Barchock et al v. CVS Health Corporation et al

Filing 41

ORDER adopting 38 Report and Recommendations in its entirety and GRANTING 32 Motion to Dismiss for Failure to State a Claim with prejudice. So Ordered by Senior Judge Mary M. Lisi on 4/18/2017. (Feeley, Susan)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
MARY BARCHOCK, THOMAS
WASECKO, and STACY WELLER,
Plaintiffs,

v.

C.A. No. 16-061-ML

CVS HEALTH CORPORATION, THE
BENEFITS PLAN COMMITTEE OF CVS
HEALTH CORPORATION, and
GALLIARD CAPITAL MANAGEMENT,
INC.,
Defendants.

MEMORANDUM AND ORDER
Plaintiffs1

The
Sections
Income

in

502(a)(2)
Security

and

Act

this

case,

502(a)(3)

which

was

the

29

(“ERISA”),

of

U.S.C.

brought

Employee

under

Retirement

§1132(a)(2)

and

§1132(a)(3), are participants in the Employee Stock Ownership
Plan

(the

Companies
Capital

“Plan”)
(“CVS”)

of

CVS

sponsored

Management,

Inc.

Health
by

Corporation

CVS

and

(“Galliard”).

and

managed

Affiliated

by

According

Galliard
to

the

Plaintiffs, the Defendants breached their fiduciary duties owed
to the Plaintiffs and to the Plan by “imprudently investing too
much of the Plan’s Stable Value Fund assets in ultra-short-term

1

The Complaint is styled as a class action brought on behalf of
the named Plaintiffs, the Plan, and participants in the Plan.
Complaint at ¶1.
1

cash

management

funds

that

provided

extremely

low

investment

returns.” First Amended Complaint (the “Complaint”)(ECF No. 30)
at ¶2.
The matter is before the Court on review of the second
Report

and

Recommendation

("R&R")

issued

in

the

case

by

Magistrate Judge Sullivan (ECF No. 38). Because the Plaintiffs
filed a timely objection to the R&R, the Court reviews de novo
those portions of the R&R to which an objection has been made.
See Fed. R. Civ. P. 72(b). The Court has thoroughly reviewed and
considered the Complaint, the Defendants’ motion to dismiss the
Complaint (ECF No. 32), the Plaintiffs’ response (ECF No. 34),
the R&R, the Plaintiffs’ objections thereto (ECF No. 39), and the
Defendants’ response (ECF No. 40). Having done so, the Court now
adopts the R&R in its entirety. Accordingly, the Defendants’
motion to dismiss the Complaint is GRANTED.
I. Factual Summary2
The
Ownership

Plaintiffs
Plan

of

are
CVS

participants
Health

in

the

Corporation

Employee
and

Stock

Affiliated

Companies, which is sponsored by CVS and administered by the
Benefits

Plan

Committee

(as

designated

by

the

CVS

Board

of

Directors, the “Committee”). The Plan offers various investment

2

The factual
Complaint.

summary

is

based
2

on

the

allegations

in

the

options,3 including the Stable Value Fund (the “Fund”) managed by
Galliard. As stated in the audited financial statement attached
to the Plan’s 2013 Annual Return on Form 5500,4 the Fund “seeks
to preserve capital while generating a steady rate of return
higher than money market funds provide.” Complaint ¶27. Unlike
other,

more

participants

aggressive
farther

lifestyle

from

funds

retirement

designed
who

can

for
wait

“younger
out

the

downside of market cycles and have a higher risk tolerance,”
Complaint ¶9, the Fund is designed for investors who are older
and closer to retirement and likely to be more risk-averse.
The Plaintiffs suggest that the Stable Value Fund (1) was
excessively

concentrated

in

investments

with

ultra-short

durations, and (2) maintained excessive liquidity “far beyond any
reasonable need for it.” Complaint at ¶26. The Plaintiffs further
assert that, as a result of this approach, they were injured “in
the form of significantly lower crediting rates than they would
have received had the Stable Value Fund been prudently managed in

3

According to the Complaint, the Plan “gives workers the
opportunity to invest in a range of between one or more of sixteen
available designated investment options, including the Stable Value
Fund.” Complaint ¶8.
4

As noted in the June 24, 2016 R&R, the Plaintiffs agreed that
the Court may consider these documents—which were referenced in the
initial complaint and later submitted by the Defendants—without
converting the instant motion into a motion for summary judgment.
First R&R at 2 n.2 (ECF No. 24).
3

accordance

with

industry

standards

regarding

duration

and

liquidity.” Id.
In specific terms, the Plaintiffs take issue with having
received lower returns because during the years in question, the
Defendants allocated more than half of the Fund’s assets in the
EB Temporary Investment Fund, invested primarily in cash and socalled

cash

equivalents.

Complaint

¶29.

According

to

the

Plaintiffs, the EB Temporary Investment Fund was used by other
investors as a short-term investment option and offered only a
low rate of return. Complaint ¶¶30, 32. The Complaint asserts
that during the same time period, another large portion of the
Fund was invested in the Wells Fargo Stable Value Fund D, of
which Galliard is a wholly owned subsidiary, and which invests
all of its assets into the Wells Fargo Synthetic Stable Value
Fund (the “WF Synthetic Value Fund”). Plaintiffs note that in the
period

between

2010

and

2012,

the

WF

Synthetic

Value

Fund

invested less than ten percent of its asset in interest-bearing
cash or cash equivalents, from which they infer that Galliard
“well understood...that it was not necessary to maintain such a
large percentage of cash or cash equivalents in a stable value
fund.” Complaint ¶¶37,36.
The Plaintiffs note that, when compared to other stable
value fund investment averages (as documented in SVIA [Stable
4

Value Investment Association] reports) the investment of the Fund
in

cash

or

cash

equivalents

“was

a

severe

outlier

and

categorically imprudent.” Complaint ¶45 (emphasis in original).
The Plaintiffs further assert that the large investment in cash
depressed the Fund’s performance by acting as “an enormous drag
on

the

overall

Stable

Value

Fund

portfolio”

and

because

it

involved payment of an unnecessary liquidity premium. Complaint
¶46.
Pointing out that the portion of the Fund that was invested
in

other

liquid,

significantly
Fund,

higher

Complaint

investments

capital

with

¶51,

preservation

return
the

higher

than

the

Plaintiffs
returns

EB

assets
Temporary

conclude

would

provided

that

have

a

Investment
(1)

been

other

readily

available; and (2) “excessive allocation” to the EB Temporary
Investment Fund constitutes “imprudence in the management of the
Stable Value Fund.” Complaint ¶61. Although it is unstated how
the

actual

performance

of

the

Fund

varied

from

the

average

performance of other stable value funds, the Plaintiffs suggest
that if the Fund’s allocation to cash investments had instead
been “invested in the same manner as the other assets of the
[Fund],” the Fund would have yielded higher earnings. Complaint
¶52.
In sum, the Plaintiffs assert claims of fiduciary breach
5

against the Defendants by alleging that (1) Galliard caused the
Fund to invest in “securities with extremely low yields, low
durations, and excessive liquidity compared to what should be
expected from prudently managed stable value fund investments,”
Complaint ¶81; and (2) CVS and the Committee failed to monitor
and supervise

Galliard,

and

to

cause

Galliard

to

change

its

investment conduct. Complaint ¶82. The Plaintiffs’ assertions are
bolstered

primarily

by

comparisons

between

investment

characteristics of the Fund, i.e., the percentage of investments
allocated

to

cash

and

the

duration

of

investments,

with

investment averages of other stable value funds, as summarized in
the SVIA Survey. See, e.g., Complaint ¶¶ 17, 23, 24, 44, 45, 47,
48.
On behalf of those Plan participants who invested in the
Fund and/or who were invested in the Moderate Lifestyle Fund
and/or the Conservative Lifestyle Fund from six years before the
filing of this action until the time of trial, the Plaintiffs
seek monetary damages for the asserted loss of benefits resulting
from the Defendants’ alleged breach of their fiduciary duty,
injunctive relief, and attorneys’ fees and costs. Complaint at
¶¶27-28.
II. Procedural History
The

Plaintiffs

brought

a

first
6

complaint

(the

“Initial

Complaint”)

on February 11, 2016 (ECF No. 1), asserting—as they

do in the instant Complaint—that Defendants “knew or should have
known that the Plan’s Stable Value Fund assets should have been
invested in securities that would have provided a significantly
higher yield with no material additional investment, credit, or
liquidity risk.” Initial Complaint at ¶2. On April 14, 2016, the
Defendants

filed

a

motion

to

dismiss

the

Initial

Complaint

pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim
upon which relief can be granted, Defs.’ Mem. at 5-6 (ECF No. 151), in response to which the Plaintiffs filed an objection on
April 28, 2016 (ECF No. 19). The Defendants filed a reply on May
9, 2016 (ECF No.20).
Following a hearing on the Defendants’ motion to dismiss on
June 10, 2016, Magistrate Judge Sullivan issued a first R&R on
June 24, 2016, in which she recommended that the Defendants’
motion be granted and the Initial Complaint be dismissed. R&R at
11 (ECF No. 24). Plaintiffs promptly filed an objection to the
R&R on July 8, 2016 (ECF No. 27), to which the Defendants filed a
response in opposition on July 25, 2016 (ECF No. 29).

In the

interim, on July 22, 2016, Plaintiffs also filed a motion to
amend/correct the Initial Complaint (ECF No. 28).
On August 2, 2016, after this Court granted the Plaintiffs’
request to amend/correct the Initial Complaint, the Plaintiffs
7

filed the Complaint now at issue (ECF No. 30). As before, the
Defendants filed a motion to dismiss the Complaint for failure to
state a claim (ECF No. 32). Plaintiffs filed an objection (ECF
No. 34) and Defendants filed a reply (ECF No. 35).
On

January

31,

2017,

following

another

hearing

on

Defendants’ motion to dismiss the Complaint, Magistrate Judge
Sullivan issued a thorough, detailed, and well-reasoned R&R in
which

she

again

recommended

that

the

Defendants’

motion

be

granted and that the Plaintiffs’ claims be dismissed for failure
to “provide sufficient facts to raise an inference of imprudent
investment

management

Plaintiffs

filed

a

on

the

timely

part

of

objection

Galliard.”
to

this

R&R

second

at

16.

R&R

on

February 14, 2017 (ECF No. 39), to which Defendants filed a
response in opposition (ECF No. 40).
III. Standard of Review
A motion to dismiss for failure to state a claim upon which
relief may be granted is governed by Fed. R. Civ. P. 12(b)(6). In
deciding

a

motion

to

dismiss,

the

Court

must

construe

the

complaint in the light most favorable to the plaintiff, taking
all well-pleaded facts as true, and giving the plaintiff the
benefit of all reasonable inferences. Arruda v. Sears, Roebuck &
Co., 310 F.3d 13, 18 (1st Cir. 2002). In order to withstand a
motion

to

dismiss,

a

claim

“must
8

contain

sufficient

factual

matter ... to state a claim to relief that is plausible on its
face.”

Katz

v.

Pershing,

LLC,

2012)(citations

omitted).

The

“factual content

that

672

F.3d

64,

complaining

allows the

72-73

party

court to draw

(1st

must
a

Cir.

include

reasonable

inference” in the pleader’s favor. Id. “[I]f, under any theory,
the allegations are sufficient to state a cause of action in
accordance with the law,” the motion to dismiss must be denied.
Vartanian v. Monsanto Co., 14 F.3d 697, 700 (1st Cir.1994). The
Court ignores, however, “statements in the complaint that simply
offer legal labels and conclusions or merely rehash cause-ofaction-elements.” Schatz v. Republican State Leadership Comm.,
669 F.3d 50, 55 (1st Cir. 2012). In addition, “the party invoking
the jurisdiction of a federal court carries the burden of proving
its existence.” Johansen v. United States, 506 F.3d 65, 68 (1st
Cir.2007).
Although

the

Court

generally

may

not

consider

documents

outside of the complaint unless it converts the motion to dismiss
pursuant to Rule 12(b)(6) into one for summary judgment, it may
make an exception “for documents the authenticity of which are
not disputed by the parties; for official public records; for
documents central to the plaintiffs’ claim; or for documents
sufficiently referred to in the complaint.” Watterson v. Page,
987 F.2d 1, 3 (1st Cir. 1993).
9

It is well established that a motion to dismiss for failure
to state a claim in the ERISA context is an “important mechanism
for

weeding

out

meritless

claims.”

Fifth

Third

Bancorp

v.

Dudenhoeffer, — U.S. — , 134 S.Ct. 2459, 2471, 189 L.Ed.2d 457
(2014). A

determination

of

whether

an

ERISA

claim

should

be

dismissed for failure to state a claim “requires careful judicial
consideration of whether the complaint states a claim that the
defendant has acted imprudently.” Id. (citing Fed. Rule Civ.
Proc. 12(b)(6); Ashcroft v. Iqbal, 556 U.S. 662, 677–680, 129
S.Ct.

1937,

173

L.Ed.2d

868

(2009);

Bell

Atlantic

Corp.

v.

Twombly, 550 U.S. 544, 554–563, 127 S.Ct. 1955, 167 L.Ed.2d 929
(2007)).
The standard against which the Defendants’ actions are to be
measured is “ERISA’s prudent person standard.” Bunch v. W.R.
Grace & Co., 555 F.3d 1, 6 (1st Cir. 2009). “[U]nder ERISA, a
fiduciary is required to act with ‘the care, skill, prudence and
diligence ... that a prudent man acting in a like capacity and
familiar

with

such

matters

would

use.’”

Id.

at

7

(quoting•

Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 18 (1st
Cir.1998)); 29 U.S.C. §1104(a)(1)(B). The Prudent Man Rule is a
test “of conduct, and not a test of the result of performance of
the investment.” Id. (quoting Donovan v. Cunningham, 716 F.2d
1455,

1467

(5th

Cir.1983)).

Moreover,
10

the

prudence

of

a

fiduciary’s actions “cannot be measured in hindsight;” rather,
they

are

“viewed

from

the

perspective

of

the

time

of

the

challenged decision.” Bunch v. W.R. Grace & Co., 555 F.3d at 7.
IV.

Discussion
In their objection to the R&R, the Plaintiffs maintain that

they have stated “plausible” claims for breach of fiduciary duty
under ERISA. Pltfs.’ Mot. 2 (ECF No. 39). Specifically, they
assert that the R&R erroneously characterizes their claims as a
mere “hindsight” attack on the Stable Value Fund’s performance;
that it failed to appreciate that the Plaintiffs’ allegations go
to the very structure and definition of a stable value fund; and
(3)

that

it

conflates

Plaintiffs’

properly-pleaded

breach

of

prudence claims with unasserted claims for breach of the duty of
loyalty and violation of plan documents. Id. The Plaintiffs also
reiterate that Galliard’s management decision (1) to maintain the
investments for a short duration, and (2) to maintain a large
portion of assets in cash (both decisions as compared to average
duration

and

proportion

of

investment

of

other

stable

value

funds) “predictably” caused the Fund to underperform. Id. The
Plaintiffs maintain that such management decisions constituted a
violation of Galliard’s fiduciary duty and its duty of prudence
under ERISA because the Fund’s assets would have yielded higher
returns, had they been invested more in line with the average
11

investment allocations of other stable value funds. Id. at 7.
On their part, the Defendants maintain that, “by plaintiffs’
own

account,

the

CVS

Stable

Value

Fund

was

at

all

times

structured to meet—and did in fact meet—its stated investment
objectives: ‘to preserve capital while generating a steady rate
of

return

higher

than

money

market

funds

provide.’”

Defs.’

Response at 1-2 (ECF No. 40). The Defendants note that, under
those circumstances, Plaintiffs’ contentions that the Fund could
have “predictably” earned higher returns by means of a different
investment allocation, constitutes “improper hindsight critique.”
Id. at 2. Regarding the Plaintiffs’ reliance on industry averages
to support a claim of Defendants’ imprudent investment in higher
cash and cash-equivalent holdings, the Defendants note that “the
salient question is whether the [Fund]’s portfolio conformed to
its investment objective,” which it concededly did. Id.
As noted in the January 31, 2017 R&R, the Complaint includes
no allegations from which it could be inferred that Galliard
failed

to

adhere

to

the

Plan’s

guidelines

and

investment

objectives, R&R at 14, nor do the Plaintiffs assert that Galliard
assessed unreasonable or excessive fees or that it materially
deviated from the disclosures in the Plan documents.
Instead, the newly asserted facts in the Complaint focus
primarily on the extent and duration of the Fund’s investment in
12

cash or cash-equivalent assets, as compared to industry averages,
and are intended to permit an inference that Galliard’s conduct
was inconsistent with its duty of prudence. With the benefit of
20/20 hindsight, the Plaintiffs assert, inter alia, that if the
Fund’s allocation to cash had been invested in the same manner as
the

Fund’s

other

assets,

the

Fund

would

have

earned

more.

Complaint ¶52. Although that may have been the outcome in this
particular case, the Plaintiffs appear to suggest that, rather
than keeping the Fund’s assets diversified, it would have been
more prudent to put more eggs into the same basket, in the
anticipation

of

a

greater

gain

while

assuming

that

such

a

strategy would entail no additional risk.
In

support

of

this

contention,

the

Plaintiffs

point

to

average allocation data “based on a large sample of stable value
funds,”

from

which

the

Plaintiffs

infer

that

the

Fund’s

investment allocation was a “severe outlier and categorically
imprudent.” Complaint ¶45. Leaving aside the question of whether
the calculated average of such data points is an appropriate
measure

of

comparison—as

it

allows

for

the

possibility

of

multiple outliers at either end of the spectrum—a mere deviation
from that average does not allow for an inference that Galliard’s
investment strategy was imprudent. As such, the comparison of the
Fund’s

investment

allocation

with
13

an

industry

average

is

insufficient to show that Galliard did not act “with the care,
skill,

prudence,

and

diligence

under

the

circumstances

then

prevailing that a prudent man acting in a like capacity and
familiar

with

such

matters

would

use

in

the

conduct

of

an

enterprise of a like character and with like aims.” 29 U.S.C.
§1104(a)(1)(B).
The Plaintiffs in this case are not asserting that they
incurred

losses

because

Galliard

deviated

from

the

Plan’s

disclosed investment objective; rather, they have commenced this
litigation

because

hindsight,

might

their

have

investments,

yielded

higher

when

gains

considered

in

Galliard

had

if

elected to allocate the Fund’s investment more in line with the
industry average. It is well established, however, that “the test
of prudence...is one of conduct, and not a test of the result of
the performance of the investment.” Bunch v. W.R. Grace & Co.,
555 at 7. In this case, the Fund was invested in conformance with
its stated objective and whether that strategy was prudent cannot
be measured in hindsight. Id. Accordingly, Plaintiffs’ Complaint
is insufficient to withstand the Defendants’ motion to dismiss.
Conclusion
For the above reasons, and for the reasons set forth in the
January 31,
Complaint

is

2017

R&R, the

GRANTED

and

Defendants’
the
14

motion

Complaint

is

to

dismiss

dismissed

the
with

prejudice.

SO ORDERED.
/s/ Mary M. Lisi
Senior United States District Judge
April 18, 2017

15