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Chendes v. Xerox HR Solutions, LLC

United States District Court, E.D. Michigan, Southern Division

October 19, 2017




         Plaintiffs are participants in three Ford Motor Company retirement plans. (Dkt. #21 Pg. ID 360.) They bring this proposed class action against Defendant Xerox HR Solutions, LLC-the company that provides “platform and recordkeeping services” for the administration of their plans (id. at Pg. ID 362)-for alleged violations of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. Before the court is Defendant's “Motion to Dismiss Plaintiffs' First Amended Class Action Complaint” (Dkt. # 23). The motion is fully briefed, and this court held a hearing on October 25, 2017. For the following reasons, Defendant's motion is granted, and Plaintiffs are given limited leave to replead.

         I. BACKGROUND

         Plaintiffs are participants in three Ford Motor Company retirement plans (“Ford Plans”): the Ford Retirement Plan, the Ford Motor Company Savings and Stock Investment Plan for Salaried Employees, and the Ford Motor Company Tax-Efficient Savings Plan for Hourly Employees. (Dkt. #21 Pg. ID 360.) These plans are “‘individual account plans, ' tax qualified retirement plans maintained by employers for the benefit of their employees.” (Id. at Pg. ID 362.) Participants in the Ford Plans are in charge of directing the investment of their accounts among the available investment options. (Id. at Pg. ID 363.) Plaintiffs bring this action on behalf of their plans and “all other similarly situated qualified retirement plans.” (Id. at Pg. ID 360.)

         The Ford Plans “participate in the Ford Defined Contribution Plan Master Trust” (“Master Trust”), which was created “to permit the commingling of trust assets of the Ford Plans for investment and administrative purposes.” (Id. at Pg. ID 361.) “Participant accounts in the Ford Plans are thus comprised of various combinations of any employee contributions, any employer contributions[, ] and any investment income earned from the individual investment options selected within the participant account.” (Id.) At the end of 2015, the net assets in the Master Trust totaled $13.94 billion. (Id. at Pg. ID 362.)

         Defendant “provides platform and recordkeeping services to the Master Trust for the administration of the Ford Plans.” (Id.) “[A]mong the optional services that Xerox HR makes available to its qualified plan customers is the opportunity for plan participants to obtain professional investment advice regarding the investment of their plan accounts.” (Id. at Pg. ID 364.) For that service, “Xerox HR has contracted with Financial Engines [(‘FE')].” (Id.) According to Plaintiffs, Ford decided to include this optional service among the services that it offered to Plaintiffs and other participants in the Ford Plans, and the “Ford Plans and/or Master Trust” executed a separate agreement with FE. (Id.) “The agreement between the Ford Plans and FE contains an acknowledgement that FE is an ERISA fiduciary with respect to the investment advice program” and provides for the fee Plaintiffs and other plan participants will pay for FE's services, a percentage of the participant's account value on a scaled basis. (Id.)

         Plaintiffs allege that, while the Ford Plans and FE executed their own agreement, Defendant “dictates and controls certain of the terms and conditions on which FE will provide services to the retirement plans administered on the Xerox HR platform.” (Id.) As to the cost of being included as the sole investment advice service provider on Defendant's platform, “FE agreed to pay-and is paying-Xerox HR a significant percentage of the fees it collects from Ford's 401(k) plan investors, ” including Plaintiffs. (Id. at Pg. ID 365.)

         This, according to Plaintiffs, is the problem-because Xerox is already collecting fees for its recordkeeping services, its demand for a percentage of FE's take from Plaintiffs amounts to a “kickback.” (Id.) The fees Xerox HR collects from FE “are not being paid for any substantial services being provided by Xerox HR to FE or to participants of the Plans, . . . but are instead being paid as part of a so-called ‘pay-to-play' arrangement.” (Id.) Specifically, Plaintiffs allege that “FE is paying Xerox HR over 30% of the fees it receives from the Ford Plans, ” an amount that they believe “is plainly unreasonable.” (Id. at Pg. ID 370.) Moreover, “[t]his ‘pay to play' arrangement wrongfully inflates the price of FE's professional investment advice services that are critical to the successful management of workers' retirement savings and violates the fiduciary responsibility and prohibited transaction rules of Sections 404, 405[, ] and 406 of ERISA, 29 U.S.C. §§ 1104, 1105[, ] and 1106.” (Id. at Pg. ID 365.)

         Plaintiffs bring four claims for this allegedly wrongful activity. First, Plaintiffs allege that Defendant and FE breached their fiduciary duties to the Plan participants and beneficiaries in violation of ERISA § 404, 29 U.S.C. § 1104 (“Count I”). (Id. at Pg. ID 387-90.) Second, Plaintiffs allege various “prohibited transactions” in violation of ERISA § 406, 29 U.S.C. § 1106, by both Defendant and FE (“Count II”). (Id. at Pg. ID 390-93.)[1]Third, Plaintiffs claim that, even if Defendant is not a fiduciary, Defendant is liable for FE's commission of prohibited transactions because Defendant knowingly received improper payment from FE, a fiduciary to the Ford Plans, see Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241 (2000) (“Count III”). (Id. at Pg. ID 394- 95.) Finally, Plaintiffs allege that Defendant failed to meet its disclosure obligations under 29 C.F.R. § 2550.408b-2(c)[2] (“Count IV”). (Id. at Pg. ID 395-96.)

         II. STANDARD

         Federal Rule of Civil Procedure 8(a)(2) requires that a complaint contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not shown-that the pleader is entitled to relief.” Id. at 679. The court views the complaint in the light most favorable to the plaintiff and accepts all well-pleaded factual allegations as true. Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009). The court, however, “need not accept as true legal conclusions or unwarranted factual inferences.” Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007).

         “In determining whether to grant a Rule 12(b)(6) motion, the court primarily considers the allegations in the complaint, although matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint, also may be taken into account.” Amini v. Oberlin College, 259 F.3d 493, 502 (6th Cir. 2001) (quoting Nieman v. NLO, Inc., 108 F.3d 1546, 1554 (6th Cir. 1997)). Furthermore, “when a document is referred to in the pleadings and is integral to the claims, it may be considered without converting a motion to dismiss into one for summary judgment.” Commercial Money Ctr. v. Ill. Union Ins. Co., 508 F.3d 327, 335-36 (6th Cir. 2007).


         A. Defendant's Fiduciary Liability (Count I)

         “The threshold question in all cases charging breach of ERISA fiduciary duty is whether the defendant was ‘acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.'” Cataldo v. U.S. Steel Corp., 676 F.3d 542, 552 (6th Cir. 2012) (quoting Pegram v. Herdrich, 530 U.S. 211, 226 (2000)). A fiduciary includes anyone who “exercises any discretionary authority or discretionary control respecting management of [the] plan or exercises any authority or control respecting management or disposition of its assets.” 29 U.S.C. § 1002(21)(A)(i). “[T]he definition of a fiduciary under ERISA is a functional one, is intended to be broader than the common law definition, and does not turn on formal designations such as who is the trustee.” Smith v. Provident Bank, 170 F.3d 609, 613 (6th Cir. 1999). Because an ERISA fiduciary “may wear different hats, ” a party may act as a fiduciary with respect to some matters but not others. See Pegram, 530 U.S. at 225; see also Coulter v. Morgan Stanley & Co., 753 F.3d 361, 366 (2d Cir. 2016).

         Plaintiffs' first three counts turn on whether Defendant and/or FE was a fiduciary with respect to the challenged conduct. Counts I and II-for violation of fiduciary duties and prohibited transactions, respectively-require that Defendant was a fiduciary with respect to the challenged conduct. To the extent that Plaintiffs argue that Defendant can also be held liable for FE's breaches as a co-fiduciary under § 405, 29 U.S.C. § 1105, (see Dkt. #21 Pg. ID 389, 393), FE must be a fiduciary for liability to attach. Count III, which alleges that FE committed prohibited transactions for which Defendant can be liable as a party in interest, requires that FE be a fiduciary. Defendant also contends that Plaintiffs are required to establish fiduciary duty with respect to Count IV-that claim, however, is dismissed on other grounds, as set forth below.

         Defendant's first argument on this motion to dismiss is that Plaintiffs cannot state a claim for breach of fiduciary duties or for prohibited transactions because neither Defendant nor FE was a fiduciary of the plan with respect to the challenged conduct. (Dkt. #23 Pg. ID 713-21.) Plaintiffs disagree. Plaintiffs premise Defendant's fiduciary status on three grounds. Each will be addressed in turn.

         i. Discretion over Compensation

         First, Plaintiffs claim that Xerox HR is a fiduciary because it had discretion over the amount of its compensation. See Pipefitters Local 636 Ins. Fund v. Blue Cross & Blue Shield of Mich., 722 F.3d 861, 867 (6th Cir. 2013). (Dkt. #27 Pg. ID 987.) Specifically, Plaintiffs allege that because the agreement between Defendant and Ford did not cabin Defendant's ability to seek compensation from a party like FE, Defendant in effect controlled the terms of its own compensation by seeking additional money from FE. (Id. at Pg. ID 987-90 (“What is significant is that the agreements between Xerox and the Plans did not limit Xerox's discretion in negotiating additional fees for itself from FE.” (emphasis original)).)

         Defendant, on the other hand, argues that it and FE cannot be fiduciaries with respect to their own compensation (i.e., the fees at issue in this case) because Defendant's and FE's business relationships with both each other and Ford amount to “arm's length contract[s]” that “[do] not give rise to ERISA fiduciary status.” See Seaway Food Town, Inc. v. Med. Mut. of Ohio, 347 F.3d 610, 619 (6th Cir. 2003). (Dkt. #23 Pg. ID 714-17.) While Defendant acknowledges that under Sixth Circuit precedent a party in an “arm's length contract” may be held liable as a fiduciary where a contract term “authorizes the party to exercise discretion” as to its own compensation, see Seaway, 347 F.3d at 619, Defendant argues that it had no discretion in setting its own compensation as it relates to this case. Defendant points to the fact that Plaintiffs premise “discretion” on Defendant's ability to seek compensation from FE. (Id. at Pg. ID 716) (“Of note, Plaintiffs do not allege that the actual FE-Xerox Agreement gives Xerox any discretion over its compensation, but only that the negotiation of this contract gave Xerox such discretion.”) But negotiation of this contract, according to Defendant, does not amount to a fiduciary act. (Id.)

         It seems to the court, then, that the question here is what constitutes “discretion” in setting compensation. The court disagrees with Plaintiffs that “discretion” includes the ability to seek additional compensation not provided for in the original agreement.

         Plaintiffs rely on Pipefitters, which they say “explained that the contract at issue in that case ‘in no way cabins Defendant's discretion to charge or set the . . . fee' that it received for its services, and that, as such, ‘Defendant necessarily had discretion in the way it collected the funds to defray its [costs].'” (Dkt. #27 Pg. ID 987 (brackets and ellipses in original) (quoting 722 F.3d at 867).) In Pipefitters, the plaintiff insurance fund brought suit against the defendant insurance company for breach of fiduciary duty. 722 F.3d at 865. The fund alleged that its insurance company had wrongfully imposed and failed to disclose the imposition of a fee-a cost transfer subsidy-that was arguably permitted under the terms of the parties' contract. Id. at 864-65. The term of the contract at issue, however, did not “set forth the dollar amount for the [fee] or even a method by which the [fee was] to be calculated.” Id. at 867. Because the defendant only charged the fee to some of its customers, the Sixth Circuit found that the defendant had discretion in how it collected funds from the plaintiff.

         This case, however, is not like Pipefitters. There is no contract provision between Defendant and the Plans that permits Defendant to exercise discretion in the amount of money it receives from the Plans directly. Plaintiffs do not allege that the agreement between Xerox and the Plans in any way permitted Xerox to exercise discretion in how much money it received from the Plans. Rather, Plaintiffs rely on the fact that their agreement with Defendant did not limit Defendant's ability to seek further compensation elsewhere. (Dkt. #27 Pg. ID 989.) Indeed Plaintiffs, in response to the motion to dismiss, refer not to Defendant's discretion in retaining funds from Plaintiffs, but rather to Defendant's “discretion over the compensation it received from FE.” (Id. at Pg. ID 990.) This is not the kind of discretion that was at issue in Pipefitters, where the defendant exercised discretion in exacting fees from the plaintiff insurance fund.

         Any fees that Defendant collected were collected from FE, and were based firstly on an arm's length negotiation between Defendant and FE-not Defendant's discretion as it related to the Plans. Even after Defendant and FE entered into their agreement, Defendant's compensation was based on factors outside of Defendant's discretion: namely, the number of participants who used FE's services and the valuation of the assets of those participants. Even so, Defendant's receipt of a portion of FE's fees is entirely dependent on whether the Plan's participants engage FE's services in the first place. If participants in the Plans choose not to use FE's services, Defendant receives no such fees at all.

         Because Defendant did not have discretion over the amount of its own compensation as it relates to Plaintiffs, Defendant was not ...

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