Penn Employees Win Revival of Suit Over Retirement Plans (2)

University of Pennsylvania employees will get a second shot at their lawsuit accusing the school of mismanaging their retirement plans.

The U.S. Court of Appeals for the Third Circuit revived the employees’ proposed class action May 2, saying they can proceed with their breach of fiduciary duty allegations under the Employee Retirement Income Security Act. The 2-1 panel partly reversed a 2017 dismissal.

Penn had been the first of more than a dozen elite U.S. colleges to defeat such claims outright after employees launched a wave of nearly identical lawsuits in 2016. Yale, Vanderbilt, Johns Hopkins, Cornell, NYU, Columbia, Duke, Emory, MIT, and Princeton face similar suits.

But Penn will now have to face claims that it chose investment options with high fees that performed no better than less costly alternatives. The employees also accused Penn of failing to solicit competitive bids by plan administrators, retaining underperforming options, and failing to highlight strong investments that it offered alongside many more mediocre options.

The employees alleged enough to survive Penn’s motion to dismiss their breach of fiduciary duty claims, Judge D. Michael Fisher wrote for the court.

“It is not enough to avoid misconduct, kickback schemes, and bad-faith dealings,” Fisher said. “The law expects more than good intentions.”

The court rejected the argument that the suit failed to “rule out every lawful explanation” for its plan choices. That requirement, from the landmark U.S. Supreme Court ruling in Bell Atlantic Corp. v. Twombly, is specific to antitrust cases, it said, expressly declining to apply it in the ERISA context.

Congress intentionally balanced the rights of employees against the possible burden of frivolous litigation, Fisher said.

“Fiduciary discretion must be exercised within the statutory parameters of prudence and loyalty,” he wrote. If Penn’s plan management actually was prudent, it will have the chance to prove that later in the litigation, Fisher said.

Judge Patty Shwartz joined the majority opinion.

Judge Jane Richards Roth dissented. Imposing ERISA liability on fiduciaries that act in good faith would deter employers from offering retirement packages in the first place, she said.

The employees’ claim that the Penn plan engaged in prohibited transactions with plan administrators wasn’t revived. That could have exposed fiduciaries to liability for “necessary services,” the appeals court said.

The Third Circuit’s partial reversal means the stakes just got significantly higher, observers told Bloomberg Law.

“There’s a one-two punch in that not only do you now wind up with more significant legal fees. You wind up really materially increasing the risk that you could lose the case,” Andrew Oringer, partner at Dechert LLP in New York City, said of the latest development.

American Council on Education general counsel Peter McDonough cited Roth’s warning about that very thing. “The university is in an unenviable position in which it has every incentive to settle quickly,” Roth opined, adding that additional costs (research fees, individual liability, prospective damages) are now in play.

McDonough said ACE, which filed a friend of the court brief in the case, is disappointed with the ruling.

“The filing of these sorts of lawsuits reflects opportunism,” he wrote in an email. “Our hope is that other courts in the pipeline to hear similar cases will come down very differently than the Third Circuit.”

The plaintiffs are represented by Profy Promisloff & Ciarlanto and Schlichter Bogard & Denton. Penn is represented by Morgan Lewis & Bockius.

The case is Sweda v. Univ. of Penn., 3d Cir., No. 17-3244, 5/2/19.