Sweda v. Univ. of Pa.

• Decision Date: 02 May 2019
• Docket Number: No. 17-3244,17-3244
• Citation: 923 F.3d 320
• Parties: Jennifer SWEDA; Benjamin A. Wiggins; Robert L. Young ; Faith Pickering; Pushkar Sohoni; Rebecca N. Toner, individually and as representatives of a class of participants and beneficiaries on behalf of the University of Pennsylvania Matching Plan, Appellants v. UNIVERSITY OF PENNSYLVANIA; Investment Committee; Jack Heuer
• Court: U.S. Court of Appeals — Third Circuit

923 F.3d 320

Jennifer SWEDA; Benjamin A. Wiggins; Robert L. Young ; Faith Pickering; Pushkar Sohoni; Rebecca N. Toner, individually and as representatives of a class of participants and beneficiaries on behalf of the University of Pennsylvania Matching Plan, Appellants

v.UNIVERSITY OF PENNSYLVANIA; Investment Committee; Jack Heuer

No. 17-3244

United States Court of Appeals, Third Circuit.

Argued October 2, 2018

Opinion Filed: May 2, 2019

OPINION OF THE COURT

FISHER, Circuit Judge.

Plaintiffs Jennifer Sweda, Benjamin Wiggins, Robert Young, Faith Pickering, Pushkar Sohoni, and Rebecca Toner, representing a class of participants in the University of Pennsylvania’s 403(b) defined contribution, individual account, employee pension benefit plan, sued Defendants, the University of Pennsylvania and its appointed fiduciaries, for breach of fiduciary duty, prohibited transactions, and failure to monitor fiduciaries under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001 - 1461. Plaintiffs (collectively, "Sweda") alleged that Defendants (collectively, "Penn"), among other things, failed to use prudent and loyal decision making processes regarding investments and administration, overpaid certain fees by up to 600%, and failed to remove underperforming options from the retirement plan’s offerings. The District Court dismissed Sweda’s complaint in its entirety. We will reverse the District Court’s dismissal of the breach of fiduciary duty claims at Counts III and V only and remand for further proceedings.

I.

Sweda and her fellow Plaintiffs-Appellants are current and former Penn employees who participate, or participated, in Penn’s retirement plan (the "Plan"). They sought to represent the proposed class of Plan participants, 20,000 current and former Penn employees who had participated in the Plan since August 10, 2010. The Defendants are the University of Pennsylvania, its Investment Committee, and Jack Heuer, the University’s Vice President of Human Resources. The Plan is a defined contribution plan under 29 U.S.C. § 1002(34), tax qualified under 26 U.S.C. § 403(b). The University matches employees’ contributions up to 5% of compensation.

As a 403(b), the Plan offers mutual funds and annuities: the former through TIAA-CREF and Vanguard Group, Inc. and the latter through TIAA-CREF. Since 2010, the Plan has offered as many as 118 investment options. As of December 2014, the Plan offered 78 options: 48 Vanguard mutual funds, and 30 TIAA-CREF options including mutual funds, fixed and variable annuities, and an insurance company separate account. Effective October 19, 2012, Penn organized its investment fund lineup into four tiers. The TIAA-CREF and Vanguard options under Tier 1 consisted of lifecycle or target-date funds for the "Do-it-for-me" investor. Certain core funds were designated Tier 2, designed for the "Help-me-do-it" investor looking to be involved in his or her investment choices without having to decide among too many options. Under Tier 3, the Plan offered an "expanded menu of funds" for "the more advanced ‘mix-my-own’ investor," and under Tier 4, the Plan offered the option of a brokerage account window for the "self-directed" investor looking for additional options, subject to additional fees. Plan participants thereafter could "select a combination of funds from any or all of the investment tiers." At the end of 2014, the Plan had $ 3.8 billion in assets: $ 2.5 billion invested in TIAA-CREF options, and $ 1.3 billion invested in Vanguard options.

TIAA-CREF and Vanguard charge investment and administrative (recordkeeping) fees. Mutual fund investment fees are charged as a percentage of a fund’s managed assets, known as the expense ratio, and the rate can differ by share class. The mutual funds in which the Plan invests have two share classes: retail and institutional. Retail class shares generally have higher investment fees than institutional class shares. There are also two common recordkeeping fee models. In a flat fee model, recordkeeping fees are a set amount per participant, whereas in a revenue sharing model, part of an option’s expense ratio is diverted to administrative service providers. TIAA-CREF and Vanguard charged the Plan under the revenue sharing model.

Sweda alleged numerous breaches of fiduciary duty and prohibited transactions. She brought six counts against all Defendants, and one count against the University. The first six counts alleged breaches of fiduciary duty in violation of 29 U.S.C. § 1104(a)(1) (Counts I, III, and V) and prohibited transactions in violation of 29 U.S.C. § 1106(a)(1) (Counts II, IV, and VI). Sweda also alleged that the University failed to adequately monitor its appointed fiduciaries in Count VII.

Penn moved to dismiss the complaint, and the District Court granted the motion. The court determined that Sweda failed to state a claim for fiduciary breach under Bell Atl. Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Renfro v. Unisys Corp. , 671 F.3d 314 (3d Cir. 2011), because her factual allegations could also indicate rational conduct. As for the prohibited transaction claims, the court held that the service agreements could not constitute prohibited transactions without an allegation that Penn had the subjective intent to benefit a party in interest. The court dismissed Count VII after determining that it was duplicative of the claims at Counts I, III, and V.¹ Sweda now appeals.

II.

The District Court had jurisdiction under 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e)(1) and (f). We have jurisdiction under 28 U.S.C. § 1291. We conduct plenary review of an order granting a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure (12)(b)(6). Renfro , 671 F.3d at 320 ; Burtch v. Milberg Factors, Inc. , 662 F.3d 212, 220 (3d Cir. 2011).

III.

A. Pleadings standards for claims brought under ERISA

The question in this case is whether Sweda stated a claim that should survive termination at the earliest stage in litigation. When a court grants a motion to dismiss a complaint under Rule 12(b)(6), it deprives a plaintiff of the benefit of the court’s adjudication of the merits of its claim before the court considers any evidence. That is why, in exercising our plenary review, we apply the same standard as the district court and construe the complaint "in the light most favorable to the plaintiff," Santomenno ex rel. John Hancock Tr. v. John Hancock Life Ins. Co. , 768 F.3d 284, 290 (3d Cir. 2014) (citation and internal quotation marks omitted), to determine whether it "contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face,’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "[W]e disregard rote recitals of the elements of a cause of action, legal conclusions, and mere conclusory statements." James v. City of Wilkes-Barre , 700 F.3d 675, 679 (3d Cir. 2012). A claim "has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."

Thompson v. Real Estate Mortg. Network, 748 F.3d 142, 147 (3d Cir. 2014) (citation and internal quotation marks omitted).

Here, the District Court held that Sweda’s complaint did not state a plausible claim, observing at various points in its memorandum that "[a]s in Twombly , the actions are at least ‘just as much in line with a wide swath of rational and competitive business strategy’ in the market as they are with a fiduciary breach." Sweda v. Univ. of Pennsylvania , No. CV 16-4329, 2017 WL 4179752, at *7, 8 (E.D. Pa. Sept. 21, 2017) (quoting Twombly , 550 U.S. at 554, 127 S.Ct. 1955 ). However, Twombly ’s discussion of alleged misconduct that is "just as much in line with a wide swath of rational and competitive business strategy" is specific to antitrust cases. 550 U.S. at 554, 127 S.Ct. 1955. In an antitrust case, "a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality," therefore "when allegations of parallel conduct are set out in order to make a § 1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action." Id. at 557, 127 S.Ct. 1955.

One of our sister circuits has declined to extend Twombly ’s antitrust pleading rule to breach of fiduciary duty claims under ERISA because "[r]equiring a plaintiff to rule out every possible lawful explanation for the conduct he challenges would invert the principle that the complaint is construed most favorably to the nonmoving party." Braden v. Wal-Mart Stores, Inc. , 588 F.3d 585, 597 (8th Cir. 2009) (citation and internal quotation marks omitted). We agree, and decline to extend Twombly ’s antitrust pleading rule to such claims. To the extent that the District Court required Sweda to rule out lawful explanations for Penn’s conduct, it erred.

We now turn to the task of evaluating Sweda’s complaint. We progress in three steps: First, we will note the elements of a claim; second, we will identify allegations that are conclusory and therefore not assumed to be true, and; third, accepting the factual allegations as true, we will view them and reasonable inferences drawn from them in the light most favorable to Sweda to decide whether "they plausibly give rise to an entitlement to relief." Connelly v. Lane Constr. Corp. , 809 F.3d 780, 787 (3d Cir. 2016) (quoting Iqbal , 556 U.S. at 679, 129 S.Ct. 1937 ).² Pleadings that establish only a mere possibility of misconduct do not show entitlement to relief. Fowler , 578 F.3d at 211.

In our evaluation of the complaint, we must account for the fact that Rule 8(a)(2), Twombly , and Iqbal operate with contextual specificity. Renfro , 671 F.3d at 321 ("[W]e must...