United States District Court, D. Massachusetts
KATHERTNE FLEMING, EDWARD R. HADUCK, and VICTORIA WENDEL, Plaintiffs,
FIDELITY MANAGEMENT TRUST COMPANY and FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC., Defendants.
MEMORANDUM AND ORDER
ALLISON D. BURROUGHS, U.S. DISTRICT JUDGE
in this putative class action allege various violations of
the Employee Retirement Income Security Act of 1974
("ERISA"), 29 U.S.C. §§ 1001 et
seq. [ECF No. 1] (hereinafter "Compl."). They
claim that Defendants have breached their fiduciary duties
under ERISA and engaged in transactions that ERISA prohibits.
Compl. ¶¶ 67-86. Pending before the Court are three
motions, all opposed: (1) Defendants' motion to dismiss
for lack of subject matter jurisdiction [ECF No. 36]; (2)
Defendants' motion to dismiss for failure to state a
claim [ECF No. 23]; and (3) Plaintiffs' motion to strike
an exhibit and related factual assertions [ECF No. 29]. For
the reasons that follow, Defendants' motion to dismiss
for lack of subject matter jurisdiction is DENIED,
Defendants' motion to dismiss for failure to state a
claim is ALLOWED, and Plaintiffs' motion to
strike is DENIED AS MOOT.
following allegations are drawn from Plaintiffs'
Complaint, with additional details reserved for later
discussion. Plaintiffs Katherine Fleming, Edward Haduck, and
Victoria Wendel are individual participants within the
meaning of ERISA, 29 U.S.C. § 1002(7), in the Delta
Family-Care Savings Plan ("Plan"). Compl.
¶¶ 1, 21-24. The Plan qualifies under ERISA as both
an employee pension benefit plan, 29 U.S.C. §
1002(2)(A), and an individual account plan, 29 U.S.C. §
1002(34). Id. ¶25. Many of the employee
accounts in question are 401(k) accounts, which permit
individuals to contribute a portion of their salary and wages
on a pre-tax basis in order to save for retirement.
Id. ¶ 4.
Fidelity Management Trust Company ("FMTC") and
Fidelity Investments Institutional Operations Company, Inc.
("FIIOC") were hired to provide certain services to
the Plan. Li ¶¶26-27. As trustee of the Plan, FMTC
holds the Plan's investment assets and executes
investment transactions as instructed by the Plan and
individual Plan participants. Id. ¶ 27. FIIOC,
a wholly owned subsidiary of FMTC, provides trust services,
record-keeping, and information management services to the
Plan. Li ¶ 26.
assets of the Plan are held in and invested through a Master
Trust. Id. ¶ 50. The trust is controlled in all
material respects by a Master Trust Agreement (along with
related supplements and amendments) involving the Plan
sponsor (Delta Air Lines, Inc.), the named fiduciary (the
Delta Air Lines, Inc., Benefit Funds Investment Committee),
the Plan administrator (the Administrative Committee of Delta
Air Lines, Inc.), and the trustee (FMTC). [ECF No. 25 at Ex.
Complaint alleges wrongdoing in two particular aspects of the
Plan, although the Plan sponsor, named fiduciary, and
administrator are not parties to the case. First, it
challenges the relationship between Defendants and a third
party, Financial Engines Advisors, LLC ("FE").
Compl. ¶¶ 6-7. FE provides investment advice
services to individual Plan participants. Id. ¶
6. It charges a fee for these services that varies based on
the value of a participant's individual account.
Id. Second, the Complaint attacks the portal through
which individual Plan participants are permitted to invest
their savings on a self-directed basis. Id. ¶
8. Branded as "BrokerageLink, " this portal allows
individuals to purchase an array of securities, including,
most importantly here, a selection of mutual funds (both
Fidelity and non-Fidelity funds) that are not included among
the Plan's designated investment alternatives.
Id. ¶¶ 9-10.
gravamen of Plaintiffs allegations regarding FE is that
Defendants and FE have agreed to an improper "pay to
play" arrangement. Id. ¶ 7. Basically,
Plaintiffs allege that FE, in exchange for being included as
the Plan's investment advisor, agreed to pay Defendants a
significant percentage of the fees that FE collects from
individual Plan investors. Id. This fee-sharing
arrangement, according to Plaintiffs, is unrelated to any
substantial services performed by Defendants and artificially
inflates the cost of investment advice for Plan participants,
which violates the fiduciary responsibility and prohibited
transaction provisions of ERISA, 29 U.S.C. §§ 1104,
1106. Id. Plaintiffs allege that, to effect this
arrangement, Defendants "hired FE and controlled the
negotiation of the terms and conditions under which FE would
provide its services to Plaintiffs [and other] Plan
participants, " including the fee-sharing arrangement,
and the fact that Defendants receive at least half of
FE's Plan-related fees under the fee-sharing arrangement
shows that Defendants' fee is "plainly unreasonable
in relation to the service being provided." Id.
¶¶ 33, 38, 47.
acknowledge that individual Plan participants who use
BrokerageLink exercise at least some discretionary control
when it comes to their investment choices, including which
mutual funds to purchase. Id. ¶ 10. They take
issue, however, with the specific classes of mutual fund
shares that are available for purchase through BrokerageLink.
a mutual fund that offers different share classes will offer
both "retail" shares, which have higher expenses
for the investor, and "institutional" shares, which
generally have lower expenses. Id. ¶¶
11-13. The Complaint alleges that when individual Plan
participants use BrokerageLink to invest in mutual funds with
different share classes, Defendants "do[ ] not always
acquire the class of shares with the lowest expense
ratio." Id. ¶ 16. Instead, Defendants
acquire shares with higher fees, which typically include
revenue-sharing payments made to parties who distribute the
shares or provide other services. Id. ¶ 12-13,
16. Defendants, in turn, get a cut of these higher fees in
the form of revenue-sharing payments. Id. ¶ 17.
also allege that, in 2013, Defendants suddenly stopped
reporting a list of funds from which they received
revenue-sharing payments, disclosing only that they received
an unspecified amount of indirect compensation from
BrokerageLink. Id. ¶ 53. Plaintiffs allege
"[t]here is no discernible purpose or
justification" for this change other than "a
deliberate attempt to conceal the amount of [Defendants']
compensation." Id. According to the Complaint,
the purchase of higher-cost shares violates Defendants'
obligations under ERISA to select share classes solely in the
best interests of the Plan and its participants, and to
refrain from using Plan assets for their own interests.
Id. ¶ 17.
filed their Complaint on May 20, 2016. Compl. at 24. On July
22, 2016, Defendants filed amotion under Fed.R.Civ.P.
12(b)(6) seeking dismissal of the Complaint for Mure to state
a claim upon which relief can be granted. [ECF No. 23].
Accompanying the motion was a declaration by Defendants'
counsel, along with three exhibits, two of which were filed
under seal. [ECF No. 25]. Plaintiffs opposed this motion on
September 12, 2016, and filed a motion to strike one of the
exhibits attached to the declaration, and related factual
assertions contained in the memorandum in support of the
motion. [ECF Nos. 28, 29]. Defendants opposed the motion to
strike on October 17, 2016. [ECF No. 35]. Shortly thereafter,
on November 3, 2016, Defendants filed amotion to dismiss for
lack of subject matter jurisdiction under Fed.R.Civ.P.
12(b)(1). [ECF No. 36]. Plaintiffs responded to this motion
on December 12, 2016 [ECF No. 42], and Defendants filed a
reply on January 12, 2017 [ECF No. 45].
a court is confronted with motions to dismiss under both
Rules 12(b)(1) and 12(b)(6), it ordinarily ought to decide
the former before broaching the latter." Deniz v.
Municipality of Guaynabo, 285 F.3d 142, 149 (1st Cir.
2002). The Court follows that approach here, addressing first
Defendants' motion to dismiss under Rule 12(b)(1), and
then Defendants' motion to dismiss under Rule 12(b)(6)
along with Plaintiffs' motion to strike.
Subject Matter Jurisdiction
argue that the Court does not have subject matter
jurisdiction over Plaintiffs' BrokerageLink claims
because Plaintiff Fleming, the only named plaintiff to allege
injury from using that service, lacks Article III standing.
[ECF No. 37 at 10-11; Compl. ¶ 22-24]. Plaintiffs
respond that Fleming has standing because she was
"forced to pay unnecessary and excessive fees" by
using the BrokerageLink platform [ECF No. 42 at 2].
doctrine recognizes this Court's limited power to hear
"Cases" and "Controversies" under Article
III of the U.S. Constitution. Hochendoner v. Genzyme
Corp., 823 F.3d 724, 731 (1st Cir. 2016) (quoting U.S.
Const, art. Ill. § 2, cl. 1). "The heartland of
constitutional standing is composed of the familiar amalgam
of injury in fact, causation, and redressability." Id.,
(citing Lujan v. Defs. of Wildlife, 504 U.S. 555,
560-61 (1992)). When evaluating subject matter jurisdiction
at the pleading stage, the Court must "accept the
factual averments of the complaint as true, and construe
those facts in the light most congenial to [Plaintiffs']
cause." Royal v. Leading Edge Prods., Inc., 833
F.2d 1, 1 (1st Cir. ...