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certifying a class of retirement plans that used a common plan product, with plan participants as class representatives
Summary of this case from Wood v. Prudential Ret. Ins. & Annuity Co.Opinion
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For Jaclyn Santomenno, Karen Poley, individually and on behalf of Employee Retirement Income Security Act of 1974,etc; as an investor in the Lommis Sayles Investment Grade Bond Ret. Opt and the First American Mid Cap Growth Opportunities Inv. Opt.,etc.; as an investor of Vanguard Target Ret, Barbara Poley, individually and on behalf of Employee Retirement Income Security Act of 1974,etc; as an investor in the Lommis Sayles Investment Grade Bond Ret. Opt and the First American Mid Cap Growth Opportunities Inv. Opt.,etc.; as an investor of Vanguard Target Ret, Plaintiffs: Arnold Carl lakind, Robert E Lytle, LEAD ATTORNEYS, PRO HAC VICE, Szaferman Lakind Blumstein Blader and Lehmann PC, Lawrenceville, NJ; Havila C Unrein, Khesraw Karmand, LEAD ATTORNEYS, Juli E Farris, Keller Rohrback LLP, Santa Barbara, CA; Daniel S Sweetser, Robert L Lakind, Stephen Skillman, PRO HAC VICE, Szaferman Lakind Blumstein and Blader PC, Lawrenceville, NJ; Derek W Loeser, Gretchen S Obrist, Lynn L Sarko, Michael D Woerner, PRO HAC VICE, Keller Rohrback LLP, Seattle, WA; Mark A Fisher, Robert Gannon Stevens, Jr, PRO HAC VICE, Szaferman Lakind Blumstein Blader and Lehmann PC, Lawrenceville, NJ.
For Transamerica Life Insurance Company, Transamerica Investment Management, LLC, Transamerica Asset Management, Inc., Defendants: Thomas R Curtin, LEAD ATTORNEY, George C Jones, Graham Curtin PA, Morristown, NJ; Brian David Boyle, O'Melveny and Myers LLP, Washington, DC; Catalina J Vergara, O'Melveny & Myers, Los Angeles, CA; Christopher Brendan Craig, O'Melveny and Myers LLP, Los Angeles, CA; Robert N Eccles, Shannon M Barrett, PRO HAC VICE, O'Melveny and Myers LLP, Washington, DC; Stella Dahye Kim, O'Melveny and Meyers LLP, Los Angeles, CA.
ORDER GRANTING SECOND MOTION TO CERTIFY CLASS [Dkt. No. 358]
DEAN D. PREGERSON, J.
Presently before the Court is Plaintiffs' Second Motion for Class Certification, brought under Federal Rule of Civil Procedure 23(b)(3). (Dkt. No. 358.) Having considered the parties' submissions and heard oral argument, the Court adopts the following Order.
I. BACKGROUND
The facts of this case are taken from the Court's previous Order denying class certification. (Dkt. No. 354.) New facts and procedural history follow.
A. Statement of Facts from Order Denying First Motion for Class Certification
Transamerica Life Insurance Company (" TLIC" ) sells a 401(k) plan product targeted at small and mid-size employers. (Compl. ¶ ¶ 62, 94.) The product consists of a bundle of investment options and administrative services that an employer can purchase. (Id. ¶ 7.)
Plaintiffs and potential class members are the retirement " plans" that used these TLIC products and people who are or were participants in or beneficiaries of the plans. (Mot. Class Cert., dkt. no. 277, § III.) Plaintiffs allege that the fees they were charged for these products were excessive, in violation of the Employee Retirement Income Security Act (" ERISA" ). (Compl. ¶ 1.)
Employers who purchase the 401(k) plan product enter into a group annuity contract (" GAC" or " the contract" ) with TLIC. (See Decl. Darcy Hatton ISO Def.'s Mot. Dismiss, Exs. D-1 and D-2.) Through the GAC, TLIC provides a set of investment options to the employer. Plaintiffs' employers selected the " Partner Series III" retirement package. (Compl. ¶ 243.) This package gives employers 170 investment options, from which the employer may select a smaller number to offer to their employees. (Id. ¶ ¶ 241-42.) The 401(k) plan sponsored by the former employer of Plaintiff Santomenno, the Gain Capital Group, LLC 401(k) Plan (the " Gain Plan" ), selected 46 of 170 investment options. (Id. ¶ ¶ 17, 206-08.) The plan sponsored by the employer of Plaintiffs Karen and Barbara Poley, the QualCare Alliance Networks, Inc. Retirement Plan (the " QualCare Plan" ), selected 36 of 170 investment options. (Id. ¶ ¶ 16, 206-08.)
The employer and TLIC also enter into an " Application and Agreement for Services" (" Services Agreement" ), which sets out the various services TLIC agrees to provide for the employer's plan, including recordkeeping services, enrollment services, and website hosting. (See, e.g., Decl. Darcy Hatton ISO Def.'s Mot. Dismiss, Ex. A.) Plaintiffs do not challenge fees associated with the Services Agreements.
One of the benefits TLIC provides to client employers is the " Fiduciary Warranty." (Id. ¶ 155.) Having entered into a GAC, an employer may pick and choose from the investment options à la carte, or it may choose one of TLIC's pre-selected " model" lineups. (Id. ¶ 157.) If an employer chooses a model line-up, the employer qualifies for TLIC's Fiduciary Warranty, which " provides specific assurances" that the line-up will satisfy ERISA's " broad range of investments" requirement and its " prudent man standards." (Id.) TLIC warrants that if employees assert a claim for breach of those fiduciary duties against the employer, TLIC will indemnify the employer and make the plan whole. (Id. ¶ 159.) TLIC's Fiduciary Warranty applies when an employer constructs its own line-up only if the employer selects investments from specified categories. (Id. ¶ 157.)
TLIC structures its investment product under the GAC such that each investment option is considered a " separate account." (Id. ¶ 132.) Each separate account corresponds to an underlying investment: a mutual fund, a collective trust, or a traditional separate account. (Id. ¶ 130.) In each separate account, TLIC pools together the retirement assets of all employees who choose a certain investment option, regardless of their employer. (Id.) Many of the mutual funds are publicly traded and managed by investment managers unaffiliated with TLIC such as Fidelity or Vanguard. (See, e.g., id. ¶ 214.) Some of the mutual funds and collective trusts are managed by Transamerica Investment Management, LLC (" TIM" ) or Transamerica Asset Management, Inc. (" TAM" ), affiliates of TLIC. (Id. ¶ 340.)
TLIC assesses fees for most accounts. The GAC specifies that there are Investment Management Charges and Administrative Management Charges (" IM/Admin Fee" ) associated with each separate account, which " may be withdrawn daily and will belong to [TLIC]." (Hatton Decl., Ex. D-1.) These fees are a percentage of the assets in the separate account, and the rate varies depending on which separate account is in question. (Hatton Decl., Exs. D-1 and D-2.) Thus, the IM/Admin Fee is not plan-specific, but investment-specific; it is charged uniformly to each separate account, regardless of plan. (Decl. Robert Lakind, Ex. P at 21-23 (deposition testimony of Eric King, VP of TLIC's Investment Solutions Group).) The GAC provides a schedule of fees for each of the separate accounts but reserves the " right to change the Investment Management Charge or the Administrative Charge upon advance written notice to the Contractholder of at least 30 days." (Hatton Decl., Ex. D-1.)
Plaintiff alleges that for separate account investment options invested in mutual funds, TLIC's fees are approximately 75 basis points, or 0.75% of the Plan assets invested in each option. (Id. ¶ 271.) For at least 28 of the mutual fund options, plan participants pay the fee charged by the mutual fund in addition to a higher fee charged by TLIC. (Id. ¶ ¶ 245, 248.) For instance, for the separate account that invests in the Vanguard Total Stock Market Index Ret Opt, the underlying mutual fund charged a fee of 18 basis points and TLIC charged an additional account fee of 93 basis points, for a total fee of 111 basis points or 1.11% of the separate account assets. (Id. ¶ 246.) For separate account investment options invested in collective trusts, TLIC charged a fee ranging from 79 basis points to 150 basis points. (Id. ¶ ¶ 331, 333-34.)
In their complaint, Plaintiffs alleged that Defendants' fees are excessive and are a breach of Defendants' fiduciary duty to Plaintiffs under ERISA. More specifically, Plaintiffs alleged that TLIC's fees on separate accounts that invest in publicly available mutual funds are excessive because TLIC provides no services on such accounts: the underlying mutual funds' investment management fees covered " all of the necessary investment management/advisory services needed for the mutual fund," and thus " the alleged management services performed by TLIC were unnecessary or simply not performed." (Compl. ¶ 276.) As a result, Plaintiffs argued, the fees they paid to TLIC were " excessive and unnecessary." (Id.) " The charging of any fees by TLIC to Plaintiffs that are in excess of the fees charged by each of the mutual funds that underlie the overlaying separate account is impermissible." (Id. ¶ 293.)
Plaintiffs further alleged that TLIC has not used its institutional leverage to invest their money in the lowest price share class of mutual funds. (Id. ¶ 314.) This, Plaintiffs alleged, was a breach of TLIC's fiduciary duty under ERISA. (Id. ¶ 314.)
Plaintiffs also alleged that TLIC affiliates TIM and TAM made transactions that are prohibited under ERISA and knowingly participated in TLIC's violations of fiduciary duty. (Id. Count IV.)
B. Second Class Certification Motion
In Plaintiffs' Second Motion for Class Certification, Plaintiffs note that there are two categories of fees at issue: separate account-level fees and plan-level fees. (Second Mot. to Certify Class, dkt. no. 358, at 3 (" Mot." ).) The IM/Admin fees are separate account-level fees, as are fees billed by underlying mutual funds. (Id.) The plan-level fees are the Contract Asset Charge (" CAC" ) paid by participants and the service fees collected under the Service Agreement. (Id.) Plaintiffs' experts opine that TLIC's service fees under the Service Agreement " are adequate and reasonable," and so Plaintiffs do not challenge TLIC's service fees. (Id. at 3, 5.)
The CAC fees pay for " plan-level (a) 'sales, marketing and administrative expenses of the contract' (Dec. RL, Ex. 10, p. 5), (b) commissions (Dec. RL, Ex. 4, TRAN-540496), which are passed through to the broker (Dec. RL, Ex. 6, pp. 23-24) and (c) discontinuance charges that may be paid to the plan's prior service provider, which TLIC refers to as an 'asset bridge' or 'MVE.' (Dec. RL Ex. 11, p. 16)." (Id. at 4.) Some of these fees, such as the commissions for the broker, are pass-through fees and are not challenged by Plaintiffs. (Id. at 5.)
The dispute, Plaintiffs explain, is whether the IM/Admin fees " subsidize plan-level fees" and thus make the total fees excessive. (Id. at 4.) This total fee argument is in response to the Court's prior Order denying class certification. In that Order, the Court held that " if Plaintiffs wish to assert a claim under TLIC's fiduciary duty to defray only reasonable expenses, they must do so by considering TLIC's fees as a whole compared to TLIC's total reasonable expenses in providing its services." (Order, dkt. no. 354, at 30-31.)
Plaintiffs' Motion seeks to certify three classes, modified since the Court's prior Order. First is the " TLIC Prohibited Transaction Class" that alleges " TLIC committed ERISA prohibited transactions under 29 U.S.C. § 1106(b)(1) (self-dealing) because TLIC unlawfully paid itself from plan assets over which it was a fiduciary." (Mot. at 6.) Second is the " TLIC Excessive Fee Class" that " seeks to prosecute three claims: the claim that, as a consequence of its excessive fee, TLIC breached (1) its duty of loyalty, to act 'solely in the interest of participants and beneficiaries,' 29 U.S.C. § 1104(a)(1)(A); (2) its duty to defray only reasonable expenses, 29 U.S.C. § 1104(a)(1)(A)(ii); and (3) its duty of prudence, 29 U.S.C. § 1104(a)(1)(B)." (Mot. at 6.)
Third is the " TIM and TAM Class" that has two claims: first, " that TLIC committed a prohibited transaction under 29 U.S.C. § 1106(b)(1) and (2) (self-dealing and acting on behalf of or representing a party whose interests are adverse to the plan) by allowing plan assets to be invested in Ret Opt investment choices that were managed for a fee by TLIC affiliates" ; and second, that " TLIC breached its three duties under 29 U.S.C. § 1104(a)(1)(A), (A)(ii), and (B) as described above, by allowing TIM and TAM to charge excessive fees on plan assets invested in the Affiliated Separate Accounts." (Mot. at 6.) Specifically, Plaintiffs argue that TIM and TAM charged TLIC investors higher fees than " TAM charged to others with whom it bargained at arm's length for the same services." (Id.)
Plaintiffs explain that the TLIC Prohibited Transaction Class and one of the claims for the TIM and TAM Class " allege 'per se' ERISA prohibited transaction claims," where reasonableness is not a defense. (Id.) Reasonableness is central to the TLIC Excessive Fee Class and claim two of the TIM and TAM Class because Plaintiffs must prove that the fees were excessive. (Id.)
Plaintiffs further explain that the changes Plaintiffs have made to this motion address the Court's concerns in the prior Order. (Id. at 6-8.) Plaintiffs now seek partial certification of the TIM and TAM prohibited transaction claim, produce evidence regarding commonality, and explain the legal basis of the prohibited transaction claim. (See Order, Dkt. No. 354, at 18-20, 35 n.8.) Further, Plaintiffs are not focused solely on the uniform investment-level Separate Account IM/Admin fee of each Ret Opt, as they were in their prior Motion. (Mot. at 7.) Instead, Plaintiffs " redefin[ed] the TLIC Excessive Fee Class to limit the class to plans in which plan-level costs are either unsubsidized or which require subsidization, but even after accounting for the subsidy, the balance of the IM/Admin is still excessive." (Id. at 7-8.) C. Procedural History
This Court denied Plaintiffs' first Motion for Class Certification on August 28, 2015. (Dkt. No. 354.) On October 15, 2015, the parties filed a Stipulation Regarding Briefing Schedule and Length of Parties' Second Class Certification Briefs. (Dkt. No. 355.) In a footnote, the stipulation states that " Defendants reserve all objections with respect to Plaintiffs' intended Second Motion for Class Certification, including that it is procedurally improper." (Id. at 2 n.1.) The Court granted the stipulation in its Order on October 27, 2015. (Dkt. No. 357.) Then, Plaintiffs filed their second Motion to Certify Class on October 28, 2015. (Dkt. No. 358.) The next day, Defendants filed an Ex Parte Application to Expedite Motion to Strike Plaintiffs' Second Motion for Class Certification, which this Court denied in a Minute Order. (Dkt. Nos. 361, 362.) On October 30, 2015, Defendants filed an Ex Parte Application to Strike Plaintiffs' Second Motion for Class Certification. (Dkt. No. 363.) The Court directed Plaintiffs to file a responsive brief, which Plaintiffs did on November 16, 2015. (Dkt. Nos. 364, 365.)
Defendants had three primary arguments in their Ex Parte application for why the Court should strike the Second Motion for Class Certification: (1) Plaintiffs should have filed an interlocutory appeal of the Court's previous Order denying class certification; (2) Plaintiffs' motion is really a Motion for Reconsideration but there is no legal basis for such a motion; and (3) the Second Class Motion is untimely under the Court's scheduling order. (Ex Parte, dkt. no. 363, at 1.)
Plaintiffs responded by arguing that they understood any objections to the second class motion would be dealt with in Defendants' opposition to the class certification motion. (Ex Parte Opp'n, dkt. no. 365, at 1.) According to Plaintiffs, the briefing schedule and page limits were agreed upon by the parties and approved by the Court before Plaintiffs filed their successive motion; thus, Defendants' Ex Parte was the wrong place to air procedural disagreements. (Id.) Plaintiffs also argued that their successive motion is acceptable under the Federal Rules of Civil Procedure, part of an amended scheduling order pursuant to the stipulation, and not a motion for reconsideration. (Id. at 3-10.) The Court denied Defendants' Ex Parte in a Minute Order, stating that " Defendants' arguments should be raised in opposition to Plaintiffs' second class certification motion rather than in the extreme remedy of an ex parte motion to strike." (Dkt. No. 367.) After regular briefing concluded, Defendants filed a Notice of Supplemental Authority, responded to by Plaintiffs. (Dkt. Nos. 377, 379.) Then, Defendants filed an Ex Parte for leave to file an additional brief as a sur-reply to Plaintiffs, which the Court granted. (Dkt. Nos. 380, 381.)
At the second class certification motion hearing, Plaintiffs withdrew without prejudice their motion to certify the TLIC excessive fee class. The Court also ordered the parties to provide supplemental briefing as to Plaintiffs' proposed prohibited transaction classes, particularly as Defendants raised new issues and defenses to that claim in Defendants' supplemental briefing. (Dkt. Nos. 385, 388.)
II. LEGAL STANDARD
The party seeking class certification bears the burden of showing that each of the four requirements of Rule 23(a) and at least one of the requirements of Rule 23(b) are met. See Meyer v. Portfolio Recovery Assocs., LLC, 707 F.3d 1036, 1041 (9th Cir. 2012); Hanon v. Dataproducts Corp., 976 F.2d 497, 508-09 (9th Cir. 1992). In determining whether to certify a class, a court must conduct a " rigorous analysis" to determine whether the party seeking certification has met the prerequisites of Rule 23 of the Federal Rules of Civil Procedure. Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1233 (9th Cir. 1996). Rule 23(a) sets forth four prerequisites for class certification:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
Fed. R. Civ. P. 23(a); see also Hanon, 976 F.2d at 508. These four requirements are often referred to as numerosity, commonality, typicality, and adequacy. See Gen. Tel. Co. v. Falcon, 457 U.S. 147, 156, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982).
In determining the propriety of a class action, the question is not whether the plaintiff has stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974). The court considers the merits of the underlying claim to the extent that the merits overlap with the Rule 23(a) requirements, but does not conduct a " mini-trial" or determine at this stage whether plaintiffs could actually prevail. Ellis v. Costco Wholesale Corp., 657 F.3d 970, 981, 983 n.8 (9th Cir. 2011); see also Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 131 S.Ct. 2541, 2551-52, 180 L.Ed.2d 374 (2011).
Rule 23(b) defines different types of classes. Leyva v. Medline Indus. Inc., 716 F.3d 510, 512 (9th Cir. 2012). Relevant here, Rule 23(b)(3) requires that " questions of law or fact common to class members predominate over individual questions . . . and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3).
III. DISCUSSION
As an initial note, the Court holds that the Second Motion to Certify Class is not procedurally improper. In their Opposition, Defendants repeated essentially the same arguments raised in their Ex Parte Motion, which this Court previously denied. (See Opp'n at 30 (" incorporating by reference" the arguments in the Ex Parte application).) Defendants waited to file their objections to the successive class motion until right after Plaintiffs filed their motion, and Defendants did not raise their objections in the meet and confer with Plaintiffs. Further, by entering into the stipulation with Plaintiffs without providing Plaintiffs with their objections other than to " reserve" them in a footnote, Defendants essentially agreed to a modification of the Scheduling Order, which this Court ratified in its Order granting the stipulation. (See Dkt. No. 357.)
Lastly, courts frequently allow successive class certification motions where a previous motion is denied but there is a colorable claim that could be classified because courts have " broad discretion" in revisiting class certification before final judgment. See, e.g., Hartman v. United Bank Card, Inc., 291 F.R.D. 591, 597 (W.D. Wash. 2013)(collecting cases and noting that usually a change in circumstances is the basis for a reconsideration of an original class ruling). Plaintiffs here claim that they present new facts and legal theory in this " significantly" different class certification motion. (Dkt. No. 372-13, Reply at 25 (incorporating by reference the arguments in Plaintiffs' response to the Ex Parte.) Therefore, the Court will address the motion on the merits.
A. Rule 23(a) Requirements
1. Numerosity
Numerosity is satisfied when " the class is so numerous that joinder of all members is impracticable." Fed.R.Civ.P. 23(a)(1). Although there is no minimum number of class members below which numerosity cannot be satisfied per se, the Supreme Court has held that a class of fifteen was too small. Gen. Tel. Co. v. EEOC, 446 U.S. 318, 330, 100 S.Ct. 1698, 64 L.Ed.2d 319 (1980). In addition, courts have held that a class of 40 or more members will generally satisfy the numerosity requirement. See EEOC v. Kovacevich " 5" Farms, No. CV-F-06-165, 2007 WL 1174444, at *21 (E.D. Cal. Apr. 19, 2007); Ikonen v. Hartz Mountain Corp., 122 F.R.D. 258, 262 (S.D. Cal. 1988). In general, " 'impracticability' does not mean 'impossibility,' but only the difficulty or inconvenience of joining all members of the class." Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 913-14 (9th Cir. 1964).
The Court's previous Order found that Plaintiffs' proposed class involved about " 300,000 participants in about 7,400 plans," which satisfied the numerosity requirement. (Order, dkt. no. 354, at 7-8.) The numbers are about the same in this second motion for the TLIC Prohibited Transaction class. (Mot. at 15.) For the TIM and TAM classes, Plaintiffs claim there are at least 6,000 members based on defense expert Dr. Strombom's report. (Id. citing Dec. RL, Ex. 12 (ex. 28(b)).) Defendants do not appear to dispute these numbers. (See generally Opp'n.) Therefore, the Court holds this factor is satisfied.
2. Commonality
Commonality is satisfied if " there are questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). However, " [t]he requirements of Rule 23(a)(2) have been construed permissively, and all questions of fact and law need not be common to satisfy the rule." Ellis, 657 F.3d at 981 (internal quotation marks and brackets omitted). However, merely showing that there are common questions of fact is not enough; the questions must be ones that will " generate common answers apt to drive the resolution of the litigation." Dukes, 131 S.Ct. at 2551 (internal quotation omitted).
a. TLIC's Fiduciary Status
In the ERISA context, " a person is a fiduciary with respect to a plan to the extent (I) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets." 29 U.S.C. § 1002(21)(A)(I). A fiduciary is also a person with " any discretionary authority or discretionary responsibility in the administration of such plan." 29 U.S.C. § 1002(21)(A)(iii). " In every case charging breach of ERISA fiduciary duty . . . the threshold question is . . . whether that person was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint." Pegram v. Herdrich, 530 U.S. 211, 226, 120 S.Ct. 2143, 147 L.Ed.2d 164 (2000).
The Court determined that TLIC's fiduciary status is a question common to the previous class. (Order, dkt. no. 354, at 8-15.) There, the Court analyzed in detail fiduciary duty as to Plaintiffs' claim of excessive fees as well as to other actions by TLIC, such as not investing in lowest-cost share classes and other fee collection actions. (Id.)
Fiduciary status and the incorporated duties that come with that status are elements common to the current classes as well. (Mot. at 15-16.) Defendants do not reargue their contention that they are not fiduciaries other than to preserve their claim. (See Opp'n at 10 n.8, 25 n.19.) Therefore, the Court holds that the same analysis from the previous Order applies here, and the question of TLIC's fiduciary status and duties is common among all the classes.
b. Other Common Questions
In the previous Order, the Court held that there were also common questions as to separate account and investment-level fees, although the Court acknowledged that commonality may be defeated by an examination of the total fees. (Order, dkt. no. 354, at 15-18 & n.4.) Further, the Court noted that Defendants raised a defense based on the total fees being reasonable, particularly for individual plans, but the Court held these arguments were " more properly addressed in the predominance analysis under Rule 23(b)(3)." (Id. at 18.)
In the current Motion, Plaintiffs argue that for the TLIC Prohibited Transaction class, Plaintiffs must show that TLIC was a fiduciary and that by taking the IM/Admin fees from the assets over which TLIC was a fiduciary, TLIC committed a per se prohibited transaction under 29 U.S.C. § 1106(b). (Mot. at 15-16.) Because the IM/Admin fees are collected at the separate account level, Plaintiffs argue " there are no issues unique to any plan." (Id. at 16.)
Plaintiffs bring the TIM and TAM class claims under 29 U.S.C. § 1106(b)(1) and (2) for the prohibited transaction claim and 29 U.S.C. § 1104(a)(1)(A), (a)(1)(A)(ii), and (a)(1)(B) for the excessive fee claim. Thus, Plaintiffs argue that the relevant questions are whether TLIC is a fiduciary, whether TLIC breached its duties by allowing TIM and TAM to charge the class higher fees than TAM charged third parties for the same service, whether that higher fee charged was excessive, and whether TIM and TAM " participate[d] in TLIC's fiduciary breaches," and Plaintiffs claim that there is common proof underlying these common questions. (Id.)
Defendants had contested TLIC's fiduciary status, as well as other issues of commonality under Rule 23(a), in their Opposition to the previous class certification motion. (See Opp'n at 10 n.8; Opp'n to First Class Certification, dkt. no. 300, at 9-26.) Defendants do not address commonality in this current Opposition, but do note that the Court previously rejected Defendants' arguments on this factor and instead considered the arguments under a predominance analysis, a decision Defendants urge the Court to reconsider. (Opp'n at 10 n.8.)
Based on the present record, the Court holds that, consistent with the Court's holding in the previous Order denying class certification, common questions of law and fact are present for both classes. Defendants' arguments about individual variation are more appropriate in a predominance analysis.
3. Typicality
Typicality is satisfied if " the claims or defenses of the representative parties are typical of the claims or defenses of the class." Fed.R.Civ.P. 23(a)(3). The Ninth Circuit explains the typicality requirement as revolving around a broad-based inquiry to ensure the interests of the class are the same as the interests of the named plaintiff:
The purpose of the typicality requirement is to assure that the interest of the named representative aligns with the interests of the class. Typicality refers to the nature of the claim or defense of the class representative, and not to the specific facts from which it arose or the relief sought. The test of typicality is whether other members have the same or similar injury, whether the action is based on conduct which is not unique to the named plaintiffs, and whether other class members have been injured by the same course of conduct.
Hanon, 976 F.2d at 508 (internal quotation marks and citations omitted).
The Court's previous Order found typicality satisfied. (Order, dkt. no. 354, at 22-23.) Defendants raised two arguments against typicality: that the subsidization of plan fees was disclosed to participants after December 2011 and that fees vary by plan size. (Id. at 22.) The Court held these arguments did not make the Plaintiffs typical of the average case. The Court explained that defenses that are unique to class representatives are the main concern in a typicality analysis. So the concern is not that certain plans may have received disclosures, where the vast majority had not receive the disclosures. (Id. at 23.) Further, that fees vary in relation to the size of the plan relates to the potential differences in damages, not that the injuries suffered are different in kind. (Id. at 22-23.)
Now, Plaintiffs argue that " [b]oth Plaintiff plans and all three lead Plaintiffs invested in a variety of TLIC Ret Opt choices which pay an IM/Admin Fee to TLIC that form the basis for the claim of the TLIC Prohibited Transaction Class." (Mot. at 17 citing Dec. RL ¶ ¶ 6-8.) This is typical of the class because " TLIC paid its IM/Admin Fee from plan assets for all plans." (Id.) Further, Plaintiffs allege that both the Plaintiff plans and the named Plaintiffs invested in TIM and TAM managed funds; thus, their claims are typical of the TIM and TAM class.
Defendants respond that Plaintiffs' new theories of the case fail typicality, but only substantively address the excessive fee class Plaintiffs withdrew without prejudice at oral argument. (Opp'n at 10-11; 22-23.) Defendants do not discuss the typicality of the TLIC Prohibited Transaction class or the TIM and TAM class, other than to note that the TIM and TAM class is the " excessive fee claim by another label." (Id. at 24 n.18.)
With Plaintiffs' facial satisfaction of the requirement, and without any real argument to the contrary, and the Court holds that the named Plaintiffs are typical of the TLIC Prohibited Transaction Class and the TIM and TAM Class.
4. Adequacy
Adequacy of representation is satisfied if " the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4). Inasmuch as it is conceptually distinct from commonality and typicality, this prerequisite is primarily concerned with " the competency of class counsel and conflicts of interest." Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 158 n. 13, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982). Thus, " courts must resolve two questions: (1) do the named plaintiffs and their counsel have any conflicts of interest with other class members and (2) will the named plaintiffs and their counsel prosecute the action vigorously on behalf of the class?" Ellis, 657 F.3d at 985.
The Court previously found adequacy of representation satisfied. (Order at 24-25 & n.7.) The Court found no standing issues for the named Plaintiffs and no conflicts of interest based on other class members belonging to different plans. (Id.) Plaintiffs claim that there is nothing new to add to this analysis. (Mot. at 17-18.) Defendants also add nothing new beyond the arguments articulated above for typicality. Defendants still maintain there is a lack of standing. (Opp'n at 22-23 & n.16.) The Court holds that, consistent with the Court's prior Order, there are no adequacy issues here for any of the classes claimed.
B. Rule 23(b) Requirements
1. Action Under Rule 23(b)(3)
A class action may be certified under Rule 23(b)(3) if " the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3). In making findings on these two issues, courts may consider " the class members' interests in individually controlling the prosecution or defense of separate actions," " the extent and nature of any litigation concerning the controversy already begun by or against class members," " the desirability or undesirability of concentrating the litigation of the claims in the particular forum," and " the likely difficulties in managing a class action." Id.
a. Predominance
" The Rule 23(b)(3) predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). " Even if Rule 23(a)'s commonality requirement may be satisfied by [a] shared experience, the predominance criterion is far more demanding." Id. at 623-24. Predominance cannot be satisfied if there are many " significant questions peculiar to the several categories of class members, and to individuals within each category." Id. at 624. However, Rule 23(b)(3) predominance " requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class." Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S.Ct. 1184, 1191, 185 L.Ed.2d 308 (2013).
The Court's previous Order denied class certification based on Plaintiffs' failure to satisfy the predominance requirement. (Order, dkt. no. 354, at 27-35.) The Court first noted that due to the potential size of the class (" 300,00 participants in about 7,400 plans" ), " individual inquiries potentially loom large" because " any difference in facts or legal posture among plans is potentially multiplied a thousandfold." (Id. at 27-28.) Defendants argued, and the Court agreed, that the problem with Plaintiffs' prior class definition was that it gave rise to individualized defenses that overwhelmed the common questions. (Id. at 28-29.)
The Court explained that " if Plaintiffs wish to assert a claim under TLIC's fiduciary duty to defray only reasonable expenses, they must do so by considering TLIC's fees as a whole compared to TLIC's total reasonable expenses in providing its services." (Id. at 30-31.) One of the Court's concerns was that the individual IM/Admin fee that Plaintiffs alleged was excessive could be subsidizing the plan-level expenses that Plaintiffs did not contest. (See id. at 31.) This concern led the Court find that " fees charged to individual plans must be compared to the expense of providing services to those plans" and that " [t]hese individualized inquiries would be significantly more complex than Plaintiffs' proposed inquiry into a single fee whose reasonableness (Plaintiffs argue) could be straightforwardly determined as to all plans equally." (Id.)
In a footnote, the Court highlighted the option for partial class certification, but stated that Plaintiffs had neither requested partial certification nor provided sufficient legal basis for such potential classes. (Id. at 35 n.8.) For Plaintiffs' arguments about the TIM and TAM charges, the Court found the same predominance problems for excessive fee claims as the Court had found for the other TLIC charges. (Id.) The Court found that Plaintiffs' prohibited transaction claims lacked developed legal authority and was not briefed for partial certification. (Id.)
Now, Plaintiffs have asked the Court for full or partial class certification, and originally had three separately defined classes. However, at the motion hearing, Plaintiffs dropped their TLIC excessive fee class, so the Court will only discuss the two remaining classes.
i. TLIC Prohibited Transaction Class
This class alleges violation of 29 U.S.C. § 1106(b)(1), which classifies self-dealing as a per se prohibited transaction: " A fiduciary with respect to a plan shall not - (1) deal with the assets of the plan in his own interest or for his own account." Plaintiffs argue that TLIC's practice of taking the IM/Admin fee from plan assets is such a prohibited transaction. (Mot. at 19.) For legal authority, Plaintiffs primarily rely on Barboza v. California Ass'n of Professional Firefighters, 799 F.3d 1257 (9th Cir. 2015) (which came out as amended on the same day as the Court's previous Order, August 28, 2015), and Patelco Credit Union v. Sahni, 262 F.3d 897 (9th Cir. 2001), discussed below.
Plaintiffs have also cited other cases approving the reasoning and holding in Patelco and Barboza: Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Mich., 751 F.3d 740, 750 (6th Cir. 2014); Nat'l Sec. Sys., Inc. v. Iola, 700 F.3d 65, 95 (3d Cir. 2012); Kanawi v. Bechtel Corp., 590 F.Supp.2d 1213, 1223 (N.D. Cal. 2008); LaScala v. Scrufari, 96 F.Supp.2d 233, 239 (W.D.N.Y. 2000). (See Dkt. No. 388, Pl. Response, at 2-3 & n.1.)
Defendants argue that Barboza does not provide a basis " to condemn longstanding 401(k) servicing arrangements in which fiduciaries withdraw from plan assets those fees that the plans' independent fiduciaries have agreed to in advance, and in which 401(k) platform providers like TLIC offer affiliated investment options alongside unaffiliated ones to their plan clients." (Opp'n at 25.) Defendants read Barboza narrowly, arguing that the prohibited transaction was " the service provider's failure to present evidence that the plan client had approved, in advance, the specific fees that the service provider opted to withdraw from plan accounts." (Id. (citing Brief of Sec'y Labor ISO Pl.-Appellant at 8 n.1, Barboza, 799 F.3d 1257 (filed Feb. 7, 2012).) Thus, Defendants argue that the analysis is actually one based on causation: " whether TLIC used any such fiduciary authority to cause the transactions that plaintiffs label 'prohibited.'" (Id. at 25-26.) Defendants say that if this Court accepts Plaintiffs' argument, then " service providers could never be paid out of plan assets, even with the agreement of independent fiduciaries on the precise amount of the fees to be deducted." (Id. at 28.) This, Defendants claim, " would stop defendants, and other 401(k) providers, from doing business altogether." (Id.)
Defendants further argue that TLIC is covered by several exceptions in the statute that excuse conduct that may otherwise be considered a prohibited transaction. (Opp'n at 28 (discussing fiduciary entitlement to reasonable fee); Dkt. No. 382, Def. Additional Brief, at 1-2 (29 U.S.C. § 1108(b)(8)); Dkt. No. 385, Def. Supp. Brief, at 1-7 (29 U.S.C. § 1108(b)(8), (c)(2)).)
First, the statutory language. As provided for in the U.S. Code, ERISA § 406, 29 U.S.C. § 1106, states: And the relevant portions of ERISA § 408, 29 U.S.C. 1108, state:
The Court has included the print version of the U.S. Code sections at issue here. The Court found the print version more accurately set forth aspects of the statute such as its structure, spacing, and indentation, which is not found on unofficial online versions.
Plaintiffs bring class claims under § 1106(b)(1) for the TLIC Prohibited Transaction Class. On the face of the statutory section, no causation is required. The statute simply states that a fiduciary shall not deal with the assets of a plan in the fiduciary's own interest. There is no language about causing a prohibited transaction as Defendants argued. (See Opp'n at 26.) There is causation language in § 1106(a)(1): " A fiduciary with respect to a plan shall not cause the plan to engage in a transaction . . . ." 29 U.S.C. § 1106(a)(1) (emphasis added). The absence of this causation language in subsection (b) indicates that, at least facially, there is no need for Plaintiffs to establish causation -- either there was a prohibited self-dealing transaction under (b) or there was not.
Additionally, the plain language and structure of the statute undercuts Defendants' argument that they are protected by exceptions in 29 U.S.C. § 1108. Again, under " (a) Transactions between plan and party in interest," Congress included language that is not repeated under " (b) Transactions between plan and fiduciary." Id. § 1106. Directly under the (a) heading, slightly indented, Congress wrote: " Except as provided in section 1108 of this title:" and then provided subsections (1) and (2), listing out prohibited transactions. That language (" Except as provided . . ." ) is not repeated under subsection (b), and it is not provided above both subsections (a) and (b) as a disclaimer clearly applying to both kinds of prohibited transactions. Nor is subsection (b) a part of or dependent on subsection (a) -- subsection (b) is an independent heading, equal to (a). In place of a lead-in with reference to exceptions, subsection (b) has a lead-in stating: " A fiduciary with respect to a plan shall not," then listing three prohibited transactions, (1) through (3).
Looking at the way Congress organized § 1106, it appears that the language indented under each subsection, (a) and (b), is meant to only apply to the particular subsection in which the language is located and not to other, independent subsections. The Court provides a complete primary source version of the statutes (and § 1108) at the end of this Order because the structure Congress intended is more clearly seen in print than with purely electronic versions of the statute in terms of spacing and indents. While it is not determinative of what Congress intended, the structure and the plain language of the statute provide strong evidence that the exceptions contained in § 1108 are referenced only in § 1106(a) and that is the only subsection to which they apply absent some other indication.
Section 1108 does provide such indication to the contrary. Subsection (a), titled " Grant of exemptions" details how the Secretary can grant an exemption from the prohibited transactions of § § 1106 and 1107(a). 29 U.S.C. § 1108(a). Somewhat in tension with the structural and plain language analysis of § 1106 given above, subsection (a) of § 1108 does have instructions for creating exceptions to § 1106(b), although such exceptions are singled out as more difficult to make than those for § 1106(a) and § 1107(a): " The Secretary may not grant an exemption under this subsection from section 1106(b) of this title unless he affords an opportunity for a hearing and makes a determination on the record with respect to the findings required by paragraphs (1), (2), and (3) of this subsection." Id. § 1108(a).
Further, subsection (b) is titled, " Enumeration of transactions exempted from section 1106 prohibitions." 29 U.S.C. § 1108(b). Indented below it, Congress stated: " The prohibitions provided in section 1106 of this title shall not apply to any of the following transactions:" followed by the enumeration of detailed exceptions in subsections (1) through (20). Id. Most exceptions explicitly involve parties in interest, governed by § 1106(a), but not all. See id. § 1108(b)(1)-(3), (5), (8), (12), (15)-(18), (20). Subsection (b)(19), not argued by the parties here, is the only subsection that explicitly mentions § 1106(b), and it provides for how cross trading " of a security between a plan and any other account managed by the same investment manager" can take place without violating § 1106(a)(1)(A) and (b)(2). Id. § 1108(b)(19). While it appears incongruent with the structure and language of § 1106(a) and (b) to allow exemptions to § 1106(b), this cross trading exemption applies to both § 1106(a) and (b) prohibited transactions based on § 1108(b)(19)'s plain language. No other exemption under § 1108(b) mentions § 1106(b), though many single out § 1106(a) and other statutory sections. Therefore, it appears that the later enacted sections in § 1108 indicate Congress's intention for at least some § 1108(b) exemptions to apply to prohibited transactions in § 1106(b).
Relevant here as potential exceptions argued by Defendants are subsections (b)(8) and (c)(2). First, subsection (b)(8) provides:
Defendants argue that they fall into this subsection and that it should be applied to otherwise prohibited transactions under § 1106(b). Defendants explain that this exemption " expressly allows regulated insurers to invest client assets in pooled separate accounts like TLIC's separate accounts here -- even in circumstances involving alleged self-dealing -- where the insurer receives no more than reasonable compensation, and either the plan document permits such investments or the investment is approved by fiduciary independent of the insurer." (Dkt. No. 385, Def. Supp. Brief, at 1.)
Perhaps this reading of the exemption is correct, but it seems that Defendants are missing Plaintiffs' allegation, which is not that TLIC invested client assets in pooled separate accounts, but rather that TLIC paid its fees -- which TLIC had the discretion to change at thirty days notice -- out of the plan assets that TLIC was holding. Thus, it is not clear to the Court how the (b)(8) exemption, assuming it applies to § 1106(b) based on the plain reading of § 1108 described above, clears Defendants from the prohibited transaction at issue in this case.
Subsection (b)(8) appears concerned with exempting transactions that are " a sale or purchase in the fund" for which " the bank, trust company, or insurance company receives not more than reasonable compensation," and if " such transaction is expressly permitted by the instrument under which the plain is maintained, or by a fiduciary (other than the bank, trust company, or insurance company or an affiliate thereof) who has authority to manage and control the assets of the plan." Id. § 1108(b)(8)(A)-(C). The transaction Plaintiffs challenge is not " a sale or purchase in the fund," but instead the act of TLIC taking its own fees out of the plan assets over which TLIC exercises fiduciary management. Therefore, the Court finds § 1108(b)(8) does not apply to the prohibited transaction Plaintiffs are alleging in this case, even if it can in theory apply to other prohibited transactions under § 1106(b).
Second, Defendants appear to argue that their conduct is exempted under § 1108(c)(2). Subsection (c) under § 1108 is titled, " Fiduciary benefits and compensation not prohibited by section 1106," and it states that " [n]othing in section 1106 of this title shall be construed to prohibit any fiduciary from" (1) receiving benefits as a participant or beneficiary of a plan, or (2) " receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan," or (3) " serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest." Id. § 1108(c)(1)-(3). This subsection allows a fiduciary to receive " reasonable compensation" for services rendered, the main issue in Plaintiffs' excessive fee classes being what that reasonable compensation is. The prohibited transaction classes, by contrast, claim that regardless of the fee Defendants charge being reasonable, by taking the fee directly out of the plan assets, Defendants are engaged in prohibited self-dealing under § 1106(b)(1). Thus, the question here is whether § 1108(c)(2) allows for Defendants to pay their fees from the plan assets they hold as alleged fiduciaries.
In Barboza, the Ninth Circuit held that an ERISA-protected welfare benefit plan fiduciary engages in per se self-dealing when the fiduciary pays its own fees from plan assets. Barboza, 799 F.3d at 1269. The " safe harbor for fiduciary compensation" in § 1108(c)(2) does not apply to a " fiduciary who engages in a prohibited transaction under 29 U.S.C. § 1106(b)(1) by paying itself from the assets of a welfare benefit plan." Id. at 1269-70 (citing Patelco, 262 F.3d at 910-11). " In other words, while a plan may pay a fiduciary 'reasonable compensation for services rendered' under 29 U.S.C. § 1108, the fiduciary may not engage in self-dealing under 29 U.S.C. § 1106(b) by paying itself from plan funds. Such conduct constitutes a per se violation of § 1106(b)(1)." Barboza, 799 F.3d at 1269 (citing Patelco, 262 F.3d at 910-11) (internal citations omitted).
The defendants in Barboza -- supported by the Department of Labor -- argued that such payment was not a per se prohibited transaction in both the rehearing of the Ninth Circuit case and the petition for a writ of certiorari to the Supreme Court. However, the Ninth Circuit did not change its analysis in the amended decision and the Supreme Court, after considering the fully briefed petition, denied the petition. Cal. Ass'n of Prof'l Firefighters v. Barboza, 136 S.Ct. 1171, No. 15-708, 194 L.Ed.2d 178, 2016 WL 763283 (Feb. 29, 2016).
Patelco involved a similar situation to that in Barboza. The plaintiffs there sued under ERISA for breach of fiduciary duties by Defendant Sahni and his companies in administering the plaintiffs' employee health benefit plan. Patelco, 262 F.3d at 900. Sahni controlled the assets for the plan and took monthly administrative fees, which were allegedly disclosed to the plans, out of those assets. Id. at 909-10. Sahni argued that the fees were reasonable compensation under § 1108(c). Id. at 910. The plaintiffs claimed that Sahni was self-dealing in violation of 29 U.S.C. § 1106(b). The Ninth Circuit held that " the reasonable compensation provision does not apply to fiduciary self-dealing." Patelco, 262 F.3d at 911. It undertook a close statutory analysis, examining the different language under § 1106(a) compared to § 1106(b):
29 U.S.C. § 1106(a) prohibits fiduciaries from causing the plan to engage in specified transactions with parties in interest " [e]xcept as provided in section 1108 of this title." But 29 U.S.C. § 1106(b), which prohibits fiduciary self-dealing, makes no mention of the exceptions in § 1108.
Patelco, 262 F.3d at 910. Further, the Ninth Circuit examined Department of Labor regulations, which it concluded supported its reading of the statute that the reasonable compensation in § 1108(c) only modified § 1108(b) exceptions and " does not establish an independent exception." Patelco, 262 F.3d at 910-11 (citing 29 C.F.R. § § 2550.408b-2(a), 2550.408c-2(a)). The court has determined that other cases that examined " the applicability of § 1108 to § 1106(b) are in accord that reasonable compensation does not apply to fiduciary self-dealing." Patelco, 262 F.3d at 911 (collecting cases).
In both Barboza and Patelco, the fiduciary defendant had a contract with the plan and permission to take administrative and service fees from the plan funds. Barboza, 799 F.3d at 1263, 1270 n.5 (" Because fiduciary self-dealing under 29 U.S.C. § 1106(b)(1) is a per se violation of ERISA, it is irrelevant that [Defendant] CAISI was authorized to pay its own fees and expenses from Plan assets pursuant to its administrative services agreement with [Defendant] CAPF." ); Patelco, 262 F.3d at 901, 909-10.
The Court holds that under its reading of Barboza, which is controlling Ninth Circuit precedent, a fiduciary cannot pay itself out of the plan assets over which the fiduciary exercises its fiduciary duties -- period. This rule applies regardless of whether the fees are agreed upon service fees disclosed in a contract and constitute reasonable compensation for services provided. The policy behind this rule is that certain fundamental fiduciary duties, including the duty against self-dealing, are essentially sacrosanct. Thus, it does not matter if there is no bad faith, or if the fee is reasonable compensation for services provided. As stated by the court in Gilliam v. Edwards, 492 F.Supp. 1255 (D.N.J. June 9, 1980), and quoted by the Ninth Circuit in Patelco:
The only case Defendants rely on is Dupree v. Prudential Insurance Co. of America, No. 99-8337-CIV-Jordan, 2007 WL 2263892, at *42-43(S.D. Fla. Aug. 7, 2007)(unpublished), for their argument that exemptions from § 1108 apply to prohibited transactions under § 1106. (See Dkt. No. 385, Def. Supp. Brief, 3-4.) The Court not only finds this case unpersuasive in its analysis of the application of § 1108(b)(2) and (b)(8) to prohibited transactions under § 1106(b), but also is bound to follow the law of the Ninth Circuit. The case relied heavily on Department of Labor opinion letters, which are not binding or entitled to Chevron deference like regulations are, as well as a short statutory analysis where § 1108 was examined before examining the language of § 1106. Dupree, No. 99-8337, Id. at *42-43. Also, the court in Dupree did not opine on whether fees were a " transaction" under (b)(8) or on the application of (c)(2) to § 1106(b).
Section 1106(b) thus creates a per se ERISA violation; even in the absence of bad faith, or in the presence of a fair and reasonable transaction, § 1106(b) establishes a blanket prohibition of certain acts, easily applied, in order to facilitate Congress' remedial interest in protecting employee benefit plans. In essence, a combined reading of § § 1106 and 1108 and the relevant regulation suggests that a fiduciary, normally permitted to receive reasonable compensation for services rendered -- this rule is preserved by the § 1108 exemption -- may not if self-dealing is involved in the transaction securing the payment.
Id. at 1263 (citation and footnote omitted); see also Cutaiar v. Marshall, 590 F.2d 523, 530 (3d Cir. 1979) (" That such extensive publication and hearing procedures were established by Congress [in § 1108] before [an] exemption may be authorized indicates an intent to create, in § 406(b), a blanket prohibition of certain transactions, no matter how fair, unless the statutory exemption procedures are followed." ); cf. George Gleason Bogert et al., The Law of Trusts and Trustees, § 543. The rule is a decision that the party of in charge of another's funds cannot take its own fee out of those funds because there is too much potential for abuse, even in the absence of such conduct in a particular case.
As the class is alleged here, Plaintiffs claim that TLIC as a fiduciary has taken its service fees out of plan assets, and under Barboza, this is a per se prohibited transaction even if all other fiduciaries and beneficiaries were aware of the fees, how they were paid, and even agreed to such a system. Defendants argued that their practice of taking the service fees out of plan assets is efficient, industry standard, and approved by the Department of Labor. This Court is mindful of these considerations, but based on the statute and the Ninth Circuit cases, it appears that Congress has emphasized the need to avoid potential abuses over these other considerations. Further, Defendants contend that requiring some other method of obtaining fees would require restructuring their business model. This issue was not addressed in detail by either party. Therefore, the Court declines to speculate about whether there may be methods of payment available that are not unduly burdensome and comply with the law provided in the statute and the Ninth Circuit. While the merits of the class are not at issue here, the law from the Ninth Circuit dictates that the kind of prohibited transaction that Plaintiffs are alleging here is a per se violation if it is indeed found. Individualized inquiries are not necessary, as all that will be examined is whether TLIC is a fiduciary and if the fiduciary is paying administrative fees from plan assets in violation of § 1106(b)(1). Therefore, predominance is met for this class.
ii. TIM and TAM Class
The TIM and TAM class allege two separate categories of claims: first, that TLIC committed a prohibited transaction and second, that TLIC breached three duties by allowing its affiliates, TIM and TAM, to charge excessive fees. (Mot. at 6.)
(A) TIM and TAM Prohibited Transactions
This class alleges violation of 29 U.S.C. § 1106(b)(1) and (2), which prohibits self-dealing as quoted above, as well as dealing with a third party with interests adverse to the plan: " A fiduciary with respect to a plan shall not - . . . (2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interest of the plan or the interests of its participants or beneficiaries." Plaintiffs argue that " TLIC's purchase of units in affiliated funds, managed by TIM and TAM, who charged a management fee" are prohibited transactions under these subsections. (Mot. at 19.)
Plaintiffs acknowledge that the complaint alleges violations of (b)(1) and (b)(3), but state they are no longer pursuing their (b)(3) allegation. Instead, Plaintiffs request the Court to allow them to bring an allegation under (b)(2) and seek leave to amend their complaint for that limited purpose. (Id. at 21-22 & n.6.)
For the TIM and TAM claims under § 1106(b)(1), Plaintiffs explain that TLIC engaged in self-dealing " by repeatedly investing plan assets in affiliated funds and by paying a fee to its affiliates," because by so doing, " TLIC dealt with 'assets of the plan it [its] own interest.'" (Mot. at 21 (quoting 29 U.S.C. § 1106(b)(1).) TIM and TAM were participants in TLIC's prohibited transactions and therefore Plaintiffs argue they must disgorge profits and make restitution. (Id.) Further, Plaintiffs allege " [s]ince TIM and TAM have not waived their fees" for the TLIC plans despite TLIC's affiliation with TIM and TAM, TIM and TAM violated (b)(1). (Id. at 21-22.)
For the TIM and TAM claims under § 1106(b)(2), Plaintiffs allege that TLIC committed a prohibited transaction when it acted on behalf of or represented TIM and TAM, whose interests were adverse to the plans. (Id. at 22.) Specifically, Plaintiffs argue that TLIC violated (b)(2) by: " (a) favorably evaluating TIM and TAM Funds notwithstanding their excessive fees (see, e.g., Dec. RL, Ex. 28, pp. 2-5); (b) depositing money with TIM and TAM so that their fees would be paid from plan assets; (c) paying TIM and TAM; and (d) repeatedly buying shares in these Affiliated Advised Accounts." (Id. at 23.) Plaintiffs argue the questions for (b)(2) are also common to the class: whether TLIC is a fiduciary, the status of TIM and TAM as affiliates of TLIC, and whether TIM and TAM were paid fees from plan funds. (Id. at 24.)
The same logic applies here and a per se violation would not require individualized proof. However, some of Plaintiffs' allegations are different for the TIM and TAM Class than from the TLIC Prohibited Transaction Class. To the extent that Plaintiffs are alleging TLIC again took funds from the plans to pay itself and its affiliates, that would appear to fall under the same rule as the TLIC Prohibited Transaction class. But the different theories of self-dealing under (b)(1) and (b)(2) may not have a simple, per se answer, or may be subject to defenses. The Court holds that predominance is facially met at this point in the litigation. It appears from Plaintiffs' arguments that the same issues of fact and law predominate for all the different plans because the same actions of TLIC, TIM, and TAM are alleged to be violations of § 1106(b) for all the different plans. The Court also grants Plaintiffs leave to amend the complaint to drop the (b)(3) claim and to add the (b)(2) claim. The parties are aware of the underlying facts giving rise to the claim and the theory is essentially the same. Defendant has not objected to the proposed amendment. Since there are no notice issues and no injustice by allowing the amendment, the Court grants Plaintiffs fourteen days from the date of this Order to amend the complaint consistent with this paragraph.
(B) TIM and TAM Excessive Fees
Plaintiffs argue that the question at issue for this subpart of the class is whether TIM and TAM's fees were excessive. (Mot. at 26.) Plaintiffs allege that TLIC breached three duties under 29 U.S.C. § 1104(a)(1)(A), (A)(ii), and (B) (duties of loyalty, to defray only reasonable expenses, and prudence, respectively). (Mot. at 6.) According to Plaintiffs, " TLIC allowed TIM and TAM to charge investors in the Affiliated Separate Accounts higher fees than the fees TAM charged to others with whom it bargained at arm's length for the same services." (Id.) For damages, Plaintiffs claim that the TIM and TAM class would receive the part of the fees that were excessive, but that this calculation can be done " using a common method that is a mechanical process." (Id. at 26-27.) What makes the fees excessive, Plaintiffs explain, is the rates charged by TIM and TAM to outside clients, which are considerably lower than the fees charged to TLIC plans. (Reply at 25.)
Defendants state:
Plaintiffs also pursue a related theory that TLIC breached fiduciary duties by " allowing" TI Management and TA Management to collect IM/Admin charges from affiliated Ret Opts that exceeded what TI Management and TA Management charged institutional clients to manage like investment portfolios. This is simply their excessive fee claim by another label. The Court has already recognized that under TLIC's bundled service arrangement, investment-level fees (including those charged on affiliated Ret Opts) are used to provide more than just portfolio management services; they are also used to defray the costs of plan- and participant-level services. (Dkt. No. 354 at 30-31.) For the reasons already developed, plaintiffs' excessive fee claims do not raise predominant common questions, and can only proceed individually. This is true however they are labeled.
(Opp'n at 24 n.18.)
The Court holds based on the state of the record at this point that there appear to be common issues of fact and law among the TIM and TAM investors alleged as class members based on Plaintiffs' representations. Therefore, the TIM and TAM class satisfies this requirement.
b. Superiority
Rule 23(b)(3) also requires a class action to be " superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3). The Rule further provides four factors the Court must consider in Rule 23(b)(3)(A) through (D):
(A) the class members' interests in individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.
Here, a class action is superior to individual suits, particularly because the costs of bringing an action likely exceed the potential individual damages award, as this Court mentioned in its previous Order. (Order, dkt. no. 354, at 35.) In the previous Order, the Court was concerned with individual issues predominating, and thus a class action would not have ultimately been superior with the class definition then provided. (Id.) Now, there are less difficulties in managing a class action because common issues of law and fact predominate. Further, no other lawsuits have been brought by class members to the Court's and parties' knowledge, and venue in this Court is appropriate. (See Mot. at 28.) Therefore, the Court finds the class action superior to other forms of litigation.
C. Ascertainability
Although not strictly a Rule 23 requirement, courts have held that a threshold requirement for class certification is that the class, as defined, " must be adequately defined and clearly ascertainable before a class action may proceed." Wolph v. Acer Am. Corp., 272 F.R.D. 477, 482 (N.D. Cal. 2011) (quoting Schwartz v. Upper Deck Co., 183 F.R.D. 672, 679-80 (S.D. Cal. 1999)). The class definition should be " precise, objective and presently ascertainable" such that " it is administratively feasible to determine whether a particular person is a class member." Id. (quotation marks and citations omitted).
The Manual for Complex Litigation indicates that the concerns that motivate the ascertainability inquiry are less pressing in an action under Rule 23(b)(1) or (b)(2) as compared to a Rule 23(b)(3) action:
Because individual class members must receive the best notice practicable and have an opportunity to opt out, and because individual damage claims are likely, Rule 23(b)(3) actions require a class definition that will permit identification of individual class members, while Rule 23(b)(1) or (b)(2) actions may not.
Federal Judicial Center, Manual for Complex Litigation, Fourth, § 21.222 (2004).
Plaintiffs have defined the prohibited transaction classes clearly, and explained ascertainability: The TLIC Prohibited Transaction Class is " all plans serviced by TLIC under its GAC Form that made investments in any of TLIC's Ret Opt investment options." (Mot. at 8.) This class is identifiable by TLIC's records that would indicate which plans had investment is Ret Opt investment options. Plaintiffs indicate that defense expert Dr. Strombom has already quantified the plans holding Ret Opt investments. (Id. (citing Dec. RL, Ex. 6 at Ex. 1).)
The TIM and TAM Prohibited Transaction Class is " all plans that made investments in TLIC's Ret Opt investment options which were either directly advised by TIM or were invested in mutual funds advised by TAM." (Id. at 14.) Plaintiffs argue that Dr. Strombom has already " used Defendants' records to identify the plans invested in TIM-managed and TAM-managed options." (Id. (citing Dec. RL, Ex. 12.)
Defendants have not argued that these classes are not ascertainable. Instead, Defendants focused almost exclusively on the issue of causation as to the prohibited transaction classes. (Opp'n at 24-28.)
The Court finds that Plaintiffs' proposed prohibited transaction classes for TLIC and TIM and TAM are ascertainable under the methods described, particularly as Defendants have not provided any argument to the contrary. Further, the TIM and TAM excessive fee class is also ascertainable as shown by the defense expert's use of records to identify qualifying class members. Therefore, the TLIC Prohibited Transaction Class and the TIM and TAM Class are both ascertainable.
IV. CONCLUSION
For all the reasons listed above, the Court GRANTS Plaintiff's Second Motion for Class Certification. Plaintiffs are granted fourteen days leave to amend the Complaint, as detailed above.
IT IS SO ORDERED.
Defendants also rely on the Department of Labor opinion letters and the contrast between a regulation explicitly providing that § 1108(b)(2) does not apply to prohibited transactions under § 1106(b) and the lack of such regulation for § 1108(b)(8). As explained above, it does not appear § 1108(b)(8) applies here, but even if it does, the Court holds that the reasoning behind the Ninth Circuit's conclusion in Barboza and Patel applies with equal force to other potential exemptions in § 1108 such that absent explicit naming of § 1106(b) -- like occurred for cross trading in (b)(19) -- the Court will not extend the reach of § 1108(b) exemptions into § 1106(b) without clearer direction from the Ninth Circuit or Congress.