The United States District Court for the Central District of California has once again ruled in the lawsuit Alas vs. AT&T.
The court has previously ruled in this matter in favor of AT&T’s motion to dismiss the Employee Retirement Income Security Act (ERISA) challenge, which also includes allegations of wrongdoing against Fidelity and Financial Engines. The court’s earlier decision explicitly left room for another amended complaint and was based on questions of timeliness and a lack of standing, rather than on the facts of the relevant compensatory arrangements in place between the defendants.
In its new ruling, the district court sides in part with the plaintiffs and in part with defendants. The court also leaves room for re-pleading of the plaintiffs’ failed arguments, making the filing of a third amended complaint likely before any allegations can advance to trail.
By way of context, on November 6, 2017, Plaintiffs Julio Alas, Robert Bugielski, and Chad Simecek, individually as participants in the AT&T Retirement Savings Plan and as representatives of all persons similarly situated, filed a second amended class complaint under ERISA. The amended complaint again named as defendants AT&T Inc., AT&T Services, and some 50 individual fiduciary defendants. On August 27, 2018, defendants filed a motion to dismiss the second amended class complaint, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Plaintiffs subsequently filed their opposition on September 24, 2018, and defendants filed their reply on October 8, 2018.
As case documents show, the defendants chose Fidelity Investments Institutional Operations Company LLC to provide the plan’s recordkeeping and administrative services. The defendants also chose Fidelity Brokerage Services LLC to provide self-directed brokerage accounts to plan participants through Fidelity’s BrokerageLink service. In addition, defendants chose Financial Engines Advisors LLC to provide individualized computer-based investment advice to plan participants.
The second amended complaint argues that, beginning no later than 2012, the AT&T defendants failed to leverage the plan’s size to obtain reasonable recordkeeping fees or review Fidelity’s total compensation, and consequently paid fees that were significantly above market rate, costing plan participants “tens of millions of dollars in unnecessary recordkeeping expenses during the class period.”
Plaintiffs allege that these failures “were not simple imprudence but were motivated in part by defendants’ self-interest,” as AT&T chose Fidelity for its own benefit, rather than for the benefit of the plan’s participants. According to plaintiffs, AT&T and Fidelity had a “larger agreement in which plan participants paid high rates for Fidelity’s services to the plan, while Fidelity provided discounts on services to other employee benefit plans, resulting in cost savings for AT&T.”
According to the compliant, through BrokerageLink, Fidelity allowed plan participants to invest in a wide range of mutual funds that are not included among the plans’ designated investment alternatives through an account that is referred to as a “brokerage window” or “self-directed brokerage account.” The plaintiffs suggest plan participants who used BrokerageLink compensated Fidelity through a variety of brokerage fees, and that defendants controlled the mutual funds that would be offered to the plan’s participants through BrokerageLink and offered “retail shares” of certain mutual funds, even when less expensive “institutional shares” of the same fund were also available.
The complaint further states that, starting in 2015, the plan introduced participants to Financial Engines, which offers automated investment advice to participants.
“This merely required Fidelity to provide a secure communications link from participants’ accounts to Financial Engines, but Fidelity received millions of dollars each year for this ‘fixed level of service,’” the complaint states. “Defendants similarly failed to take this into account when determining Fidelity’s aggregate compensation.”
Based on this, plaintiffs allege that because Financial Engines provided services to Fidelity for less than was being charged to plan participants who subscribed to that service, the payments amounted to an “illegal kickback to Fidelity.”
Before ruling on whether these allegations should be dismissed outright or heard in open court, the district court steps through its own procedural rules and requirements as stipulated by Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). As the court explains, here the AT&T defendants seek dismissal of the complaint under Rules 12(b)(1) and 12(b)(6) on the following grounds: First that the plaintiffs lack standing; second that the BrokerageLink claim is untimely; third that plaintiffs fail to state a claim; and fourth that AT&T and the individually named fiduciary defendants are not appropriate defendants.
On the first matter, the court considers claims having to do with the filing of the plan’s Form 5500, as well as claims having to do with the offering of BrokerageLink.
“Even when considered alongside the second amended complaint’s discussion of the mutual funds available through BrokerageLink and the alleged ‘larger agreement’ between defendants and Fidelity, the bare allegation that the transaction fees were excessive is akin to a label or conclusion, as opposed to a plausible inference that [the lead plaintiff] suffered a concrete injury,” the decision states. “Accordingly, the court grants defendants’ motion to dismiss as to the second amended complaint’s allegations regarding BrokerageLink, with leave to amend, and declines to rule on the parties’ arguments regarding the timeliness of the claim.”
Plaintiffs have more success regarding their Form 5500 arguments.
“Defendants also contend that plaintiffs do not have standing to assert claims regarding the challenged disclosures on the plan’s Form 5500s, as any inaccurate 5500 disclosures did not harm plaintiffs ‘in any concrete way,’” the decision states. “Courts commonly hold that plaintiffs seeking purely injunctive remedies of ERISA’s disclosure requirements do not need to demonstrate actual injury, however. The 9th Circuit has found that a requirement that plaintiffs prove individual harm when seeking injunctive relief ‘would be to say that the fiduciaries are free to ignore their duties so long as they do no tangible harm,’ a result that ‘is not supported by the language of ERISA, the common law, or common sense.’”
According to the court, plaintiffs here thus have standing to allege that defendants did not report all indirect compensation on the Form 5500s, which would in fact be a violation of their reporting obligations under ERISA’s disclosure requirements. Accordingly, the court denies the AT&T defendants’ motion to dismiss plaintiffs’ claims to injunctive relief regarding the Form 5500s.
Stating a claim
The court then turns to the matter of whether the plaintiffs have adequately stated their claims. In ruling on this question, the court points out that the 9th Circuit has acknowledged directly that “circumstances surrounding alleged breaches of fiduciary duty may frequently defy particularized identification at the pleading stage” because plaintiffs may not “be in a position to describe with particularity the events constituting the alleged misconduct.”
The district court here finds that plaintiffs “are in just such a position.”
“Defendants maintain that even if plaintiffs do not have to plead facts about the fiduciary process directly, they still must plead facts that plausibly suggest that the fiduciary process was defective,” the decision states. “Here, plaintiffs have done so through their allegations that plan participants paid excessive administrative costs, and that defendants received a discount on administrative services in exchange for allowing Fidelity to overcharge plan participants as part of a ‘larger agreement.’ As the court must accept plaintiffs’ allegations as true, rather than ‘look beyond the complaint and make a factual determination based on incomplete evidence,’ the court concludes it is plausible that the defendants breached their fiduciary duties.”
Accordingly, the AT&T defendants’ motion to dismiss the second amended complaint for failure to state a claim as to breaches of fiduciary duty is denied.
A win for individual defendants
Finally, the court rules in favor of AT&T’s arguments that the individual fiduciary defendants should be dismissed from this litigation.
“Plaintiffs have named 50 John Does as individual defendants in this action, but have alleged no facts demonstrating any plausible liability for individual defendants, as they must in order to bring an ERISA claim against a fiduciary in their individual capacity,” the court explains. “The plaintiffs’ opposition to defendants’ motion to dismiss again cites no authority in arguing that the John Does should remain as defendants, other than it not being ‘nefarious, or prejudicial, or even burdensome.’”
Accordingly, the court grants plaintiffs’ motion to dismiss the individual defendants, with leave to amend.