The Eighth Circuit has swung to the left. In two recent decisions, the Eighth Circuit has reached results that would make the Ninth Circuit blush. First, in In re Prempro Prods. Liability Litig., 2009 WL 3518245 (8th Cir. Nov. 2, 2009), the Eighth Circuit threw aside Daubert and held admissible expert testimony that through the alchemy of differential diagnosis one may divine the cause of breast cancer.
Now we have Braden v. Wal-Mart Stores, Inc., 2009 WL 4062105 (8th Cir. Nov. 25, 2009), in which the Eighth Circuit dramatically relaxes the standards governing standing and pleading in ERISA cases. Reversing the district court’s dismissal of a putative class action against Wal-Mart alleging the violation of fiduciary duties imposed by ERISA, the Eighth Circuit adopted a latitudinarian approach to constitutional standing and the Twombly-Iqbal pleading standard in ERISA cases.
Jeremy Braden, an employee at Wal-Mart and a participant in its employee retirement plan (“Plan”), brought a putative class action against Wal-Mart charging that certain mutual funds in the Plan assessed excessive 12b-1 fees and that the Plan’s Trustee had been induced to include these mutual funds in the Plan through improper revenue sharing payments.
Wal-Mart’s “Profit Sharing and 401(k) Plan” is an employee pension benefit plan governed by ERISA. The Wal-Mart Plan is an individual account plan that establishes an individual profit sharing and 401(k) account for each participating employee. Wal-Mart is the Plan’s sponsor and administrator. Merrill Lynch & Co., Inc. is the Plan’s Trustee, holding its assets in trust and providing administrative services for the Plan.
At the end of 2007, the Plan had over one million participants and nearly $10 billion in assets. 2009 WL 4062105, at * 1. Each individual participant in the Plan directed the investment of his assets in his Plan account by selecting from a menu of investment options. These options included ten mutual funds, a common/collective trust, Wal-Mart common stock, and a stable value fund. Id. These options were selected by Wal-Mart’s Retirement Plans Committee, the Plan’s named fiduciary and the entity responsible for the operation, investment policy, and administration of the Plan. Id.
Braden began working for Wal-Mart in May 2002, becoming eligible to participate in the Plan in June 2003 and making his first contribution on October 31, 2003. He filed his complaint on March 27, 2008. His principal complaint was that the Plan failed to adequately evaluate the investment options that had been included in the Plan and that the failure owed to the fact that Merrill Lynch had received a share of these fees. Braden alleged that these excessive fees had cost the Plan $60 million over the past six years and that these fees would continue to cost the Plan approximately $20 million per year. Id.
Braden asserted that the Plan had substantial bargaining power, so that it could obtain institutional shares of mutual funds which Braden further alleged are significantly cheaper than retail shares. 2009 WL 4062105, at * 2. He complained that the Plan nonetheless offered only retail class shares to participants. Finally, he alleged that the relatively high fees charged by the mutual funds in the Plan could not be justified by greater returns on investments because most of these plans underperformed lower cost alternatives. In consequence, Braden asserted that the higher fees and lower returns of the mutual funds in the Plan cost the Plan roughly $140 million by the end of 2007. Id.
Braden’s principal complaint concerned the fact that Merrill Lynch had engaged in “revenue sharing” with the mutual fund companies. Braden charged that such revenue sharing did not constitute reasonable compensation for services rendered by Merrill Lynch, but rather was a kickback paid by the mutual fund companies in exchange for inclusion of their funds in the Plan. Id.
The district court dismissed Braden’s claims. First, the district court concluded that Braden did not have Article III standing to assert claims for breaches of fiduciary duty before October 31, 2003, the date he first contributed to the Plan. Second, the district court dismissed the remaining claims on the grounds that Braden had alleged insufficient facts to support the claim of imprudent or disloyal management, that Wal-Mart had no duty to disclose the information Braden sought, and that Braden had failed to plausibly plead that the revenue sharing payments were not exempted by 29 U.S.C. § 1108(b)(2). The Eighth Circuit reversed.
The Court concluded that Braden had standing to maintain claims for the period before he began participating in the Plan. The Court concluded that “the district court erred by conflating the issue of Braden’s Article III standing with his potential personal causes of action under ERISA.” 2009 WL 4062105, at *4. In the Court’s view, there were two distinct issues:
Whether Braden may pursue claims on behalf of the Plan at all is a question of constitutional standing which turns on his personal injury. Whether relief may be had for a certain period of time is a separate question, and its answer turns on the cause of action Braden asserts.
Id. Braden had “satisfied the requirements of Article III because he has alleged actual injury to his own Plan account.” Id.
Turning to the issue of whether Braden could assert claims for the period before he had personally suffered injury, the Court concluded that the issue “is not one of constitutional standing, but turns instead on what the statutory provision on which the claim rests properly can be understood as granting persons in the plaintiff’s position a right to judicial relief.” Id. The Court held that 29 U.S.C. § 1132(a)(2) provided Braden “a cause of action to seek relief for the entire Plan.” 2009 WL 4062105, at * 5. Therefore, “the relief that may be appropriate, should Braden succeed, is not necessarily limited to the period in which he personally suffered injury.” Id. In the Court’s view, Braden had “a personal stake in the litigation” because “his own recovery will stand or fall with that of the Plan because § 1132(a)(2) does not provide a remedy for individual injuries distinct from plan injuries.” Id.
Second, the Court held that Braden’s complaint satisfied the Twombly-Iqbal pleading standard, which “requires the plaintiff to show at the pleading stage that success on the merits is more than a shear possibility.” 2009 WL 4062105, at * 7. The standard “is not, however, a probability requirement.” Id. Applying the standard to Braden’s complaint, the Court concluded that Braden’s factual allegations had stated a plausible claim for breach of fiduciary duty under ERISA. “Rule 8 does not . . . require a plaintiff to plead specific facts explaining precisely how the defendant’s conduct was unlawful.” 2009 WL 4062105, at * 7. “Rather it is sufficient for a plaintiff to plead facts indirectly showing unlawful behavior, so long as the facts pled give the defendant fair notice of what the claim is and the grounds upon which it rests.” Id.
The Court found that these allegations in Braden’s complaint adequately pled a cause of action of breach of fiduciary duty under ERISA:
The complaint alleges that the Plan comprises a very large pool of assets, that the 401(k) marketplace is highly competitive, and that retirement plans of such size consequently have the ability to obtain institutional class shares mutual funds. Despite this ability, according to the allegations of the complaint, each of the 10 funds included in the Plan offers only retail class shares, which charged significantly higher fees than institutional shares for the same return on investments. The complaint also alleges that seven of the Plan’s 10 funds charged 12b-1 fees from which participants derived no benefit. The complaint states that appellees did not change the options included in the Plan despite the fact that most of them underperformed the market indices they were designed to track. Finally, it alleges that the funds included in the Plan made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the Plan.
Id. The Court remarked that the district court had “correctly noted that none of these allegations directly addressed the process by which the Plan was managed.” 2009 WL 4062105, at * 8. Nonetheless, the Court concluded that “it is reasonable, however, to infer from what is alleged that the process was flawed.” Id. “If these allegations are substantiated, the process by which appellees selected and managed the funds in the Plan would have been tainted by failure of effort, competence, or loyalty.” On this conclusion, the Court held that “the allegations state a claim for breach of fiduciary duty.” Id.
In a rather remarkable footnote, the Court offered an utterly unpersuasive justification for its adoption of a penumbral pleading standard:
In concluding that Braden has stated a claim, we do not suggest that a claim is stated by a bare allegation that cheaper alternative investments exist in the marketplace. It is clear that nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund . . . as discussed above, however, application of Rules 8 and 12(b)(6) is a context-specific task . . . and our ultimate conclusions rest on the totality of the specific allegations in this case.
2009 WL 4062105, at * 8 n. 7.
The Court concluded that if Braden’s “allegations are substantiated, the process by which appellees selected and managed the funds in the Plan would have been tainted by failure of effort, competence, or loyalty.” Id. “Thus the allegations state a claim for breach of fiduciary duty.” Id.
The Court was constrained to acknowledge that “these are of course only inferences, and there may well be lawful reasons appellees chose the alleged investment options.” Id. But in the Court’s view, “it is not Braden’s responsibility to rebut these possibilities in his complaint.” Id. “Rule 8 does not require a plaintiff to plead facts tending to rebut all possible lawful explanations for a defendant’s conduct.” Therefore, “the district court erred by placing that burden on [Braden], finding the complaint inadequate for failing to rule out lawful explanations for [Wal-Mart’s] conduct,” such as the fact that “appellees could have chosen funds with higher fees for any number of reasons, including potential for higher return, lower financial risk, more services offered, or greater management flexibility.” Id.
The Court reasoned that under the “plausibility requirement” of the Twombly-Iqbal pleading standard, “an inference pressed by the plaintiff is not plausible if the facts he points to are precisely the result one would expect from lawful conduct in which the defendant is known to have engaged.” Id. Nonetheless, “not every potential lawful explanation for the defendant’s conduct renders the plaintiff’s theory plausible.” 2009 WL 4062105, at * 9. That is, “a defendant is not entitled to dismissal of the facts or merely consistent with lawful conduct.” Id. The Court concluded:
And that is exactly the situation in this case. Certain appellees could have chosen funds with higher fees for various reasons, but this speculation is far from the sort of concrete, obvious alternative explanation Braden would need to rebut in his complaint. Requiring a plaintiff to rule out every possible lawful explanation for the conduct he challenges would invert the principle that the complaint is construed most favorably to the nonmoving party . . . and would impose the sort of probability requirement at the pleading stage which Iqbal and Twombly explicitly reject.
Id.
The Court acknowledged that the Twombly-Iqbal pleading standard recognizes “a significant cost of discovery in complex litigation and the attendant waste and expense that can be inflicted upon innocent parties by meritless claims.” Id. But in the Court’s view, these policy considerations give way to “ERISA’s remedial purpose and evident intent to prevent through private civil litigation misuse and mismanagement of plan assets.” Id. Remarkably, the Secretary of Labor filed an Amicus Curiae brief in support of Braden’s appeal, in which the Secretary “expressed a concern over the erection of ‘unnecessarily high pleading standards’ in ERISA cases.” Id. n. 8.
What goes unremarked by the Court and the Secretary is that Congress also intended ERISA “to offer employees enhanced protection for their benefits, on the one hand, and, on the other . . . not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place.” Varity Corp. v. Howe, 516 U.S. 489, 497 (1996).
The Court explained:
Congress intended that private individuals would play an important role in enforcing ERISA’s fiduciary duties – duties which have been described as the highest known to the law . . . In giving effect to this intent, we must be cognizant of the practical context of ERISA litigation. No matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make their claims in detail unless and until discovery commences. Thus, while a plaintiff must offer sufficient factual allegations to show that he or she is not merely engaged in a fishing expedition or strike suit, we must also take account of their limited access to crucial information. If plaintiffs cannot state a claim without pleading facts which tends to systemically to be in the sole possession of defendants, the remedial scheme of the statute will fail and the crucial rights secured by ERISA will suffer. These considerations counsel careful and holistic evaluation of an ERISA complaint’s factual allegations before concluding that they do not support a plausible inference that the plaintiff is entitled to relief.
Id. On this reasoning, the Court concluded that Braden had pled sufficient facts to state a claim for breach of fiduciary duty.
The Court concluded that the district court had also erred in concluding that ERISA does not require disclosure of revenue sharing arrangements. The Court concluded that Braden stated a claim for breach of the general duty of loyalty under 29 U.S.C. § 1104(a)(1) by alleging that Wal-Mart “had a duty to disclose to participants that Plan funds charged higher fees than comparable funds, that Wal-Mart had access to more cost effective institutional shares, and that appellees did not select or evaluate the funds on the basis of the fees they charged.” 2009 WL 4062105, at * 11. Braden stated a claim under § 1104 because “participants might conclude in light of this information that Plan funds were not selected using appropriate criteria and might therefore direct their investments toward other options.” Id.
The Court further concluded that Braden had stated a claim that Wal-Mart had breached its “duty of loyalty by failing to disclose details about the revenue sharing payments.” Id. “Braden alleges that those payments corrupted the fund selection process – that each fund was selected for inclusion in the Plan because it made payments to the trustee, and not because it was a prudent investment.” Id. The Court acknowledged that while “there may be no per se duty to disclose [revenue sharing] payments, that conclusion is not dispositive here. 2009 WL 4062105, at * 12.
Finally, the Court determined that Braden had stated a claim under § 1106(a)(1)(C):
The complaint alleges that appellees caused the Plan to enter into an arrangement with Merrill Lynch, a party in interest, under which Merrill Lynch received undisclosed amounts of revenue sharing payments in exchange for services rendered to the Plan. This arrangement amounts to a ‘direct or indirect . . . furnishing of services . . . between the Plan and a party interest,” 29 U.S.C. § 1106(a)(1)(C). The facts alleged are sufficient to shift the burden to appellees to show that “no more than reasonable compensation was paid” for Merrill Lunch’s services.
Id.
The Court rejected Wal-Mart’s argument that this interpretation of §§ 1106 and 1108 rendered any business between the covered Plan and the service provider a prima facie prohibited transaction. Wal-Mart argued that “unless a plaintiff is required to plead facts plausibly suggesting the transaction is not exempted under § 1108, ERISA fiduciaries will be forced to defend the reasonableness of every service provider transaction.” Id.
The Court rejected these arguments. Rather, the Court concluded that “§ 1106(a)(1) does not by its terms demand that a plaintiff make any allegation of reasonableness.” Id. Second, the Court reasoned that its “construction of the statute is in keeping with traditional principles of trust law, which inform our interpretation of ERISA.” Id. “At common law, the fiduciary bears the burden of justifying such transactions.” Id. Third, the Court observed that “Braden could not possibly show at this stage in the litigation that the revenue-sharing payments were unreasonable in proportion to the services rendered because the trust agreement between Wal-Mart and Merrill Lynch required the amounts of the payments to be kept secret.” 2009 WL 4062105, at * 14. “It would be perverse to require plaintiffs bringing prohibitive transaction claims to plead facts that remain in the sole control of the parties who stand accused of wrongdoing.” Id. The Court remarked that Wal-Mart maintained “both that they have no duty to disclose the amounts of the revenue sharing payments and that Braden must nonetheless allege specific facts showing those amounts were unreasonable.” Id. “In this context – where the ultimate issue involves the highest duties known to the law . . . this position is untenable.” Id. Therefore, Braden’s allegations were sufficient to state a claim under 29 U.S.C. § 1106(a)(1)(C).
