Cunningham v. Cornell Univ., Nos. 21-88-cv, 21-96-cv, 21-114-cv, __ F. 4th __, 2023 WL 7504142 (2d Cir. Nov. 14, 2023) (Before Circuit Judges Livingston, Kearse, and Park)

The case law governing excessive fee cases continues to develop in unpredictable ways, as this decision from the Second Circuit demonstrates.

A class of participants and beneficiaries of two 403(b) retirement plans administered by Cornell University sued the college and its appointed fiduciaries under ERISA alleging that defendants breached their duties of prudence, loyalty, and monitoring and engaged in prohibited transactions by failing to adequately oversee the plans to ensure they were not retaining underperforming and costly investment options and that the fees paid to service providers were not excessive for the services rendered.

The complaint alleged that defendants violated these duties by (1) offering investment products that had high fees and poor performance histories; (2) not selecting available institutional share classes of mutual funds; (3) failing to control recordkeeping and investment management fees; and (4) hiring party-in-interest service providers to furnish recordkeeping and administrative services to the plan in a manner not exempted under ERISA’s prohibited transaction statute.

The plaintiffs have faced significant hurdles throughout the course of their litigation. First, on September 29, 2017, the district court granted a large portion of defendants’ motion to dismiss. It dismissed all but plaintiffs’ imprudence and monitoring claims predicated on defendants’ failure to monitor recordkeeping fees and those premised on the retention of certain investments in underperforming funds and in retail share-classes. The duty of loyalty claims, the prohibited transaction claims, and the remainder of the imprudence allegations were all dismissed.

Two years later, in September of 2019, the district court granted summary judgment in favor of the fiduciaries on nearly all of the remaining claims. It held then that plaintiffs failed to present evidence of loss resulting from the allegedly high recordkeeping fees. Regarding the claims based on the retention of the remaining investment options, the district court concluded that no reasonable trier of fact could determine that defendants’ monitoring process was so flawed that it violated its duty of prudence. Finally, with regard to the retail share classes, the district court awarded judgment in favor of defendants for all but one of the mutual funds.

All that remained after the district court’s summary judgment decision was the duty of prudence and derivative monitoring claim related to the failure to adopt a lower cost share class of one target date fund. That claim settled. This appeal followed, and plaintiffs’ difficulties have continued.

The appellant class of participants challenged the district court’s rulings on summary judgment and at the pleadings. The Second Circuit in this order affirmed, while at the same time setting out a new pleading standard for prohibited transaction claims.

The court of appeals held that to state a prohibited transaction claim an ERISA plaintiff needs to include allegations that the transaction with a service provider was either unnecessary or involved unreasonable compensation. Differentiating itself from some of its sister circuits, the Second Circuit did not find that a prohibited transaction claim requires explicit allegations of self-dealing or disloyal conduct, as these elements are not part of the statute and would require a more expansive reading of the text. Nevertheless, the appeals court disagreed with plaintiffs that exceptions to prohibited transactions are an affirmative defense to be raised by the plan sponsor, even though a number of other courts, including the Eighth Circuit, have found that the text of ERISA supports treating the Section 408 exemptions as such. Rather, the Second Circuit understood the exceptions spelled out in Section 408 as necessary elements of a prohibited transaction claim under ERISA Section 406, stating that “the exception should be understood as part of the definition of the prohibited conducted – and thus its inapplicability must be pled.” Moreover, the court of appeals agreed with the lower court that plaintiffs had not met this standard when pleading their prohibited transaction claim, and thus affirmed its dismissal.

The court also affirmed the remainder of the dismissal decision. The appellate court agreed with the district court that defendants’ alleged wrongdoing and disloyalty could not be inferred from the allegations of the complaint and that they therefore did not give rise to a cause of action for fiduciary breach.

Having upheld the claims eliminated at the motion to dismiss stage, the decision moved on to scrutinizing the summary judgment decision. In this portion, the court held that plaintiffs’ fee claims failed because they did not establish or provide evidence of a suitable benchmark “against which loss could be measured.” In the court’s estimation, the testimony of plaintiffs’ experts did not satisfy this requirement, and neither did their numerical pricing data because this evidence was insufficient to “lead a reasonable juror to conclude that Cornell could have achieved lower fees,” and thus did not establish a “‘prudent alternative’ fee…or otherwise establish loss.” Thus, the Second Circuit affirmed the summary judgment decision regarding the administrative fee claims.

With regard to the investment option claims, the court of appeals agreed with the district court that defendants’ monitoring process was not flawed given the context of the relevant time period, although by today’s standards it would likely fall below expectations for ERISA fiduciaries. Finally, the Second Circuit took a look at the share class claims, pointing to evidence in the record which demonstrated that defendants had tried to lobby TIAA to allow the plan to transition to the cheaper share classes but were rebuffed by TIAA. “Given this evidence, a reasonable finder of fact could not conclude that Cornell could have forced, or should have tried harder to force, TIAA to offer the Plans the lower-cost share funds at an earlier date.” Thus, the grant of summary judgment for defendants on this claim too was affirmed. Accordingly, the court of appeals found no basis for reversal of any of the district court’s decisions, and therefore affirmed its judgment entirely.

The plaintiffs have filed a petition for panel or en banc rehearing. They argue that the panel’s holding that the plaintiff bears the burden of pleading that a prohibited transaction exemption does not apply conflicts with the Eighth Circuit’s decision in Braden v. Wal-Mart. In this regard, the plaintiffs contend that the Second Circuit improperly imported the self-dealing standard set forth in the Investment Company Act, rather than applying the reasonableness standard expressly set forth in ERISA Section 408. They also argue that the panel’s conclusion that the plaintiff failed to adequately allege unreasonable compensation conflicts with decisions from the Third and Seventh Circuit reversing dismissals of fiduciary breach claims alleging substantively identical facts. We will of course keep our readers apprised of any developments. 

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


Second Circuit

Shafer v. Stanley, No. 20 Civ. 11047 (PGG), 2023 WL 8100717 (S.D.N.Y. Nov. 21, 2023) (Judge Paul G. Gardephe). Twelve former financial advisors at Morgan Stanley bring this putative class action against Morgan Stanley Smith Barney LLC and the fiduciaries of the company’s two deferred compensation programs for violations of ERISA by allegedly illegally forfeiting deferred compensation benefits. Plaintiffs assert claims for equitable relief under Section 502(a)(3), reformation of the plan under Sections 502(a)(1) and (3), and breach of fiduciary duty under Sections 502(a)(2) and (3). Defendants moved to compel individual arbitration of the benefit disputes and to stay these proceedings. Their motion was granted in this decision. Although the court agreed with plaintiffs that the plans at issue are ERISA-governed retirement plans, it nevertheless disagreed with their basic assertion that their claims are not arbitrable because the arbitration provisions’ class action waivers eliminate their right under ERISA “to remediate the plans as a whole via a representative action.” The court held that defendants presented clear evidence that the plaintiffs agreed to arbitrate and that the arbitration provisions were valid. As to their enforceability and applicability to the claims at issue, the court adopted defendants’ position that the plaintiffs were not actually bringing their claims in a representative capacity to restore any losses to the plan, but were instead using artful pleading to seek to recover benefits allegedly not paid to them. The court found that plaintiffs’ claims truly fall within the scope of Section 502(a)(1)(B) and that they could therefore be resolved individually through arbitration. “Having failed to allege a true § 502(a)(2) claim, Plaintiffs will not be heard to complain that claims under § 502(a)(2) are non-arbitrable.” The court went on to state that “case law indicates that plaintiffs who bring putative class actions alleging 502(a)(3) claims may nevertheless be required to arbitrate their claims individually…Plaintiffs cite no case demonstrating that 502(a)(3) claims are non-arbitrable.” Finally, the court disagreed with plaintiffs that arbitration would void statutory rights under the prospective waiver doctrine. It wrote, “[p]rohibiting class treatment does not inherently limit statutory remedies, however, because class treatment is a procedural matter, and not a substantive right.” For these reasons, the court held that plaintiffs’ claims were within the scope of the arbitration provisions they agreed to and thus granted the motion to compel arbitration. The case will be stayed pending the arbitration proceedings. 

Breach of Fiduciary Duty

Fifth Circuit

Harmon v. Shell Oil Co., No. 3:20-cv-00021, 2023 WL 8014235 (S.D. Tex. Nov. 9, 2023) (Magistrate Judge Andrew M. Edison). Plaintiffs are current and former employees of Shell Oil Co. and participants of its 401(k) retirement plan. In this class action they allege that that the plan’s fiduciaries breached their duties to the participants and beneficiaries by failing to control the plan’s recordkeeping and managed account fees, maintaining more than 300 investment options in the plan, “contrary to prudent investment practices,” leading to ballooning costs for the participants, and by engaging in prohibited transactions. Plaintiffs moved for partial summary judgment on their fiduciary breach claims related to the 300-plus investment options. Defendants meanwhile moved for summary judgment on all counts. In his report and recommendation Magistrate Judge Andrew M. Edison recommended that both motions be denied. Beginning with plaintiffs’ partial summary judgment motion, Magistrate Judge Edison expressed that he believed it was the most prudent course of action to deny the partial summary judgment motion as its resolution would not simplify the trial or “ultimately advance the…resolution of the case.” In Magistrate Edison’s view the best approach is to allow the parties to present their positions at trial and let the presiding district court judge hear the testimony, consider the evidence and exhibits, and “enter a well-reasoned decision – both on the merits of the claims and, if necessary, the appropriate damages to be awarded.” Therefore, Magistrate Edison felt it was unnecessary to even consider whether genuine issues of material fact concerning the investments exist. Instead, he recommended that the court exercise its discretion to deny plaintiffs’ motion for partial summary judgment and leave the questions around the investments for resolution by the judge in the context of the trial. The report then addressed defendants’ summary judgment motion. There, the judge found that genuine issues of material fact were present which preclude summary judgment. Magistrate Judge Edison wrote that he could not conclude as a matter of law that defendants’ actions and process for overseeing the plan were prudent nor that the prohibited transactions were necessary for the operation of the plan and qualified as reasonable compensation for the services rendered. For these reasons, it was Magistrate Edison’s opinion that the district court should deny both summary judgment motions and resolve their disputes and all factual and legal issues following the trial.

Medical Benefit Claims

Third Circuit

Doe v. Indep. Blue Cross, No. 23-1530, 2023 WL 8050471 (E.D. Pa. Nov. 21, 2023) (Judge Timothy J. Savage). Plaintiff Jane Doe, a transgender woman, sued her health insurance provider, defendant Independence Blue Cross, under the Affordable Care Act (“ACA”), the Americans with Disabilities Act (“ADA”), ERISA, and Pennsylvania’s insurance bad faith statute after she was denied coverage for facial feminization surgeries as a treatment for her gender dysphoria. Blue Cross maintains that the surgeries were cosmetic rather than medically necessary and therefore not covered under her ERISA-governed healthcare plan. Ms. Doe believes that the benefit denial was both factually inaccurate and discriminatory. Blue Cross moved to dismiss the complaint for failure to state a claim. It argued that Ms. Doe failed to plead intentional acts of discrimination based on sex or disability to support her ACA and ADA claims, that her ERISA breach of fiduciary duty claim was a repackaged benefits claim, and that her state law bad faith insurance claim was preempted by ERISA. The court granted in part the motion to dismiss. It concluded that Ms. Doe plausibly alleged a violation of Title IX to state a claim of sex discrimination under the ACA. The court agreed with Ms. Doe that for the purposes of pleading she alleged facts demonstrating intentional discrimination and that the denial “depended on ‘whether or not [Ms. Doe] conforms to society’s expected standard for a cisgender female.’” The guidelines in the policy and the claim determination, the court held, considered gender stereotypes and based coverage on the extent to which a claimant conforms to those norms. It wrote that the plan “does not categorically exclude facial reconstructive surgeries… On the contrary, the policy covers these procedures for insureds who establish ‘medical necessity demonstrating a functional impairment.’ There is no question that this language is gender-neutral on its face. But, as alleged in this case, [Blue Cross’s] application of the policy depended on subjective determinations based on gender stereotypes and Ms. Doe’s conformity to them.” If these allegations prove true, the court stated that these considerations of stereotypes are prohibited under anti-sex discrimination laws and that Ms. Doe therefore stated a claim under the ACA for discrimination on the basis of sex. However, it found that she had not stated a disability discrimination claim to support either an ACA or ADA claim on the basis of disability discrimination. In addition, the court agreed with Blue Cross that Ms. Doe’s breach of fiduciary duty ERISA claim was impermissibly duplicative of her claim for benefit reimbursement. It held that Ms. Doe’s Section 502(a)(1)(B) benefit claim can provide the remedy for her injuries and that she therefore cannot proceed with an independent Section 502(a)(3) claim. Finally, the court found that the state law bad faith claim arising from an ERISA-governed plan was indeed preempted by ERISA under both conflict and express preemption. As a result, following this decision Ms. Doe was left with her ERISA benefits claim and her ACA claim. The remainder of her causes of action were dismissed.

Tenth Circuit

E.W. v. Health Net Life Ins. Co., No. 21-4110, __ F. 4th __, 2023 WL 8042746 (10th Cir. Nov. 21, 2023) (Before Circuit Judges Holmes, McHugh, and Eid). Plaintiff-appellant E.W. is a participant in an ERISA-governed healthcare plan. He sued the plan’s insurance providers, Health Net Insurance Company and Health Net of Arizona, Inc., after the plan denied his daughter’s coverage for sub-acute residential treatment of her mental health conditions, including eating disorders which developed when the girl was just eleven years old. The denials at issue were based on the McKesson InterQual Behavioral Health Child and Adolescent Psychiatry Criteria. Under these criteria, continued care at inpatient residential treatment facilities is considered medically necessary only if the insured has displayed certain acute symptoms of an eating disorder or a “serious emotional disturbance” within the past week. Health Net denied the claim for benefits after it determined that E.W.’s daughter did not experience suicidal or homicidal ideation, psychotic symptoms, or severe agitation within the past seven days. However, the denial letters did not address the InterQual criteria pertaining to an eating disorder, which had its own set of acute symptoms, including pronounced body image distortion, restrictive eating, and other behaviors to prevent prescribed weight gain including failing to consume prescribed calories and gaining “less than two pounds per week.” In his complaint, E.W. alleged that Health Net violated ERISA by failing to comply with its fiduciary obligations, failing to conduct a full and fair review, and improperly denying medically necessary healthcare benefits. Additionally, plaintiff alleged that Health Net violated the Mental Health Parity and Addiction Equity Act by imposing limitations on the coverage of mental health treatment that it did not apply to analogous medical or surgical treatments. The district court dismissed E.W.’s Parity Act claim on the pleadings. Later, the court granted summary judgment to Health Net on the remaining ERISA claims. E.W. appealed both decisions in the Tenth Circuit. In this order the court of appeals affirmed the granting of summary judgment on the ERISA claims, but reversed and remanded the district court’s finding that plaintiff failed to state a claim under the Parity Act. Starting there, the Tenth Circuit wrote that E.W. had “plausibly alleged that the InterQual Criteria capture acute conditions while residential treatment centers…provide subacute care.” Moreover, the appellate court found plaintiff plausibly alleged that inpatient skilled nursing facilities and mental health residential treatment centers are analogues for the purposes of Mental Health Parity claims. Finally, the Tenth Circuit stated that plaintiff plausibly alleged a disparity between the limitations placed on benefits for mental health and substance abuse treatments compared to those for medical and surgical care, which under the plan are not dependent on week by week symptoms. It also stressed, “[t]he allegation that Health Net applied subacute criteria to analogous medical or surgical care…is a factual allegation that we must accept as true on Health Net’s motion to dismiss.” Based on the foregoing, the appeals court concluded that E.W. plausibly stated a claim under the Mental Health Parity and Addition Equity Act and therefore reversed the lower court’s dismissal of this claim at the pleadings. However, as mentioned above, the Tenth Circuit did not disturb the district court’s summary judgment holdings. It found that Health Net did not fail to conduct a full and fair review by denying coverage of the stay at the treatment facility. As for the denial itself, the Tenth Circuit agreed with the district court that Health Net had not acted arbitrarily and capriciously in denying the claim. On appeal, E.W. argued that the district court erroneously failed to address his argument that Health Net had abused its discretion by not considering the InterQual Criteria pertaining to an eating disorder. The district court found that E.W. could not raise this argument during litigation because he had failed to raise it with Health Net during the internal administrative appeals process. The Tenth Circuit concurred with the lower court. It agreed that because the family had specifically requested the claims reviewer not utilize the InterQual Criteria, they could not argue throughout litigation that it was an abuse of discretion to have ignored this criteria pertaining to eating disorders. Next, the court of appeals found, contrary to plaintiff’s position, Health Net had provided a reasoned explanation for its denials, and appropriately engaged with the medical record. The Tenth Circuit held, “it is clear to us that the reviewers summarized rather than cherrypicked from the InterQual criteria associated with a serious emotional disturbance,” and “Health Net’s denial letters demonstrate that it did in fact consider all criteria relevant to a serious emotional disturbance even if it did not recite each criterion verbatim.” Having so found, the court of appeals held that Health Net did not abuse its discretion when denying the claim for benefits and that the district court did not err in granting summary judgment to Health Net on the ERISA claims.

Pension Benefit Claims

Second Circuit

Guzman v. Bldg. Serv. 32BJ Pension Fund, No. 22 CIVIL 1916 (LJL), 2023 WL 8039261 (S.D.N.Y. Nov. 20, 2023) (Judge Lewis J. Liman). The Building Service 32BJ Pension Fund, its executive director, its employer trustees, and its union trustees (“collectively defendants”) moved to dismiss the amended complaint of pro se plaintiff Carlos J. Guzman. Defendants’ motion was granted in this order. Mr. Guzman sued the plan and its trustees under ERISA alleging that they underpaid his retirement benefits by denying him an actuarial increase in his benefits, denied him a full and fair review, failed to send out a suspension notice, and breached their fiduciary duties. The court agreed with defendants that Mr. Guzman could not state his claims for relief. It held that it was clear from the face of the complaint that Mr. Guzman’s benefits were calculated properly under the terms of the governing plan documents. “The language of the 2018 SPD is clear and unambiguous. A plan participant is entitled to an actuarial increase for each month after reaching the normal retirement age of sixty-five during which the employee does not receive a pension except for those months in which the employee is engaged for more than forty hours in Disqualifying Employment. Plaintiff was engaged in Covered Employment which is a subset of Disqualifying Employment. The Plan properly denied him the actuarial increase.” The court further concluded that amending the SPD did not give rise to a claim for fiduciary breach because the amendment didn’t change Mr. Guzman’s entitlement to an actuarial increase “and there was therefore no need to notify him of the non-change.” In addition, the court stressed that the essence of Mr. Guzman’s Section 502(a)(3) fiduciary breach claim was an alleged underpayment of benefits, which made his (a)(3) claim duplicative of his Section 502(a)(1)(B) claim. Finally, it found that defendants’ technical noncompliance through its failure to mail a suspension notice to Mr. Guzman did not give rise to a substantive claim for withheld benefits. Accordingly, defendants’ motion to dismiss was granted and Mr. Guzman’s amended complaint was dismissed with prejudice.