Capital Group’s Appeal to SCOTUS Puts into Question Participant Standing in Plan Litigation

A lawsuit against Capital Group could give the U.S. Supreme Court an opportunity to weigh in on a long-running debate with litigation under the Employee Retirement Income Security Act, on whether participants in defined contribution plans can seek monetary relief on behalf of other participants whose accounts they do not personally share.

In Capital Group Cos. Inc. v. Pover, the company’s plan sponsor is asking the Supreme Court to review a 9th U.S. Circuit Court of Appeals decision that allowed participant plaintiff Cathy Pover to pursue fiduciary-breach claims seeking plan-wide relief. The petition raises questions about the extent to which participants may pursue claims involving investments in which they did not personally invest and whether existing class-action safeguards are required when seeking relief for other plan members.

The case stems from allegations that Capital Group breached its fiduciary duties by offering and retaining proprietary investment funds in the company’s 401(k) plan. Pover’s case alleges the investments underperformed comparable alternatives, causing losses to plan participants.

ERIC Files Amicus Brief

The case has attracted attention from employer groups, including the ERISA Industry Committee, which filed an amicus brief on November 2, urging the Supreme Court to hear the case.

According to Doug Hinson, executive director of the ERIC Legal Center, participants in defined contribution plans should generally be limited to pursuing claims tied to their own accounts unless they satisfy the requirements for class certification.

“These cases often involve conflicts among participants,”” says Hinson. “An investment that one participant believes was imprudent may have benefited another participant who invested during a different period.”

Hinson argues that class-action procedures exist to address those conflicts and ensure that one participant is not representing others whose interests may differ from their own. He says participants seeking relief on behalf of other plan members should be required to undergo the class-certification process rather than proceeding solely as individual plaintiffs.

“The class-action rules are designed to weed out those conflicts,” says Hinson.

Deciding on Plan-Wide Relief

The dispute has gained prominence following developments in another fiduciary-breach lawsuit, Trauernicht v. Genworth Financial Inc. In March, the U.S. 4th Circuit Court of Appeals vacated class certification in that case, finding that participants invested in challenged funds experienced different outcomes and could not automatically be treated as a single class. The full court later declined in June to rehear the case en banc.

Hinson says the Genworth ruling highlighted the concerns raised by employers and plan sponsors, which is that participants who profited from a particular investment option could have interests that conflict with participants who experienced losses.

He also pointed to what he characterized as a growing split among federal appeals courts. According to Hinson, the 9th Circuit and several other courts have allowed participants to seek plan-wide relief, while the 4th Circuit’s approach suggests greater scrutiny of whether one participant can represent others with differing interests.

Plaintiff’s attorney Charles Field, who represents Pover, disputes the notion that Pover’s case centers on participant representation or class certification.

Field, who is the co-vice chairman and financial mismanagement and ERISA litigation practice group co-chair at Sanford Heisler Sharp McKnight LLP, argues that ERISA’s text expressly allows participants to seek recovery for losses suffered by a plan as a whole. He points to Sections 502(a)(2) and 409(a) of ERISA, which permit participants, beneficiaries, fiduciaries and the Department of Labor to seek recovery of losses caused by fiduciary breaches.

“What we’re saying is that ERISA allows the participant to bring a claim on behalf of the plan, to recover all losses caused by fiduciary breach,” says Field.

Field also argues that the petition mischaracterizes the legal issue before the courts. In his view, the case principally concerns whether plan arbitration provisions can prevent participants from pursuing plan-wide remedies authorized by ERISA.

“The words are the words,” Field says of the statute, adding that ERISA repeatedly refers to losses to the plan, rather than losses suffered by individual participants.

While ERIC argues that the Supreme Court should clarify the limits of participant representation in defined contribution plans, Field said there is little ambiguity in the statute’s language and that courts have consistently recognized participants’ ability to pursue plan-wide fiduciary-breach claims.

Capital Group did not immediately respond to requests for comment.

The Supreme Court has not yet decided whether it will hear the case. The petition for a writ of certiorari was filed in August and the initial response deadline of October was extended to December 2.

If the justices grant review, the outcome could have significant implications for excessive-fee and imprudent-investment litigation, potentially determining whether participants may continue pursuing plan-wide relief in fiduciary-breach lawsuits or face additional hurdles when seeking to recover losses on behalf of other plan members.