In Abbott, Seventh Circuit Refines Applicability of Class Action Device in Defined Contribution Challenge

by Goodwin

On August 7, 2013, the U.S. Court of Appeals for the Seventh Circuit took what it called “the next step” in its analysis of when a class may be certified in a case alleging breach of ERISA fiduciary duties with respect to a defined contribution plan, after it first addressed the question in its January 2011 decision, Spano v. Boeing Co., reported in Goodwin Procter’s March 30, 2011 ERISA Litigation Update.  In Abbott v. Lockheed Martin Corporation, No. 12-3736, 2013 WL 4010226, a panel comprised of the same judges who decided the Spano case reversed denial of a class that was “more focused” than the one it rejected in Spano, and remanded the case to the trial court, allowing a class of 401(k) participants who invested in a single fund available under their plan to proceed to trial. 


Abbott is one of many cases challenging the fees associated with 401(k) plan investments.  Through a number of previous rulings, the district court had narrowed the case down to three claims:  (i) the administrative fees paid by the plan were excessive; (ii) the stable value fund investment option was imprudently managed resulting in underperformance, and (iii) the company stock fund investment option was imprudently managed due to allegedly excessive fees and a high level of cash held in the fund.  The trial court had once before certified a class, though the decision had been remanded by the Seventh Circuit in 2011 based on Spano v. Boeing.  After Spano, the trial court again ruled on class certification, with one of the classes it declined to certify receiving interlocutory review by the Seventh Circuit.

The Trial Court Decision as to the Challenged Class

After remand, the trial court certified two classes, one with respect to the administrative fee claim and a second with respect to the stock fund.  However, it declined to certify a third class of participants who invested in the stable value fund during a six-year period when the fund underperformed relative to a specified index.  The court below had held that, in attempting to navigate the Seventh Circuit’s earlier Spano decision, the plaintiffs created a fatal issue – asking the court to use the class certification mechanism to “backdoor” the contested question of underperformance with their chosen benchmark.  Because the trial court had not ruled substantively on whether such alleged underperformance constituted any breach of duty, it declined to certify the stable value class. 

In its decision, the Seventh Circuit addressed only the stable value proposed class.

The Seventh Circuit Finds That Certification Was Appropriate

Preliminary to its discussion of class certification, the Seventh Circuit rejected the defendants’ challenge to the constitutional standing of the sole named plaintiff who was invested in the stable value fund – and whose account outperformed the index he selected – holding that there could be harm aside from underperformance with the index. 

Turning to the class issues, the appellate court held that simply allowing a class definition that makes reference to underperformance of a fund to an index is not tantamount to accepting that the index is the proper measure of harm or breach.  The court observed that the class definition is simply a “tool of case management” and does not, as defendants contended, “sneak into the case a theory of liability that was rejected at summary judgment.”

The court went on to explain why certification of the single, stable value fund class was consistent with Spano.  It explained that the class in Spano was not limited to a single fund and, indeed, it was not apparent from the complaint in Spano which fund(s) were challenged “or why.”  The Seventh Circuit explained that Spano stood for the proposition that a combination of a broad class and vague claims would inevitably create “intra-class conflict of the sort that defeats both typicality and adequacy-of-representation requirements” of the Federal Rules of Civil Procedure 23(a).  It found, by contrast, that the class in Abbott was “considerably narrower than those at issue in Spano” and that the nature of stable value funds were such that there was little risk that some investors would reap a windfall by mismanagement such that a conflict would exist for a class comprised solely of investors in a stable value fund.

Postscript on Spano

On September 19, 2013, six weeks after Abbott was decided by the Seventh Circuit, the district court in Spano granted in part the plaintiffs’ amended motion for class certification, and certified a class and four sub-classes.  The class was comprised, again, of all plan participants, but was limited to a six-year period and specified that all participants paid recordkeeping fees.  One subclass was comprised of participants in all mutual funds during that period under the theory that every fund was “laden with imprudently excessive fees,” and the three remaining sub-classes corresponded to individual fund choices for specified periods of time.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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