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9th Circuit Greenlights Another Dismissed Excessive Fee Suit

Litigation

For the second time in a month, the Ninth Circuit Court of Appeals has given new life to an excessive fee suit.

The suit was filed in late 2019 against fiduciaries of Trader Joe’s Company Retirement Plan by plaintiffs Nicolas R. Marks and Lorri Bowling (both ex-participants) for allegedly “breaching its ERISA fiduciary duties in the management, operation and administration of the Plan.” Once again, we’re talking about a large plan ($1,629,409,314 as of Dec. 31, 2018, and some 46,600 participants), one that the plaintiffs argue had “tremendous bargaining power to demand low-cost administrative and investment management services and well-performing, low cost investment funds,” but instead “chose inappropriate, higher cost mutual fund share classes and caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.” Earlier this month the Ninth Circuit reversed a decision by a lower court that had also held the plaintiffs’ allegations in an excessive fee suit were inadequate. 

District Decisions

In an era where it’s not unusual for excessive fee litigation to entail more than 100 pages of allegations, citations and examples (why do you think these summaries are so long?), the original filing was a mere 18 pages, widely spaced (the plaintiffs here are represented by Capozzi Adler PC and Rosman & Germain APC). While quantity doesn’t necessarily equate to quality, the brevity of the filing was unusual in this arena—and so, it didn’t seem out of line when just about a year ago Judge Percy Anderson of the U.S. District Court for the Central District of California granted the fiduciary defendants’ motion to dismiss the case for basically making allegations that he felt were unsupported by the facts presented. 

In November, the plaintiffs took another shot at making their case—but Judge Anderson was no more impressed then than he had been seven months earlier, noting “Despite having been granted leave to amend once and following dismissal of a substantially similar case, Plaintiffs added only conclusory allegations that are insufficient to state a claim for breach of the fiduciary duty. In addition, Plaintiffs do not ask for leave to amend, and make no showing that they can allege additional facts should the Court grant Plaintiffs leave to amend. The Court accordingly concludes that granting Plaintiffs leave to amend would be futile”—dismissing the suit without a leave to amend. 

But then the appeal in this case was put on hold awaiting the U.S. Supreme Court’s decision in Hughes v. Northwestern University, which was finally decided in late January.

The Decision

While the decision (Kong v. Trader Joe’s Co., 9th Cir., No. 20-56415, unpublished 4/15/22) might have been held pending that result, once again the Hughes decision didn’t appear to be dispositive in this case. Rather, the panel of Judges Mary M. Schroeder, Susan P. Graber and Stephen M. McNamee (sitting by designation from the U.S. District Court for the District of Arizona) determined that “…the operative complaint plausibly alleges a failure to provide cost-effective investments with reasonable fees.” Restating the legal presumption that the allegations made by the party who was not moving for dismissal were true, they concluded that “defendants Trader Joe’s Company, its board of directors, and its executive committee failed to monitor and control the offering of a number of mutual funds in the form of ‘retail’ share classes that carried higher fees than those charged by otherwise identical ‘institutional’ share classes of the same investments. Except for the extra fees, the share classes were identical. That choice resulted in more than $30,464,538 in extra fees.”

They went on to note that the “defendants’ explanation for the more expensive choice is unavailing at the pleading stage. Though the parties signed a revenue sharing agreement that might provide some explanation for this choice, the agreement shows only what could occur in theory—not what occurred in fact.”

Indeed, they noted that “taking all the allegations as true, Defendants did not act with the purpose of defraying reasonable administrative expenses,” and that “for the forgoing reasons, the district court also erred in dismissing the claim for breach of the fiduciary duty to monitor”—reversing the decision and remanding the case to the lower court for reconsideration.

What This Means

It would be hard to dismiss the coincidence of these two decisions (this one and Salesforce) in such proximity to the Hughes v. Northwestern University without drawing a connection, even though the decision didn’t seem to rely/reference that case. All of which would seem to suggest that the Supreme Court’s decision—that was supposed to reconcile the varying standards for plausibility of allegations between different federal court districts, but arguably didn’t—may have done that, after all.

Stay tuned. 

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