Wong v. FMR LLC

• Court: Court of Appeals for the First Circuit
• Decided: March 5, 2021
• Docket: 20-1286P
• Status: Published

Opinion

United States Court of Appeals For the First Circuit

No. 20-1286

IN RE: FIDELITY ERISA FEE LITIGATION

ANDRE W. WONG, on behalf of the T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust and on behalf of all other similarly situated Employee Benefit Plans; JANICE ANDERSEN; JASON BAILIS; NATALIE DONALDSON; CYNTHIA EDDY; MYRL JEFFCOAT; THOMAS GOODRICH; KAYLA JONES; KAREN PETTUS; GINA SUMMERS; HEATHER WOODHOUSE; REGINA CRYSTAL ROBINSON, on behalf of the T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust and on behalf of all other similarly situated Employee Benefit Plans; TYLER WAYNE SILLS, on behalf of the T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust and on behalf of all other similarly situated Employee Benefit Plans; CATEENIA D. JOHNSON, on behalf of the T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust and on behalf of all other similarly situated Employee Benefit Plans,

Plaintiffs, Appellants,

BOARD OF TRUSTEES OF UFCW LOCAL 23 & GIANT EAGLE PENSION FUND,

Plaintiff,

v.

FMR LLC; FIDELITY MANAGEMENT & RESEARCH COMPANY; FIDELITY MANAGEMENT TRUST COMPANY; FIDELITY BROKERAGE SERVICES LLC; NATIONAL FINANCIAL SERVICES LLC; FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC.,

Defendants, Appellees,

JOHN AND JANE DOES 1–10,

Defendants. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Leo T. Sorokin, U.S. District Judge]

Before

Kayatta and Barron, Circuit Judges, and Smith, District Judge.

Alec J. Berin, with whom James E. Miller, Laurie Rubinow, Shepherd, Finkelman, Miller & Shah, LLP, David Pastor, and Pastor Law Office were on brief, for appellants. Bradley N. Garcia, with whom Jonathan D. Hacker, Brian D. Boyle, and O'Melveny & Myers LLP were on brief, for appellees.

March 5, 2021

 Of the District of Rhode Island, sitting by designation. KAYATTA, Circuit Judge. The plaintiffs in this putative

class action are participants in 401(k) retirement plans sponsored

by their respective employers. They train our attention on fees

that the defendant, Fidelity,1 charges some mutual funds for the

privilege of being placed on the menu of investment options

Fidelity makes available to 401(k) plans that contract with it to

receive an array of services and investment opportunities. Seeking

equitable and remedial relief on behalf of themselves and the

retirement plans in which they participate, plaintiffs contend

that Fidelity's exaction and retention of those fees violate

fiduciary duties it owes to its customer plans and their

participants under the Employee Retirement Income Security Act

(ERISA), 29 U.S.C. § 1001 et seq. In granting a motion to dismiss

under Federal Rule of Civil Procedure 12(b)(6), the district court

disagreed. For the following reasons, so do we.

I.

We resolve first a procedural dispute concerning the

scope of the record appropriate for our consideration in reviewing

the dismissal of a complaint under Federal Rule of Civil

Procedure 12(b)(6). When a complaint expressly cites and relies

upon a written contract in support of a claim, the drafter of the

1 Plaintiffs have sued FMR LLC and several related Fidelity entities and affiliates, known and unknown. For ease of reference, we refer to all of the defendants collectively as "Fidelity" or "defendant."

- 3 - complaint cannot prevent the court from considering the written

contract in ruling on a motion under Rule 12(b)(6). See Beddall

v. State St. Bank and Tr. Co., 137 F.3d 12, 17 (1st Cir. 1998)

("When . . . a complaint's factual allegations are expressly

linked to -- and admittedly dependent upon -- a document (the

authenticity of which is not challenged), that document

effectively merges into the pleadings and the trial court can

review it in deciding a motion to dismiss under Rule 12(b)(6).");

see also Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 229 n.1

(1st Cir. 2013) (declining to accept truth of factual allegation

contradicted by rider to mortgage agreement). Here, plaintiffs'

Consolidated Amended Complaint ("the Complaint") devotes an entire

section to "the Contracts," a set of "standard form agreements"

between Fidelity and its customers. The Complaint then describes

the Contracts at some length, expressly labeling Fidelity's

authority as "[p]ursuant to the Contracts." So the Contracts are

undoubtedly central to plaintiffs' Complaint.

Quite unremarkably, Fidelity therefore filed with its

motion to dismiss a copy of relevant portions of its agreements

with T-Mobile USA, Inc., the employer of four of the plaintiffs,

as an example of the "standard form agreements" described in the

- 4 - Complaint.2 Fidelity also produced copies of the complete T-Mobile

Contracts to plaintiffs' counsel, allowing them to bring any other

sections to the court's attention. Plaintiffs then objected to

the court's consideration of the T-Mobile Contracts on the basis

of lack of authenticity. When the district court sought

clarification about the authenticity objection, plaintiffs

forthrightly conceded that they had no basis to say that the T-

Mobile Contracts were not what they purported to be. Rather, they

argued that they simply could not verify that for themselves

without discovery.

We see no error in the district court's decision to

consider the T-Mobile Contracts. Fidelity filed a declaration

under penalty of perjury signed by its Vice President of Contracts

authenticating the excerpts and the complete, current set of

agreements from which they were drawn. Were the declaration false,

it would be easily seen as such by the thousands of employers and

plan officials who have entered into these "standard form

agreements" with Fidelity, including the officials at T-Mobile who

administer the plan in which four of the named plaintiffs

participate. We see no good faith basis for disputing the T-

Mobile Contracts' authenticity.

2The excerpts were drawn from the Service Agreement and Basic Plan Document for the T-Mobile USA, Inc., 401(k) Plan. We refer to these excerpts collectively as "the T-Mobile Contracts."

- 5 - II.

So we turn now to the factual allegations of the

Complaint as supplemented by the T-Mobile Contracts. We describe

here the basic outline of the dealings at issue, adding further

detail later in this opinion where most relevant to our

consideration of plaintiffs' various claims.

Since 1989, Fidelity has maintained what it calls a

"supermarket" named the FundsNetwork. Rather than offering

groceries, the FundsNetwork stocks thousands of opportunities to

invest in mutual funds established by third parties other than

Fidelity.

Fidelity's customers include approximately 24,000

employer-established retirement plans. For each plan, Fidelity

performs recordkeeping, takes possession of plan assets, and

invests those assets at the direction of the plan or a plan

participant. Each plan selects from the FundsNetwork's offerings

the particular mutual funds in which each particular plan's

participants may invest. The plans pay Fidelity an agreed-upon

fee for its services.

Fidelity also charges some of the mutual fund managers

a so-called "infrastructure fee" for the privilege of being listed

as an investment opportunity in the FundsNetwork. In online

notices to which the Complaint directs us, Fidelity describes these

fees to its plan customers and their participants as "supermarket

- 6 - fees (paid by the fund company to Fidelity)," Understanding

Fidelity's FundsNetwork® Fees, Fidelity,

http://www.fidelity.com/mutual-funds/all-mutual-funds/fees (last

visited Mar. 4, 2021), or, more specifically, as "a fee from

unaffiliated product providers to compensate Fidelity for

maintaining the infrastructure to accommodate unaffiliated

products," Brokerage Commission and Fee Schedule, Fidelity,

http://www.fidelity.com/bin-

public/060_www_fidelity_com/documents/brokerage_commissions_fee_

schedule.pdf (last visited Mar. 4, 2021).

The pivotal question here is whether the Complaint's

allegations regarding this arrangement plausibly paint Fidelity as

a fiduciary for the plans (or their participants) with respect to

the collection of infrastructure fees from some of the fund

managers whose funds appear in Fidelity's FundsNetwork. We review

de novo the district court's negative answer to that question in

dismissing the complaint for failure to state a claim. See In re

Fid. ERISA Float Litig., 829 F.3d 55, 59 (1st Cir. 2016).

III.

The parties agree that under ERISA, a person may be a

fiduciary because he is so identified in a plan instrument or

pursuant to a procedure specified in that instrument. 29 U.S.C.

§ 1102(a). A person not named as a plan fiduciary may nevertheless

- 7 - become a "functional fiduciary" depending on his relationship with

the plan. Specifically, a person is a functional fiduciary

with respect to a plan to the extent

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(ii) he renders investment advice for a fee or other compensation, direct or 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 discretionary authority or discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A) (emphasis added).

This qualified language makes clear that functional

fiduciary status is not an all-or-nothing designation. See

Beddall, 137 F.3d at 18. A person or entity can be a fiduciary of

a plan for some purposes and not for others. See Pegram v.

Herdrich, 530 U.S. 211, 225 (2000). So "[i]n every case charging

breach of ERISA fiduciary duty . . . the threshold question

is . . . whether that person was acting as a fiduciary (that is,

was performing a fiduciary function) when taking the action subject

to complaint." Id. at 226.

Plaintiffs advance three arguments for treating Fidelity

as a functional fiduciary. We consider each in turn.

- 8 - A.

Plaintiffs argue first that Fidelity acted as a

fiduciary by exercising control over the factors affecting the

compensation it receives from the plans. Plaintiffs advance two

theories in support of this argument.

1.

Plaintiffs' first theory does not rely on the

infrastructure fees. Rather, plaintiffs assert that under the

T-Mobile Contracts (and other standard form agreements like them)

Fidelity retains discretion over the payments by the plans because

Fidelity may "unilaterally change its investment management and

administrative charges assessed under the Contracts." See, e.g.,

Golden Star, Inc. v. Mass. Mut. Life Ins. Co., 22 F. Supp. 3d 72,

81 (D. Mass. 2014) (finding that service provider was a fiduciary

where it "had the discretion to unilaterally set fees up to a

maximum and exercised that discretion"). But the T-Mobile

Contracts say no such thing. Rather, Fidelity sets the fees by

agreement. See T-Mobile Service Agreement, art. II, § 11.

Undeterred, plaintiffs reason that another clause allows Fidelity

to amend the T-Mobile Contracts "unilaterally." T-Mobile Service

Agreement, art. II, § 12. But that power is contingent on there

being "no impact on the fees set forth in this Agreement." T-

Mobile Service Agreement, art. II, § 12 (amended Apr. 1, 2016).

So plaintiffs retreat to their contention that we must turn a blind

- 9 - eye to what the T-Mobile Contracts actually say because they are

not attached to the Complaint. And that is a contention we have

already rejected.

2.

Plaintiffs' second theory in support of their argument

that Fidelity exercises discretionary control over its

compensation posits that in charging infrastructure fees to mutual

funds, Fidelity effectively increased the amount of compensation

it received from the plans, and thereby should be deemed to be a

fiduciary with respect to the collection of such fees. Of course,

the fees in question are paid by the mutual funds, not the plans.

But plaintiffs reason that the burden of any fee paid by a mutual

fund to Fidelity is passed through to the plan participants in the

form of increased fees charged by the mutual funds to participants

who chose those funds. Plaintiffs offer no example of any such

pass-through by any mutual fund. Rather, they contend it is

probable as a matter of "simple economics." We doubt that is so,

at least absent a basis to conclude that Fidelity charges fees in

a manner that affects a fund's expense ratio for every investor or

that both the law and the lack of market competition allow the

funds in question to charge different investors undisclosed

different amounts. But for Rule 12(b)(6) purposes we will assume

it is true.

- 10 - This theory for labeling the infrastructure fee a

payment by the plans stumbles initially because Fidelity provides

consideration in return for the payment of the fee by the funds --

access to the FundsNetwork. In this respect, Fidelity is like a

supermarket that charges a vendor a fee in return for favorable

shelf space. No one would deem that fee to be compensation from

the supermarket's customers.

Plaintiffs' theory also overlooks the numerous

intervening and independent decisions inherent in the so-called

pass-through to which they point. This series of independent

decisions precludes us from agreeing with plaintiffs that the

infrastructure fees are compensation paid to Fidelity by the plans.

Fidelity must negotiate the fee with the fund manager, who remains

free to agree or not. The fund manager -- not Fidelity -- then

decides whether or not to try to increase its fees charged to

investors -- and such fees must be disclosed. See Form N-1A

Registration Form for Open-End Management Investment Companies

(2021), General Instructions to Item 3,

http://www.sec.gov/files/formn-1a.pdf (requiring mutual funds to

disclose expense ratios in registration statements); 17 C.F.R.

§ 230.485 (requiring advance notice for post-effective date

- 11 - amendments to fund registration statements).3 Even then, the fund

would only be listed by Fidelity as an available option on the

FundsNetwork. It would remain for the plan's fiduciary investment

advisors to decide whether to make the fund available to that

plan's participants. In other words, even if Fidelity puts the

fund on FundsNetwork (sometimes called its "Big Menu"), a plan

must select that fund for its "Small Menu" before it becomes a

permissible investment option for the plan's participants. And it

would ultimately be up to the participants to decide whether to

invest in the fund. Only then would the theoretical pass-through

of infrastructure fees posited by the plaintiffs occur.

This theoretical pass-through is no less the product of

independent decisions if Fidelity negotiates infrastructure fees

with the mutual funds after a plan has already retained Fidelity

as a service provider and selected the fund for its Small Menu.

Fidelity and the fund would still have to agree on the fee, the

fund would still have to decide to raise its investment fees, and

3 At oral argument, plaintiffs' counsel acknowledged that mutual funds must disclose their expense ratios up front but suggested that funds may still pass through infrastructure fees by charging transaction fees deducted from the fund's return. Plaintiffs argue that this method of fee assessment obscures an infrastructure fee's negative effect on the fund's performance and, by extension, the participants. This argument does not alter our conclusion. Rather, it underscores that funds -- not Fidelity -- decide whether and how to charge fees to investors.

- 12 - the plan would still have to decide to continue offering the fund

on its Small Menu.

Plaintiffs point to no case treating such a series of

independent decisions as the equivalent of Fidelity controlling

its compensation from plans. One could just as easily say that by

charging infrastructure fees to funds, Fidelity lowers the costs

it incurs as a service provider, and thus can agree to charge plans

less; indeed, it likely would charge less unless it has market

power. Plaintiffs also overlook the significance of having other

fiduciaries in this chain of independent decision-making. It is

difficult to see what would be gained in the end for plan

participants by trying to deem Fidelity's attempt to sell shelf

space to fund managers to be a fiduciary function on behalf of

Fidelity's plan customers.

All in all, we see nothing here that calls for treating

Fidelity's charging of fees to some funds as an exercise of

authority or control over any plan assets, management, or

administration.

B.

Plaintiffs next argue that Fidelity acts as a fiduciary

in determining which mutual funds it includes or removes from its

FundsNetwork. Two circuits have rejected this argument as applied

to comparable "product design" decisions. See Santomenno v. John

Hancock Life Ins. Co. (USA), 768 F.3d 284, 295 (3d Cir. 2014);

- 13 - Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905, 911 (7th

Cir. 2013). Indeed, those courts have rejected this argument as

applied to Fidelity's actions as a service provider. See Renfro

v. Unisys Corp., 671 F.3d 314, 323 (3d Cir. 2011); Hecker v. Deere

& Co., 556 F.3d 575, 583 (7th Cir. 2009). So, too, have two

district courts in this circuit concluded that where the plan, not

Fidelity, made the final decision about which investment options

to offer participants, Fidelity was not a fiduciary with respect

to its receipt of revenue-sharing payments. See Fleming v. Fid.

Mgmt. Tr. Co., No. 16-cv-10918-ADB, 2017 WL 4225624, at *5 (D.

Mass. Sept. 22, 2017) (unpublished); Columbia Air Servs. Inc. v.

Fid. Mgmt. Tr. Co., No. 07-cv-11344-GAO, 2008 WL 4457861, at *4

(D. Mass. Sept. 30, 2008) (unpublished).

Plaintiffs' advocacy to the contrary ignores the nature

of the relative roles played in these transactions. The plans and

their investment advisors decide which investment opportunities

are made available to their participants. In making these

decisions, they have a variety of vendors from whom they might

obtain access to investment opportunities, either directly or

indirectly. Fidelity is just one of those options. Should a plan

choose Fidelity, it then chooses which funds to select from

Fidelity's Big Menu of offerings, which include Fidelity and non-

Fidelity funds. With knowledge of their participants' investment

- 14 - goals, the plan and its investment advisors assemble the Small

Menu from which the participants pick.

Nothing in this arrangement suggests that Fidelity must

automatically be treated as if it were also a fiduciary advising

which options to select. See 29 U.S.C. § 1002(21)(A) (designating

as a fiduciary a person who "renders investment advice for a fee

or other compensation"). ERISA does not treat as a fiduciary one

who offers without advice numerous investment options from which

an investment advisor might select investments. To rule otherwise

would be to deprive plan fiduciaries of the benefit of having

vendors who need not themselves bear the expense of duplicating

the investment advisor's fiduciary role.

As we have noted, case law almost directly on point

flatly rejects plaintiffs' notion that Fidelity acts as a fiduciary

in selecting funds for its FundsNetwork. In an effort to transform

their claim into a version less vulnerable to this accumulating

authority, plaintiffs in their brief argue that Fidelity also

controls which funds are actually offered to plan participants on

each plan's Small Menu. This argument, though, finds no footing

in the Complaint. While the Complaint alleges repeatedly that

Fidelity controls which funds are made "available to the Plans,"

there is no claim that Fidelity has control over which funds a

plan selects for the menu available to the plan's participants.

Moreover, the T-Mobile Contracts belie the assertion raised in

- 15 - plaintiffs' briefs. The T-Mobile Contracts make clear that

"Fidelity shall have no responsibility for the selection of

Permissible Investments for the Plan" and that "[a]ll Plan assets

must be invested in the Permissible Investments selected by the

Employer . . . ." T-Mobile Service Agreement, art. II, § 5; see

also T-Mobile Basic Plan Document, § 8.01 ("The Accounts of

Participants shall be invested and reinvested only in Permissible

Investments designated in the Service Agreement. The Trustee shall

have no responsibility for the selection of Permissible

Investments . . . ."). As Fidelity persuasively argues, these

provisions show that Fidelity cannot take actions that affect a

participant's existing investment in an option on a plan's Small

Menu.

What plaintiffs may mean to say is that the very decision

to list or delist a fund on the FundsNetwork itself indirectly

controls whether it can be chosen when a plan designs its Small

Menu. In an advisory opinion, the Department of Labor has opined

that a service provider does not become a fiduciary "solely as a

result of deleting or substituting a fund from a program of

investment options and services offered to plans, provided that

the appropriate plan fiduciary in fact makes the decision to accept

or reject the change" after being given "advance notice of the

change" and "a reasonable period of time within which to decide

whether to accept or reject the change and, in the event of a

- 16 - rejection, secure a new service provider." Dep't of Labor Pension

& Welfare Benefit Programs, Op. 97-16A, 1997 WL 277979, at *5

(May 22, 1997). One district court in this circuit has concluded

that the prerequisites identified in the DOL's guidance are

necessary to ensure "that the Plan has the final authority on which

investment options are available." Golden Star, Inc., 22 F. Supp.

3d at 82. Plaintiffs claim that Fidelity makes changes to its

fund offerings without such notice or opportunity for rejection.

We need not decide whether the ability to change

unilaterally the Small Menu offerings by changing the Big Menu's

offerings per se turns the service provider into a fiduciary absent

the notice and rejection opportunities noted in the DOL opinion.

Here, the Complaint contains no allegation that Fidelity's

decision to stop offering a fund in its FundsNetwork removes that

fund from those already selected by a plan for its Small Menu.

The absence of such an allegation from the Complaint is

unsurprising because, as noted already, the T-Mobile Contracts

preclude Fidelity from having any "responsibility for the

selection of Permissible Investments for the Plan." And, adding

belt to suspenders, if a plan or its investment advisors become

- 17 - dissatisfied with Fidelity's Big Menu offerings, they could opt to

shop elsewhere.4

C.

Plaintiffs' final fiduciary status argument trains on

the fact that Fidelity can successfully impose infrastructure fees

only because it has in its hands lots of plan assets to be invested.

As directed trustee for the plans, Fidelity is obligated to

safeguard and allocate assets in accordance with participants'

investment directions. See T-Mobile Basic Plan Document, § 20.04

("The Trustee shall have no discretion or authority with respect

to the investment of the Trust Fund but shall act solely as a

directed trustee of the funds contributed to it."); 29 U.S.C.

§ 1103(a)(1) (permitting plan assets to be managed and controlled

by a trustee "subject to proper directions" of a named fiduciary).

According to the Complaint, Fidelity performs its directed trustee

duties by pooling participants' investments in a particular fund

into an "Omnibus Account." Plaintiffs argue that Fidelity's acts

4 Plaintiffs suggest that their ability to take their business elsewhere could be restricted by an inappropriate termination fee. See Rozo v. Principal Life Ins. Co., 949 F.3d 1071, 1074–75 (8th Cir. 2020) (holding that fee for leaving the plan and year-long delay in fund withdrawal were impediments to exit that made service provider a fiduciary). But plaintiffs acknowledge that the motion to dismiss record is "devoid of any evidence either way" about whether Fidelity charges plans a termination fee. This gap in the record is plaintiffs' problem, as they bear the burden of setting forth allegations that state a plausible claim for relief.

- 18 - as a directed trustee relate to its collection of infrastructure

fees because funds pay those fees to gain access to the Omnibus

Account assets. But Fidelity is able to charge funds a fee because

it has lots of customers, not because it controls those customers

or their assets in any meaningful manner. The fund simply gets on

the store's shelves, and the participant has the final say on

whether the fund also gets in the grocery cart.

None of this is to ignore the fact that Fidelity does

have some fiduciary duties vis-à-vis the plans and their

participants. Rather, the point is that Fidelity's actions in a

fiduciary capacity are not the subject of plaintiffs' complaint.

See Pegram, 530 U.S. at 226; see also Leimkuehler, 713 F.3d at

912–14 (explaining that service provider's management of assets in

accordance with participant instructions did not make the service

provider a fiduciary with respect to challenged action); Renfro,

671 F.3d at 323 ("Fidelity's limited role as a directed

trustee . . . does not encompass the activities alleged as a breach

of fiduciary duty."). Fidelity's fiduciary responsibilities as a

directed trustee are distinct from and do not extend to Fidelity's

charging of an infrastructure fee.

D.

Plaintiffs also argue that the district court improperly

dismissed the Complaint as to several unnamed defendants when it

invoked Federal Rule of Civil Procedure 4(m). We may affirm the

- 19 - dismissal of a complaint "on any basis available in the record."

Yan v. ReWalk Robotics Ltd., 973 F.3d 22, 30 (1st Cir. 2020)

(quoting Lemelson v. U.S. Bank Nat'l Ass'n, 721 F.3d 18, 21 (1st

Cir. 2013)). Plaintiffs offer no theory of liability applicable

to the unnamed defendants that we have not already rejected above.

We therefore dismiss the Complaint as to all of the defendants,

named and unnamed. Cf. Rodríguez-Reyes v. Molina-Rodríguez, 711

F.3d 49, 57–58 (1st Cir. 2013) (affirming dismissal of claims

against unnamed defendants where plaintiffs did not develop

argument as to sufficiency of claims against those defendants).

IV.

For the foregoing reasons, we affirm the dismissal of

plaintiffs' Consolidated Amended Complaint.

- 20 -