The U.S. District Court for the Northern District of California has ruled against Franklin Templeton’s twin motions for dismissal and summary judgement of a lawsuit alleging self-dealing within the company’s defined contribution retirement plan, among other claims.
The district court’s ruling also consolidates the case with a similar lawsuit filed in August 2016, given the closely related matters raised by plaintiffs in that challenge. Together, the complaints allege the defendants breached their fiduciary duties by causing the Franklin Templeton retirement plan to invest in proprietary funds offered and managed by the firm and its subsidiaries, when better-performing and lower-cost funds were available.
According to the plaintiffs, all 40 mutual funds offered by the plan during the proposed class periods were managed by Franklin Templeton or its subsidiaries. The plan also included a company stock fund, which invests in common stock of Franklin Templeton, and a collective trust, managed by State Street Global Advisors, which is intended to track domestic large-capitalization stocks as represented in the S&P 500 Index. Prior to 2015, the S&P 500 Index Fund was the only passively managed, and only non-proprietary, option in the plan, the complaints allege.
The now-consolidated case has received one prior ruling from the district court, which rejected Franklin Templeton’s motion for summary adjudication. That motion had unsuccessfully argued that the original complaint violates a covenant not to sue contained in the agreement the lead plaintiff signed when he was terminated.
This new ruling to consolidate the cases and allow them to proceed comes just about a week after the parties appeared for a hearing before the court, on April 3, 2018.
Concerning the motion for summary judgement, the Franklin Templeton defendants asserted that plaintiff’s suit should be barred by a covenant not to sue in a severance agreement. The court disagrees, according to the following line of logic: “In defendants’ view, the release and covenant not to sue broadly promises that the employee, plaintiff, releases all claims including ERISA claims and will not bring any lawsuit relating to those claims. Plaintiff argues, however, that the release is subject to the carve-out and the carve-out covers this lawsuit. The carve-out provides an exception for ‘any right that relates to … the employee’s vested participation in any qualified retirement plan.’ Plaintiff argues that her suit seeks to vindicate rights that relate to her vested participation in the plan. Regardless of whether the severance agreement applies to plaintiff’s claims, the Ninth Circuit’s holding in Bowles v. Reade prevents its enforcement here.”
In that case, the Ninth Circuit held that a plan participant cannot settle, without the plan’s consent, a § 502(a)(2) breach of fiduciary duty claim seeking “a return to the plan and all participants of all losses incurred and any profits gained from the alleged breach of fiduciary duty.”
The text of the new district court decision details several counterarguments to this conclusion, but the judge is not swayed.
Concerning the motion to dismiss, Franklin Templeton argued the court should dismiss the complaint on a number of diverse grounds. The firm suggested the first-to-file doctrine bars plaintiff’s suit, and that plaintiff fails to state a claim on all four asserted causes of action. None of these approaches was successful. For example, the court states in no uncertain terms that it will not apply the first-to-file rule here: “Where two duplicative suits are pending in the same district, the Ninth Circuit has applied the claim-splitting doctrine rather than the first-to-file rule.” Each of the subsequent arguments alleging that plaintiffs fail to state a claim similarly fail.
It should be noted that Franklin Templeton has strongly denied these allegations of inappropriate self-dealing. The firm shared the following statement with PLANADVISER: “This second lawsuit was filed by the same law firm that filed the pending Cryer action against the Company, on behalf of a plaintiff who is already a member of the Cryer class. Both actions are premised on the same alleged core facts and seek duplicative relief for the identical class. The court’s decision to consolidate the actions does not change the underlying nature of the litigation or afford the plaintiffs the prospect of any additional remedies. Franklin Templeton takes pride in its 401(k) plan, which offers a generous matching program and provides employees with a diversified line-up of investment choices, including proprietary and non-proprietary funds. The Company is defending against the litigation aggressively.”
The full text of the decision is available here.