Lawsuit Regarding Computer-Generated Advice to 401(k) Participants Revs Up Against Financial Engines

Dechert LLP

Last week, in a complaint dated August 8, 2014, plaintiffs commenced a lawsuit in the US District Court for the Eastern District of Texas against Financial Engines, Inc. and Financial Engines Advisors L.L.C. asserting a patent-infringement claim relating to the use of certain computer-based advice strategies used in connection with the investment of accounts under "401(k)" and similar participant-directed retirement plans.

By way of background, in 2001, the US Department of Labor (the "DOL") indicated in an Advisory Opinion issued to SunAmerica that a computer-based investment program designed to provide independent and unconflicted investment advice to participants in participant-directed retirement plans did not generally involve a "prohibited transaction" under the Employee Retirement Income Security Act of 1974, as amended. Previously, in 1997, TCW had obtained from the DOL an individual exemption for a similar program.

The SunAmerica opinion enabled providers to offer qualified computer-generated investment advice to plan sponsors, and allowed plan sponsors in turn to offer the advice to plan participants and beneficiaries, without the need to obtain a prohibited transaction exemption. In 2006, Congress codified the permissibility of a computer-based approach by adding a new statutory exemption for computer-based advice if the advice meets various specified conditions. A number of providers now offer computer-based investment advice to employers that then make such advice available to their employees.

The lawsuit against Financial Engines asserts that the plaintiffs in the case own patents that have been and are being infringed upon by Financial Engines. The complaint alleges that, "[a]s of 2014, Financial Engines’ existing contracts cover 7.9 million workers with $824 billion in their 401(k) plans and it is managing $92 billion of those assets." The complaint seeks, among other things, a permanent injunction against the alleged infringement by Financial Engines, and an as-yet undetermined amount of monetary damages.

It is possible that the owners of the patents in question might take the position that there are other providers who are infringing on the patents in question, as well.

Financial institutions that offer or are contemplating offering computer-based advice, as well as employers that make use of the advice under their plans, may wish to familiarize themselves with the pending lawsuit to see if it has any relevance to their own situations.

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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