A federal court decision establishing a new, higher burden of proof in excessive fee suits has—for now—handed fiduciary defendants another win.
The win in this case—Baumeister v. Exelon Corp., N.D. Ill., No. 1:21-cv-06505, 9/22/22—was a suit filed by participant-plaintiffs Fred Baumeister, Kenneth Berkeihiser, Dwayne Clauser, John Conlin, Carl S. Lehman, Greg Mattioni, and William Riale[i] against the fiduciary defendants of the Exelon Corporation Employee Savings Plan. Those fiduciary defendants moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6).
The Motions
In the U.S. Court of Appeals for the Seventh Circuit, Judge John Robert Blakey noted that the plaintiffs’ complaint stated just a single count of breach of fiduciary duty, as well as two derivate counts: one alleging failure to monitor and the other alleging co-fiduciary liability. “Inexplicably, Plaintiffs decided to lump all of the alleged breaches into a single count”—but, nonetheless, Judge John Robert Blakey noted that “…a review of the entire complaint confirms that the allegations fail to meet the plausibility threshold required to state a claim.”
Judge Blakey then referenced the plausibility standard as outlined in the cases of Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal which he said were applicable in ERISA breach of fiduciary duty cases through a context-specific inquiry. That inquiry, in turn (“as highlighted by the parties’ notices of supplemental authority”) was shaped further by recent developments, specifically the U.S. Supreme Court’s ruling in Hughes v. Northwestern University, which he said, “cast doubt on the Seventh Circuit’s precedent in this area, finding that the court had placed too onerous a burden on plaintiffs.” But he then noted that the Seventh Circuit (recently) “interpreted Hughes narrowly in its recent decision in Albert v. Oshkosh, however, reaffirming prior circuit precedent and further clarifying the applicable pleading standard.” And “since the claims presented in Albert closely parallel those asserted here, Albert squarely governs the requisite context-specific inquiry.”
Oshkosh Precedence
Judge Blakey went on to cite the facts in that Albert v. Oshkosh case, commenting that plaintiff Albert pled three counts of breach of fiduciary duty by the Oshkosh Corporation’s 401(k) plan fiduciaries: the first based upon excessive recordkeeping costs, the second based upon excessive investment management expenses, and the third based upon the costs of advisory services for plan participants—and noting that all three counts relied upon comparisons between Oshkosh’s plan-related costs and fees and the costs and fees of other purportedly comparable 401(k) plans—and that, ultimately, “the Seventh Circuit affirmed the district court’s dismissal of all three of Albert’s breach of fiduciary duty claims.”
As for the particulars of that case, Judge Blakey recalled that Albert’s complaint featured a series of charts comparing the Oshkosh plan’s expenses and fees to the rates paid by selected comparator plans—charts that plaintiff Albert argued created a reasonable inference that plan fiduciaries had violated their duties of prudence and loyalty by outspending the comparators. However, Judge Blakey commented that the plaintiff “provided the court with no rationale as to how he selected the comparator funds,” and failed to “explain whether the funds performed in similar ways, relied on similar strategies, or in any other way resembled the challenged Oshkosh funds such that a fee comparison would be appropriate.” Moreover, that the Seventh Circuit “emphasized that higher fees are often justified by higher quality services and thus, without more, the court could not reasonably infer breach of fiduciary duty from the fee comparisons alone.”
Substantially Similar
Judge Blakey then observed that in the case at hand, the plaintiffs made “three substantially similar theories of breach and offer comparator charts nearly identical to those used in Albert,” that “like Albert, Plaintiffs fail to allege facts to plausibly state a claim for breach based upon the selected comparator data. On the matter of recordkeeping fees, Plaintiffs plead no facts to show whether the selected comparators receive recordkeeping services of a similar nature and quality to those offered by the Plan’s recordkeeper. Similarly, on the matter of investment advisory services, Plaintiffs plead no facts to show that the services offered by comparator plans are comparable to those offered by the Plan’s selected service provider. Thus, Albert directs that any claims based upon these theories must be dismissed.”
Judge Blakey did note that the plaintiffs here “come closer to stating a claim with regard to fund management costs,” in that along with tables comparing the fund management costs of Exelon’s plan with other selected plans, Plaintiffs assert that the comparator funds are more affordable than Exelon’s challenged funds, and they also feature “substantially similar investment mixes,” “the same or better performance,” and “substantially similar investment strategies and underlying assets.”
‘Factual Similarities’
“These kinds of factual similarities”, Blakey writes, “if supported by more than conclusory remarks, would provide the context necessary for Plaintiffs’ claims. Plaintiffs further provide performance data over 1-, 5-, and 10-year periods to illustrate that the higher fee funds Exelon offered were not justified by higher performances than comparators over time.” That said, however, he commented that “in the absence of facts to show that the comparator funds are appropriate benchmarks, the comparative performance data remains insufficient to state a claim.”
Noting that the “Plaintiffs plead no facts showing a conflict of interest or any other disloyal behavior,” and commenting (as the Seventh Circuit explained in Albert), “plaintiffs must do more than recast purported breaches of fiduciary duty as disloyal acts”—Judge Blakey concluded that the plaintiffs here failed to plead a plausible claim of breach of the duty of loyalty by any Defendant. And because the other claims (failure to monitor and co-fiduciary liability) stem from the claim he just rejected, those claims fell short as well.
That said, Judge Blakey also noted that the dismissal was “without prejudice,” and gave the Plaintiffs an opportunity to replead their case to meet the standards outlined in what he termed the “requisite Albert standard”—by Oct. 31.
What This Means
Well, if it seems that all of a sudden, the tides have shifted in these cases—well, it sure seems that way. While Oshkosh was the precedent cited here, the genesis of this new standard seems to come from the CommonSpirit case in another jurisdiction. That said, this “new” determination of a standard of plausibility—that the determination of reasonability of fees requires an understanding of the services rendered for those fees—seems to apply primarily to recordkeeping services. Investment management fees have a different threshold.
But note that in this case, while Judge Blakey ruled that the suit wasn’t crafted sufficiently to meet that threshold, he left the door open for the plaintiffs to remedy that shortcoming. So, stay tuned.
[i] The plan participants were represented by Berger Montague PC, Edelson Lechtzin LLP, and Law Offices of Michael M. Mulder.
