Vellali v. Yale Univ., No. 3:16-cv-1345 (AWT), 2022 WL 13684612 (D. Conn. Oct. 21, 2022) (Judge Alvin W. Thompson)

A district court in Hartford, Connecticut has held that a longstanding suit by participants in the Yale University 403(b) Retirement Account Plan can proceed to trial on their imprudence claims against Yale and related plan fiduciaries. Given last year’s decision by the Supreme Court in Hughes v. Northwestern University, 142 S. Ct. 737 (2022), vacating judgment in the university’s favor, it should come as no surprise that courts such as this one are giving serious scrutiny to ERISA cases challenging the prudence of investment options in defined contribution plans offered by universities.

A class of 20,000 Yale workers and plan participants brought suit in 2016, asserting claims against Yale and other fiduciaries for breaching their duty of prudence in various ways with respect to plan investments, engaging in prohibited transactions, failing to monitor the plan’s investments, and failing to monitor the other plan fiduciaries. On the defendants’ motion for summary judgment, the court ruled that, with respect to most of plaintiffs’ claims, there were genuine issues of material fact that must be resolved at trial.

In their complaint plaintiffs outlined several ways in which they believed defendants’ actions were deficient under ERISA. First, they challenged Yale’s “bundled” services arrangement with The Teachers Insurance Annuity Association of America (“TIAA”), under which Yale agreed to a contract with TIAA that prohibited it from opting out of TIAA’s investment options or selecting any other recordkeeper for TIAA’s annuities. According to plaintiffs, entering such a contract “committed the Plan to an imprudent arrangement.” The court concluded that genuine issues of material facts with respect to the prudence of the bundling arrangements necessitated a trial on this count.

Plaintiffs additionally alleged defendants breached their duties by causing the plan to pay unreasonable administrative and recordkeeping fees to both of the plan’s service providers, TIAA and Vanguard. Although defendants countered that they reduced these fees in 2015 by dropping Vanguard as a recordkeeper and retaining only TIAA, the court agreed with the plaintiffs that there were genuine issues as to whether this took too long, since the plan fiduciaries began considering consolidation of recordkeepers in 2010.

Plaintiffs also argued that defendants improperly allowed TIAA to use plan data to cross-sell and aggressively market products outside the plan to participants. Claims based on similar allegations directly against TIAA were dismissed in Carfora v. Teachers Ins. Annuity Ass’n of Am., No. 21 CIVIL 8384 (KPF), 2022 WL 4538213 (S.D.N.Y. Sep. 28, 2022), summarized as Your ERISA Watch’s notable decision in our October 5th newsletter. In this case, however, the court concluded that plaintiffs raised issues appropriate for resolution at trial about whether Yale acted imprudently by not obtaining information about TIAA’s cross-selling activities or prohibiting TIAA from engaging in these activities.

Likewise, the court allowed claims based on defendants’ lack of process for monitoring the performance of the plan’s funds, and their failure to select available institutional share classes over costlier retail share classes, to go forward.

The court, however, granted the motion with regard to claims asserting prohibited transactions and failure to monitor co-fiduciaries. The court held that there was ultimately no evidence of concealment or self-dealing to show that prohibited transactions occurred. Finally, the court agreed with defendants that plaintiffs failed to create a genuine dispute supporting their assertion that defendants lacked a sufficient process in place to monitor the delegated plan administrators.

The long and the short of this decision is that most of the claims against Yale will proceed to trial.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Breach of Fiduciary Duty

Sixth Circuit

Parker v. GKN N. Am. Servs., No. 21-12468, 2022 WL 15142598 (E.D. Mich. Oct. 26, 2022) (Judge Sean F. Cox). Defendants, GKN North America Services, Inc. and the other fiduciaries of GKN’s “GoalMaker” 401(k) Plan, moved for reconsideration of the court’s August 26, 2022 order denying defendants’ motion to dismiss this putative class action asserting breaches of fiduciary duties. Defendants’ failure “to demonstrate ‘a palpable defect’ in need of correction that would result in a different disposition of the case” was unwelcome to the court, which understood this motion to be a rehashing of issues previously addressed in defendants’ original motion to dismiss. The court rejected defendants’ assertion that plaintiffs’ comparator funds did not “consistently outperform” the challenged funds simply because they didn’t constantly outperform the challenged funds. The court also disagreed with defendants’ understanding of controlling authority Smith v. CommonSpirit, 37 F.4th 1160 (6th Cir. 2022), and found that their assertion that active and passive funds can never be compared missed the mark. In the court’s view, “(t)he issue here is not active versus passive, but rather failure to investigate, failure to select lower-cost options, and retaining imprudent plan investments. Therefore, funds in the same Morningstar category constitute appropriate comparator data in this case.” Accordingly, the court denied defendants’ motion for reconsideration, and things stand today in the case just as they stood on August 26.

Class Actions

Sixth Circuit

Dover v. Yanfeng U.S. Auto. Interior Sys., No. 2:20-cv-11643, 2022 WL 14789119 (E.D. Mich. Oct. 25, 2022) (Judge Terrence G. Berg). Plaintiffs moved for preliminary approval of class action settlement agreement in this breach of fiduciary duty action relating to the management of the Yanfeng Automotive Interior Systems Savings and Investment 401(k) Plan. The court began by conditionally certifying the class of plan participants and beneficiaries, finding the class of around 9,000 members satisfies the requirements of Rule 23(a) and (b) as common questions about defendants’ conduct predominate. For settlement purposes the court preliminarily appointed the named plaintiffs as class representatives and their counsel, Edelson Lechtzin LLP, and Fink Bressack LLP, as class counsel. Furthermore, the court was satisfied that the settlement agreement itself seems to be the product of fair and informed negotiations and therefore approved the settlement subject to further consideration after the final fairness hearing takes place early next year. Finally, the court approved the proposed settlement administrator, Angeion Group, and the Notice and mailing plan. For these reasons, plaintiffs’ motion for preliminary settlement approval was granted.

Eleventh Circuit

Huang v. Trinet HR III, Inc., No. 8:20-cv-2293-VMC-TGW, 2022 WL 13631836 (M.D. Fla. Oct. 21, 2022) (Judge Virginia M. Hernandez Covington). Participants of two multiemployer ERISA plans, the TriNet 401(k) Plan (“the TriNet III Plan”) and the TriNet Select 401(k) Plan (“the TriNet IV Plan”), brought a putative class action lawsuit against the plans’ sponsors and fiduciaries for fiduciary breach related to plan investments. Specially, plaintiffs allege that defendants failed to investigate or include lower-cost and better performing passively managed funds, choosing instead to invest in costly and poorly performing actively managed funds. They also argued that defendants failed to negotiate for and utilize institutional share classes. Finally, plaintiffs alleged defendants paid too much in recordkeeping expenses, and plaintiffs challenged TriNet’s use of revenue sharing to pay for the plans’ fees and expenses. Plaintiffs moved for class certification. Defendants opposed certification. They argued that the named plaintiffs did not have standing to bring claims as to the TriNet III Plan because they only participated in the TriNet IV plan. The court disagreed. Plaintiffs, the court held, are challenging defendants’ general practices, which affect both plans. Accordingly, the court found the TriNet IV Plan plaintiffs have standing to pursue their claims relating to both plans. Turning to the requirements of Rule 23, however, the court concluded that, despite having standing, plaintiffs did not satisfy Rule 23(a)’s typicality requirement for the TriNet III Plan. “None of the TriNet IV Plaintiffs invested in any of the challenged funds in the TriNet III Plan. There is no overlap between the TriNet III challenged funds and the TriNet IV challenged funds. The Plans also utilized different recordkeepers operating under different contracts.” Concluding that the claims relating to each of the two plans do not sufficiently overlap, the court altered the definition of the proposed class and limited it to the participants and beneficiaries of only the TriNet IV Plan. However, under this new limited definition, the court was convinced that plaintiffs met all the requirements of Rule 23(a) and (b) and therefore granted the motion to certify this class.

Disability Benefit Claims

Sixth Circuit

Card v. Principal Life Ins. Co., No. 5:15-139-KKC, 2022 WL 15512209 (E.D. Ky. Oct. 27, 2022) (Judge Karen K. Caldwell). In 2015, plaintiff Susan Card filed her initial complaint against defendant Principal Life Insurance Company challenging Principal’s denial of her disability benefit claim. The court granted summary judgment in favor of Principal, affirming the denial under arbitrary and capricious review. Plaintiff appealed and the Sixth Circuit reversed, concluding that Principal had abused its discretion and that the claim should be sent back to Principal for further consideration. After Principal failed to issue a timely decision, Card filed a motion with the district court to recover attorneys’ fees and costs for her success achieving remand to the plan administrator. She also moved to reopen her case in the district court. The district court denied both motions. Ms. Card once again appealed, and once again found success in the court of appeals, which vacated the district court’s order. The court in this order reconsidered Ms. Card’s attorneys’ fees motion and her motion to reopen her case for judicial review of her long-term disability benefit claim. This time both motions were granted. To begin, the court addressed the motion for fees and costs. Ms. Card sought a total of $66,142.50 in attorneys’ fees and $4,761.45 in costs. The court concluded that Ms. Card’s successes in the Sixth Circuit constituted a degree of success on the merits warranting an award of attorneys’ fees, especially when weighing the other King factors which also favored an award of fees. The court nevertheless reduced the requested amounts and ultimately awarded $47,635.00 in fees and $857.92 in costs. This reduction reflected a downward adjustment of the number of hours expended. The court did not award fees for hours spent on unsuccessful arguments, including the time counsel spent arguing in favor of de novo review. The court also reduced hours for time spent litigating a motion to compel a third-party subpoena. However, the court did not reduce the hourly rates of the attorneys, Michael and Andrew Grabhorn, or their staff, and accepted their rates ranging from between $125 – $525 per hour as acceptable based on the prevailing market rate in Eastern Kentucky. Moving on to the motion to reopen, the court reopened the case, deeming Ms. Card’s claims exhausted because Principal failed to issue a determination on her long-term disability claim by the required 90-day deadline under ERISA. “Without a deadline for determining disability claims on court-ordered remand, the claims could be pending in perpetuity, leaving claimants without recourse and foreclosing their avenue to judicial relief.” And so, this case now stands not far from where it stood in 2015, with the district court once again in a place where it will be tasked with reviewing a disability claim.

Bulas v. Unum Life Ins. Co. of Am., No. 2:22-cv-112, 2022 WL 14813537 (S.D. Ohio Oct. 26, 2022) (Judge Sarah D. Morrison). Plaintiff Robert Bulas, M.D. practiced as a neuroradiologist until 2017, when an eye condition left him unable to continue working and he went on long-term disability. Four years later, in August 2021, Dr. Bulas’s benefits were terminated when the plan’s insurer concluded that although Dr. Bulas would be unable to perform interventional procedures, his ocular condition would not prevent him from performing the duties associated with diagnostic radiology and that he was thus not totally disabled from performing the material duties of his occupation. In this action Dr. Bulas sued Unum Life Insurance Company of America, alleging that he was denied a full and fair review, seeking a declaration that he is totally disabled within the meaning of the policy, and asking the court to reinstate his benefits under the plan. To begin, the parties disputed whether Unum or rather its related subsidiary, Provident Life and Accident Insurance Company, is the proper defendant to the suit. Splitting the baby, the court substituted Provident as the defendant for the claim for benefits and for Dr. Bulas’s claim seeking a declaration of disability, but denied the motion to substitute Provident for the full and fair review claim. This decision was ultimately immaterial though, as the court granted Unum’s motion to dismiss the full and fair review claim. Agreeing with the majority of circuit courts, the court ruled that the 2002 claims regulation did not require administrators to provide claimants with the materials generated during an administrative appeal, and therefore held that Dr. Bulas failed to state a claim based on Unum’s failure to do so. Finally, the court denied Dr. Bulas’s motion for judgment on the pleadings requesting a declaration that he is totally disabled under the policy. The court held that there are genuine disputes among the parties that preclude judgment on the pleadings.

ERISA Preemption

Ninth Circuit

Healthcare Ally Mgmt. of Cal. v. Aetna Life Ins. Co., No. CV 22-4826 DSF (KSx), 2022 WL 14518731 (C.D. Cal. Oct. 25, 2022) (Judge Dale S. Fischer). Plaintiff Healthcare Ally Management of California, LLC sued Aetna Life Insurance Company in Los Angeles County Superior Court alleging two state law causes of action, promissory estoppel and negligent misrepresentation, in connection with underpayment of medical benefits for services it provided to two insured patients. Aetna removed the matter to the Central District of California pursuant to federal question jurisdiction. Plaintiff moved to remand the action. It argued that its claims are based on representations made by Aetna about how much it would be paid. Accordingly, plaintiff argued that its claims concern the rate of payment rather than the right to payment and are thus not preempted by ERISA. The court ultimately agreed with Healthcare Ally Management and granted its motion to remand.

Tenth Circuit

Bank Midwest v. R.F. Fisher Elec. Co., No. 19-CV-2560-JAR-GEB, 2022 WL 14807787 (D. Kan. Oct. 26, 2022) (Judge Julie A. Robinson). In 2019 an electrical contractor, R.F. Fisher Electric Co., LLC, ceased its operations. Immediately after, Bank Midwest filed suit against R.F. Fisher for defaulting on loan agreements. R.F. Fisher was indebted to the bank for approximately $11 million. Bank Midwest moved for a receiver, and one was appointed over R.F. Fisher’s collateral. The bank wasn’t the only party interested in collecting payment from R.F. Fisher. So too were a group of multi-employer ERISA plans who were owned unpaid contributions by R.F. Fisher and its various other related corporate entities. During the receivership, the Funds obtained hundreds of thousands of dollars in payments from R.F. Fisher’s customers in the amounts owed to the Funds for the unpaid contributions. The receiver subsequently brought claims of conversion and tortious interference with contract against the Funds for obtaining these payments which the receiver considers to be “diverted Fisher receivables.” The Funds moved to dismiss, arguing the claims are preempted by ERISA. The court held that the receiver only has the right to obtain Fisher’s property “if R.F. Fisher would have a right to it, and (not) what R.F. Fisher would not have rightful ownership of.” The court concluded that the state law claims are based on the Fund’s alleged misconduct in collecting the fringe benefits and that the claims therefore relate to the ERISA plans are thus fall under ERISA preemption. Additionally, the court found that the receiver’s remedy would involve removal of plan assets, further implicating ERISA preemption and its purposes. Having so concluded, the court granted the Funds’ motion to dismiss.

Exhaustion of Administrative Remedies

Tenth Circuit

Fischer v. Rocky Mountain Hosp. & Med. Serv., No. 21-cv-01489-CMA-MEH, 2022 WL 13682928 (D. Colo. Oct. 21, 2022) (Judge Christine M. Arguello). Since 2008, plaintiff Erik G. Fischer has been taking a daily antibiotic medication called Azithromycin to treat a microbial infection in his spine and abdomen that he developed from a surgical procedure. Mr. Fischer is a participant in an ERISA-governed health plan, and he regularly submits claims to Anthem for coverage of his prescription medication. This ERISA lawsuit is the fourth filed by Mr. Fischer against his plan and Anthem. In 2014, 2016, and 2020 he brought nearly identical actions under Section 502(a)(1)(B) to recover denied claims for his medical benefits. After the plan and Anthem denied reimbursement for his antibiotics this time, in the Spring of 2021, Mr. Fischer skipped the administrative appeals process, reasoning exhaustion would be futile given this pattern of routine denials. The parties jointly moved for determination. Mr. Fischer argued the denial was arbitrary and capricious. Anthem argued that Mr. Fischer’s action should be barred for failure to exhaust administrative remedies. The court ruled in Anthem’s favor, agreeing that Mr. Fischer’s failure to exhaust the internal appeals process was not excusable by his futility arguments, especially given the “important purposes (the exhaustion requirement) serves.” The court was not persuaded that Anthem’s prior denials nor Mr. Fischer’s prior lawsuits were proof that his claim would have certainly been denied on appeal. Thus, the court awarded judgment against Mr. Fischer and in favor of Anthem.  The court did not, however, award Anthem attorney’s fees and costs, though it did caution Mr. Fischer against bringing a future claim for benefits without first exhausting administrative remedies. Failure to do so, the court warned, could warrant awarding Anthem attorney’s fees.

Life Insurance & AD&D Benefit Claims

Fifth Circuit

Clements v. Southern Nat’l Life Ins. Co., No. 6:20-CV-01205, 2022 WL 13981831 (W.D. La. Oct. 21, 2022) (Judge Robert R. Summerhays). In 2019 decedent Anthony Clements was fatally electrocuted while at work in a salt mine in Louisiana. Mr. Clements was insured under both a group term life insurance policy and an accidental death and dismemberment (“AD&D”) policy. His son, TC, was the beneficiary of both policies. Defendant Southern National Life Insurance Company paid the benefits from the group term life insurance policy but denied the claim under the AD&D policy. In the denial letter, Southern National informed the family that the claim fell under the policy’s drug exclusion because the toxicology report found that Mr. Clements had narcotic drugs in his system and the death certificate stated that the drugs were a contributing cause of death. Confident in its interpretation of the plan language, Southern National moved for judgment. In this order the court granted the motion, agreeing that the death fell within the exclusion and the denial on this basis was reasonable under arbitrary and capricious review.

Pension Benefit Claims

Ninth Circuit

Lundstrom v. Young, No. 18-cv-2856-GPC, 2022 WL 15524624 (S.D. Cal. Oct. 27, 2022) (Judge Gonzalo P. Curiel). Plaintiff Brian Lundstrom is a divorcé who commenced this legal action against his ex-wife, Carla Young, his former employer, Ligand Pharmaceuticals Inc., and his ERISA 401(k) Plan, asserting state law and ERISA claims challenging the validity of  a court issued qualified domestic relations order (“QDRO”) which granted 100% of his 401(k) Plan account assets to Ms. Young, and the validity of a court-issued domestic relations order (“DRO”) that transferred stock options under Mr. Lundstrom’s Stock Incentive Plan to Ms. Young. Ms. Young and the Ligand Pharmaceutical defendants moved to dismiss. The court granted Ms. Young’s motion and granted in part Ligand Pharmaceuticals and the plan’s motion. The court held that Mr. Lundstrom’s claims against his ex-wife were subject to collateral estoppel because Mr. Lundstrom had already challenged what he considered defects in the 401(k) QDRO and the Stock DRO in Texas state court and in an appeal to the Supreme Court of Texas. Thus, the court considered these issues to have been fully and fairly litigated in the state court actions. However, the court did not agree with the Ligand defendants that all of Mr. Lundstrom’s claims against the company and the plan rely on the validity of the QDRO and DRO. “Plaintiff’s first cause of action alleges that Ligand distributed the benefits in Plaintiff’s 401(k) account in violation of the Plan’s terms. The fourth cause of action relates to the procedures Ligand must have in place for determining the status of a QDRO and whether and how those procedures are communicated to employees. The twelfth cause of action alleges that Plaintiff’s employment was terminated in retaliation for exercising his rights under the 401(k) Plan and ERISA. These allegations are separate and distinct from the question of the validity or invalidity of the 401(k) QDRO and Stock DRO.” Accordingly, these claims against the Ligand defendants were not dismissed. However, Mr. Lundstrom’s breach of fiduciary duty ERISA claims were dismissed as they were premised on Ligand’s failure to investigate the merits of the QDRO, which ERISA does not permit.

Retaliation Claims

Seventh Circuit

Clapper v. United Airlines, Inc., No. 20 CV 2635, 2022 WL 14632805 (N.D. Ill. Oct. 25, 2022) (Judge Manish S. Shah). Flight attendant Gale Clapper was fired by defendant United Airlines, Inc. in 2019 after she took a passenger’s lost iPad and brought it home with her. Ms. Clapper commenced this wrongful termination suit following her termination, believing that the firing was discriminatory and violated ERISA Section 510 because she was scheduled for hip-replacement surgery and was in her 60s and struggling to walk properly. United Airlines argued that its decision to fire Ms. Clapper was because of her theft of the iPad, which it stated was a violation of its professional conduct policies. Regarding Ms. Clapper’s ERISA Section 510 claim, United stated that its decision was not motivated by an intent to interfere with her attainment of benefits and supported this position by proving that it paid for her hip-replacement surgery even after the termination. The court held that United met its burden of providing a non-discriminatory reason for the termination and stated that “nothing about the timing of United’s disciplinary process gives rise to an inference of discrimination.” Accordingly, the court granted United’s motion for summary judgment.

Withdrawal Liability & Unpaid Contributions

Ninth Circuit

Gciu-Employer Ret. Fund. v. MNG Enters., No. 21-55864, __ F. 4th __, 2022 WL 15579987 (9th Cir. Oct. 28, 2022) (Before Circuit Judges Smith, Jr. and Nelson, and District Judge Gershwin A. Drain). An ERISA multiemployer pension plan, the GCIU-Employer Retirement Fund, challenged an arbitrator’s award assessing withdrawal liability against the defendant employer, MNG Enterprises Inc. In the district court the arbitration decision was affirmed except for a typographical error in the assessed interest rate. The Fund appealed the decision, arguing that the district court erred in affirming the arbitrator’s choice of interest rate, and the arbitrator’s decision that MNG could not be assessed partial withdrawal liability following a complete withdrawal. MNG Enterprises took issue with a different aspect of the arbitrator’s and the district court’s decision: the inclusion of contribution histories of two smaller employers that it acquired a few years before the date of the withdrawal. The Ninth Circuit agreed with the lower court and the arbitrator that the interest rate used was appropriate because it took the plan’s assets and past performance into account and was therefore the “best estimate.” However, the Ninth Circuit did not choose to adopt the Fund’s requested interest rate published by the Pension Benefit Guaranty Corporation because it did not reflect the experience or expectations of the plan. Additionally, the court of appeals affirmed the district court’s conclusion that a partial withdrawal cannot occur after a complete withdrawal and “(s)pecifying two types of withdrawal would hardly make sense if a partial withdrawal always followed a complete one.” However, the circuit court vacated the inclusion of the contribution histories of the two small, acquired businesses. The Ninth Circuit felt the district court did not properly address MNG’s potential successor liability for the two businesses it acquired more than a decade earlier. Thus, the appeals court vacated this aspect of the order and remanded to the district court to determine whether MNG had successor liability and if the arbitrator was correct in applying the businesses’ contribution histories at the time of the asset sales.