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Goldman Sachs Wins Big on Summary Judgment in Case Challenging 401(k)’s Investments in Goldman Proprietary Funds


Falberg v. The Goldman Sachs Grp., No. 19 Civ. 9910 (ER), 2022 WL 4280634 (S.D.N.Y. Sep. 14, 2022) (Judge Edgardo Ramos)

Fee cases continue to dominate the world of ERISA pension litigation. In this week’s case of the week, Goldman Sachs obtains a complete and somewhat surprising win on summary judgment in a proposed class action on behalf of 17,000 participants in the company’s massive $7.5 billion 401(k) plan.

Leonid Falberg, a participant in the 401(k) plan, brought suit challenging the plan’s investments in a number of Goldman proprietary mutual funds, alleging that Goldman and its in-house fiduciaries breached their duties under ERISA by, among other things: (1) “only reluctantly and belatedly” removing underperforming Goldman investment funds as investment options in 2017 (rather than in 2014, as Mr. Falberg alleged they should have); (2) failing to consider lower-cost institutional investment vehicles; and (3) failing to claim “fee rebates” on behalf of the Plan that allegedly were available to other similarly situated retirement plans that invested in the Goldman funds.

Mr. Falberg’s complaint pointed out a number of red flags. First, three of the challenged Goldman funds were rated “not broadly recommended” by Rocaton Investment Advisors LLC, Goldman’s outside investment advisor for the Plan. Second, the majority of the mutual funds retained by the Plan were proprietary funds and were “higher-cost” than other investment options. Third, the challenged funds consistently underperformed their benchmarks, in “stark contrast” to the Plan’s nonproprietary funds. Finally, the Plan did not have an investment policy statement, a fact that experts for both sides spent much time discussing.

All of this, Mr. Falberg alleged, indicated that the defendants breached their duties of loyalty and prudence by “retaining high-cost, poorly performing mutual funds in the Plan” based on their “own self-interest” and in “disregard for participants.” Mr. Falberg also alleged that the investment committee’s failure to claim fee rebates that were available to other plans violated ERISA’s prohibited transaction restrictions, and that Goldman breached its duty to monitor the Retirement Committee.

The court, however, disagreed on all fronts. The court saw the fiduciary breach claim as turning primarily on Goldman’s lack of an investment policy statement for the plan. Although the plaintiff’s experts testified that having an IPS was a common and indeed “best practice,” and even the defendant’s expert testified that it was one indicia of a well-run plan, because it was not strictly required under ERISA the court concluded that the lack of such a policy did not establish imprudence.

Nor did the court agree that the plan fiduciaries lacked a deliberative process, despite the sparse minute reports from the investment committee’s quarterly and ad hoc meetings. The plaintiff’s expert testified that the minutes of these meetings revealed that the committee at most engaged in a cursory review of the challenged funds. But again, the court focused on the lack of any requirement in ERISA that minute meetings be more robust. Ultimately, the court concluded that Mr. Falberg’s prudence claim failed because he could not show that a prudent fiduciary in Defendants’ position would have acted differently.

With respect to the claims for self-dealing and disloyalty, the court acknowledged that the defendants operated under a conflict of interest with respect to the plan’s investments in the Goldman proprietary funds, but concluded that a conflict of interest alone is not enough to establish a violation of ERISA’s duty of loyalty. Instead, the court held that a plaintiff must show that plan fiduciaries were influenced by the conflict. Because, at most, Mr. Falberg raised the possibility that committee members may have been influenced by a desire to benefit Goldman, but could not point to any evidence demonstrating that they did act for the purpose of advancing Goldman’s interests, the Committee was entitled to summary judgment on the loyalty claim.

The judge also ruled in favor of the Committee on Mr. Falberg’s claim that it engaged in a prohibited transaction by failing to collect fee rebates in the form of revenue sharing on the proprietary mutual funds at issue. Although the court acknowledged that the investments in the Goldman funds were prohibited under ERISA Section 406, the court concluded that it was nevertheless exempt under the Department of Labor’s Prohibited Transaction Exemption 77-3 (“PTE 77-3”). The court concluded that because the Plan was treated the same with respect to the revenue sharing as any other retirement plan which had the same recordkeeper during the same period, this meant the plan was treated “no less favorable basis” than plans in similar circumstances and the transaction was thus exempt under the terms of PTE 77-3.

Finally, the court concluded that the claim against Goldman for failure to monitor the Committee was derivative of and dependent on the fiduciary breach claims against the Committee. Having concluded that those claims failed, the court reached the same conclusion on the monitoring claims and likewise granted summary judgment in favor of Goldman.

At the end of the day, the court appeared impressed by the expertise and credentials of the Goldman Committee members and satisfied that they evaluated the Goldman funds under a prudent, if truncated, process and were not influenced by their conflicts of interests.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Breach of Fiduciary Duty

Third Circuit

Leone v. Olympus Corp. of the Am’s., No. 20-cv-3158, 2022 WL 4280481 (E.D. Pa. Sep. 15, 2022) (Judge Mitchell S. Goldberg). In 2019, the Olympus Corporation of the Americas amended its defined benefit plan to give participants who had not yet started receiving pension benefits the option to elect to receive an immediate lump sum distribution of their plan benefits. Plaintiffs are the 39 individuals who opted to receive these lump sum payments during the available window. They commenced this action against Olympus Corporation, the plan’s administrative committee, and ten individual fiduciaries alleging breach of fiduciary duty under Sections 502(a)(2) and 502(a)(3), equitable estoppel, and detrimental reliance after defendants informed them that their lump sum amounts were calculated using the 2019 interest rates rather than the 2018 interest rates, resulting in estimated values that were about 33% higher than defendants would later inform them they were actually entitled to under defendants’ interpretation of the terms of the amendment. Defendants stated that they were in the midst of distributing the checks to the plaintiffs when they discovered that the actuarial firm they employed to calculate the lump sums had used the lower interest rates resulting in these greater payouts. Accordingly, only six of the 39 plaintiffs received their checks and did not return the overpayments to defendants; the remaining 33 individuals either never received their distribution checks thanks to stop-payments orders issued by defendants or voluntarily returned the overpayments. Defendants moved to dismiss. They argued that the claims failed as a matter of law and that plaintiffs lacked standing. Simply put, defendants argued, and the court agreed, a miscalculation of benefits “is not actionable under ERISA.” An honest mistake, the court opined, is not the type of bad faith action for which a fiduciary can be held liable. Thus, the court sided with defendants and their interpretation of events and concluded that the ERISA breach of fiduciary duty claims failed as a matter of law. Additionally, the court went on to hold that even if the ERISA claims didn’t fail on the merits, plaintiffs lack Article III standing to sue under the Supreme Court’s ruling in Thole v. U.S. Bank because their plan is a defined benefit plan. Plaintiffs’ argument that the fiduciary breach in this instance was not the mismanagement of plan assets that was addressed in Thole, but instead failure to comply with the terms of the plan document which resulted in greatly reduced payouts, was brushed over by the court which circled back to its original posture, stating, “plaintiffs are not entitled to keep the overpayments because no fiduciary duty was breached.” Finally, the court dismissed the Section 502(a)(3) equitable estoppel claim, once again concluding that plaintiffs failed to establish defendants acted in bad faith. However, the six plaintiffs who were paid their lump sum distributions were able to proceed with their fiduciary breach for misrepresentation claim as they sufficiently proved they had detrimentally relied on defendants’ action. For these reasons, defendants’ motion to dismiss was almost wholly granted.

Class Actions

First Circuit

Glynn v. Maine Oxy-Acetylene Supply Co., No. 2:19-cv-00176-NT, 2022 WL 4234761 (D. Me. Sep. 14, 2022) (Judge Nancy Torresen). Participants of the Maine Oxy-Acetylene Supply Company’s employee stock ownership plan (“ESOP”) and Secretary of Labor, Martin J. Walsh, the plaintiffs in this breach of fiduciary duty class action, moved unopposed for preliminary approval of the parties’ settlement agreement. As the court had already certified a class consisting of participants of the ESOP “who sold their shares back to Maine Oxy after the (owners) sold their 51% interest in the company,” the inciting incident of this action, the court understood its role here as evaluating whether the proposed settlement is fair, reasonable, and adequate, and the result of a good faith arm’s length negotiation. In its analysis, the court expressed that it was satisfied that the proposed settlement, totaling $6,330,000, was just that. Specifically, the court emphasized that the $6,330,000 figure, which was based on a $400 per share stock valuation, was exceedingly reasonable given that plaintiffs’ expert’s valuation of the stock ranged from $262 to $467.57, and the $400 per share valuation was “almost exactly what the Class Plaintiffs’ expert would have testified to at trial.” For preliminary purposes, the court also expressed that it found the proposed $7,500 in incentive awards to each of the class representatives to be fair and typical, and the requested $1,200,000 in attorneys’ fees, representing 19% of the total settlement, to also be reasonable. Additionally, the court was convinced that the proposed settlement, which will calculate payments to each class member based on the number of shares allocated under the ESOP, treated the members of the class equitably. Finally, the court was satisfied that the proposed notice was “clear, concise and states in plain language the certified class definition, the class claims, how to request exclusion from the class, and the binding effect of the class judgment.” For these reasons, the court granted preliminary approval of the settlement, approved the proposed notice, and directed the clerk to schedule a final approval fairness hearing.

Second Circuit

The Med. Soc’y of State of N.Y. v. UnitedHealth Grp., No. 16 CIVIL 5265 (JPO), 2022 WL 4234547 (S.D.N.Y. Sep. 14, 2022) (Judge J. Paul Oetken). Plaintiffs in this class action are healthcare providers in New York State who have sued UnitedHealth Group and related entities under ERISA for failing to pay billed facility fees for office-based surgeries. The court held a five-day bench trial in the case last February. The parties then filed post-trial briefing and the court in this order issued its final rulings, finding in favor of defendants on all counts. The court concluded that United’s process for denying facility fees complied with ERISA’s requirements and sufficiently explained to participants why their claims were denied, as the plans’ language did not require United to reimburse providers for billed facility fees when they were submitted by office-based surgery centers. The court reached its conclusion having reviewed a sampling of plan language provided by United. None of the plans the court reviewed required United to pay facility fees to physician offices, and some of them expressly excluded such coverage. The court was particularly persuaded by “the fact that Medicare conventions, other insurers, and New York law support United’s determination that a physician office is not a facility and therefore not entitled to separate facility fees.” The court found this background information helpful in providing context and felt it supported its conclusion that United acted reasonably. Accordingly, the court held that plaintiffs failed to successfully demonstrate that United systematically violated ERISA.

Ninth Circuit

Atzin v. Anthem, Inc., No. 2:17-cv-06816-ODW (PLAx), 2022 WL 4238053 (C.D. Cal. Sep. 14, 2022) (Judge Otis D. Wright II). Plaintiffs in this class action are amputees insured by Anthem, Inc. who have had their claims for a type of prosthetic called “microprocessor-controlled prostheses” denied, either for being investigational in the case of the microprocessor-controlled foot-ankle prostheses (one of the sub-classes), or for being medically unnecessary as defined by the plans for microprocessor-controlled knee prostheses (the other sub-class.) The parties have reached a settlement wherein Anthem has agreed to significant changes to its medical necessity criteria for these prosthetics. The agreed-upon modified criteria are now much less restrictive and are in line with the criteria used by Medicare and other insurers. Furthermore, microprocessor foot/ankle prostheses will no longer be considered investigational under the terms of the settlement, representing “a major shift.” Finally, Anthem has agreed to reprocess the claims of each of the class members under these new criteria and has agreed not to object to paying plaintiffs’ requested $850,000 in attorneys’ fees, $36,833.99 in costs, and $30,000 in incentive awards pending the court’s approval of these amounts. In this order, the court conditionally granted final approval of the settlement pending the distribution of post-approval notice to the class members. The court found the settlement to be not only fair and reasonable but “a very good result for the class.” The court then addressed the motion for attorneys’ fees, costs, and incentive awards. As previously stated, plaintiffs moved for an award of $850,000, which was slightly less than their $882,740.00 lodestar in the case based on 1,098.5 hours of work billed at rates of $900/hour for counsel Robert S. Gianelli, $700/hour for counsel Joshua S. Davis, and $675/hour for counsel Adrian J. Barrio. Because this is a reprocessing class action, no conflict exists between attorneys and class members. The court thus considered its oversight role to be greatly reduced, and accordingly granted the agreed-upon fee award of $850,000, finding it to be reasonable. The same was true of the requested $36,833.99 in costs. However, the court felt that $15,000 incentive awards to each of the two named plaintiffs was excessively high in the Ninth Circuit and reduced the awards to $10,000 each instead.

Disability Benefit Claims

Second Circuit

Provident Life & Accident Ins. Co. v. McKinney, No. 3:19-CV-1325 (SVN), 2022 WL 4120768 (D. Conn. Sep. 9, 2022) (Judge Sarala v. Nagala). Provident Life & Accident Insurance Company brought an ERISA Section 502(a)(3) suit, seeking the equitable relief of recission of an ERISA disability policy, against an insured, defendant Bradley McKinney, after he applied for disability benefits and Provident discovered certain misrepresentations Mr. McKinney had made on his policy application. The policy at issue included a clause providing that “omissions and misstatements in the application could cause an otherwise valid claim to be denied or to be rescinded.” Specifically, Provident Life asserted that Mr. McKinney had falsely represented that he had not received treatment for memory loss, confusion, or speech disruption in the preceding five years, and had also falsely stated that he had not missed one or more days of work due to sickness or injury in the 180 days preceding his application. After Provident filed its lawsuit, Mr. McKinney filed a counterclaim under Section 502(a)(1)(B), asserting that Provident wrongfully denied him benefits, and seeking an order from the court requiring Provident to pay him benefits due under the policy. The parties filed cross-motions for summary judgment. The court stated that its role in ruling on the summary judgment motions revolved around answering the question of whether Mr. McKinney had knowingly made material misrepresentations in his application for the insurance policy, and, if he had, whether those misrepresentations were material to Provident in its decision to issue the policy. Upon examination of the record, the court concluded that there was no genuine dispute of material fact that Mr. McKinney had knowingly made material misrepresentations on his application, as he had been treated for cognitive issues including confusion and speech disruption while he was hospitalized in 2016, and because he had missed a day of work to undergo surgery due to a medical condition. As a result, the court granted Provident’s motion for summary judgment, and denied Mr. McKinney’s summary judgment motion.

Seventh Circuit

McCurry v. Kenco Logistic Servs., No. 22-1273, __ F. App’x __, 2022 WL 4284222 (7th Cir. Sep. 16, 2022) (Before Circuit Judges Easterbrook, Kirsch, and Jackson-Akiwumi). Plaintiff Edith McCurry brought an ERISA Section 502(a)(1)(B) suit after she began experiencing interruptions in her disability benefit payments. Originally, Ms. McCurry named both her former employer, Kenco Logistic Services, as well as the plan’s administrator, Hartford Life and Accident Insurance Company, as defendants in the case. However, Hartford’s motion to dismiss for improper venue was granted by the court, which left Kenco as the sole defendant. Concluding that the evidence in the record clearly demonstrated that Hartford and not Kenco was responsible for all discretionary decisions related to the payment of benefits, the district court held that Kenco couldn’t be liable for the interruptions that Ms. McCurry had experienced. Thus, the district court entered summary judgment for Kenco. Ms. McCurry appealed this decision to the Seventh Circuit, arguing that the district court had failed to view the evidence in the light most favorable to her, the non-moving party, and attempted to demonstrate to the court of appeals that certain evidence sowed doubt as to whether Kenco had in fact made certain decisions that caused her payments to be delayed. The Seventh Circuit felt that Ms. McCurry had failed to “explain the significance of this evidence.” Additionally, the Seventh Circuit pointed out that it was Ms. McCurry’s own failure to adhere to local procedural rules for summary judgment in the district court that had “rendered unrebutted the evidence in the record that Kenco did not influence Hartford’s administration of her benefits.” Given the district court’s broad discretion to enforce local procedural rules of civil litigation, coupled with the Seventh Circuit’s own experience with Ms. McCurry in which she “had flouted the local rules” in previous appeals, the Seventh Circuit not only affirmed the summary judgment ruling but also warned Ms. McCurry “that further frivolous appeals may incur monetary sanctions.”

Discovery

Sixth Circuit

Iannone v. AutoZone, Inc., No. 19-cv-2779-MSN-tmp, 2022 WL 4122226 (W.D. Tenn. Sep. 9, 2022) (Magistrate Judge Tu M. Pham). In this class action, participants of the AutoZone 401(k) Plan have sued the plan’s fiduciaries for breaching their duties under ERISA by failing to control fees and monitor the performance of the plan’s investments. In particular, plaintiffs are challenging the plan’s “most significant investment option”: a proprietary stable value fund called the Prudential Guaranteed Income Fund, which they allege was significantly underperforming. On December 1, 2020, plaintiffs served non-party Prudential with a subpoena seeking information relating to the administrative and service fees it was paid by the plan. The following year, plaintiffs requested additional information and documents from Prudential relating to the stable value products it furnished to other defined contribution plans. That discovery dispute was resolved by a court order in March of this year, wherein the court directed Prudential to produce documents related to the Prudential Guaranteed Interest Fund rates for “the 11 versions of the (guaranteed interest fund) referenced in Plaintiff’s Motion.” Prudential complied with that order and produced the documents. Prudential also made an electronically stored information (“ESI”) production, which included 6,4000 documents. Within its ESI production, Prudential had included a draft of an email instead of a copy of the version of the email that was actually sent, from March 18, 2019, that plaintiffs assert is “the single most important document in the case.” The email was between a managing director at Prudential and an AutoZone Human Resources employee. The version of the email that Prudential produced removed certain key details, and when plaintiffs discovered this discrepancy during their deposition of Prudential’s managing director, they stopped the deposition and filed their present motions, a motion to compel and a motion for sanctions against Prudential. In this order the court denied the motions, holding that Prudential did not engage in discovery misconduct regarding the email and its failure to produce the sent version of the email appeared to the court “to be the result of an ESI oversight rather than bad faith conduct.” This was especially true, the court held, because Prudential has since reexamined its documents and has produced more documents rectifying its mistakes. “Because Prudential has already represented that they have reviewed and corrected the production issue,” the court was unwilling to issue sanctions. Plaintiffs, the court stated, should resume their deposition of Prudential’s managing director now that they have the correct version of the email. Finally, regarding certain third-party subpoenas that plaintiffs served on other 401(k) plans, the court found that plaintiffs were attempting to use them to circumvent its prior discovery order, and therefore also denied plaintiffs’ motion to compel relating to these third-party subpoenas. Accordingly, all of plaintiffs’ motions were denied.

ERISA Preemption

Ninth Circuit

Aton Ctr. v. Northwest Adm’rs, No. 21cv1843-L-MSB, 2022 WL 4229307 (S.D. Cal. Sep. 13, 2022) (Judge M. James Lorenz). Aton Center, Inc. is a healthcare provider of residential inpatient substance use disorder treatment. Aton Center filed suit against defendants Northwest Administrators, Inc. and Innovative Care Management, the administrators of the health insurance policy of a patient, C.P., who received treatment at Aton Center. Aton Center alleged in its complaint that defendants promised to pay usual, customary, and reasonable rates for C.P.’s treatment during a verification of benefits call between the parties. After defendants failed to pay as agreed, Aton Center commenced this suit alleging claims for breach of contract, breach of implied-in-fact contract, promissory estoppel, unfair competition, and fraud. Defendants moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. First, defendants argued that the claims were preempted by Section 514(a) of ERISA. The court disagreed. Instead, it held that Aton Center’s state law causes of action were based “on equitable, tort, and contract principles and premised on Defendants’ alleged representations rather than the plan itself.” Because of this, the court concluded that the claims do not depend on interpreting plan language and are therefore not preempted. Next, the court turned to whether Aton Center’s complaint adequately stated claims, and concluded that it did, and its “allegations (were) sufficient to meet the notice pleading requirement under Rule 8(a)(2),” as well as under the heighted Rule 9(b) standard to plead a fraud claim. Accordingly, the motion to dismiss was denied.

Pleading Issues & Procedure

Eighth Circuit

G.C. v. Automated Benefits Servs., No. 4:22-CV-949 RLW, 2022 WL 4130796 (E.D. Mo. Sep. 12, 2022) (Judge Ronnie L. White). What’s in a pseudonym? That which we call a plaintiff mattered a great deal to the court in this order. Plaintiffs filed this ERISA medical benefits and Mental Health Parity Act violation suit under the initials G.C. and S.C. Plaintiff G.C. is Plaintiff S.C.’s father, and plaintiffs are residents of Michigan. S.C. received treatment for mental health disorders, as well as a substance use disorder, at a residential treatment facility in Texas. Neither of the plaintiffs have identified their full names. Citing Federal Rule of Civil Procedure Rule 10(a), the court stressed that “the title of the complaint must name all the parties,” and emphasized that anonymity is the exception to the presumption against allowing parties to use pseudonyms. Thus, the court would not allow plaintiffs to proceed under their initials absent a motion seeking the court’s permission to do so, in which they identify the factors that would justify allowing them to proceed anonymously. Plaintiffs’ barebones references to the “sensitive nature” of the lawsuit were insufficient to the court. Accordingly, the court ordered plaintiffs to file a request for leave to proceed under pseudonyms/initials by September 23, 2022, or in the alternative, to file an amended complaint under their real names by that same date. Should plaintiffs fail to do this, the court stated that it will dismiss the action for failure to comply with Rule 10(a).

Withdrawal Liability & Unpaid Contributions

Sixth Circuit

Polly’s Food Serv. v. United Food & Commercial Workers Int’l Union – Indus. Pension Fund, No. 2:21-CV-12895-TGB-KGA, 2022 WL 4277516 (E.D. Mich. Sep. 15, 2022) (Judge Terrence G. Berg). Plaintiff Polly’s Food Service, Inc. is an employer which has withdrawn from a multi-employer pension plan administered by defendant United Food & Commercial Workers International Union – Industry Pension Fund. The parties are currently in arbitration to resolve a withdrawal liability dispute. Plaintiff commenced this action seeking declaratory relief that it is not required to continue making interim withdrawal liability payments, and injunctive relief from continuing to make such payments. Plaintiff is required to make these payments under the “pay now dispute later” rule of the Multiemployer Pension Plan Amendments Act (“MPPAA”). The court in this order dismissed the case, holding that no special circumstances exist that warrant judicial intervention in the arbitration dispute. “MPPAA requires the parties to arbitrate the dispute and judicial intervention is impermissible at this juncture.” The court expressly stated that Sixth Circuit precedent makes clear that “a district court errs when it rules on MPPAA claims that are pending in arbitration.” For this reason, defendant’s 12(b)(6) motion to dismiss was granted.



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