Compliance

Participant Fails to Establish Class Status in Prudential Lawsuit

The denial of the class certification motion goes into some detail regarding what it takes to establish class standing under ERISA.

By John Manganaro editors@assetinternational.com | August 09, 2017

A federal district court judge has denied class action status to an ERISA challenge filed by a retirement plan participant invested in a stable value product offered by Prudential.

The suit, filed against Prudential Retirement Insurance and Annuity Company in the U.S. District Court for the District of Connecticut, alleged that the firm improperly assessed and failed to disclose compensation derived from clients’ investment in a stable value fund.

As laid out in the initial complaint, the plaintiffs alleged that Prudential sets the crediting rate for certain stable value funds “well below its internal rate of return on the invested capital it holds through the SVAs. Thus, the company guarantees a substantial profit for itself … It does not disclose to its retirement plan clients and their respective participants the difference between its internal rate of return and the crediting rate. Thus, the company collects tens of millions of dollars annually in undisclosed compensation from the retirement plans and participants to whom it owes the highest duties known to the law, in violation of the Employee Retirement Income Security Act (ERISA) and statutory disclosure obligations.”

Among other allegations, plaintiffs also charged that Pruential “does not provide reasonable notice of a change in the crediting rate. Accordingly, a plan cannot reasonably terminate [the stable value investment contract] if defendant imposes an unfavorable crediting rate. Further … defendant imposes substantial penalties on the plans should the plans attempt to terminate the [contract] because of an unfavorable rate. Thus, plan fiduciaries are effectively precluded from making determinations concerning the reasonableness of the crediting rate, and from replacing the [contract] with another stable value fund when a crediting rate imposed by defendant is unreasonable.”

In seeking class certification and determining the proposed scope of the class, the suit cites Rule 23 of the Federal Rules of Civil Procedure. The plaintiff's conclusion is bold and the suit seeks to include “all ERISA covered employee pension benefit plans whose plan assets were invested in Prudential Retirement Insurance and Annuity Company’s Group Annuity Contract Stable Value Funds within the six years prior to, on or after December 3, 2015.”

Turning to the decision issued this week by the Connecticut district court, it seems Prudential has successfully convinced the court that certain assertions in the challenge are faulty, leading to the result that class certification is in appropriate. In particular, the court notes, “while the plaintiff has offered evidence that ‘most pools’ used the same crediting rate, defendants counter that plans invested in [the relevant products called out by the suit] benefit from a ‘wide range’ of crediting rates, and that [the products] provide distinct rate changes to at least 20% of the rate pools.”

Strictly speaking, Prudential did not challenge the “numerosity prerequisite” set forth in Rule 23(a), and the court “therefore considered only whether the plaintiff’s proposed class satisfies requirements for commonality, typicality, and adequacy of representation.”

NEXT: Commonality, typicality and adequacy 

The court’s analysis is helpfully laid out on each of these points. Concerning commonality, the decision states that class members must have claims that “depend upon a common contention,” that are “capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” This precedent comes from Wal–Mart Stores, Inc. v. Dukes, a 2011 decision. The court further notes that “the test for commonality is not demanding and is met so long as there is at least one issue common to the class.”

After some consideration, the court has ruled that “determining whether Prudential breached any fiduciary duty is unsuited to classwide resolution. As with the question of whether the [products in question] offered a reasonable rate of return, variables among plans render unmanageable any attempt to reach classwide conclusions regarding the reasonableness of the spread. These variables include individually negotiated asset charges, frequent and non-uniform readjustment of crediting rates among rate pools, and the fact that new or large funds are often given more favorable crediting rates. The difficulty of reaching classwide conclusions regarding whether Prudential acted as a fiduciary or breached any fiduciary duty therefore prevents the court from finding that the commonality prerequisite has been met.”

Regarding the establishment of typicality, the court observes this standard “is satisfied when each class member’s claim arises from the same course of events and each class member makes similar legal arguments to prove the defendant’s liability. Minor variations in the fact patterns underlying the individual claims do not preclude a finding of typicality. By contrast, unique defenses that threaten to become the focus of the litigation may preclude such a finding.” This precedent is taken from Sykes v. Mel Harris and Assoc. 2011.

Through a similar analysis, the court rules that as with commonality, it “cannot find that plaintiff’s claims are typical of the class, because the proposed class is so varied that the resolution appropriate for the plaintiff may differ from that suitable to participants in other ERISA plans administered by Prudential.”

On the final point of adequacy there is even more analysis. The court concludes that “the typicality and adequacy of representation requirements … tend to merge, at least with respect to whether the named plaintiff adequately represents the interests of the class … However, the adequacy prong is more concerned with whether a plaintiff’s interests are antagonistic to the interest of other members of the class,” per Baffa v. Donaldson, Lufkin & Jenrette Secs. Corp., 222 F.3d 52, 60 (2d Cir. 2000). The court’s decision boils down to the fact that, “because she is unable to seek prospective injunctive relief and has not persuaded the court that injunctive relief would never advance the interests of any class member or subclass, the plaintiff cannot adequately represent the interests of current plan participants.”

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