A recent decision by an appeals court warrants rethinking a decision on an excessive expense lawsuit, or so the plan’s trustees argue.
The lawsuit in question was filed by a group of participants-plaintiffs in the $5.354 billion Humana retirement savings plan (represented by the law firm Capozzi Adler). The plan in question may have been voluminous, but the lawsuit filed in May 2021 was just 27 pages, relying on all-too-familiar allegations, in particular that the plan’s trustees “violated the duties they owed to the plan.” , Complainants , and other Plan participants by 1) failing to objectively and adequately review the Plan’s investment portfolio with due diligence to ensure that each investment option was prudent in terms of cost; and (2 ) maintaining certain funds in the plan despite the availability of the same or similar investment options with lower costs and/or better performance histories; and (3) failing to control the administrative and record-keeping costs of the Plan .
The case was one of several that had come to the attention of the United States Chamber of Commerce, which had filed a “friend of the court” brief on behalf of the fiduciary defendants – although Judge Rebecca Grady Jennings rejected that filing, stating that since the amicus brief “does not present anything that is ‘useful or otherwise necessary to the administration of justice’ – and that it ‘…will not assist the Court in deciding the issues of which it is seized”.
As to that decision, in March Judge Jennings found that the allegations made by the plaintiffs were “…sufficient to survive a motion to dismiss because, if true, they could establish that the committee had not acted as a prudent fiduciary,” citing decisions in Hughes v. Northwestern, Cassell v. Vanderbilt University, Davis vs. Magna Int’l of Am., Inc.and Marshall vs Northrop Grumman Corp. At the same time, while Humana’s board and Humana had argued that plaintiffs’ failure to adequately oversee the claim of other trustees should be dismissed as arising from their breach of the fiduciary duty.—well, having concluded that the allegations were sufficient to substantiate the former, she also kept those allegations alive.
But then came the decision of the Sixth Circuit in Smith vs. CommonSpirit Health which the Humana defendants argued (Moore v. Humana Inc., WD Ky., No. 3:21-cv-00232, motion for reconsideration 7/20/22) in the U.S. District Court for the Western District of Kentucky constitutes “precisely the type of change in control law” which allows courts to reconsider previous decisions. Under this standard, the Humana defendants asserted that the plaintiffs’ allegations “do not set out a plausible claim for breach of fiduciary duty.”
‘I like’ the circumstances
The defendants explained that “like the plaintiffs in CommonSpiritThe plaintiffs here have not alleged facts establishing that any of the plans they cite as comparators paid less for the same record-keeping services guaranteed by the plan. Plaintiffs also fail to provide any other factual allegations showing that the plan’s record-keeping fees were unreasonable in relation to the specific services the plan received in exchange. The plaintiffs simply allege that a few plans of roughly similar size paid lower record keeping fees than the plan at some point during the relevant period. Citing CommonSpiritthey note that these “lack” the kind of context that might displace [Plaintiffs’] allege from possibility to plausibility” and “respectfully request the Court to reconsider its dismissal order and dismiss the First Amended Complaint (FAC) in its entirety”.
Change of position(s)
Adding some flavor to their motion, defendants explain that plaintiffs originally alleged that $40 per participant per year (PPPY) would have been a reasonable record keeping fee for the plan – but that once Humana told them provided information showing that the plan had paid between $23 and $37 PPPY for record keeping services during the relevant period, “the plaintiffs filed an amended complaint which abandoned their previous benchmark of $40 for reasonableness,” changing their position to assert that the plan trustees “should have been able to negotiate a record-keeping cost in the range of $20 from the start of the Class Period until today. The plaintiffs identified four other plans with “more than 34,000 participants and over $2.5 billion in assets under management” that allegedly paid record-keeping fees between $25 and $28 PPPY in 2018, and also “cited anecdotal information from other litigation regarding record-keeping fees paid by unrelated third parties.” plans” – but provided “no context on how the services provided to any of these other plans compare to the specific set of services the plan received”.
Oh, and defendants note that plaintiffs’ amended complaint acknowledged that defendants conducted competitive bidding for plan recordkeeping services in 2014 and 2019, and that bidding is a “best practice.” to assess pension and service plan record-keeping fees, but nevertheless “allege that the RFP process must have been ‘flawed’ because the plan did not change record keepers in 2019 (instead of ‘obtain lower fees from the incumbent, which the requestors claimed was the lowest bidder), and because the 2014 RFP did not result in record-keeping fees being as low as those paid in 2018 by the comparison plans proposed by the applicants.”
Defendants went on to note (citing CommonSpirit) this “[e]Even without recognition of a regular tender, “courts routinely dismiss claims of recklessness like these for failing to allege an adequate market comparison. »
The defendants note:[N]Early three months after the Court denied defendants’ motion to dismiss, the Sixth Circuit issued its decision in CommonSpirit.” In this case, the Sixth Circuit endorsed for the first time a requirement adopted by other courts: that plaintiffs alleging recklessness based on allegedly excessive record-keeping fees must demonstrate that the “charges were excessive in relation to the services rendered” – and in view of this “modification of the law applicable under CommonSpiritThe defendants now seek reconsideration of the Court’s order dismissing their motion to dismiss. »
They comment that the CommonSpirit The decision “breaks new ground in the Sixth Circuit by holding that plaintiffs alleging recklessness based on allegedly excessive record-keeping fees must plead facts indicating ‘that the fees were excessive in relation to the services rendered’ to the plan in question.” Prior to this decision, Defendants acknowledge that the Magna International District Court, for example, held that “Plaintiffs need not allege why the fees were not justified by the services provided” – a decision that , unsurprisingly, the plaintiffs had encouraged the court to follow. “But the subsequent and defining decision of the Sixth Circuit in CommonSpirit rejects Magna International’s reasoning and confirms that plaintiffs are required to allege facts that plausibly show that a plan’s recordkeeping fees were excessive in relation to the specific services provided to the plan” – a standard that defendants note has not been relaxed for claims of excessive record keeping fees as set forth in the North West Case.
Although the Amended Complaint provides information about the “number of participants, amount of assets and record keeping fees paid” by these proposed comparators, the plaintiffs make no factual allegation that any of these comparator plans got the same services as the plan for a lower rate. . Nor does the FAC provide any factual allegations otherwise demonstrating that the plan’s record keeping fees were excessive in relation to the specific services rendered to that plan.
Recognize the “meanings”
“To the contrary,” they write, the amended complaint “…acknowledges that the plan’s record-keeping services were regularly challenged (a practice the plaintiffs call a fiduciary “best practice” for contributory plans defined), and does not allege that the defendants opted for any supplier other than the lowest bidder in these periodic calls for tenders. This, they argue, “provides compelling confirmation that, for the specific set of services required by the plan at issue here, the plan was paying the market rate, and therefore a reasonable rate.” The plaintiffs’ failure to make these claims about service comparisons, when they already know what services the archivist provided in exchange for his record-keeping fee, renders the amendment futile and should not allow plaintiffs to open the doors of discovery. »
They conclude that “the shortcomings of Plaintiffs’ record keeping fee allegations require the dismissal of the FCC in its entirety. Plaintiffs’ claim for failure to supervise other trustees in the second claim for relief arises from their primary breach of fiduciary duty in their first claim for relief and cannot survive by itself. »
Will the court be convinced? The decision in CommonSpirit will it be enough to stem the tide of relatively superfluous allegations surviving the motions to dismiss? Stay tuned.