Last year, we alerted you to the filing of several class action lawsuits alleging that plan fiduciaries violated their duties of prudence and loyalty under Title I of ERISA by applying forfeitures to reduce employer contributions instead of to reduce administrative expenses borne by plan participants. The complaints also alleged that applying forfeitures to reduce employer contributions violates ERISA’s anti-inurement provision and constitutes a prohibited transaction under ERISA Sections 406(a) and (b). See https://www.wagnerlawgroup.com/blog/2023/12/longstanding-internal-revenue-service-position-called-into-question/. To date, we know of eleven putative class action lawsuits filed against large plan sponsors alleging similar violations of ERISA.
In June of this year, we wrote about the first ruling on a motion to dismiss one of those cases. https://www.wagnerlawgroup.com/blog/2024/06/district-court-denies-motion-to-dismiss-forfeiture-complaint/. That article discussed the May 24, 2024, decision by a United States District Court in the Southern District of California (Judge Benitez) denying Qualcomm’s motion to dismiss the case filed against it. Then, one month after the Qualcomm decision was issued, we alerted you to a June 17, 2024 decision by a United States District Court in the Northern District of California (Judge Freeman), granting a motion to dismiss in a case involving HP Inc. See https://www.wagnerlawgroup.com/blog/2024/07/district-court-grants-motion-to-dismiss-forfeiture-complaint/.
Two months have gone by and there is now more to report including: (a) another order denying a motion to dismiss issued this week in the Intuit case, (b) an order denying a motion to reconsider or certify the issue for interlocutory appeal in the Qualcomm case, and (c) the filing of two more lawsuits against large plan sponsors alleging misconduct in the use of forfeiture amounts.
- Another District Court Denies Motion to Dismiss Forfeiture Complaint:
On August 12, 2024, a United States District Court in the Northern District of California (Judge Pitts) issued the third substantive ruling on a motion to dismiss in a forfeiture case and, like the Qualcomm court, denied the plan sponsor’s motion to dismiss. See Rodriguez v. Intuit Inc., et al., 23-cv-5053 (N.D. Cal. 8/12/2024) (the Intuit decision). In a very organized manner, over 16 pages, the district court in Intuit addressed and overruled arguments seeking to dismiss substantive causes of action based on allegations asserting the misuse of plan forfeitures (the same allegations filed by the same law firm in the Qualcomm and HP Inc. cases). In Intuit, the Court concluded that the plaintiff had plausibly alleged violations of ERISA §§ 404(a)(1)(A) and (B), 403(c)(1), 406(a)(1) and 406(b).
Of note, the Intuit court (like the HP Inc. and Qualcomm courts) agreed that Treasury regulations did not foreclose the plaintiff’s claims:
That Treasury regulations and DOL Guidance would generally permit employers to structure plans to allow forfeitures to cover contributions does not establish that Intuit’s implementation by using forfeitures to offset its mandatory Matching Contributions within the parameters of this specific Plan (which Ms. Rodriguez plausibly alleges prohibited such a use of forfeitures) was permissible, lawful, or inconsistent with a finding that Intuit violated ERISA’s anti-inurement provision.
Intuit decision, p. 13. Similar to the holdings of both the Qualcomm and HP Inc. courts, the Intuit court also found that Intuit acted as a fiduciary when it allocated forfeited amounts to reduce employer contributions rather than to pay plan expenses. The Intuit court concluded that Intuit’s plan provided Intuit with discretion over the management of forfeiture amounts and, regardless of whether the three options provided by the plan for the use of forfeitures were established properly by Intuit in its settlor (non-fiduciary) capacity, Intuit’s decision to use forfeiture amounts in a particular way amounted to the exercise of fiduciary discretion:
Although Intuit’s decision about how to allocate those plan assets undoubtedly effected the amount it would contribute as settlor each year, by the Plan’s own terms it was making decisions about the management and disposition of plan assets. As such, it acted in a fiduciary capacity when making those decisions.
Intuit decision, p. 7. The Court additionally rejected Intuit’s reliance on plan language allowing the use of forfeitures to reduce employer contributions, concluding that “even if Intuit had complied with the terms of the Plan Document, that alone would not excuse Intuit from fulfilling its fiduciary duties under ERISA.” Intuit decision, p. 9:
ERISA “makes clear,” however, “that the duty of prudence trumps the instructions of a plan document.” Fifth Third, 573 U.S. at 421. Generally, “any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy,” 29 U.S.C. § 1110(a). Accordingly, it is plausible that the defendants could have breached their duty of prudence even while complying with the terms of the Plan Document. See Fifth Third, 573 U.S. at 421 (observing that Section 1104(a)(1)(D) “would make little sense if … the duty of prudence is defined by the aims of the particular plan as set out in the plan documents, since in that case the duty of prudence could never conflict with a plan document.”).
Intuit decision, p. 10. Having found that the plaintiff had plausibly alleged that Intuit was a fiduciary, that forfeiture amounts were plan assets and that Intuit was subject to ERISA’s fiduciary duties when it decided to use forfeiture amounts in a particular manner, the Intuit court had no problem concluding that plaintiff had plausibly alleged violations of ERISA’s duties of loyalty and prudence (Sections 404(a)(1)(A) and (B)), ERISA’s anti-inurement provision (Section 403(c)(1)) and ERISA’s prohibited transaction provisions (Sections 406(a)(1) and 406(b)(1)).
Finally, in ruling for the plaintiff, the Intuit court noted its consideration of the contrary HP Inc. decision granting a motion to dismiss similar allegations and distinguished the specific facts in the complaint before it from those found lacking by the HP Inc. court (“the allegations here differ from those at issue in [the HP Inc. matter]”). Intuit decision, p. 10, n 3.
- Bank of America and Nordstrom Targeted With Forfeiture Lawsuits:
August has also seen the filing of two more lawsuits alleging misconduct with regard to the use of forfeiture amounts. The first, Becerra v. Bank of America Corp., et al., 24-cv-01697 (C.D. Cal. 8/9/2024), filed on August 9, 2024, is a putative class action lawsuit against Bank of America Corporation alleging violations similar to those raised in the other forfeiture cases. The basic factual pleadings in the Bank of America complaint are similar to those underlying the other forfeiture complaints and, in particular, allege that Bank of America violated ERISA by improperly using forfeiture amounts to benefit itself (by reducing employer contributions) rather than for the benefit of participants (by reducing plan expenses). On this basis, the plaintiff alleges that Bank of America violated (a) ERISA’s fiduciary duties of loyalty, prudence and adherence to plan documents (Sections 404(a)(1)(A), (B) and (D)), (b) ERISA’s anti-inurement provision (Section 403(c)(1)), (c) ERISA’s prohibited transaction provisions (Sections 406(a)(1) and 406(b), and (d) the duty to monitor appointed fiduciaries.
The second putative class action lawsuit was filed on August 12, 2024, against Nordstrom and is entitled McWashington, et al. v Nordstrom, Inc., et al., (W.D. Wash. 8/12/2024). The Nordstrom lawsuit includes allegations that the Nordstrom 401k Plan Retirement Committee caused the plan to pay excessive fees for recordkeeping and other administrative expenses as well as allegations that the Committee improperly utilized forfeiture amounts in a way that benefited Nordstrom and disfavored participants. Regarding the alleged misuse of forfeiture amounts, the plaintiffs assert that the Committee violated ERISA’s fiduciary duties of loyalty and prudence (Sections 404(a)(1)(A) and (B)) and ERISA’s prohibited transaction provisions barring self-dealing (Section 406(b)). The plaintiffs also allege that both Nordstrom and its board of directors violated their duty to monitor the Committee relating to its misuse of forfeiture amounts.
- Court Denies Motion for Reconsideration/Certification in Qualcomm:
Finally, on August 12, 2024, the Court overseeing the Qualcomm case issued an order denying Qualcomm’s motion for reconsideration or for interlocutory review. Perez-Cruet v. Qualcomm Inc., et al., 23-cv-1890, DKT # 28 (S.D. Cal. 8/12/2024). In denying the motion for reconsideration, the district court (similar to the Intuit court) rejected Qualcomm’s argument that the HP Inc. court’s grant of a motion to dismiss required reconsideration of the Qualcomm court’s prior decision:
On the whole, Hutchins [the HP Inc. decision] stands in harmony with this Court’s Order. That Hutchins arrived at a different outcome strongly suggests that the Rule 12(b)(6) plausibility test for an ERISA breach of fiduciary duty claim is inherently fact specific. Because the plausibility test requires a focus on facts, it is not surprising that there might be different outcomes on a motion to dismiss for these types of claims. In fact, Hutchins found that its plaintiffs might be able to plausibly allege a claim based on more particularized facts or special circumstances and granted leave to amend. E.g. Hutchins, Order at 12, 20.
Concluding that an interlocutory appeal would only slow the litigation, the Qualcomm court also rejected Qualcomm’s argument that certification was appropriate.
Thoughts:
The recent decisions in Intuit and Qualcomm are certainly welcome news for the plaintiffs in the eleven forfeiture cases filed so far as well as for any plaintiffs considering bringing additional actions. In addition, they highlight the difficulties inherent in defendants’ arguments seeking to easily dismiss these cases.
In December, The Wagner Law Group noted that we did not share the general sentiment that the recent spate of forfeiture cases was unlikely to succeed. Our skepticism about the ease with which these forfeiture cases might be easily dismissed was borne out first by the Qualcomm ruling and now by the Intuit court and their point-by-point resolutions of issues in favor of the plaintiffs. At the same time, the HP Inc., decision with its full consideration of the many issues raised in these cases and its robust ruling in favor of defendants demonstrates that plaintiffs also have a long way to go to succeed in these cases.
These rulings and the additional filings continue to serve as signals for plan sponsors to review the forfeiture provisions of their defined contribution plans to determine what, if any, actions might be advisable to reduce the risk of litigation. For example, consideration should be given to whether fiduciary decisions relating to forfeitures could be seen as relieving the employer of an obligation to the plan and imposing additional costs on participants and whether action should be taken now that might mitigate any litigation risk going forward. Plan sponsors and relevant fiduciaries could also defer decisions on the allocation of forfeitures to see if decisions on the motions to dismiss in the other cases challenging the allocation of forfeitures provide additional guidance on this issue. Note, however, that decisions in these cases challenging the allocation of forfeitures will have no effect on the tax-qualified status of the plans.