9th Circuit Resuscitates Excessive Fee Case

The plaintiffs in the only excessive fee suit to reach the Supreme Court will get another chance to make their case.

The 9th U.S. Circuit Court of Appeals in San Francisco has now ordered a U.S. district court to rehear the Tibble vs. Edison International excessive 401(k) fee case. The opinion, written by Judge Milan D. Smith Jr., vacated the Los Angeles District Court’s ruling that the case could not proceed because of a statute of limitations on three of six funds in question with the $2 billion plan.

“Regardless of whether there was a significant change in circumstances, Edison should have switched from retail-class fund shares to institutional-class fund shares to fulfill its continuing duty to monitor the appropriateness of the trust investments … a trustee cannot ignore the power the trust wields to obtain favorable investment products, particularly when those products are substantially identical – other than their lower cost – to products the trustee has already selected,” Smith wrote.

En Banc Basis

The decision arises out of a decision by a majority vote among the 9th Circuit’s active, nonrecused judges, that determined that the case be reheard “en banc.” The plaintiffs, represented by the law firm of Schlichter, Bogard & Denton, had successfully persuaded the Supreme Court that ERISA’s six-year statute of limitations extended beyond the initial decision to place certain retail class mutual funds on the plan menu in 1999. However, when the 9th Circuit reconsidered the issue in light of the Supreme Court’s ruling earlier this year (both it and the district court had originally ruled against the plaintiffs), it found that the plaintiffs never asserted that the plan fiduciaries violated their duty by failing to monitor the retail-class mutual funds – “they asserted only that we ought to read ERISA as excusing an otherwise time-barred lawsuit where the effects of a past breach continue into the future.” At the time the 9th Circuit had ruled that “since the court was not presented with an argument about the ongoing duty to monitor, it is ‘elementary’ that beneficiaries should not be allowed a second bite at the apple on remand.”

That is not, however, how the en banc panel saw the matter – not only vacating the district court’s decisions concerning the funds added to the plan before 2001, but remanding for trial the claim that, “regardless of whether there was a significant change in circumstances, Edison should have switched from retail-class fund shares to institutional-class fund shares to fulfill its continuing duty to monitor the appropriateness of the trust investments.”

Forfeit Sure?

The decision came despite the court’s acknowledgement that, “Generally, we do not entertain[] arguments on appeal that were not presented or developed before the district court,” noting that, “Although no bright line rule exists to determine whether a matter [h]as been properly raised” in the lower court, “an issue will generally be deemed waived on appeal if the argument was not raised sufficiently for the trial court to rule on it.” Though that had essentially been the position of the 9th Circuit the last time, the en banc court concluded not only that “the beneficiaries did not forfeit their failure-to-monitor argument in either the district court or on appeal,” but that “Edison itself forfeited the forfeiture argument in its initial appeal.”

The en banc court noted that the plaintiffs argument on appeal that there was an ongoing duty to monitor and remove imprudent investments that was not limited to “changed circumstances,” and that “each failure to exercise prudence constitutes a new breach of duty, that is to say, a new claim” was in alignment with the theory accepted by the Supreme Court. In response the court said that the plaintiffs had argued for a duty that was limited to changed circumstances, but that the plaintiffs had not alleged any such changed circumstances. “The Tibble III panel accepted Edison’s limiting theory, but the Supreme Court rejected it,” the en banc court noted, going on to hold that, “The claim was not forfeited on appeal.”

‘Duty’ Bound?

After allowing for a couple of scenarios that might explain the district court’s logic (including the possibility that “the district court had forgotten a portion of its voluminous summary judgment ruling”), the en banc court concluded that, “whatever the intent behind the district court’s hypothetical questions to an expert, they did not constitute a change in its earlier ruling sufficient to put the beneficiaries on notice that they could then, contrary to the court’s earlier ruling, put on evidence to prove their preferred continuing duty theory.”

Instead, the en banc court noted that “the Supreme Court held that the fiduciary duty identified in this case is continuing in nature, and that each new breach begins a six-year limitations period.” Moreover, it noted that the Supreme Court “recognized the breach as ‘a fiduciary’s allegedly imprudent retention of an investment’ which results in a series of related breaches as the investment is retained over time,” and that “only a ‘breach or violation,’ such as a fiduciary’s failure to conduct its required regular review of plan investments, need occur within the six-year statutory period; the initial investment need not be made within the statutory period.”

The en banc panel also instructed the lower court to reconsider the matter of attorney fees. “In determining that the beneficiaries’ original fee request should be drastically reduced, the district court expressed its skepticism concerning the importance of the beneficiaries’ partial victory,” the court noted, going on however to state that, “Considering the Supreme Court decision that followed, and our en banc decision in this case, we believe that this case has far greater importance than the district court believed it did at the time of its earlier fee determinations. Accordingly, we direct the district court to reconsider the fee issue in light of the significant amount of work that has been required to vindicate an important ERISA principle in our court and the Supreme Court.”

So, apparently Tibble toppled, but it did not fall down.

See also 5 Investment Committee Lessons Learned From Tibble.

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