Fleming et al v. Fidelity Management Trust Company et al
Judge Allison D. Burroughs: MEMORANDUM AND ORDER entered. 36 Defendants' motion to dismiss for lack of subject matter jurisdiction is DENIED, 23 Defendants' motion to dismiss for failure to state a claim is ALLOWED, and 29 Plaintiffs' motion to strike is DENIED AS MOOT. (Montes, Mariliz)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
KATHERINE FLEMING, EDWARD R.
HADUCK, and VICTORIA WENDEL,
FIDELITY MANAGEMENT TRUST
COMPANY and FIDELITY INVESTMENTS
Civil Action No. 16-cv-10918-ADB
MEMORANDUM AND ORDER
Plaintiffs in this putative class action allege various violations of the Employee
Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1001 et seq. [ECF No. 1]
(hereinafter “Compl.”). They claim that Defendants have breached their fiduciary duties under
ERISA and engaged in transactions that ERISA prohibits. Compl. ¶¶ 67–86. Pending before the
Court are three motions, all opposed: (1) Defendants’ motion to dismiss for lack of subject
matter jurisdiction [ECF No. 36]; (2) Defendants’ motion to dismiss for failure to state a claim
[ECF No. 23]; and (3) Plaintiffs’ motion to strike an exhibit and related factual assertions [ECF
No. 29]. For the reasons that follow, Defendants’ motion to dismiss for lack of subject matter
jurisdiction is DENIED, Defendants’ motion to dismiss for failure to state a claim is
ALLOWED, and Plaintiffs’ motion to strike is DENIED AS MOOT.
The following allegations are drawn from Plaintiffs’ Complaint, with additional details
reserved for later discussion. Plaintiffs Katherine Fleming, Edward Haduck, and Victoria Wendel
are individual participants within the meaning of ERISA, 29 U.S.C. § 1002(7), in the Delta
Family-Care Savings Plan (“Plan”). Compl. ¶¶ 1, 21–24. The Plan qualifies under ERISA as
both an employee pension benefit plan, 29 U.S.C. § 1002(2)(A), and an individual account plan,
29 U.S.C. § 1002(34). Id. ¶ 25. Many of the employee accounts in question are 401(k) accounts,
which permit individuals to contribute a portion of their salary and wages on a pre-tax basis in
order to save for retirement. Id. ¶ 4.
Defendants Fidelity Management Trust Company (“FMTC”) and Fidelity Investments
Institutional Operations Company, Inc. (“FIIOC”) were hired to provide certain services to the
Plan. Id. ¶¶ 26–27. As trustee of the Plan, FMTC holds the Plan’s investment assets and executes
investment transactions as instructed by the Plan and individual Plan participants. Id. ¶ 27.
FIIOC, a wholly owned subsidiary of FMTC, provides trust services, record-keeping, and
information management services to the Plan. Id. ¶ 26.
The assets of the Plan are held in and invested through a Master Trust. Id. ¶ 50. The trust
is controlled in all material respects by a Master Trust Agreement (along with related
supplements and amendments) involving the Plan sponsor (Delta Air Lines, Inc.), the named
fiduciary (the Delta Air Lines, Inc., Benefit Funds Investment Committee), the Plan
administrator (the Administrative Committee of Delta Air Lines, Inc.), and the trustee (FMTC).
[ECF No. 25 at Ex. A].
The Complaint alleges wrongdoing in two particular aspects of the Plan, although the
Plan sponsor, named fiduciary, and administrator are not parties to the case. First, it challenges
the relationship between Defendants and a third party, Financial Engines Advisors, LLC (“FE”).
Compl. ¶¶ 6–7. FE provides investment advice services to individual Plan participants. Id. ¶ 6. It
charges a fee for these services that varies based on the value of a participant’s individual
account. Id. Second, the Complaint attacks the portal through which individual Plan participants
are permitted to invest their savings on a self-directed basis. Id. ¶ 8. Branded as
“BrokerageLink,” this portal allows individuals to purchase an array of securities, including,
most importantly here, a selection of mutual funds (both Fidelity and non-Fidelity funds) that are
not included among the Plan’s designated investment alternatives. Id. ¶¶ 9–10.
A. FE Allegations
The gravamen of Plaintiff’s allegations regarding FE is that Defendants and FE have
agreed to an improper “pay to play” arrangement. Id. ¶ 7. Basically, Plaintiffs allege that FE, in
exchange for being included as the Plan’s investment advisor, agreed to pay Defendants a
significant percentage of the fees that FE collects from individual Plan investors. Id. This feesharing arrangement, according to Plaintiffs, is unrelated to any substantial services performed
by Defendants and artificially inflates the cost of investment advice for Plan participants, which
violates the fiduciary responsibility and prohibited transaction provisions of ERISA, 29 U.S.C.
§§ 1104, 1106. Id. Plaintiffs allege that, to effect this arrangement, Defendants “hired FE and
controlled the negotiation of the terms and conditions under which FE would provide its services
to Plaintiffs [and other] Plan participants,” including the fee-sharing arrangement, and the fact
that Defendants receive at least half of FE’s Plan-related fees under the fee-sharing arrangement
shows that Defendants’ fee is “plainly unreasonable in relation to the service being provided.” Id.
¶¶ 33, 38, 47.
B. BrokerageLink Allegations
Plaintiffs acknowledge that individual Plan participants who use BrokerageLink exercise
at least some discretionary control when it comes to their investment choices, including which
mutual funds to purchase. Id. ¶ 10. They take issue, however, with the specific classes of mutual
fund shares that are available for purchase through BrokerageLink. Id. ¶¶ 11–17.
Typically, a mutual fund that offers different share classes will offer both “retail” shares,
which have higher expenses for the investor, and “institutional” shares, which generally have
lower expenses. Id. ¶¶ 11–13. The Complaint alleges that when individual Plan participants use
BrokerageLink to invest in mutual funds with different share classes, Defendants “do[ ] not
always acquire the class of shares with the lowest expense ratio.” Id. ¶ 16. Instead, Defendants
acquire shares with higher fees, which typically include revenue-sharing payments made to
parties who distribute the shares or provide other services. Id. ¶ 12–13, 16. Defendants, in turn,
get a cut of these higher fees in the form of revenue-sharing payments. Id. ¶ 17.
Plaintiffs also allege that, in 2013, Defendants suddenly stopped reporting a list of funds
from which they received revenue-sharing payments, disclosing only that they received an
unspecified amount of indirect compensation from BrokerageLink. Id. ¶ 53. Plaintiffs allege
“[t]here is no discernible purpose or justification” for this change other than “a deliberate attempt
to conceal the amount of [Defendants’] compensation.” Id. According to the Complaint, the
purchase of higher-cost shares violates Defendants’ obligations under ERISA to select share
classes solely in the best interests of the Plan and its participants, and to refrain from using Plan
assets for their own interests. Id. ¶ 17.
Plaintiffs filed their Complaint on May 20, 2016. Compl. at 24. On July 22, 2016,
Defendants filed a motion under Fed. R. Civ. P. 12(b)(6) seeking dismissal of the Complaint for
failure to state a claim upon which relief can be granted. [ECF No. 23]. Accompanying the
motion was a declaration by Defendants’ counsel, along with three exhibits, two of which were
filed under seal. [ECF No. 25]. Plaintiffs opposed this motion on September 12, 2016, and filed a
motion to strike one of the exhibits attached to the declaration, and related factual assertions
contained in the memorandum in support of the motion. [ECF Nos. 28, 29]. Defendants opposed
the motion to strike on October 17, 2016. [ECF No. 35]. Shortly thereafter, on November 3,
2016, Defendants filed a motion to dismiss for lack of subject matter jurisdiction under Fed. R.
Civ. P. 12(b)(1). [ECF No. 36]. Plaintiffs responded to this motion on December 12, 2016 [ECF
No. 42], and Defendants filed a reply on January 12, 2017 [ECF No. 45].
“When a court is confronted with motions to dismiss under both Rules 12(b)(1) and
12(b)(6), it ordinarily ought to decide the former before broaching the latter.” Deniz v.
Municipality of Guaynabo, 285 F.3d 142, 149 (1st Cir. 2002). The Court follows that approach
here, addressing first Defendants’ motion to dismiss under Rule 12(b)(1), and then Defendants’
motion to dismiss under Rule 12(b)(6) along with Plaintiffs’ motion to strike.
Subject Matter Jurisdiction
Defendants argue that the Court does not have subject matter jurisdiction over Plaintiffs’
BrokerageLink claims because Plaintiff Fleming, the only named plaintiff to allege injury from
using that service, lacks Article III standing. [ECF No. 37 at 10–11; Compl. ¶ 22–24]. Plaintiffs
respond that Fleming has standing because she was “forced to pay unnecessary and excessive
fees” by using the BrokerageLink platform. [ECF No. 42 at 2].
Standing doctrine recognizes this Court’s limited power to hear “Cases” and
“Controversies” under Article III of the U.S. Constitution. Hochendoner v. Genzyme Corp., 823
F.3d 724, 731 (1st Cir. 2016) (quoting U.S. Const. art. III, § 2, cl. 1). “The heartland of
constitutional standing is composed of the familiar amalgam of injury in fact, causation, and
redressability.” Id. (citing Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992)). When
evaluating subject matter jurisdiction at the pleading stage, the Court must “accept the factual
averments of the complaint as true, and construe those facts in the light most congenial to
[Plaintiffs’] cause.” Royal v. Leading Edge Prods., Inc., 833 F.2d 1, 1 (1st Cir. 1987). “Dismissal
can be justified only if it clearly appears that no colorable hook exists upon which subject matter
jurisdiction can be hung.” Id.
Defendants’ motion is premised on the fact that Plaintiffs’ BrokerageLink theory appears
to have evolved over the course of the litigation. The Complaint asserts a general allegation that
Defendants, through BrokerageLink, “select[ed] share classes that charged higher fees . . . for the
purpose of receiving significant amounts of revenue sharing payments.” Compl. ¶¶ 77–78. In
responding to Defendants’ Rule 12(b)(6) motion to dismiss, Plaintiffs later tried to clarify the
allegations in the Complaint, saying, “Plaintiffs claim quite simply that, once a participant
selected a mutual fund to purchase, Fidelity had a choice of share classes to acquire. It did not
disclose that choice to participants and it consistently and affirmatively chose to acquire a share
class that resulted in greater compensation to Fidelity at the expense of the participants.” [ECF
No. 28 at 19] (emphasis added).
Seizing on this more specific allegation, Defendants then moved to dismiss for lack of
subject matter jurisdiction, and included a declaration by an employee experienced in
BrokerageLink’s online platform in support. [ECF Nos. 36, 37 at 13]. The declaration avers that
any investor who uses this platform to purchase mutual fund shares must enter or select a
specific ticker symbol, which identifies both the mutual fund and the share class to be purchased.
[ECF No. 38 at 2–3]. Thus, by entering a particular ticker symbol, Fleming herself selected both
the mutual fund and the share class for her investments. Id. According to Defendants, this means
that Fleming suffered no injury in fact caused by the conduct alleged in the Complaint, and that
the Court therefore lacks subject matter jurisdiction over Plaintiffs’ BrokerageLink claims. [ECF
No. 37 at 13].
In response, Plaintiffs dispute the facts asserted in the declaration and argue that
Defendants’ reliance on it demonstrates that their jurisdictional challenge is factual, rather than
facial, in nature. [ECF No. 42 at 4–5]. See Torres-Negron v. J & N Records, LLC, 504 F.3d 151,
162–63 (1st Cir. 2007) (discussing different standards for factual versus facial jurisdictional
challenges). Plaintiffs acknowledge that investors like Fleming do indeed “choose” the share
class, even if only in a “purely mechanical sense,” [ECF No. 42 at 6], but argue that Defendants
remain liable under ERISA because BrokerageLink does not always offer investors “a
meaningful choice of share class, such that the investor is free to choose the lowest cost share
class for which that investor may be qualified.” [ECF No. 42 at 3–4, 6].
Defendants do not assert that Fleming lacks standing to assert this more recent iteration
of the BrokerageLink theory, which claims, in effect, that Plaintiffs did not have the option of
choosing the most cost-efficient share class. [ECF No. 45 at 5]. Moreover, this theory is
consistent with the more general allegation contained in the Complaint, which the Court at this
stage is bound to construe in the light most favorable to Plaintiffs. See Royal, 833 F.2d at 1.
Thus, this is not a case in which “no colorable hook exists upon which subject matter jurisdiction
can be hung.” Id. Accordingly, Defendants’ motion to dismiss for lack of subject matter
jurisdiction [ECF No. 36] is DENIED.
Failure to State a Claim
To survive a motion to dismiss under Rule 12(b)(6), a “complaint must contain sufficient
factual matter to state a claim to relief that is plausible on its face.” In re Fid. ERISA Float Litig.,
829 F.3d 55, 59 (1st Cir. 2016) (quoting Saldivar v. Racine, 818 F.3d 14, 18 (1st Cir. 2016)). The
plausibility question triggers a two-step analysis. Id. First, the Court must “distinguish the
complaint’s factual allegations (which must be accepted as true) from its conclusory legal
allegations (which need not be credited).” Id. Second, it “must determine whether the factual
allegations are sufficient to support the reasonable inference that the defendant is liable.” Id.
1. Count III: Fiduciary Duty (BrokerageLink) 1
Plaintiffs allege in Count III of the Complaint that Defendants “had the discretionary
authority to select the share classes of mutual funds to purchase for Plaintiffs and the Plans
through BrokerageLink” and breached their duties of loyalty under ERISA, 29 U.S.C. §§
1106(b)(1), 1106(b)(3), by “selecting share classes that charged higher fees than share classes
otherwise available for investment.” Compl. ¶¶ 74–77. According to the Complaint, Defendants
did this “for the purpose of receiving significant amounts of revenue sharing payments” from the
higher-cost funds. Id. ¶ 78. The Complaint alleges that this conduct violated two provisions of
ERISA, one of which prohibits a “fiduciary with respect to a plan” from “deal[ing] with the
assets of the plan in his own interest or for his own account,” 29 U.S.C. § 1106(b)(1), and the
other of which prohibits a “fiduciary with respect to a plan” from “receiv[ing] any consideration
for his own personal account from any party dealing with such plan in connection with a
transaction involving the assets of the plan,” 29 U.S.C. § 1106(b)(3). Id. ¶¶ 74–77.
The Court discusses the counts in the Complaint in the order most conducive to its analysis
rather than in the order presented by Plaintiffs.
Again, Plaintiffs’ theory has evolved somewhat over the course of the litigation, but their
current theory of BrokerageLink liability seems to be that Defendants breached their fiduciary
duty to the Plan by “selecting” only higher-cost share classes to be available through
BrokerageLink, while leaving out lower-cost share classes, and thereby maximizing their
revenue-sharing payments at the expense of Plan participants. [See Compl. ¶¶ 77–78; ECF No.
28 at 16–17; ECF No. 42 at 6; ECF No. 43 at 2–4].
To establish liability under this theory, Plaintiffs must first demonstrate that Defendants
qualify as “fiduciar[ies] with respect to a plan.” 29 U.S.C. § 1106(b). See Pegram v. Herdrich,
530 U.S. 211, 226 (2000) (“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.”); O’Toole v. Arlington Tr. Co.,
681 F.2d 94, 97 n.1 (1st Cir. 1982) (indicating that fiduciary status is “predicate condition” for
violation of § 1106(b)(1)).
Under ERISA, an entity is a fiduciary with respect to a plan only to the extent that it (1)
exercises any discretionary authority or discretionary control respecting management of a plan or
exercises any authority or control respecting management or disposition of its assets; (2) renders
investment advice for a fee or other compensation, direct or indirect, with respect to any moneys
or other property of such plan, or has any authority or responsibility to do so; or (3) has any
discretionary authority or responsibility in the administration of such plan. 29 U.S.C. §
1002(21)(A). Emphasizing the statute’s “to the extent that” language, the First Circuit has made
clear that “fiduciary status is not an all or nothing proposition.” Beddall v. State St. Bank & Tr.
Co., 137 F.3d 12, 18 (1st Cir. 1998). Rather, “fiduciary liability arises in specific increments
correlated to the vesting or performance of particular fiduciary functions in service of the plan,
not in broad, general terms.” Id.
Thus, for Plaintiffs’ BrokerageLink theory to go forward, they must first sufficiently
allege that Defendants were exercising a fiduciary function with respect to the decision regarding
which share classes would be available to Plan participants through BrokerageLink. They have
failed to do so.
At this stage in the case, the Court is required to construe the facts alleged in the
Complaint in the light most favorable to Plaintiffs and indulge all reasonable inferences in their
favor. Yacubian v. United States, 750 F.3d 100, 107–08 (1st Cir. 2014). “However, ‘[i]t is a
well-settled rule that when a written instrument contradicts allegations in the complaint to which
it is attached, the exhibit trumps the allegations.’” Id. at 108 (quoting Young v. Wells Fargo
Bank, N.A., 717 F.3d 224, 229 n.1 (1st Cir. 2013)).
Here, the Court accepts as true Plaintiffs’ assertion that Defendants were responsible for
deciding which share classes of mutual funds would be made available through BrokerageLink.
[ECF No. 28 at 16–17; ECF No. 42 at 6]. This, however, is a “product design” decision by
Defendants that is wholly distinct from the decision to make BrokerageLink available to
individual Plan participants. The Master Trust Agreement, which is incorporated by reference
into the Complaint, demonstrates that this decision rested solely with Delta, either as the Plan
sponsor or through its benefits committee. The agreement states that the Plan sponsor “shall
determine the type of Plan investment options to be offered to Participants” and that Defendants
“shall have no responsibility for the selection of investment options under the Trust.”2 [ECF No.
On its face, this latter phrase could be interpreted as being in tension with the allegation,
accepted as true at this stage of the case, that Defendants selected which share classes of mutual
funds to make available through BrokerageLink. In context, however, it is clear to the Court that
25 at Ex. A, § 5(a)–(b)]. According to Schedule C of the Master Trust Agreement, the Delta
committee, as Named Fiduciary, “direct[ed]” Defendants that individual accounts could be
invested in a list of 28 funds or products, one of which was BrokerageLink. [ECF No. 25 at Ex.
A, Schedule C].
Read together, this language makes plain that the Delta entities, not Defendants, retained
control over whether BrokerageLink—and by extension the classes of mutual fund shares offered
through it—was made available to Plan participants. There is no suggestion in the Complaint that
Delta lacked the authority or ability to leave BrokerageLink off of Schedule C if it determined
that the share classes offered through BrokerageLink were unsuitable for Plan participants.
Accordingly, Defendants did not exercise the type of authority or control over the decision to
include BrokerageLink in the Plan that would give rise to ERISA liability. See Columbia Air
Servs., Inc. v. Fid. Mgmt. Tr. Co., No. 07-11344-GAO, 2008 WL 4457861, at *4 (D. Mass. Sept.
30, 2008) (rejecting ERISA complaint where it was “clear that the selection of the mutual funds
was done by” plan sponsor rather than service provider). The Plan documents show that once
Delta chose to include BrokerageLink on Schedule C, Defendants were bound to follow Plan
participants’ investment instructions and exercised no discretion or authority with respect to
which securities participants elected to purchase. [See ECF No. 25 at Ex. A, § 5(c), (g)].
Plaintiffs’ BrokerageLink theory closely resembles ERISA “product design” claims
considered and rejected by at least two circuit courts. The Third Circuit Court of Appeals
affirmed the dismissal of a complaint that alleged, in part, that John Hancock charged excessive
fees to an ERISA plan by offering investment options that included fee-charging mutual fund
this language pertains to the inclusion of investment options on Schedule C, not to the initial
selection of mutual fund share classes by Defendants in designing the BrokerageLink product.
share classes, when it could have negotiated for access to no-fee share classes. Santomenno ex
rel. John Hancock Tr. v. John Hancock Life Ins. Co. (U.S.A), 768 F.3d 284, 292 (3d Cir. 2014).
The claim failed because “a service provider owes no fiduciary duty to a plan with respect to the
terms of its service agreement if the plan trustee exercised final authority in deciding whether to
accept or reject those terms.” Id. at 293. In other words, because “[n]othing prevented the
trustees from rejecting John Hancock’s product and selecting another service provider,” John
Hancock was not a fiduciary in selecting the funds offered through their investment product. Id.
Similarly, the Seventh Circuit Court of Appeals rejected an ERISA challenge to revenuesharing agreements between a 401(k) plan’s service provider and the mutual funds it offered to
plan participants. Leimkuehler v. American United Life Ins. Co., 713 F.3d 905, 907–08 (7th Cir.
2013). The Seventh Circuit held that, “standing alone, the act of selecting both funds and their
share classes for inclusion on a menu of investment options offered to 401(k) plan customers
does not transform a provider of annuities into a functional fiduciary under [29 U.S.C. §]
1002(21)(A)(i).” Id. at 912. See also Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir. 2009)
(“[A] service provider does not act as a fiduciary with respect to the terms in the service
agreement if it does not control the named fiduciary’s negotiation and approval of those terms.”).
Although it appears that the First Circuit Court of Appeals has not yet addressed this type
of ERISA “product design” theory, Plaintiffs offer no compelling reason, and the Court sees
none, to deviate from the reasoning of the Third and Seventh Circuits.
The Court also notes that the cases upon which Plaintiffs rely are distinguishable in
important ways. Many involved defendants who possessed unilateral authority or control over
which funds or investment options would be offered to plan participants. See Braden v. Wal-
Mart Stores, Inc., 588 F.3d 585, 589–90 (8th Cir. 2009); Charters v. John Hancock Life Ins. Co.,
583 F. Supp. 2d. 189, 192, 199 (D. Mass. 2008); Haddock v. Nationwide Fin. Servs., Inc., 419 F.
Supp. 2d 156, 161, 166 n.6 (D. Conn. 2006). That is not the case here, where the Master Trust
Agreement indicates that Delta, and not any of the named Defendants, selected the roster of
investment options available to Plan participants. [ECF No. 25 at Ex. A, § 5(a)–(b) and Schedule
C]. In other cases cited by Plaintiffs, the defendants retained authority or control, beyond the
reach of the plan sponsor, to set their own rates of compensation, which does not seem to be the
case with respect to BrokerageLink. See Golden Star, Inc. v. Mass Mut. Life Ins. Co., 22 F.
Supp. 3d 72, 75–76 (D. Mass. 2014); Glass Dimensions, Inc. ex rel. Glass Dimensions, Inc.
Profit Sharing Plan & Tr. v. State St. Bank & Tr. Co., 931 F. Supp. 2d 296, 301–02 (D. Mass.
In sum, Plaintiffs have failed to plausibly allege that Defendants were exercising a
fiduciary function under 29 U.S.C. § 1002(21)(A) when they decided which securities to make
available through BrokerageLink because Delta retained ultimate authority to include or reject
the BrokerageLink product from the list of investment options made available to Plan
participants. Thus, Count III must be dismissed.
2. Count I: Fiduciary Duty (FE)
Count I of the Complaint, which relates to the investment advisor FE, runs into similar
difficulties. This count claims that Defendants acted in a fiduciary capacity by “hiring FE and
controlling the negotiation of the terms and conditions under which FE would provide its
services to Plan participants” and by “selecting FE as an investment advice provider for Plan
participants.” Compl. ¶ 64. According to the Complaint, Defendants breached their duty of
loyalty under ERISA by receiving revenue-sharing payments from FE at the expense of the Plan
and Plan participants, and by charging unreasonable and excessive fees for the services they
provided to FE. Id. ¶ 65. The Complaint alleges that this conduct violates 29 U.S.C. §§
1106(b)(1) and 1106(b)(3), the same two ERISA provisions discussed above. Id. ¶¶ 62–63.
This theory is premised on the notion that Defendants, rather than Delta, “hir[ed]” FE or
“select[ed] FE as an investment advice provider for Plan participants,” Compl. ¶ 64, but the
Master Trust Agreement contradicts this premise. See Yacubian, 750 F.3d at 108 (describing
“well-settled rule that when a written instrument contradicts allegations in the complaint to
which it is attached, the exhibit trumps the allegations”). The agreement states that the “Named
Fiduciary” (here, the Delta Air Lines, Inc., Benefit Funds Investment Committee) “may also
appoint an investment manager” and “has so appointed Financial Engines with respect to assets
held in the individual Plan accounts of Participants enrolled in Professional Management.” [ECF
No. 25 at Ex. A, Amendment II, § 5]. It also states that the “Trustee” (here, FMTC) “shall have
no responsibility” for the decision to offer such a service. Id., § 2.
This language is fatal to Plaintiffs’ FE claim. No matter how generously one reads the
allegations in the Complaint, the FE claim boils down to another version of the “product design”
theory described above. See Santomenno, 768 F.3d at 292–93; Leimkuehler, 713 F.3d at 907–08,
912. The Court rejects this claim for the same basic reason: the Master Trust Agreement compels
the conclusion that Delta, not Defendants, exercised final authority or control over the selection
or hiring of FE. If Delta believed, as the Complaint alleges, that the fee-sharing arrangement
between Defendants and FE “wrongfully inflate[d] the price of investment advice services,”
Compl. ¶ 7, Delta was free to decline to hire FE or to terminate its relationship with both
Defendants and FE to avoid an unfavorable fee-sharing arrangement. 3
Insofar as the Complaint challenges the amount of the fees that Defendants collect from
FE, Courts have held that plan service providers (such as Defendants) are not acting in a
fiduciary capacity when they negotiate with plan sponsors for their own compensation, so long
as the final agreement with the plan does not give the service provider the ability to determine or
control the actual amount of its compensation. See, e.g., F.H. Krear & Co. v. Nineteen Named
Trustees, 810 F.2d 1250, 1259 (2d Cir. 1987); Schulist v. Blue Cross of Iowa, 717 F.2d 1127,
1131–32 (7th Cir. 1983). The critical inquiry is who controls the “decision whether or not, and
on what terms, to enter into an agreement” with a service provider. F.H. Krear & Co., 810 F.2d
at 1259. Absent authority or control over that decision, a service provider “is not an ERISA
fiduciary with respect to the terms of the agreement for his compensation.” Id. Extending that
logic to an agreement between Defendants and a third party, such as FE, it is difficult to see how
a service provider could be an ERISA fiduciary when it negotiates a fixed rate of compensation
from an entity other than the Plan, as Plaintiffs allege here. Importantly, the Complaint does not
allege that, once FE was hired, Defendants retained any authority or control over the rate of
This renders superfluous the parties’ contentions regarding Defendants’ own investment advice
product and, consequently, renders moot Plaintiffs’ motion to strike the exhibit establishing the
existence of this product. The challenged exhibit is a Form ADV, filed with the Securities and
Exchange Commission (“SEC”). [ECF No. 29 at 1; ECF No. 25 at Ex. C]. The Court believes
this document would be judicially noticeable in any event. See, e.g., Gent v. CUNA Mut. Ins.
Soc’y, 611 F.3d 79, 84 n.5 (1st Cir. 2010) (taking judicial notice of facts on government website
that were “not subject to reasonable dispute”); Metzler Inv. GMBH v. Corinthian Colleges, Inc.,
540 F.3d 1049, 1064 n.7 (9th Cir. 2008) (proper for district court to take judicial notice of
publicly available financial documents, including SEC filings); Citadel Equity Fund Ltd. v.
Aquila, Inc., 168 F. App’x 474, 476 (2d Cir. 2006) (within court’s discretion to take judicial
notice of public SEC filing on motion to dismiss). The Court, however, does not rely on this
document or the product that it discusses in resolving the Rule 12(b)(6) motion. Accordingly,
Plaintiffs’ motion to strike [ECF No. 29] is DENIED AS MOOT.
compensation it would receive from FE. See Danza v. Fid. Mgmt. Tr. Co., 533 F. App’x 120,
126 (3d Cir. 2013) (“What differentiates this case from cases in which we have held that [§
1106(b)] applied is the fact that Fidelity, at the time it collected the fee, had no actual control or
discretion over the transaction at issue—the price of the previously bargained-for fees.”).
Accordingly, Count I is dismissed.
3. Count IV: Prohibited Transaction Between Plan and Party in Interest
Count IV of the Complaint is based on a provision of ERISA that prohibits certain
transactions involving non-fiduciaries:
A fiduciary with respect to a plan shall not cause the plan to engage in a
transaction, if he knows or should know that such transaction constitutes a direct
or indirect . . . furnishing of goods, services, or facilities between the plan and a
party in interest [or] transfer to, or use by or for the benefit of a party in interest,
of any assets of the plan.
29 U.S.C. § 1106(a)(1)(C)–(D). Generally, § 1106(a) is concerned about “commercial bargains
that present a special risk of plan underfunding because they are struck with plan insiders,
presumably not at arm’s length.” Lockheed Corp. v. Spink, 517 U.S. 882, 893 (1996). In order to
make out a claim under § 1106(a), “a plaintiff must show that a fiduciary caused the plan to
engage in the allegedly unlawful transaction.” Id. at 888–89.
Count IV alleges that Defendants are a “party in interest” within the meaning of ERISA,
29 U.S.C. 1002(14), by virtue of the trustee and other administrative services that they perform
for the Plan. Compl. ¶ 83. The Complaint also directs the Court to Harris Tr. & Sav. Bank v.
Salomon Smith Barney, Inc., 530 U.S. 238, 241 (2000), which held that even a non-fiduciary
“party in interest” (such as Defendants here) sometimes may be held liable for a transaction
barred by § 1106(a). The Complaint asserts that Defendants violate ERISA by receiving
“excessive and unreasonable compensation” from (1) the fees they collect from the mutual funds
that Plan participants acquire through BrokerageLink and (2) the fees that FE shares with
Defendants pursuant to their revenue-sharing agreement. Compl. ¶ 85.
Accepting as true the Complaint’s allegation that the mutual funds and FE agreed to share
parts of their fees with Defendants, Compl. ¶¶ 6–7, 12, 17, the claim nonetheless fails because
none of these fees come from a transaction properly subject to § 1106(a)(1). Although the
Complaint is correct that Defendants became parties in interest upon agreeing to provide
administrative and trustee services, Compl. ¶ 83, the conduct complained of involves earlier
transactions between Defendants and mutual funds, or Defendants and FE, in which Delta, as the
only relevant Plan fiduciary, had no part. Nowhere does the Complaint allege that the Plan or
Delta in any way caused those agreements to come into existence or participated in negotiating
them. See Lockheed, 517 U.S. at 889 n.3 (“[T]he only transactions rendered impermissible by §
[1106(a)] are transactions caused by fiduciaries.”); Danza, 533 F. App’x at 125 (3d Cir. 2013)
(reasoning that because service provider was not providing services and was not a fiduciary at
the time trust agreement was signed, transaction was not prohibited by § 1106 (a)). To the
contrary, the Complaint and the incorporated Master Trust Agreement indicate that Defendants’
fee-sharing agreements pre-dated their involvement with the Plan.
Plaintiffs’ prohibited transaction claim also fails because the Complaint does not plead
knowledge of wrongdoing by a relevant fiduciary. See 29 U.S.C. § 1106(a)(1) (imposing liability
only if fiduciary “knows or should know” that transaction is prohibited). Again, the only relevant
Plan fiduciary here is Delta, but the Complaint makes no allegations, nor it is reasonably
inferable from the facts alleged in the Complaint, that Delta knew or should have known that it
was causing the Plan to engage in a transaction prohibited by § 1106(a). Instead, the Complaint
alleges only that the Defendants knew their fee-sharing arrangement with FE was unlawful.
Compl. ¶ 70. As already discussed, Defendants were not exercising fiduciary responsibility when
they entered into the fee-sharing agreements at issue in this case. See Patrico v. Voya Fin., Inc.,
No. 16 CIV. 7070 (LGS), 2017 WL 2684065, at *4 (S.D.N.Y. June 20, 2017) (rejecting
prohibited transaction liability on similar grounds).
Finally, to the extent that Plaintiffs rely on 29 U.S.C. § 1106(a)(1)(D) [see ECF No. 28 at
23], their claim still fails. This provision bars a plan fiduciary from causing the plan to engage in
a transaction involving the “transfer to, or use by or for the benefit of a party in interest, of any
assets of the plan.” 29 U.S.C. § 1106(a)(1)(D). Here, the fees that Defendants collect from the
mutual funds or from FE are not “assets of the plan” within the meaning of ERISA.
The First Circuit has held that interest earned on the cash paid out by mutual funds is not
an “asset of the plan” because “[t]he payout from the redemption does not go, and is not intended
to go, to the plan itself.” In re Fid. ERISA Float Litig., 829 F.3d at 60. Here, the fees at issue are
destined for the mutual funds and FE, respectively, for the use and benefit of those entities. See
Compl. ¶¶ 6–7, 12, 17. Because the fees that the mutual funds and FE collect from the Plan do
not go to, and are not intended to go to, the Plan itself, they do not qualify as “assets of the plan,”
as required to make out a claim under 29 U.S.C. § 1106(a)(1)(D).
Even the authority cited in Plaintiffs’ response supports this conclusion. The Department
of Labor has advised that the “assets of a plan” are defined by “[a]pplying ordinary notions of
property rights.” DOL Advisory Op. 2013-03A (July 3, 2013). This typically “requires
consideration of any contract or other legal instrument involving the plan, as well as the actions
and representations of the parties involved.” Id. Here, that principle requires consideration of the
Master Trust Agreement, which incorporates by reference the pre-existing fee-sharing
agreements between Defendants and the mutual funds, and Defendants and FE. Those
agreements, alongside the facts pleaded in the Complaint, support the view that the challenged
fees are directed to the mutual funds and to FE rather than to the Plan. Accordingly, Count IV is
4. Count II: Equitable Relief
Finally, Count II of the Complaint seeks equitable relief under 29 U.S.C. § 1132(a)(3).
Compl. ¶ 69. This subsection permits a “participant, beneficiary, or fiduciary” to obtain an
injunction or “other appropriate equitable relief” to redress an act or practice that violates
ERISA. 29 U.S.C. § 1132(a)(3). The equitable relief permitted under ERISA does not authorize
appropriate equitable relief “at large,” but rather only such relief as will enforce the terms of a
plan or ERISA itself. US Airways, Inc. v. McCutchen, 569 U.S. 88, 100 (2013).
Here, Plaintiffs’ claim for equitable relief rises or falls with the viability of their claims
alleging violations of §§ 1106(a) and 1106(b). The Complaint seeks to hold Defendants liable
because they “knew or should have known” that their arrangement with FE violated §§ 1106(a)
and 1106(b). Compl. ¶ 70. For the reasons already discussed, those underlying violations are
dismissed. Therefore, Plaintiffs’ claim for equitable relief also fails.
For the foregoing reasons, Defendants’ motion to dismiss under Rule 12(b)(1) [ECF No.
36] is DENIED. Defendants’ motion to dismiss under Rule 12(b)(6) [ECF No. 23] is
ALLOWED. Plaintiffs’ motion to strike [ECF No. 29] is DENIED AS MOOT.
Dated: September 22, 2017
/s/ Allison D. Burroughs
ALLISON D. BURROUGHS
U.S. DISTRICT JUDGE
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