The 6^th Circuit recently heard a case in which participants in a TriHealth (“Defendants”) 401(k) fund (“Plan”) alleged that the administrators of the Plan breached their fiduciary duty to the participants by offering costly mutual fund options. The 6^th Circuit revived one of the class claims, though affirmed the lower court’s dismissal of other claims brought under ERISA. This case was brought by the named Plaintiff, Danielle Forman, and included allegations that TriHealth breached its fiduciary duties under ERISA by charging high fees to participants, providing funds that underperformed their counterparts, and offering expensive actively managed options. The decision to dismiss these claims relied heavily on the precedent set in Yosaun Smith v. CommonSpirit Health et al. (follow the link to see a summary of CommonSpirit: https://www.mehrfairbanks.com/blog/sixth-circuit-affirms-dismissal-of-erisa-case-holding-that-plan-management-was-not-imprudent/).

However, one of the claims against TriHealth was not governed by the CommonSpirit decision. The 6^th Circuit panel of judges stated that “[t]he gist [of the claim] is this: Even if a prudent investor might make available a wide range of valid investment decisions in a given year, only an imprudent financier would offer a more expensive share when he could offer a functionally identical share for less.” Therefore, “The plaintiffs in this last respect have stated a plausible claim that TriHealth acted imprudently.”

Forman’s attorney argued that the differences between the fees charged for the respective funds were “sort of a bulk purchase discount”, and that “[s]hare classes that were in the fund lineup were simply more expensive than other share classes of the same fund that were available to the Defendants for years.” This argument weighed into the panel’s decision to uphold this particular claim while dismissing the others. They further rejected arguments made by the Defendants that the Plaintiffs hadn’t provided a comparable plan to demonstrate that the retail share classes’ returns were lower than other options available to the Defendants. The Court stated, “Unlike a claim premised on an imprudent choice between two different mutual funds that perform differently over time, a claim premised on the selection of a more expensive class of the same fund guarantees worse returns.”

The Defendants also argued that the share class offerings were “revenue-sharing arrangements” and thus the remaining claim should also be dismissed. The Court disagreed, first stating that the argument was offered in an amicus brief by the U.S. Chamber of Commerce, not TriHealth, and second that the argument provides a “competing inference” as an explanation for the offering of the funds. Therefore, “In the absence of discovery or some other explanation that would make an inference of imprudence plausible, we cannot dismiss the case on this ground.”

This case began in July of 2019 with the named Plaintiff brining an action in Ohio federal court, which dismissed the case based on the failure to state a claim several months later in September. The Plaintiffs subsequently appealed. The case is now remanded by the Court of Appeals to address the remaining claim against the Defendants.

The result of this case shows a trend in the 6^th Circuit to let issues such as the one revived by the panel be resolved in discovery. Attorneys have speculated that this process will provide clarity for the standards expected in pleadings. After the Supreme Court decision in Hughes v. Northwestern University, this clarity is welcome. Essentially, courts are now considering whether revenue-sharing agreements are considered to be under the purview of Hughes (which held that employers couldn’t rely on providing better investment options to relieve them from claims stemming from offering worse ones). Therefore, TriHealth gives lower courts the chance to determine if revenue-sharing agreements breach the fiduciary duties required under ERISA. Opinions of this decision vary between counsel for beneficiaries and counsel for employers, with each side focusing on the aspects that most favor arguments that will have to be made in the future. The former feel positively about the revival of the share class claim due to the commonality of employers providing such options to employees. The latter focus on the claims for violations of ERISA that were dismissed by the court. The nature of the holding is such that plaintiffs are now more likely to move past the pleading stage in cases of this nature and therefore engage in discovery, which may facilitate settlement agreements between parties

The Court of Appeals for the Sixth Circuit recently held that when a claim is brought under ERISA § 502(a)(2), individual arbitration agreements signed by employees do not apply. The rationale behind this decision is that claims brought under § 502(a)(2) are brought by the Plan, not by the individual employees who had signed the agreements.

The Plan at issue in this case is the “Partner’s Plan” (Plan), a “defined contribution” plan sponsored by one of the Defendants, Cintas. Defined contribution plans offer participants the opportunity to select investment options from a “menu” chosen by the plan’s sponsor (in this case, Cintas). Individual accounts are created for each participant, their value determined by the amount they have contributed, fees associated with management of the plan, and the market performance of the investment options selected.

ERISA requires fiduciaries to fulfill certain duties to plan participants, the two at issue in this case being the duty of loyalty and the duty of prudence. The duty of loyalty requires that plans be managed “for the best interests of its participants and beneficiaries,” while the duty of prudence requires that plans be managed “with the care and skill of a prudent person acting under like circumstances.” The Plaintiffs in this case allege that these duties were breached when the Defendants only offered opportunities to invest in “actively managed funds” and when excessive recordkeeping fees were charged to participants. The Plaintiffs brought action against Cintas, as well as its Investment Policy Committee and Board of Directors. These entities within the company are responsible for administering and appointing members to investment committees. The suit is putative class action encompassing all participants in the Plan and their beneficiaries during the relevant class period.

The issue on appeal is whether individual employment agreements signed by employees who participated in the Plan delineating that all claims be settled through arbitration are applicable to the claim of breach of fiduciary duty under ERISA. Due to these agreements, the Defendants moved to stay proceedings in federal court and compel arbitration. The district court denied the motions, stating that the fact that the Plaintiffs had signed individual arbitration agreements was irrelevant, as the action was brought on behalf of the Plan and any agreements signed by individual employees were inapplicable.

The Defendants argued that the arbitration agreements related to “all rights and claims relating to their employment” which includes claims arising under ERISA. Further, they argue that the “right” to assert the claims “belong[s]” to the individual plaintiffs, and thus claims are subject to the arbitration agreement consented to by the employees. However, the Plaintiffs countered that the claims of breach of fiduciary duty belong to the Plan itself, which was not subject to arbitration as it had not consented. The Court is careful to add that it is generally settled that ERISA claims are arbitrable, but state that the issue in this case is not whether ERISA claims can be arbitrated, but rather if the claims must be arbitrated as subject to the employee arbitration agreement.

The Court concludes that the Plaintiffs are correct in their assertion that the claims at issue belong to the Plan and not to the participants themselves, and thus the arbitration clause does not apply. § 502(a)(2) states that actions may be “brought in a representative capacity on behalf of the plan as a whole.” The Court relies on precedent set in Mass. Mut. Life Ins. Co. v. Russel, 473 U.S. 134 (1985). Russel provides that, “the ‘plan’ [is] [the] victim of any fiduciary breach and the recipient of any relief,” when considering the structure of defined-benefit plans. Mass. Mut. Life Ins. Co. v. Russel, 473 U.S. 134, 254-55, (1985). This context changes slightly when considering defined-contribution plans, though the Court still notes that, “although § 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.” Id. at 256. Further, in LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008), the Court established that, “§ 502(a)(2) authorizes suits on behalf of a defined-contribution plan even if the harm is inherently individualized.” Hawkins v. Cintas Corp., 2022 U.S. App. LEXIS 11377 at 11.

The Court next recognizes the failures of the Defendants arguments, mainly that in responding to case law presented by the Plaintiffs, they fail to offer a definition of the word “rights” as it applies to the language in the arbitration agreement and the right of the plan participants to bring a claim under § 502(a)(2). The Defendants proffer that since the agreements include “all of Employee’s rights or claims arising under [ERISA],” the claims at issue in this case are precluded from litigation by the agreement. The Court rejects this argument, stating that despite the inclusion of language relating to ERISA in the agreements, they are not “fundamentally different” than the arbitration agreements in cases used in support of the Plaintiffs’ arguments. Further, the Defendants did not provide an alternative definition of “rights,” nor did they provide case law interpreting the word. The Defendants also offered no explanation as to the possibility of arbitration being used to assert such a “right.”

The Court concludes that based on precedent, if an injury is considered a plan injury rather than an injury sustained by one person’s account, the claim is not considered to be sought for individual relief and thus is not bound by arbitration agreements. According to the Court, the claims at issue in this case relate to the Plan as a whole, and thus the Plaintiffs are not precluded from pursuing the claims in court by the arbitration agreements. Therefore, the Court of Appeals affirmed the district court decision and ruled in favor of the Plaintiffs.

Recently, a Federal Court in North Carolina approved a settlement for over $3 million between a Coca-Cola (Defendant) bottling plant and a class of former employees. The named Plaintiffs brought the action against the Defendant alleging that the company had violated their fiduciary duties by presenting “risky” investment options to ERISA plan holders while additionally charging excessive fees. The Court held that the amount of the settlement was “fair, reasonable and adequate, taking into account the costs, risks and delay of litigation, trial and appeal.” Pursuant to this decision, the Court also ruled that the class presented by the Plaintiffs was appropriate for certification and includes all “participants and beneficiaries” under the plan in question. This totals around 13,000 individuals, according to a motion brought by the named Plaintiffs which is now moot after the Court’s certification of the class.

The details of the settlement agreement include statements that the Defendants denies any “wrongdoing or legal liability,” as well as the Defendants’ opinion that the group of 13,000 individuals was not appropriate for class certification. The specific wrongdoing alleged by the Plaintiffs is that the Defendants could have used their large size as a corporation in order to ensure that record-keeping and management fees were low for plan participants, which the failed to do. Additionally, Plaintiffs contend that the Defendants “imprudently” chose higher cost management services, though they had been presented with lower cost alternatives. According to the Plaintiffs, these decisions made by the corporation and its plan fiduciaries caused monetary losses into the millions. Lastly, the Plaintiffs contend that coupled with the breach of fiduciary duties through the above-mentioned means, the Defendants also breached their duties through their failure to disclose information concerning the fees and “risks” of the investment options they had selected. Further, the Plaintiffs state that the Defendants did not make an effort to actively monitor those in charge of administering their ERISA plans, thus further acting imprudently and in violation of their duties to the participants.

Prior to this proceeding, the Defendants had moved to dismiss the case in early 2021, a request which was subsequently denied in March the same year. The Court ruled that the Plaintiffs had presented a case that should move past the initial pleading stage of the trial process, and thus dismissal would be inappropriate. The parties will now move forward with the settlement agreement, with the Plaintiffs now as a certified class.

This decision is one of many recent decisions mirroring the same outcome, as courts are consistently holding that plaintiffs with complaints alleging violations of fiduciary duties by their employers and ERISA plan administrators are entitled to class certification. ERISA itself lays the foundation for employees to bring suit against their employers in cases similar to that brought in North Carolina, as the law requires that fiduciaries to a plan must act, “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”[i] Through numerous class certifications, courts are presenting plaintiffs with the opportunity to correct wrongs brought against them by the actions of their employers and ERISA fiduciaries alike.

[i] 29 U.S.C. § 1104(a)(1)(B).