All eyes watching DC ERISA case before high court

The U.S. Supreme Court agreed to hear a case that legal experts say could refine standards on how lower courts interpret ERISA complaints covering defined contribution sponsors' administrative and investment fees, investment lineups and overall plan management.

The court's July 2 decision to hear oral arguments in the case of Hughes et al. vs. Northwestern University et al. is viewed by consultants, ERISA attorneys and interest groups as a chance to clarify guidance because federal District Courts and federal appeals courts have issued conflicting rulings on what constitutes sufficient grounds for a case to be dismissed or to go to trial.

"The Supreme Court has the opportunity to play traffic cop," said Andrew Oringer, New York-based partner in the ERISA and executive compensation group at Dechert LLP.

"People on both sides don't know what the rules are," said Mr. Oringer, who represents sponsor clients in ERISA cases. "There's no consensus in the lower courts. This is an opportunity for the Supreme Court to straighten things out."

The key issue before the court is what is required for an ERISA complaint to get past a motion to dismiss. Judges must determine whether a complaint states a claim "upon which relief can be granted," according to federal rules of civil procedure. Unless a judge rules that a claim is plausible and, in ERISA cases, adequately alleges a breach of fiduciary duty, the judge will dismiss the case.

For sponsors, getting a court to dismiss a case saves the time and expense of preparing for trial. For plaintiffs, getting a court to reject a dismissal motion allows them, through the legal discovery process, to gather information so they can further substantiate their allegations.

"The potential impact is huge," said Kimberly Jones, a Chicago-based partner at Faegre Drinker Biddle & Reath LLP. "If the Supreme Court can clarify a standard for motion to dismiss, it would provide clarity for both sides." And clarity could reduce the number of cases proceeding to trial, said Ms. Jones, who represents defendants in ERISA cases.

"The current level of ERISA litigation is unsustainable," said Joshua A. Lichtenstein, a New York-based partner and head of the ERISA fiduciary practice at Ropes & Gray LLP.

"If there is an ability for cases to be dismissed early, it could have a big impact," said Mr. Lichtenstein, whose firm represents sponsors in ERISA cases. The conflicting lower court rulings "is having an impact on plan sponsor behavior."

The source of uncertainty — and a reason the Supreme Court agreed to hear the case, though date for oral arguments has been set — is a "circuit split," conflicting rulings among federal appeals courts on cases with similar allegations.

The court agreed to hear the Northwestern case because different appeals courts made different decisions on the trial-worthiness of alleged ERISA violations regarding excessive fees, poor-performing investment options, too many record keepers and/or inattentive management.

In the Northwestern case, participants in two university 403(b) plans sued in 2016, but a U.S. District Court judge dismissed the case in May 2018. The 7th U.S. Circuit Court of Appeals in Chicago upheld the decision in May 2020, saying there was "no error" in the judge's ruling.

The participants petitioned the Supreme Court in August 2020, saying the 7th Circuit's decision clashed with rulings by two other federal appellate courts, which allowed cases to proceed involving similar complaints against other universities' 403(b) plans.

In one of those cases, Jennifer Sweda et al. vs. Jack Heuer et al., the University of Pennsylvania announced in January 2021 that it would pay a $13 million settlement. Ms. Sweda is a participant in a university 403(b) plan; Mr. Heuer is vice president of human resources for the university.

Current and former participants sued in 2016, alleging a series of ERISA violations in plan management. A U.S. District Court judge in Philadelphia dismissed the case in 2017. However, the 3rd U.S. Circuit Court of Appeals in Philadelphia reversed the lower court's ruling on some allegations covering excessive administrative fees, failing to "comprehensively review" plan management, failing to use the plan's size to negotiate lower fees and keeping high-cost investment options when cheaper, better-performing investments were available.

The university asked the U.S. Supreme Court to review the appeals court's decision, but the request was denied in March 2020.

In the other case, the 8th U.S. Circuit Court of Appeals in St. Louis in May 2020 reversed part of a U.S. District Court judge's September 2018 ruling that dismissed the entire complaint in Davis et al. vs. Washington University in St. Louis et al.

The appeals court said plaintiffs made a valid argument about excessive fees, but it upheld the dismissal of the allegation that the university's 403(b) plan kept too many poor-performing investments in its menu. The appeals court remanded the case to the lower court, where it remains pending.

The Supreme Court has asked Northwestern University and the plaintiffs for additional information, and interest groups are likely to file amicus briefs in such a high-profile case.

Some of the plaintiffs' allegations — about high record-keeping fees and retention of "imprudent" investments — are supported by the U.S. solicitor general's office, which submitted its opinion on May 25 while asking the court to address the matter.

"The case presents an opportunity for this court to clarify that ERISA requires fiduciaries to work actively to limit a plan's expenses and remove imprudent investments, and that fiduciaries will not be excused from those responsibilities on the ground that they selected some (or even many) other prudent investments for a plan," wrote Acting Solicitor General Elizabeth B. Prelogar.

Citing the disagreements among appeals courts, she added: "The question of what ERISA requires of plan fiduciaries to control expenses is important to millions of employees throughout the nation whose retirement assets are invested in ERISA-governed plans. And that question frequently recurs."

Ms. Prelogar's comments highlighted a dispute among the courts that, she wrote, should have been resolved via May 2015 Supreme Court ruling in Tibble et al. vs Edison International Inc. et al. In that case about the statute of limitations for plaintiffs filing an ERISA complaint, the Supreme Court's unanimous pro-plaintiff ruling contained the requirement that fiduciaries have "a continuing duty to monitor trust investments and remove imprudent ones."

However, in the Northwestern case, the 7th Circuit ruled that fiduciaries can offer a range of investment options and that participants make choices rather than be forced to accept unattractive options.

This reasoning "was unsound," Ms. Prelogar wrote. "Fiduciaries are not excused from their obligations not to offer imprudent investments with unreasonably high fees on the ground that they offered other prudent investments."

The 7th Circuit Court of Appeals ruling "was really misguided," Dara Smith, Washington-based attorney for the AARP Foundation, said in an interview.

"It conflicts with the duty to monitor," she said. "It falls squarely under Tibble. I don't think any greater clarity is necessary. It should be an easy question to answer."

An opposing view by the U.S. Chamber of Commerce and pro-defense ERISA attorneys is that the current pleading standards in some jurisdictions are so meager that plaintiffs can overcome a motion to dismiss by offering out-of-context comparisons.

"We want specificity," said Chantel L. Sheaks, Washington-based vice president for retirement policy for the Chamber, which has filed amicus briefs for defendants in various Supreme Court and lower court cases supporting employers in ERISA cases.

Specificity, she added, means that sponsors should be evaluated not only on the cost of their plans but also on the services provided.

"Cheaper alone should not be enough to drag a company into court," she said.

"There will always be something out there that's cheaper," she said, referring to plaintiffs' lawsuits comparing a sponsor's record-keeping and investment fees to others in the marketplace. "ERISA says you don't have to be the cheapest."

A Supreme Court ruling could reinforce the fact that lower courts should evaluate sponsors' actions under ERISA based on how they developed their plans and investments rather than on short-term outcomes.

"It can't be a test of results," said Douglas Hallward-Driemeier, the Washington-based chairman of the Ropes & Gray appellate and Supreme Court practice. "It has to be a test of the process."

The clash of appeals court rulings has exasperated consultant Michael Barry so much that he is willing to accept guidance that doesn't favor his view that the pro-defense 7th Circuit Court of Appeals ruling was correct.

"If we get a pro-plaintiff answer, that actually would be an improvement over what we have now," said Mr. Barry, president of O3 Plan Advisory Services LLC, a part of October Three Consulting in Chicago.

"This all boils down to a vision of ERISA," he said. "One is that retirement investing is a closed insular world where people are held to a higher standard than anyone else." The other vision, which he supports, is that "the retirement investor shouldn't take a deal worse than the retail investor."