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Another defense victory: Seventh Circuit affirms dismissal of excessive fee case against Oshkosh

By Lawrence Fine | September 14, 2022

This recent decision may be indicative of a growing wave of courts willing to apply more scrutiny to excessive fee cases at the outset.
Financial, Executive and Professional Risks (FINEX)
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On August 29, 2022, the U.S. Court of Appeals for the Seventh Circuit decided Albert v. Oshkosh Corp. (7th Cir., No. 21-2789, 8/29/22). In affirming the prior dismissal, the Court distinguished the decision below from the district and Seventh Circuit decisions in Divane v. Northwestern University which were reversed and remanded by the U.S. Supreme Court (under the caption Hughes v. Northwestern University). The Seventh Circuit in Oshkosh indicated that the U.S. Supreme Court decision in Hughes only overruled the defense based on participant choice and left the rest of ERISA jurisprudence relating to pleading requirements intact. The decision cited the Sixth Circuit’s June decision in favor of defendants in Smith v. CommonSpirit Health as providing persuasive authority on pleading standards post-Hughes (see prior article). This decision is more excellent news for plan sponsors (and insurers), and may be indicative of a growing wave of courts willing to apply more scrutiny to excessive fee cases at the outset.

The decision

In the course of dismissing the entire complaint, the Seventh Circuit chose to quote two defense-friendly sentences twice: 1. The sentence from Hughes which the Sixth Circuit quoted and relied on in its CommonSpirit decision: “[T]he circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise” (142 S.Ct. 737, 742 (2022); and 2. A sentence from Seventh Circuit’s dismissal affirmance in Hecker v. Deere & Co. (556 F.3d 575, 586 (7th Cir. 2009)) that “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).” The Seventh Circuit also cited as persuasive the recent Sixth Circuit dismissal affirmance in Smith v. CommonSpirit Health.

The Oshkosh complaint was similar to other excessive fee cases in most respects, except for one allegation which caused the Court some confusion: “Albert claims that the plan should have offered higher-cost share classes of certain mutual funds because the “net expense” of those funds would be lower in light of revenue sharing.” The Court observed that this allegation was “the inverse of what ERISA plaintiffs typically argue”. The Court found that the amended complaint “does not allege sufficient facts to make this novel theory plausible”. “While a prudent fiduciary might consider such a metric, no court has said that ERISA requires a fiduciary to choose investment options on this basis”.

In relation to the more typical allegation that the plan imprudently offered expensive actively managed investment options, the Seventh Circuit cited approvingly the Sixth Circuit’s language to the effect that an ERISA plaintiff can’t state a duty of prudence claim “where the plan merely “offer[ed] actively managed funds in its mix of investment options.””

In dismissing the claim for excessive recordkeeping fees, the Seventh Circuit pointed out that “the Sixth Circuit recently held that an ERISA plaintiff failed to state a duty of prudence claim where the complaint “failed to alleged that the [recordkeeping] fees were excessive relative to the services rendered”.” The Court also stated clearly that the recordkeeping claim “fails under our precedent which Hughes left untouched.” The Seventh Circuit also made clear that “Hughes did not hold that fiduciaries are required to regularly solicit bids from service providers.”

The Court also dismissed a claim about allegedly excessive investment advisory fees, saying that no meaningful benchmarks were provided, and dismissed claims of breach of loyalty since “Albert does not allege, for example, that Fidelity gave Oshkosh kickbacks in exchange for selecting SAI.”

In relation to the plaintiff’s allegations of prohibited transactions, the Court stated that the plaintiff’s interpretation of what constitutes a prohibited transaction was overreaching “inconsistent with the purpose of the statute as a whole”.

Finally, the Court dismissed plaintiff’s purported “duty to disclose” claim, explaining that ERISA only requires disclosure of total fees for funds offered in the plan and “not the internal, post-collection distribution of the fee.”

Key takeaways

This appellate decision adds momentum to the trend of courts taking a hard look at excessive fee claims at the motion to dismiss stage. The Seventh Circuit has reiterated that it is a circuit which will apply such scrutiny at the early stages (as is the case in the Sixth Circuit). This adds Illinois, Indiana and Wisconsin to the list of states in which it is clear that excessive fee complaints can be challenged at the outset (along with states in the Sixth Circuit, Michigan, Ohio, Kentucky and Tennessee). This is particularly good news since one of the highest volume filers of excessive fee complaints is based in Wisconsin (and represented the plaintiff in the Oshkosh case). The only circuit to reverse dismissals since the Hughes decision is the 9th Circuit (but those decisions, one involving Salesforce.com and one against Trader Joe’s, were both short and unpublished and so not considered to be precedential), while other circuits have yet to issue post-Hughes decisions. Not surprisingly, defense counsel in pending cases have quickly submitted the Oshkosh decision as supplemental authority to be considered in relation to pending motions to dismiss (see, for example, this filing in the case against Dish Network Corporation); this may help continue the momentum towards courts applying meaningful standards to excessive fee cases at the pleading stage.

In light of substantial precedent in favor of enforcing choice of venue in plans, plan sponsors with relevant connections to the 7 states in the Sixth and Seventh Circuits may want to consider adopting such provisions if they have not already. We have seen some carriers willing to offer improved terms for clients with venue selection provisions in favorable jurisdictions.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

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