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Plaintiffs’ Appeal in Excessive Fee Case Falls Short—Again

Litigation

The plaintiffs—who won at least a partial victory in an excessive fee case—but came up short on damages—appealed that decision—and lost again. Oh, and guess who their persistent lawyers were?


In a Nutshell

In an appeal with regard to the decisions in favor of the fiduciary defendants (and their assessment of damages), the Tenth Circuit backed the decisions and determinations of the lower court, finding that it “operated well within its purview in calculating damages and prejudgment interest.” The appellate court also concurred that “a run-of-the-mill agreement for recordkeeping services does not constitute a prohibited transaction under ERISA”—and that “the district court properly exercised its discretion in denying injunctive relief.”


The appellate court summed up the case to date thusly (or you can check out our recap here):

“A class of employees who participated in Banner Health, Inc.’s 401(k) defined contribution savings plan accused Banner and other plan fiduciaries of breaching duties owed under the Employee Retirement Income Security Act. Following an eight-day bench trial, the district court agreed in part, concluding that Banner had breached its fiduciary duty to plan participants by failing to monitor its recordkeeping service agreement with Fidelity Management Trust Company. This failure to monitor resulted in years of overpayment to Fidelity and corresponding losses to plan participants.

“During the bench trial, the employees’ expert witness testified the plan participants had incurred over $19 million in losses stemming from the breach. But having determined the expert evidence on losses was not reliable, the court fashioned its own measure of damages for the breach. The court calculated damages of about $1.6 million and awarded prejudgment interest calculated at the Internal Revenue Service’s underpayment rate. Also, despite finding that Banner breached its fiduciary duty, the district court entered judgment for Banner on several of the class’s other claims: the court found that Banner’s breach of duty did not warrant injunctive relief and that Banner had not engaged in a “prohibited transaction” with Fidelity as defined by ERISA.”

The Appeal

That decision was handed down a little more than a year ago—and now, “appealing both the district court’s findings of fact and conclusions of law, the participant-plaintiffs (represented by Schlichter Bogard & Denton LLP) argue that the district court “adopted an improper method for calculating damages and prejudgment interest, abused its discretion by denying injunctive relief, and erred in entering judgment for Banner on the prohibited transaction claim.”

Now, in this case (Ramos v. Banner Health, 10th Cir., No. 20-1231, 6/11/21) the plaintiffs had an uphill battle to climb; as the appellate court noted, its review of the district court’s findings of fact was “for clear error and its conclusions of law de novo”—the former to be found as “clearly erroneous if there is no support for it in the record or we are left with a definite and firm conviction that a mistake has been made.” Moreover, the court noted that in “reviewing factual findings, we must view the evidence in the light most favorable to the district court’s ruling and must uphold any district court finding that is permissible in light of the evidence.” 

After a brief review of ERISA’s purpose and structure, the court acknowledged that “determining the damages arising from a breach of fiduciary duty can often be difficult.” Moreover, the court explained that “If a district court finds a breach of fiduciary duties but rejects a plaintiff’s proposed measure of damages, the court may fashion its own measure of loss resulting from the breach,” and that “when a district court undertakes such a calculation of damages, we give it considerable discretion.” 

The court also stated that “if a court determines a fiduciary breached its duty to a plan, it also has discretion to award the plaintiffs prejudgment interest,” and that the purpose of that interest is “to make the plaintiffs whole, not to punish the fiduciary.”

Expert Testimony 

All that said, a bone of contention was the expert witness testimony submitted by the plaintiffs. Here, of course Martin Schmidt testified both as to the existence of a breach and the extent of damages, and on the latter “projected a range of appropriate recordkeeping fees for each year in question, selected a fee from these ranges for each year, and then measured the difference between his chosen fee and what Banner actually paid Fidelity.” But the district court, while finding Schmidt helpful in identifying the underlying breach, concluded that “Schmidt relied almost exclusively on his unquantifiable and non-replicable experience for his damages estimates, a process which the Court is constrained to find as unreliable”—and that this reliance was exacerbated by the fact that “the scant information Mr. Schmidt provided about these other experiences ... does not allow the Court to meaningfully assess and consider whether the quality and service of the recordkeeper services provided to these comparator plans were on par with ... services provided by Fidelity to the Plan.”

Now, the plaintiffs argued that the district court abused its discretion by:

  • applying an incorrect legal standard for assessing Schmidt’s testimony; 
  • failing to acknowledge that Schmidt had a methodology supporting his damages calculation; and 
  • basing its decision on inconsistent factual findings.

In essence that, the district court held his testimony to an “unnecessarily high standard.”

However, the appellate court countered that “this principle of ERISA damages does not relieve an expert of demonstrating that his calculations are based on a reliable methodology,” further commenting that the plaintiffs had “directed us to no cases suggesting the standards for assessing expert evidence are relaxed in the context of ERISA.” And while Schmidt identified various factors he relied on in coming up with his estimate, including the Plan’s size, services provided to the Plan, and the number of other recordkeepers that could perform those services, “…pressed on how he extrapolated from those factors to the specific fees he proposed, he could only invoke vague allusions to his ‘experience.’

“Without any replicable method underlying Schmidt’s estimates, the district court concluded[i] it could not determine whether his approximations were reliable. The district court did not abuse its discretion in coming to this conclusion.” 

Damage Assessment

As for the district court’s reliance on Schmidt’s testimony in finding a breach—but disregarding it for purposes of assessing damage—the appellate court explained that, “Expert testimony is not an all-or-nothing proposition. The fact that an expert’s opinion on one issue is admissible does not mean all his proposed opinions are admissible.”

At issue: Schmidt had determined that the plaintiffs lost out on $19.4 million—and had sought $85 million in total damages on all counts, according to court documents, versus the $1.6 million in damages awarded by the district court.

As for the damages awarded, the appellate court then turned to the district court’s determination of damages, noted that it “considered ‘multiple alternatives measures’ and ultimately determined that the revenue credits that Fidelity actually paid back to Banner are the best estimate of the excess fees the Plan paid in the first instance”—which the district court said “…may be viewed as the amount that Fidelity itself considered to be excessive recordkeeping fees…”

Here the appellate court also concurred, noting that “the district court provided more than enough reasoning for us to evaluate its decision,” since the agreement “instituting the revenue credits made clear the credits were to be “based on the Plan characteristics, asset configuration, net cash flow, fund selection[,] and number of participants.” Moreover, the appellate court said that the lower court “was under no obligation to go through and explain why it declined to use all other conceivable measure of damages found in the record,” that it had “considered and rejected the only other measure of damages the class proposed at trial—Schmidt’s calculations based on his experience—because it was not grounded in a reliable methodology. Left without the benefit of party presentation on any other measure of damages, the court selected a measure of loss and explained its choice.”

Concluding that the calculation used was “permissible” (and as you’ll see in a moment, that determination matters), the appellate court went on to explain that “the district court was not tasked with taking over for a class of plaintiffs that failed to provide adequate evidence and making their case for them. Rather, the court’s sole job was to make a reasonable approximation of the recordkeeping losses,” and that “on appeal, we must view the evidence in the light most favorable to the district court’s ruling and must uphold any district court finding that is permissible in light of the evidence.” 

And while the appellate court noted that the plaintiffs insist that the lower court “was obliged to scour the record in search of a more generous theory of damages. No such obligation exists.”

Equitable Relief

There was also a question of equitable relief—but since at the time the case went to trial, “Banner had ended the previous uncapped, revenue-sharing arrangement and agreed to a per-participant recordkeeping fee with Fidelity,” the lower court (backed by this one) said “there is simply no evidence from which the Court can reasonably conclude that Banner Defendants will at some point in time resume a policy or practice of violating their duty of prudence with respect to recordkeeping fees.” And thus denied that claim.

It’s worth noting—as the appellate court pointed out—that the lower court did not find a breach simply because Banner had failed to perform a request for proposals. “Rather, the court found a breach of fiduciary duty because Banner failed to adequately monitor the uncapped, revenue-sharing agreement. Once Banner changed to the per-participant recordkeeping fee with Fidelity, the breach the court had identified ended.” The appellate court then concluded that “because the underlying fee arrangement that triggered the initial finding of breach changed, we cannot say the court’s decision to deny injunctive relief was arbitrary or manifestly unreasonable.”

As for claims that there was a prohibited transaction because Fidelity was a party in interest that contracted with Banner to provide services to the plan, the appellate court also confirmed the determination of the lower court because “ERISA only prohibits such service relationships with persons who are ‘parties in interest’ by virtue of some other relations ... It does not prohibit a plan from paying an unrelated party, dealt with at arm’s length, for services rendered.” Moreover, the appellate court explained that the “district court expressed concern that treating the service agreement between Fidelity and Banner as a prohibited transaction would ‘discourage employers from offering ERISA plans’ altogether.” 

In conclusion, “the class has provided no evidence to show that the service agreement between Fidelity and Banner was anything less than an arm’s length deal or that Fidelity had some pre-existing relationship with Banner.” 

What This Means

At the time the district court’s decision was handed down, we commented that damages awarded that were a fraction of the injuries alleged didn’t mean that the judgement wouldn’t be appealed—and sure enough, the defendants here had to once again make their case(s). 

Ultimately, this result likely comes down to little more than the traditional deference of an appellate review on certain specific elements; essentially, failing some clear evidence of misjudgment or application of precedent, the appellate court isn’t inclined to upend the math. And, apparently unlike the district court’s assessment of the expert witness’ assessment, the appellate judges found the explanation of the methodology of the lower court to be sufficient. 

Perhaps lost in the focus on the calculation of damages (not to mention the allegations of conflicts of interest), a sound, documented (and apparently prudent) process wound up being largely sufficient to fend off allegations about imprudent (and allegedly expensive) fund choices—even in the apparent lack of any RFP/evaluation process in more than two decades. 


[i] “Like many a math teacher, the class faults the district court for not adequately showing its work,” the appellate judges wrote, nonetheless concluding that “the district court provided more than enough reasoning for us to evaluate its decision.”

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