Court Rejects Nationwide’s Counterclaim Attempt in Revenue Sharing Suit

July 28, 2010 ( – A federal judge has denied Nationwide Financial’s move to certify a class of counterclaim defendants in a suit in which it is accused of breaching its fiduciary duties under the Employee Retirement Income Security Act for accepting revenue sharing payments from mutual fund companies.

U.S. District Judge Stefan R. Underhill said Nationwide failed to meet the standard of Rule 23(b)(2) because monetary damages, and not injunctive relief, predominates. He said Nationwide’s counterclaim lacks any formal request for an injunction against the Trustees, and pointed out that Nationwide never contends that the Trustees must be enjoined from entering future agreements in which their annuity providers receive revenue sharing payments from mutual funds or other investment vehicles.  

“The absence of a requested injunction in its third amended counterclaim is quite telling, however, and suggests that any injunctive relief is ‘insignificant’ in relation to monetary damages, even if it may not be a ‘sham,’” Underhill wrote.  

The court also questioned the logic of the counterclaim. According to the opinion, Nationwide chiefly aims to have the Trustees pay whatever amount Nationwide is found liable to disgorge to the plans. However, if the Trustees succeed in enjoining the defendants from continuing to collect revenue sharing payments, Nationwide would have no reason to seek an injunction against the Trustees. Also, should Nationwide be barred from collecting revenue sharing payments, it will likely lose the authority and control over plan assets that gave rise to its fiduciary status, and with the loss of that fiduciary status, it would lack the capacity to countersue the Trustees.  

In addition, Underhill said that in the absence of a possible monetary recovery, a reasonable plaintiff in Nationwide’s position would not bring a suit to obtain the requested injunctive or declaratory relief for the simple reason that a reasonable plaintiff would not waste resources litigating for a redundant remedy. If Nationwide is barred from accepting future revenue sharing payments, why would it expend more money to enjoin the Trustees from ratifying revenue sharing payments that are already prohibited.  

Finally, the court found no rational trier of fact could find the Trustees wholly responsible for the plans’ losses after first finding that Nationwide is liable to the plans for its breach.   

He accused Nationwide of a thinly veiled claim for contribution and/or indemnification to distribute liability equitably between Nationwide and Trustees, which he pointed out is “precisely” the claim he dismissed in an earlier decision, in which he held that Nationwide could pursue an independent breach of fiduciary duty claim against the Trustees, provided that Nationwide pled damages directly caused by the Trustees’ ERISA violations. In that decision, Underhill warned Nationwide that its counterclaims would be unsuccessful (see Nationwide Turned Back on Revenue Sharing Countersuit Attempt).  

Nationwide was seeking to certify a putative class that includes all Trustees of ERISA-qualified retirement plans that had variable annuity contracts with Nationwide, or whose participants had contracts with Nationwide, at any time from January 1, 1996, or the first date Nationwide began receiving payments from mutual funds based on a percentage of the assets invested in the funds by Nationwide, whichever came first, to the date November 6, 2009.  

It alleged that “[a]ny injuries that the Plaintiffs and the class members allegedly sustained occurred as a direct result of their failure to exercise reasonable prudence and care,” and that the Trustees had ratified all of the revenue sharing payments of which they now complain.