Another excessive fee suit has been dismissed—in favor of the fiduciary defendants.
In a suit filed at the onset of the COVID-19 pandemic, Tim Davis, Gregor Miguel, and Amanda Bredlow—participants in the $2 billion 401(k) plan of CRM provider (and now DJIA component) Salesforce—made a series of allegations common to excessive fee suits: that the plan fiduciaries “breached their fiduciary duty of prudence by selecting and retaining investment options with high costs relative to other, comparable investments,” that the “Committee Defendants breached their fiduciary duty of loyalty, in that some of the funds’ ‘investment managers own a portion of [Salesforce],’” and that the Board, Benioff, and Salesforce breached their fiduciary monitoring duty by failing to adequately monitor the Committee Defendants.
The Salesforce defendants moved to dismiss the suit—and in considering that motion (Tim Davis et al. v. Salesforce.com Inc. et al., case number 3:20-cv-01753), U.S. District Judge Maxine M. Chesney started by noting that a dismissal “can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory,” but that “in analyzing a motion to dismiss, a district court must accept as true all material allegations in the complaint and construe them in the light most favorable to the nonmoving party.”
Active vs. Passive
At the outset, defendants argue, passively managed funds “are not comparable to actively-managed funds in any meaningful way”—and on that point, Judge Chesney agreed. She cited other cases that stated that the two “have different aims, different risks, and different potential rewards that cater to different investors,” that “analysts continue to debate whether active or passive management is a better approach,” and that “In light of such differences, plaintiffs’ allegations that passively managed funds are available as alternatives to the actively managed funds offered in the Plan do not suffice to demonstrate imprudence.” Moreover, she explained that, even assuming that a passively managed fund can be used for purposes of comparison, “the complaint here contains no factual allegations to support a finding that the passively managed funds identified therein provide a ‘meaningful benchmark.’”
She disregarded plaintiffs’ arguments—they’re represented by Rosman & Germain LLP and Capozzi Adler PC[i]—that the passively managed funds have “the same investment style” or “materially similar characteristics” as certain actively managed funds offered in the Plan as “conclusory allegations,” insufficient to state a claim for relief.
And, as if that weren’t enough, she also lined up with the defendants’ rebuttal that allegations “based on five-year returns are not sufficiently long-term to state a plausible claim of imprudence.”
As for the issue of lower-cost share classes, Judge Chesney noted that the plaintiffs here (as have many other plaintiffs arguing this issue) claimed that lower-priced mutual funds at issue “are identical to the mutual funds in the Plan in every way except for their lower cost.”
She began the discussion here by distinguishing other cases that the plaintiffs had used to make their case, explaining first that, in a number of those cases, the plaintiffs “alleged numerous acts of wrongdoing, which, when viewed collectively, were found sufficient to state a claim,” and that in others—well, she didn’t see that they had submitted the kinds of off-setting explanations regarding revenue-sharing considerations as the defendants provided here. She also invoked part of the Ninth Circuit’s reasoning in rejecting claims regarding lower-cost funds from the Tibble v. Edison case: “[t]here are simply too many relevant considerations for a fiduciary, for that type of bright-line approach to prudence to be tenable.” Ultimately, she noted that the cases—and the basis upon which the plaintiffs relied—were not, “without more, sufficient to state a claim for imprudence.”
CITs and Separate Accounts
As for the use of collective trusts and separate accounts as less costly alternatives, Judge Chesney once again aligned with the plaintiffs’ argument that “plans are under no duty to offer alternatives to mutual funds, even when the plaintiffs argue they are markedly superior.” Moreover, she cited a ruling in White v. Chevron where the court stated it was “inappropriate to compare [these] distinct investment vehicles solely by cost, since their essential features differ so significantly.” And concluded therefore that “plaintiffs fail to state an imprudence claim predicated on a comparison of mutual funds with collective trusts and separate accounts.”
Regarding allegations that the fiduciary defendants here breached their duty of loyalty by offering funds managed by companies that were investors in Salesforce (specifically Fidelity and JPMorgan Chase), Judge Chesney dismissed them as “wholly conclusory and, consequently, insufficient to state a claim.”
As for the alleged failure in their duty to monitor other fiduciaries, Judge Chesney noted that, having failed to successfully establish a failure of duty by the fiduciaries, a claim regarding a failure to monitor those fiduciaries also “necessarily fails.” Nor was there a need for the jury trial that the plaintiffs had requested.
With that, she dismissed the case—but gave plaintiffs until October 23 to amend their complaint to address the shortcomings she identified.
What This Means
As satisfying as a dismissal of suit surely is for the defendants, it’s worth noting that it’s not quite as powerful, and offers no real value as precedent. That said, it should serve as a reminder that the mere assertion of a condition as evidence of a fiduciary breach without more generally won’t—and shouldn’t—be enough to take a case to trial.
Some might even say it shouldn’t be sufficient to get a hearing.
[i]These firms also have teamed up to file an excessive fee suit against LinkedIn, while Capozzi Adler has been quite active in 2020, having recently filed suit against Universal Health Services, Inc., and before that Aegis Media Americas Inc., about a year agothe BTG International Inc. Profit Sharing 401(k) Plan, earlier this year the $2 billion health technology firm Cerner Corp., and less than a month ago Pharmaceutical Product Development, LLC Retirement Savings Plan and Gerken v. ManTech Int’l Corp.
Oh, and Capozzi Adler happens to be one of the three law firms specifically named in at least one P&C insurer’s policy renewal questionnaire, alongside Schlichter Bogard & Denton LLP and Nichols Kaster PLLP.