Department of Justice Changes Stance on Class Action Waivers in Favor of Employers

In a fascinating turn of events, the United States Department of Justice (“DOJ”) switched sides in a critical pending Supreme Court case last Friday. The three consolidated cases—National Labor Relations Board v. Murphy Oil USA, Case No. 16-307, Epic Systems Corp. v. Lewis, Case No. 16-285 and Ernst & Young LLP v. Morris, Case No. 16-300—have been closely watched as the Supreme Court is expected to resolve a growing circuit split over whether an employment contract that requires an employee to waive his or her right to bring or participate in a class action violates the National Labor Relations Act (“NLRA”).  The NLRA protects employees’ rights to engage in concerted activity concerning wages, hour and working conditions.  Employers are increasingly relying on such waivers, which are an effective way to avoid costly class action litigation.  To read a more in-depth analysis of this pending case, click here. Jackson Lewis represents Murphy Oil before the Supreme Court.

Under the Obama Administration, the government had defended the NLRB’s position that class action waivers violated the NLRA and were unenforceable. Now, under President Trump, the DOJ has reversed course.  In an amicus curiae brief filed on Friday, DOJ expressly acknowledged that it had “previously filed a petition…on behalf of the NLRB, defending the Board’s view” that class action waivers were unenforceable, but stated that “[a]fter the change in administration, the [DOJ] reconsidered the issue and has reached the opposite conclusion.”

Of course the change does not guarantee that the Supreme Court will agree with DOJ. It does, however, appear to make that outcome more likely – especially given the recent appointment of Justice Gorsuch to the Court, breaking an ideological stalemate. To read more on Justice Gorsuch’s judicial philosophy, click here.

Stay tuned for more on this important issue affecting the workplace law landscape!

 

Supreme Court: Plaintiffs May Not Voluntarily Dismiss Case to Appeal Class Certification Decision

Plaintiffs may not voluntarily dismiss their class action claims upon receiving an adverse class certification decision and subsequently invoke 28 U.S.C. § 1291, the general rule that appeals can be taken only from a final judgment, to appeal the decision as a matter of right, the U.S. Supreme Court has ruled. Microsoft Corporation v. Baker, No. 15-457 (June 12, 2017).

Background
In this case, the plaintiffs were denied Rule 23(f) permission to appeal the district court’s refusal to grant class certification. Rather than pursuing their individual claims to final judgment on the merits, the plaintiffs stipulated to a voluntary dismissal of their claims “with prejudice,” but reserved the right to revive their claims if the Court of Appeals reversed the district court’s certification denial. Microsoft stipulated to the dismissal, but maintained that respondents would have “no right to appeal” the order striking the class allegations after thus dismissing their claims.  The U.S. Court of Appeals for the Ninth Circuit, in San Francisco, relying on Berger v. Home Depot USA, Inc., 741 F.3d 1061 (9th Cir. 2014), accepted the plaintiffs’ appeal and reversed the district court’s decision rejecting class-based adjudication. The Ninth Circuit stated that “in the absence of a settlement, a stipulation that leads to a dismissal with prejudice does not destroy the adversity in that judgment necessary to support an appeal” of a class certification denial. Therefore, the Ninth Circuit, after reviewing the district court’s decision, ultimately held that the lower court had abused its discretion in striking the plaintiffs’ class allegations. (For a full summary of the procedural history or an analysis of the Supreme Court oral argument, please see our article, Supreme Court Hears Argument on Appellate Jurisdiction after Denial of Class Certification.)

Question is Jurisdiction
The Supreme Court agreed to review the case to resolve a circuit conflict over the following question: Do federal courts of appeals have jurisdiction under § 1291 and Article III of the Constitution to review an order denying class certification (or, as here, an order striking class allegations) after the named plaintiffs have voluntarily dismissed their claims with prejudice?

Going Too Far
Justice Ruth Bader Ginsburg, writing for a court majority (that included Justices Anthony Kennedy, Stephen Breyer, Sonia Sotomayor, and Elena Kagan), stated that the plaintiffs’ voluntary-dismissal tactic “invites protracted litigation and piecemeal appeals.” Stressing that the final judgment rule (now codified in § 1291) preserves the proper balance between trial and appellate courts, minimizes harassment and delay that would result from repeated interlocutory appeals, and promotes the efficient administration of justice, the majority found the plaintiffs’ attempt to secure appeals as of right from adverse class-certification orders stretched § 1291 too far.

The Court concluded that because the device subverted the final-judgment rule and the process Congress has established for refining that rule and for determining when nonfinal orders may be immediately appealed, the majority of the Court found the plaintiffs’ tactic did not give rise to a “final decision” under § 1291.
While the plaintiffs maintained that their position promoted efficiency (because after dismissal with prejudice, the case is over if the plaintiff loses on appeal) the Court disagreed. It found the plaintiffs overlooked the prospect that plaintiffs with weak merits claims will readily assume the risk in order to leverage class certification for a hefty settlement.

Additionally, the majority was concerned that if plaintiffs’ voluntary dismissal tactic was allowed, Rule 23(f)’s careful calibration — as well as Congress’ intent behind the rule — would be “severely undermined.” Further, the plaintiffs’ theory would permit only plaintiffs, and never defendants, to force an immediate appeal of an adverse certification ruling.

Accordingly, the majority did not find it appropriate to disturb the rulemaking process carefully selected by Congress to govern in this context. The judgment of the Ninth Circuit was therefore reversed, and the case remanded for further proceedings consistent with the Court’s opinion.

Concurrence
The concurrence, led by Justice Clarence Thomas (joined by Chief Justice John Roberts and Justice Samuel Alito) agreed with the majority that the Court of Appeals lacked jurisdiction over the plaintiffs’ appeal, but would have grounded that conclusion in Article III of the Constitution, instead of 28 U.S.C. § 1291.

Justice Thomas reiterated that the judicial power of the United States extends only to “cases” and “controversies,” which limits the jurisdiction of the federal courts to issues in which the parties maintain an “actual” and “concrete” interest. Here, he stated, the plaintiffs’ appeal from their voluntary dismissal did not satisfy this jurisdictional requirement. Once the plaintiffs asked the district court to dismiss their claims, they consented to the judgment against them and disavowed any right to relief from Microsoft. The parties, thus, were no longer adverse to each other on any claims and the Court of Appeals could not “affect the[ir] rights” in any legally cognizable manner.
***

While this decision is not surprising, a different outcome would have had severe consequences for companies defending against class actions. Microsoft issued a statement praising the decision, commenting, “This case was about following procedural rules that Congress established and that work for everyone. No party should be able to do an end-run around these rules and have rights that the other party doesn’t get. We’re grateful to the Supreme Court for its time and consideration of this issue.”
For more information or to discuss the potential implications of this ruling, please contact the Jackson Lewis attorney with whom you regularly work.

UNANIMOUS SUPREME COURT DECISION IN FAVOR OF “CHURCH PLAN” DEFENDANTS

Today, the Supreme Court handed a long-awaited victory to religiously affiliated organizations operating pension plans under ERISA’s “church plan” exemption. In a surprising 8-0 ruling, the Court agreed with the Defendants that the exemption applies to pension plans maintained by church affiliated organizations such as healthcare facilities, even if the plans were not established by a church. Justice Kagan authored the opinion, with a concurrence by Justice Sotomayor.  Justice Gorsuch, who was appointed after oral argument, did not participate in the decision.  The opinion reverses decisions in favor of Plaintiffs from three Appellate Circuits – the Third, Seventh, and Ninth.

For those of you not familiar with the issue, ERISA originally defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.”   Then, in 1980, Congress amended the exemption by adding the provision at the heart of the three consolidated cases.  The new section provides: “[a] plan established and maintained . . . by a church . . . includes a plan maintained by [a principal-purpose] organization.”  The parties agreed that under those provisions, a “church plan” need not be maintained by a church, but they differed as to whether a plan must still have been established by a church to qualify for the church-plan exemption.

The Defendants, Advocate Health Care Network, St. Peter’s Healthcare System, and Dignity Health, asserted that their pension plans are “church plans” exempt from ERISA’s strict reporting, disclosure, and funding obligations.  Although each of the plans at issue was established by the hospitals and not a church, each one of the hospitals had received confirmation from the IRS over the years that their plans were, in fact, exempt from ERISA, under the church plan exemption because of the entities’ religious affiliation.

The Plaintiffs, participants in the pension plans, argued that the church plan exemption was not intended to exempt pension plans of large healthcare systems where the plans were not established by a church.

Justice Kagan’s analysis began by acknowledging that the term “church plan” initially meant only “a plan established and maintained . . . by a church.” But the 1980 amendment, she found, expanded the original definition to “include” another type of plan—“a plan maintained by [a principal-purpose] organization.’”  She concluded that the use of the word “include” was not literal, “but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition.”

Thus, according to Justice Kagan, because Congress included within the category of plans “established and maintained by a church” plans “maintained by” principal-purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements. Although the DOL, PBGC, and IRS had all filed a brief supporting the Defendants’ position, Justice Kagan mentioned only briefly the agencies long-standing interpretation of the exemption, and did not engage in any “Chevron-Deference” analysis.  Some observers may find this surprising, because comments during oral argument suggested that some of the Justices harbored concerns regarding the hundreds of similar plans that had relied on administrative interpretations for thirty years.

In analyzing the legislative history, Justice Kagan aptly observed, that “[t]he legislative materials in these cases consist almost wholly of excerpts from committee hearings and scattered floor statements by individual lawmakers—the sort of stuff we have called `among the least illuminating forms of legislative history.’” Nonetheless, after reviewing the history, and as she forecasted by her questioning at oral argument (see our March 29, 2017 Blog, Supreme Court Hears “Church Plan” Erisa Class Action Cases), Justice Kagan rejected Plaintiffs’ argument that the legislative history demonstrated an intent to keep the “establishment” requirement.  To do so “would have prevented some plans run by pension boards—the very entities the employees say Congress most wanted to benefit—from qualifying as `church plans’…. No argument the employees have offered here supports that goal-defying (much less that text-defying) statutory construction.”

In sum, Justice Kagan held that “[u]nder the best reading of the statute, a plan maintained by a principal-purpose organization therefore qualifies as a `church plan,’ regardless of who established it.”

Justice Sotomayor filed a concurrence joining the Court’s opinion because she was “persuaded that it correctly interprets the relevant statutory text.” Although she agreed with the Court’s reading of the exemption, she was “troubled by the outcome of these cases.”  Her concern was based on the notion that “Church-affiliated organizations operate for-profit subsidiaries, employee thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA.”  This concern appears to be based on the view that some church-affiliated organizations effectively operate as secular, for-profit businesses.

 Takeaways:

 Although this decision is positive news for church plans, it may not be the end of the church plan litigation.  Numerous, large settlements have occurred before and since the Supreme Court took up the consolidated cases, and we expect some will still settle, albeit likely for lower numbers.

In addition, Plaintiffs could still push forward with the cases on the grounds that the entities maintaining the church plans are not “principal-purpose organizations” controlled by “a church.”  If you maintain a church plan, reach out to us with any concerns about the impact of, and your ability to rely on, this decision.

Timing Is Everything: District Court in New York Approves CAFA Removal Two Years After Case Filing

In a somewhat unusual ruling, a New York federal court denied an unpaid intern’s attempt to remand a putative wage-hour class action against Oscar de la Renta to state court even though the case was removed to federal court under the Class Action Fairness Act (“CAFA”) approximately two years after the case was filed.

CAFA

Under CAFA, federal courts have jurisdiction over class actions if the defendant establishes “a reasonable probability” that the class has more than 100 members, the parties are minimally diverse, and the amount in controversy exceeds $5 million. Specific, enumerated exceptions to CAFA include the “local controversy” and the “home state” exceptions.  Generally, under both exceptions, the federal court cannot assert jurisdiction over class actions that involve “local” parties and controversies (i.e., involving parties and controversies from the forum state).

Removal After Two Years Considered Timely

Principle to the Court’s finding was a rejection of Plaintiff’s argument concerning timeliness.  Plaintiff argued that notice of removal was untimely since it was filed more than 30 days after the employer could have determined that the amount in controversy exceeded $5 million “with a reasonable amount of intelligence” by reviewing its own records.

When Oscar de la Renta ultimately conducted its own internal investigation, including a review of it s documents to determine the number of individuals who interned during the statutory period, it learned the proposed class contained approximately 600 individuals and the $5 million amount in controversy threshold was satisfied.  As a result, it sought removal.

Plaintiff argued the employer needed to review its own records to determine that the CAFA requirements were met, and that failing to do so for two years was unreasonable.

The Court disagreed.  The Complaint stated the potential class exceeded 40 individuals, and the Court found this alleged number of proposed class members would not yield an amount in controversy approaching $5 million.  Instead, with just 40 alleged class members, the amount in controversy would be less than $500,000.  The Court held that CAFA does not require a defendant to look beyond the pleadings and related documents to determine if the requirements are met, and failure to conduct an investigation earlier provided no basis for concluding that removal was untimely.  The Court also found that the CAFA exceptions did not apply as the Plaintiff failed to prove their application absent anecdotal arguments.

Takeaway

While we would not go so far as to say that “it’s never too late” to apply CAFA, this ruling shows that, even years after filing, the CAFA requirements can be met for the first time, and removal to federal court may be an option. As a result, defendants should always take a fresh look at each stage of the litigation to see if the requirements have been met in the first instance.  But once the CAFA requirements are satisfied, remove quickly.  Failure to do so may result in the removal application being denied.  After all, “time makes fools of us all.”

UPDATE ON UNIVERSITY SECTION 403(b) CASES: INCONSISTENT RULINGS

As a result of rulings on motions to dismiss within a day of each other (May 10 and 11, 2017, respectively), Emory University and Duke University must continue to defend claims challenging aspects of their Section 403(b) retirement plans in plaintiffs’ proposed class actions: Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP; and Clark v. Duke Univ., M.D.N.C., No. 1:16-cv-01044.  As we have previously reported, these cases are two out of a series of twelve proposed class actions filed against the retirement plans of 12 prominent American universities, challenging various aspects of plan management, including excessive fees and fiduciary prudence.

In granting in part and denying in part the Emory defendants’ motion to dismiss, Judge Charles Parnell found that the plaintiffs could move forward with a claim that choosing retail-class shares (with higher expense ratios) over institutional-class shares is imprudent.  The plaintiffs allege that Emory could have but did not use its bargaining power to negotiate lower cost fees, and that no reasonable fiduciary would “choose or be complacent with being provided retail-class shares over institutional-class shares.”  (Order, Doc. 61, p. 7, Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP (May 10, 2017)).

A novel theory proceeding in both the Duke and Emory cases is the claim that the defendants were imprudent to hire multiple record keepers, where consolidating services with one record keeper could have resulted in lower fees for participants.

Plaintiffs in both cases also raised the novel theory that the defendants acted imprudently by offering too many investment options—111 at Emory, and more than 400 at Duke. Judge Catherine Eagles, who issued the ruling in the Duke case, allowed this claim to go forward.  In contrast, Judge Charles Parnell disagreed with the Emory plaintiffs.  In his ruling, he reasoned that “[h]aving too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.”  (Order, Doc. 61, p. 7, Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP (May 10, 2017)).

In Duke, the court dismissed as time-barred plaintiffs’ claims that Duke imprudently “locked” itself into offering TIAA-CREF products and recordkeeping, because the actual act of “locking” into the arrangement with TIAA-CREF occurred more than six years before the complaint was filed.  Judge Eagles disagreed with the plaintiffs’ argument that their claim is based on Duke “maintaining” the arrangement with TIAA-CREF, as though the failure to monitor and remove CREF stock from the plan were a continuing violation.

In contrast, the “locked in” claim is moving forward in Emory.  Emory made the same arguments that the “locked in” claim is time-barred; however, Judge Parnell was persuaded by plaintiffs’ argument that they challenge not just the initial arrangement, but the maintenance of the arrangement and failure to monitor and remove CREF stock within the six years preceding the complaint.  However, the Emory plaintiffs may only recover damages resulting from being “locked in” to TIAA-CREF that occurred within six years before the filing of the complaint.

We’ll continue to post updates as decisions in the other University cases are handed down. In the meantime, if you have any questions about these cases or issues, please contact René Thorne (thorner@jacksonlewis.com), one of the firm’s senior ERISA class action litigators.

ALERT: Senate confirms Acosta as Secretary of Labor

Today the U.S. Senate approved Alexander Acosta as Secretary of the U.S. Department of Labor by a vote of 60-38.  Click here to read more background information on Acosta.  Acosta’s nomination was previously approved by the U.S. Senate Health, Education, Labor and Pensions Committee by a 12-11 party line vote in March.

Chief among the issues awaiting Acosta is what position the DOL will take with respect to the new overtime rule announced by the Obama administration in 2016, which more than doubled the minimum salary threshold for the FLSA’s white collar exemptions to $47,476 annually.  After a District Court in Texas issued a nationwide injunction in December blocking the rule from taking effect, the case was appealed.  The U.S. Court of Appeals for the Fifth Circuit recently granted the government’s request for additional time to file its final reply brief.   Stay tuned.

 

 

ALERT: Senate confirms Neil Gorsuch to the Supreme Court

Today, after a three-day hearing, the Senate confirmed Neil Gorsuch to the Supreme Court.  Gorsuch was approved by a 54 to 45 vote after a rule change that allowed him to be confirmed with a simple majority.  To see Jackson Lewis’ detailed analysis of Neil Gorsuch, click here.  Gorsuch is expected to be sworn in within the next week, potentially as soon as Monday, and will replace the late Justice Antonin Scalia.  Senate Judiciary Chairman Chuck Grassley stated of Gorsuch, “This brilliant, honest, humble man is a judge’s judge and he will make a superb Justice.” 

 

Judge Decertifies Class Based on Plaintiffs’ Differing Accounts of Their Responsibilities

Those who follow developments in wage and hour class actions know that challenges to the exempt status of assistant managers are quite common. Such cases often hinge on a detailed analysis of the actual job duties performed—with the plaintiffs claiming that the entire class performed little or no managerial work and the employer claiming that management was the primary duty of the position.  A recent decision from a federal court in New York involving this issue is likely to have a significant impact on similar cases going forward.

On March 29, 2017, a District Judge in the Southern District of New York rejected a motion for Rule 23 certification and decertified an FLSA collective based largely on the plaintiffs’ own varying accounts of their management responsibilities.  Scott v. Chipotle Mexican Grill, Inc. (a copy of the decision is available here) was brought by seven current and former Chipotle “apprentices” from six different states (along with 516 opt-in plaintiffs).  The apprentice role is akin to that of an assistant manager.  Plaintiffs occupied that position while being groomed for the position of general manger. As expected, plaintiffs alleged that they performed little to no managerial work and were improperly classified as exempt.  Chipotle argued that the apprentices were exempt under the executive exemption, the administrative exemption, or both.

Chipotle had one job description for the apprentice position at issue, which applied nationwide. Discovery also revealed that Chipotle had previously conducted an internal audit of the apprentice position and concluded that it was properly classified as exempt and should be nationwide because apprentices at all locations had the “same responsibilities.”

Deposition testimony elicited from both the named plaintiffs and several of the opt-ins suggested that, in practice, responsibilities were not so uniform. Generally speaking, apprentices at stores with higher sales volumes had greater managerial responsibilities, whereas some apprentices at lower volume locations indicated otherwise.  For example, some plaintiffs testified that they had almost no say in hiring decisions, while others testified that they routinely made hiring recommendations that were ultimately followed.

Despite finding that the requirements for Rule 23(a) certification were met, the court emphasized that because plaintiffs’ sought certification under Rule 23(b)(3) they also had to establish predominance and superiority. The court found that both of those elements were lacking.

The court emphasized the “disparate accounts from [a]pprentices” when addressing both elements and appeared to find the testimony of one opt-in plaintiff who had worked as an apprentice at two different locations especially persuasive. She testified that at one location she worked under a general manager who “limited her leadership responsibilities.”  In the other location, however, there was no general manager and she “made all the decisions for the restaurant.”  This testimony, which the court deemed indicative of disparities in responsibilities depending on location, led the court to conclude that individualized inquiries would be necessary to determine whether each apprentice was exempt—or, in other words, that individual issues would inevitably predominate.

The court also emphasized that the various state law claims asserted by plaintiffs were not identical. Two of the states involved (Colorado and Washington) had strict percentage limitations governing how much time an employee can spend on non-exempt work while still qualifying for an exemption—and even those limitations were different.  The court denied the plaintiffs’ motion for class certification.

But the court did not stop there. For many of the same reasons, the case was also deemed unfit for resolution as a collective action under the FLSA—and the court granted Chipotle’s motion to decertify the 516-person collective.  Any other decision, the court observed, “would reduce Section 216(b)’s requirement that plaintiffs be ‘similarly situated’ to a mere requirement that plaintiffs share an employer, a job title, and a professed entitlement to additional wages.”

Class certification or decertification is typically the most critical juncture in the case. The Chipotle decision is a significant arrow in the quiver of employers defending class and collective actions involving a diverse set of workers whose responsibilities differ appreciably.

SUPREME COURT HEARS “CHURCH PLAN” ERISA CLASS ACTION CASES

On Monday, the Supreme Court heard oral argument in the consolidated “church plan” cases, Advocate Health Care Network v. Stapleton, St. Peter’s Healthcare System v. Kaplan, and Dignity Health v. Rollins.  As an initial matter, unless the Senate confirms Neil Gorsuch in the very near future, the case will be decided by an eight-Justice court.  While it’s impossible to say for sure how Justices will vote, there may be cause for optimism for the Defendants (against whom the lower courts ruled in all three cases).

At first, Justices Sotomayor and Kagan both seemed hostile to the Defendants’ view of the construction of the church-plan exemption.  But this view seemed to change during the Plaintiffs’ presentation.  Justice Sotomayor commented to Plaintiffs’ counsel “I’m torn,” and – saying that ERISA’s church-plan provision “could be read either way” – asked counsel how to “break the tie.”  Both Sotomayor and Kagan also appeared to struggle with the idea that Plaintiffs’ reading would likely exclude some of the organizations that the 1980 amendments to the church plan exemption were intended to encompass.

Justices Alito and Kennedy seemed to focus on church-plan sponsors’ long-standing reliance on the IRS/PBGC interpretations of the exemption.  Defendants’ counsel noted that their liability for penalties alone could exceed $66 billion.  Justice Alito seized on Plaintiffs’ counsel suggestion that the church-plan cases were “primarily about forward-looking relief” (as opposed to penalties), going so far as to ask counsel to disavow seeking penalties in light of Defendants’ reliance on IRS letters.

Justice Kennedy also seemed concerned that hundreds of plans had sought and obtained the blessing of the IRS and/or PBGC, and could still face liability 30 years later.  Chief Justice Roberts appeared to align with this view, asking Plaintiffs’ counsel why those agencies took a view opposite to Plaintiffs’ interpretation.

Not surprisingly, Justice Ginsberg seemed to be squarely in Plaintiffs’ camp, and dismissed other Justices’ concerns by noting that the lower courts could fashion a remedy that takes Defendants’ good faith into account.

Justice Breyer took a pragmatic approach – he asked several hypotheticals, pressing Plaintiffs’ counsel to say whether a plan would be a church plan in each scenario.  This line of questioning seemed to highlight for Justice Sotomayor that Plaintiffs’ reading would deny church-plan status to many of the plans that lobbied for the 1980 amendments.

As usual, Justice Thomas was silent throughout.

In short, although any prediction would be speculative, the Justices’ questions suggest that Alito and Kennedy would take the defense view, based on the reliance concerns, likely joined by Roberts.  And it’s probably safe to assume Justice Thomas would side with these Justices.

Justices Sotomayor and Kagan could go either way, but if they adopt the Defendants’ view of the statute, it will probably be based on their concerns that the Plaintiffs’ reading ignores the purpose of the 1980 amendments (i.e., exempting plans maintained by church-affiliated groups).  If the conservative wing of the Court holds together, then the addition of either Sotomayor or Kagan would yield a victory.

However, if the usual ideological split prevails, a 4-4 tie would leave the adverse rulings intact.

DISGORGEMENT CLAIMS CONTINUE TO CONFOUND COURTS IN ERISA CLASS ACTIONS

Courts continue to be split over the availability of disgorgement and “accounting for profits” in ERISA class actions involving in-house investment plans. On March 3, 2017, in Brotherston v. Putnam Investments, LLC, No. 1:15-cv-13825-WGY (D. Mass. March 3, 2017), the court declined to resolve the dispute at the summary judgment stage, allowing the certified class of employees to move forward with their claim that the company should be forced to disgorge profits earned from defendant’s in-house 401k plan.  Previously, the court denied defendant’s motion to dismiss this claim.

This decision is in contrast to recent decisions in other courts. In Urakhchin v. Allianz Asset Management of America LP, 2016 U.S. Dist. LEXIS 104244 (C.D. Cal. Aug. 5, 2016), plaintiffs brought claims against fiduciary and non-fiduciary defendants involved in the plan under Section 502(a)(3) 29 U.S.C. §1132(a)(3). The court granted the non-fiduciary defendant’s motion to dismiss plaintiffs’ disgorgement claim, finding that the plaintiffs failed to allege that any of the money sought to be disgorged could be traced to particular funds in those defendants’ possession.

Relying in part on the Urakchin decision, the court in Moreno v. Deutsche Bank Americas Holding Corp., 2016 U.S. Dist. LEXIS 142601 (S.D.N.Y. Oct. 13, 2016), likewise held that plaintiffs could not state a claim for disgorgement and accounting of funds against the defendants, which included both fiduciary defendants and defendants whom the court determined Plaintiff had not sufficiently pled as fiduciaries.  The Moreno plaintiffs asserted that they were only seeking “an accounting of profits” under 29 U.S.C. section 1132(a)(3) and that therefore the traceability requirement did not apply.  The court held, however, that because the complaint failed to limit the request for equitable relief to an accounting, and the plaintiffs did not allege facts to meet the traceability requirement, the claim should be dismissed.

More recently, in Wildman v. American Century Services, LLC, 2017 U.S. Dist. LEXIS 31700 (W.D. Mo. Feb. 27, 2017), the court held that plaintiffs had sufficiently met the traceability requirement by alleging that the payments in question were “traceable to specific transactions that have been taken on specific dates.”  The court noted that the complaint alleged that the non-fiduciary defendant employer, American Century, had actual or constructive knowledge of the circumstances that rendered the transactions unlawful.  Accordingly, the plaintiffs were allowed to proceed with their disgorgement claim against both fiduciary and non-fiduciary defendants.

The upshot is that in some of these cases, the reason for the dismissal appears to turn on fiduciary status. In the Urakhchin and Moreno cases, the claims were asserted by non-fiduciary parties alone.  As the Urakhchin court explained, accounting and disgorgement claims are claims for equitable relief, but claims seeking these remedies against non-fiduciary parties are generally considered legal (i.e., not equitable) claims.  As a result, the court required tracing.

On the other hand, in both the Wildman and Putnam cases, the disgorgement claims were asserted against fiduciary and non-fiduciary parties (in Putnam, Plaintiff argued that all defendants were fiduciaries, but the employer/plan sponsor defendant and its CEO are disputing that claim in their pending motion for summary judgment), but the courts do not appear to have drawn distinctions based on fiduciary status.

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