Court Rejects Excess Fee Litigation Claims

By Nevin Adams • September 07, 2016 • 0 Comments
Chevron has won dismissal of an excessive fee class action in a decision that rebukes several of the claims that have surfaced in recent litigation by the law firm of Schlichter, Bogard & Denton.

Judge Phyllis J. Hamilton of the U.S. District Court for the Northern District of California rejected a number of the claims made by the plaintiffs against the $19 billion Chevron plan in White v. Chevron Corp., 2016 BL 281396, N.D. Cal., No. 4:16-cv-00793-PJH, 8/29/16), including:

  • the use of otherwise identical funds with higher fees;

  • the use of mutual funds versus alternatives such as collective funds or separate accounts; and

  • the use of revenue-sharing and asset-based fees to pay recordkeeping fees.

Significantly, for plan fiduciaries who have made plan changes ahead of litigation, only to find those acts held out as proof of their fiduciary shortcomings, Judge Hamilton found those actions to be evidence of the Chevron fiduciaries’ ongoing review and a sign of compliance with their fiduciary responsibility.

More than Price

Laying out both the arguments for and against each cause of action, Judge Hamilton noted that ERISA plan fiduciaries “have latitude to value investment features other than price” (and in fact are required to do so), and that the mere allegation of high fees (because less expensive funds were available) was insufficient to state a cause of action, in the absence of proof of a flawed investment selection process.

“Plaintiffs’ contention that the Plan fiduciaries should have offered cheaper share classes of the funds actually included in the Plan’s investment lineup is based on the assumption that the mere inclusion of a fund with an expense ratio that is higher than that of the lowest share class violates the duty of prudence,” she wrote. “This claim, standing alone, is insufficient to state a claim that fiduciaries imprudently failed to consider lower cost options.”

Apples-to-Oranges Comparison

Judge Hamilton also rebuffed the notion that it was imprudent to opt for mutual funds when less expensive structures (like collective funds and separate accounts) might have been available to a plan as large as Chevron’s because, she said, the “unique regulatory and transparency features” renders any such consideration an “apples-to-oranges comparison.”

Finally, Hamilton rejected the lawsuit’s challenge to the record keeping fees paid to Vanguard under a revenue sharing arrangement, finding no support for a “per se rule” against revenue sharing.

Similarly, on the question of offering a stable value fund (versus a money market offering), Judge Hamilton noted that, “Offering a money market fund as one of an array of mainstream investment options along the risk/reward spectrum more than satisfied the Plan fiduciaries’ duty of prudence,” and was consistent with the terms of the plan’s IPS. “The inclusion of a money market option is consistent with the IPS guidance, and plaintiffs’ attempt to infer an imprudent process from its offering is therefore implausible,” she wrote.

As for the timing of the removal of the ARTVX Fund, Judge Hamilton noted that “poor performance, standing alone, is not sufficient to create a reasonable inference that plan administrators failed to conduct an adequate investigation — either when the investment was selected or as its underperformance emerged — as ERISA requires a plaintiff to plead some other objective indicia of imprudence.” Hamilton reaffirmed that a fiduciary’s actions are judged “based upon information available to the fiduciary at the time of each investment decision and not from the vantage point of hindsight.

“Plaintiffs cite no authority in support of the proposition that causing an ERISA Plan to incur unreasonable expenses is a breach of the duty of loyalty, distinct from a breach of the duty of prudence,” Judge Hamilton wrote, going on to note that “the complaint simply alleges that defendants violated the ‘duties of loyalty and prudence’ by offering a money market fund instead of a stable value fund, by offering higher-cost funds rather than less expensive funds, and by retaining the ARTVX Fund notwithstanding its underperformance.”

Duty to Monitor

As for the allegations that the plan fiduciaries breached their duty to monitor, Hamilton noted that the plaintiffs “concede that they have alleged insufficient facts, but argue that they should be permitted to conduct discovery in order to acquire such facts. This is insufficient to state a plausible claim. While an ERISA plaintiff may lack direct evidence of the fiduciaries’ process, the plaintiff must at a minimum plead facts that give rise to a ‘reasonable inference’ that the defendant committed the alleged violation” — and stated that the plaintiffs failed to do so.

That said, Judge Hamilton’s order dismissing the case was “without prejudice,” which means that the plaintiffs could have another shot at this if they choose.