SIGNIFICANT TRENDS IN FINANCIAL SERVICES LITIGATION

Transcription

1 SIGNIFICANT TRENDS IN FINANCIAL SERVICES LITIGATION PHILLIP E. STANO STEUART H. THOMSEN BRIAN C. SPAHN CHRISTOPHER W. HAMMOND NATANYAH GANZ SUTHERLAND ASBILL & BRENNAN LLP 1275 Pennsylvania Avenue, NW Washington, D.C (202) Annual Meeting of The Association of Life Insurance Counsel May 5, 2009

2 TABLE OF CONTENTS I. INTRODUCTION...1 II. AREAS OF INTEREST... 1 A. RETAINED ASSET ACCOUNTS... 1 B. ANNUITIES LITIGATION... 4 C. REVENUE SHARING CLAIMS AGAINST FINANCIAL SERVICE PROVIDERS D. STRANGER OWNED LIFE INSURANCE (STOLI) E. LONG TERM CARE INSURANCE F. JUVENILE SMOKER LITIGATION G. SECURITIES LITIGATION UNIFORM STANDARDS ACT (SLUSA) III. CONCLUSION... 33

3 SIGNIFICANT TRENDS IN FINANCIAL SERVICES LITIGATION 1 Phillip E. Stano Steuart H. Thomsen Brian C. Spahn Christopher W. Hammond Natanyah Ganz I. INTRODUCTION The class action litigation experienced by the life insurance industry in the mid- 90s primarily constituted point of sale putative class actions involving vanishing premiums, improper replacement of life insurance and the sale of life insurance as a retirement product. Although classes were certified in many cases, numerous courts denied class certification on claims involving point of sale theories, reasoning that the alleged misrepresentations made by an agent or company to the class representative could not be extrapolated to the putative class as a whole. In addition, they faced some obstacles trying to pursue national classes with respect to state law claims where the applicable law varied from state to state. As class certifications based on oral misrepresentations became increasingly problematic, the plaintiffs bar developed new theories to achieve their twin goals of class certification and lucrative settlements. One approach has been to address the predominance of Federal Rule of Civil Procedure 23 (or its state counterpart) by applying a products liability approach to the financial products at issue, with plaintiffs frequently alleging that insurers products are inherently unsuitable or deceptive based on their terms and harmful to the consumer irrespective of how they were sold. Other approaches include more frequent assertion of federal claims under ERISA and RICO, in an effort to avoid state law variation issues. This paper explores these and other recent trends in financial services litigation. II. AREAS OF INTEREST A. RETAINED ASSET ACCOUNTS Since the 1980s, many insurers have paid death benefits (and sometimes surrenders) through retained asset accounts. See Many Default to the Retained Asset Account, 101 Nat l Underwriter Life & Health Issue 38, 1997 WLNR (22ed Sept. 22, 1997) (stating that as of 1997, more than 175 life insurers were paying death benefits through retained asset accounts). A retained asset account is an interest-bearing account to which policy benefits are credited. The beneficiary is sent a checkbook on which he or she can write checks up to the amount of the insurance proceeds. If the beneficiary wants to transfer the full amount somewhere else, he or she can do so by writing a check immediately for the full balance. In the meantime, the account earns interest. Indeed, unlike a payment by check, which produces no earnings until the check is deposited, the retained asset account begins to earn interest as soon as it is opened. 1 This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. The opinions expressed within are solely those of the individual authors of this paper and do not necessarily represent the views of Sutherland Asbill & Brennan LLP and/or its past, present or future clients. 1

4 Beginning in 2006, a number of putative class actions have been filed against insurers challenging their use of retained asset accounts. Some of the claims have been brought under state law and some under ERISA (where employee benefit plans are involved). Regardless of which law is invoked, however, there are some common themes in these cases. Plaintiffs typically argue that (a) it was a breach of contract to pay policy proceeds through retained asset accounts; (b) delivery of the retained asset account to the beneficiary does not constitute payment under the policy; (c) by crediting the funds to a retained asset account, the insurer undertook a fiduciary obligation to invest the funds for the benefit of the plaintiff; and (d) the insurer should be required to pay the plaintiff the spread between the insurer s investment earnings and the interest credited to the account. Some of the cases also include allegations that the insurer failed to pay a "competitive" interest rate (where that was allegedly promised) and/or allegations that the insurer failed to disclose that funds would remain part of the insurer s general account assets until such time as checks were presented. Mogel v. Unum Although not the earliest filed case, Mogel v. Unum Life Insurance Co. of America, No. 1:07-cv NMG (D. Mass., filed May 18, 2007), is the first case to reach the appellate courts. Plaintiffs in Mogel assert breach of fiduciary duties claims under ERISA in connection with payment of employer group life insurance benefits through retained asset accounts. The district court granted the insurer s motion to dismiss the complaint. The court rejected the insurer s argument that there was no difference between payment through a retained asset account and a lump sum payment. The court also rejected Unum s argument that plaintiffs section 502(a)(3) argument was precluded by the availability of a section 502(a)(1)(B) claim, characterizing plaintiffs claim as one for profits earned on their benefits, not for the benefits themselves. The court further rejected the insurer s argument that the retained assets were plaintiffs assets and thus could not give rise to fiduciary duties under ERISA, noting its earlier holding that setting up of the retained asset accounts was not the equivalent of providing lump sums to plaintiffs. The court held, however, that the retained assets were not plan assets by virtue of the guaranteed benefit policy provision in Section 401(b)(2) of ERISA. Since plaintiffs allegations of fiduciary status were based on the assertion that the retained assets were plan assets, plaintiffs breach of fiduciary duty claim failed. Mogel v. Unum Life Ins. Co. of Am., 540 F. Supp. 2d 258 (D. Mass. Feb. 4, 2008). The First Circuit reversed, holding that plaintiffs had stated a claim for breach of fiduciary duty. Mogel v. UNUM Life Ins. Co. of Am., 547 F.3d 23 (1st Cir. Nov. 6, 2008) ( Mogel II ). The appeals court rejected the insurer s first argument that the issuance of the checkbook constituted a lump sum payment that concluded its role as fiduciary on the following grounds: The district court found, and we agree, that delivery of the checkbook did not constitute a lump sum payment called for by the policies. As the district court put it, [t]he difference between delivery of a check and a checkbook... is the difference between UNUM retaining or UNUM divesting possession of plaintiffs funds. Mogel I, 540 F. Supp. 2d at 262. Thus UNUM cannot be said to have completed its fiduciary functions under the plan when it set up the Security Accounts and mailed the checkbooks, retaining for its use the funds due until they were withdrawn. UNUM s theory that its mailing of the checkbooks to the beneficiaries and their acceptance formed a unilateral contract is unpersuasive, for until the beneficiaries received the lump sum payments to which they were entitled, UNUM remained obligated to carry out its fiduciary duty under the plan. Mogel II, 547 F.3d at 26. The court s apparent view was that payment is not made until a beneficiary chooses to withdraw funds by presenting a check, because the insurer does not actually part with the funds until then. Yet the court seemed to recognize that delivery of a check would constitute payment, 2

5 even though the insurer does not part with funds until the check is endorsed and presented. The court failed to explain why the unilateral act of the beneficiary should determine when payment is deemed to be made in the case of the retained asset account but not in the case of a check. The insurer s second argument was that the retained assets did not represent plan assets under ERISA and that because plaintiffs breach of fiduciary duty claim assumed that the accounts were plan assets, plaintiff s claim failed. The court of appeals, however, appeared to interpret plaintiffs claim as not dependent on the presence of plan assets and therefore interpreted the insurer s second argument to be that the guaranteed benefit policy provision precluded all fiduciary liability where the plan involved such a policy. Having interpreted the argument in this manner, the court rejected the argument, finding that ERISA s fiduciary provisions extended to activities beyond investment of assets, such as plan management and administration: UNUM s disposition to the beneficiaries of benefits under the plan falls comfortably within the scope of ERISA s definition of fiduciary duties with respect to plan administration. Mogel II, 547 F.3d at 27. The court did not specify what claim for breach of fiduciary duty had been stated in the complaint, but its discussion might suggest that it had in mind a claim that the insurer breached its fiduciary duties by allegedly not paying benefits in accordance with the terms of the plan. The court did not directly address plaintiffs theory that the retained assets constituted plan assets that gave rise to fiduciary duties. In rejecting the insurer s argument that the checkbooks constituted lump sum payments, the court concluded by stating that [s]o here the sums due plaintiffs remain plan assets subject to UNUM s fiduciary obligations until actual payment, citing Commonwealth Edison Co. v. Vega, 174 F.3d 870, (7th Cir. 1999), a case in which the court held that state unclaimed property laws were preempted by ERISA in the case of uncashed pension plan benefit checks, because the funds remained plan assets until the checks were cashed. Mogel II, 547 F.3d at 26. The quoted statement in Mogel, however, was made prior to its discussion of the guaranteed benefit policy provision (which was not at issue in Vega since no insurance was involved), and ultimately there is no analysis in Mogel II of the applicability of the guaranteed benefit policy provision to retained assets. The insurer filed a petition for rehearing making two principal arguments. First, it argued that the ruling that the complaint states a claim for breach of fiduciary duty for failing to administer the plan properly is simply a claim for benefits and that the availability of relief for benefit claims under ERISA 502(a)(1)(B) precludes such a fiduciary breach claim. Second, it argued that the court should withdraw the discussion of plan assets and the guaranteed benefit policy provision as unnecessary dicta and potentially confusing. The court denied rehearing and rehearing en banc. The panel s order denying rehearing held that the insurer had waived the first argument by not raising it prior to its petition for rehearing. In response to the second argument, the panel stated: "The district court's opinion held and Unum's own brief argued explicitly that Unum could not be subject to liability for breach of fiduciary duty because of the guaranteed benefit exemption; our opinion merely addresses why the exemption does not so operate." Mogel v. UNUM Life Ins. Co. of Am., No (1st Cir. Jan. 21, 2009). This statement appears to indicate that the court of appeals was not disturbing the district court s ruling that the retained assets were not plan assets, but rather was holding that plaintiffs had stated a claim that was not dependent on whether plan assets were involved. Since the Mogel II decision was issued, plaintiffs have been citing it in both ERISA cases and state law cases, particularly its holding that delivery of a retained asset account checkbook did not constitute payment. The case is now back before the district court for further proceedings. 3

6 Other Retained Asset Account Cases In Rabin v. MONY Life Insurance Co., No. 1:06-cv LTS-KNF (S.D.N.Y., filed Feb. 1, 2006), plaintiff asserts five state law claims arising out of policy surrenders paid by retained asset account: (1) breach of contract; (2) breach of fiduciary duty; (3) common law fraud and deceit; (4) unjust enrichment; and (5) deceptive practices under NY General Business Law 349. On a motion to dismiss the amended complaint, the court dismissed the common law fraud and deceit claim, but otherwise denied the motion. The court held that a factual record was needed to determine whether (a) allegedly ambiguous contract terms permitted payment through retained asset accounts; (b) whether the interest rate paid was competitive, as represented in certain materials; (c) and whether MONY was a fiduciary. The court also found that it was not clear whether the unjust enrichment claim covered the same subject matter as the contract. Rabin v. MONY Life Ins. Co., No. 1:06-cv LTS-KNF 2007 WL (S.D.N.Y. Mar. 8, 2007). Plaintiff s motion for class certification and a motion for summary judgment by the insurer are pending. Clark v. Metropolitan Life Insurance Co., No. 3:08-cv LRH-VPC (D. Nev., First Am. Comp. filed May 5, 2008), is a putative class action asserting state law claims that the use of a retained asset account constitutes a breach of contract and that the insurer should be required to disgorge the spread on the retained assets on breach of fiduciary duty and unjust enrichment theories. On March 3, the court granted a motion to dismiss both the unjust enrichment claim as precluded by the existence of an express contract and the fiduciary duty claim, but allowed the case to proceed on the contract claim. The court also stated that the facts plead by plaintiffs were sufficient to state a claim for breach of a special or confidential relationship, although no such allegations were stated in the complaint. The court did not rely on or even cite Mogel, although plaintiff had brought it to the court s attention in supplemental briefing. Moore v. Reliance Standard Life Insurance Co., No. 2:08-cv WAP-SAA (N.D. Miss., filed July 3, 2008), initially asserted state law claims similar to those in Clark. After a motion to dismiss was filed and the Mogel decision was issued, however, plaintiff filed an amended complaint on January 8, 2009 reasserting his claim under ERISA alone. A motion to dismiss the amended complaint is pending. Garcia v. Prudential Ins. Co. of America, No. 2:08-cv-5756-JAG-MCA (D. N.J., filed Nov. 21, 2008), asserts state law claims generally similar to those in Clark, except that it adds an additional claim that the agreement specifically governing the retained asset account was also allegedly breached. Faber v. Metropolitan Life Insurance Co., No. 1:08-cv HB (S.D.N.Y., filed Dec. 5, 2008), is an ERISA case filed by some of the same attorneys who filed the Mogel case. Motions to dismiss have been filed in both Garcia and Faber. B. ANNUITIES LITIGATION 1. Sale to Seniors Litigation Claims involving annuities sold to seniors typically involve claims of breach of fiduciary duty, negligence, fraud and civil conspiracy. Recent cases have also alleged violations of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO). The typical contention is that an insurance company improperly characterizes an annuity as a suitable investment for the senior; plaintiffs allege that it is not a suitable investment because it does not allow the senior to make penalty-free withdrawals of all funds invested and that the period during which surrender charges apply may exceed the senior s actuarial life expectancy. Plaintiffs in these cases also allege that the insurance company failed to disclose the penalties associated with the withdrawal of funds from the annuity. 4

7 Earlier complaints against issuers of annuities focused on issues of suitability, but plaintiffs have begun to allege RICO violations, elder abuse, disclosure issues, and claims involving overall product design. This shift is due in part to issues related to class certification. RICO claims have had at least some limited success in getting past the class certification stage. For example, in Yokoyama v. Midland Life Ins. Co., No JMS/KSC (D. Hawaii May 3, 2005), plaintiff alleged three violations of Hawaii s Unfair and Deceptive Trade Practices laws: that the products were inherently unfair or deceptive; that the products were marketed in such a way as to make them unfair or deceptive; and that the products were inherently unsuitable when sold to seniors. (Plaintiffs did not assert a RICO violation.) Plaintiffs in Yokoyama originally alleged that the annuity products were unsuitable for most seniors. A magistrate recommended class certification, but the district court rejected the magistrate s recommendation, finding that common issues did not predominate as there would need to be an individualized inquiry into suitability, each purchaser s situation and the sales pitch made. 239 F.R.D. 607 (D. Hawaii July 2006). Plaintiff amended the complaint to focus on the alleged inherent unsuitability of the products for any investor and the uniform sales material provided to the prospective insureds. The magistrate recommended class certification; but again, class certification was denied. The district court found that individual inquiries would be required into what information was conveyed to annuitants, whether each class members relied on alleged misstatements, individual damages, and individual suitability. The court explicitly rejected the inherent unsuitability argument. 243 F.R.D. 400 (D. Hawaii June 2007). The Ninth Circuit agreed to hear an appeal of the class certification denial under Rule 23(f), which was argued November 20, 2008, and is awaiting a decision. In Negrete v. Allianz Life Ins. Co. of North America, No CAS(MANX) (C.D. Cal., filed Sept. 19, 2005), plaintiff s RICO claim alleged that the insurer conspired to deceive seniors into purchasing unsuitable deferred annuities by misrepresenting the features of the products. Plaintiff claimed that Allianz controlled its Field Marketing Organizations (FMOs) by requiring FMOs and agents to use standardized, Allianz-supplied marketing and sales materials. Plaintiff further contended that no rational senior would have purchased such an annuity had they received adequate disclosures. Plaintiff also brought claims for violations of California statutory law, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment. These claims alleged that FMOs and agents undertook to act as financial planners for class members. The court denied class certification as to plaintiffs breach of fiduciary duty claims and aiding and abetting breach of fiduciary duty claims, but granted class certification on the other claims, including the RICO claim. Even though this complaint alleged misrepresentations as the basis for the RICO claim, the court certified the RICO class because it found that the marketing material was standardized and stated that class certification was appropriate where a common scheme was allegedly used to defraud a large group with similar misrepresentations. The court explained, however, that in arguing that no rational senior would have purchased the annuity had they known the true value of the annuity, plaintiff had accepted a high bar for proving their case. 238 F.R.D. 482, 492 (C.D Cal. Nov. 2006). The same plaintiff has filed another claim, in the same court, against another insurer alleging similar claims. Negrete v. Fidelity and Guaranty Life Ins. Co., No CAS (C.D. Cal., filed Sept. 19, 2005). Defendant s motion to dismiss the state law claims was denied; defendant did not move to dismiss the RICO claims. 444 F. Supp. 2d 998 (C.D. Cal. Jan. 2006). In support of its motion for class certification, plaintiff submitted an expert report detailing the features, costs, and risks of the annuities at issue and addressed whether the insurer made adequate disclosures. Doc. No. 134, 2008 WL (C.D. Cal. Jan. 22, 2008). The expert asserted that [n]o rational class member would purchase F&G s deferred annuities if they realized that they were being asked to purchase investments with lower expected returns and more risk than readily available alternative investments. Before deciding the 5

8 motion for class certification and a pending motion for summary judgment, the court appointed a neutral expert witness, pursuant to Federal Rule of Evidence 706, to evaluate plaintiff s expert s opinion. Daubert hearings were set for March In In re Conseco Insurance Co. Annuity Marketing & Sales Practices Litigation, No RMW, (N.D. Cal. Filed Nov. 17, 2005), plaintiffs alleged that the annuities sold were inherently unsuitable for senior investors. The claims included violations of RICO, financial elder abuse, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraudulent concealment, breach of good faith and fair dealing, and unjust enrichment. The RICO claims alleged that defendants conspired to commit acts of fraud and indecency in gaining the trust of elderly citizens and selling them unsuitable investments. The common scheme was allegedly accomplished through the use of similar plans and methods for sales agents, and standardized marketing materials. The fiduciary claims were dismissed on statute of limitations grounds WL (N.D. Cal. Sept. 30, 2008). The court also dismissed plaintiffs RICO Section 1962 (a) and (c) claims, finding that plaintiffs did not allege that the funds derived from the racketeering injury were used to injure them and that plaintiffs could not establish an enterprise by alleging that a corporation, engaged in its ordinary business, constituted an enterprise. Doc. No. 76, 2007 WL (N.D. Cal. Feb. 12, 2007). The court denied defendants motion to dismiss as to plaintiffs section 1962(b) and (d) claims. Id. Plaintiffs amended complaint attempted to allege a more distinct enterprise, but plaintiffs did not re-allege a 1962(a) violation. Class certification in this case has yet to be decided. Plaintiffs also asserted inherent unsuitability in an MDL proceeding in the Eastern District of Pennsylvania. In re Am. Investors Life Ins. Co. Annuity Marketing & Sales Practices Litig., MDL No MAM (E.D. Pa. filed Oct. 26, 2005). This MDL consists of over a dozen consolidated individual and class actions complaints. Plaintiffs asserted violations of RICO, alleging that defendants engaged in racketeering activity, and used the mails and wires in furtherance of a scheme to defraud plaintiffs by purportedly designing per se unsuitable products and training representatives to sell those products. Plaintiffs also alleged that the insurer was negligent in training sales agents by purportedly training them how to maximize sales without training them how to conduct a suitability determination. Plaintiffs claimed that Defendants victimized Plaintiffs and members of the Class, perpetrating a deceptive fraudulent scheme to sell complex long term deferred annuities, which scheme financially exploits senior citizens as a targeted class when such investments were and are per se unsuitable for them. A consolidated class action complaint was filed and currently both a motion for class certification and a motion for summary judgment are pending. New putative class actions asserting claims with respect to sales of annuities to seniors were filed against Equitrust Life Insurance Company on January 12, 2009 and against American National Life Insurance Company on February 12, Other pending actions involving similar claims include In re National Western Life Insurance Deferred Annuities Litigation, No JM (LSP), 467 F. Supp.2d 1071 (S.D. Cal. Dec ) (Plaintiff s section 1962(a) claim dismissed because plaintiff did not allege an injury arising from the use or investment of racketeering income, but other RICO claims survived the motion; motion for summary judgment pending on the surviving RICO claims); Jones v. Allianz Life Ins. Co. of North America, No. 407-cv SWW (E.D. Ark. filed Mar. 1, 2007) (stayed pending the outcome of Negrete v. Allianz, a class action pending in California); Rowe v. Bankers Life, No (N.D. Ill. filed Jan. 26, 2009) (originally filed in California, then voluntarily dismissed and re-filed in Illinois); and Migliaccio v. Midland National Life Insurance. Co., No. 2:06-cv CAS-MANX (C.D. Cal. Jan. 2007) (motion to dismiss RICO claims denied; motions for class certification and summary judgment pending; Rule 706 expert appointed by court; parties using same experts as in Negrete v. Fidelity, with Daubert hearings scheduled for March). 6

9 In addition to private actions, two states, Minnesota and California, have aggressively pursued insurance companies for selling allegedly unsuitable annuities to senior citizens. Minnesota Attorney General Lori Swanson has filed and settled suits against five of the top sellers of equity-indexed annuities in the United States. The suits against the companies alleged that they sold unsuitable long-term deferred annuities to seniors and misrepresented or failed to disclose terms of those annuities. The Minnesota settlements, which allow approximately fifteen thousand seniors to seek refunds totaling $700 million, were with Midland National Life Insurance Company (settled in December 2008), North American Company for Life and Health Insurance (settled in December 2008), AmerUS Life Insurance Company and American Investors Life Insurance Company (Aviva/AmerUS) (settled in October 2008), American Equity Investment Life Insurance Company (settled in February 2008), and Allianz Life Insurance Company of North America (settled in October 2007). The settlements offered consumers a refund of their premium, plus 4.15 % interest, if it was determined that the annuity sale was unsuitable or based on misrepresentation. As part of the settlements, the companies also agreed to request and obtain additional information from consumers to make suitability determinations on future sales. The additional information includes whether the consumer has sufficient liquid assets and disposable income to pay for ongoing living expenses and emergencies without access to all of the money that would be paid into the deferred annuity. The companies also agreed to conduct an elevated review of annuity applications of consumers age 65 and older. If an annuity application is subject to an elevated review, the policy can only be issued if the company determines and documents specific, objective evidence clearly establishing that the sale is suitable for the consumer in light of his or her stated financial condition, needs, and objectives. In addition to the restitution and suitability standards, Aviva/AmerUS agreed to pay the State of Minnesota $375,000, American Equity agreed to pay $250,000, and Allianz agreed to pay $500,000. California Insurance Commissioner Steve Poizner and Attorney General Jerry Brown filed suit against Family First Advanced Estate Planning and Family First Insurance Services of Woodland Hills; John Owen, president of Family First; and American Investors Life Insurance of Kansas alleging that the companies misled seniors into buying unsuitable annuities that would not pay out for years and had substantial early withdrawal fees. They further alleged that the companies deceived seniors into purchasing living trusts and related services. The case was settled in December As part of the settlement, American Investors paid $5.5 million to be distributed to California consumers who had purchased American Investor annuities through Family First and had incurred surrender charges. Family First Insurance, Family First Advanced Estate Planning and John Owen paid a $250,000 (total) civil penalty. Family First Insurance and Family First Advanced Estate Planning paid a civil penalty of $750,000 to the Office of the Attorney General. American Investors, Family First Insurance, and Family First Advanced Estate Planning paid $500,000 to the Department of Insurance and $200,000 to the Office of the Attorney General as reimbursement for investigative and prosecution costs. American Investors agreed to provide a hardship waiver to annuity owners who bought annuities through Family First Insurance Services or its agents. Finally, purchasers who had not already received a future credit of fiftyfive percent or more of their surrender charges were allowed a one time offer of receiving the value of their annuities in monthly payments along with a bonus of 1% to 1.25%. California also filed suit against Allianz Life Insurance Company for allegedly targeting seniors in deceptive annuity sales. The case was based on a Department of Insurance market conduct examination that asserted that Allianz deceptively replaced 126 existing annuities for seniors and that ninety-seven percent of the replacements were unsuitable. The case was settled in February As part of the settlement, Allianz paid $3.3 million to the Department of Insurance for penalties, fees and costs; $3.75 million over five years to the Life and Annuity Consumer Protection Fund, which provides funding to 7

10 district attorneys to prosecute financial abuse by life agents; and $3 million in high impact investments under the California Organized Investment Network, which provides economic and social benefits to California s underserved urban and rural communities. Allianz agreed to restitution to all customers who request it unless there is insufficient evidence that the transaction involved a misrepresentation or was unsuitable. Allianz also agreed to implement a suitability review program for all potential senior customers. 2. Bonus Annuities An insurance company s deferred annuities may include a bonus feature. The bonus is usually a certain percentage of the premium paid within a specified time frame. In some cases, a contract owner may have to satisfy certain conditions to realize the value of the bonus. Some annuities can be categorized as two-tiered, meaning they have both an annuitization value and a cash value. The annuitization value equals the premium amount, any bonus credits applied, and any interest credited. To collect the annuitization value, the contract owner must wait the minimum deferral period and choose a payout option available under the contract. In a two-tiered annuity, by contrast, the cash value of the annuity equals only a percentage of the premium paid, and is credited with a lower rate of interest than for the annuitization value. Bonus amounts are not credited to the cash value of a two-tiered annuity, and the cash value is available only for a limited time as a lump sum to the contract owner. Some bonus annuities are equity-indexed, meaning that a portion of the interest credited to a contract s cash value during a deferral period may be calculated, in part, by reference to a stock market index. Litigation involving bonus annuities has focused on plaintiffs allegations that the insurance company used representations of an up-front or immediate bonus to entice individuals to purchase two-tiered equity indexed annuities. Plaintiffs argue that the representation is deceptive because a policyholder must wait a minimum deferral period, often five years, and then elect to annuitize, often for ten years, to receive the full amount of the bonus. The treatment of bonus annuity claims in federal court has been mixed. At least four cases have been dismissed. Sayer v. AmSouth Inv. Servs. Inc., No. 05-cv RDP (N.D. Ala. Oct. 12, 2006); Delaney v. Am. Express Co., No. 3:06-cv-5134, 2007 WL (D. N.J. May 11, 2007); Phillips v. Am. Int l Group, Inc., No. 1:07-cv (S.D.N.Y. May 30, 2007); and Cirzoveto v. AIG Insurance Co., No.2: 06-cv BBD-egb (W.D. Tenn., March 30, 2009). Breach of contract claims have been dismissed in most of the cases. For example, in Sayer the contract guaranteed a first-year interest rate of 5.95%, including a one percent bonus. After the first year, the minimum guaranteed rate would be three percent, and the renewal rates would be set by the insurer and would not include the bonus. Courts have found that even if the insurer designed a product such that the bonus was recouped, as plaintiffs alleged, there could be no breach of contract so long as the consumer received the stated guaranteed interest rate. The courts have also found that an insurer-insured relationship is not a fiduciary or confidential relationship and dismissed those claims. The courts that have dismissed fraud and disclosure claims have found that the disclosures accompanying the annuity contracts adequately disclose the nature of the annuity. In cases where bonus annuity claims have been allowed to proceed, the courts have addressed class certification issues. A Minnesota district court recently refused to decertify a class in Mooney v. Allianz Life Insurance Co., No. 06-cv ADM-FLN, (D. Minn., Feb. 26, 2009). Applying a preponderance of the evidence standard, the court found that common issues predominated, stating that 8

11 plaintiff could demonstrate that a majority of the class members relied on either the written material presented by the sales agent or the sales agent s representations. The court noted that sales agents signed a statement that their oral representations did not differ from the written material. Class certification was also granted in Iorio v. Allianz Life Ins. Company, No. 3:05-cv-00633JLS-CAB, (S.D. Cal. Filed Mar. 30, 2005) in Doc. No. 113 (S.D. Cal. July 26, 2006). Subsequently, the court dismissed the breach of contract claim. Doc. No. 238 (S.D. Cal. July 8, 2008). Class certification was denied, however, in Smith v. John Hancock Life Ins. Co., No. 2:06-cv MSG, 2008 WL (E.D. Pa., Sept. 2008), as the plaintiff sought predominantly monetary relief and common questions did not predominate over individual questions, such as reliance. The court also dismissed some claims, including claims for breach of fiduciary duty and breach of contract, but allowed claims for fraudulent/intentional misrepresentation and violations of Pennsylvania s Unfair Trade Practices and Consumer Protection Law to proceed. Smith v. John Hancock Life Ins. Co., 2008 WL (E.D. Pa. Sept. 2008). 3. Fixed Annuity Interest-Crediting Cases Under a typical deferred annuity, the contract owner agrees to make one or more premium payments to the insurance company in exchange for the company s promise to begin making annuity payments to the contract owner by some specified date in the future. The insurance company credits interest on the cash value, usually on an annual basis, and eventually pays the accumulated cash value out to the contract owner as a lump sum withdrawal (or series of withdrawals), as a death benefit or as annuity payments. The rate of interest is declared in advance, typically for each one year period, and must equal or exceed the contract s guaranteed minimum rate, which is equal to or greater than the rate required by state nonforfeiture law. A fixed annuity differs from a variable annuity which does not guarantee any minimum rate of return, but rather calculates contract value daily and directly passes through the investment performance of selected underlying mutual funds. Plaintiffs have raised issues with respect to the method by which insurance companies credit fixed interest. An insurer may offer higher rates of interest on new money paid into the contract, and reduce the interest rate on old money. Recent litigation has focused on the disclosure of the method for crediting interest, and whether the tiering of interest is permissible under state law, with plaintiffs asserting claims for breach of contract, bad faith, violations of consumer protection laws, and breach of fiduciary duty. In Avritt v. Reliastar Life Insurance Co., No (JNE/JJG), 2009 WL (D. Minn. Feb. 2009), a district court in Minnesota denied class certification because the individual issues of reliance, causation, and individual defenses predominated. In denying class certification, the court also noted that a nationwide class had recently been certified in a case making similar claims against the same defendant (prior to Northern Life s merger into ReliaStar). Curtis v. Northern Life Ins. Co., No (Wash. Ct. App. 2008). 4. Qualified Retirement Arrangements Tax-qualified retirement arrangements such as Individual Retirement Accounts (IRAs) and 401(k) plans allow for tax-deferred accumulation of investment income. Beginning more than ten years ago, some plaintiffs have challenged the suitability of sales of deferred annuities for use with qualified retirement arrangements, arguing that there is no need for an annuity providing for tax-deferred investment earnings when the retirement arrangement already provides for such tax deferral. Insurers 9

12 have responded by pointing out that annuities provide insurance features not found in other investment options that make them suitable for many purchasers. In Cooper v. Pacific Life Insurance Co., No. 2:03-cv AAA-JEG (S.D. Ga. filed Aug. 18, 2003), plaintiffs sued the insurer for allegedly providing unsuitable annuities for use in tax-deferred qualified retirement arrangements. Plaintiffs alleged that the defendants failed to disclose that the taxdeferral advantages of variable annuities may be redundant in tax-deferred qualified retirement arrangements. The court certified a class that included those who purchased a variable annuity to fund a qualified retirement arrangement. Cooper v. Pac. Life Ins. Co., 229 F.R.D. 245 (S.D. Ga. May 2005). On October 3, 2007, the Southern District of Georgia approved a settlement with Pacific Life. The Settlement Fund was valued at $60 million. A net cash settlement of $40 million was paid directly to class members (after deductions for attorney s fees and expenses), in proportion to the amount they had invested in annuities. The contract credit settlement amount of $20 million was to be paid in annual cash credits to their annuity accounts amounting to.10 percent of their total contract value per year for five years. In Brooks v. Lincoln National Life Insurance. Co., No. 5:03-cv DF-CMC (E.D. Tex., filed Dec. 9, 2003), plaintiffs alleged that they had purchased the defendant s variable annuities, through registered representatives of broker-dealers and employer-sponsored plans, to fund retirement accounts. Plaintiffs alleged that the defendants failed to disclose that the tax-deferral advantages of variable annuities may be redundant in tax-deferred qualified retirement plans. Plaintiffs claimed material omissions by the defendant insurer and its agents in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; claimed controlling person liability under Section 20(a) of the Exchange Act; and sought to void the annuity contracts under Section 29(b) of the Exchange Act. The court denied class certification, finding that individual issues of specific representations and reliance would predominate, as class members received widely different oral and written disclosures. Doc. No. 191 (E.D. Tex. Feb. 2, 2008) (magistrate s recommendation); Doc. No. 208 (E.D. Tex. June 23, 2008) (memorandum opinion). 5. Other Annuity Cases In Spencer v. Hartford Financial Services Group, Inc., No.3:05-cv JCH (D. Conn., filed Oct. 31, 2005), plaintiffs entered into agreements to settle claims against the defendant s insureds. Each settlement included a structured portion. Defendants, property and casualty insurers, funded the settlements though the purchase of annuities. Plaintiffs allege that this practice was fraudulent in that defendants retained a portion of that amount that was supposed to be structured and ultimately received an amount less than what they settled for. Defendants contended that the commissions and other fees deducted were to cover routine costs associated with the annuities and that plaintiffs received the promised stream of payments. Plaintiffs brought claims based on RICO, fraud, breach of contract, and unjust enrichment. The court denied class certification on the unjust enrichment and breach of contract claims, and granted class certification on the RICO and fraud claims. Doc. No. 197 (D. Conn. March 10, 2009). C. REVENUE SHARING CLAIMS AGAINST FINANCIAL SERVICE PROVIDERS In a March 2006 decision, a federal district court denied defendants summary judgment motion in Haddock v. Nationwide Financial Services, a case filed in 2001 claiming that defendants were engaged in revenue sharing practices with respect to Section 401(k) plans that allegedly violated ERISA. 419 F. Supp. 2d 156 (D. Conn. 2006). Following this ruling, dozens of putative class actions were filed 10

13 challenging the fees associated with Section 401(k) plans, other ERISA plans, Section 457 plans, and Section 403(b) programs. Many of the complaints specifically challenge alleged revenue sharing practices, typically alleged to be payments received by a financial service provider from mutual funds and/or investment advisors. Some of these lawsuits are directed at particular plan sponsors and their plans and seek to certify classes consisting of the participants and beneficiaries of such plans. Other lawsuits, which are the focus of this discussion, are directed at financial service providers who provide services with respect to the plans of many employers and typically seek to certify classes consisting of such plans or their trustees. A few of the cases challenge payments allegedly made by insurers to employee associations or organizations in connection with the plans or programs at issue. Significant issues that arise in these cases include (a) the extent to which the financial service provider is a fiduciary under ERISA; (b) whether revenue sharing payments from mutual fund assets constitute plan assets; (c) whether ERISA imposes an obligation to disclose revenue sharing arrangements; (d) the extent to which Section 404(c) of ERISA provides a defense to the claims and whether that defense can be addressed on a motion to dismiss; and (e) what law applies to claims involving Section 403(b) products and Section 457 annuities. 1. Haddock In Haddock v. Nationwide Financial Services Inc., 419 F. Supp. 2d 156 (D. Conn. 2006), plan trustees filed a putative class action in 2001 against Nationwide (the plans investment provider), alleging that certain payments it received from mutual funds or their affiliates were actually provided in exchange for offering the funds as plan investment options under Nationwide s variable annuity contracts, rather than for valuable services provided. The trustees alleged that such an arrangement constituted both a breach of fiduciary duty and a prohibited transaction under ERISA. The court agreed to consider defendants summary judgment motion in advance of class certification, and on March 7, 2006, issued a ruling denying Nationwide s motion for summary judgment. In denying Nationwide s motion, the court held that (a) a jury could find that Nationwide was a functional ERISA fiduciary to the extent that it exercised authority or control over plan assets by determining and altering which mutual funds would be offered as plan investment options under the annuity contracts; (b) plan assets under ERISA include assets received by a fiduciary as a result of its fiduciary status or exercise of fiduciary discretion or authority and at the expense of plan participants; (c) under the foregoing functional approach to defining plan assets, the payments Nationwide was alleged to have received from mutual funds or their affiliates purportedly in exchange for offering the funds as investment options might be found to be plan assets; and (d) even if the payments were not plan assets, receipt of the payments might be found to be a prohibited transaction under ERISA 406(b)(3). Haddock v. Nationwide Fin. Servs., 419 F. Supp. 2d 156, (D. Conn. 2006). As the first opportunity for judicial perspective under ERISA on revenue sharing arrangements, the summary judgment opinion is notable in at least three respects: Nationwide did not rely on the Labor Department s advisory opinions on revenue sharing in its pleadings for summary judgment. Accordingly, the court had no occasion to rule whether those opinions were a correct application of ERISA, although the court did of its own accord rely on those opinions in its analysis. While several of the court s conclusions were entirely in line with the received wisdom under ERISA, its functional definition of plan assets, and the resulting notion that revenue sharing 11

14 payments sourced in a registered mutual fund held (at least as to the individual contracts involved in the case) under a registered separate account could constitute plan assets, broke new ground. If a plan asset characterization is sustained, it could lead to a conclusion that an intermediary may retain revenue sharing amounts only if approved by the plan as consideration for services or otherwise. The judge made an obvious effort to keep the case going, not only in identifying and adopting a basis for fiduciary status not urged by the plaintiffs, but in at least one instance excusing the plaintiffs from the usual burden of supporting all essential elements of their claim with evidence in the record in order to survive summary judgment. It appears that the judge was troubled by the allegation that the revenue sharing payments were a quid pro quo for offering the funds rather than payments for actual services to the funds and was determined to permit further exploration of those facts. Plaintiffs subsequently filed a fifth amended complaint. In denying defendant s motion to dismiss, the court declined to reconsider any of its prior rulings and also held that plaintiffs had not waived the right to assert a claim that Nationwide was a fiduciary because it allegedly selected the funds available as investment options and breached fiduciary duties in that capacity. Haddock v. Nationwide Fin. Servs., 514 F. Supp. 2d 267, (D. Conn. 2007). In Haddock, plaintiffs seek to represent a class of [a]ll pension plans covered by ERISA which had variable annuity contracts with Nationwide or whose participants had individual variable annuity contracts with Nationwide. 2 The court held a class certification hearing on February 27, 2009, but has not yet ruled. 2. Subsequent Litigation Since the Haddock decision in March 2006, more than thirty putative class actions have been filed against employers and plan officials and/or financial services providers challenging fees associated with Section 401(k) plans or other defined contribution plans. Some of the cases are directed at a particular plan sponsor and seek to certify a class of participants in the plan at issue; some of these cases include the plan service provider as an additional defendant. Other cases are directed at a particular financial service provider and typically seek to certify a class of plans (or their trustees) that are serviced by the provider defendant. 3. Lawsuits Directed at Plan Sponsors In the plan sponsor cases (most of which were filed by the same law firm), plaintiffs typically assert ERISA breach of fiduciary duty claims and prohibited transaction claims arising out of allegedly excessive and improper fees and revenue sharing payments and alleged non-disclosure of the fees and payments. Much of the motions practice in these cases to date has involved motions to dismiss, motions to strike jury demands, and motions for class certification. With some exceptions, the courts have generally declined to dismiss the complaints in their entirety (although sometimes dismissing some 2 Haddock Fifth Am. Compl. (filed Mar. 21, 2006)

15 claims) 3 ; granted motions to strike jury demands (on the grounds that a jury trial is not available for ERISA claims) 4 ; and granted motions to certify classes. 5 Many of the plan sponsor cases have now moved into the summary judgment phase, although there have been few rulings to date. The federal district court in Connecticut recently granted summary judgment for defendants in Taylor v. United Technologies Corp., No. 3:06-cv-1494 (WWE), 2009 WL , at (D. Conn. Mar. 3, 2009), ruling that plaintiffs had failed to establish that it was imprudent for the plan to use actively managed funds or to fail to use managed separate trust accounts. Based on the factual record, the court further rejected arguments that the revenue sharing payments to the financial service provider (Fidelity) were improper or that Fidelity s fees were unreasonable. The court also held that there was no duty to disclose the revenue sharing payments. In discussing whether revenue sharing payments constituted plan assets, the court did not adopt or reject the Haddock functional test, but rather held that it would not apply since Fidelity was not a fiduciary. Curiously, the court did not even mention Hecker v. Deere, infra. Two other district courts have granted summary judgment in part for defendants. 6 plan sponsor cases are set for trial this year. Several of the 3 See, e.g., Loomis v. Exelon Corp., No. 1:06-cv-04900, Doc. No. 58 (N.D. Ill. Feb. 21, 2007) (granting partial motion to dismiss); Waldbuesser v. Northrop Grumman Corp., No. 2:06-cv R-JC, Doc. No. 28 (C.D. Cal. Feb. 28, 2007) (dismissing complaint, but with leave to amend); George v. Kraft Foods Global, Inc., No. 06-cv-798-DRM, 2007 WL (S.D. Ill. Mar. 16, 2007); Spano v. Boeing Co., No. 06-cv-743-DRM, 2007 WL (S.D. Ill. Apr. 18, 2007) (denying motion to dismiss); Kanawi v. Bechtel Corp., 2007 WL (N.D. Cal. May 15, 2007); Martin v. Caterpillar, Inc., No. 1:07-cv JBM-JAG, Document No. 64 (C.D. Ill. May 23, 2007) (dismissing certain defendants); Taylor v. United Techs.Corp., No. 3:06-cv-1494 (WWE), 2007 WL (D. Conn. Aug. 9, 2007) (granting in part and denying in part motion to dismiss); Abbott v. Lockheed Martin Corp., No. 06-cv-0701-MJR, 2007 WL (S.D. Ill. Aug. 13, 2007) (denying motion to dismiss); Tussey v. ABB, Inc., No. 2:06-cv NKL, Doc. No. 209 (W.D. Mo. Feb. 11, 2008) (denying motions to dismiss); In re RadioShack Corp. ERISA Litig., 547 F. Supp. 2d 606 (N.D. Tex. Mar. 31, 2008) (granting in part and denying in part motion to dismiss); Martin v. Caterpillar, Inc., No. 07-cv-1009 Gen WL (C.D. Ill. Sept. 25, 2008) (denying motion to dismiss second amended complaint). But see Young v. General Motors Investment Mgmt. Corp., 550 F. Supp. 2d 416 (S.D.N.Y. Mar. 24, 2008) (claims dismissed as time-barred), on appeal, No (2d Cir. filed March 31, 2008); Braden v. Wal-Mart Stores Inc., 590 F.Supp.2d 1159 (W.D. Mo. Oct. 28, 2008) (dismissing claims), on appeal, No (8th Cir. filed March 27, 2008). 4 See, e.g., Loomis v. Exelon Corp., No. 1:06-cv-04900, Doc. No. 57 (N.D. Ill. Feb. 21, 2007); Spano v. Boeing Co., No. 06-cv-743- DRH2007 WL (S.D. Ill. Apr. 18, 2007); Kennedy v. ABB Inc., No cv-NKL 2007 WL (W.D. Mo. Aug. 10, 2007); Abbott v. Lockheed Martin Corp., No. 06-cv-0701-MJR 2007 WL (S.D. Ill. Aug. 13, 2007); Will v. Gen. Dynamics Corp., No. 3:06-cv GPM-CJP, Doc. No. 90 (S.D. Ill. Aug. 29, 2007); Kanawi v. Bechtel Corp., No. 3:06-cv CRB, Doc. No. 579 (N.D. Cal. Oct. 10, 2008). But see Phones Plus, Inc. v. Hartford Life Ins. Co., No. 3:06-cv AVC, Doc. No. 196 (D. Conn. Sept. 30, 2008) (denying motion to strike jury demand to the extent that plaintiff was seeking damages for losses allegedly caused by fiduciary breaches, which the court characterized as an essentially legal remedy ). 5 See, e.g., Loomis v. Exelon Corp., No. 06c WL (N.D. Ill. June 26, 2007); Tussey v. ABB Inc., No. 06-cv CV-NKL 2007 WL (W.D. Mo. Dec. 3, 2007);Taylor v. United Techs. Corp., No. 3:06-cv-1494 (WWE) 2008 WL (D. Conn. June 3, 2008); George v. Kraft Foods Global, Inc., 251 F.R.D. 338 (S.D. Ill. July 17, 2008); Spano v. Boeing Co., No DRH 2008 WL (S.D. Ill. Sept. 29, 2008); Beesley v. Int l Paper Co., No DRH, 2008 WL (N.D. Ill Sept. 30, 2008); Kanawi v. Bechtel Corp., 254 F.R.D. 102 (N.D. Cal. Oct. 10, 2008). But see Waldbuesser v. Northrop Grumman Corp., No. 2:06-cv R-JC, Doc. Nos (C.D. Cal. Aug. 6, 2007) (denying class certification), on appeal sub nom. Grabek v. Northrop Grumman Corp., No (9th Cir. filed Oct. 11, 2007). 6 Kanawi v. Bechtel Corp., 590 F. Supp. 2d 1213 (N.D. Cal. Nov. 3, 2008) (granting in part and denying in part defendants motion for summary judgment); Abbott v. Lockheed Martin Corp., No. 06-cv-0701-MJR, Doc No. 226 (S.D. Ill. Mar. 31, 2009) (granting in part and denying in part defendants motion for summary judgment). 13

16 4. Hecker v. Deere & Co. A notable exception to the reluctance of courts to dismiss revenue sharing complaints in the plan sponsor cases is Hecker v. Deere & Co., in which the Seventh Circuit Court of Appeals affirmed the dismissal of claimed ERISA violations for alleged revenue sharing and excessive fees against the plan sponsor and the mutual fund complex that provided investment options and trust and other services for the plan. Hecker v. Deere & Co., 556 F.3d 575, Nos & (7th Cir. Feb. 12, 2009), aff d Hecker v. Deere & Co., 496 F. Supp. 2d 967 (W.D. Wis. June 21, 2007). By way of background, in 1990 Deere & Company engaged the Fidelity fund complex to provide a range of services for two ERISA-covered 401(k) plans it offers to its employees. According to the court, each plan presented a generous array of investment options among which plan participants would direct the investment of their accounts, including twenty three different retail mutual funds advised by Fidelity Research, two investment funds managed by Fidelity Trust (also the directed trustee and record keeper), a company stock fund, and a Fidelity open-architecture facility providing access to approximately 2,500 additional mutual funds managed by different companies. Each fund included within the plans charged a fee disclosed in its prospectus and calculated as a percentage of assets. Plaintiffs alleged that Fidelity Research shared its revenue, which it earned from the mutual fund fees, with Fidelity Trust and that Fidelity Trust in turn compensated itself through those shared fees, rather than through a direct charge to Deere for its services. Plaintiffs (plan participants on behalf of a purported class) claimed that this led to a impermissible lack of transparency in the fee structure, and alleged that the fees and expenses paid by the plans were (1) unreasonable and excessive; (2) not incurred solely for the benefit of the plans and the plans participants; and (3) not disclosed to participants. Plaintiffs argued that in allegedly subjecting the plans and their participants to these arrangements, Deere, Fidelity Research, and Fidelity Trust violated fiduciary obligations under ERISA. The district court dismissed the case on the pleadings with prejudice. In brief, the district court ruled, inter alia, that: Deere had complied with all applicable disclosure requirements found in ERISA; The facts asserted in the complaint established all the elements necessary for the defendants to take advantage of the relief from any fiduciary liability provided by the ERISA 404(c) safe harbor for participant-directed plans meeting certain requirements; and The Fidelity defendants were not fiduciaries for the purposes of making plan investment decisions and could not be held liable on that basis On appeal, the Seventh Circuit affirmed the district court s ruling in all respects. Seventh Circuit held: Specifically, the Fidelity Trust was not a fiduciary by virtue of limiting Deere s selection of funds for which it would act as trustee to those managed by its corporate affiliate. Merely playing a role or furnishing professional advice is not enough to transform a company into a fiduciary, and there was no allegation that the financial services provider exercised final authority over the choice of funds offered in a distinction from Haddock v. Nationwide Fin. Servs., 419 F. Supp. 2d 156 (D. Conn. 2006). (The Department of Labor (DOL) in an amicus brief had 14

17 argued that the functional fiduciary allegations were sufficient to withstand a motion to dismiss.) Hecker, 556 F.3d at 584. The allegation that the Fidelity defendants exercised discretion over plan assets in determining how much revenue Fidelity Research would share with Fidelity Trust also failed to state a claim. The court held that the fees that Fidelity Research collected from the mutual funds became Fidelity s assets rather than ERISA plan assets a point with which DOL agreed and contrary to the Haddock opinion which Fidelity Research could permissibly transfer to its affiliate Fidelity Trust. Id. Deere did not breach any fiduciary duty by not informing the participants that Fidelity Trust received money from the fees collected by Fidelity Research. Specifically, the Court held that disclosure of how Fidelity Research allocated the monies it collected was neither required under any ERISA statute or regulation, nor material to plan participants. (DOL had argued in its brief that such a disclosure obligation could arise under general ERISA fiduciary principles.) The court found it sufficient that Deere disclosed to the participants the total fees for the funds and directed the participants to the fund prospectuses for information about the fund-level expenses the critical information for an investor, since the alleged fee sharing did not enlarge the fund charges beyond those disclosed in the prospectus and paid by all investors. Id. Deere did not violate its ERISA duties in allegedly selecting investment options with excessive fees. The court found that Deere offered a sufficient mix of investments for participants in its plans. The court noted that there was a wide range of expense ratios among the funds available, and the fact that some other funds might have had even lower ratios was beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems). Id. Deere did not improperly limit the investment options to Fidelity funds. Nothing in ERISA requires plan fiduciaries to include any particular mix of investment vehicles in their plans. Moreover, the court noted that the issue was akin to that of the basic structuring of a plan, which would not be a duty within Deere s fiduciary responsibilities. Finally, the court found that the 404(c) defense was properly considered here because the plaintiffs affirmatively pled in their complaint why they contended the defense would not apply. The court ruled that there was no plausible allegation that the plans did not comply with 404(c). In particular, the court reasoned that 404(c) was available when a plan includes a sufficient range of options so that the participants have control over the risk of loss, and that it need not decide the question of whether there could be circumstances where a fiduciary s selection of plan investment options might not be shielded by that provision. In this respect, this court neither endorsed DOL s more limited view of the scope of fiduciary relief provided by 404(c), nor accepted the invitation to shift participants legal responsibility for their own investment choices in these circumstances, adding to the body of cases like Langbecker v. Electronic Data Systems Corp., 476 F.3d 299 (5th Cir. 2007) and Jenkins v. Yager, 444 F.3d 916 (7th Cir. 2006). Id. The court also upheld the district court s award of costs in excess of $200,000 against plaintiffs. 15

18 5. Post-Haddock Lawsuits Directed at Financial Service Providers These cases fall into three general categories, corresponding to the types of plans they relate to 401(k) plans, 403(b) plans, and 457 plans. a. Lawsuits Involving Section 401(k) Plans Approximately half of the cases directed against particular financial service providers assert claims relating to the Section 401(k) plans (and perhaps ERISA-governed other plans) for which the defendant provides services (like Haddock, discussed above). Results have been mixed on motions to dismiss in these cases. No classes have yet been certified, although certification has been denied in one case. In Phones Plus, Inc. v. Hartford, plaintiff, an employer and plan sponsor, asserted that alleged revenue sharing payments from mutual funds to defendant constituted a breach of fiduciary duty and prohibited transactions. The court denied a motion to dismiss the complaint. Phones Plus, Inc. v. Hartford Life Ins. Co., No. CIV.3:06-cv AVC 2007 WL (D. Conn. Oct. 23, 2007). The insurer moved to dismiss on the grounds that it was not a fiduciary under the analysis of Department of Labor Advisory Opinion 97-16A, which states in part: [A] person would not be exercising discretionary authority or control over the management of a plan or its assets solely as a result of deleting or substituting a fund from a program of investment options and services offered to plans, provided that the appropriate plan fiduciary in fact makes the decision to accept or reject the change. In this regard, the fiduciary must be provided advance notice of the change, including any changes in the fees received, and afforded a reasonable period of time within which to decide whether to accept or reject the change, and in the event of a rejection, secure a new service provider. See Phones Plus, Inc., 2007 WL , at *3. The court held that the Advisory Opinion was distinguishable on its facts, because plaintiff in Phones Plus alleged that the insurer received excessive fees and that the fees were not disclosed and because the annuity contract did not specify the notification procedure for changes to the contract or the time period that the plan would be given if it rejected a proposed contract change. Id. at *2-5. The court held that the issue of whether revenue sharing payments are plan assets was a mixed question of fact and law and that plaintiff s allegations were sufficient to survive a motion to dismiss, but did not analyze the issue in any depth. In a later ruling, the court in Phones Plus denied in part a motion to strike the jury demand, holding that to the extent plaintiff was seeking damages for losses allegedly caused by fiduciary breaches, that was an essentially legal remedy, on which plaintiff was entitled to a jury trial. 7 At the same time, the court denied plaintiff s motion to dismiss the insurer s counterclaims for breach of fiduciary duty, contribution, and indemnity. 8 In so ruling, the court relied in part on Second Circuit decisions 7 Phones Plus, Inc. No. 3:06-cv AVC, Doc. No. 196 (D. Conn. Sept. 30, 2008). By contrast, as noted earlier, most other courts presented with this issue in revenue sharing cases brought under ERISA have granted motions to strike jury demands. 8 Phones Plus, Inc. v. No. 3:06-cv AVC, Doc. No. 195 (D. Conn. Sept. 30, 2008). 16

19 allowing contribution and indemnity claims between ERISA fiduciaries. 9 The court also rejected plaintiff s argument that defendant s denial of fiduciary status in defending against plaintiff s claims precluded defendant from asserting counterclaims that only a fiduciary could assert, holding that this was permissible pleading in the alternative. Plaintiff in Phones Plus seeks to certify a class of plan administrators of plans for which the insurer received alleged revenue sharing payments from mutual funds or investment advisors, but there has not yet been a ruling on class certification. The case is currently set for trial in mid Plaintiff s motion for class certification was denied in Ruppert v. Principal Life Insurance Co., 252 F.R.D. 488 (S.D. Iowa Aug. 27, 2008). Plaintiff, a 401(k) plan trustee, sought to certify a class of over 24, (k) retirement plans for which Principal provided services. Ruppert asserted three counts in its complaint. The complaint asserted three ERISA counts: (1) alleged breach of fiduciary duties by failing to adequately disclose the existence or amount of alleged revenue sharing payments negotiated with mutual funds, failing to use the payments for plan expenses, and failing to act with the requisite care, skill, prudence and diligence; (2) alleged prohibited transactions through purported self-dealing and use of plan assets to generate revenue sharing payments that it retained; and (3) alleged breach of fiduciary duty and prohibited self-dealing by retaining one day s interest on contributions prior to their being invested in the chosen investment options and failing to adequately disclose this practice. The court denied plaintiff s motion to certify a class on commonality and typicality grounds. Although plaintiff sought to rely on defendant s use of templates as part of its business model to show commonality and typicality, the court cited at length evidence that defendant s templates were varied and customized on a plan-byplan basis. Similarly, the court found evidence that the mutual funds that were offered to plan sponsors varied from plan to plan, as did the delivery and use of marketing materials. The Eighth Circuit denied plaintiff s petition to appeal the denial of certification under Rule 23(f). Ruppert v. Principal Life Ins. Co., No (8th Cir. Oct. 28, 2008). In Columbia Air Services, Inc. v. Fidelity Management Trust Co., No. CIV GAO 2008 WL (D. Mass. Sept. 30, 2008), the court dismissed claims by a plan sponsor and administrator that FMTC breached ERISA fiduciary duties by receiving a share of fees earned by Fidelity funds and not disclosing those fees. The court held that FMTC, a directed trustee, was not acting in a fiduciary capacity with respect to the receipt of the fees in question. The court distinguished Haddock, supra, on the grounds that FMTC did not have the power to add and remove funds that the defendant was found to have in Haddock. Plaintiff unsuccessfully sought reconsideration of the dismissal, 10 but did not appeal. Plaintiff in Charters v. John Hancock Life Insurance Co. claims that defendant breached fiduciary duties and engaged in prohibited transactions in violation of ERISA by allegedly receiving excessive fees and revenue sharing payments in connection with a group annuity contract issued in connection with a 401(k) plan; plaintiff seeks to certify a class of all trustees, sponsors, and administrators of plans with annuity contracts from defendant. In ruling on a motion to dismiss, the court found that further factual development was needed to determine whether defendant s role in substituting and deleting funds made defendant a fiduciary by giving it authority or control over plan assets. The court also rejected an argument that plaintiff had no standing to pursue class claims on behalf of plans with which he had no connection. The court agreed with defendant, however, that plan sponsors as such have no right of 9 Chemung Canal Trust Co. v. Sovran Bank/Md, 939 F.2d 12 (2d Cir. 1991); Smith v. Local 819 I.B.T. Pension Plan, 291 F.3d 236, (2d Cir. 2002). 10 Columbia Air Servs.,, Inc. No. 1:07-cv GAO (D. Mass. Dec. 22, 2008). 17

20 action under ERISA. Charters v. John Hancock Life Ins. Co. 534 F. Supp. 2d 168 (D. Mass. Dec. 21, 2007). In a later opinion in Charters, the court granted partial summary judgment for plaintiff, holding that defendant was a fiduciary because its contract gave it discretionary authority to determine the amount of its compensation and because of its ability to substitute investment options. The court distinguished DOL Advisory Opinion 97-16A on the grounds that it was based on an arrangement which could be terminated by the plan fiduciaries without penalty; by contrast, the court found that if the plan fiduciary here wanted to continue use of a replaced investment option, his only course was to terminate the annuity contract and face a termination fee of up to two percent. The court also dismissed a counterclaim for contribution and indemnity; although the First Circuit had not addressed the availability of such claims under ERISA, the court found Eighth Circuit authority rejecting such claims 11 more persuasive than the Second Circuit authority allowing such claims that was relied on in Phone Plus, supra. Charters v. John Hancock Life Ins. Co. 583 F. Supp. 2d 189, (D. Mass. Sept. 30, 2008). b. Lawsuits Involving Section 403(b) Products Three putative class actions were filed in 2007 involving Section 403(b) programs for teachers in public education. The complaints in these cases name as defendants both the financial service provider and the teachers association or union endorsing the insurer s Section 403(b) annuities and make allegations with respect to fees received by the association from the financial service provider. Plaintiffs in each cases seek to certify a class of teachers who purchased the 403(b) annuities in question. There are some differences, however, in the legal theories asserted. Although Title I of ERISA expressly excludes from coverage plans that are established or maintained by governmental employers ( governmental plans ), plaintiffs in two of the cases have nonetheless sought to assert ERISA claims by arguing that the teachers association or union established or maintained an alleged ERISA plan. In Daniels-Hall v. National Education Association, No RBL (W.D. Wash., filed July 11, 2007), the plaintiffs were public school teachers who alleged that they purchased Section 403(b) annuities that had been endorsed by the NEA. Seeking to represent a putative national class of NEA members who purchased such annuities, plaintiffs sued NEA, an NEA affiliate, individual officers and/or directors of the affiliate, and two insurance companies alleging (a) that the NEA 403(b) annuity program constituted an employee benefit pension plan covered by ERISA because it was a plan that was established or maintained by NEA, which was alleged to be an employee organization within the meaning of ERISA; (b) that all of the defendants were fiduciaries under ERISA with respect to the alleged plan; and (c) that defendants committed purported breaches of fiduciary duty and engaged in purported prohibited transactions with respect to certain alleged fees and revenue sharing payments relating to the 403(b) annuities. Defendants moved to dismiss, arguing that the 403(b) annuities neither constituted nor were part of a plan subject to ERISA, the sole basis asserted by plaintiffs for subject matter jurisdiction. The court granted defendants motions to dismiss, holding that, as a matter of law, an employee organization cannot establish or maintain a plan involving Section 403(b) annuities. 12 Daniels-Hall v. 11 Travelers Cas. & Sur. Co. of Am. v. IADA Servs., Inc., 497 F.3d 862, 867 (8th Cir. 2007). 12 The court s conclusion that an employee organization cannot establish or maintain a plan under Section 403(b) was supported by Section 403(b) s requirement that the annuities must be purchased by the employer. The court further noted that DOL has issued safe harbor regulations setting forth circumstances under which employers and in some cases employee organizations can avoid being found to have established or maintained ERISA plans by limiting their activities in relation to the plan. The court found it significant that, while the safe harbor regulation relating to health and welfare plans addressed both employers and employee 18