The Labor Department says a federal judge mis-instructed the jury on the burden of proof in an excessive fee suit—and wants them to get another hearing.
The suit against Yale University was one of the first to be filed in this area—and by Schlichter Bogard & Denton LLP (now just Schlichter Bogard LLP), the law firm that led the litigation charge against 401(k) plan fees—in August 2016. As has been the case with most in this genre, it alleged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years. Moreover, the complaints challenge the use of multiple recordkeepers, rather than a single recordkeeper—a practice that they claim “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.”
The Jury Trial
That said—in the first (and to date only) jury trial in this genre of cases—the Yale University fiduciaries prevailed—and though the jury did conclude that they breached their duty of prudence "by allowing unreasonable recordkeeping and administrative fees to be charged" to retirement plan participants—the jury found that no damages resulted. Somewhat oddly, the jury also concluded that Yale proved that a prudent fiduciary "could have made the same decisions as to recordkeeping and administrative fees" that the university ultimately made.
And that, it seems, is the crux of the issue the Labor Department has with the case.[i] Indeed, the Labor Department explains that “the Secretary has a strong interest in ensuring that this Court articulates the correct standard of proof.”
Standard Bearing
In an amicus brief[ii]—a “friend of the court” filing—the Labor Department commented (Vellali et al. v. Yale University et al., case number 23-1082, in the U.S. Court of Appeals for the Second Circuit) that “after the jury found that Defendants breached ERISA’s duty of prudence and that Plaintiffs’ ERISA plan incurred a loss, the district court correctly required Defendants to prove that their breach did not cause losses to the plan.” But then, the Labor Department said that the “court erroneously instructed the jury as to how Defendants could meet that burden”—specifically, the Labor Department argues that “the jury instruction allowed Defendants to escape liability if they proved that a fiduciary following a prudent process could have made the same decisions as to recordkeeping and administrative fees that Defendants made, rather than require (as Plaintiffs had urged) that the jury determine whether a prudent fiduciary would, more likely than not, have done so.”
In fact, the Labor Department says that the issue raised by the case is “[w]hether a fiduciary under the Employee Retirement Income Security Act (‘ERISA’), 29 U.S.C. § 1001, et seq., can escape liability under ERISA Section 409(a) after a plaintiff establishes a fiduciary breach and a related plan loss, by showing that it ‘could have’ made the same decision had it followed a prudent process, or instead whether it must show that it ‘would have’ done so.”
The Labor Department noted that the verdict form—on which the jury was to note its conclusions—contained two special interrogatories; the first: “Have the defendants proven by a preponderance of the evidence that a fiduciary following a prudent process could have made the same decisions as to recordkeeping and administrative fees as the defendants?” Language that the Labor Department notes that plaintiffs had objected to on the ground that “the could language should be would”—but that the court ultimately retained the instruction. The Labor Department argues that the instruction should have been that the defendants could escape liability for their fiduciary breach associated with the Plan’s recordkeeping expenses if they proved that a fiduciary following a prudent process “could have” made the same decisions, rather than requiring Defendants to establish that a prudent fiduciary “would have” done so.
‘Could Have’ Standard
“The district court’s ‘could have’ standard, which allows fiduciaries to escape liability for their breaches based on mere (even remote) possibilities, is inconsistent with ERISA’s trust-law backdrop, the statute’s protective purposes, and authority from this Court and its sister circuits,” the Labor Department states. “The law of trusts—to which this Court looks for guidance in ERISA cases—is clear that breaching fiduciaries are liable for losses associated with their breaches unless they demonstrate that a prudent process ‘would have’ yielded the same decision.” More than that, the Labor Department stated that “every circuit to consider the question has held exactly that. Although this Court, like many of its sister circuits, also arguably articulated a ‘would have’ standard in Sacerdote, this Court should now make that explicitly clear and vacate the judgment on the recordkeeping claim.”
As things now stand, the Labor Department says the standard imposed was “substantively different and far more lenient standard”—one that allowed the jury to absolve the defendants “merely by finding that a fiduciary following a prudent process, by some distinct possibility, ‘could have’ agreed to the same recordkeeping fees that Defendants did. The district court’s ‘could have’ standard not only is contrary to caselaw, it also is antithetical to ERISA’s trust law roots and protective purposes.”
“The distinction between ‘could’ and ‘would’ is ‘both real and legally significant’—it is the difference between what is ‘merely possible’ and what is probable.”
Said another way, the Labor Department (and plaintiffs) argue that the current standard “should have” been “would have,” not “could have.”
Stay tuned.
[i] The plaintiffs in the case formally appealed the decision last week, challenging not only the instructions to the jury, but also the confusing jury form.
[ii] Amicus briefs are filed by parties that typically take the position of one side in a case, in the process supporting a cause that has some bearing on the issues in the case.
