A federal magistrate judge has recommended that a pair of excessive fee suits—previously dismissed for failure to state a plausible claim—be given another chance based on a new standard.
The separate suits were brought[i] against the fiduciaries of the plans at ThedaCare, Inc. and Prevea Clinic, Inc. In the former, participant-plaintiff Glick had argued (in August 2020) that ThedaCare, Inc. and its Board of Directors violated the duty of prudence under ERISA with respect to the ThedaCare Retirement and 403(b) Savings Plan because he alleged that (1) the Plan’s recordkeeping fees were “excessive;” (2) the Plan includes investment share classes that did not result in the lowest “Net Investment Expense” to participants; (3) the Plan’s actively managed investment and stable value investment options charged excessive fees compared to available alternatives; and (4) the Plan’s “Managed Account Services”—Managed Advice and PortfolioXpress—were too expensive.
Similar claims were made in the Prevea case. Both were dismissed in November 2022 by Judge William C. Griesbach—who was the judge in the Oshkosh case—and who—ironically enough, did so at the recommendation of Magistrate Judge Stephen C. Dries in dismissing the lawsuits against both Prevea and ThedaCare—while leaving the door open for the plaintiffs in those cases to file amended complaints.
Another Look?
Interestingly enough, that same Magistrate Judge Stephen C. Dries has weighed in here (Glick v. ThedaCare, Inc., E.D. Wis., No. 1:20-cv-01236, magistrate report 7/20/23)—recommending (1) that the court grant the motion as it relates to Glick’s managed account service fees and investment management fees claims; and (2) denying the motion concerning Glick’s recordkeeping and administrative service fees claim.
Judge Dries began his analysis by noting that a claim has “facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Moreover, he reminded us that, “when analyzing a motion to dismiss pursuant to Rule 12(b)(6), courts must ‘construe the complaint in the light most favorable to plaintiff, accept all well-pleaded facts as true, and draw reasonable inferences in plaintiff ’s favor,’” but (citing the Divane v. Northwestern University case) that the court “need not accept as true . . .unsupported conclusory factual allegations.”
Then, drawing also from that Northwestern decision that “as such, the Seventh Circuit has held that, ‘[w]hen claiming an ERISA violation, the plaintiff must plausibly allege action that was objectively unreasonable.’”
Judge Dries noted that there was no dispute between the parties that the named ThedaCare defendants were plan fiduciaries or that higher fees can sometimes harm plan participants. “Rather,” he noted, “ThedaCare insists that Glick has failed to plausibly plead that the named defendants breached their duty of prudence and duty to monitor other fiduciaries.”
The Discussion
“Glick maintains that ThedaCare has incurred excessive recordkeeping fees and has failed to timely remove its longtime recordkeeper, Transamerica,” Dries wrote, although he acknowledged that the plaintiff here “doesn’t know what process ThedaCare used to select, retain, or determine the fees paid to Transamerica.” Instead, Dries noted that the plaintiff wanted the court to “infer an imprudent decision-making process from ThedaCare’s failure to regularly solicit quotes or competitive bids from Transamerica and other recordkeepers and ThedaCare’s failure to leverage its substantial bargaining power to negotiate a lower fee.” Dries said that the support for this theory were comparisons to “publicly available data for the ThedaCare plan with twelve allegedly comparable plans that are supposedly prudent when it comes to recordkeeping fees.”
He then went on to comment that, while the plaintiff argued these “unreasonably excessive recordkeeping fees paid by the ThedaCare plan cost its participants millions of dollars,” the fiduciary defendants argued instead that the Seventh Circuit’s decision in Albert (a.k.a. Oshkosh) requires dismissal of Glick’s recordkeeping claim.” In Albert, the Seventh Circuit affirmed the dismissal of a similar suit.
What’s (Now) Different
Judge Dries noted that at the time—and with the Hughes case still pending on remand from the Supreme Court, the court looked elsewhere for guidance, specifically the decision in Smith v. CommonSpirit Health, a case that has since been widely cited—and in which the Sixth Circuit “held that an ERISA plaintiff failed to state a duty of prudence claim where the complaint ‘failed to allege that the [recordkeeping] fees were excessive relative to the services rendered.’” This again was the notion that an allegation of fees paid without the context of services rendered for those fees was not enough to create a “plausible” inference sufficient to move past the motion to dismiss the case by the fiduciary defendants.
But that, as they say, was then. Judge Dries noted that the judge in that Albert/Oshkosh decision acknowledged that “recordkeeping claims in a future case could survive the ‘context-sensitive scrutiny of a complaint’s allegations’ courts perform on a motion to dismiss,” and that after the parties here briefed ThedaCare’s motion to dismiss, the Seventh Circuit issued its decision in Hughes II—clarifying the pleading standard for ERISA duty-of-prudence claims, explaining that “a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness.”
‘Newly Formulated Pleading Standard’
And, applying that “newly formulated pleading standard,” the Hughes II court reversed the dismissal of an excessive recordkeeping fees claim, distinguishing that case from the Albert case, “noting that the complaint in its case alleged that “the quality or type of recordkeeping services provided by competitor providers [were] comparable to that provided by” the plan’s recordkeepers. That same suit alleged that recordkeeping services for all “jumbo plans” are fungible and that the proposed alternative fee was reasonable “based on the services provided by existing recordkeepers and the Plans’ features.” He continued that, “In other words, unlike the plaintiffs in Albert, the plaintiffs in Hughes II provided the required context to allege that their plan’s recordkeeping fees “were excessive relative to the recordkeeping services rendered.”
Judge Dries found similarities from that finding to the case at hand, in that “the operative complaint here includes the allegations missing from the complaint in Albert that move Glick’s recordkeeping claim from possible to plausible. Specifically, the second amended complaint alleges that Transamerica provided plan participants standardized recordkeeping and administrative services that all “mega plans”—those with over $500 million in assets—receive from their recordkeepers, including “things like website services, participant account maintenance, plan consulting, and call center staffing.” He noted that “it also alleges that recordkeepers for all mega plans provide more or less the same level and quality of service and that any minor variations do not materially affect the fees charged. Thus, according to the second amended complaint, the market for recordkeeping and administrative services is highly price-competitive for mega plans, such that plans with more participants generally can negotiate a lower per-participant rate.” He also noted that “other courts within this circuit have found nearly identical allegations sufficient to survive a motion to dismiss.”
Not that the ThedaCare defendants didn’t push back on that notion. Judge Dries wrote that, “according to ThedaCare, Glick admitted in his latest complaint that plans can negotiate to receive the same or better level and qualities of services from a recordkeeper, that some recordkeepers may differ in how they deliver recordkeeping services, and that some recordkeepers are more innovative than others.” Dries commented that “ThedaCare seems to believe that it’s implausible that all recordkeepers provide the exact same services. Maybe, but that’s not what Glick asserts.” And here’s where it gets interesting.
‘Negligible Effect?’
Judge Dries wrote that, rather than alleging that there were no differences in services—“any differences in services have a negligible effect on the fees charged,” and that “none of the allegations cited by ThedaCare are inconsistent with recordkeeping services being commoditized, especially for large plans like the ThedaCare plan.” But what the suit DID do, Judge Dries noted, was allege that the plan didn’t regularly solicit quotes or competitive bids, failed to leverage its bargaining power to negotiate a lower fee, and that other similarly sized plans received the same level of service for significantly less—all of which together Dries concluded supported an “inference that ThedaCare engaged in an unreasonable—and therefore imprudent—decision-making process (or lack of process) when it came to selecting, retaining, and paying Transamerica for its recordkeeping and administrative services.”
In response to arguments that there were issues/questions about the math used by the plaintiff in his suit, Judge Dries admitted that “it remains unclear how Glick came up with some of his numbers, particularly the total recordkeeping and administrative fees he says the ThedaCare plan paid Transamerica each year.” Moreover, Dries noted that if that evidence had been made in response to a summary judgment motion, he’d grant it. “However, the pleading stage is not the time to attack the source of a plaintiff’s allegations,” he wrote. Ultimately, he concluded that the allegations made were “just barely enough to nudge his recordkeeping fees claim across the line from possibility to plausibility.”
Managed Accounts
With regard to the claims regarding managed accounts, Judge Dries explained that “Glick’s managed account service fees claim suffers the same fatal flaws the court identified concerning a materially indistinguishable claim Glick asserted in his first amended complaint.” Specifically, he noted that the second amended complaint “does not contain any factual allegations showing that the comparator plans included in the chart are in fact similarly situated,” and that “simply alleging that the plans are ‘similarly situated’—without listing any details about the number of participants or asset size—is not enough.”
Judge Dries also recommended that the claims regarding a failure to monitor the managed account structure also came up short—but that the plaintiff could pursue his recordkeeping fees duty-to-monitor claim.
The same week of this recommendation, this same Judge Dries (separately) weighed in on the Previa case—recommending that the motion to dismiss—be dismissed. He also found that the allegations made were sufficient to present a “plausible” argument.
What This Means
While the different recommendation here is based on a new decision/precedent, you could hardly be faulted for feeling a bit of whiplash trying to get a fix on exactly how much needs to be asserted in order to bring suits to court. Indeed, it now seems that for some courts (specifically this one), it might actually be sufficient to simply assert that the services are, in fact, fungible without actually presenting evidence to support it.
Of course, this is still just the recommendation of a magistrate judge—which may or may not be accepted (in whole or in part) by the presiding judge.
Stay tuned.
[i] Walcheske & Luzi LLC represents the participant-plaintiff in this case.
