SANTOMENNO et al v. TRANSAMERICA LIFE INSURANCE COMPANY et al, No. 2:2012cv02782 - Document 137 (C.D. Cal. 2013)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS MOTIONS TO DISMISS 103 , 104 by Judge Dean D. Pregerson: Defendant TLICs Motion to Dismiss is DENIED with respect to the ERISA claims (Counts I, II, III, IV, V,VI, VII) and GRANTED with respect to the IAA claims (Counts VIII and IX). Defendants TIM and TAMs Motion to Dismiss is DENIED. (lc). Modified on 2/19/2013 (lc). Modified on 2/19/2013 (lc).
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SANTOMENNO et al v. TRANSAMERICA LIFE INSURANCE COMPANY et al Doc. 137 1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 JACLYN SANTOMENNO; KAREN POLEY; BARBARA POLEY, 12 Plaintiffs, 13 v. 14 15 16 TRANSAMERICA LIFE INSURANCE COMPANY; TRANSAMERICA INVESTMENT MANAGEMENT, LLC; TRANSAMERICA ASSET MANAGEMENT INC., 17 18 Defendants. ___________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 12-02782 DDP (MANx) ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTIONS TO DISMISS [Dkt. Nos. 103 & 104] 19 20 Presently before the court are Defendants Transamerica Life 21 Insurance Company (“TLIC”), Transamerica Asset Management, Inc. 22 (“TAM”), and Transamerica Investment Management, LLC (“TIM”)’s 23 Motions to Dismiss. 24 heard oral argument, the court adopts the following order. 25 I. BACKGROUND Having considered the parties’ submissions and 26 A. The Transamerica System 27 Transamerica Life Insurance Company ("TLIC") sells a 401(k) 28 plan product targeted at small and mid-size employers. (Compl. ¶¶ Dockets.Justia.com 1 62, 94.) 2 and administrative services that an employer can purchase. 3 7.) 4 15,500 401(k) plans through its group annuity product and was 5 managing approximately $19.5 billion in employee assets. 6 8.) 7 The product consists of a bundle of investment options (Id. ¶ As of December 31, 2010, TLIC was operating approximately (Id. ¶ Employers who purchase the 401(k) plan product enter into two 8 separate agreements with TLIC. First, they enter into an 9 "Application and Agreement for Services" ("Services Agreement"), 10 which sets out the various services TLIC agrees to provide for the 11 employer's plan, including recordkeeping services, enrollment 12 services, and website hosting. 13 Support of Defendant Transamerica Life Insurance Company's Motion 14 to Dismiss Class Action Complaint ("Hatton Decl."), Exh. A.) 15 Services Agreements for the Plaintiffs’ Plans contain fee schedules 16 that are based on the number of participants or, for some services, 17 an hourly rate. 18 challenging these fees. 19 Court's October 19, 2012 Order for Supplemental Briefing ("Joint 20 Statement") at 11.) (See, e.g., Decl. Darcy Hatton in The (Id., Exhs. A and C.) Plaintiffs are not (See Joint Statement in Response to 21 Additionally, and more relevant to this action, employers and 22 TLIC enter into a group annuity contract ("GAC" or “the contract”) 23 which governs TLIC's provision of investment options to the Plans. 24 (See Hatton Decl., Exhs. D-1 and D-2.) Through the GAC, TLIC 25 provides a set of investment options to the employer. 26 Plaintiffs' employers selected the "Partner Series III" retirement 27 package. 28 investment options from which they may select 50 or 80 to offer to Both of (Compl. ¶ 243.) This package gives employers 170 2 1 their employees. 2 the former employer of Plaintiff Santomenno, the Gain Capital 3 Group, LLC 401(k) Plan (the "Gain Plan"), selected 46 of 170 4 investment options. 5 the employer of Plaintiffs Karen and Barbara Poley, QualCare 6 Alliance Networks, Inc. Retirement Plan (the "QualCare Plan"), 7 selected 36 of 170 investment options. 8 9 (Id. ¶¶ 241-42.) The 401(k) plan sponsored by (Id. ¶¶ 17, 206-08.) The plan sponsored by (Id. ¶¶ 16, 206-08.) One of the benefits TLIC provides to client employers is the "Fiduciary Warranty." (Id. ¶ 155.) Having entered into a GAC, an 10 employer may pick and choose from the investment options à la 11 carte, or it may choose one of TLIC's pre-selected "model" 12 line-ups. 13 the employer qualifies for TLIC's Fiduciary Warranty, which 14 "provides specific assurances" that the line-up will satisfy 15 ERISA's "broad range of investments" requirement and its "prudent 16 man standards." 17 claim for breach of those fiduciary duties against the employer, 18 TLIC will indemnify the employer and make the plan whole. 19 159.) 20 its own line-up only if the employer selects investments from 21 specified categories. 22 (Id. ¶ 157.) (Id.) If an employer chooses a model line-up, TLIC warrants that if employees assert a (Id. ¶ TLIC's Fiduciary Warranty applies if an employer constructs (Id. ¶ 157.) TLIC structures its investment product under the GAC such that 23 each investment option is considered a separate account. (Id. ¶ 24 132.) 25 investment: a mutual fund, a collective trust, or a traditional 26 separate account. 27 publicly traded and managed by investment managers unaffiliated 28 with TLIC such as Fidelity or Vanguard. (See e.g., id. ¶ 214.) Some Each separate account corresponds to an underlying (Id. ¶ 130.) Many of the mutual funds are 3 1 of the mutual funds and collective trusts are managed by 2 Transamerica Investment Management, LLC (“TIM”) or Transamerica 3 Asset Management, Inc. (“TAM”), affiliates of TLIC. 4 (Id. ¶ 340.) In each separate account, TLIC pools together the retirement 5 assets of all employees who choose a certain investment option, 6 regardless of their employer. 7 Plaintiff Santomenno and Plaintiffs Karen and Barbara Polley each 8 selected the Vanguard Total Stock Market Index Ret Opt as one of 9 their investment options, the funds that they choose to invest in 10 that option would be channeled to and pooled in the same account, 11 despite the fact that Santomenno and the Polleys have different 12 employers. (Id. at 130.) For example, if (Id. ¶ 133.) 13 B. Fees 14 TLIC assesses fees for most separate accounts. The GAC 15 specifies that Investment Management Charges and Administrative 16 Management Charges associated with each separate account "may be 17 withdrawn daily and will belong to [TLIC]." 18 D-1.) These fees are a percentage of the assets in the separate 19 account, and the rate varies depending on which separate account is 20 in question. 21 a schedule of fees for each of the separate accounts but reserves 22 the "right to change the Investment Management Charge or the 23 Administrative Charge upon advance written notice to the 24 Contractholder of at least 30 days." 25 (Hatton Decl., Exh. (Hatton Decl., Exhs. D-1 and D-2.) The GAC provides (Hatton Decl., Exh. D-1.) The TLIC fees are not the only fees withdrawn from employees' 26 retirement assets. As discussed above, many of the separate 27 accounts overlie mutual funds that are administered by third 28 parties such as Vanguard or Fidelity. 4 (Compl. ¶¶ 214-15.) These 1 mutual funds charge their own management fees, also calculated as a 2 percentage of the assets in the account. 3 245.) 4 withdrawn from the retirement assets. 5 (See e.g. id. ¶¶ 229, Any fees charged by the underlying investments are also TLIC's fees are frequently higher than the fees of the (Id. ¶ 245.) For separate account 6 underlying mutual fund. 7 investment options invested in mutual funds, TLIC's fees are 8 approximately 75 basis points, or 0.75% of the Plan assets invested 9 in each option. (Id. ¶ 271.) For at least 28 of the mutual fund 10 options, plan participants pay the fee charged by the mutual fund 11 in addition to a higher fee charged by TLIC. 12 For instance, for the separate account that invests in the Vanguard 13 Total Stock Market Index Ret Opt, the underlying mutual fund 14 charged a fee of 18 basis points and TLIC charged an additional 15 account fee of 93 basis points, for a total fee of 111 basis points 16 or 1.11% of the separate account assets. 17 separate account investment options invested in collective trusts, 18 TLIC charged a fee ranging from 79 basis points to 150 basis 19 points. (Id. ¶¶ 245, 248.) (Id. ¶ 246.) For (Id. ¶¶ 331, 333-34.) 20 C. Plaintiffs' Allegations 21 Plaintiffs allege that Defendants' fees are excessive and are 22 a breach of their fiduciary duty to Plaintiffs under ERISA. 23 specifically, Plaintiffs allege that TLIC's fees on separate 24 accounts that invest in publicly available mutual funds are 25 excessive because TLIC provides no services on such accounts: the 26 underlying mutual funds' investment management fees covered "all of 27 the necessary investment management/advisory services needed for 28 the mutual fund," and thus "the alleged management services 5 More 1 performed by TLIC were unnecessary or simply not performed." 2 (Compl. ¶ 276.) 3 to TLIC were "excessive and unnecessary." 4 any fees by TLIC to Plaintiffs that are in excess of the fees 5 charged by each of the mutual funds that underlie the overlaying 6 separate account is impermissible." 7 to this claim, Plaintiffs allege that revenue sharing payments paid 8 by mutual funds to TLIC benefitted only TLIC and not Plaintiffs, 9 even when they were used to offset TLIC's fees. As a result, Plaintiffs argue, the fees they paid (Id.) "The charging of (Id. ¶ 293.) As a corollary This is because 10 TLIC's fees did not correlate to any benefits or services to 11 Plaintiffs, such that any offset of such fees was not a benefit to 12 Plaintiffs but a diversion to TLIC of funds that should have gone 13 to Plaintiffs. 14 (Id., Count III, ¶ 3.) Another set of Plaintiffs' allegations concern TLIC's failure 15 to use its leverage to provide them with low-fee investments. 16 respect to collective trust separate accounts, Plaintiffs allege 17 that the fees are excessive because collective investment trusts 18 "generally charge less in fees" than comparable mutual funds with 19 the same investment strategy, but the fees TLIC charged were higher 20 than a comparable mutual fund. (Id. ¶¶ 328, 330-33.) 21 Plaintiffs allege that Defendants failed to invest in the lowest 22 price share class of mutual funds despite their leverage to do so. 23 (Id. ¶ 314.) 24 With Similarly, Plaintiffs also make allegations against affiliates TIM and 25 TAM for committing prohibited transactions under ERISA and for 26 knowingly participating in TLIC's fiduciary violations. 27 Count IV.) 28 6 (Id., 1 2 3 Finally, Plaintiffs allege violations of the Investment Advisers Act (“IAA”). (Id., Counts VIII & IX.) Defendant TLIC moves to dismiss the ERISA claims on the 4 grounds that TLIC does not have a fiduciary duty to Plaintiffs with 5 respect to the fees charged. 6 ERISA claims survive. Defendants TIM and TAM separately move to 7 dismiss on the grounds that their acts do not constitute prohibited 8 transactions. 9 Without a fiduciary duty, none of the Defendant TLIC moves to dismiss the IAA claims on the grounds 10 that Plaintiffs were not parties to any investment advisory 11 contracts with TLIC and that there is nothing to rescind. 12 II. LEGAL STANDARD 13 A complaint will survive a motion to dismiss when it contains 14 "sufficient factual matter, accepted as true, to state a claim to 15 relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 16 662, 663 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 17 570 (2007)). 18 "accept as true all allegations of material fact and must construe 19 those facts in the light most favorable to the plaintiff." 20 v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000). 21 need not include "detailed factual allegations," it must offer 22 "more than an unadorned, the-defendant-unlawfully-harmed-me 23 accusation." 24 allegations that are no more than a statement of a legal conclusion 25 "are not entitled to the assumption of truth." 26 other words, a pleading that merely offers "labels and 27 conclusions," a "formulaic recitation of the elements," or "naked 28 assertions" will not be sufficient to state a claim upon which When considering a Rule 12(b)(6) motion, a court must Iqbal, 556 U.S. at 678. 7 Resnick Although a complaint Conclusory allegations or Id. at 679. In 1 relief can be granted. 2 quotation marks omitted). 3 Id. at 678 (citations and internal "When there are well-pleaded factual allegations, a court 4 should assume their veracity and then determine whether they 5 plausibly give rise to an entitlement of relief." Id. at 664. 6 Plaintiffs must allege "plausible grounds to infer" that their 7 claims rise "above the speculative level." 8 555-56. "Determining whether a complaint states a plausible claim 9 for relief" is a "context-specific" task, "requiring the reviewing Twombly, 550 U.S. at 10 court to draw on its judicial experience and common sense." 11 556 U.S. at 663-64. 12 III. DISCUSSION 13 A. 14 Iqbal, ERISA Claims This case presents the question of when a fiduciary duty 15 attaches to a company such as TLIC that negotiates with an employer 16 to provide services to a retirement plan. 17 not a fiduciary with respect to the terms of its own compensation 18 because those terms were negotiated before it became a fiduciary. 19 The court disagrees. 20 functional definition of fiduciary duty require that TLIC be held 21 accountable for the fees it assesses on employees’ retirement 22 assets. 23 24 TLIC argues that it is Basic fiduciary principles and ERISA’s 1. Fiduciary Principles In assessing TLIC’s fiduciary duty, it is essential to bear in 25 mind that a fiduciary relationship is governed by principles of 26 trust and confidence, not by contract. 27 permissible in a workaday world for those acting at arm’s length, 28 are forbidden to those bound by fiduciary ties. 8 “Many forms of conduct A trustee is held 1 to something stricter than the morals of the market place. Not 2 honesty alone, but the punctilio of an honor the most sensitive, is 3 then the standard of behavior.” 4 464 (1928)(Cardozo, J.). 5 protecting “the continued well-being and security of millions of 6 employees and their dependents [which] are directly affected” by 7 employee benefit plans. 8 Trust & Sav. Bank, 510 U.S. 86, 96 n.5 (1993)(quoting the statement 9 of purpose of 29 U.S.C. § 1001(a)). Meinhard v. Salmon, 249 N.Y. 458, ERISA fiduciaries are entrusted with John Hancock Mut. Life Ins. Co. v. Harris Congress directed courts to 10 interpret ERISA’s fiduciary requirements “bearing in mind the 11 special nature and purpose of employee benefit plans.” 12 Corp. v. Howe, 516 U.S. 489, 497 (1996)(quoting H.R. Rep. 93-533, 13 4650). 14 known to the law.” 15 Cir. 1982). 16 Varity Indeed, ERISA’s fiduciary obligations are the “highest Donovan v. Bierwirth, 680 F.2d 263, 272 n.8 (2d These broad principles do not answer the question of when TLIC 17 becomes a fiduciary, but they must frame the inquiry into any 18 question concerning fiduciary duty under ERISA. 19 20 2. ERISA’s Functional Definition of Fiduciary “Under traditional trust law . . . only the trustee had 21 fiduciary duties. ERISA, however, defines ‘fiduciary’ not in terms 22 of formal trusteeship, but in functional terms of control and 23 authority over the plan, see 29 U.S.C. § 1002(21)(A), thus 24 expanding the universe of persons subject to fiduciary duties—and 25 to damages—under § 409(a).” 26 248, 262 (1993)(emphasis in original)(internal citations omitted). 27 See also Arizona State Carpenters Pension Trust Fund v. Citibank, 28 125 F.3d 715, 720 (9th Cir. 1997). Mertens v. Hewitt Assoc., 508 U.S. 9 Under ERISA, not only named 1 trustees but those assuming fiduciary functions are deemed to have 2 a fiduciary duty. 3 is an ERISA fiduciary The statute describes those functions. A person 4 to the extent (i) he exercises any discretionary 5 authority or discretionary control respecting management 6 of such plan or exercises any authority or control 7 respecting management or disposition of its assets, (ii) 8 he renders investment advice for a fee or other 9 compensation, direct or indirect, with respect to any 10 moneys or other property of such plan, or has any 11 authority or responsibility to do so, or (iii) he has any 12 discretionary authority or discretionary responsibility 13 in the administration of such plan. 14 15 29 U.S.C.A. § 1002(21)(A).1 The purpose of a functional standard was to supplement 16 traditional trust law, which was deemed "insufficient to adequately 17 protect the interests of plan participants and beneficiaries." H.R. 18 Rep. 93-533 at 4650. 19 exacting the requirements of the common law of trusts relating to 20 employee benefit trust funds." Congress in enacting ERISA made "more Donovan v. Mazzola, 716 F.2d 1226, 21 22 23 24 25 26 27 28 1 Federal regulations elaborate on the fiduciary function of insurers, like TLIC: [A]n insurer is subject to ERISA's fiduciary responsibility provisions with respect to the assets of a separate account . . . to the extent that the investment performance of such assets is passed directly through to the plan policyholders. ERISA requires insurers, in administering separate account assets, to act solely in the interest of the plan's participants and beneficiaries; prohibits self-dealing and conflicts of interest; and requires insurers to adhere to a prudent standard of care. 29 CFR § 2550.401c. 10 1 1231-32 (9th Cir. 1983). The functional definition of fiduciary 2 was central to expanding the protection of employees’ retirement 3 benefits. "To help fulfill ERISA's broadly protective purposes, 4 Congress commodiously imposed fiduciary standards on persons whose 5 actions affect the amount of benefits retirement plan participants 6 will receive." John Hancock Mut. Life Ins. Co., 510 U.S. at 96. To say that ERISA defines fiduciary duty in functional terms 7 8 is to say that such duty is determined not by a party’s status but 9 by particular actions taken with respect to plan. The same party 10 can be both a fiduciary and a non-fiduciary, depending on the 11 action it is taking. 12 providers such as actuaries become liable for damages when they 13 cross the line from advisor to fiduciary.” 14 262. 15 fiduciary actions not comprised in their duty. 16 “the trustee under ERISA may wear different hats.” 17 Herdrich, 530 U.S. 211, 225 (2000). For instance, “[p]rofessional service Mertens, 508 U.S. at Likewise, fiduciaries such as employers can take certain nonIn other words, Pegram v. However, ERISA requires 18 that the fiduciary with two hats wear only one at a 19 time, and wear the fiduciary hat when making fiduciary 20 decisions. Thus, the statute does not describe 21 fiduciaries simply as administrators of the plan, or 22 managers or advisers. 23 administrator, for example, as a fiduciary only “to the 24 extent” that he acts in such a capacity in relation to a 25 plan. 26 duty, then, the threshold question is not whether the 27 actions of some person employed to provide services 28 under a plan adversely affected a plan beneficiary’s Instead it defines an In every case charging breach of ERISA fiduciary 11 1 interest, but whether that person was acting as a 2 fiduciary (that is, was performing a fiduciary function) 3 when taking the action subject to complaint. 4 5 Id. at 225-26 (citations omitted). TLIC does not contest that under the GAC it has fiduciary 6 responsibility for the separate accounts. It concedes that it has 7 "limited fiduciary responsibilities2 for monitoring the investment 8 performance within its separate account investment products." 9 (TLIC Mot. at 12.) But TLIC disavows any fiduciary duty with 10 respect to its fees because they were set by contract before TLIC 11 assumed its fiduciary responsibilities as defined in the same 12 contract. 13 negotiating the contract with the employer, even if the contract 14 allowed it to put on a fiduciary hat once it was in effect. Thus TLIC contends that it wore a non-fiduciary hat when 15 In support of this argument, TLIC cites cases from other 16 Circuits supporting the proposition that “a service provider does 17 not act as a fiduciary with respect to the terms in the service 18 agreement if it does not control the named fiduciary’s negotiation 19 and approval of those terms.” 20 583 (7th Cir. 2009). 21 final authority over the contract – only the employer can enter 22 into the contract on behalf of the plan - it also lacks the 23 requisite control over its compensation that would make it a 24 fiduciary with respect to its own fees. Hecker v. Deere & Co., 556 F.3d 575, TLIC argues that because it does not have 25 26 27 28 2 Without addressing the issue further, the court notes that characterizing some fiduciary responsibilities as “limited” seems oxymoronic. 12 1 The court rejects this formalistic line-drawing. TLIC is 2 negotiating to become a fiduciary and negotiating for the fees 3 that, as a fiduciary, it will assess on the employees’ retirement 4 accounts. 5 fiduciary is not responsible for the terms of its own compensation 6 is that the fiduciary could negotiate for a fee of 99% of each 7 separate account and still be considered to be fulfilling its 8 fiduciary duty of managing the separate account simply because it 9 negotiated this fee by contract. The contract can immunize the The reductio ad absurdum of the principle that a future 10 future fiduciary TLIC from fiduciary breach no more than it can 11 immunize the employer. 12 to contract themselves out of their duties, so long as it was done 13 prior to the assumption of those duties. 14 To hold otherwise would allow fiduciaries TLIC is entitled to reasonable fees and profits for the 15 services that it provides to the plans, but as a fiduciary TLIC is 16 accountable for the reasonableness of those fees. 17 does no damage to the sanctity of contracts; it simply acknowledges 18 that where fiduciary duties are involved, the fiduciary rules 19 apply. 20 ERISA fiduciary, it must be accountable to the beneficiaries of the 21 plan for the reasonableness of its compensation. 22 3. Arm’s Length Negotiations 23 This conclusion Because TLIC is negotiating to assume the high duties of an TLIC also argues that it has no control over the fees because 24 they were the terms of a contract that was negotiated at arm’s 25 length. 26 at arm's length, adherence to that term is not a breach of 27 fiduciary duty." 28 805 F.2d 732, 737 (7th Cir. 1986). TLIC asserts that where a specific term "is bargained for Ed Miniat, Inc. v. Globe Life Ins. Grp., Inc., 13 1 The court has found no precise definition of an arm’s length 2 transaction in the ERISA context. In other areas of the law, arm’s 3 length negotiations or transactions are characterized as 4 adversarial negotiations between parties that are each pursuing 5 independent interests.3 6 depart from the typical arm’s length negotiation in several 7 respects. First, the subject matter of the contract is fiduciary 8 duty: the duty the employer has and the duty TLIC will assume. 9 Importantly, these duties do not extend between the parties who are The contract negotiations at issue here 10 negotiating the contract. Instead, the duty is owed to the Plan 11 and its beneficiaries, who are absent and vulnerable. 12 3 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The typical arm’s length transaction involves an adversarial negotiation in which the parties have independent interests and each tries to obtain the best deal for itself. See, e.g., Black’s Law 6th Ed., 109 (defining an arm’s length transaction as “a transaction negotiated by unrelated parties, each acting in his or her own self interest . . . . A transaction in good faith in the ordinary course of business by parties with independent interests”); 30 C.F.R. 206.151 (defining arm’s length contract in the minerals context as an agreement between “independent persons who are not affiliates and who have opposing economic interests regarding that contract”); A.T. Kearney, Inc. v. Int’l Bus. Machines Corp., 73 F. 3d 238, 242 (9th Cir. 1995)(contrasting relationships with a special duty of care to relationships involving “two adversarial parties negotiating at arm’s length to further their own economic interests,” “business adversaries in the commercial sense”); In re U.S. Med., Inc., 531 F.3d 1272, 1277 n.4 (10th Cir. 2008)(quoting Black’s Law Dictionary 109, 6th Ed. 1990)(in the bankruptcy context, “[a]n arm's-length transaction is ‘[a] transaction in good faith in the ordinary course of business by parties with independent interests.... The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction”); Estate of Waters v. C.I.R., 48 F.3d 838, 849 (in the tax context, a negotiation that was adversarial in nature constituted a “bona fide arm’s length transaction”); Jeanes Hosp. v. Sec’y of Health and Human Servs., 448 Fed. Appx. 202, 206 (3rd Cir. 2011)(a party who “negotiated rigorously, selfishly and with an adequate concern for price,” and “conducted lengthy due diligence” and “extracted concessions” meant that the “merger bore the hallmark characteristics of arm’s-length bargaining”); and Oxford English Dictionary, Dec. 2012, arm, n.1(“The parties must be put so much at arm’s length that they stand in adverse relations of vendor and purchaser.”[1879]). 14 1 Additionally, the absent party will not only benefit from but will 2 bear a burden under the contract. 3 TLIC and the employer are not bargaining for TLIC to provide 4 services and for the employer to pay a fee, but instead for TLIC to 5 provide services and for a fee to be assessed on the employees’ 6 retirement accounts. 7 arm’s length negotiation where the parties are adverse and pursuing 8 independent interests; instead, the parties are collaborating to 9 manage the employees’ 401(k) plans. 10 It appears to the court that If this is true, it is not a traditional One example of the non-adversarial nature of these 11 negotiations is TLIC’s Fiduciary Warranty. 12 Based on the allegations before the court, it appears that the 13 Fiduciary Warranty amounts to insurance provided by TLIC to 14 employers against law suits by employees for breach of fiduciary 15 duty, but this insurance is paid for by the fees assessed on the 16 employees’ assets. 17 employers pay TLIC separately for such insurance. 18 an insurance company bargaining with a party seeking to obtain the 19 best rate for itself in its insurance purchase, the insurer is 20 bargaining with a party who is not in fact bearing the financial 21 burden of the insurance, though it will reap the benefits. 22 (See Compl. ¶¶ 157-59.) The court has found no indication that the Thus, instead of Because the contract does not appear to have been negotiated 23 at arm’s length, TLIC may not shield itself behind the contract 24 from an alleged breach of duty. 25 26 27 28 4. TLIC’s Discretion a. Discretion over Fees As a separate basis for TLIC’s fiduciary duty, Plaintiffs allege that TLIC has sufficient discretion over its own 15 1 compensation to make TLIC a fiduciary on that basis. “When a 2 contract . . . grants an insurer discretionary authority, even 3 though the contract itself is the product of an arm’s length 4 bargain, the insurer may be a fiduciary.” 5 F.2d at 737. 6 fees because it retains the right to modify those fees with 30- 7 days' notice to the plan and by assessing termination fees. 8 (Hatton Decl. Exh. D-1, Section B.08; Exh. E, Section B.08) ("We 9 reserve the right to change the Investment Management or the Ed Miniat, Inc., 805 Plaintiffs allege that TLIC has discretion over its 10 Administrative Charge upon advance written notice to the 11 Contractholder of at least 30 days."). 12 contract termination and participant level redemption fees. 13 at 22; Hatton Decl., Exhs. D-1 & D-2, at Dkt. pp. 3337, 3344, 3393, 14 3408.)4 Plaintiffs also point to (Opp. TLIC asserts that it has no discretion over the fees because 15 16 employers have a 30-day period during which they can accept the fee 17 change or reject it by terminating the contract. 18 argument, TLIC conflates an ability to change the fees with the 19 consequences of changing the fees. 20 any time, without any approval apparently required from the 21 employer. 22 because it has the power to modify them without approval; whether 23 the employer chooses to terminate the contract or not is immaterial 24 to determining whether TLIC has the discretion to change the fees. 25 The same logic applies to a scenario in which TLIC raises its 26 fees. In making this TLIC could lower its fees at In such a scenario, TLIC has discretion over its fees TLIC has discretion to modify its fees, and an employer has 27 4 28 Plaintiffs also note that a "confidential document shows applicable termination charges." (Opp. at 22 n.13.) 16 1 thirty days in which it can terminate the contract or not. The 2 employer’s decision regarding contract termination does not mean 3 that TLIC lacks discretion over the fees.5 4 true where, as here, there are financial and logistical hurdles to 5 prevent an employer from cancelling a contract. 6 brief period within which to secure a new service provider for an 7 employer’s ERISA plan and all it entails, including negotiating 8 such a contract and ensuring that it allows the employer to comply 9 with its obligations under ERISA.6 This is all the more Thirty days is a Additionally, there appear to 10 5 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TLIC contends that because it must give advance notice to the employer of the fee change and because the employer can terminate the contract, all discretion is vested exclusively with the employer. As a fiduciary, any employer would likely have the ability and indeed the duty to terminate the contract at any time if an investment administrator were to have the employees’ funds in investments with excessive fees or later to transfer the funds to investments with excessive fees. This right exists regardless of any contract provision providing the same. Therefore, that the contract states that there is a “right” of termination is a slight reed from which to build the argument that it is the employer—not TLIC-that has discretion over fees. 6 Defendants point to a Department of Labor (“DOL”) advisory opinion which advised that 60 day notice period followed by a 120day period following notice within which to reject the change to investment options and secure a new service provider meant that the original service provider was not "exercising discretionary authority or control over the management of a plan." Dep’t of Labor, Advisory Op. 97-16A, 1997 WL 277979 *4 (May 22, 1997). The notice period at issue here is half as long. The DOL advisory opinion notes that the acceptable notice period is context specific, and that a period of fewer than 120 days might be sufficient in some contexts. Id. at *5 n.5("What constitutes a ‘reasonable period’ within which to terminate an arrangement and change service providers will depend on the particular facts and circumstances of each case. There may be situations in which a time period shorter than 120 days may constitute a ‘reasonable period.'")(emphasis in original). A district court in Massachusetts found that a three months' notice requirement still gave an insurance company enough discretion to be considered an ERISA fiduciary. Charters v. John Hancock Life Ins. Co., 583 F. Supp. 2d 189, 198 (D.Mass. 2008). The court makes no holding on what an adequate notice period would be in this context, but finds only that based on the facts alleged, TLIC’s contractually explicit (continued...) 17 1 be termination fees associated with terminating the contract, even 2 if the termination is a consequence of increased fees. 3 Hatton Decl., Exh. D-2, Amendment to Contract, Dkt. p. 3392) 4 (“Transamerica reserves the right to: . . . Assess[] a transfer fee 5 or redemption fee for a particular Contract Account.”). 6 (See, e.g., The court rejects TLIC’s claim that the notice period gave 7 final authority over the fees to the employer. “[I]t is undisputed 8 that [the service provider] retained sole discretion to change the 9 maximum administrative maintenance charge at any time upon 10 three-months prior written notice to [the employer]. That 11 discretion was sufficient to make [the service provider] an ERISA 12 fiduciary with respect to its fees.” 13 Ins. Co., 583 F. Supp. 2d 189, 197-198 (D.Mass. 2008) 14 Charters v. John Hancock Life Based on the facts before it, the court finds that the notice 15 period provided here to employers does not relieve TLIC of 16 discretion over the fees. b. 17 Control over investment line-up Plaintiffs allege that TLIC has discretionary control over 18 19 its fees for the additional reason that TLIC “retains the authority 20 to unilaterally add and delete investment options at its 21 discretion” and to “unilaterally change the share class [] of the 22 mutual fund, in which Plaintiffs’ assets are invested,” thereby 23 altering its own compensation. (Compl. ¶¶ 152-54.) 24 that the ability to add or delete investment options does not give 25 it discretion that would qualify it as an ERISA fiduciary with TLIC contends 26 6 27 28 (...continued) discretion to change fees is not reversed by the brief notice period, all the more so when there also appears to be a termination fee. 18 1 respect to the fees for the same reasons that it asserts it does 2 not have discretion over the Administrative and Investment 3 Management Fees: because Plaintiffs do not allege that TLIC ever 4 exercised its authority to change investment options, and because 5 TLIC must give advance notice of the change. 6 The court finds that TLIC has a fiduciary duty that attaches 7 from its power to add and delete investment options, such that it 8 “exercises authority or control over plan assets by determining and 9 altering which mutual funds are available for the Plans’ and the 10 participants’ investment.” 11 419 F. Supp. 2d 156, 166 (D.Conn. 2006). 12 (“DOL”) has taken the position that when the service provider gives 13 an employer advance notice of a deletion or substitution and 120 14 days to reject the change and secure a new service provider, “a 15 person would not be exercising discretionary authority or control 16 over the management of a plan or its assets solely as a result of 17 deleting or substituting a fund from a program of investment 18 options and services offered to plans, provided that the 19 appropriate plan fiduciary in fact makes the decision to accept or 20 reject the change.” 21 277979 *5.7 22 thus the approval of such a change by a fiduciary. 23 24 Haddock v. Nationwide Fin. Servs. Inc., The Department of Labor Dep’t of Labor, Advisory Op. 97-16A, 1997 WL The crucial feature barring a finding of discretion is The facts alleged by Plaintiffs are sufficient to state a claim for TLIC’s fiduciary responsibility on this theory. Unlike 25 7 26 27 28 The DOL has also offered the opinion that reserving the right to “add or remove mutual fund families . . . [made] available to Plans” could be considered discretionary authority such that receiving fees from those mutual funds would be subject to restrictions on fiduciaries. Dep’t of Labor Advisory Op. 97-15A, 1997 WL 277980 *3. 19 1 in Hecker, where the complaint alleged that the service provider 2 “played a role” in the choice of funds rather than exercising 3 “final authority,” Hecker, 556 F.3d at 584, here there is no 4 indication that an employer has final authority over such changes 5 beyond its ability to terminate the contract.8 6 an employer’s ability to terminate a contract if it does not 7 approve of a unilateral decision to substitute or delete options 8 does not somehow transform TLIC’s decision into the employer’s 9 decision.9 c. Exercise or possession of discretion 10 11 As discussed above, TLIC argues that even if it is found to have discretionary 12 authority over its fees and the investment line-up, it has not 13 exercised such discretion and is therefore not a fiduciary. 14 points out that under the ERISA statute, an entity is a fiduciary 15 if it "exercises any discretionary authority or discretionary 16 control respecting management of such plan or exercises any 17 authority or control respecting management or disposition of its TLIC 18 8 19 20 21 22 23 Again, TLIC conflates its discretion to do an act, i.e., its election to switch to investment options with allegedly excessive fees, with the employer’s possible remedy in terminating the contract. It also appears to assume again that the employer has the right to terminate the contract only because the contract so specified. But the employer may have both the right and the obligation to terminate the contract if employees’ investments were placed in or moved into investment accounts with excessive fees, regardless of the terms of the contract with TLIC. 9 24 25 26 27 28 TLIC contends that “Negotiated termination fees are just a mechanism for service providers to ensure reasonable compensation, including the recovery of initial costs in the event of an early termination. The mere fact that termination would entail costs or inconvenience does not give a service provider control over the sponsor’s decisions.” (TLIC Reply at 8-9.) The service provider need not have “control” over a sponsor’s decision to make termination an unrealistic option for the sponsor. A termination fee may be so burdensome that it alone could stop a sponsor from terminating a plan. 20 1 assets," or to the extent it "has any discretionary authority or 2 discretionary responsibility in the administration of such plan." 3 29 U.S.C. § 1002(21)(A)(emphasis added). TLIC asserts that 4 Plaintiffs have alleged that TLIC possesses, but not that it has 5 exercised, discretionary authority with respect to the management 6 or disposition of assets. 7 argues, is insufficient to create fiduciary duty under the relevant 8 clause of the statute. 9 Merely having such authority, TLIC Plaintiffs respond that while they did not allege in the 10 Complaint that TLIC exercised its authority,9 TLIC’s conduct 11 “should be measured by what it did or failed to do. 12 has affirmative obligations to conduct itself prudently. . . . 13 [Fiduciary duties] entail obligations to end conduct that may be 14 self dealing or imprudent.” 15 Plaintiffs appear to be saying that TLIC is “exercising” its 16 discretionary authority by not altering its fees when it should, as 17 required by its fiduciary duty. 18 A fiduciary (Opp. at 24, emphasis omitted.) There is a fine line between “having” and “exercising” 19 discretionary authority. Discretionary authority is premised on a 20 power or a capacity. 21 of Wildlife, 551 U.S. 644, 668 (2007)(quoting Random House 22 Dictionary of the English Language 411 (unabridged ed. 1967) 23 (“‘discretion’ defined as ‘the power or right to decide or act 24 according to one's own judgment; freedom of judgment or choice’”)). 25 Discretion is the touchstone of fiduciary duty under ERISA because See Nat’l Ass'n of Home Builders v. Defenders 26 9 27 28 Plaintiffs assert that they have “uncovered evidence that TLIC altered its fees” and that “[d]iscovery will likely reveal other similar instances,” but they do not claim to have pled altered fees. (Opp. at 24.) 21 1 it is precisely this power of free decision that is transferred in 2 trust to a fiduciary. 3 only the power to act but the power not to act. 4 discretionary authority has no choice with respect to acting or not 5 acting; she is required either to act or to refrain from acting, 6 depending on the circumstances. 7 authority, in contrast, may act or not act, as she deems best. 8 she exercises her discretion no less in choosing not to act than in 9 choosing to act. 10 The power of free decision comprises not A person without A person with discretionary But TLIC’s assertion that “a party is only a fiduciary with 11 respect to the management of a plan or the disposition of its 12 assets when it exercises authority or control over the plan,” in 13 contrast to “plan administration, as to which a party only needs to 14 have discretionary authority” makes little sense. 15 10, emphasis in brief.) 16 exercise authority over the plan without having such authority, the 17 rationale behind such a distinction, or its implications, nor does 18 it cite any authority for such an interpretation. 19 interpretation contravenes Congress’s directive to construe 20 fiduciary duty broadly in order to effect the remedial purposes of 21 ERISA. See Varity, 516 U.S. at 497. 22 in the ERISA context, having and exercising discretionary authority 23 are so close as to be identical, and that under ERISA, a fiduciary 24 duty attaches not because a party takes a discretionary action but 25 when that party acquires the power to take a discretionary action. 26 (TLIC Reply at TLIC does not explain how a party can Such an The court therefore finds that 5. Plaintiffs’ Fiduciary Duty Claims 27 Because the court finds that Plaintiffs have stated a claim 28 for TLIC’s fiduciary status, all of Plaintiffs’ allegations that 22 1 TLIC violated its fiduciary duty under ERISA must survive TLIC’s 2 Motion to Dismiss.10 3 Mutual Fund Excessive Fee Claims (Counts I and II):Plaintiffs 4 allege that because TLIC has a fiduciary duty with respect to its 5 fees, the fees it charges in excess of the fees charged by an 6 underlying mutual fund are excessive. Likewise, they allege that 7 TLIC’s investment management fees on separate accounts are also 8 excessive. 9 fiduciary status with respect to its fees, these claims survive. 10 Since Plaintiffs have stated a claim for TLIC’s Revenue Sharing Claim (Count III): Plaintiffs allege that TLIC 11 receives “fee income” or “Revenue Sharing Payments” from 12 Plaintiffs’ investments, ranging from 15 to 25 bps. 13 281, 283-84.) 14 Sharing Payments to offset the Investment Management and 15 Administrative Charges, as TLIC claims it does, those payments are 16 still impermissible because they are only offsetting TLIC’s 17 excessive fees, themselves impermissible. (Compl. ¶¶ They allege that even if TLIC uses those Revenue (Id. ¶¶ 288-91.) 18 Because the court has already found that Plaintiffs have 19 stated a claim that TLIC is a fiduciary with respect to its fees, 20 Plaintiffs have also stated a claim with respect to the Revenue 21 Sharing Payments. 22 permissible use of Revenue Sharing Payments. 23 stated a claim for breach of fiduciary duty and the commission of 24 prohibited transactions with respect to these Payments. 25 26 Offsetting impermissible fees may not be a Plaintiffs have thus Mutual Fund Share Class Claim (Count V) and Collective Trust/Separate Account Excessive Fee Claim (Count VI): In Count V, 27 10 28 Plaintiffs’s claims against TIM and TAM are discussed below. 23 1 Plaintiffs allege that TLIC breached its ERISA fiduciary duties by 2 failing to invest in the lowest cost share class of the mutual 3 funds underlying separate account investment options, even though 4 TLIC had the leverage to do so. 5 Plaintiffs allege that TLIC failed to use its economic leverage to 6 negotiate lower fees for collective trusts and traditional separate 7 accounts. 8 claim that TLIC is a fiduciary with respect to its fees, the fact 9 that the employer has approved the inclusion of a particular mutual 10 fund or the expenses of a collective trust or separate account will 11 not get TLIC off the hook if, as a fiduciary, TLIC should have 12 selected the cheapest share class or negotiated lower fees. 13 Plaintiffs have thus stated a claim on these two counts. 14 15 (Id. ¶¶ 320-337.) (Compl. ¶¶ 302-19.) In Count VI, Because Plaintiffs have stated a 6. Prohibited Transaction and Affiliate Claims (Counts IV and VII) a. Claims against TLIC 16 ERISA’s prohibited transactions rule provides that “[a] 17 fiduciary with respect to a plan shall not – (1) deal with assets 18 of the plan in his own interest or for his own account, . . . or 19 (3) receive any consideration for his own personal account from any 20 party dealing with such plan in connection with a transaction 21 involving the assets of the plan.” 22 legislative history of ERISA demonstrates that “the crucible of 23 congressional concern was misuse and mismanagement of plan assets 24 by plan administrators and that ERISA was designed to prevent these 25 abuses in the future.” 26 U.S. 134, 140 n.8 (1985). 27 28 29 U.S.C. § 1106(b). The Mass. Mut. Life Ins. Co. v. Russell, 473 Plaintiffs allege that TLIC committed prohibited transactions under ERISA § 406(b), 29 U.S.C. § 1132(a)(3), by paying advisory 24 1 fees from employees’ accounts to affiliates TIM and TAM for 2 advising or subadvising certain mutual funds, collective investment 3 trusts, or traditional separate accounts. 4 VII.) 5 dealing with assets of the Plaintiff Plans for its own interest, 6 because TIM and TAM were its affiliates. 7 Additionally, Plaintiffs allege that TIM and TAM violated ERISA § 8 502(a)(3), 29 U.S.C. § 1132(a)(3), for knowingly participating in 9 those prohibited transactions. 10 (Compl., Counts IV and These fees, allege Plaintiffs, were an instance of TLIC (Compl., Count IV, ¶ 4.) (Compl., Count IV, ¶ 8.) TLIC asserts that these claims fail because Plaintiffs do not 11 identify any specific “transaction” that would trigger liability 12 under ERISA § 406. 13 Corp., where the Ninth Circuit found that the Corporation’s 14 decision to continue to hold a certain percentage of plan assets in 15 employer stock was not a transaction because it was not “akin to a 16 ‘sale, exchange, or leasing of property, or the lending of money or 17 extension of credit,’ all commercial bargains defined by the 18 Supreme Court in Lockheed as falling under § 1106.” 19 1101 (9th Cir. 2004), quoting Lockheed Corp. v. Spink, 517 U.S. 20 882, 893 (1996)(alterations omitted). 21 “transaction” involving Plan assets identified in the Complaint is 22 the selection of the original Plan investment lineup. 23 argues that even if collecting fees from separate accounts can be 24 considered a transaction, doing so is not a prohibited transaction, 25 since TLIC was “merely collecting fees from transactions that a 26 different, independent fiduciary caused the plan to undertake.” 27 (TLIC Reply at 15.) TLIC points to Wright v. Oregon Metallurgical 28 25 360 F.3d 1090, Here, TLIC argues, the only TLIC also 1 The court finds that Plaintiffs have stated a claim for 2 prohibited transactions in the form of collecting fees from 3 separate accounts and selecting the investment lineup. 4 discussed above, TLIC may not insulate itself from its fiduciary 5 obligations by invoking the terms of its contract with the 6 employers; TLIC cannot by contract permit itself transactions that 7 would otherwise be prohibited to it as a fiduciary. 8 employer-fiduciaries did approve the selection of TIM- and TAM- 9 managed accounts by selecting them for the line-ups offered to the As Here, the 10 employees. 11 not relieve TLIC of potential responsibility for fees being paid to 12 TLIC affiliates. 13 TLIC used the promise of the fiduciary warranty to direct employers 14 to select TIM- and TAM-managed accounts. 15 control or responsibility which makes a person a fiduciary may be 16 exercised ‘in effect’ as well as in form, mere approval of the 17 transaction by a second fiduciary does not mean that the first 18 fiduciary has not used any of the authority, control or 19 responsibility which makes such person a fiduciary to cause the 20 plan to pay the first fiduciary an additional fee for a service.” 21 29 CFR § 2550.408b-2(e)(2). 22 23 24 25 Nonetheless, mere approval by another fiduciary does For instance, Plaintiffs may be able to show that “[B]ecause the authority, The court finds that Plaintiffs have stated a claim for prohibited transactions by TLIC. b. Claims against TIM and TAM “Section 502(a)(3) authorizes a civil action: ‘by a 26 participant, beneficiary, or fiduciary (A) to enjoin any act or 27 practice which violates . . . the terms of the plan, or (B) to 28 obtain other appropriate equitable relief (i) to redress such 26 1 violations or (ii) to enforce any such provisions of . . . the 2 terms of the plan.’” 3 Knudson, 534 U.S. 204, 209 (2002)(quoting 29 U.S.C. § 1132(a)(3)). 4 “‘[E]quitable relief’ in § 502(a)(3) must refer to those categories 5 of relief that were typically available in equity.” 6 (citation and internal quotation marks omitted). 7 requested from TIM and TAM is restitution. 8 either a legal or an equitable remedy, depending on the 9 circumstances. Great-West Life & Annuity Ins. Co. v. Id. at 210 Here, the relief Restitution may be “[R]estitution is a legal remedy when ordered in a 10 case at law and an equitable remedy when ordered in an equity case, 11 and whether it is legal or equitable depends on the basis for the 12 plaintiff’s claim and the nature of the underlying remedies 13 sought.” 14 marks omitted). “[F]or restitution to lie in equity, the action 15 generally must seek not to impose personal liability on the 16 defendant, but to restore to the plaintiff particular funds or 17 property in the defendant’s possession.” 18 omitted).11 19 “where money or property identified as belonging in good conscience 20 to the plaintiff could clearly be traced to particular funds or 21 property in the defendant’s possession.” 22 Id. at 213 (alterations, citation, and internal quotation Id. at 214 (footnote More specifically, restitution in equity is possible Id. at 213. TIM and TAM argue that Plaintiffs are “not seeking recovery of 23 specific funds in Defendants’ possession that properly belong to 24 the Plan” but “are instead seeking broad recovery of the fees” 25 26 27 28 11 A remedy was considered to be restitution at law when a plaintiff “sought to obtain a judgment imposing a merely personal liability upon the defendant to pay a sum of money,” in what was essentially a breach of contract claim. Great-West Life, 534 U.S. at 213 (citation and internal quotation marks omitted). 27 1 received by TIM and Tam. (TIM/TAM Mot. at 4.) These fees are not 2 traceable, assert TIM and TAM, because the fees TIM and TAM 3 received were paid out of the mutual funds, which are not 4 considered plan assets under ERISA § 401(b)(1), 29 U.S.C. § 5 1101(b)(1). 6 which invests in any security issued by an investment company 7 registered under the Investment Company Act of 1940 [15 U.S.C.A. § 8 80a-1 et seq.][indicating a mutual fund], the assets of such plan 9 shall be deemed to include such security but shall not, solely by Under ERISA § 401(b)(1), “[i]n the case of a plan 10 reason of such investment, be deemed to include any assets of such 11 investment company.” 12 Circuit, “[o]nce the fees are collected from the mutual fund’s 13 assets and transferred to one of the Fidelity entities, they become 14 Fidelity’s assets – again, not the assets of the Plans.” 15 556 F.3d at 584. 16 29 U.S.C.A. § 1101. According to the Seventh Hecker, Even if this is correct, it is not clear how it defeats the 17 traceability of the fees. Plaintiffs allege that TIM and TAM 18 knowingly participated in TLIC’s alleged self-dealing by 19 withdrawing fees from the mutual fund or collective trust accounts 20 into which TLIC’s separate accounts invested Plaintiffs’ retirement 21 funds. 22 TAM, or their successors. 23 percentage of the mutual fund’s value. 24 difficult to determine the fees assessed by and in the possession 25 of TIM and TAM with respect to each Plaintiff’s account.11 The fees are allegedly in the current possession of TIM, The fees assessed appear to be a It does not appear to be 26 11 27 28 In Hecker, the court found that assessing fees on mutual funds could not be the source of fiduciary status because the mutual fund is not itself a plan asset. 556 F.3d at 584. Without (continued...) 28 1 B. Investment Advisers Act Claims 2 In Counts VIII and IX, Plaintiffs make claims against TLIC for 3 violation of the Investment Advisers Act (“IAA”), which requires 4 investment advisers to register with the Securities and Exchange 5 Commission (“SEC”). 6 investment advisory contracts entered into by unregistered 7 investment advisors and permits investors to bring actions for 8 equitable relief. 9 Lewis, 444 U.S. 11, 18-19 (1979). IAA § 215(b), 15 U.S.C. § 80b-15(b), voids Transamerica Mortg. Advisors, Inc. (TAMA) v. “[T]here exists a limited 10 private remedy under the Investment Advisers Act of 1940 to void an 11 investment advisers contract, but . . . the Act confers no other 12 private causes of action, legal or equitable.” 13 Plaintiffs allege that TLIC entered into contracts with them 14 pursuant to which TLIC rendered investment advice to them without 15 registering with the SEC. 16 Plaintiffs seek to void the advisory contracts and recover the 17 “Investment Management Fees” paid by Plaintiffs. 18 Id. at 24. (Compl. ¶ 38 and Count VIII, ¶ 10.) TLIC argues that Plaintiffs were not party to the contract. 19 The contract was with the Plan, and “[n]o new, individual contracts 20 between TLIC and the participants were required or can be 21 reasonably inferred.” 22 that the Investment Management Fees were paid not by Plaintiffs, as 23 Plaintiffs allege, but instead by the Plan. (TLIC Reply at 18.) Furthermore, they claim 24 25 26 27 28 11 (...continued) such a rule, all mutual fund administrators (such as Fidelity) would automatically be fiduciaries when any retirement funds are invested into the mutual funds. Here, in contrast, the issue is whether the fees assessed by TIM and TAM are traceable, and the technical distinction between plan assets and mutual fund assets has no bearing on this inquiry. 29 The parties disagree on what, if anything, should be 1 2 considered the investment advisory contract. TLIC maintains that 3 the contract is the GAC, while Plaintiffs point to a functional 4 contract that developed out of the economic relationship between 5 Plaintiffs and TLIC. 6 contract between Plaintiffs and TLIC by analogy to the Securities 7 Act. 8 “investment contract” broadly based on its use in state laws prior 9 to the adoption of the statute: “Form was disregarded for substance Plaintiffs argue that there was a functional In that context, the Supreme Court construed the term 10 and emphasis was placed upon economic reality. 11 contract thus came to mean a contract or scheme for the placing of 12 capital or laying out of money in a way intended to secure income 13 or profit from its employment.” 14 293, 298 (1946)(internal quotation marks omitted). 15 An investment S.E.C. v. W.J. Howey Co., 328 U.S. Using a similar functional analysis, Plaintiffs argue, there 16 was a contract between TLIC and each Plaintiff when that Plaintiff 17 purchased units in the separate account, paid an Investment 18 Management Fee, and received investment advice from TLIC in the 19 form of advisory fact sheets. 20 that the requirements of offer, acceptance, and consideration are 21 all met in this case. 22 each Plaintiff with a personal electronic account and a menu of 23 pre-selected investment options which a Plaintiff may accept,” the 24 “acceptance” by Plaintiff selecting an investment online or by 25 mail, and “consideration” from Plaintiffs in the form of investment 26 and management fees, and from TLIC by its “culling and analysis of 27 available investments.” (Opp. at 46.) Plaintiffs contend The “offer” is made by TLIC “by providing (Opp. at 48.) 28 30 1 The court does not disagree that there could be a functional 2 investment advice contract between Plaintiffs and TLIC even if the 3 fees paid technically came from Plan assets rather than from a 4 check written by each Plaintiff to TLIC; the temporary placement of 5 the money into a Plan account does not alter the economic reality 6 that the fees are coming out of each Plaintiff’s retirement fund. 7 However, here there is already a contract in place – the GAC – 8 which governs the same relationship. 9 website, which Plaintiffs construe as part of the “offer,” is part TLIC points out that the 10 of a prior separate services agreement between TLIC and the Plan 11 which requires TLIC to provide a website allowing employees to 12 manage their accounts. 13 Reply at 18 n.11.) There is no indication that the consideration in 14 the GAC is different from the consideration in the purported 15 functional contract (the fees assessed by TLIC on the separate 16 accounts and the investment services and advice provided by TLIC). 17 Plaintiffs appear to suggest that the Investment Management Fee was 18 not consideration for the GAC, but in that case, it is unclear what 19 the consideration for the GAC was. 20 arguing that the GAC is invalid, but instead that it exists 21 alongside a functional contract between Plaintiffs and TLIC. 22 However, all the relevant components of a functional contract 23 appear already to be governed by the GAC. 24 (Hatton Decl., Exh. C, Dkt. p. 3297; TLIC Plaintiffs do not appear to be It is a principle of contract law that “[t]here cannot be a 25 valid, express contract and an implied contract, each embracing the 26 same subject matter, existing at the same time.” Berkla v. Corel 27 Corp., 302 F.3d 909, 918 (9th Cir. 2002) (internal quotation marks 28 and citation omitted). See also Rogers v. American President 31 1 Lines, Limited, 291 F.2d 740, 742 (9th Cir. 1961)(“An action does 2 not lie on an implied contract where there exists between the 3 parties a valid express contract which covers the same subject 4 matter.”) The same principle applies in this context. 5 both conceptual and practical reasons. 6 already contractually obliged to perform a certain action, that 7 action cannot be consideration for a separate contract. 8 Practically, rescinding an implied (or functional) contract will 9 have no effect on the express contract. This is for Conceptually, if a party is Here, Plaintiffs wish to 10 rescind the functional contract for investment advice between 11 themselves and TLIC. 12 GAC would still exist and put them back in the same position. 13 Plaintiffs do not appear to argue that they are parties to the GAC, 14 which is the express contract that could be rescinded, nor do they 15 argue that as beneficiaries they may rescind that contract. 16 Even if they were successful in doing so, the Plaintiffs argue that even if they are not a party to an 17 investment management contract with TLIC they are still entitled to 18 restitution under a theory of unjust enrichment, which does not 19 require an actual contract. 20 but finds that the GAC is once again a barrier to recovery under 21 the IAA. 22 which does not lie when an enforceable, binding agreement exists 23 defining the rights of the parties.” 24 General Elec. Capital Corp., 96 F.3d 1151, 1167 (9th Cir. 1996). 25 Since the content of the GAC and the content of the quasi-contract 26 claimed by Plaintiffs appear to be identical, Plaintiffs can have 27 no claim for unjust enrichment. The court does not disagree with this, “[U]njust enrichment is an action in quasi-contract, 28 32 Paracor Finance, Inc. v. Plaintiffs have failed to state a claim for violation of the 1 2 IAA. 3 IV. CONCLUSION 4 For these reasons, Defendant TLIC’s Motion to Dismiss is 5 DENIED with respect to the ERISA claims (Counts I, II, III, IV, V, 6 VI, VII) and GRANTED with respect to the IAA claims (Counts VIII 7 and IX). Defendants TIM and TAM’s Motion to Dismiss is DENIED. 8 9 IT IS SO ORDERED. 10 11 12 Dated: February 19, 2013 DEAN D. PREGERSON United States District Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 33
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