University Seeks SCOTUS Review in Excessive Fee Suit

One of the first universities to find itself targeted in a 403(b) excessive fee suit has asked the nation’s highest court to resolve the threshold for getting to trial.

The suit was not only one of the first of the university 403(b) excessive fee suits to be filed (and yes, by the firm of Schlichter Bogard & Denton), the district court decision, in favor of the fiduciary defendants for the University of Pennsylvania Matching Plan, had been cited in a number of these cases, including a number of settlements (as evidence that prevailing at trial was no sure thing). 

The suit, brought by participants in the $3.8 billion University of Pennsylvania Matching Plan against the University of Pennsylvania and its Vice President of Human Resources back in 2016, alleged three main things, specifically that:

• the defendants breached their fiduciary duty by “locking in” plan investment options into two investment companies;
• the administrative services and fees were unreasonably high due to the defendants’ failure to seek competitive bids to decrease administrative costs; and
• the fiduciaries charged unnecessary fees while the portfolio underperformed.

The case was dismissed in September 2017, but then on appeal in May 2019, U.S. Court of Appeals for the 3rd Circuit revived the employees’ proposed class action, partially reversing (by a 2-1 vote) the 2017 dismissal of the suit. They did so noting that when a court dismisses a complaint without trial (as the district court did in this case), “it deprives a plaintiff of the benefit of the court’s adjudication of the merits of its claim before the court considers any evidence,” going on to explain that they considered this appeal construing the complaint “in the light most favorable to the plaintiff.” 

However, the UPenn defendants (petitioners to the Supreme Court here) argue that that court reversed the dismissal of respondents’ claims based on allegations that other courts of appeals have found insufficient as a matter of law.

The Case for the Case

In outlining their case, the petitioners explained that “ERISA class actions impose immense economic and reputational costs on fiduciaries who choose to administer employee retirement plans,” going on to note that, however, “the statute was not meant to generate “litigation expenses” that “unduly discourage employers from offering [such] plans.” They go on to describe the “new wave of ERISA class action litigation” as not only being filed against universities “and the men and women who agree to serve as fiduciaries for their retirement plans,” noting that “in a single week in 2016, respondents’ counsel sued fiduciaries at seven different schools—including the University of Pennsylvania and its co-petitioners here,” and that “all told, about twenty universities have been hit with such lawsuits.” Moreover, explain that “the lawsuits are so numerous[i]because they rest on substantively identical allegations and target retirement plan features that are commonplace” among those programs.

Not that, as the petitioners argue, it means that retirees’ savings are in jeopardy. They cited the comments of Judge Roth’s dissent on the appellate court ruling that “the University of Pennsylvania plan’s assets increased by more than $1 billion during the class period.” Moreover, they explain, “the only one of these cases to produce a trial verdict thus far established that the plan features that respondents criticize here—and that other plaintiffs criticize in the other university cases—do not constitute a breach of fiduciary duty under ERISA.”

That record notwithstanding, and while “…no plaintiff has prevailed on the merits of these allegations, universities face immense pressure to quickly settle any claims that survive the pleading stage. It is extremely expensive to litigate ERISA class actions, and the amount of money theoretically at stake is staggering: the New York University plaintiffs alone claimed $358 million in losses,” they write. “So far, six universities have settled lawsuits like this after losing motions to dismiss, at an average rate of $11 million per university.” They note that two of those settlements came after the appellate decision in this case “…and more will follow if that decision stands.”

‘Split’-ing the Difference?

Noting that the divided 3rd Circuit panel reversed dismissal of respondents’ “two core claims,” they state that the analysis of that court “rested on a fundamental mistake,” specifically that it held that the district court “erred” by relying on the pleading standard set forth in Bell Atlantic Corp. v. Twombly, which the appellate court saw as being “specific to antitrust cases.” Rather, the appellate judges in that case were more inclined to see the pleas through the prism of another excessive fee decision, Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 597 (8th Cir. 2009). In that case on appeal (eventually settled), the 8th Circuit not only said that the lower court “ignored reasonable inferences supported by the facts alleged,” it went on to criticize that court for not only drawing inferences in favor of the party (Walmart) that had made the motion to dismiss, but for criticizing the plaintiff for “failing to plead facts tending to contradict those inferences.” 

However, the UPenn petitioners here argue that conclusion “conflicts with decisions from this Court and many circuits,” explaining that “this Court has rejected any suggestion that “Twombly should be limited to pleadings made in the context of an antitrust dispute,” going on to note that “it has even held that courts “should apply the pleading standard as discussed in Twombly and Iqbal” to resolve ERISA fiduciary duty claims in particular (citing the Fifth Third v. Dudenhoeffer decision).

Not only has not other court had an issue with that application, the petitioners note that the 2nd, 7th, 8th and 9th Circuits “have all recognized that Twombly fully applies to these ERISA claims.” Were that not enough, they state that “it is no accident that decisions in those four circuits have also dismissed complaints resting on the sorts of allegations that the Third Circuit allowed past the pleading stage here.” They note that the appellate court here “even conceded that respondents “may not have directly alleged how [petitioners] mismanaged the Plan,” but nonetheless “found respondents’ allegations—that some of the plan’s investment options charged excessive fees or performed inadequately—sufficient to state a claim, regardless of the sound reasons that would support the decision to make such investment options available to plan participants.” Ultimately, they explain “Unless the allegations ‘show[ ] that a prudent fiduciary in like circumstances would have acted differently,’ they do not clear the Twombly threshold.”

That, then is the essence of their argument – that the U.S. Supreme Court needs to step in a resolve the issue, to “reaffirm Twombly’s applicability and resolve the numerous circuit splits created by the Third Circuit.”

“By holding that Twombly’s pleading requirements do not govern ERISA claims, the Third Circuit contradicted the decisions of this Court and four courts of appeals,” they write, and therefore “that ruling sows enormous confusion for plan fiduciaries, who must decipher conflicting messages from the Third Circuit and other courts, without real guidance as to what decisions they must make now to avoid liability later.” 

The petitioners conclude by explaining that, “as the current wave of university litigation shows, it is easy to become the target of a lawsuit like this. This Court’s guidance is urgently needed, and this case provides an ideal vehicle.”

Will the Supreme Court agree? We shall see.