ARGUMENT ANALYSIS

Justices settle into opposing camps on duties of retirement-plan sponsors

Monday’s argument in Hughes v. Northwestern University displayed a case that presents a prosaic question of trust law – the fiduciary obligation of the sponsors that control the defined-contribution plans on which so many of us depend for our retirement. In general, the dispute involves allegations that Northwestern University, in its management of the retirement plan for its employees, did not do enough either to reduce the fees it pays for recordkeeping related to the plan or to ensure that the choices it offers for investment have reasonably low fees.

On both points, the plaintiffs argue that the retirement plan would have lower fees if Northwestern “consolidated” its plan to have fewer options, because it would have more money invested in each of the remaining options. On the second point, the central allegation is that many funds, with identical investment practices, have “investment” and “retail” flavors that differ only in that the retail flavor has higher fees than the investment flavor; the plaintiffs allege that Northwestern should have offered the lower-fee investment flavors instead of the higher-fee retail flavors.

Similar suits have been brought against other universities, but the lower courts dismissed this one. The issue before the Supreme Court is whether the complaint makes out a cause of action under Employee Retirement Income Security Act, which obligates the fiduciaries of such plans to comply with a duty of prudence drawn directly from the common law of fiduciary duty.

The reactions of the justices to the case seemed to have less to do with a careful parsing of the statute imposing that duty and much more to do with the differing predispositions that the justices have about the propensity of class actions to present defendants with an extortionate compulsion to settle even the flimsiest of allegations.

For one group of justices, the only visible aspect of the complaint is the possibility that letting the case go past the motion to dismiss would force trial courts to resolve allegations of an irresolute vagueness far beyond judicial capacity to manage. That problem, in turn, would present defendants with a hydraulic pressure to settle that in practice would deprive them of any fair chance to rebut the allegations in court. I offer examples from four of the justices: Clarence Thomas, Samuel Alito, Neil Gorsuch, and Brett Kavanaugh.

One strategy was to suggest that opening up the courts to consider claims like this encourages plaintiffs to file claims that essentially second-guess the legitimate determinations of experts. Thomas, for example, suggested the complaint really boils down to “disagreeing with the strategy” of investment selected by Northwestern, suggesting it is as if you sued Northwestern arguing that proper investments would have returned 20% when Northwestern’s investment choices returned only 19%. Similarly, Kavanaugh noted the allegation that many other universities had made the changes that the plaintiffs suggested and wondered if the core of the complaint really was just an allegation that Northwestern didn’t “change fast enough” to suit the plaintiffs.

Another approach, pursued repeatedly by Alito, was to question whether the complaint had laid out the allegations in sufficient detail to be plausible. So, for example, with respect to the allegation that Northwestern improperly failed to offer the institutional “flavors” of the funds, Alito pointed repeatedly to Northwestern’s explanation that those institutional funds have minimum investment thresholds and noted that the complaint failed to state specifically what the thresholds are for each of those funds. It was not enough, he suggested, to allege (as the plaintiffs did) that other universities routinely obtained waivers of those thresholds.

A third approach was to suggest, as Gorsuch did, that the complex factual determinations necessary to resolve the claims – especially a claim that Northwestern could have improved returns by “consolidating” the plan’s holding so that it offered employees many fewer options – would “raise some questions about judicial competence and administration and realms of reasonable judgment.” Referring to that same “consolidation” argument, Alito suggested part of the problem is that the portfolio “includes some options that are popular … but they have high fees. What is a court supposed to do with a claim like that?” For him, it seemed intractable to permit a suit against a fiduciary for including “something that a lot of investors want” just because “an expert might say … the fees are too high.”

Finally, the most direct approach, which came principally from Kavanaugh but was echoed by Alito’s questions about how many of “these cases” ever get past the pleading stage, was to directly challenge the concern that class actions give plaintiffs undue leverage if courts cannot reject them on a motion to dismiss. Noting both the “huge pressure to settle” and the reality that most of the earlier cases in the area had settled before courts addressed the merits of the complaints, Kavanaugh commented:

The concern in the amicus briefs, and I don’t know how to deal with this, is that the class action complaints are such that the game is to get past pleading stage. We’ve heard … “Don’t worry about it, it can all be worked out at trial.” It doesn’t happen in the real world.” What do we do about that?

By contrast, another group of justices, principally Justices Elena Kagan and Sonia Sotomayor, sees straightforward allegations that Northwestern failed to use reasonable care to advance the interests of its employees in their retirement fund, suggesting that cases like this one generally benefit affected employees by improving the performance of their retirement plans.

Kagan repeatedly paraphrased and reframed the claims against Northwestern in the most favorable way. For example, asking David Frederick (representing the employees) whether he was “saying that, basically, Northwestern just failed to use its existing leverage, failed to bargain. There was a bargain right in front of it and it ignored it. … That just sounds like negligence and bad trust management.”

She was particularly aggressive in her question of Gregory Garre, representing Northwestern, as she challenged his argument that Northwestern could not be liable for having relatively high-cost options because its menu allowed participants to pick some number of relatively low-cost options. Kagan explained:

As I understand what the 7th Circuit ruled in this case, … fiduciaries can avoid liability for offering imprudent investments with unreasonably high fees if they also offer prudent investments with reasonable fees. That’s the essence of the 7th Circuit’s judgment. Are you defending that or not?

Garre tried, through several rounds of questioning, to avoid answering the question, but Kagan stuck to the point.  Noting that she was “losing track of your answer to my question,” she asked again if he was “defending a position that says you can insulate yourself from a suit that says you’re acting imprudently … by saying [that] some of the investments that we offer in our plan are prudent and they have reasonable fees?”

Similarly, responding to Garre’s argument that the complaint about recordkeeping fees was too vague, Kagan asked a hypothetical:

Suppose there were a complaint that said the fees that they were paying were much higher than comparative plans have paid, and this was because they never went back to their record-keepers and … stomped on the table and got lower prices … and they never did a bunch of things that can lead to lower recordkeeping fees.

For such a complaint – quite similar to the one in this case – she challenged Garre to explain “why [you] can’t go into federal court saying all your competitors are paying far lower fees than you are for the exact same service?”

Sotomayor was just as transparent in her acceptance of the allegations. In discussion with Frederick, she complimented his argument about offering the higher-cost retail flavors of investment options, describing that as his “strongest argument. … And you say that others have offered institutional shares without the minimum, and they could have done this. You have to prove it, but [the allegations are] plausible.”

More generally, Sotomayor firmly rejected Garre’s suggestion that the litigation in this area had harmed employees:

It’s a fine balance between litigation and not, but some of this litigation has ended up being to the benefit of the retirees because the universities were not doing basic steps, like just asking for price reductions, like just asking for waivers. And when they did, they got them. And so I don’t know, counsel, that we can say a rule as broad as the 7th Circuit has without harming the beneficiaries. We may not have a rule as broad as the petitioner wants, but there has to be a happier medium than what you’re advocating.

The gap between the two sides is large. It is not easy to imagine either side giving in to a narrow middle-ground opinion. My take on it is that we can expect two diametrically opposed opinions and that the judgment will depend on the views of those in the middle. I don’t think we’ll see a final answer to this one until the spring.