Barchock v. CVS Health Corp.

• Citation: 886 F.3d 43
• Decision Date: 23 March 2018
• Docket Number: No. 17-1515,17-1515
• Parties: Mary BARCHOCK; Thomas Wasecko; Stacy Weller, Plaintiffs, Appellants, v. CVS HEALTH CORPORATION; The Benefits Plan Committee of CVS Health Corporation; Galliard Capital Management, Inc., Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

886 F.3d 43

Mary BARCHOCK; Thomas Wasecko; Stacy Weller, Plaintiffs, Appellants,

v.CVS HEALTH CORPORATION; The Benefits Plan Committee of CVS Health Corporation; Galliard Capital Management, Inc., Defendants, Appellees.

No. 17-1515

United States Court of Appeals, First Circuit.

March 23, 2018

Jason H. Kim, with whom Todd M. Schneider, Schneider Wallace Cottrell Konecky Wotkyns LLP, Emeryville, CA, Sonja L. Deyoe, East Providence, RI, and Law Offices of Sonja L. Deyoe were on brief, for appellants.

Meaghan VerGow, Washington, DC, with whom Brian D. Boyle, Philadelphia, PA, Bradley N. García, O'Melveny & Myers LLP, Robert Clark Corrente, Whelan, Corrente, Flanders, Kinder & Siket LLP, Joel S. Feldman, Mark B. Blocker, Robert N. Hochman, Daniel R. Thies, and Sidley Austin LLP, Chicago, IL, were on brief, for appellees.

Evan A. Young, Austin, TX, Shane Pennington, Baker Botts LLP, Houston, TX, Steven P. Lehotsky, Washington, DC, Janet Galeria, U.S. Chamber Litigation Center, and Janet M. Jacobson, on brief for amici curiae Chamber of Commerce of the United States of America and American Benefits Council.

Brian D. Netter, Washington, DC, Nancy G. Ross, Mayer Brown LLP, Chicago, IL, and Kevin Carroll, on brief for amicus curiae Securities Industry and Financial Markets Association.

Before Torruella, Kayatta, and Barron, Circuit Judges.

BARRON, Circuit Judge.

The plaintiffs allege violations of the fiduciary duty of prudence under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 - 1461, by the fiduciaries of an employer-sponsored retirement plan. Specifically, the plaintiffs contend that a particular investment fund offered through the plan was invested too heavily in cash or cash-equivalents for the years at issue and thus that the plan was imprudently managed and monitored. The District Court dismissed the complaint for failure to state a claim under ERISA. We affirm.

I.

To understand the sole issue on appeal, it helps to provide some background concerning the duty of prudence that ERISA establishes. We then describe the particular allegations that the plaintiffs offer in support of the imprudence claims that they bring and the travel of the case. Finally, we briefly review the rulings below.

A.

ERISA provides that any person who exercises discretionary authority or control in the management or administration of an ERISA plan (or who is compensated in exchange for investment advice) is a fiduciary. 29 U.S.C. § 1002(21)(A). ERISA further provides that such a fiduciary has a duty to 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." Id. § 1104(a)(1)(B).

Importantly, the Supreme Court has explained that "the content of the duty of prudence turns on ‘the circumstances ... prevailing’ at the time the fiduciary acts." Fifth Third Bancorp v. Dudenhoeffer, ––– U.S. ––––, 134 S.Ct. 2459, 2471, 189 L.Ed.2d 457 (2014) (omission in original) (quoting 29 U.S.C. § 1104(a)(1)(B) ). Accordingly, with respect to whether a complaint states a claim of imprudence under ERISA, "the appropriate inquiry will necessarily be context specific." Id.

As we explained in Bunch v. W.R. Grace & Co., 555 F.3d 1 (1st Cir. 2009), in connection with a claim of imprudence concerning an ERISA plan's investments, "[t]he test of prudence—the Prudent Man Rule—is one of conduct, and not a test of the result of performance of the investment." Id. at 7 (quoting Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983) ). Moreover, we explained that "[w]hether a fiduciary's actions are prudent cannot be measured in hindsight." Id. (quoting DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 424 (4th Cir. 2007) ).

B.

In 2016, the plaintiffs—Mary Barchock, Thomas Wasecko, and Stacy Weller—filed this suit in the United States District Court for the District of Rhode Island. They did so pursuant to 29 U.S.C. § 1132(a), which authorizes any ERISA plan participant to bring a civil action against an ERISA fiduciary liable under 29 U.S.C. § 1109 for breach of its duties.

According to the complaint, the three plaintiffs participated from 2010 to 2013 in an ERISA employee retirement plan that was sponsored by their employer, CVS Health Corporation ("CVS"), and administered by the Benefits Plan Committee of CVS.¹ The plan was a 401(k) defined contribution plan that offered several investment options to participants, including what is known as a "stable value fund." The Benefits Plan Committee appointed Galliard Capital Management, Inc. ("Galliard") to manage that fund.

All three plaintiffs allocated portions of their retirement investments under the plan to this stable value fund, which held approximately $1 billion in assets. Their complaint alleged that CVS, the Benefits Plan Committee, and Galliard owed the plaintiffs a fiduciary duty of prudence under ERISA with respect to the plan's investments in the fund and that each of the defendants breached that duty.

In so claiming, the plaintiffs' complaint described what a stable value fund is by quoting the description of such funds given by the Seventh Circuit in Abbott v. Lockheed Martin Corp., 725 F.3d 803 (7th Cir. 2013). Specifically, the complaint quoted Abbott as describing stable value funds, or SVFs, as "recognized investment vehicles" that

typically invest in a mix of short- and intermediate-term securities, such as Treasury securities, corporate bonds, and mortgage-backed securities. Because they hold longer-duration instruments, SVFs generally outperform money market funds, which invest exclusively in short-term securities. To provide the stability advertised in the name, SVFs are provided through "wrap" contracts with banks or insurance companies that guarantee the fund's principal and shield it from interest-rate volatility.

Id. at 806 (citations omitted).

The complaint did not identify what information was provided by the defendants to plan participants before they invested in the CVS stable value fund. Notably, the complaint did not allege that the plan documents specified how the fund's assets would be allocated. The complaint did, however, allege that the fund was part of a mix of investment options that the employer offered in "lifestyle" funds described as "conservative" and "moderate," as opposed to "aggressive." The complaint also alleged that, according to the plan's Internal Revenue Service Form 5500 Annual Return from one of the years at issue, the fund's stated objective was "to preserve capital while generating a steady rate of return higher than money market funds provide" (emphasis omitted).

With respect to Galliard, the complaint contended that, as a fiduciary, it breached its duty of prudence under ERISA in managing the CVS stable value fund by investing "too much" of the fund's assets in short-term debt obligations equivalent to cash, as opposed to intermediate-term investments that generally provide higher returns. Specifically, the complaint alleged that from 2010 to 2013, Galliard invested between twenty-seven and fifty-five percent of the fund's assets in an investment fund offered by a different firm that was invested "primarily" in such cash equivalents. (Galliard allocated the balance of the CVS stable value fund to intermediate-term investments.) This asset allocation, according to the complaint, predictably both resulted in unnecessary liquidity and "acted as an enormous drag on the duration of the overall Stable Value Fund portfolio, which depressed returns."

The complaint further alleged that this asset allocation was a "severe outlier" when compared to allocation averages for the stable value industry.² And, to identify those averages, the complaint incorporated a survey of industry data from 2011 and 2012.³ That survey was released by the Stable Value Investment Association, which the complaint described as a trade association for the stable value industry. The complaint alleged that, according to the survey, the average mean allocation of assets to cash or cash-equivalent investments by stable value funds surveyed was between only five and ten percent for the years 2011 and 2012.⁴

Finally, the complaint alleged that Galliard's relatively high allocation of investments in short-term, cash-equivalents was at odds with "well-established principles of stable value investing." The complaint explained that investors in stable value funds generally agree to contractual provisions that restrict the liquidity of their investments in exchange for relatively stable returns from longer-term investments. Yet, the complaint alleged, Galliard's excessive allocation of the CVS stable value fund's assets to short-term, cash-equivalent investments resulted in liquidity that the investors did not want and for which the plaintiffs paid a premium by losing out on the higher returns generally associated with longer-term investments. And, the complaint asserted, that allocation decision cannot be justified in terms of reducing risk because stable value funds, as conventionally structured, have historically outperformed money market funds—which invest in cash equivalents—in terms of both return and volatility. To support that last proposition, the complaint cited an academic study from 2007 and an updated version of that study from 2011. See David F. Babbel & Miguel A. Herce, A Closer Look at Stable Value Funds Performance (Wharton Financial Institutions Center Working Paper No. 07-21, 2007); David F. Babbel & Miguel A. Herce, Stable Value Funds: Performance to Date (Wharton Financial Institutions Center Working Paper No. 11-01, 2011).

As for the other two defendants—CVS and the Benefits Plan Committee—the complaint alleged that they had breached their duty of prudence by inadequately monitoring Galliard. The complaint asserted that, had they been prudent, they "would have immediately discovered...