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Road to ERISA Class Action Certification Gets Bumpier With Second Circuit Decision in Nationwide Life Ins. Co. v. Haddock

Posted in ERISA Litigation

In Nationwide Life Ins. Co. v. Haddock, No. 10-4237-cv (Feb. 6, 2012), the Second Circuit vacated a district court’s order certifying an ERISA class action in light of the United States Supreme Court’s decision in Wal-Mart v. Dukes, 131 S. Ct. 2541 (2011). This decision may be a game-changer in the ERISA class action litigation arena, and may ease the pressure on service providers and employers to settle even frivolous claims to avoid the expense of litigation.

The Haddock litigation is substantial in terms of the number of plans involved. This is not the typical ERISA litigation involving one plan. Plaintiffs are ERISA plan trustees who claim to represent more than 24,000 qualified retirement plans who contracted with Nationwide to provide investment services to the plans. The plaintiffs sued Nationwide for breaching an alleged fiduciary duty by collecting “revenue sharing payments” from the mutual funds it selected under these (apparently 24,000) variable annuity contracts. The plaintiffs sought to:

  1. obtain a declaration that Nationwide had violated ERISA,
  2. enjoin Nationwide from receiving any more “revenue sharing payments,” (injunctive relief) and
  3. force Nationwide to disgorge the payments it had already received (monetary relief).

Federal Rule of Civil Procedure 23 provides that a court may certify a class action (e.g., involving 24,000 otherwise unrelated plans) where the Rule 23(a) requirements of commonality, typicality, and adequacy are met. Plaintiffs typically seek class status under Rule 23(b)(2): the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole. Plaintiffs may alternatively seek class status under Rule 23(b)(3), but that standard is more stringent.

While 23(b)(2) does not allow for monetary damages on its face, courts have applied various tests to allow certain claims for monetary relief to be brought in conjunction with claims for injunctive or declaratory. In 2009, the district court applied the Second Circuit’s test to Haddock. The district court looked to whether claims for declaratory and injunctive relief “predominated” over claims for monetary relief, found “predominance,” and allowed class certification under 23(b)(2). Defendants appealed. (As an aside, it is hard to see substance in the declaratory and injunctive relief claims, where the trustees have chosen to continue the relationships after asserting knowledge of the revenue-sharing.)

In 2011, in Wal-Mart, a Title VII employment discrimination case, the U.S. Supreme Court held that 23(b)(2) certification is appropriate only where the monetary relief sought is merely “incidental to the injunctive or declaratory relief.” The Wal-Mart Court holding was based on due process concerns: members of a 23(b)(2) are not entitled to the notice and opt-out protections that are afforded to members of a class certified under 23(b)(3). Charlie Warner discussed this case and its general implications in more detail in a previous post on our sister blog, Employer Law Report.

In 2012, in Haddock, the Court of Appeals for the Second Circuit has applied this Wal-Mart test to the ERISA revenue-sharing matter. The Second Circuit held that the plaintiffs’ suit failed the certification requirements of Rule 23(b)(2) because their claims for disgorgement of revenue sharing payments, if successful, would require “the type of non-incidental, individualized proceedings for monetary awards that Wal-Mart rejected under Rule 23(b)(2).” The Second Circuit then remanded the case to the district court to determine whether the plaintiffs could prove entitlement to certification under Rule 23(b)(3). That rule, besides affording due process, also requires the plaintiff to:

  1. prove predominance of common questions; and
  2. show that the class action is a superior method of adjudication.

Further, as the Haddock Court notes in a footnote, plaintiffs will have to establish the Rule 23(a) requirements of commonality, typicality, and adequacy. The Wal-Mart Court reminded us that a rigorous analysis applies to determining whether these requirements are satisfied. Establishing both the Rule 23(a) requirements and the Rule 23(b)(3) requirements should prove quite a challenge, especially when there are 24,000 different plans involved. That road block has to be cleared before the plaintiffs get to the next challenges: establishing that the defendant was a fiduciary, that a fiduciary breach occurred, that the defendant rather than the plaintiffs (themselves fiduciaries) are liable for any breach, the occurrence and amount of damages, and that a monetary remedy constitutes other appropriate equitable relief under ERISA Section 502(a)(3) (see our prior post).

Whether the other circuits will follow the Second Circuit’s lead, and how the Wal-Mart test will be applied in the context of other ERISA litigation, remains to be seen. But the Second Circuit’s decision in Haddock seems to be a game-changer for ERISA class action litigation because it all but removes Rule 23(b)(2) as an option for certification. In fact, it is hard to imagine an ERISA class action – whether alleging excessive fees or breach of fiduciary duty following a stock drop  – that would not require the type of “non-incidental, individualized proceedings for monetary awards” at issue in Haddock. It remains to be seen how courts will apply Rule 23(b)(3) to ERISA class actions. But one thing is clear: the smooth ride of Rule 23(b)(2) is over.