Maryland Federal Court Refuses To Certify “Class Of One” In ERISA Bar Tips Case

By Gerald L. Maatman, Jr., Zachary J. McCormack, and Jesse S. Stavis

Duane Morris Takeaways: On July 10, 2024, Judge Peter J. Messitte of the U.S. District Court for the District of Maryland denied a bartender’s motion to certify a class of approximately 2,300 restaurant workers in Frankenstein v. Host Int’l, Inc., No. 8:20-CV-01100, 2024 U.S. Dist. LEXIS 120678 (D. Md. July 10, 2024). Plaintiff alleged that his employer violated the Employee Retirement Income Security Act (“ERISA”) by forcing tipped workers to accept gratuities in cash which prevented them from making pre-tax contributions to retirement accounts. The Court held that Plaintiff could not represent the class because he failed to show that any other employees opposed the policy. The ruling serves as a reminder to employers about the importance of considering conflicts within a putative class when opposing class certification.

Case Background

Defendant Host International, Inc. (“Host”), headquartered in Bethesda, Maryland, operates restaurants and bars, many of which are located in airports. Id. at *2. The company has a longstanding practice of paying out credit card tips in cash at the end of workers’ shifts. Id. at *4. While employees tend to support this policy, it has one unintended effect: An employee aiming to contribute a large percentage of his or her income to a 401(k) account is not able to do so using pre-tax earnings. Id. A bartender, Dan Frankenstein, objected to this policy, claiming his inability to contribute these pre-tax earnings to his retirement account prevented him from meeting his retirement goals. Id. at *8. This policy, he argued, violated § 502 of the ERISA, which allows plan participants to sue for breach of fiduciary duties. Id. at *9. He further claimed Host’s refusal to permit employees to defer credit card tips amounted to discrimination against tipped-employee participants, and that Host’s decision to prevent such deferrals is arbitrary and capricious. Id. at *10.

After the Court denied Host’s motion to dismiss, Frankenstein filed a motion to certify a class that would include all tipped workers who participated in the 401(k) plan and who had elected to defer some of their income. Id. The Court ordered evidentiary hearings and limited discovery to determine both the parameters of the class and the extent of any objections by its putative members. Id. at *11. Ultimately, Host presented witnesses who testified that many employees, and the unions that represented them, supported the tips-in-cash policy. Id. at *14. In response, Frankenstein was unable to present any evidence that other workers were unhappy with the policy. Id. at *15.

The Court’s Ruling

The Court denied Frankenstein’s motion for class certification. It held that Plaintiff had failed to demonstrate numerosity, commonality, typicality, and adequacy of representation under Rule 23(a). Id. at *17-18.

According to the Court, Frankenstein could not represent a class of aggrieved workers because he appeared to be the only aggrieved worker. Id. at *32. In fact, the tips-in-cash policy was exceptionally popular among Host’s employees. Id. at *33. When the company tried to change the policy by paying tips through an electronic debit card, many workers complained and the union representing employees filed an unfair labor practices charge with the National Labor Relations Board. Id. at *9. Despite Frankenstein’s yearlong opportunity to identify other employees who shared his complaints, he failed to present even one other individual. Id. at *28. The Court opined that the existence of an “intraclass conflict” proved fatal to Frankenstein’s motion for class certification. Id. at *22. Considering that Plaintiff appeared to present what the Court called as a “class of one,” he could not establish numerosity. Id. at *32. Further, due to his inability to point to other workers who shared his grievances, the Court concluded that he could not establish commonality or typicality. Id. at *28. Finally, considering Frankenstein’s views differed from those shared by other members of the putative class, the Court ruled that Plaintiff could not adequately represent the interests of the class. Id. at *25.

Implications Of The Decision

Frankenstein highlights the importance of investigating and considering potential intra-class conflicts when responding to motions for class certification. Evidence showing that members of the putative class disagree on fundamental issues in a lawsuit can help defendants establish that a class action is not appropriate. While Frankenstein presents a particularly dramatic example — the named plaintiff appeared to the only employee in the country who opposed his employer’s policy — this strategy also should be considered when different groups of putative class members disagree with one another.

The Class Action Weekly Wire – Episode 50: 2024 Preview: ERISA Class Action Litigation

Duane Morris Takeaway:
This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Jesse Stavis with their discussion of 2023 developments and trends in ERISA class action litigation as detailed in the recently published Duane Morris ERISA Class Action Review – 2024.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Google Podcasts, the Samsung Podcasts app, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, YouTube or our RSS feed.

Episode Transcript

Jerry Maatman: Welcome to our listeners, thank you for being here on our weekly podcast, the Class Action Weekly Wire. My name is Jerry Maatman, I’m a partner at Duane Morris, and joining me today is my colleague, Jesse Stavis. Thank you for being on the podcast – this is episode 50 of the Class Action Weekly Wire, so we’re excited to have you with us today, Jesse.

Jesse Stavis: Thanks, Jerry, always happy to be part of the podcast.

Jerry: Today we’re discussing a recent publication of Duane Morris, the inaugural issue of the Duane Morris ERISA Class Action Review, and listeners, you can find that e-book publication on our blog, the Duane Morris Class Action Blog. Jesse, could you give our listeners an idea of what they can expect from this publication?

Jesse: Absolutely, Jerry. So in the last few years we’ve seen a surge in class action litigation filed under the Employee Retirement Income Security Act, or ERISA, and 2023 was more the same. The plaintiffs’ bar continues to focus on challenges to ERISA fiduciary’s management of 401(k) and other retirement plans. To that end, the class action team at Duane Morris is pleased to present the ERISA Class Action Review for 2024. This publication analyzes the key ERISA-related rulings and developments in 2023, and the significant legal decisions and trends impacting this type of class action litigation for 2024. We hope the companies will benefit from this resource as they figure out how to comply with this evolving law and standards.

Jerry: Well, Jesse, in 2023 courts throughout the country issued what I consider to be a mixed bag of rulings – major victories for the plaintiff side, and likewise major victories for the defense side. In terms of your analysis of the case law and what occurred last year, what do you think are the key takeaways in the publication for corporate counsel?

Jesse: Well, Jerry, I’d say that motions to dismiss still play an outsized role in ERISA class action litigation. And in this respect litigators on both sides of the V are still dealing with the fallout of the Supreme Court’s decision in a 2022 case called Hughes v. Northwestern University. There was a lot of anticipation that this case would clear up some thorny issues surrounding the pleading standards in ERISA cases. Ultimately, though, the court issued a relatively narrow ruling that left us with more questions than answers. As a result, pleading standards are still very much up in the air. Now, courts have varied in how they have addressed motions to dismiss, but, generally speaking, there’s been a lot of focus on the sufficiency of the comparators that plaintiffs provide. Without more guidance from the Supreme Court, these battles are likely to continue. I will say that there were quite a few significant rulings in ERISA class actions in 2023. On the whole, the plaintiffs’ bar continued to have success, particularly when it came to fending off defense challenges to standing under Rule 12(b)(1).

Jerry: Well, I know, Jesse. In our practice we download and monitor the filings in all 50 States and in all Federal courts in these subsystem areas of law. And certainly ERISA class based litigation is a growing area, and one of the trends that I thought was important, and one of the takeaways that are very interesting for corporate counsel is the enforceability of workplace arbitration programs that have class action waivers in them, and while that might defuse the so-called atomic bomb of a class action in other substantive areas in ERISA. It’s not only so could you explain kind of the rationale on the lines of the case law that you followed in 2023 on that issue.

Jesse: Yeah, I would definitely agree that we are seeing less of an appetite to enforce these class action waivers, and that the difficulty of enforcing this waivers means that we’re really likely to see increased activity this year. There’s a very high rate of class certification – these cases in 2023 was granted 82% of the time, and of course, certification is the Holy Grail for plaintiffs’ lawyers, and that makes these cases very lucrative for the plaintiffs’ bar. I anticipate that class certification is going to remain challenging to defeat outright, and that all has to do with the nature of these claims. So ERISA plaintiffs assert that discrete types of plan mismanagement led to common injuries affecting large numbers of planned participants, and that it did it in similar ways. And, as you know, Jerry, that’s a very good recipe for class certification and it’s a good incentive for plaintiffs’ lawyers to file more of these cases.

Jerry: You used an interesting phrase that I think is spot on – the Holy Grail of these cases is class certification as I view them. The plaintiffs’ bar files them, tries to certify them, and then monetize them, because they know if a case gets certified, it becomes very, very dangerous to try and settle it, inevitably following the wake of certification numbers. What did the space look like on the ERISA front in terms of class-wide settlements in 2023?

Jesse: Well, plaintiffs did very well in securing high value settlements. In 2023, the top 10 ERISA class action settlements totaled $580.5 million – so we crossed the half billion dollar mark. And that’s a significant jump from 2022, when the top 10 ERISA class action settlements totaled $399.6 million.

Jerry: Well, those are record breaking numbers, and we’re following them in 2024. And my prognostication as they’re going to be even higher this year as compared to last year. Thank you, Jesse, and thank you to our loyal blog listeners for reading our publication and for tuning into this week’s podcast. Jesse, I sincerely appreciate you joining the show this week and for your thought leadership in this space.

Jesse: Absolutely. Thanks for having me, Jerry, and of course, thanks to all the listeners.

Introducing The Duane Morris ERISA Class Action Review – 2024!

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaway: The surge of class action litigation filed under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001 et seq., over the last several years persisted in 2023, with class action litigators in the plaintiffs’ bar continuing to focus on challenges ERISA fiduciaries’ management of 401(k) and other retirement plans. Plaintiffs continue to assert that ERISA fiduciaries breached their fiduciary duties of prudence and loyalty by, among other things, offering expensive or underperforming investment options and charging participants excessive recordkeeping and administrative fees. Hundreds fee and expense class actions have been filed since 2020, driven by a number of familiar plaintiffs’ class action law firms alongside some new entrants into the space.

To that end, the class action team at Duane Morris is pleased to present a new publication – the 2024 edition of the ERISA Class Action Review. We hope it will demystify some of the complexities of ERISA class action litigation and keep corporate counsel updated on the ever-evolving nuances of these issues.  We hope this book – manifesting the collective experience and expertise of our class action defense group – will assist our clients by identifying developing trends in the case law and offering practical approaches in dealing with consumer fraud class action litigation.

Click here to download a copy of the Duane Morris ERISA Class Action Review – 2024 eBook.

Stay tuned for more ERISA class action analysis coming soon on our weekly podcast, the Class Action Weekly Wire

Illinois Federal Court Enjoins “Equivalent Benefit” Provision Of Day And Temporary Labor Services Act In Significant Win For Staffing Agencies And Their Company Clients

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Gregory Tsonis

Duane Morris Takeaways: In a consequential ruling on March 11, 2024, Judge Thomas M. Durkin of the U.S. District Court for the Northern District of Illinois granted in part and denied in part a motion for a preliminary injunction concerning amendments to the Illinois Day and Temporary Labor Services Act (“DTLSA”) in Staffing Services Association of Illinois et al. v. Flanagan, Case No. 23-CV-16208 (N.D. Ill. Mar. 11, 2023).  The ruling is significant as it enjoins enforcement of the DTLSA provision requiring staffing agencies to provide equivalent benefits as directly-hired, comparable client company employees.  The decision does not, however, affect the DTLSA requirement that staffing agencies provide equal wages after 90 days of work at a client.  However, this opinion and order indicates that the DTLSA’s equal benefits requirement – considered by many to be the most onerous portion of the recent DTLSA amendments – appears likely to be preempted by the Employment Retirement Income Security Act (“ERISA”) and may never go into effect at all.


In May 2023, the Illinois General Assembly amended the DTLSA to include several new and significant provisions, which Governor Pritzker signed into law on August 4, 2023.  See 820 ILCS 175/et seq.  Section 42 of the amended DTLSA, titled “Equal Pay for Equal Work,” included the obligation that staffing companies pay temporary workers that work more than 90 days within a twelve-month period at a client company the same wages and “equivalent benefits” as the lowest paid, comparable, directly-hired employee at the client company.  Staffing agencies also could opt to pay the “hourly cash equivalent” of benefits owed under the law.  Section 42 also imposed information-sharing requirements on third-party companies utilizing temporary workers, requiring them to provide staffing agencies with “all necessary information related to job duties, pay, and benefits of directly hired employees” to facilitate compliance by staffing agencies.

The amended DTLSA also required staffing agencies to disclose to temporary workers prior to the start of any assignment whether the work site was experiencing any “strike, lockout, or other labor trouble” and gave the worker the right to refuse the assignment without prejudice to receiving another assignment.  See 820 ILCS 175/11.  Section 67 of the DTLSA includes a private right of action, allowing “interested parties” to bring actions against staffing agencies or their company clients for violations of the DTLSA.  An “interested party” is defined in the Act as “an organization that monitors or is attentive to compliance with public or worker safety laws, wage and hour requirements, or other statutory requirements.”  See 820 ILCS 175/5, 67.  A comprehensive breakdown of the 2023 amendments to the DTLSA and the law’s significant new requirements can be found here.

The Illinois Department of Labor published emergency rules and proposed final rules in August 2023.  The emergency rules expired on January 4, 2024, and the proposed final rules remain pending.  Further legislation in November 2023 delayed the start of the 90-day calculation period necessary to trigger the equal pay and benefits provision in Section 42 the DTLSA until April 1, 2024.

In December 2023, the Staffing Services Association of Illinois, the American Staffing Association, and three staffing agencies brought suit in federal court against the director of the Illinois Department of Labor (“IDOL”) and sought a preliminary injunction preventing the enforcement of §§ 11, 42, and 67 of the amended DTLSA and related regulations.  On February 7, 2024, the Court held a hearing on the motion and heard testimony from the three plaintiff staffing agencies.

The Court’s Decision

The Court’s opinion first summarized the relevant provisions of the DTLSA and relief sought by the plaintiffs.  The Court noted that the plaintiffs did not challenge the equal wage requirement in § 42 of the DTLSA.  Id. at 2 n.1.  As to the DTLSA regulations, the Court denied plaintiffs’ motion for an injunction against the emergency rules in light of their January 2024 expiration, and further declined to enjoin the proposed final DTLSA rules that plaintiffs sought to enjoin given that they were subject to and likely to change.

To grant a preliminary injunction, the Court noted that plaintiffs must establish that they are likely to succeed on the merits, are likely to suffer irreparable harm absent an injunction, and that the balance of equities tip in their favor and that an injunction is in the public interest.  Turning to § 42 of the DTLSA, the Court began its analysis by assessing plaintiffs’ likelihood of success on the merits.  Noting that the ERISA preempts laws that “require providers to structure benefit plans in particular ways,” id. at 5, the Court ultimately concluded that plaintiffs’ argument that the ERISA preempts the DTLSA provision is likely to succeed.  The Court reasoned that the “equivalent benefits” provision forces agencies to “determine the value of many different benefit plans and then determine whether to provide the value in cash or the benefits themselves by modifying their plans or adopting new ones,” which prohibits a staffing agency in its “ability to administer ERISA plans uniformly.”  Id. at 7.  The Court also rejected the IDOL’s argument that the option to pay the cash value of benefits avoids preemption by the ERISA, noting that for staffing agencies with employee working in different states, § 42 “denies agencies the ability to administer its ERISA plans uniformly” and even the cash option “requires agencies to make judgment calls about employees’ eligibility and level of benefits on an individualized and ongoing basis.”  Id. at 8.

Having found that plaintiffs are likely to succeed on the merits as to the “equivalent benefits” provision, the Court turned to the analysis of irreparable harm from § 42.  The Court noted the clear “expense and burden of determining the relevant values of benefits and creating, selecting, modifying, or supplementing existing ERISA plans or paying the difference” that staffing agencies would be forced to incur.  Id. at 18.  Additionally, the Court credited evidence offered by the staffing agencies of reduced revenue, lost clients, and the administrative burdens that would force one staffing agency to cease doing business altogether.  Id.  As a result, the Court found that staffing agencies had demonstrated far more than the “mere possibility” of irreparable harm to support an injunction.  Id. at 20.

Finally, the Court evaluated the balance of the equities and public interest and concluded that plaintiffs’ showing that they are likely to succeed on the merits and the irreparable harm that would result from § 42 outweighed the IDOL’s goal of ending “permatemping,” or the long-term hiring of temporary workers without offering them a permanent position with corresponding wages and benefits of directly-hired employees.  Id. at 21.

Notably, the staffing agency plaintiffs also sought to invalidate the portion of § 42 of the DTLSA requiring client companies to disclose pay and benefit data.  The Court held that the plaintiffs lacked standing to assert that challenge. However, it observed in a footnote that “[t]he challenge to this part of Section 42 should come from the agencies’ third-party clients.”  Id. at 5 n.3.

Next, the Court analyzed plaintiffs’ challenge to § 11 of the DTLSA, which requires staffing agencies to disclose to temporary workers prior to beginning an assignment of any “strike, lockout, or other labor trouble” at a client site.  Id. at 11.  The staffing entity plaintiffs argued that the provision is preempted by the National Labor Relations Act (“NLRA”) and applicable U.S. Supreme Court precedent interpreting the NLRA.  Ultimately, the Court disagreed, holding that § 11 of the DTLSA regulates disclosure and work assignments, given the employee’s right to refuse the assignment, while the relevant section of the NLRA protects an employee’s right to “join, or assist labor organizations; collectively bargain through a representative of the employee’s choosing; engage in concerted activity, e.g., striking or picketing; or refrain from engaging in such activities.”  Id. at 12-13.  That § 11 of the DTLSA and the rights protected by the NLRA “might arise in the same setting,” the Court concluded, does not mean that § 11 is precluded outright.  Id. at 14.  The Court similarly rejected plaintiffs’ argument that the right to hire replacement workers is an “economic weapon” afforded by the NLRA, which the DTLSA curtails through the right of refusal, reasoning that the DTLSA “merely requires agencies to give their employees information about a potential work site and the right to an alternative assignment.”  Id. at 15.

Finally, the Court analyzed plaintiffs’ contention that § 67 of the DTLSA, which gives a private right of action to any “interested party,” violates constitutional due process guarantees because the “interested party” may not be injured by any violation.  The Court noted the existence of other statutes giving private rights of action to interested parties, ultimately concluding that plaintiffs’ argument is one of standing, which the Court declined to address in a hypothetical scenario.  Id. at 17.

Implications For Employers

This decision is hugely consequential for both staffing agencies and the companies that use them.

The ongoing coordination and information-sharing regime envisioned by the DTLSA concerning employee benefits is unprecedented, and was the source of significant concern for staffing agencies and third-party company clients alike.  This Court’s ruling not only prevents enforcement of the “equivalent benefits” requirement of the DTLSA indefinitely, but also indicates that the benefits provision in § 42 of the DTLSA is unlikely to survive at all.  Though technically unaffected by this decision, the § 42 requirement requiring companies to disclose benefit-related data may await a similar fate if and when a challenge by a staffing company client is brought.  While undoubtedly litigation over the DTLSA will continue, including possibly an appeal of the Court’s opinion and order, this decision prevents the application of the most onerous provision in the DTLSA and the imposition of a burdensome administrative regime on staffing agencies and their clients for at least the foreseeable future.

Texas Federal Court Allows ERISA Class Action To Proceed Based On ESG Initiatives

By Gerald L. Maatman, Jr., Brad A. Molotsky, and Jesse S. Stavis

Duane Morris Takeaways: On February 21, 2024, in Spence v. American Airlines, Inc., No. 4:23-CV-00552-O (N.D. Tex. Feb. 21, 2024), Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas denied defendants’ motion to dismiss in a class action filed under the Employee Retirement Income Security Act of 1974 (ERISA). The ruling strikes the latest blow in the war between advocates and opponents of so-called environmental, social, and governance (ESG) investment. If the decision stands and if other courts adopt the rationale of the ruling, ERISA fiduciaries that invest in funds based on ESG factors are apt to face heightened risks and exposures.

Case Background

The primary purpose of the ERISA is to protect the beneficiaries of employee retirement plans. To achieve this goal, the law imposes demanding fiduciary duties on plan administrators, who are required to act with prudence and loyalty in selecting investment vehicles. In general, ERISA fiduciaries are expected to choose funds that will maximize profits for plan beneficiaries. However, in recent years, many investment funds have made concerted efforts to consider the social and environmental impacts of their decisions. This practice has proven controversial, as some plan beneficiaries have claimed that the focus on socially conscious investment has harmed their bottom line.

In Spence, the named plaintiff, an American Airlines pilot, is seeking to represent a class of approximately 100,000 participants in the company’s 401(k) plans. Spence argues that plan fiduciaries violated their duties of loyalty and prudence by investing in underperforming ESG funds, and by choosing funds that are managed by investment firms that pursue ESG goals through proxy voting and shareholder activism. According to plaintiff, firms like BlackRock had cast proxy votes that caused ExxonMobil and Chevron to adopt environmentally and socially conscious policies. Because these policies allegedly resulted in declining stock prices, the plaintiff asserts claims for breach of fiduciary duty to invest in funds managed by these individuals.

The airline and its employee benefits committee moved to dismiss. They contended that plaintiff lacked standing because he had not shown that he was personally impacted by any investment decisions. Defendants further argued that the plaintiff’s failure to provide meaningful comparisons between the airline’s plans and supposedly better-performing plans was fatal to his case. Finally, they urged the Court to reject plaintiff’s “Challenged Manager theory,” which suggests that investment in funds managed by individuals who have signaled their commitment to ESG is itself a breach of fiduciary duty. This theory, they argued, “is as wrong as it sounds.” Id. at 2.

The Court’s Ruling

In its ruling, the Court rejected all of the defendants’ arguments and denied the motion to dismiss. The Court held that the plaintiff had presented a plausible theory by arguing that ESG funds systematically underperform and that plan fiduciaries breached their duties by selecting these underperforming funds. According to the Court, “[f]ailure to consider [the alleged underperformance of ESG funds] gives rise to a plausible inference that defendants’ conduct was imprudent.” Id. at 12. The Court further held that plaintiff was not required to provide detailed benchmarks at the motion to dismiss stage.

Most significantly, the Court endorsed plaintiff’s Challenged Manager Theory. According to Judge O’Connor:

Plaintiff articulates a plausible story: Defendants’ public commitment to ESG initiatives motivated the disloyal decision to invest Plan assets with managers who pursue non-economic ESG objectives through select investments that underperform relative to non-ESG investments, all while failing to faithfully investigate the availability of other investment managers whose exclusive focus would maximize financial benefits for Plan participants.

Id. at 12-13. This focus on the identity of fund managers, rather than on specific actions taken by those managers, was an innovative theory, and one that the Court adopted in full.

Implications Of The Ruling

The implications of the Court’s ruling are striking. According to the Court, ERISA plans can breach their fiduciary duties not only by choosing the wrong funds, but also by doing business with fund managers who have signaled their commitment to ESG investment.

The decision in Spence is unlikely to be the last word in this space.

Michigan Federal Court Declines To Compel Arbitration Of ERISA Claims Due To An Unenforceable Class Action Waiver

By Gerald L. Maatman, Jr. and Derek Franklin

Duane Morris Takeaways: In Parker, et al. v. Tenneco Inc., et al., Case No. 2:23-CV-10816 (E.D. Mich. Aug. 21, 2023), Judge George Steeh of the U.S. District Court for the Eastern District of Michigan denieda motion to compel arbitration based on finding an ERISA class action waiver in an arbitration agreement unenforceable. The Court determined that Plaintiffs’ breach-of-fiduciary-duty claim under the ERISA “seeks relief for the [Benefits] plan as a whole,” and that “the harm (and the recovery) is to the Plan, rather than to plaintiffs specifically.” Id. at 14-15. In turn, the Court concluded that compelling arbitration and enforcing the class action waiver would prevent plan participants from seeking plan-wide remedies conferred by the ERISA statute. For these reasons, the Parker decision is instructive for employers seeking to implement an enforceable class action wavier and configure arbitration agreements that are best suited to account for the possibility of a class action waiver being nullified.

Case Background

The group of Plaintiffs in the Parker lawsuit were led by Tanika Parker, a current employee of DRiV Automotive Inc. (“DRiV”), and Andrew Farrier, a former worker for Tenneco Inc. (“Tenneco”). DRiV and Tenneco were two of several affiliated entities named as Defendants in the case. Parker and Farrier, participants in ERISA-covered 401(k) plans (the “Plans”) sponsored by their respective employers, alleged that Defendants breached their fiduciary duties under the ERISA by failing to prudently monitor and control the Plans’ investments and expenses. Defendants moved to compel arbitration of Plaintiffs’ claims on an individual basis, pursuant to an Arbitration Procedure adopted by the Plans containing language barring participants from bringing ERISA claims as a group or class. The Arbitration Procedure also provided that, if the class action waiver was found unenforceable or invalid by a court, the entire arbitration procedures would become null and void.

Eastern District of Michigan Opinion

In denying Plaintiffs’ motion to compel arbitration, Judge Steeth ruled that the class action waiver within the Arbitration Procedure was unenforceable because it “limits a participant’s substantive right under ERISA by prohibiting plan participants from bringing suit.” Id. at 15.

The Court’s reasoning cited an April 2022 Sixth Circuit decision in Hawkins v. Cintas Corp., 32 F.4th 625, 630 (6th Cir. 2022), which held that breach-of-fiduciary-duty claims under the ERISA are “brought in a representative capacity on behalf of the plan as a whole.” Id. at 10. The Court also quoted the explanation in the Hawkins decision that, although an ERISA breach-of-fiduciary-duty claim is typically brought by individual plaintiffs, “it is the plan that takes legal claim to the recovery, suggesting that the claim really ‘belongs’ to the Plan,” and that “an arbitration agreement that binds only individual participants cannot bring such claims into arbitration.” Id. at 12.

Consistent with that rationale, the Court in Parker held that the ERISA class action waiver in the Arbitration Procedure at issue was unenforceable because it would preclude Plan participants from pursuing “plan-wide remedies” provided for under the ERISA statute that cannot be waived by an agreement. Id. at 15. According to the Court, this would occur by the class action waiver “(1) prohibiting participants from bringing suit in a representative capacity on behalf of the plan, and (2) limiting relief to losses attributable to individual participant accounts, as opposed to plan-wide remedies.” Id.

Given that the Arbitration Procedure provided that it “shall be rendered null and void in all respects” if the class action waiver were to be “found unenforceable or invalid by the court,” the Court declared the entire Arbitration Procedure null and void and denied Defendants’ motion to compel arbitration. Id. at 15-16.

Implications for Class Action Defendants

As federal courts continue to issue decisions limiting the application of class action waivers relative to claims under the ERISA, it remains critical for businesses and employers to regularly review their arbitration agreements and class action waiver language to ensure legal compliance. Any business trying to implement an enforceable class action waiver should carefully consider the potential risks of extending that language to cover plan mismanagement claims under the ERISA. Businesses should also review their arbitration procedures to ensure they are best positioned to function independently of a potentially unenforceable class action waiver.

Georgia Federal Court Declines To Dismiss ERISA Prohibited Transaction Claims And Certifies Class Despite Differences In Class-wide Investment Choices

By Gerald L. Maatman, Jr., Brian W. Sullivan, and Jesse S. Stavis

Duane Morris Takeaways:  On August 2, 2023, Judge Clay Land of the U.S. District Court for the Middle District of Georgia granted a motion to certify a class of participants in an ERISA class action involving an employer-sponsored defined contribution plan in Goodman v. Columbus Regional Healthcare System, Inc., No. 21-CV-15, 2023 WL 4935004 (M.D. Ga. Aug. 2, 2023). The Court rejected defense arguments to deny certification of one large class in favor of smaller sub-classes based on differences in the investment choices and resulting injuries of putative class members.  Instead, the Court concluded that allegations that the asserted injuries were caused by Defendant’s common conduct warranted class certification without regard to such differences.  For these reasons, the Goodman decision is instructive for ERISA plans and fiduciaries defending putative class claims under the ERISA.

Case Background

Plaintiffs were participants in a defined contribution plan (the “Plan”) sponsored by their employer, Defendant Columbus Regional Healthcare System, Inc.  Plaintiffs alleged that Defendant violated its fiduciary duties under the ERISA by failing to prudently monitor and control the Plan’s investments and expenses and because it caused the Plan to engage in prohibited transactions with the Plan’s record-keeper and investment advisor (together, the “Service Providers”).  Goodman, 2023 WL 4935004, at *1-2.  Plaintiffs moved to certify a class under Rule 23(b)(1) consisting of all plan participants or beneficiaries of the plan with an account balance on or after February 2, 2015 through the termination of the Plan.  Id.

Class Certification Granted

Plaintiffs sought to certify a class with respect to their three ERISA claims that Defendant violated its duty to prudently monitor investments and expenses and had engaged in prohibited transactions.  Id. at *3.  Defendant opposed certification on the grounds that “the class proposed by Plaintiffs is so broad that Plaintiffs did not meet their burden to establish standing, commonality, and typicality” as required by Rule 23.  Id. at *4.

Addressing Defendant’s standing challenge first, the Court acknowledged that, to have standing, Plaintiffs and other Plan participants “must have suffered a decrease in value of their defined contribution accounts due to a breach of fiduciary duty.”  Id.  The Court rejected Defendant’s argument that “it is possible that some members of the putative class as presently defined did not suffer any loss due to the alleged breaches of fiduciary duties.” The Court reasoned that “this is not a standing problem but a liability issue.”  Id.  It explained that “[t]he possibility that some putative class members may not ultimately make a recovery does not eliminate standing for class certification purposes,” particularly where evidence of specific losses “should be readily ascertainable.”  Id.

The Court likewise rejected Defendant’s arguments that Plaintiffs failed to establish the commonality or typicality requirements of Rule 23(a).  The Court explained that commonality requires a showing that class members have suffered “the same injury” and that their claims depend on “common questions or law or fact” with common answers.  Id. at *5.  Typicality, the Court explained, requires evidence of “a sufficient nexus” between the claims of the Plaintiffs and those of the putative class as shown by claims or defenses arising “from the same event or pattern or practice” and “based on the same legal theory.”  Id.  Together, the Court opined that commonality and typicality require Plaintiffs and the class members to have the same interest and suffer the same injury, even though the Plaintiffs need not have suffered injury “at the same place and on the same day as the class members.”  Id.

Applying these principles, the Court rejected Defendant’s suggestions “that there must be a separate sub-class for each allegedly imprudent investment and that the named Plaintiffs cannot establish typicality for allegedly imprudent investments options in which they did not invest.”  Id.  Instead, the Court held that this “level of granularity” was not “required at the class certification stage” where Plaintiffs had alleged that Defendant employed “flawed selection and monitoring practices” that were the same for class members across all investment options.  Id.  The same was true of “the excessive fee and prohibited transaction claims,” which were based on Defendant’s “alleged failure to insist” that the Service Providers charge “no more than reasonable fees, which resulted in harm to Plan participants” invested in relevant funds.

As such, the Court concluded that “the alleged cause of the injury remains the same across all funds.”  Id.  On these allegations, the Court found that there were common questions capable of class-wide resolution and for which Plaintiffs’ claims were typical of the class – whether Defendant breached its fiduciary duties by offering imprudent investments and by allowing the Service Providers to collect unreasonable fees.  The Court determined that more granular issues concerning the specific investments and injuries of particular class members “relate to the degree of injury and level of recovery” such that the Court did “not see the benefit of dividing the proposed class into sub-classes by investment option.”  Id. at 5-6.  For these reasons, the Court granted Plaintiffs’ motion to certify the class.

Implications for Employers and Plan Administrators

Goodman is typical of federal court decisions in the last several years addressing motions to certify classes in cases asserting breach of fiduciary duty claims under the ERISA.  The ruling underscores that the focus for class certification of such claims remains on the existence of common, injury-producing conduct rather than the similarity of the resulting injuries.  Courts generally will not decline to certify a class based on differences in the investment options chosen or injuries suffered by class members so long as those investments or injuries are linked by a defendant’s common conduct, at even high levels.

Federal Court In Connecticut Certifies Over 25,000 Person Class In ERISA Class Action Lawsuit

By Gerald L. Maatman, Jr. and Jeffrey R. Zohn

Duane Morris Takeaways: On July 28, 2023, Judge Michael P. Shea of the U.S. District Court For The District Of Connecticut granted class certification for current and former employees of Yale-New Haven Hospital in Ruilova et al. v. Yale-New Haven Hospital, Inc. et al., Case No. 3:22-CV-00111 (D. Conn. July 28, 2023).  Plaintiffs alleged that their retirement accounts were not appropriately managed, which resulted in poor investment decisions and excessive fees.  Although many class action defendants are emboldened to fight on every aspect of plaintiffs’ claims, the Defendants in Ruilova took a different approach.  Prior to the Court granting certification, Defendants stipulated to the certification of an over 25,000-person class in order to streamline the litigation and efficiently manage the litigation.  Per Rule 23, the Court deemed that the motion satisfied the requirements for class certification.

Case History

In January 2022, Plaintiffs Kaity Ruilova and Eileen Brannigan (“Plaintiffs”) filed a class action lawsuit against Yale-New Haven Hospital, Inc. and its Board of Directors and Investment Oversight Committee (“Defendants”) alleging breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”).  Plaintiffs sought to represent over 25,000 former and current employees that participated in the Yale-New Haven ERISA Plan (“the Plan”).  The Plan had assets totaling approximately $1.66 billion.

The lawsuit alleged that Defendants failed to fully disclose the expenses and risks of the Plan’s investment options to participants, allowed unreasonable expenses to be charged to participants (at a rate around 33% higher than comparable plans), and accepted high-cost and poorly-performing investments.  Plaintiffs sought to recover all losses resulting from each breach of fiduciary duty.

Defendants filed a motion to dismiss that the Court granted in part and denied in part.  The Court dismissed the claims made against the Board of Directors because the Board of Directors was not a fiduciary of the Plan.  The Court denied the motion to dismiss as to the claim alleging that the Plan incurred excessive recordkeeping and administrative fees and the related failure-to-monitor claims.

While still denying that they are liable to Plaintiffs, approximately four months later, Defendants struck a deal with Plaintiffs to jointly file a stipulation to certify the class just as Plaintiffs articulated in the Complaint.  The Court certified the class in a brief half page order one month later. Per its duty under Rule 23, the Court analyzed the motion and determined that Plaintiffs met the prerequisites for class certification.

Implications for Class Action Defendants

While a court certifying a class does not always make headlines, this one is unique. Defendants proactively agreed to stipulate to the certification of the class that Plaintiffs’ counsel alleged in the Complaint.  The parties’ conversations and thought processes that led to this decision will never be known, but this strategy is a good reminder to always assess the merits of plaintiffs’ claims and only attack the weakest aspects of the case.  Doing more is a waste of everyone’s resources, may demonstrate a lack of good faith, and could damage credibility in the eyes of the court.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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