Fiduciary defendants have moved to dismiss (with prejudice) a 401(k) suit that alleged a fiduciary breach in the use of forfeitures to offset company contributions saying, among other things, that the participant-plaintiff suffered no injury—and thus, had no standing to sue.
At a high level, the Clorox defendants assert that the suit should be dismissed “because it effectively seeks (i) to bar the long-standing practice, expressly required by a sixty-year old IRS regulation, of reallocating forfeitures to cover other benefits promised by the Plan and (ii) to require instead that forfeitures be diverted to individual participant accounts to provide additional benefits not promised by the Plan. The Court should reject Plaintiff’s novel, and strained, construction of ERISA.”
The Suit
In their motion to dismiss (McManus v. Clorox Co., N.D. Cal., No. 4:23-cv-05325, motion to dismiss 12/13/23) the suit by James McManus, the fiduciaries of the Clorox Company 401(k) plan, explain that the core issue is “whether Plaintiff has standing to challenge the Defendants’ reallocation of forfeited, non-vested employer contributions to Clorox’s other contribution obligations under the Plan where he has received all benefits promised by the Plan and the Plan’s terms do not entitle him to those forfeitures.”
McManus—represented by a pair of lawyers from Hayes Pawlenko LLP, a South Pasadena, CA-based firm that positions themselves as an employment litigation firm “representing employees in disputes with their employers”—said in his suit that the firm breached its fiduciary duties, violated ERISA’s anti-inurement provision, and engaged in “self-dealing and transactions prohibited by ERISA.” It was one of four such suits filed to date by the same law firm in the northern and southern federal court districts in California.
‘Counter’ Points
The Clorox defendants argued that the suit failed to state a claim for any violation of the Employee Retirement Income Security Act of 1974 “where Defendants’ conduct is permitted by an Internal Revenue Service (‘IRS’) regulation.” Moreover, they asserted that the “plaintiff has failed to adequately allege that Defendants breached any fiduciary duties, or even that they were fiduciaries, with respect to the challenged conduct,” and that they failed “to state a claim for breach of ERISA’s anti-inurement rule where the rule does not bar Defendants from reallocating forfeitures to other contribution obligations, and the forfeitures did not inure to Clorox’s benefit and were not Plan assets.” They also asserted that “the Complaint fails to state a claim for breach of ERISA’s duty to monitor against Clorox where Plaintiff has not pled an underlying breach of any duties by the Committee.”
“Reallocating forfeitures to other contribution obligations under the same plan to cover other promised benefits has been a commonplace practice at least since the IRS regulation became effective in 1963,” the Clorox motion explains. “This practice has been endorsed since that time by both Congress and the United States Department of Labor (‘DOL’), which has enforcement authority over ERISA’s fiduciary provisions. Acknowledging as much, the Plan’s governing documents explicitly allow this practice.”
No Harm
Perhaps more fundamentally, they note (citing the Supreme Court’s ruling in Thole v. U.S. Bank, N.A.) that “the Court need not address the merits of Plaintiff's claims at all because he lacks standing to pursue them. Plaintiff does not allege that his individual Plan account received less than was promised under the Plan or that his account suffered losses or lost profits due to the Committee’s investment decisions. He acknowledges that the Plan does not require that forfeitures be diverted to his individual account to cover expenses that his account otherwise bears, but, rather, expressly permits their reallocation to other contribution obligations. Plaintiff has, therefore, suffered no injury-in-fact. The Court should not rewrite the terms of the Plan to provide him with a windfall of additional benefits that he has no standing to recover.”
Document ‘Ed’
The Clorox defendants also challenge the merits of the plaintiff’s arguments. “Each claim rests on the argument that Defendants violated ERISA by reallocating forfeitures to other contribution obligations,” they explain. “This premise fails to state a claim because the IRS regulation requires that forfeitures be reallocated as Defendants did. While the IRS regulation also permits the application of forfeitures to plan expenses generally (such as the Plan expenses Clorox otherwise pays), it does not require that application. And it prohibits Plaintiff from seeking, as he does here, an entitlement to the application of forfeitures to increase his benefits by having his personal account’s administrative expenses reduced those forfeitures, where such an entitlement is not set forth in the Plan Document.” They go on to explain that ERISA “specifically provides that it does not supersede or impair other federal law.”
The defendants also assert that the breach of fiduciary duty claims also fall for “individual reasons” as well “because he cannot plausibly plead a breach where Defendants merely reallocated forfeitures as required by the IRS regulation and permitted by the Plan. They also fail because he cannot establish that Defendants were acting as relevant fiduciaries in doing so—at most, in declining to provide additional benefits through reduced individual expense payments, they acted as settlors.”
And if that were not sufficient, they assert that the claim alleging breach of ERISA’s anti-inurement rule (Count III) “fails because that rule does not bar Defendants from reallocating forfeitures to other contribution obligations internally within the same plan, and because forfeitures did not inure to Clorox’s benefit and were not Plan assets.”
Settlor Standards
The prohibited transaction claims? “Fail because reallocating forfeitures internally within the same plan does not constitute a covered “transaction,” Defendants were not acting as fiduciaries in reallocating forfeitures, and forfeitures were not Plan assets,” the motion notes. And as for claims regarding a breach of the duty to monitor other fiduciaries claim—well, being “derivative of Plaintiff’s other claims” … if they’re invalid (as the defendants assert), those evaporate as well.
The motion also explains that the plan document not only provides for the forfeiture of non-vested contributions, but that “[f]orfeited amounts will be used, as determined by the Committee in its sole discretion, to pay Plan expenses, to reduce contributions to the Plan and to restore forfeitures.” Moreover, “No provision of the Plan—and Plaintiff points to none—entitles any participant to contributions made to or forfeited by other participants.”
Ultimately, the motion notes that the plaintiff “does not allege that Clorox failed to make any required contribution to his individual Plan account, that his individual Plan account received less than was promised under the Plan, or that his account suffered investment losses or lost profits due to any investment decisions pertaining to his account. Rather, he alleges that Defendants had ‘discretion’ to use ‘forfeited nonvested [Plan] accounts’ of former participants ‘to pay the Plan’s expenses or reduce [Clorox’s] contributions to the Plan,’ and that Defendants elected the latter.’ That, however, fails to establish any ‘injury in fact because his suit seeks amounts to which he is not entitled under the Plan.’”
Returning to Thole, “Plaintiff has ‘no concrete stake in [this] lawsuit,’ and therefore has not suffered an injury in fact, because he has received all of the benefits he was promised under the Plan and sues instead to receive additional amounts,” the motion explains. “In Thole, the Supreme Court affirmed dismissal of pension plan participants’ claims where they had received all benefits to which they were entitled under their plan and were suing to recover additional amounts not promised under the plan,” commenting also that “the Ninth Circuit recently followed Thole in holding that welfare plan participants also lack standing where they have received all benefits to which they were entitled under their plan.”
Will the court be persuaded? Stay tuned.
