Another federal court has weighed in on the status of participant data as a plan asset.
The issue arose most recently last January in an excessive fee suit brought by the St. Louis-based law firm of Schlichter, Bogard & Denton on behalf of four participant-plaintiffs in Shell Oil Co.'s $10.5 billion 401(k) plan. Most of the allegations were typical for this type of suit: use of funds that were too expensive and underperforming (and that happened to be those of Fidelity’s, the plan’s recordkeeper), lack of monitoring of those options, and layering of fees with the managed account option.
But the issue that stood out here—one that the Schlichter firm[i] had previously broached in its 403(b) university plan targets—was the use of participant data by the recordkeeper to solicit non-plan related services. More specifically, the suit alleged that “…Shell Defendants caused the Plan to engage in transactions that constituted a direct or indirect transfer to, or use by or for the benefit of a party in interest, a valuable asset of the Plan, Confidential Plan Participant Data, in violation of 29 U.S.C. §1106(a)(1)(D).”
The Judgment
Now U.S. District Judge Jeffery Vincent Brown of the District Court for the Southern District of Texas, Galveston Division, has granted Fidelity’s motion to dismiss those claims.
First acknowledging that at the motion-to-dismiss stage, a court “must accept all well pleaded facts alleged in the complaint as true and must construe the allegations in the light that is most favorable to the plaintiff”—which would, of course, meant giving the benefit of the doubt to the litigating party—Judge Brown wrote that while the plaintiffs here sought to hold Fidelity liable for “breaching its alleged fiduciary duty by sharing participant data with other Fidelity entities which would then market their products to Plan members.” He then noted, “But for this to hold true, the court would first have to rule that participant data are ‘plan assets’ under ERISA.”
In a nine-page opinion, Judge Brown explained that “ERISA provides that the term ‘plan assets’ means plan assets as defined by such regulations as the Secretary [of Labor] may prescribe,” going on to point out that “Two such regulations have been prescribed.”
The first—in 29 CFR § 2510.3-101–Definition of “plan assets”–plan investments, which Judge Brown notes “…expressly defines ‘plan assets,’ provides that ‘the plan’s assets include its investment,’ but makes no mention of any ‘data.’”
The second regulation, focusing on “participant contributions” to the plan, “likewise fails to mention ‘data,’” he writes. Indeed, Judge Brown comments that “neither of the promulgated regulations either expressly or by any plain-language interpretation includes participant data as plan assets under ERISA.”
Other Courts
Moreover, he comments that this view “that participant data does not amount to ‘plan assets’ under ERISA—comports with how other courts have ruled on this question,” specifically citing the case of Divane v. Northwestern University , where, he noted, “the court rejected claims almost identical to those here—that the plan sponsor violated ERISA by permitting the record keeper to market products using participant data.”
“As in this case,” he wrote, “the Divane plaintiffs failed to cite any court that has ever held that releasing or allowing someone to use confidential information constitutes a breach of fiduciary duty under ERISA.” And while that court acknowledged that confidential participant information “has some value,” Judge Brown noted that “it could not “conclude that it is a plan asset under ordinary notions of property rights.”
He went on to note that at least two other cases[ii] support the same conclusion: participant data are not plan assets under ERISA, and that “the court finds no reason to depart from those holdings.”
Down for ‘the Counts’
He then proceeded to dismiss:
- Count IV (that Fidelity was a fiduciary because of its control over participant data (for failure to state a claim);
- Count VII (that Shell transferred plan assets—the participant data—to Fidelity, that Fidelity used that data to market retail products and services, and that together this conduct constitutes a prohibited transaction), because, like Count IV, that depended upon a determination that participant data was “plan assets,” and thus it also failed to state a claim; and
- Count IX—Injunctive Relief (plaintiffs wanted to stop Fidelity from using participant data to market retail products to Plan participants going forward) since granting that relief would require the plaintiffs to prevail in either of the foregoing claims. “As both of those counts have been dismissed, Count IX is, too,” Judge Brown wrote.
Not surprisingly, a Fidelity spokesperson noted in an email that the firm was “pleased with the court’s decision, which clearly reached the correct result. As the court recognized, the claims against Fidelity were entirely unsupported in the law. The plaintiffs’ complaint also mischaracterized the nature of Fidelity’s business, and how Fidelity interacts with retirement plan sponsors and plan participants. Fidelity is pleased to have been vindicated by the Court’s decision.”
What This Means
As noted above, the issue of participant data as a plan asset is relatively new in retirement plan litigation, certainly in this recent wave. While most ERISA attorneys of my acquaintance would agree with Judge Brown’s assessment (and the prior judgments of the courts he references), it’s worth noting that in recent months settlements (see Schlichter Strikes Another Excessive Fee Settlement) have been negotiated in cases where this was raised as an issue, that called for restrictions on data usage.
This particular resolution notwithstanding, the issue will likely remain a potential concern for the immediate future—and perhaps a litigation factor.
