Olmsted v. Pruco Life Ins. Co. of New Jersey

• Decision Date: 07 March 2002
• Docket Number: Docket No. 00-9511.
• Citation: 283 F.3d 429
• Parties: Sidney OLMSTED and Johanna Olmsted, on their own behalf and on behalf of all others similarly situated, Plaintiffs-Appellants, v. PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY and the Prudential Insurance Company of America, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

283 F.3d 429

Sidney OLMSTED and Johanna Olmsted, on their own behalf and on behalf of all others similarly situated, Plaintiffs-Appellants, v. PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY and the Prudential Insurance Company of America, Defendants-Appellees.

Docket No. 00-9511.

United States Court of Appeals, Second Circuit.

Argued September 4, 2001.

Decided March 7, 2002.

Jeffrey H. Squire, Kirby McInerney & Squire, LLP, New York, NY (Paul D. Wexler, Bragar, Wexler, Eagel & Morgenstern, LLP, New York, NY, on the brief), for Plaintiffs-Appellants.

Mark Holland, Clifford Chance Rogers & Wells LLP, New York, NY (James N. Benedict, Mary K. Dulka, C. Neil Gray, on the brief; Leonard P. Novello, Stephen Parker, The Prudential, Newark, NJ, of counsel), for Defendants-Appellees.

David M. Becker, General Counsel, Meyer Eisenberg, Deputy General Counsel, Jacob H. Stillman, Solicitor, Mark Pennington, Assistant General Counsel, Christopher Paik, Special Counsel, Washington, DC, the Securities and Exchange Commission, Amicus Curiae.

Before: NEWMAN, CALABRESI, and SACK, Circuit Judges.

SACK, Circuit Judge.

Plaintiffs Sidney and Johanna Olmsted appeal from a judgment of the United States District Court for the Eastern District of New York (Nicholas G. Garaufis, Judge) granting the defendants' Fed. R.Civ.P. 12(b)(6) motion to dismiss the complaint for failure to state a claim upon which relief can be granted. The plaintiffs allege that the defendants violated §§ 26(f) and 27(i) of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. (Supp. 2001) (the "ICA"), by imposing upon the plaintiffs, who are holders of certain variable annuity contracts, fees, charges, and expenses that are excessive and unreasonable in relation to the services provided, the expenses to be incurred, and the risks assumed. We affirm the judgment of the district court because we agree with its conclusion that Congress did not intend to create a private right of action for violations of §§ 26(f) and 27(i).

BACKGROUND

The plaintiffs are holders of "variable annuity" insurance contracts issued by the defendants. Compl. ¶ 2. Such contracts combine features of a mutual fund and a life insurance policy. A contract holder makes periodic payments into an account maintained by the issuer and consisting of various investments, such as mutual funds, selected by the holder. Compl. ¶ 14. The holder continues to make payments until a pre-selected maturity date, at which time he or she receives a payout in the form of either a lump-sum payment or a lifetime annuity. The contracts are "variable" because payouts depend on the market performance of the investments in the holder's account, as contrasted with the "fixed" payout of a traditional insurance policy.

The plaintiffs' contracts also include a feature called a "death benefit." Compl. ¶ 16. Under it, a holder who dies before the maturity date receives from the issuer a payment equal to the greater of (a) the value of the assets in the holder's investment account, and (b) the sum of the amounts of the holder's periodic payments before his or her death. Id.

The defendants identify three risks they assume in issuing the contracts. First, they assert that they assume a risk under the "death benefit" that they might be required to cover for a decline in the value of the contract holder's investments. Second, they aver that they assume a mortality risk, in that a contract holder might select the lifetime annuity payout option and then live longer than expected. Third, they allege that they assume an "expense risk," in that the expenses associated with administering the contracts might exceed the fixed annual expense charge. For these asserted risks assumed and other services provided, the defendants' total annual compensation under the contracts is 1.4% of the assets in each contract holder's account.¹

On March 8, 2000, the plaintiffs brought a class action in the United States District Court for the Eastern District of New York on behalf of all persons who purchased variable annuity contracts from the defendants on or after March 1, 1997. Compl. ¶ 7. The complaint alleges that the defendants have violated §§ 26(f) and 27(i) of the ICA because the fees they charge on their variable annuity contracts are "excessive and unreasonable in relation to the services provided, the expenses to be incurred and risks assumed...." Id. ¶ 21.² On October 30, 2000, the district court granted the defendants' motion under Fed. R.Civ.P. 12(b)(6) to dismiss the plaintiffs' complaint. Olmsted v. Pruco Life Ins. Co. of New Jersey, 134 F.Supp.2d 508, 517 (E.D.N.Y.2000). In a thorough and well-reasoned opinion, Judge Garaufis concluded that the ICA does not provide a private right of action for violations of §§ 26(f) and 27(i) and that the plaintiffs' complaint must be dismissed for failure to state a claim upon which relief can be granted. Id.

The plaintiffs appealed, asserting that the district court erred in concluding that the ICA does not provide a private right of action for violations of §§ 26(f) and 27(i). The defendants argue that the district court was correct and that the plaintiffs' complaint also should be dismissed (i) as time-barred, (ii) for failure to allege sufficient facts, and (iii) as barred by the filed-rate doctrine.

DISCUSSION

I. Standard of Review

We review de novo a district court's dismissal of a complaint under Fed R. Civ. P. 12(b)(6), accepting all factual allegations in the complaint as true and drawing all reasonable inferences in the plaintiffs' favor. Kalnit v. Eichler, 264 F.3d 131, 137-38 (2d Cir.2001).

II. Congressional Intent

The Supreme Court has established that courts must look to the intent of Congress in determining whether a federal private right of action exists for violations of a federal statute. "Like substantive federal law itself, private rights of action to enforce federal law must be created by Congress." Alexander v. Sandoval, 532 U.S. 275, 286, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001). Without congressional intent, "a cause of action does not exist and courts may not create one, no matter how desirable that might be as a policy matter, or how compatible with the statute." Id. at 286-87, 121 S.Ct. 1511.

Determining congressional intent to create a right of action is therefore a matter of statutory interpretation. Id. at 286, 121 S.Ct. 1511 ("Statutory intent ... is determinative."). A court must "begin [its] search for Congress's intent with the text and structure" of the statute, id. at 288, 121 S.Ct. 1511, and cannot ordinarily conclude that Congress intended to create a right of action when none was explicitly provided. See, e.g., Touche Ross & Co. v. Redington, 442 U.S. 560, 571, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) ("[I]mplying a private right of action on the basis of congressional silence is a hazardous enterprise, at best."); West Allis Mem'l Hosp. v. Bowen, 852 F.2d 251, 254 (7th Cir.1988) ("A strong presumption exists against the creation of... implied rights of action.").

No provision of the ICA explicitly provides for a private right of action for violations of either § 26(f) or § 27(i), and so we must presume that Congress did not intend one. This presumption is strengthened by three additional features of the statute.

First, §§ 26(f) and 27(i) do not contain rights-creating language. Section 26(f) provides:

It shall be unlawful for any ... account funding variable insurance contracts, or for the sponsoring insurance company of such account, to sell any such contract —

(A) unless the fees and charges deducted under the contract, in the aggregate, are reasonable....

15 U.S.C. § 80a-26(f). And § 27(i)(2) provides:

It shall be unlawful for any ... account funding variable insurance contracts, or for the sponsoring insurance company of such account, to sell any such contract unless —

....

(B) the insurance company complies with section 80a-26[f] of this title and any rules or regulations issued by the Commission under section 80a-26[f] of this title.

15 U.S.C. 80a-27(i)(2). The language of these sections only describes actions by insurance companies that are prohibited; it does not mention investors such as the plaintiffs. "Statutes that focus on the person regulated rather than the individuals protected create `no implication of an intent to confer rights on a particular class of persons.'" Sandoval, 532 U.S. at 289, 121 S.Ct. 1511 (quoting California v. Sierra Club, 451 U.S. 287, 294, 101 S.Ct. 1775, 68 L.Ed.2d 101 (1981)).

Second, § 42 of the ICA (15 U.S.C. § 80a 41) explicitly provides for enforcement of all ICA provisions, including §§ 26(f) and 27(i), by the Securities and Exchange Commission ("SEC") through investigations and civil suits for injunctions and penalties. See 15 U.S.C. § 80a-41. In Sandoval, the Supreme Court observed that:

The express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others.... Sometimes the suggestion is so strong that it precludes a finding of congressional intent to create a private right of action, even though other aspects of the statute ... suggest the contrary.

532 U.S. at 290, 121 S.Ct. 1511 (internal citations omitted).

Third, Congress explicitly provided in § 36(b) of the ICA for a private right of derivative action for investors in regulated investment companies alleging that investment advisors breached certain fiduciary duties. 15 U.S.C. § 80a-35(b). Congress's explicit provision of a private right of action to enforce one section of a statute suggests that omission of an explicit private right to enforce other sections was intentional. "Obviously ... when Congress wished to provide a private damage remedy, it knew how to do so and did so expressly." Touche Ross, 442 U.S. at 572, 99 S.Ct. 2479.³

We therefore conclude that the ICA's text creates a strong presumption that Congress did not intend to create private rights of action for violations...