ERISA Class Certification Fails to Get a Clean Bill of Health

A recent federal appellate decision put certification of ERISA claims under the microscope. In Trauernicht v. Genworth Financial Inc., the Fourth Circuit Court of Appeals decertified a class action asserting claims under Federal Rule of Civil Procedure 23(b)(1). The plaintiffs, former employees who invested in target date funds, alleged that the sponsor of its employee defined contribution retirement plan breached its fiduciary duties by selecting and retaining imprudent investment opportunities for the plan.

The Fourth Circuit held, on interlocutory review, that in the context of defined contribution plans, ERISA claims under section 502(a)(2) present claims for individualized monetary relief and thus are not appropriate for class treatment under Rule 23(b)(1). The court explained that, in a defined contribution plan, unlike a defined benefit plan, a plan participant technically brings section 502(a)(2) claims on behalf of the plan, and the plan assets at issue in these claims are the assets in the participant’s individual retirement account. Therefore, section 502(a)(2) and section 409(a) claims in the context of defined contribution plans amount to individualized monetary claims. Citing hypothetical scenarios, the court demonstrated that in a defined contribution plan the loss, if any, to any individual account could vary significantly depending on factors such as how much money a participant invested in the allegedly imprudent fund, the duration of the particular investment, and the “precise timing” of when the fund was bought and sold.

Relying on Wal-Mart Stores Inc. v. Dukes, the court concluded that these individualized monetary claims are not appropriate for class treatment under Rule 23(b)(1). The court reasoned that class actions seeking predominantly individual monetary relief must be brought under Rule 23(b)(3), which provides procedural protections like notice and the opportunity to opt out of the class. In contrast, classes certified under Rule 23(b)(1), which have long been favored by ERISA litigants, are “mandatory” because class participants do not have the opportunity to opt out of the class and the court is not obliged to give class members notice of the action. Therefore, aggregating claims for monetary relief in a mandatory class under Rule 23(b)(1) would violate the due process rights of class members.

Finally, the court held that the district court abused its discretion by not conducting a rigorous analysis to determine whether the plaintiffs satisfied the commonality requirement of Rule 23(a)(2). The district court concluded that the plaintiffs satisfied this requirement because section 502(a)(2) claims inherently presented issues common to the class. The Fourth Circuit rejected this conclusion because the district court failed to address the individualized nature of relief in the context of defined contribution plans or the fact that members of the proposed class participated in the plan in materially different ways. Specifically, plan participants made their own investment decisions and selected the challenged investment options at different times and under different market conditions, thus potentially suffering different injuries or no injury at all.

If other circuits adopt the Fourth Circuit’s reasoning, the decision could eliminate the availability of mandatory certification under Rule 23(b)(1), but the ruling does not foreclose the possibility that ERISA breach of fiduciary duty class actions arising under defined contribution plans can be filed under Rule 23(b)(3). Even so, plaintiffs will face greater challenges, including requiring them to provide class members with notice and the opportunity to opt out of the class. Additionally, plaintiffs may face a higher burden when pleading commonality, and future classes may be limited to participants who participated in the plan in a similar manner and suffered the same or similar injuries.