By: Mark Casciari

Synopsis: A new Third Circuit decision has allowed an ERISA fee complaint to stand even though there were no specific allegations of fiduciary errors in the process of selecting investment options and fees. This development is yet another in the line of decisions that decide if the federal door to discovery will be opened or closed at the complaint stage of the litigation. Expect judges to differ and more such decisions to issue.

We recently reported, in a sister blog, on a Supreme Court decision affirming that a federal plaintiff needs to allege concrete allegations of injury, caused by a defendant, in order to trigger the onerous discovery weapons in the Federal Rules of Civil Procedure. See here.

ERISA lawsuits are not immune from this specificity precondition to discovery, and the expensive consequences if is satisfied.

A new decision from the Court of Appeals for the Third Circuit, Sweda v. University of Pennsylvania, 2019 U.S. App. LEXIS 13284 (May 2, 2019), shows the difference of opinion of judges when it comes to opening the discovery door.

In Sweda, a putative plaintiff class of 20,000 participants in an ERISA-regulated 403(b) defined contribution plan with assets in 2014 totaling $3.8 billion sued plan fiduciaries to recover on alleged overpayments of fees and underperformance of investment options. The class undoubtedly seeks tens of millions of dollars in damages.

The Sweda putative class presented the question whether the allegations of a breach of ERISA fiduciary duties were sufficiently specific and plausible. Two judges answered in the affirmative; one dissented.

The majority employed a “holistic” analysis that did not parse the complaint “piece by piece to determine whether each allegation, in isolation, is plausible.” The majority twice described the allegations as “numerous” — showing that lengthy complaints help plaintiffs pass through the discovery door. The majority also said that the complaint contained “circumstantial” evidence allegations of better performing benchmarks and allegations that the fiduciaries selected high fee retail mutual funds, as opposed to lower fee institutional funds, as investment options.

The majority ignored the lack of allegations of how the fiduciaries mismanaged the plan — there is no fiduciary breach if the fiduciary process is reasonable. To be sure, specific allegations of an illegal fiduciary process are hard to come by because ERISA fiduciary disclosure rules are limited, but that is the balance Congress struck in limiting fiduciary legal obligations in order to encourage the establishment of ERISA plans and not discourage individuals from serving as fiduciaries.

The dissent tracked recent Supreme Court decisions that require “concrete” and “plausible” allegations before allowing the discovery “pressure to settle,” regardless of the merits, to kick in. The dissent found the complaint insufficient, for example, because it lacked allegations of facts linking any of the named plaintiffs to any chosen investment option and shortcoming. The allegations of harm, the dissent reasoned, lacked the specificity (“concreteness”) needed before full discovery can commence.

Sweda shows that federal judges will continue to grapple with whether to find complaint allegations sufficiently specific to allow the case to proceed to discovery and a likely settlement. This is especially so when the complaint is lengthy and the plan assets are substantial. ERISA is no different than other federal statutes in this regard. The result in any one case likely depends on the level of concern a judge has about allowing litigation to devour resources and cause settlements as a result, without a trial on the merits of the federal claim.