1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 PAUL HUTCHINS, Case No. 23-cv-05875-BLF
8 Plaintiff, ORDER GRANTING MOTION TO 9 v. DISMISS WITH LEAVE TO AMEND
10 HP INC., et al., [Re: ECF No. 25] 11 Defendants.
12 13 This purported class action presents a novel question: Whether and under what 14 circumstances is a plan administrator’s decision to use “forfeited” employer contributions to a 15 retirement plan to reduce employer contributions rather than to pay administrative costs a violation 16 of the Employee Retirement Income Security Act (“ERISA”)? Plaintiff Paul Hutchins has opened 17 with a swing for the fences—his Complaint takes the position that a failure to use forfeited 18 contributions to pay administrative costs is always a violation of ERISA. Defendants HP Inc. 19 (“HP”) and the HP Inc. Plan Committee (“Committee”) disagree and have moved to dismiss the 20 Complaint. ECF No. 25 (“Mot.”). Plaintiff opposes the motion. ECF No. 34 (“Opp.”). 21 Defendants filed a reply. ECF No. 35 (“Reply”). The Court held a hearing on the motion on May 22 9, 2024. ECF No. 44. 23 For the reasons stated below, the Court GRANTS the motion to dismiss with LEAVE TO 24 AMEND. 25 I. BACKGROUND 26 HP is the sponsor and administrator of a 401(k) plan (“Plan”). ECF No. 1 (“Compl”) ¶ 6. 27 The Committee was created by HP to assist in managing the Plan and was delegated authority to, 1 Id. ¶ 7. The Plan is a defined contribution, individual account, employee benefit plan under 29 2 U.S.C. § 1002(2)(A) and 1002(34). Id. ¶ 4. Under ERISA, an individual account or defined 3 benefit plan “provides for an individual account for each participant and for benefits based solely 4 upon the amount contributed to the participant’s account, and any income, expenses, gains and 5 losses, and any forfeitures of accounts of other participants which may be allocated to such 6 participant’s account.” 29 U.S.C.A. § 1002(34); see also Compl. ¶ 13. The Plan is funded by 7 voluntary deferrals, which are withheld from a participant’s wages, and HP’s matching 8 contributions, both of which are deposited into Plan’s trust fund. Compl. ¶ 14. HP provides a 9 matching contribution of 100% of the first 4% of eligible earnings a participant contributes each 10 pay period. Id. ¶ 15; ECF No. 25-1 (“Plan”) § 5(d). The expenses for administering the Plan are 11 paid directly by the Plan, with each participant’s account charged a fixed amount of $34 per year 12 for recordkeeping services. Id. ¶ 19; see also Plan § 17(b). 13 HP’s contributions are subject to a three-year cliff vesting schedule, in which a participant 14 who stays employed by HP for three years becomes 100% vested in employer contributions in the 15 participant’s account. Compl. ¶ 18; Plan § 11(c). When a participant has a break in service prior 16 to full vesting of HP’s matching contributions, the participant forfeits the balance of HP’s 17 unvested matching contributions in the participant’s individual account. Compl. ¶ 21; Plan 18 § 11(f). Defendants have discretionary authority and control over how forfeited matching 19 contributions are used, and the Plan provides that forfeited amounts may be used to “reduce 20 employer contributions, to restore benefits previously forfeited, to pay Plan expenses, or for any 21 other permitted use.” Plan § 11(h); Compl. ¶¶ 22–23. Plaintiffs allege that Defendants have used 22 forfeited matching contributions “solely to reduce Company contributions to the Plan.” Compl. 23 ¶ 24. 24 On November 14, 2023, Plaintiff initiated this lawsuit, seeking to represent a class of 25 participants and beneficiaries of the Plan in challenging Defendants’ use of forfeited amounts from 26 2019 to 2023. See Compl. ¶¶ 25–29, 32. Plaintiff brings six claims under ERISA: (1) breach of 27 the fiduciary duty of loyalty, 29 U.S.C. § 1104(a)(1)(A); (2) breach of the fiduciary duty of 1 § 1103(c)(1); (4) prohibited transactions between the plan and a party in interest, 29 U.S.C. 2 § 1106(a)(1); (5) prohibited transactions by the fiduciary dealing in assets of the plan in its own 3 interest, 29 U.S.C. § 1106(b)(1); and (6) failure to monitor fiduciaries. Compl ¶¶ 36–71. 4 II. LEGAL STANDARD 5 “A Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 6 claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation 7 Force v. Salazar, 646 F.3d 1240, 1241–42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 8 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts 9 as true all well-pled factual allegations and construes them in the light most favorable to the 10 plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the 11 Court need not “accept as true allegations that contradict matters properly subject to judicial 12 notice” or “allegations that are merely conclusory, unwarranted deductions of fact, or 13 unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) 14 (internal quotation marks and citations omitted). While a complaint need not contain detailed 15 factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to 16 relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. 17 Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the 18 court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. 19 In deciding whether to grant leave to amend, the Court must consider the factors set forth 20 by the Supreme Court in Foman v. Davis, 371 U.S. 178 (1962), and discussed at length by the 21 Ninth Circuit in Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003). A district 22 court ordinarily must grant leave to amend unless one or more of the Foman factors is present: (1) 23 undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies by 24 amendment, (4) undue prejudice to the opposing party, or (5) futility of amendment. Eminence 25 Capital, 316 F.3d at 1052. “[I]t is the consideration of prejudice to the opposing party that carries 26 the greatest weight.” Id. However, a strong showing with respect to one of the other factors may 27 warrant denial of leave to amend. Id. III. REQUEST FOR JUDICIAL NOTICE 1 A court generally cannot consider materials outside the pleadings on a motion to dismiss 2 for failure to state a claim. See Fed. R. Civ. P. 12(b)(6). A court may, however, consider items of 3 which it can take judicial notice without converting the motion to dismiss into one for summary 4 judgment. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). A court may take judicial notice 5 of facts “not subject to reasonable dispute” because they are either “(1) generally known within 6 the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by 7 resort to sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201. A court 8 may additionally take judicial notice of “‘matters of public record’ without converting a Motion to 9 Dismiss into a motion for summary judgment.” Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th 10 Cir. 2001) (quoting MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986)). Under 11 the incorporation by reference doctrine, courts may consider documents “whose contents are 12 alleged in a complaint and whose authenticity no party questions, but which are not physically 13 attached to the [plaintiff’s] pleading.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 14 (9th Cir. 1999) (quoting Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994)) (alteration in 15 original). 16 Plaintiff requests that the Court take judicial notice of certain excerpts from the Plan’s 17 Form 5500 filings with the Department of Labor for plan years 2018 through 2022 and a brief 18 filed by the Department of Labor in support of a motion for partial summary judgment in Acosta v. 19 Allen, 3:17-cv-784-CHB (W.D. Ky.). See Opp. at 1–2; ECF Nos. 34-1, 34-2, 34-3, 34-4, 34-5 20 (Forms 5500); ECF No. 34-6 (DOL’s brief). Defendants have not objected to Plaintiff’s request 21 for judicial notice. The Court takes judicial notice of the Plan’s Form 5500 filings because they 22 are matters of public record not subject to reasonable dispute and of which courts in this district 23 routinely take judicial notice. See Tobias v. NVIDIA Corp., No. 20-CV-06081-LHK, 2021 WL 24 4148706, at *5 (N.D. Cal. Sept. 13, 2021). The Court also takes judicial notice of DOL’s brief in 25 Acosta because it is a matter of public record not subject to reasonable dispute. See Plastic 26 Surgery Ctr., P.A. v. Aetna Life Ins. Co., 967 F.3d 218, 237 n.23 (3d Cir. 2020) (taking judicial 27 notice of a DOL brief in a different case). The Court does not take notice of the truth of any of the 1 facts asserted in these documents. See City of Sunrise Firefighters’ Pension Fund v. Oracle Corp., 2 No. 18-cv-04844-BLF, 2019 WL 6877195, at *23 (N.D. Cal. Dec. 17, 2019). Accordingly, 3 Plaintiff’s request for judicial notice is GRANTED. 4 Defendants note that the Court may consider the HP Inc. 401(k) Plan, Amended and 5 Restated as of January 1, 2017, under the incorporation by reference doctrine. See Mot. at 4 n.1; 6 ECF No. 25-1. The Court will consider this document as incorporated by reference in the 7 complaint because it forms the basis of Plaintiff’s claims, and no party contests its authenticity. 8 B.R. v. Beacon Health Options, No. 16-CV-04576-MEJ, 2017 WL 2351973, at *3 (N.D. Cal. May 9 31, 2017) (considering, as incorporated by reference, a document describing an employee welfare 10 benefit plan’s terms because “Plaintiffs’ claim is predicated entirely on the terms and benefits of 11 the SAG Plan”). 12 IV. DISCUSSION 13 A. Whether Plaintiff’s Claims Are Foreclosed by Settled Law (All Claims) 14 Defendants argue that settled law expressly allows the use of forfeited amounts to reduce 15 employer contributions. Mot. at 5–7. Defendants point to two Treasury regulations that they 16 argue foreclose Plaintiff’s theory of liability. First, 26 C.F.R. § 1.401-7(a) provides:
17 In the case of a trust forming a part of a qualified pension plan, the plan must expressly provide that forfeitures arising from severance of 18 employment, death, or for any other reason, must not be applied to increase the benefits any employee would otherwise receive under the 19 plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions thereunder. The amounts so 20 forfeited must be used as soon as possible to reduce the employer's contributions under the plan. 21 22 26 C.F.R. § 1.401-7(a) (emphasis added). Second, the Treasury Department has proposed a new 23 regulation for forfeitures in qualified retirement plans, including defined contribution plans. See 24 Use of Forfeitures in Qualified Retirement Plans, 88 Fed. Reg. 12282-01 (proposed Feb. 27, 25 2023). In it, the Treasury Department explains:
26 the proposed regulation would clarify that forfeitures arising in any defined contribution plan (including in a money purchase pension 27 plan) may be used for one or more of the following purposes, as benefits in other participants’ accounts in accordance with plan terms. 1 2 Id. at 12283. Defendants also argue that Plaintiff’s theory is implausible because it relies on a 3 false premise that HP receives a windfall from forfeited amounts and it would require that plan 4 expenses are always paid before reducing employer contributions. Mot. at 7–8. Plaintiff argues 5 that neither the current Treasury regulation nor the proposed Treasury regulation that Defendants 6 cite are applicable to the Plan. Opp. at 4–8. 7 Plaintiff is correct that 26 C.F.R. § 1.401-7(a) does not apply to the Plan. The Plan is a 8 stock bonus plan, which is a type of defined contribution pension plan under ERISA. Plan § 1 9 (noting that the Plan “is intended to qualify as a stock bonus plan under section 401(a) of 10 [ERISA]”); Finnerty v. Stiefel Lab’ys, Inc., 756 F.3d 1310, 1323 (11th Cir. 2014) (“[S]tock bonus 11 plans are considered defined contribution pension plans.”). Contrary to Defendants’ assertion, 26 12 C.F.R. § 1.401-7(a) does not apply to stock bonus plans, a point that the Treasury Department has 13 made clear in a subsequent revenue ruling. See Rev. Rul. 71-313, 1971-2 C.B. 203 (1971) (noting 14 that 26 U.S.C. § 401(a)(8) and 26 C.F.R. § 1.401-7 “do[] not extend to profit-sharing and stock 15 bonus plans”). Similarly, the proposed regulation on the use of forfeitures does not foreclose 16 Plaintiff’s theory of liability because it is at best persuasive authority. Tedori v. United States, 211 17 F.3d 488, 492 (9th Cir. 2000), as amended (May 18, 2000) (“[P]roposed regulations carry no more 18 weight than a position advanced on brief.” (quoting Estate of Howard v. Commissioner, 910 F.2d 19 634, 637 n.1 (9th Cir. 1990) (Rymer, J., dissenting))). The proposed regulation applies only to 20 plan years beginning on or after January 1, 2024, and Plaintiff challenges the use of forfeitures 21 from 2019 to 2023. See Use of Forfeitures in Qualified Retirement Plans, 88 Fed. Reg. at 12284; 22 Opp. at 7; Compl ¶¶ 25–29. Because neither 26 C.F.R. § 1.401-7(a) nor the proposed Treasury 23 regulation apply to the Plan, neither authority outright forecloses Plaintiff’s theory of liability 24 under ERISA. 25 Although neither authority forecloses Plaintiff’s theory as a matter of law, the Court agrees 26 with Defendants that these authorities may be considered as persuasive authority in evaluating the 27 plausibility of Plaintiff’s claims. See Mot. at 7–8; Reply at 2–3. The Court addresses this point B. Whether Defendants Acted as Fiduciaries (All Claims) 1 Defendants argue that Plaintiff has failed to meet the threshold requirement to allege that 2 Defendants were acting as fiduciaries in deciding whether to allocate forfeited amounts to reduce 3 employer contributions as opposed to paying Plan expenses because such decisions are settlor, as 4 opposed to fiduciary, duties. Mot. at 8–10. Plaintiff argues that Defendants were acting as 5 fiduciaries, rather than settlors, because the allocation of forfeited amounts is an administrative 6 decision that falls outside of typical design-related settlor functions and Defendants exercised 7 discretion within the preexisting design of the Plan. Opp. at 9–13. 8 “In every case charging breach of ERISA fiduciary duty, then, the threshold question is . . . 9 whether [the person employed to provide services under a plan] was acting as a fiduciary (that is, 10 was performing a fiduciary function) when taking the action subject to complaint.” Pegram v. 11 Herdrich, 530 U.S. 211, 226 (2000). This requirement is rooted in ERISA’s definition of a 12 fiduciary. See Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996). ERISA states: 13 a person is a fiduciary with respect to a plan to the extent (i) he 14 exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or 15 control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or 16 indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any 17 discretionary authority or discretionary responsibility in the administration of such plan. 18 19 29 U.S.C. § 1002(21)(A). In defining the scope of fiduciary duties under ERISA, courts have 20 drawn a distinction between actions taken as a fiduciary and actions taken as a settlor. Fiduciary 21 duties “consist of such actions as the administration of the plan’s assets.” Hughes Aircraft Co. v. 22 Jacobson, 525 U.S. 432, 444 (1999); see also Coulter v. Morgan Stanley & Co. Inc., 753 F.3d 23 361, 367 (2d Cir. 2014) (“Fiduciary functions include, for instance ‘the common transactions in 24 dealing with a pool of assets: selecting investments, exchanging one instrument or asset for 25 another, and so on.’” (quoting Harris Trust & Sav. Bank v. John Hancock Mut. Life Ins. Co., 302 26 F.3d 18, 28 (2d Cir.2002))). Settlor duties include decisions “regarding the form or structure of 27 the Plan such as who is entitled to receive Plan benefits and in what amounts, or how such benefits 1 functions, in contrast, include conduct such as establishing, funding, amending, or terminating a 2 plan.”); Spink, 517 U.S. at 890 (noting that fiduciary functions do not include plan design). 3 The Court finds that the decision to allocate forfeited amounts is a fiduciary, as opposed to 4 a settlor, function. Defendants are correct that the decision to include a Plan term stating that 5 forfeited amounts may be used to reduce employer contributions, to restore benefits previously 6 forfeited, or to pay Plan expenses is a settlor decision because it is a design decision. See Plan 7 § 11(h); Mot. at 8; Hughes Aircraft, 525 U.S. at 444. However, Plaintiff’s challenge is not to 8 § 11(h) of the Plan, but to Defendants’ selection of one of the options under § 11(h). This is 9 confirmed by the language of the Complaint, which states that the alleged breach of fiduciary duty 10 was in “choosing to utilize forfeited funds in the Plan for the benefit of the Company rather than 11 solely in the interest of the participants and beneficiaries.” Compl. ¶ 38; see also ¶ 44 (similar). 12 Understood in this way, Plaintiff attacks not the decision to include § 11(h) as a Plan term, but 13 Defendants’ implementation of that decision—that is, Defendants exercised discretion and control 14 over Plan assets and thus were making decisions of Plan administration rather than Plan design. 15 Waller v. Blue Cross of California, 32 F.3d 1337, 1342 (9th Cir. 1994) (noting that the challenge 16 to the implementation of a plan design decision falls within fiduciary duties under ERISA). 17 Accordingly, Plaintiff has met the threshold requirement of alleging that Defendants acted as 18 fiduciaries when they determined how to allocate forfeited amounts. 19 C. Breach of Fiduciary Duties (Claims 1 and 2) 20 Defendants argue that they have not breached any fiduciary duties because they acted in 21 compliance with the Plan document and consistently with Treasury regulations. Mot. at 10–12. 22 Plaintiff argues that compliance with Treasury regulations and Plan terms is not a defense to an 23 ERISA claim because the Treasury regulations do not apply to ERISA and compliance with Plan 24 terms does not permit fiduciaries to act in a way that contravenes ERISA. Opp. at 14–17. 25 “ERISA is . . . a ‘comprehensive and reticulated statute,’ the product of a decade of 26 congressional study of the Nation’s private employee benefit system.” Mertens v. Hewitt Assocs., 27 508 U.S. 248, 251 (1993) (quoting Nachman Corp. v. Pension Benefit Guar. Corp., 446 U.S. 359, 1 does ERISA mandate what kind of benefits employers must provide if they choose to have such a 2 plan.” Spink, 517 U.S. at 887. Instead, the purpose of ERISA is “to ensure that employees will 3 not be left empty-handed once employers have guaranteed them certain benefits.” Id. “ERISA 4 does no more than protect the benefits which are due to an employee under a plan.” Wright, 360 5 F.3d at 1100 (quoting Bennett v. Conrail Matched Sav. Plan Admin. Comm., 168 F.3d 671, 677 6 (3d Cir.1999)). To protect the benefits due to employees under a plan, ERISA requires a fiduciary 7 to “discharge his duties with respect to a plan solely in the interest of the participants and 8 beneficiaries.” 29 U.S.C. § 1104(a)(1). The duty of loyalty requires a fiduciary to act “for the 9 exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and 10 (ii) defraying reasonable expenses of administering the plan.” Id. § 1104(a)(1)(A). The duty of 11 prudence requires a fiduciary to act “with the care, skill, prudence, and diligence under the 12 circumstances then prevailing that a prudent man acting in a like capacity and familiar with such 13 matters would use in the conduct of an enterprise of a like character and with like aims.” Id. 14 § 1104(a)(1)(B). A fiduciary is also required to act “in accordance with the documents and 15 instruments governing the plan insofar as such documents and instruments are consistent with the 16 provisions of this subchapter and subchapter III.” Id. § 1104(a)(1)(D). 17 “ERISA requires fiduciaries to comply with a plan as written unless it is inconsistent with 18 ERISA.” Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1100 (9th Cir. 2004); see also 19 Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014) (“[Section 1104(a)(1)(D)] makes 20 clear that the duty of prudence trumps the instructions of a plan document.”). The parties appear 21 to agree that, in allocating forfeited amounts to reduce employer contributions, Defendants acted 22 consistent with § 11(h) of the Plan. However, the parties dispute whether the decision to allocate 23 forfeited amounts to reduce employer contributions rather than to pay administrative costs is 24 contrary to the fiduciary duties of loyalty and prudence under ERISA. Plaintiff advances a novel 25 legal theory under which it is a breach of fiduciary duty to allocate forfeited amounts to reduce 26 employer contributions rather than to pay administrative costs. To date, there is no binding 27 authority that addresses this theory, and the Court is aware of only one other court that has 1 BEN (MMP), 2024 WL 2702207, at *2 (S.D. Cal. May 24, 2024).1 2 The Court finds that Plaintiff’s theory of liability has broad reach, and it is the theory’s 3 breadth that makes it implausible. Plaintiff alleges that Defendants breached their fiduciary duties 4 of loyalty and prudence when they chose to allocate forfeited amounts to reduce employer 5 contributions rather than to pay administrative expenses. See Compl. ¶¶ 38–39, 44–46. The 6 import of these allegations is that, if given the option between using forfeited funds to pay 7 administrative costs or to reduce employer contributions, a fiduciary is always required to choose 8 to pay administrative costs. But the flaw in such a theory is that it is not limited to any particular 9 circumstances that may be present in this case. The Supreme Court has emphasized that “the 10 content of the duty of prudence turns on ‘the circumstances . . . prevailing’ at the time the 11 fiduciary acts, the appropriate inquiry will necessarily be context specific.” See Dudenhoeffer, 12 573 U.S. at 425 (internal citation omitted) (quoting 29 U.S.C. § 1104(a)(1)(B)). In Dudenhoeffer, 13 the Supreme Court held that there is no presumption of prudence in favor of employee stock 14 ownership plan (“ESOP”) fiduciaries. Id. at 418–19. In remanding to the Court of Appeals, the 15 Supreme Court instructed the Court of Appeals to apply the pleading standard of Twombly and 16 Iqbal and highlighted certain considerations. Id. at 426. In particular, the Supreme Court rejected 17 as implausible the plaintiff’s broad allegation that “a fiduciary should have recognized from 18 publicly available information alone that the market was over- or undervaluing the stock,” but the 19 Court left open the possibility that the plaintiff might “point[] to a special circumstance affecting 20 the reliability of the market price” that might make the fiduciary’s actions imprudent. Id. at 427. 21 Plaintiff’s theory is in tension with the Supreme Court’s analysis in Dudenhoeffer, which 22 emphasizes that the plausibility of allegations of breach of fiduciary duty should consider the 23 context and circumstances of the fiduciary’s actions. As pled, Plaintiff’s theory would require any 24 fiduciary to use forfeited amounts to pay administrative costs regardless of any such context or 25
26 1 The Perez-Cruet court’s analysis of whether a decision to reduce employer contributions rather than pay administrative costs is a violation of the duties of loyalty and prudence is conclusory and 27 does not directly address many of the points made by Defendants in the motion to dismiss. 2024 1 circumstances. This broad allegation is implausible because it would improperly extend ERISA 2 beyond its bounds and would be contrary the settled understanding of Congress and the Treasury 3 Department regarding defined contribution plans like the one at issue in this case. 4 First, Plaintiff’s theory of liability would improperly extend the protection of ERISA 5 beyond its statutory framework. As stated above, ERISA does not mandate what benefits an 6 employer must provide under a plan and does no more than protect the benefits which are due to 7 an employee under a plan. See Spink, 517 U.S. at 887; Wright, 360 F.3d at 1100. Because 8 Plaintiff’s claims are so broad, he is effectively arguing that the fiduciary duties of loyalty and 9 prudence create a benefit: the payment of his administrative costs. However, the Plan does not 10 provide any such benefit, and Plaintiff does not allege any facts showing that he is entitled to such 11 a benefit. Cf. Plan § 17(b). To the extent he relies on the fiduciary duty provisions of ERISA to 12 create an entitlement to administrative costs, consistent with the statutory framework, those 13 provisions “create[] no exclusive duty of maximizing pecuniary benefits. Under ERISA the 14 fiduciaries’ duties are found largely in the terms of the plan itself.” Foltz v. U.S. News & World 15 Rep., Inc., 865 F.2d 364, 373 (D.C. Cir. 1989); see also US Airways, Inc. v. McCutchen, 569 U.S. 16 88, 101 (2013) (emphasizing that ERISA’s purpose is to “protect contractually defined benefits” 17 and the statutory scheme “is built around reliance on the face of written plan documents” (first 18 quoting Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 148 (1985); then quoting Curtiss-Wright 19 Corp. v. Schoonejongen, 514 U.S. 73, 83 (1995))); Collins v. Pension & Ins. Comm. of S. Cal. 20 Rock Prod. & Ready Mixed Concrete Associations, 144 F.3d 1279, 1282 (9th Cir. 1998) (“The 21 duty to act in accordance with plan document does not . . . require a fiduciary to resolve every 22 issue of interpretation in favor of plan beneficiaries.”). Plaintiff’s claim is that the fiduciary duty 23 provisions create an unqualified duty to pay administrative costs—that is, to maximize pecuniary 24 benefits in favor of plan beneficiaries. But it is neither disloyal nor imprudent under ERISA to fail 25 to maximize pecuniary benefits. Foltz, 865 F.2d at 373. 26 Second, Plaintiff’s theory of liability is contrary to the settled understanding of Congress 27 and the Treasury Department regarding defined contribution plans. The Treasury Department and 1 to the remaining participants under a nondiscriminatory formula, used to reduce future employer 2 contributions, or used to offset administrative expenses of the plan.” Use of Forfeitures in 3 Qualified Retirement Plans, 88 Fed. Reg. at 12283. The Conference Report accompanying the 4 Tax Reform Act of 1986 “noted that changes made by [the Act] provided uniform rules regarding 5 the use of forfeitures under any defined contribution plan” under which forfeitures could be 6 reallocated to the accounts of other participants, used to reduce future employer contributions, or 7 to reduce administrative costs. Id. (citing H.R. Rep. 99-841, at II-442 (1986)). Consistent with 8 these uniform rules and the historical understanding of defined contribution plans, the Treasury 9 Department has proposed regulations that “would clarify that forfeitures arising in any defined 10 contribution plan” may be used for any one of the following: “(1) to pay administrative expenses, 11 (2) to reduce employer contributions under the plan, or (3) to increase benefits in other 12 participants’ accounts in accordance with plan terms.” Id. If Plaintiff’s theory is correct, this 13 provision of the Treasury regulations is contrary to ERISA and option (2), and potentially option 14 (3), are a nullity. The Court does not understand the general provisions of the fiduciary duty 15 provision of ERISA to not only create a benefit to which Plaintiff is not entitled but also to 16 abrogate Treasury regulations and settled rules regarding the use of forfeitures in defined 17 contribution plans. Cf. Mertens, 508 U.S. at 261 (noting that a statute’s basic purpose does not 18 overcome text regarding the specific issue under consideration, especially when considering 19 legislation such as ERISA, “an enormously complex and detailed statute that resolved 20 innumerable disputes between powerful competing interests—not all in favor of potential 21 plaintiffs”). Plaintiff does not point to any intervening changes in the law or any particular facts 22 that would justify departing from over 38 years of settled rules regarding defined contribution 23 plans. 24 Thus, Plaintiff’s claim at its current breadth is implausible. But Plaintiff might be able to 25 plausibly allege disloyalty or imprudence based on more particularized facts or special 26 circumstances present in this case. See Dudenhoeffer, 573 U.S. at 427–29 (noting that whether a 27 plaintiff could plausibly allege imprudence might turn on whether the plaintiff could point to “a 1 DISMISS Plaintiff’s fiduciary duty claims with leave to amend to permit Plaintiff to narrow these 2 claims. 3 D. Violation of ERISA’s Anti-Inurement Provision (Claim 3) 4 Defendants argue that allocation of forfeited amounts to reduce future employer 5 contributions does not violate ERISA’s anti-inurement provision because the forfeited amounts 6 remain Plan assets and are used to pay obligations to Plan participants. Mot. at 12–14. Plaintiff 7 argues that the use of forfeited amounts to reduce future employer contributions is akin to using 8 plan assets to forgive an employer’s debts, which is a violation of ERISA’s anti-inurement 9 provision. Opp. at 19–22. 10 ERISA’s anti-inurement provision states that, with enumerated exceptions, “the assets of a 11 plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes 12 of providing benefits to participants in the plan and their beneficiaries and defraying reasonable 13 expenses of administering the plan.” 29 U.S.C. § 1103(c)(1). The Supreme Court has interpreted 14 this language as “focus[ing] exclusively on whether fund assets were used to pay pension benefits 15 to plan participants.” Hughes Aircraft, 525 U.S. at 442; see also Raymond B. Yates, M.D., P.C. 16 Profit Sharing Plan v. Hendon, 541 U.S. 1, 22 (2004) (“The provision demands only that plan 17 assets be held for supplying benefits to plan participants.”). Allegations of “indirect” or 18 “incidental” benefits to an employer are insufficient to state a claim under the anti-inurement 19 provision. See Krohnengold v. New York Life Ins. Co., No. 21-CV-1778 (JMF), 2022 WL 20 3227812, at *10 (S.D.N.Y. Aug. 10, 2022); Hughes Aircraft, 525 U.S. at 445 (noting that receipt 21 of “incidental” benefits to an employer do not constitute a breach of the anti-inurement provision); 22 Holliday v. Xerox Corp., 732 F.2d 548, 551 (6th Cir. 1984) (“[The anti-inurement provision] 23 cannot be read as a prohibition against any decisions of an employer with respect to a pension plan 24 which have the obvious primary purpose and effect of benefitting the employees, and in addition 25 the incidental side effect of being prudent from the employer’s economic perspective.”). In 26 addition, claims under the anti-inurement provision usually require reversion or diversion of plan 27 assets to the sponsor. See Aldridge v. Lily-Tulip, Inc. Salary Ret. Plan Benefits Comm., 953 F.2d 1 been a removal of plan assets for the benefit of the plan sponsor or anyone other than the plan 2 participants.”); Maez v. Mountain States Tel. & Tel., Inc., 54 F.3d 1488, 1506 (10th Cir. 1995) 3 (finding that a plaintiff failed to state a claim under the anti-inurement provision where “no such 4 reversion, diversion, or any other sort of payment of surplus assets . . . is alleged”). 5 The Court finds instructive cases that address the disposition of surplus plan assets. For 6 example, in Hughes Aircraft, the Supreme Court held that a plan sponsor did not violate the anti- 7 inurement provision when the plan sponsor used surplus plan assets from a contributory structure 8 to add a noncontributory structure to a plan because the sponsor was using plan assets “for the sole 9 purpose of paying pension benefits to Plan participants” and “satisfied its continuing obligation 10 under the provisions of the Plan and ERISA to assure that the Plan was adequately funded.” 11 Hughes Aircraft, 525 U.S. at 442. Similarly, in Flanigan v. General Electric, the Second Circuit 12 held that the transfer of pension surplus from GE’s plan to Lockheed Martin’s plan during an 13 acquisition of GE did not violate ERISA’s anti-inurement provision. Flanigan v. Gen. Elec. Co., 14 242 F.3d 78, 88 (2d Cir. 2001). The Second Circuit noted that “all of the pension surplus that GE 15 transferred to Lockheed was used to fund pension benefits. Any benefit received by GE 16 [including a higher sale price and an advantage in dealing with government contract claims] was, 17 at most, indirect.” Id. at 87–88. Finally, in Maez v. Mountain States Telephone and Telephone, 18 the defendants used surplus plan assets to fund a second early retirement offer, which had the 19 effect of furthering the defendants’ desire to reduce the workforce, but the plaintiffs alleged that 20 the surplus funds should have been used to benefit them. Maez, 54 F.3d at 1506. The Tenth 21 Circuit found that the plaintiffs failed to state a claim for violation of ERISA’s anti-inurement 22 provision because they did not allege any “reversion, diversion, or any other sort of payment of 23 surplus assets to [the employer]” and the surplus funds “remained with the Pension Plan and were 24 still held in trust for participants in the plan and their beneficiaries.” Id. 25 The Court acknowledges that the Perez-Cruet court found Hughes Aircraft distinguishable 26 because Hughes Aircraft considered a defined benefit plan, which does not give participants any 27 entitlement to a plan’s surplus funds. See Perez-Cruet, 2024 WL 2702207, at *4. The Perez- 1 in which participants “have a right to contributions,” a decision regarding the use of surplus funds 2 is inapplicable. See id. However, “a right to contributions” is not an entitlement to forfeited 3 amounts. Defined contribution plans entitle a participant to “whatever assets are dedicated to his 4 individual account,” which provides for “benefits based solely upon the amount contributed to the 5 participant’s account.” Hughes Aircraft, 525 U.S. at 439. This entitlement does not include 6 forfeited amounts from the accounts of other participants unless they are allocated to the 7 participant’s account. See 29 U.S.C. § 1002(35) (defining “defined contribution plan” to provide 8 “for benefits based solely upon the amount contributed to the participant’s account . . . and any 9 forfeitures of accounts of other participants that may be allocated to such participant’s account” 10 (emphasis added)). Moreover, Plaintiff has not pointed the Court to any provision of the Plan that 11 would entitle him to forfeited amounts. The forfeited amounts in this case, despite being part of a 12 defined contribution plan, are similar to surplus funds in a defined benefit plan because, before 13 reallocation, they are not assets to which any participant is entitled. Thus, the Court finds that the 14 cases considering the treatment of surplus amounts are persuasive. 15 Consistent with Hughes Aircraft, Flanigan, and Maez, Plaintiff’s factual allegations show 16 that the forfeited amounts remain part of the Plan’s trust fund and are used to benefit Plan 17 beneficiaries. The Complaint alleges that the forfeited amounts remain Plan assets and that 18 Defendants used the forfeited amounts “as a substitute for the Company’s own matching 19 contributions to the Plan.” Compl. ¶ 53. Put differently, when an employee leaves HP before the 20 employee’s matching contributions are fully vested, Defendants elect to use the forfeited amounts 21 to supply HP’s matching contributions for other Plan beneficiaries. This is not a violation of the 22 anti-inurement provision because the forfeited amounts are plan assets which do not leave the Plan 23 trust fund and are used to pay pension benefits to Plan participants. Hughes Aircraft, 525 U.S. at 24 442; Maez, 54 F.3d at 1506. The fact that HP benefits through the reduction in its future matching 25 contributions does not make the use of forfeited amounts in this way a violation of the anti- 26 inurement provision—the benefit that HP receives is incidental to the payment of pension benefits. 27 See Holliday, 732 F.2d at 551; Flanigan, 242 F.3d at 88. 1 debts to the plan. See Opp. at 19–21. For example, in Holland v. Arch Coal, the D.C. Circuit held 2 that the Coal Industry Retiree Health Benefit Act (“Coal Act”) required Arch Coal to provide 3 security to a pension benefit plan after a successor to the plan filed for bankruptcy. Holland as Tr. 4 of UMWA 1992 Benefit Plan v. Arch Coal, Inc., 947 F.3d 812, 814–15, 819 (D.C. Cir. 2020). 5 Arch Coal argued that the successor’s letter of credit, which was previously used to provide 6 security, should be used to reduce Arch Coal’s obligations under the Coal Act. Id. at 821. The 7 D.C. Circuit rejected this argument, finding that the Plan had already drawn down on the letter of 8 credit such that it was no longer providing security and to dedicate the proceeds of the letter of 9 credit to reduce Arch Coal’s obligations “in this way would run afoul of the clear injunction in 10 ERISA that the ‘assets of a plan shall never inure to the benefit of any employer.’” Id. (quoting 29 11 U.S.C. § 1103(c)(1)). Similarly, in Chao v. Malkani, defendant plan fiduciaries stopped making 12 annual contributions to the plan, demanded that plan assets be used to pay their administrative 13 expenses, fired the third-party administrator after the third-party administrator refused to use plan 14 assets to pay the defendants’ administrative expenses, appointed one defendant trustee of the plan 15 during the transition, and after a TRO was imposed, requested a large reimbursement from plan 16 assets based on the argument that the plan was overfunded. Chao v. Malkani, 452 F.3d 290, 291– 17 93 (4th Cir. 2006). The Fourth Circuit affirmed the district court’s determination that the 18 defendants breached their fiduciary duties, noting that “[w]hile one of their several dubious actions 19 standing alone may have made the extraordinary remedy of removal a closer call, when their 20 behavior is considered in the aggregate, it becomes evident that defendants abdicated their 21 fiduciary obligations.” Id. at 294. Relevant here, the Fourth Circuit found that the defendants’ 22 request for a reimbursement would have violated ERISA’s anti-inurement provision because the 23 defendants would have “[o]btain[ed] Plan assets for contributions made many years in the past.” 24 Id. at 297. 25 Holland, Malkani, and the other cases cited by Plaintiff are distinguishable from this case 26 for the same reasons—those cases involved outstanding and unpaid amounts owed by the 27 defendants. See, e.g., Brown v. Health Care & Ret. Corp. of Am., 25 F.3d 90, 93 (2d Cir. 1994) 1 fund’s claim to collect delinquent payments” (emphasis added)). Plaintiff does not allege any 2 facts that would make HP’s future obligation in this case similar to the obligations owed in 3 Holland and Malkani because Plaintiff has not alleged that HP owes any outstanding or unpaid 4 amounts or that HP has otherwise failed to meet its obligations to provide matching contributions 5 to the Plan. Moreover, Plaintiff’s attempt to analogize HP’s future obligation to provide matching 6 benefits to a debt is based on a distinction between “new money” that HP contributes to the Plan 7 as matching contributions and “old money” that HP has already contributed to the Plan that is 8 without support in the terms of the Plan, the text of ERISA, or case law. 9 The Court finds that Plaintiff’s claim that forfeited amounts inured to the benefit of HP is 10 implausible. However, the Court finds that amendment may not be futile and will DISMISS 11 Plaintiff’s claim under the anti-inurement provision with leave to amend to allege further facts 12 showing that forfeited amounts were reverted or diverted to HP and/or that forfeited amounts were 13 used to offset outstanding and unpaid obligations. 14 E. Prohibited Transactions (Claims 4 and 5) 15 Defendants argue that Plaintiff has failed to allege a prohibited transaction between the 16 Plan and another party because the reallocation of forfeited amounts is neither prohibited nor a 17 transaction. Mot. at 14–15. Plaintiff argues that the use of forfeited amounts as a substitute for 18 HP’s future contributions to the Plan is a transaction. Opp. at 22–24. Plaintiff also argues that the 19 provision prohibiting self-dealing does not require a transaction. Id. at 24–25. 20 ERISA provides that a fiduciary
21 shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect-- 22 (A) sale or exchange, or leasing, of any property between the plan and a party in interest; 23 (B) lending of money or other extension of credit between the plan and a party in interest; 24 (C) furnishing of goods, services, or facilities between the plan and a party in interest; 25 (D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan; or 26 (E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 1107(a) of this title. 27 1 fiduciary,” including where a fiduciary “deal[s] with assets of the plan in his own interest or for 2 his own account. Id. § 1106(b)(1). In order to allege a violation of § 1106(a) or (b), the plaintiff 3 must allege an unlawful transaction. See Spink, 517 U.S. at 888; Wright, 360 F.3d at 1101 4 (“Plaintiffs fail to identify any transaction that falls within § 1106(a)(1) or (b).” (emphasis 5 added)). 6 The Court finds that Plaintiff has failed to plausibly allege a prohibited transaction. The 7 Supreme Court has held that the payment of benefits is not a “transaction” under the prohibited 8 transactions provision. See Spink, 517 U.S. at 892–93. The Supreme Court noted that the types of 9 transactions enumerated in § 1106(a)(1) “are commercial bargains that present a special risk of 10 plan underfunding because they are struck with plan insiders, presumably not at arm’s length.” Id. 11 at 893. The Court emphasized that these transactions “involve uses of plan assets that are 12 potentially harmful to the plan.” Id. Following this analysis, the Ninth Circuit has held that 13 merely holding plan assets in employer stock is not a prohibited transaction under § 1106(a)(1) or 14 (b)(1) because “[i]t was merely a lawful decision to remain in full compliance with the explicit 15 language of the Plan’s terms.” Wright, 360 F.3d at 1101. Similarly, another court in this district 16 has held that the use of funds available to satisfy one benefit to fund a different benefit that would 17 have otherwise been funded by an additional “true up” from the plan sponsor is not a prohibited 18 transaction in violation of § 1106(a)(1) or (b)(1). Black v. Greater Bay Bancorp Exec. 19 Supplemental Comp. Benefits Plan, No. 16-CV-00486-EDL, 2017 WL 8948732, at *8–9 (N.D. 20 Cal. Jan. 18, 2017); see also Chao v. Hagemeyer N. Am., Inc., No. CV 2:06-01173-PMD, 2006 21 WL 8443663, at *6 (D.S.C. Oct. 20, 2006) (holding that “exchanges or ‘reallocations’ between 22 accounts of plan participants” that constituted “a redistribution within the plan of the plan assets” 23 was not a prohibited transaction). As discussed above, Plaintiff’s allegations show that forfeited 24 amounts remain Plan assets and are merely reallocated to provide pension benefits to other 25 employees through use as matching contributions. But this is not a prohibited transaction. See 26 Hagemeyer, 2006 WL 8443663, at *6. In addition, the fact that reallocation of the forfeited 27 amounts will reduce the amount that HP contributes as matching contributions in the future does 1 (holding that the use of plan assets to fund a benefit that the employer might otherwise fund was 2 not a prohibited transaction). Moreover, this is not similar to the types of commercial transactions 3 contemplated by Congress because Plaintiff does not allege any facts showing that the reallocation 4 of forfeited amounts in this way put the Plan at “a special risk of plan underfunding.” Spink, 517 5 U.S. at 893. As noted above, Plaintiff does not allege that HP has failed to meet its obligations to 6 contribute to the Plan. 7 Plaintiff’s arguments to the contrary are unavailing. First, to the extent that Plaintiff relies 8 on Commissioner v. Keystone Consolidated Industries, that case is not applicable here because it 9 dealt with a traditional commercial transaction. See Comm’r v. Keystone Consol. Indus., Inc., 508 10 U.S. 152, 158–59 (1993). The defendant in Keystone contributed truck terminals and other real 11 property to satisfy its funding obligations for a plan. See id. The Supreme Court held that this 12 was a “sale or exchange” under the Internal Revenue Code because it involved “the transfer of 13 property in satisfaction of a debt.” Id. at 159. Second, although Plaintiff argues that § 1106(b)(1) 14 does not require allegations of a transaction, this argument is contrary to binding Ninth Circuit 15 precedent. See Wright, 360 F.3d at 1101 (finding that a failure to identify a transaction required 16 dismissal of a claim under § 1106(a)(1) and § 1106(b)). 17 The Court finds that Plaintiff’s prohibited transaction claims are implausible because 18 Plaintiff fails to allege a prohibited transaction. The Court will DISMISS Plaintiff’s claims with 19 leave to amend to allege more particular facts that might show a prohibited transaction. 20 F. Failure to Monitor (Claim 6) 21 Defendants argue that Plaintiff’s failure to monitor claim is derivative of Plaintiff’s other 22 claims and should fail for the same reasons. Mot. at 15–16. Plaintiff argues that he has 23 adequately alleged a plausible claim under the duty to monitor because he has alleged other 24 plausible violations of ERISA. Opp. at 25. Because the Court finds that Plaintiff’s allegations fail 25 to state a claim for breach of fiduciary duties, a breach of the anti-inurement provision, or breach 26 of the prohibited transaction provision, the Complaint also fails to state a claim for a failure to 27 monitor. See Bracalente v. Cisco Sys., Inc., No. 5:22-CV-04417-EJD, 2023 WL 5184138, at *6 1 a claim for a breach of fiduciary duty). 2 Vv. ORDER 3 For the foregoing reasons, IT IS HEREBY ORDERED that Defendants HP Inc. and the 4 HP Inc. Plan Committee’s motion to dismiss (ECF No. 25) is GRANTED WITH LEAVE TO 5 AMEND. Plaintiff may file an amended complaint that addresses the deficiencies identified in 6 this Order within 30 days of the date of this Order. 7 8 Dated: June 17, 2024 ° BEA H LABSON FREEMAN 10 United States District Judge 11 a 12
13 14
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