Noting that “where ERISA is concerned, nationwide uniformity isn’t just an ideal—it’s an imperative,” AT&T has appealed a recent ruling by the Ninth Circuit Court of Appeals.
In petitioning for a rehearing (Bugielski v. AT&T Servs., Inc., 9th Cir., No. 21-56196, rehearing petition 9/1/23), AT&T states that “in a ‘watershed moment’ for ERISA plans and plan sponsors, the panel decision violated that imperative—departing from Supreme Court precedent and splitting with the Third and Seventh Circuits.” They go on to state that a “rehearing is needed to resolve these conflicts and restore uniformity on an important, recurring issue of ERISA law.”
The Suit
That arguably controversial decision came in the wake of a suit filed by participant-plaintiffs of the AT&T 401(k) that had argued that after AT&T engaged Fidelity as recordkeeper, Fidelity engaged Financial Engines for additional services (new brokerage and investment advisory services)—which the plaintiffs alleged not only cost plan participants more, but that AT&T got a discount on administrative services as a result. They also accused AT&T of breaching its “duty of candor” by not listing the money paid to Fidelity on the Form 5500 annual reports.
The Appeal(s)
The plaintiffs lost twice previously at the district court level—once in September 2021 and again back in 2018 (when they had been accorded a chance to “fix” their arguments). Then in August 2023 the U.S. Court of Appeals for the Ninth Circuit (Bugielski v. AT&T Servs., Inc., 9th Cir., No. 21-56196, 8/4/23), acknowledged their conclusions differed from other federal courts, concluding that “AT&T, by amending its contract with Fidelity to incorporate the services of BrokerageLink and Financial Engines, caused the Plan to engage in a prohibited transaction.”
And in making that determination, remanded the case to the district court for reconsideration as to whether AT&T met the requirements for an exemption from the prohibited-transaction bar because the contract was “reasonable,” the services were “necessary,” and no more than “reasonable compensation” was paid for the services. Specifically, they wanted the district court to consider “whether Fidelity received no more than ‘reasonable compensation’ from all sources, both direct and indirect, for the services it provided the Plan.” They also reversed the district court’s summary judgment on the duty-of-prudence claim, concluding that, “as a fiduciary, AT&T was required to monitor the compensation[iii] that Fidelity received through BrokerageLink and Financial Engines,” directing the lower court to also consider the duty-of-prudence claim “under the proper framework in the first instance.”
The Petition for Rehearing
In the request for an en banc rehearing, the AT&T defendants noted that “Faithfully following Lockheed, the Third and Seventh Circuits have held that arm’s-length agreements to provide necessary plan services like recordkeeping are not categorically prohibited transactions.” It continues (citing Sweda) that “As the Third Circuit explained, ERISA ‘acknowledges that certain services are necessary to administer plans’ and so construing the same statute ‘to prohibit necessary services would be absurd.’”
Explaining that Section 406(a) of ERISA “prohibits benefit plan sponsors from entering into certain agreements called ‘prohibited transactions,’ AT&T proceeded to note that ‘in Lockheed Corporation v. Spink, the Supreme Court reversed a decision of this Court and held that the ‘transactions’ prohibited by ERISA must involve ‘commercial bargains that present a special risk of plan underfunding because they are struck with plan insiders, presumably not at arm’s length.’”
They then argue that that is “exactly the construction adopted by the panel decision here: it held that § 406(a) bars plans from entering any contract for plan services—even necessary services procured in an arm’s-length transaction”—and that, “[i]n adopting this construction, the panel decision openly ‘disagree[d]’ with the Third and Seventh Circuits. If permitted to stand, the panel decision will allow wasteful litigation attacking routine, arm’s-length agreements between ERISA plans and service providers, such as recordkeepers—all under a provision the Supreme Court has already held deals only with ‘plan insiders.’”
“Ultimately, it will mean ‘lower returns for employees and higher costs for plan administration,’” according to the petition, “and it will put plan sponsors in the impossible situation of administering ERISA plans where an agreement to provide necessary plan services is a prohibited transaction in one jurisdiction, but not in another.” This, they argue is a result “directly contrary to Congress’s mandate that plans not be burdened with ‘complying with conflicting directives,’ or forced to ‘tailor substantive benefits to the particularities of multiple jurisdictions.’”
They then concluded “this Court should grant rehearing to resolve the ‘conflicting directives’ created by the panel decision and restore nationwide uniformity on an exceedingly important issue of ERISA law.”
Stay tuned.
