On January 24, 2022, the U.S. Supreme Court issued its eagerly awaited decision in the Northwestern University excessive fee case. Justice Sotomayor wrote the 8-0 opinion (Justice Barrett didn’t participate) which found for the plaintiffs, vacating the previous dismissals and remanding the case back to the 7th Circuit. Although the decision was unanimous in favor of the plaintiffs, the very limited holding may not have wide-ranging impact. The decision is preliminarily cited as Hughes et al. vs. Northwestern University et al. 595 U.S. (2022).
In the course of her discussion of the case, Justice Sotomayor characterized the plaintiffs’ allegations as follows: “Petitioners allege that respondents violated their statutory duty of prudence in a number of ways, three of which are at issue here. First, respondents allegedly failed to monitor and control the fees they paid for recordkeeping, resulting in unreasonably high costs to plan participants. Second, respondents allegedly offered a number of mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical “institutional” share classes of the same investments, which are available to certain large investors. App. 83–84, 171. Finally, respondents allegedly offered too many investment options—over 400 in total for much of the relevant period—and thereby caused participant confusion and poor investment decisions.”
The 7th Circuit had affirmed a holding which dismissed the case without substantively addressing the specifics of plaintiffs’ allegations, focusing instead on Northwestern University’s defense that plaintiffs had been offered other investment choices which were not alleged to be imprudent. The Supreme Court’s decision rejected the 7th Circuit’s unusually absolute position on the “investment choice” defense, writing:
“Such a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones. See Tibble v. Edison Int’l, 575 U. S. 523, 530 (2015). Accordingly, we vacate the judgment below and remand the case for reconsideration of petitioners’ allegations.”
This result isn’t surprising in light of the fact that even Northwestern University’s counsel declined to support the 7th Circuit’s position on “investment choice” as an absolute defense and chose to focus instead on pleading deficiencies which the lower courts hadn’t considered. On direct questioning from Justice Kagan, counsel for Northwestern University conceded that “choice is not always a defense”. Ultimately, the Court chose not to entertain Northwestern University’s arguments concerning alternative bases for affirmance, vacating the 7th Circuit opinion based on its disagreement with that circuit’s perceived acceptance of investment choice as a total defense.
While some may be tempted to see this unanimous U.S. Supreme Court decision as a devastating loss for excessive fee defendants, in fact little can be gleaned from the fact that the Court revived the case for the 7th Circuit to consider substantively for the first time. This decision simply stands for the proposition that excessive fee class actions are potentially viable claims if pled with sufficient specificity. The Court declined to declare a new rule that investment choice is a total defense to such claims (note that the opposite result, if the Court had affirmed the 7th Circuit’s dismissal based on investor choice, would have been an extremely helpful development from the perspective of plan sponsors). The Court did not pass on the ultimate merits of the case at all, leaving that to the 7th Circuit on remand. Unfortunately, this decision did not provide much guidance for the 7th Circuit or anyone else concerning what constitutes sufficient specificity to establish a plausible pleading, except for Justice Sotomayor’s caution that “[a]t times, the 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.” As a result, this U.S. Supreme Court decision doesn’t offer plan sponsors ammunition for the hoped for rate and retention relief in a hard fiduciary insurance market, but on the other hand it should not be considered an appropriate justification for further term escalation.
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