The Ninth Circuit’s recent decision in Bafford v. Northrop Grumman (April 15, 2021) affirmed the district court’s dismissal of the plaintiffs’ breach of fiduciary duty claims under ERISA but vacated the district court’s holding that state-law professional and negligent misrepresentation claims were preempted.
Northrop Grumman (Northrup), sponsor of the ERISA-governed retirement plan at issue, delegated administration of the plan to an administrative committee (the Committee). The Committee, in turn, contracted with a record keeper to provide outside administrative services. One of the services offered by the record keeper was an online benefits portal to assist plan participants in estimating pension benefits.
The plaintiffs, utilizing this benefits portal, requested statements showing their monthly pension benefit based on participant-entered assumptions. The statements created using these assumptions grossly overestimated the benefits to which they were entitled. The plaintiffs then alleged that Northrup, the Committee and the record keeper breached their fiduciary duties and failed to provide benefit information required under ERISA. In addition, the plaintiffs alleged that the record keeper was liable for professional negligence and negligent misrepresentation.
The Ninth Circuit’s Analysis
Regarding the first issue, the Ninth Circuit upheld the lower court’s determination that calculation of benefits according to a formula is not a fiduciary function and, therefore, they did not breach a fiduciary duty. ERISA provides that “an entity is a fiduciary under ERISA to the extent it has or exercises any discretionary authority, control, or responsibility in the management or administration of an ERISA plan.” 29 U.S.C. § 1002(21)(A)(i), (iii). The Ninth Circuit clarified that “[t]o state a claim for breach of fiduciary duty under ERISA, a plaintiff must allege that (1) the defendant was a fiduciary; and (2) the defendant breached a fiduciary duty; and (3) the plaintiff suffered damages.” See 29 U.S.C. § 1109(a); see also Mathews v. Chevron Corp., 362 F.3d 1172, 1178 (9th Cir. 2004).
The court further noted that there are two types of fiduciaries under ERISA:
- Named fiduciary: a named fiduciary is a party designated in a plan instrument.
- Functional fiduciary: a functional fiduciary is a person who exercises discretionary control over management or administration of a plan.
Given this distinction, the court clarified that for a party to be held liable as a functional fiduciary, “the plaintiff must allege that the defendant was performing a fiduciary function during the purported violation.” In this case, the action being taken was ministerial in function and was not fiduciary in nature.
The second issue raised in this case was whether ERISA preempted the state-law professional negligence and negligent misrepresentation claims against the record keeper. The court overturned the lower court’s holding here, finding ultimately that these claims were not preempted. The court reasoned that professional negligence claims are based on common law negligence principles, and “[t]hese laws do not act ‘immediately and exclusively on ERISA plans, and the existence of an ERISA plan is not essential to these laws’ operation” — findings essential to an ERISA preemption analysis.
Faegre Drinker Perspective
Though there have been no findings on the validity of the plaintiffs’ negligence assertions, this case serves as an excellent reminder of the importance of administrative accuracy in providing information to plan participants. It also provides helpful clarification of the Ninth Circuit’s interpretation of fiduciary duties as they relate to ERISA preemption.