In an opinion that provides both a roadmap of what not to do, and a cautionary tale to other participants considering filing class actions against their plans, on April 11, 2011, the Seventh Circuit issued a decision in George v. Kraft Foods. In George, et al. v. Kraft Foods Global, No. 10-1469 (April 11, 2011), current and former participants in the Kraft Goods 401(k) plan filed a class action lawsuit in 2006 against 7 fiduciaries responsible for administering Kraft Foods’ 401(k) plan, including Hewitt, who was the recordkeeper, and State Street Bank & Trust Company, who was the plan’s trustee.
The participants claimed that the fiduciaries breached the prudent man standard of care under ERISA section 404(a) (29 USC 1104(a)(1)) by paying excessive fees to the plan’s fiduciaries and by allowing the plan’s fiduciaries to mismanage two investment choices available to participants which held company stock funds. Specifically, participants claimed that the fiduciaries breached their duty when they did not (1) eliminate unitization and the cash buffer and allow participants to own shares of Kraft stock directly, thereby eliminating both investment drag and transactional drag; (2) impose measures designed to reduce the number of participant-initiated transactions by imposing a trading limit that limited the number or frequency of trades participants could make, thereby reducing transactional drag; (3) paid Hewitt a higher than normal fee per participant; and (4) allowed State Street to keep float income.
The district court granted summary judgment to Kraft Foods, and the participants appealed to the 7th Circuit Court of Appeals. The 7th Circuit reversed the grant of summary judgment in part, and remanded the case back to the trial court. The court affirmed the grant of summary judgment in favor of State Street. The 7th Circuit also affirmed the trial court’s denial of participant’s motion to amend the complaint and include an expert witness.
One of the issues before the 7th Circuit was whether the district court properly denied Plaintiffs’ motion to amend the complaint to add 21 defendants and additional claims regarding investment decisions made by the plan’s fiduciaries, including whether the plan used appropriate investment vehicles and whether the mix of investment choices were reasonable. The 7th Circuit, stating that they might not have denied leave to amend the complaint if they had been in the district court’s position, upheld the district court’s denial of leave to amend the complaint, reasoning that the district court had not abused its discretion in making the decision.
Following the twists and turns of this part of the decision is what makes it such a good roadmap for future litigation.
First, on Oct. 16, 2006, participants file the class action against Kraft Foods in the Southern District of Illinois. The fiduciaries file a motion to transfer venue and move the case to the Northern District of Illinois. During discovery related to the fiduciaries’ motion to transfer venue to the Northern District of Illinois, the 7th Circuit says the participants learned much of the information they wanted to include in their amended complaint. The district court grants fiduciaries’ motion to transfer the case, and lawsuit moves to the U.S. District Court for the Northern District of Illinois on March 26, 2007, a little more than 5 months after it was filed by the participants.
Once the lawsuit reaches the Northern District of Illinois, the trial court conducts various hearings on discovery and scheduling. During these hearings, the 7th Circuit notes that neither party requested a deadline for joining parties or amending pleadings. Ultimately, this failure is part of what dooms the participants’ request to amend the complaint.
Following the classic discovery pattern of overwhelm and obscure, the fiduciaries provided an overwhelming number of documents to the participants during discovery, and on January 31, 2008, participants moved the court for an extension of time to complete discovery due to the overwhelming number of documents provided to them by the fiduciaries, which the trial court granted.
Then, on March 21, 2008, the participants filed a motion to compel discovery because the fiduciaries had provided redacted copies of certain documents and the participants wanted the unredacted versions of those same documents. The trial court granted this motion.
On May 7, 2008, the participants filed their motion to amend the complaint to add 21 defendants and the additional causes of action, which was denied by the trial court and this decision was affirmed by the 7th Circuit.
As part of the cautionary tale provided by this case, the 7th Circuit applied the rule they stated last year in United States v. Lupton, 620 F.3d 790, 807 (7th Cir. 2010) which states that arguments raised for the first time in a reply brief are forfeited. The 7th Circuit said that because the participants did not include any argument in their opening brief on appeal indicating that they were disputing the finding by the trial court that the participants knew about the facts that gave rise to their proposed amended complaint in 2006, they could not dispute it for the first time in their reply brief. In the reply brief, according to the 7th Circuit, the participants said that it was access to the unredacted documents which they received as a result of the March 21, 2008, motion to compel discovery that provided sufficient information to file the motion to amend the complaint on May 7, 2008.
In one of the ironic parts of the case, the trial court denied the participants’ motion to amend the complaint due to the prejudice the delay would cause the fiduciaries, stating that amending the complaint would thwart the discovery schedule which has already been postponed a number of times, due in part to the actions of the defendants in producing redacted documents and an overwhelming number of documents.
One of the claims not added to the lawsuit because the trial court did not allow the complaint to be amended was that the fiduciaries paid excessive fees to the managers of 2 actively managed funds which were provided as investment options to plan participants. The court noted that actively managed funds are different than passively managed funds in that actively managed funds attempt to beat the market through the selection of securities included in the fund while passively managed funds, or indexing, simply replicate the performance of the market as measured by an index. The participants’ position was that active management is of dubious value and therefore the plan should only have offered passively managed index funds to participants. Again, because the motion to amend the complaint was denied, this issue was not included in the lawsuit.