7th Circuit Shift Resuscitates Excessive Fee Suit

A shift in precedent has lowered the bar to establish a plausible argument sufficient to overcome a motion to dismiss—and plaintiffs in yet another case are getting another shot at proceeding to trial.

We recently covered the recommendation of a magistrate judge in a case involving the Prevea Clinic, Inc. 401(k)—which in August 2020 had similar allegations, and a nearly identical judicial path as a case where former participant-plaintiff Joseph B. Glick argued that ThedaCare, Inc. and its Board of Directors violated the duty of prudence[i] under ERISA with respect to the ThedaCare Retirement and 403(b) Savings Plan.

Case History

Now, as is customary in such matters, ThedaCare subsequently moved to dismiss each of those claims—but on Aug. 25, 2022, the Court issued a Decision and Order denying in part ThedaCare’s motion to dismiss, largely based on the U.S. Supreme Court’s decision in Hughes v. Northwestern University (the suits had been paused pending that outcome). But then—just four days later, the 7^th Circuit issued its decision in Oshkosh, which the defendants here characterized as “a precedential opinion that affirmed this Court’s 12(b)(6) dismissal with prejudice of virtually identical ERISA fiduciary-breach claims in a lawsuit filed in this Court by the same counsel representing Mr. Glick.” And then the Theda defendants moved for reconsideration in light of the Oshkosh decision in September 2022.

Then Judge William C. Griesbach—who was the judge in the Oshkosh case—dismissed the lawsuit  against ThedaCare—but left the door open for the plaintiffs in those cases to file amended complaints —and did so in accordance with the recommendations of Magistrate Judge Stephen C. Dries. Now, if all of this sounds familiar, it’s because it was also the experience of the Prevea Clinic lawsuit—including the involvement of both Judges Grisebach and Dries.

The Analysis

When analyzing a motion to dismiss pursuant to Rule 12(b)(6), courts must “construe the complaint in the light most favorable to plaintiff, accept all well-pleaded facts as true, and draw reasonable inferences in plaintiff ’s favor”—though he noted that courts “need not accept as true . . .unsupported conclusory factual allegations.” That said, and ultimately, Judge Dries noted that the 7^th Circuit has held that, “[w]hen claiming an ERISA violation, the plaintiff must plausibly allege action that was objectively unreasonable.”

As in the Prevea Clinic case, Judge Dries noted (Glick v. ThedaCare, Inc., E.D. Wis., No. 1:20-cv-01236, magistrate report 7/20/23) that “ThedaCare does not dispute that the named defendants are plan fiduciaries under 29 U.S.C. § 1002(21) or that higher fees can sometimes harm plan participants. Rather, ThedaCare insists that Glick has failed to plausibly plead that the named defendants breached their duty of prudence and duty to monitor other fiduciaries.”

Using words that mirrored those in the Prevea Clinic recommendation, Judge Dries noted that plaintiff Glick maintains that ThedaCare has incurred excessive recordkeeping fees and has failed to timely remove its longtime recordkeeper, Transamerica. He doesn’t know what process ThedaCare used to select, retain, or determine the fees paid to Transamerica. Instead, Glick says we should infer an imprudent decision-making process from ThedaCare’s failure to regularly solicit quotes or competitive bids from Transamerica and other recordkeepers and ThedaCare’s failure to leverage its substantial bargaining power to negotiate a lower fee.” Judge Dries shared comparative tables that plaintiff Glick claimed showed the fees paid for plans that were allegedly comparable in terms of plan size/participant count—and commented that the plaintiff here had alleged that “the unreasonably excessive recordkeeping fees paid by the ThedaCare plan cost its participants millions of dollars.”

Different Standards

But while the ThedaCare defendants wanted Judge Dries to rely on the Oshkosh/Albert decision (which, in turn, leaned on the CommonSpirit decision) as to the criteria for making a sufficiently plausible case, Judge Dries turned to the more recent decision by the 7^th Circuit in what he referred to as Hughes II, though you might be more familiar with it as the reconsideration of the suit involving Northwestern University’s 403(b) suit. In that case, Judge Dries noted that “the court clarified the pleading standard for ERISA duty-of-prudence claims, explaining that ‘a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness,’” but that it would also “depend on ‘the circumstances . . . prevailing at the time the fiduciary acts’”—and “context specific.”

Judge Dries then explained that in applying this “newly formulated pleading standard,” the Hughes II court reversed the dismissal of an excessive recordkeeping fees claim, seeing that case as being different from the Albert/Oshgosh case that alleged that “‘the quality or type of recordkeeping services provided by competitor providers [were] comparable to that provided by’ the plan’s recordkeepers.” Moreover, that jumbo plan recordkeeping services were “fungible” and that the proposed alternative fee was reasonable “based on the services provided by existing recordkeepers and the Plans’ features.” Said another way (but exactly how he said it in the Prevea Clinic case), Judge Dries continued “…unlike the plaintiffs in Albert, the plaintiffs in Hughes II provided the required context to allege that their plan’s recordkeeping fees “were excessive relative to the recordkeeping services rendered.”

From Possible to Plausible

But LIKE the Hughes II suit, “the operative complaint here includes the allegations missing from the complaint in Albert that move Glick’s recordkeeping claim from possible to plausible. Specifically, the second amended complaint alleges that Transamerica provided plan participants standardized recordkeeping and administrative services that all “mega plans”—those with over $500 million in assets—receive from their recordkeepers, including “things like website services, participant account maintenance, plan consulting, and call center staffing.” Judge Dries also noted that the suit “alleges that recordkeepers for all mega plans provide more or less the same level and quality of service and that any minor variations do not materially affect the fees charged,” and “thus, according to the second amended complaint, the market for recordkeeping and administrative services is highly price-competitive for mega plans, such that plans with more participants generally can negotiate a lower per-participant rate.”

“Given these alleged facts, Glick asserts that the ThedaCare plan’s fees were excessive relative to the services received, as the comparator plans used recordkeepers that provided at least the same services for a third to half of the price,” Judge Dries noted, continuing to comment that “Other courts within this circuit have found nearly identical allegations sufficient to survive a motion to dismiss.” And then, as he did with the Prevea Clinic case, Judge Dries noted that “if Glick had presented the same evidence in response to a summary judgment motion, I would grant the motion. However, the pleading stage is not the time to attack the source of a plaintiff ’s allegations”—and, setting aside the motion to dismiss, noted that “Glick can show his work during discovery and future motion practice.”

“…Glick asserts that ThedaCare failed to mitigate excessive recordkeeping fees in several ways,” Judge Dries wrote. “Those allegations are just barely enough to nudge his recordkeeping fees claim across the line from possibility to plausibility.”

And—as he did in the Prevea Clinic case—Judge Dries saw things differently with allegations regarding the managed account fees and services. “…[T]he evidence Glick relies upon to support his assertion that all managed account service providers offer the same services actually undermines Glick’s assertion,” Dries wrote. “That document indicates that, although managed account service providers generally offer the same basic service, they do vary in how they provide services. And the variance in that process may, in some cases, explain the difference in fees charged,” concluding that the arguments presented were NOT sufficient to overcome the motion to dismiss.

What This Means

While there are surely some differences in this case, and the one involving Prevea Clinic, the differences only seem to be in the names of the parties and the funds (and the comparables).  But for that, you could pretty much just look at the one case and arguments. Here, as with the conclusions in Prevea Clinic, the shift in precedents have sent the standard careening from one extreme to the other in terms of making a case sufficient to overcome a motion to dismiss due to a shift in what is determined to be “plausible.” 

Of course, like in the Prevea case, this is still just the recommendation of a magistrate judge—which may or may not be accepted (in whole or in part) by the presiding judge. But the track record here suggests it will.

Stay tuned.