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Fleming v. Fidelity Management Trust Co.

United States District Court, D. Massachusetts

September 22, 2017




         Plaintiffs 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.

         I. BACKGROUND

         The 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.

         Defendants 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.

         The 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. A].

         The 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.

         A. FE Allegations

         The 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.

         B. BrokerageLink Allegations

         Plaintiffs 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. Id.¶¶ 11-17.

         Typically, 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.

         Plaintiffs 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.


         Plaintiffs 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].


         "When 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.

         A. Subject Matter Jurisdiction

         Defendants 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].

         Standing 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. ...

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