Insurance Groups Allege New ERISA Investment Advice Fiduciary Definition Violates First Amendment

On May 24, 2024, a group of insurance trade associations led by the American Council of Life Insurers (ACLI) filed a complaint in the Northern District of Texas asking the court to declare the Department of Labor's (DOL) Fiduciary Rule contrary to law and invalid under the Administrative Procedure Act (APA) and the Constitution and to preliminarily and permanently enjoin its enforcement. American Council of Life Insurers et al. v. U.S. Department of Labor et al., No. 4:24-cv-00482 (N.D. Tex. May 24, 2024). This is the second legal challenge brought against the Fiduciary Rule this month, after the Federation of Americans for Consumer Choice (FACC) and other insurance industry practitioners filed a similar claim in another Texas district court. Like the FACC complaint, ACLI's legal challenges draw heavily from a Fifth Circuit case, Chamber of Commerce v. DOL, 885 F.3d 360 (5th Cir. 2018), that invalidated a 2016 version of the DOL's Fiduciary Rule. Unlike the FACC case, the ACLI complaint additionally alleges that the Fiduciary Rule is unconstitutional under the First Amendment.

To recap our prior summary: The 2024 Fiduciary Rule, finalized last month, expands the definition of "investment advice fiduciaries" under ERISA by defining such fiduciaries as, in relevant part, persons who make professional investment recommendations on a regular basis to retirement investors under circumstances indicating to a reasonable investor that the advice is based on the investor's particular needs or circumstances and may be relied upon to advance the investor's best interest. This definition, as the ACLI complaint repeatedly emphasizes, may encompass one-time sales interactions between insurance agents and brokers and retirement investors that would not have been covered by the DOL's prior, longstanding definition of investment advice fiduciaries.

The ACLI complaint alleges that the Fiduciary Rule "again impose[s] fiduciary obligations across the retirement savings marketplace" that are "invalid for the very same reasons the 2016 rule failed." The complaint describes the Fifth Circuit's 2018 decision in Chamber of Commerce as standing for the proposition that ERISA codified the common-law understanding of "fiduciary," such that any departure from that understanding on the part of the DOL would be in excess of the agency's authority to interpret the statute. Echoing the FACC complaint, ACLI alleges, in accordance with Chamber of Commerce, that the common-law definition of fiduciary status hinged on the existence of a relationship of "trust and confidence," which does not exist in the context of "sales recommendations." 

ACLI brings four causes of action against the Fiduciary Rule. First, the complaint alleges that the Rule's definition of "fiduciary" is contrary to law under the APA because it is excess of the DOL's statutory jurisdiction, based on the reasoning of Chamber of Commerce. Second, the complaint takes aim at the Fiduciary Rule's requirement that fiduciaries under the Rule provide a "written acknowledgment" of their fiduciary status to clients, alleging that such requirement is likewise contrary to law because it creates a private right of action against fiduciaries that the agency lacks authority to create. ACLI's third cause of action under the APA alleges that the Fiduciary Rule is arbitrary and capricious because it is the product of unreasoned decision-making. The complaint includes a detailed recounting of the DOL's rule-making process and concludes, (1) the DOL failed to establish that the Rule was necessary in light of the many regulations that already apply to the retirement investment industry, (2) the Rule arbitrarily targets annuities, (3) the DOL's cost-benefit analysis was rushed and incomplete, and (4) the DOL did not "adequately address significant comments" raised during the rule-making process. 

In addition to its APA challenges, ACLI raises a fourth claim based on the First Amendment, alleging that the Rule, as applied to "truthful commercial speech," infringes on the First Amendment rights of insurance salespersons, for two reasons. First, the complaint alleges that the Rule imposes unjustified restraints on sales speech by "heaping significant fiduciary burdens on garden-variety sales conversations." Second, the complaint alleges that the Rule also compels speech in requiring insurance agents and brokers to pledge fiduciary status to their clients.

Along with their complaint, ACLI and co-plaintiffs filed a motion for preliminary injunction to promptly prevent the law from going into effect. DOL's response to this motion, as well as its response to the FACC filings, can be expected in the next few weeks and will provide the first exposition of the agency's defense of the Fiduciary Rule in court. 

District Court Denies Motion to Dismiss in Qualcomm Case Alleging Misuse of Forfeitures

In a twist on Yagy v. Tetra Tech, the forfeiture-related case we discussed last week, on May 24, 2024, the District Court for the Southern District of California denied a motion to dismiss in Perez-Cruet v. Qualcomm Inc., No. 23-cv-1890, 2024 WL 2702207 (S.D. Cal. May 24, 2024), a case challenging how Qualcomm Inc. (Qualcomm) and its Retirement Committee handle the 401(k) plan money forfeited by workers who leave their jobs after short periods. Unlike plan contributions from an employee's salary, which are immediately fully vested, employer contributions can remain unvested for a period of time and can be forfeited when a worker leaves the company before the vesting period has run. Similar to the allegations in Yagy, the plaintiff in Perez-Cruet, an ex-employee of Qualcomm and a current participant in Qualcomm's defined contribution employee pension plan, alleged that Qualcomm put forfeited money towards current participants' accounts to reduce the company's future contributions to the plan, instead of applying those funds to offset plan expenses. 

Notably, the plan permitted the defendants to make either choice, but the plaintiff alleged that overarching principles of ERISA and the defendants' fiduciary duties under ERISA truly left only one choice: defray the administrative costs of the plan. For example, they assert that in 2021, the defendants allocated $1,222,072 of previously forfeited non-vested contributions toward Qualcomm's matching contributions for current employees, when they could have used the forfeited contributions to defray the 2021 pension plan administrative expenses of $954,269.

Qualcomm moved to dismiss the complaint. The district court denied the motion, holding that the plaintiff had plausibly alleged violations of ERISA, including:

• ERISA's fiduciary duty of loyalty: According to the court, "[t]he employer has the express duty under § 404(a)(1)(A)(ii) of defraying reasonable expenses of administering the plan." In this case, the court concluded, the plaintiff plausibly claimed that the defendants breached that duty "by making a choice that put the employer's interests above the interests of the [p]lan participants." 
• ERISA's fiduciary duty of prudence: Although the defendants argued that they were following the plan's terms, the court, citing Supreme Court precedent, held that ERISA § 404(a)(1)(B) "makes clear that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary."
• ERISA's anti-inurement principle: Under ERISA § 403(c)(1), "the assets of a pension plan shall never inure to the benefit of any employer," and, here, the court concluded that the plaintiff had alleged sufficiently that non-vested forfeited contributions are to be considered plan "assets" (an open question of law) and that defendants therefore violated that principle by utilizing forfeited contributions as a substitute for the company's own future contributions.
• ERISA's prohibited-transaction rules: ERISA § 406 prohibits a plan fiduciary from engaging in a transaction using assets of the plan for the benefit of a party in interest. The court held that if the forfeited contributions were "assets" of the plan, the plaintiff adequately alleged that the defendants used those "assets" for future company contributions, "thus violating the prohibition on dealing with plan assets for a fiduciary's own interest."

Much of the court's analysis hinged on whether non-vested employer contributions are, in fact, "assets" of a plan. In answering "yes," the court pointed to Acosta v. Pac. Enterprises, 950 F.2d 611 (9th Cir. 1991), where the Ninth Circuit held that "Congress' imposition of a broad duty of loyalty upon fiduciaries of employee benefit plans counsels a... functional approach. To determine whether a particular item constitutes an 'asset of the plan,' it is necessary to determine whether the item in question may be used to the benefit (financial or otherwise) of the fiduciary at the expense of plan participants or beneficiaries." According to the district court, Acosta's functional approach made it "easy to come to the conclusion that nonvested employer contributions may not be used to benefit the employer/fiduciary by reducing its own financial burden to make contributions in the future when done at the expense of not defraying the administrative costs borne by participants and beneficiaries." 

Given the uncertainty in this area, the plan asset question is one that other courts will likely grapple with in the future, especially as the number cases challenging the use of forfeited contributions grows steadily. Current litigation targets include large companies like Intuit, Inc., Clorox Co., and Honeywell International, Inc. 

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