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Seventh Circuit Gives Oshkosh Another Excessive Fee Suit Win

Litigation

A federal appellate court took another look at an excessive fee case it had dismissed—and found nothing in a recent Supreme Court decision to change its mind.

It was, in fact, the same appellate court (the Seventh Circuit) that had its judgement in the Hughes v. Northwestern University decision in favor of the fiduciary defendants vacated and remanded for further consideration by the U.S. Supreme Court in January

Oshkosh, By Gosh!

As for the case at hand, it involves the $1.1 billion Oshkosh Corp. 401(k) that former participant and now-plaintiff Andrew Albert had alleged subjected participants to excessive fees because it retained higher-cost actively managed funds, failed to retain only the lowest-cost share class of funds it offered, and paid excessive fees for recordkeeping services (to Fidelity). All told, the suit, filed in the U.S. District Court for the Eastern District of Wisconsin, claimed those practices resulted in $15.9 million in unnecessary losses to plan participants. 

The suit was dismissed roughly a year ago by Judge William Griesbach who noted at the time that while the plaintiff here had backed up his assertions about recordkeeping costs with “charts, graphs, and tables that the same or different recordkeepers have accepted lower recordkeeping fees from similar plans with approximately the same number of participants and the same amount of assets under management during the statutory time period”—that the plaintiff had nonetheless failed to allege “any facts as to what would constitute a reasonable fee or any facts suggesting that the fee charged by Fidelity is excessive in relation to the services provided.” 

The Appeal

However, armed with the Supreme Court’s refutation of this court’s judgement in the Hughes decision, plaintiff Albert (represented still by Walcheske & Luzi LLC) thought he’d give it another shot, appealing in the U.S. Court of Appeals for the Seventh Circuit in what turns out to be the first ruling of this court since that Hughes v. Northwestern University decision earlier in the year. 

Indeed, the ruling here (Albert v. Oshkosh Corp., 7th Cir., No. 21-2789, 8/29/22) starts by noting that “while this appeal was pending, the Supreme Court issued its opinion in Hughes v. Northwestern University, 142 S. Ct. 737 (2022), vacating our decision in Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020), and remanding for reevaluation of the operative complaint.” That said, the ruling (written by Judge Amy J. St. Eve, and joined by Judges Frank H. Easterbrook and Candace Jackson-Akiwumi) goes on to note that the “district court cited Divane repeatedly in its opinion, albeit not for the proposition that the Supreme Court rejected in Hughes.” In other words, the issues that the Supreme Court found in the Hughes case did not apply here.

Judge St. Eve noted that while this court’s decision in the Northwestern case had basically hinged on a conclusion that the inclusion of low-cost investment options in the plan mitigated concerns that other investment options were imprudent—a premise the Supreme Court rejected[i] as “inconsistent with the context‐specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.” However, she also noted that the Supreme Court had acknowledged that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

The Defense

The fiduciary defendants here (represented by Morgan, Lewis & Bockius LLP and Ogletree, Deakins, Nash, Smoak & Stewart PC) argued that none of that changed the fundamental requirements of an ERISA fiduciary—more precisely that it “did not radically reinvent this area of law or upend years of precedent”; it simply reinforced that “ERISA does not allow the soundness of investments A, B, and C to excuse the unsoundness of investments D, E, and F.” On the other hand, plaintiff Albert argued that Hughes basically “renders reliance on any aspect of Divane improper.”

Judge St. Eve quickly affirmed Albert’s standing to bring suit, and acknowledged the history of the case, and the arguments being presented. She turned back to the Divane rule, where the court “…rejected the notion that a failure to regularly solicit quotes or competitive bids from service providers breaches the duty of prudence”—and then stated that the plaintiff “overstates the significance of Hughes,” noting that “Hughes did not hold that fiduciaries are required to regularly solicit bids from service providers. Nor did it suggest that the reasoning in Hecker and Loomis no longer stands”—that it “merely rejected this court’s assumption that the availability of a mix of high‐cost and low‐cost investment options in a plan insulated fiduciaries from liability.”

CommonSpirit Spirit

And while she noted that the Hughes case is still pending, she turned to the Sixth Circuit, and the decision in Smith v. CommonSpirit Health where that court “recently 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.’” That court, she noted “did not consider Hughes to have any bearing on the analysis of such claims, and neither do we.”

She continued, “although the district court repeatedly cited Divane in its discussion of Albert’s recordkeeping claim, we affirm the dismissal of Count I”—as “that claim fails under our precedent that Hughes left untouched. In so holding, we emphasize 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.’” However, she continued that “Albert’s complaint simply does not provide ‘the kind of context that could move this claim from possibility to plausibility’ under Twombly[ii] and Iqbal.” 

As for the claims regarding investment management fees, Judge St. Eve took issue with the plaintiff’s reliance on data from Form 5500, since it “does not require plans to disclose precisely where money from revenue sharing goes. Some revenue sharing proceeds go to the recordkeeper in the form of profits, and some go back to the investor, but there is not necessarily a one‐to‐one correlation such that revenue sharing always redounds to investors’ benefit,” though she commented that the plaintiff’s argument seemed to assume so.

Expense ‘Sieve?’

She challenged the plaintiff’s argument that the plan fiduciaries should have offered higher-cost share classes because the “net expense” would be lower due to revenue-sharing. She contrasted that with the argument also made here that the defendants should have gone with passive, rather than actively managed funds in order to obtain less-expensive funds. 

“We agree with Oshkosh that the amended complaint does not allege sufficient facts to make this novel theory plausible,” Judge St. Eve wrote. “While a prudent fiduciary might consider such a metric, no court has said that ERISA requires a fiduciary to choose investment options on this basis.”

“Albert’s allegations are similarly threadbare: that ‘Defendants failed to consider materially similar and less expensive alternatives to the Plan’s investment options.’ In the absence of more detailed allegations providing a ‘sound basis for comparison,’” she wrote, dismissing the second count of the suit.

She was even harsher in her criticism of the part of the suit condemning the service provider/advisor fees paid to SAI. Plaintiff Albert had argued that those advisory services “provided virtually no benefit to some participants and a negative value to other participants”—but offered no comparisons for that claim, other than alleging that it was a natural result from an assumption that no competitive bidding had been conducted for those services. But, as Judge St. Eve commented here, failure to conduct an RFP was deemed “insufficient to state a claim for breach of the duty of loyalty.”

At this point, perhaps needless to state, Judge St. Eve, having dismissed all of the fiduciary breach claims, found that the other allegations—duty to monitor, as well as claims that Oshkosh engaged in prohibited transactions with Fidelity, were derivative of the dismissed claims—and dismissed them as well. Finally, as regards clams that Oshkosh failed to disclose fees charged to participants, specifically the method of calculating revenue-sharing fees, Judge St. Eve (citing Deere v. Hecker) found that “the total fee, not the internal, post‐collection distribution of the fee, is the critical figure for someone interested in the cost of including a certain investment in her portfolio and the net value of that investment.”

What This Means

That the Supreme Court’s ruling in Hughes v. Northwestern University wasn’t seen as having an impact here (at least by this court) is instructive. While that review of the case was ostensibly about establishing which party bore the burden of proof in these cases—well, it didn’t. 

Filling that “vacuum” in recent weeks has been the CommonSpirit case cited above (and other cases that have relied upon that decision) which seems to have established a threshold of claims necessary to get past a dismissal—a threshold that acknowledges that the only way to know if a fee is reasonable is to consider what service(s) you get for that price.      

 

[i] The case is still pending before this court on remand from the U.S. Supreme Court. 

[ii] From which one of all-time favorite legal metaphors arose, the need to ‘divide the plausible sheep from the meritless goats.”

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