‘Mega-Class’ Suit Threat in 5th Cir. Alarms Benefits Providers

Companies providing administrative services to workplace benefit plans fear a federal appeals court in Louisiana may soon greenlight “mega-class” lawsuits that leave them vulnerable to possible civil litigation from nearly all their clients.

The US Court of Appeals for the Fifth Circuit heard oral arguments last week in a case brought under the Employee Retirement Income Security Act that would certify a class of nearly 300,000 workers in 3,300 different plans that use Texas-based Fringe Benefit Services Inc. as their plan provider.

Multi-plan ERISA cases that involve thousands of individual plan participants are an alluring new target for plaintiffs attorneys that threaten to upend the market for benefit plan service providers, critics warn. Supersized classes may create too high a cost for third-party partners wary of treading into strict fiduciary territory.

“The bigger the class, the bigger the settlement,” said Chantel Sheaks, vice president for retirement policy at the US Chamber of Commerce.

Plaintiffs in the Fifth Circuit claim Fringe acted as a fiduciary to their plans and violated ERISA by directly charging their own health and retirement plan trustees excessive fees that were passed off to workers in the form of higher premiums and lower pension returns.

Justices in the case are left to determine whether a district court in Texas erred by certifying a class of plaintiffs that encompass nearly all the employees nationwide whose employers contract with Fringe to provide worker benefits. They’ll weigh whether a handful of workers have the constitutional standing to represent thousands of potentially unique circumstances and if broad class certification ran afoul of civil procedure.

The US District Court for the Western District of Texas has twice certified a class that covers “all participants in and beneficiaries of employee benefit plans” funded by two trusts that Fringe has established for its clients. Those trusts represent what one Fifth Circuit judge probingly called the “lowest common denominator” during last week’s oral arguments.

Different Fees, Different Lawsuits

Fringe Benefit Services, like most recordkeeping firms, negotiates different fee arrangements for each of the plans it does business with, meaning the appropriate common nexus would be individual plans, not the trusts by which they’re funded, Sheaks said. One set of participants in a single plan couldn’t possibly fairly represent the interests of all participants in all plans Fringe services, she added.

The US Court of Appeals for the Second Circuit said as much late last year when it overruled a lower court’s decision to certify a class of all plans that the Teachers Insurance & Annuity Association provides with retirement plan loan services. The court took issue with a lack of concern the district court judge showed in determining the effect different interest rates had on each of the plans potentially involved in the class.

“It looks like the circuits may finally be saying, ‘Wait a minute, wait a minute, we can’t certify a class action this massive,’” said Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council. “And we think that’s the right answer: You can’t. We certainly are looking for ways that we can address the sort of inappropriate rise in massive class action suits, because a lot of times, it causes real harm.”

Large-class proponents say the practice is explicitly authorized under ERISA and that it empowers large numbers of individuals who have only minor damages to pool their resources around a common cause. AARP and consumer legal advocacy group Public Justice both filed briefs in support of the case against TIAA.

By aggregating lawsuits, the plaintiffs bar can put defendants in “a much tougher spot,” said Nicholas Paston, a Covington & Burling LLP litigator who specializes in class action suits involving ERISA and tax issues.

One class that represents all of the health and retirement plans a single company does business with gives lawyers more leeway in negotiating a settlement and can open up more doors for gathering evidence.

The risk for even larger plan providers, such as Fidelity Investments Inc. or The Vanguard Group Inc., could be catastrophic, according to Sheaks. The precedent courts set in establishing massive classes could one day see plaintiffs cornering companies that manage assets for tens or even hundreds of thousands of plan participants around the country, she said.

“The factual differences are important,” Sheaks said. “ERISA was designed to allow a participant to bring suits on behalf of a plan, not on behalf of every plan in the US.”