Ten years to the day after Tibble v. Edison International was filed, Judge Stephen V. Wilson of the U.S. District Court for the Central District of California handed the plaintiffs a hard-fought $7.5 million win in one of the first ERISA class actions challenging investment fees and revenue sharing to be filed and only the second to go through trial to decision—in fact, it went through two trials. The summary judgment rulings and decision after the first trial resulted in complete victories for Edison. But after a trip to the Supreme Court and remand to the Ninth Circuit, the pendulum swung in favor of the Edison 401(k) Plan (Plan) participants as the parties went back to trial over prudence issues concerning retail mutual funds which had been in the Plan's investment lineup from 1999 until 2011, when they were removed. If history is any guide, the case could be heading back to the Ninth Circuit.

Factual Background 

Edison's 401(k) Plan offered dozens of investment options, at one point offering an array of up to 50 different funds. At issue in the case were 17 retail-class mutual funds selected by the Plan fiduciaries in 1999. These funds paid revenue sharing to offset the cost of recordkeeping expenses but charged higher fees than the identical institutional funds, which became available after 2001. The fiduciaries did not switch to the lower-cost institutional funds. Since Edison, not the Plan, paid the recordkeeping costs, the company was able to reduce its costs by remaining with the retail class funds and continuing the revenue sharing arrangement. The plaintiffs filed suit on August 16, 2007—exactly 10 years before the most recent decision—against Edison International and various Plan fiduciaries alleging that they violated their fiduciary duties of loyalty and prudence by choosing and retaining the higher-cost retail share class mutual funds to benefit the company at the expense of the Plan and its participants and beneficiaries. 

Case History

A significant focus of the litigation's decade-long path through the federal court system revolved around ERISA's six-year statute of limitations for fiduciary breach claims. Of the mutual funds at issue, several were initially selected beyond the six-year statute of limitations (i.e., pre-2001), but those funds were retained beyond 2001. The plaintiffs filed suit in 2007. In 2009, the court granted Edison's partial summary judgment motion, eliminating the plaintiffs' claims concerning the selection of certain underperforming funds, use of revenue sharing in general to reduce costs, float compensation, and the Edison stock fund. Judge Wilson further agreed with Edison that the plaintiffs could not challenge any funds selected more than six years before 2007, unless the circumstances sufficiently changed with respect to those funds to warrant a review. The changed circumstances issue and the fiduciaries' selection of retail class mutual funds that charged higher fees but provided favorable revenue sharing arrangements went to a bench trial in 2010. Following the trial, the district court held that Edison acted both prudently and loyally in selecting the funds and that the plaintiffs failed to prove that a prudent fiduciary would have reviewed and removed the mutual funds due to significant changes in circumstances.¹

The Ninth Circuit affirmed,² but the Supreme Court vacated that opinion.³ In a unanimous decision, the Supreme Court held that a plan fiduciary has a continuing duty to monitor the prudence of investment options, regardless of significant changed circumstances, meaning that "imprudent retention of an investment" may trigger the tolling of a new statute of limitations period.⁴ The Ninth Circuit remanded the case back to the Central District to apply the new standard.⁵  

The appellate court also revisited the district court's previous denial of the plaintiffs' $2.5 million request for attorneys' fees.⁶ Citing "the significant amount of work that was required to vindicate an important principle" and reasoning that the case was "of greater importance than [the Ninth Circuit previously] believed," Judge Wilson was instructed to reconsider a motion for attorney's fees.⁷  

The District Court's Most Recent Opinion 

Fiduciary Liability

Judge Wilson first found that a prudent fiduciary would have invested in the institutional-class shares for each mutual fund, disagreeing that a reasonably prudent fiduciary would have remained in the retail-class shares.⁸ He also was not persuaded by the defendants' argument that they had a right to take advantage of revenue sharing, finding that their argument should have been raised at the first trial and that their explanation for investing in the retail funds was unreasonable.⁹ The court also found unconvincing and speculative the defense that eliminating revenue sharing would have resulted in the company's shifting the administrative costs to the Plan.¹⁰

Timing of Duty-to-Monitor Breach

On the timing of the breach, the district court, citing "guidance" from the Supreme Court's 2015 decision, found that the defendants breached their ongoing duty to monitor from August 16, 2001 (i.e., the earliest ERISA's six-year statute of limitations would reach), onward.¹¹ The court noted that this case presented an "extreme situation," explaining that a prudent fiduciary should always know that lower-priced institutional shares are available.¹² The court cautioned that its opinion should not be read to suggest that "in all duty to monitor cases a fiduciary would breach their duty the day a fund becomes imprudent."¹³ Typically, a breach of the duty to monitor will only occur when a reasonable fiduciary would be expected to discover that an investment has become imprudent, which "may not occur until the systematic consideration of all investments at some regular interval."¹⁴ 

Calculating Damages

The court then issued its holding on damages, marking just the second time an excessive fee case has reached the damages phase.¹⁵ Because the Plan fiduciaries corrected the error in 2011, the court had to bifurcate its damages analysis. For the period up to 2011, the parties stipulated that damages totaled $7.5 million, calculated based on "the profits the Plan would have accrued" had it invested in institutional rather than retail share classes.¹⁶  

From 2011 to present, the parties proposed four methods of calculating damages: (i) the statutory post-judgment interest rate; (ii) the returns of the S&P 500 index fund; (iii) the Plan returns as a whole; and (iv) the returns of the Plan's target date funds.¹⁷ Edison urged the court to adopt the statutory post-judgment rate, presumably in part because after 2011, when the funds at issue were removed, the participants moved into other funds.¹⁸ The court, however, refused to apply it, finding it "unreasonable" since money saved from investing in the lower cost institutional shares would have carried over to the new investment; this reasoning appears to ignore the purpose of the pre-2011 damages award, which was to compensate for those sums.¹⁹ Judge Wilson was equally dismissive of the plaintiffs' argument to follow the only other excessive fees case tried to judgment to date, Tussey v. ABB, Inc., and use the S&P 500 index fund.²⁰  The Tibble court reasoned that the Tussey court did not explain its decision to use the S&P 500 index fund and use of that fund would be inappropriate in this case when only a small proportion of plan assets were invested in the S&P 500 index fund, meaning that the evidence does not show that a participant who actually invested in the retail class shares would have moved his or her investments to the S&P 500 index fund.²¹ Of the remaining two options, the court found the Plan returns to be the only reasonable approximation of the lost investment opportunity.²² 

The court ordered the plaintiffs to submit a proposed judgment that includes a calculation of the overall damages award within 20 days.²³ Lastly, per the Ninth Circuit's instruction, the court stated that it would reconsider attorneys' fees and ordered the plaintiffs to file a motion within 60 days.²⁴ 

Lessons Learned?

Given the fact that fiduciary issues concerning retail class mutual funds, institutional class mutual funds, and revenue sharing have evolved significantly in the past 10 years, we would hope that the considerations raised in this decision do not raise any current red flags. Regardless of the ultimate outcome of this case, what remains important is that fiduciaries continue to be mindful of the Supreme Court's instruction "to monitor trust investments and remove imprudent ones" and the duty to "systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate."²⁵ 

For more information, please contact:

Theresa S. Gee, tgee@milchev.com, 202-626-5928

Michael N. Khalil*

Nicholas P. Wamsley*

*Former Miller & Chevalier attorney

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¹ Tibble v. Edison Int'l, No. CV 07-5359 SVW (AGRx), 2010 WL 2757153, at *31 (C.D. Cal. July 8, 2010).
² Tibble v. Edison Int'l, 729 F.3d 1110 (9th Cir. 2013).
³ Tibble v. Edison Int'l, 135 S. Ct. 1823 (2015).
⁴ Id. at 1826, 1828–29.
⁵ Tibble v. Edison Int'l, 843 F.3d 1187 (9th Cir. 2016).
⁶ Id. at 1199.
⁷ Id. 
⁸ Tibble v. Edison Int'l, No. CV 07-5359 SVW (AGRx), 2017 WL 3523737, at *11–12 (C.D. Cal. Aug. 16, 2017).
⁹ Id.
¹⁰ Id. at *12.
¹¹ Id. 
¹² Id.  
¹³ Id.
¹⁴ Id.
¹⁵ We addressed the first instance, Tussey v. ABB Inc., in a prior alert.
¹⁶ Tibble, 2017 WL 3523737, at *12–13.
¹⁷ Id. at *13.
¹⁸ Id. at *14–15.
¹⁹ Id.
²⁰ Id. at *13–14.
²¹ Id.
²² Id. at *13–15.
²³ Id. at *15.
²⁴ Id.
²⁵ Tibble, 135 S. Ct. at 1828–29.

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