduciary, with actual or constructive knowledge of the facts satisfying the elements of a [prohibited] transaction, caused the plan to engage in the transaction.” Martinez agreed with Great-West, citing the plaintiff’s “failure to distinguish these two elements of a non-fiduciary liability claim.”

Martinez said, “Accordingly, an ERISA plaintiff cannot rely solely on the knowledge that would satisfy a fiduciary’s liability for a prohibited transaction to likewise hold a non-fiduciary party in interest liable for that transaction. Rather, the plaintiff must show that the defendant knew or should have known that the transaction violated ERISA. Plaintiff has not attempted to make this showing, but has instead continually asserted only that the undisputed facts show Defendant had the basic knowledge necessary to make a fiduciary liable.” He granted summary judgment to Great-West on count three.

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