The defense’s dismissal motions have failed in the Employee Retirement Income Security Act (ERISA) lawsuit known as Pinnell v. Teva Pharmaceuticals USA, meaning the case can now proceed to discovery and trial before the U.S. District Court for the Eastern District of Pennsylvania.
In the underlying suit, the plaintiffs—three former employees of Teva Pharmaceuticals USA—claim that the defendants breached their ERISA fiduciary duties by imprudently managing the company’s retirement plan. Distinguishing this challenge from other ongoing fiduciary breach lawsuits is the fact that the plaintiffs do not challenge the performance of any plan investment. Rather, their claims focus more on the fees paid by the plan’s participants, alleging the defendants violated ERISA’s duties of prudence and loyalty by failing to select the least expensive investment options and permitting participants to pay excessive recordkeeping fees.
In the new ruling, the district court points out that its supervising court of appeals—i.e., the 3rd United States Circuit Court of Appeals—has recently reviewed the level of specific pleading necessary for a participant in an employer’s 401(k) plan to state a breach of fiduciary duty claim against the plan and employer fiduciaries under ERISA. Additionally, the U.S. Supreme Court just this week denied a different plan’s petition for a review of the 3rd Circuit standard, meaning it is the appropriate standard to apply here.
“Participants, mindful of our Court of Appeals’ direction and Rule 11, [have successfully] amended their complaint and plead charts, comparative studies and specific facts necessary to proceed into discovery,” the new ruling states. “We deny the fiduciaries’ motion to dismiss.”
The court cites other important precedent-setting cases in its ruling, including in the following summary paragraph: “Defendants moved to dismiss arguing the participants failed to allege Teva’s fiduciary process had fatal flaws as required by our court of appeals’ decision in Renfro, instead complaining of conduct laying squarely within the plan fiduciaries’ legal discretion. The participants argued their specific factual allegations more closely mirror those our Court of Appeals found sufficient at this preliminary stage in Sweda rather than the conclusory allegations dismissed in Renfro. We agree with the participants at this preliminary stage.”
Details from the Ruling
The text of the decision then goes into some detail about these two precedents, noting first that nine years ago in Renfro v. Unisys Corporation, the 3rd Circuit affirmed a dismissal of a complaint for failure to state a claim of breach of fiduciary duty under ERISA.
“Mr. Renfro alleged Unisys breached its fiduciary duties in composing the mix and range of investment options in the Unisys defined contribution [DC] plan,” the decision recounts. “But Mr. Renfro did not challenge the prudence of any particular investment option, instead focusing broadly on the plan fiduciaries’ decision to include an array of Fidelity retail mutual funds. Neither did Mr. Renfro compare the Unisys plan’s investment options with similar, lower-cost alternatives.”
Based on these facts, the 3rd Circuit held that the range of investment options and the characteristics of those included options—including the risk profiles, investment strategies and associated fees—are “highly relevant and readily ascertainable facts against which the plausibility of claims challenging the overall composition of a plan’s mix and range of investment options should be measured.” In then dismissing the complaint, the 3rd Circuit considered, among other factors, the Unisys plan’s offering of 73 distinct investment options, its inclusion of a variety of risk and fee profiles within the offered retail mutual funds, and its inclusion of several non-mutual fund investment vehicles such as collective trusts and company stock.
“Our court of appeals dismissed Mr. Renfro’s ‘conclusory assertions’ and ‘general allegations of prudence and disloyalty’ for failure to state a claim,” the new ruling explains.
On the other hand, in Sweda v. University of Pennsylvania, the 3rd Circuit last year reversed a district court’s dismissal of a fiduciary duty claim more specifically pled than in Renfro.
In that matter, the ruling states, “Our Court of Appeals emphasized Renfro did not hold [that having] ‘a meaningful mix and range of investment options [automatically] insulates plan fiduciaries from liability for breach of fiduciary duty,’” the new decision explains. “The University of Pennsylvania plan included, depending on the year, 78 to 118 investment options.”
Among her allegations, the lead plaintiff in Sweda claimed the University of Pennsylvania selected and retained higher cost retail class shares despite the availability of lower-cost institutional class shares, and that it failed to solicit competitive bids to assess the reasonableness of plan recordkeeping fees. Importantly, the plaintiff “included a table comparing plan options with readily available, cheaper alternatives.”
“Ms. Sweda also compared plan fiduciary decisions with the practices of similarly situated fiduciaries,” the new decision notes. “Our Court of Appeals held that while Ms. Sweda may not have directly alleged how the University of Pennsylvania mismanaged the plan, she provided substantial circumstantial evidence from which the District Court could ‘reasonably infer’ that a breach had occurred. The University of Pennsylvania argued it employed a prudent process, which our Court of Appeals described as a merits-based argument ‘misplaced’ at the early stage of a motion to dismiss.”
The ruling goes on to point to other relevant cases from different appellate circuits across the United States which, according to the court, bolster this decision against early dismissal.