Yale University Challenges Appeal in 403(b) Excessive Fee Suit

In a lengthy filing (109 pages), Yale University says the plaintiffs who lost their excessive fee case in a jury trial shouldn’t get a “do over.”

More specifically, the Yale fiduciary defendants in that case have filed the aforementioned brief stating that the Second Circuit need not concern itself with entertaining an appeal of that judgement—the first (and to date only) jury trial in this genre of cases. 

Yale University prevailed in that trial—and though the jury did conclude that they breached their duty of prudence "by allowing unreasonable recordkeeping and administrative fees to be charged" to retirement plan participants—the jury found that no damages resulted. Somewhat oddly, the jury also concluded that Yale proved that a prudent fiduciary "could have made the same decisions as to recordkeeping and administrative fees" that the university ultimately made.
 
In addition to the plaintiffs appeal in the case—one of the first, filed back in 2016[1] by Schlichter Bogard & Denton LLP (now just Schlichter Bogard LLP), the Labor Department has aligned itself with that appeal, filing an amicus brief in support of that appeal late last year.

The Issues

At issue raised in the appeal was the arguably contradictory jury results that a breach had occurred, but no damages resulted. Also questioned was the jury’s assessment that a prudent fiduciary COULD have made the same decisions, whereas the plaintiffs argued that the correct standard was that a prudent fiduciary WOULD have made those decisions.

Indeed, the Yale defendants in their motion (Vellali et al. v. Yale University et al., case number 23-1082, in the U.S. Court of Appeals for the Second Circuit) comment that the “Plaintiffs’ main argument on appeal is to attack the jury instructions on damages,” before going on to explain that “But the jury found for each claim that Plaintiffs failed to prove either breach or loss—which come before damages. So there is no need for this Court to review the damages instructions.”

Beyond that, they argue that the instructions provided to the jury were correct. “They stated that Yale could reduce the potential damages by showing that a prudent fiduciary ‘could have’ made the same decision that Yale made. Plaintiffs proposed a ‘would have’ standard, but that standard would hold plan fiduciaries liable for objectively reasonable decisions, contrary to ERISA,” they argue in their motion. They continue to note that plaintiffs here “make a hodgepodge of other arguments about other jury instructions, the verdict form, evidentiary rulings at trial, and the summary judgment ruling,” but state that the plaintiffs forfeited most of those arguments not only by failing raise them previously, but that those arguments are wrong.

“The district court carefully formulated the jury instructions and verdict form, following this Court’s precedents, and none of the district court’s evidentiary decisions is an abuse of discretion or prejudicial plain error,” they write. 

Should ‘Could Have’ Been ‘Would Have?’

With regard to the “should have/would have” controversy, the motion states that the “plaintiffs’ proposed ‘would have’ standard would require a fiduciary to show that there was one single best decision that a prudent fiduciary would have made. That standard would hold fiduciaries liable even though they made objectively reasonable decisions,” something they argue would be “contrary to ERISA, would be near-impossible to satisfy in most cases, and would give windfalls to plaintiffs.”

Then, arguing in the alternative, the Yale defendants note that, even if the “would have” instructions were correct, the appellate court should affirm the lower court’s decision. “The evidence at trial conclusively demonstrated that a prudent fiduciary in Yale’s position would not have used a different recordkeeper or achieved lower fees because a different arrangement simply was not possible before 2015,” they write. 

As for the jury instructions, the defendants comment that while the plaintiffs contend that the placement of two sentences of damages instructions may have confused the jury about how to determine breach and which party bore the burden of proof on loss and damages, “plaintiffs proposed the placement of those instructions. Further, the district court gave careful instructions on each element, and viewing the instructions as a whole, there was no reasonable likelihood of confusion.” Indeed, they note that the verdict on the recordkeeping claim—where the jury found breach but no amount of loss—“demonstrates that the jury understood those instructions.”

"Plaintiffs had a full and fair opportunity to present their claims to a jury, and the jury rejected them," Yale said. "Plaintiffs provide no persuasive reason to overturn the jury's verdict."

Will the court be so persuaded? Stay tuned.

Footnote

[1] The suit against Yale University was one of the first to be filed in this area—and by Schlichter Bogard & Denton LLP (now just Schlichter Bogard LLP), the law firm that led the litigation charge against 401(k) plan fees—in August 2016. As has been the case with most in this genre, it alleged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years. Moreover, the complaints challenge the use of multiple recordkeepers, rather than a single recordkeeper—a practice that they claim “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.”