Northwestern University workers who took their lawsuit over the school’s retirement plan to the US Supreme Court revived part of their lawsuit Thursday, in a Seventh Circuit opinion that attorneys say eliminates certain defenses and could lead to more lawsuits.
The US Court of Appeals for the Seventh Circuit’s decision reviving two claims against Northwestern did something the Supreme Court declined to do when it weighed the case in 2022: it articulated a pleading standard for claims of fiduciary breach tied to retirement plan fees and investment options.
According to the appeals court, a breach claim will fail when there’s an obvious, alternative explanation for the fiduciary’s conduct that plan participants can’t overcome. But when each side’s explanation is equally reasonable—when the “alternative inferences are in equipoise"—the participant’s claim will survive a motion to dismiss, the court said.
Northwestern had pushed for a higher pleading standard, arguing that participants challenging a particular fiduciary action—like the use of an allegedly high-cost record keeper—must show that a better course of action was “actually available” to the plan.
The court rejected this standard, saying it “overreads” the Supreme Court’s Northwestern opinion and improperly attempts to import the “heightened” pleading standard the high court established for Employee Retirement Income Security Act cases involving drops in the value of a retirement plan’s employer stock. Under that standard, announced in 2014’s Fifth Third Bancorp v. Dudenhoeffer, retirement plan fiduciaries typically won’t be liable for failing to protect against a stock drop unless plan participants identify some legal, alternative action they could have taken that wouldn’t be more likely to harm the plan.
Applying these principles, the Seventh Circuit allowed two claims against Northwestern to move forward: one challenging its plan recordkeeping fees, and one claiming the plan offered expensive retail share class funds instead of identical institutional share classes that cost less.
The decision could affect more than a dozen retirement plan fee challenges pending in courts throughout the Seventh Circuit, including those against Reynolds Consumer Products LLC, Marmon Holdings Inc., Dover Corp., Cook Group Inc., and NorthShore University HealthSystem.
The Seventh Circuit’s opinion appeared to depart from the questions the Supreme Court told trial courts to focus on when weighing these cases, Meaghan VerGow, a partner with O’Melveny & Myers LLP in Washington, told Bloomberg Law. The Supreme Court emphasized that plan fiduciaries can choose among a range of reasonable options in managing their plans, but the Seventh Circuit’s analysis focuses more on whether plan participants have identified a plausible alternative action the fiduciary could have taken, she said.
“Focusing on the question whether a plaintiff’s proposed alternative course of conduct was available to the fiduciary does not answer the question of whether the course the fiduciary actually pursued was reasonable for the particular plan, in view of the circumstances particular to that plan,” she said.
VerGow, whose practice includes representing employers and retirement plan fiduciaries, said the Seventh Circuit’s standard provides “little predictive guidance” as to how these cases will be resolved at the pleadings stage.
“When you’ve got a mushy pleading standard, what that spells is more litigation,” she said.
No Heightened Standard
Mark G. Boyko, a partner with Bailey & Glasser LLP in Missouri who represents retirement plan participants, called the decision a “really detailed opinion which in many ways protects plan participants’ ability to enforce their rights under ERISA.”
It also ends any argument that the Dudenhoeffer pleading standard applies outside the context of a retirement plan that offers stock in the sponsoring employer, he said.
That’s huge, Boyko said, because a heightened pleading standard on a claim challenging recordkeeping fees would mean that a plan participant would have to do their own request for proposals for these services “long before filing their case.”
Instead, “it’s enough to show that other plans were able to get lower fees by taking steps plaintiffs plausibly allege the defendant could have done, and that other recordkeepers plausibly would have performed the same or comparable services for a lower price,” he said.
VerGow said she was surprised by the Seventh Circuit’s suggestion that Dudenhoeffer announced a pleading standard that’s unique to cases involving employer stock plans. The primary holding in Dudenhoeffer “is exactly the opposite—that courts had erred in applying a unique pleading standard to such cases,” VerGow said.
The Northwestern case—like hundreds of recent ERISA lawsuits—accuses retirement plan fiduciaries of mismanaging the plan by allowing fees to reach excessive levels. Northwestern prevailed in both the district court and on appeal, but the Supreme Court vacated the Seventh Circuit’s opinion favoring the school in 2022.
The justices unanimously rejected the Seventh Circuit’s “categorical rule” that would excuse a plan’s bad or expensive funds if good ones are also offered, but they resisted announcing other rules to guide judges in considering whether these cases are viable.
Since then, decisions in these cases have been mixed. The Seventh Circuit rejected a challenge to retirement plan fees in a case against Oshkosh Corp. in 2022, taking a narrow interpretation of the Supreme Court’s Northwestern opinion. The Ninth Circuit revived lawsuits against Trader Joe’s Co. and Salesforce.com Inc., while the Sixth and Eighth circuits issued employer-friendly decisions largely favoring CommonSpirit Health Inc., TriHealth Inc., and MidAmerican Energy Co.
The Seventh Circuit’s opinion was issued by Judges Diane S. Sykes, David F. Hamilton, and Michael B. Brennan.
A Northwestern spokesman said the school “is pleased that the omnibus attack on the University’s management of its retirement plans has been narrowed to a set of claims that have now survived a motion to dismiss.”
“The University looks forward to addressing these claims with a full factual record,” he said.
An attorney representing the plan participants didn’t immediately respond to a request for comment.
Willkie Farr & Gallagher LLP represents Northwestern. Schlichter Bogard & Denton LLP represents the plan participants.
The case is Hughes v. Nw. Univ., 2023 BL 96269, 7th Cir., No. 18-2569, 3/23/23.
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