ERISA Class Certification in The Wake of Dukes And Amara

The Second Circuit Ruling

In Nationwide Life Insurance Co. v. Haddock, No. 10-4237, 2012 U.S. App. LEXIS 2340 (2d Cir. Feb. 6, 2012), the Second Circuit reversed a district court order granting class certification. The plaintiffs in Haddock asserted that the insurance company breached its fiduciary duty under ERISA by allegedly collecting “revenue sharing payments” from mutual funds that it selected as investment choices for its annuity holders. The district court had granted class certification under Rule 23(b)(2). In reversing, the Second Circuit went out of its way to state that the district court's order granting class certification was correct under the Second Circuit's pre-Dukes analysis.

However, the Second Circuit recognized that, under the Supreme Court's holding in Dukes, “a class complaint alleging numerous individual claims for monetary relief may not be certified under Rule 23(b)(2) 'at least where ' the monetary relief is not incidental to the injunctive or declaratory relief'.” Id. at *4 (quoting Dukes, 131 S. Ct. at 2557). Analyzing the suit before it, the Second Circuit concluded that the plaintiffs' claims for monetary relief were not merely incidental to the claim for equitable relief. Specifically, the Second Circuit observed that “if plaintiffs are ultimately successful in establishing [the insurance company's] liability ', the district court would then need to determine the separate monetary recoveries to which individual plaintiffs are entitled.” Id. at *6. The Second Circuit then recognized that “[t]his process would require the type of non-incidental, individualized proceedings for monetary awards” that the Supreme Court said are impermissible under Rule 23(b)(2). Id. The Second Circuit has remanded the case to the district court to determine whether certification is appropriate under Rule 23(b)(3). Id. at *7.

In the Courts

Lower courts have also taken seriously Dukes' admonition that a rigorous analysis of the allegations is necessary, and they are now focusing on whether the relief sought will require the court to engage in the type of individualized inquiry that Dukes held was outside of the scope of Rule 23(b)(2). For example, in Pennsylvania Chiropractic Association v. Blue Cross Blue Shield, No. 09 C 5619, 2011 U.S. Dist. LEXIS 148689, at*42 (N.D. Ill. Dec. 28, 2011), the district court rejected an attempt to certify an ERISA class action under Rule 23(b)(2). The court relied on Dukes' explanation that “[t]he key to the (b)(2) class is the indivisible nature of the injunctive or declaratory remedy warranted ' the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.” Id. at *41 (citing Dukes, 131 S. Ct. at 2557).

There, the plaintiffs argued that they qualified for Rule 23(b)(2) certification because they were challenging the defendants' uniform misconduct and because the recovery of damages in an ERISA action constitutes equitable relief. The Northern District of Illinois was not convinced. “The fact that monetary relief may be characterized as equitable is irrelevant.” Id. at *41-42 (internal quotation marks and citation omitted). Rather, the monetary relief must be merely incidental ' i.e., a mere mechanical computation ' to the grant of the injunction or declaratory relief. The plaintiff failed to make any such showing. Id. at *42.

Other Views

Not all lower courts, however, have paid sufficient attention to Dukes or Amara. In Mezyk v. U.S. Bank Pension Plan, No. 3:09-cv-384-JPG-DGW, 2011 U.S. Dist. LEXIS 146758 (S.D. Ill. Dec. 21, 2011), the plaintiffs asserted claims related to the transition from a traditional defined benefit pension plan to a cash balance plan, including claims that Plan failed to give adequate notice of an amendment that significantly reduced the rate of future benefit accruals, and that the Summary Plan Description (SPD) contained misleading information. The plaintiffs sought the value of the benefit to which each would have been entitled had the Plan not been amended. The district court had certified the notice and SPD claims prior to Dukes, and the defendant moved for decertification in light of it. The district court denied the motion, disagreeing that Dukes forecloses certification under Rule 23(b)(2) of claims that require individualized determinations of relief.

In a one-paragraph “analysis” of Dukes, the district court concluded that the relief the plaintiffs sought was for declaratory or injunctive relief that would apply to the class as a whole ' a declaration that certain Plan provisions violate ERISA, an injunction requiring the Plan to cease implementing those Plan provisions and reformation of the Plan, and an injunction requiring recalculation and payment of benefits under the proper calculations. According to the district court, “[a]ny monetary relief that might flow from such a decision is incidental, which [Dukes] does not foreclose.” Id. at *7-8.

Not only did the district court give Dukes short shrift, but it also entirely ignored Amara's holding that plaintiffs must establish “actual damages” prior to obtaining reformation of the plan. Under Amara, “to obtain relief by surcharge for violations of [ERISA] ” 102(a) and 104(b) [for disclosure violations], a plan participant or beneficiary must show that the violation injured him or her.” Id. at 1881. Although Amara held that detrimental reliance was not necessary, i.e., each plaintiff need not prove that he or she actually read the misleading statements and relied on them, and instead authorized a watercooler-type theory of harm, this holding still requires courts to engage in an individualized inquiry of precisely what each class member read or heard “through fellow employees or [in] informal workplace discussion” prior to authorizing monetary relief. Amara, 131 S. Ct. at 1881-82. Such an inquiry should most certainly preclude Rule 23(b)(3) class actions, as the individual inquiries will predominate over any common issues, but should also preclude Rule 23(b)(2) class actions similar to Mezyk, where the class claim stems from the company's alleged misrepresentations. Whether the Mezyk holding will reach the Seventh Circuit Court of Appeals remains to be seen.

The Commonality Requirement

Another aspect of Dukes that has brought about changes in the lower courts' analysis is its holding regard Rule 23(a)'s commonality requirement, the rule requiring a putative class action plaintiff to show that “there are questions of law or fact common to the class.” Fed. R. Civ. P. 23(a). Prior to Dukes, plaintiffs needed only to show a common nucleus of operative facts among the claims of the proposed class members. In practice, commonality was nearly always deemed satisfied, as “[a]ny competently crafted class complaint literally raises common 'questions.'” Dukes, 131 S. Ct. at 2551 (citation omitted). Post-Dukes, plaintiffs must now demonstrate that the common contention is of “such a nature that it is capable of classwide resolution ' which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Dukes, 131 S. Ct. at 2551.

Groussman v. Motorola, Inc., No. 10 C 911, 2011 U.S. Dist. LEXIS 134769 (N.D. Ill. Nov. 15, 2011), demonstrates the powerful effect of Dukes on the commonality requirement. There, the plaintiffs alleged that the defendant-company continued offering its stock as part of employees' 401(k) investments, when the company possessed negative information about its business, and failed to provide complete and accurate information to plan participants. Id. at *3-4. The Groussman plaintiffs failed the commonality test. Not surprisingly, the plaintiffs argued that the company's alleged violations arose from a common set of facts (i.e., all proposed class members were participants in the plan and all had invested in the company's stock) and common legal issues (i.e., whether the company violated ERISA or breached its fiduciary duties). The plaintiffs sought to ignore Dukes, arguing that courts in other cases of this type have found such cases to be “particularly suitable for class certification.” Id. at *10.

The district court did not agree with the plaintiffs' argument, noting that “the determination of whether the requirements are met in this case must be made based upon a detailed and rigorous evaluation of the facts and law in this case, not based on rulings in other cases, particularly pre-Dukes cases.” Id. “[F]or the commonality requirement more is required than merely some common aspects among class members.” Id. at *9-10. The plaintiffs failed to do so, instead alleging common facts and legal issues that were precisely “the type of loose factual connections among class members that does not suffice under Dukes.” Id. at *10.

By contrast, in Merrimon v. Unum Life Insurance Company of America, No. 1:10-CV-447-NT, 2012 U.S. Dist. LEXIS 15516 (D. Me. Feb. 3, 2012), the court determined that plaintiffs' breach of fiduciary duty claims could be determined on a classwide basis. There, the plaintiffs alleged that the insurance company breached its fiduciary duty by retaining and investing the plaintiffs' death benefits in retained asset accounts (RAAs) in a manner aimed at optimizing the company's own earnings, rather than the beneficiaries' earnings. The district court certified the class under Rule 23(b)(3), holding that the breach of fiduciary duty arose out of the company's discretionary choices to retain the assets behind the RAAs in its own general accounts and to set the features for these RAAs, including the applicable interest rates, in its own interest rather than solely in the interest of the beneficiaries. Id. at *39-40. “These choices affected all of the beneficiaries in a similar manner ' i.e., in the loss of additional interest to their accounts for the period of time in which they left their funds in the RAAs.” Id. at *40. While the plaintiffs' individual damages would be different based on how long they kept their money in the RAAs, the court found that plaintiffs' varying motivations for leaving money in these accounts was not relevant to the company's liability or the calculation of damages. Id.; see also Churchill v. Cigna Corporation, No. 10-06911, 2011 U.S. Dist. LEXIS 90716 (E.D. Pa. Aug. 12, 2011) (granting Rule 23(b)(2) class certification where the plaintiffs challenged the company's national policy of denying a certain type of treatment for autism; the commonality element was satisfied “[b]ecause the entire class was allegedly harmed by [the company's] uniform policy.”).

Conclusion

As the above cases make clear, obtaining class certification in the post-Dukes era is far more difficult, as district courts now must genuinely probe behind the pleadings and determine whether common issues will indeed answer critical questions and whether damages can be determined on a classwide basis. Amara adds an extra level of individualized inquiry. With the requirement of actual harm, plaintiffs must somehow show that all class members heard the same misrepresentation and reacted in the same manner. While ERISA fiduciary duty class actions will continue to be brought, the rate of success is expected to drastically decrease.

Darren E. Nadel is a shareholder in Littler Mendelson's Denver office, where he represents employers nationally in complex litigation and employment law. He represents clients in cases involving trade secrets and unfair competition, employee benefits litigation, and whistleblower and Sarbanes Oxley matters.
Allison R. Cohn is an associate in the same office.

The U.S. Supreme Court issued two starkly different decisions in 2011 that together will shape (and, indeed, have already shaped) the analysis that courts must employ in determining whether to certify ERISA class actions: Wal-Mart Stores, Inc. v. Dukes , 131 S. Ct. 2541 (2011), and CIGNA Corp. v. Amara , 131 S. Ct. 1866 (2011). Dukes has, of course, clarified the standard for determining commonality in class actions and narrowed the circumstances in which plaintiffs may certify Federal Rule of Civil Procedure 23(b)(2) class actions. Amara ruled that a plaintiff must establish “actual harm” from alleged misrepresentations made about upcoming changes to pension plan benefits in order to obtain “appropriate equitable relief” under section 502(a)(3) of ERISA. Taken together, Dukes and Amara make class certification exceedingly difficult (though not impossible) in the ERISA context.

Background

Prior to Dukes, breach of fiduciary duty claims were commonly certified under Rule 23(b)(2), which permits certification of class actions where “injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” Certification under Rule 23(b)(2) has traditionally been easier to obtain than under Rule 23(b)(3), which permits certification of claims for monetary relief where common issues predominate over individualized issues. In February 2012, however, the Second Circuit Court of Appeals became the first circuit court post-Dukes to address whether a Rule 23(b)(2) class action is the proper vehicle when the plaintiffs seek monetary recovery in addition to declaratory and injunctive relief. The Second Circuit said it was not.

The Second Circuit Ruling

In Nationwide Life Insurance Co. v. Haddock, No. 10-4237, 2012 U.S. App. LEXIS 2340 (2d Cir. Feb. 6, 2012), the Second Circuit reversed a district court order granting class certification. The plaintiffs in Haddock asserted that the insurance company breached its fiduciary duty under ERISA by allegedly collecting “revenue sharing payments” from mutual funds that it selected as investment choices for its annuity holders. The district court had granted class certification under Rule 23(b)(2). In reversing, the Second Circuit went out of its way to state that the district court's order granting class certification was correct under the Second Circuit's pre-Dukes analysis.

However, the Second Circuit recognized that, under the Supreme Court's holding in Dukes, “a class complaint alleging numerous individual claims for monetary relief may not be certified under Rule 23(b)(2) 'at least where ' the monetary relief is not incidental to the injunctive or declaratory relief'.” Id. at *4 (quoting Dukes, 131 S. Ct. at 2557). Analyzing the suit before it, the Second Circuit concluded that the plaintiffs' claims for monetary relief were not merely incidental to the claim for equitable relief. Specifically, the Second Circuit observed that “if plaintiffs are ultimately successful in establishing [the insurance company's] liability ', the district court would then need to determine the separate monetary recoveries to which individual plaintiffs are entitled.” Id. at *6. The Second Circuit then recognized that “[t]his process would require the type of non-incidental, individualized proceedings for monetary awards” that the Supreme Court said are impermissible under Rule 23(b)(2). Id. The Second Circuit has remanded the case to the district court to determine whether certification is appropriate under Rule 23(b)(3). Id. at *7.

In the Courts

Lower courts have also taken seriously Dukes' admonition that a rigorous analysis of the allegations is necessary, and they are now focusing on whether the relief sought will require the court to engage in the type of individualized inquiry that Dukes held was outside of the scope of Rule 23(b)(2). For example, in Pennsylvania Chiropractic Association v. Blue Cross Blue Shield , No. 09 C 5619, 2011 U.S. Dist. LEXIS 148689, at*42 (N.D. Ill. Dec. 28, 2011), the district court rejected an attempt to certify an ERISA class action under Rule 23(b)(2). The court relied on Dukes' explanation that “[t]he key to the (b)(2) class is the indivisible nature of the injunctive or declaratory remedy warranted ' the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.” Id. at *41 (citing Dukes, 131 S. Ct. at 2557).

There, the plaintiffs argued that they qualified for Rule 23(b)(2) certification because they were challenging the defendants' uniform misconduct and because the recovery of damages in an ERISA action constitutes equitable relief. The Northern District of Illinois was not convinced. “The fact that monetary relief may be characterized as equitable is irrelevant.” Id. at *41-42 (internal quotation marks and citation omitted). Rather, the monetary relief must be merely incidental ' i.e., a mere mechanical computation ' to the grant of the injunction or declaratory relief. The plaintiff failed to make any such showing. Id. at *42.

Other Views

Not all lower courts, however, have paid sufficient attention to Dukes or Amara. In Mezyk v. U.S. Bank Pension Plan, No. 3:09-cv-384-JPG-DGW, 2011 U.S. Dist. LEXIS 146758 (S.D. Ill. Dec. 21, 2011), the plaintiffs asserted claims related to the transition from a traditional defined benefit pension plan to a cash balance plan, including claims that Plan failed to give adequate notice of an amendment that significantly reduced the rate of future benefit accruals, and that the Summary Plan Description (SPD) contained misleading information. The plaintiffs sought the value of the benefit to which each would have been entitled had the Plan not been amended. The district court had certified the notice and SPD claims prior to Dukes, and the defendant moved for decertification in light of it. The district court denied the motion, disagreeing that Dukes forecloses certification under Rule 23(b)(2) of claims that require individualized determinations of relief.

In a one-paragraph “analysis” of Dukes, the district court concluded that the relief the plaintiffs sought was for declaratory or injunctive relief that would apply to the class as a whole ' a declaration that certain Plan provisions violate ERISA, an injunction requiring the Plan to cease implementing those Plan provisions and reformation of the Plan, and an injunction requiring recalculation and payment of benefits under the proper calculations. According to the district court, “[a]ny monetary relief that might flow from such a decision is incidental, which [Dukes] does not foreclose.” Id. at *7-8.

Not only did the district court give Dukes short shrift, but it also entirely ignored Amara's holding that plaintiffs must establish “actual damages” prior to obtaining reformation of the plan. Under Amara, “to obtain relief by surcharge for violations of [ERISA] ” 102(a) and 104(b) [for disclosure violations], a plan participant or beneficiary must show that the violation injured him or her.” Id. at 1881. Although Amara held that detrimental reliance was not necessary, i.e., each plaintiff need not prove that he or she actually read the misleading statements and relied on them, and instead authorized a watercooler-type theory of harm, this holding still requires courts to engage in an individualized inquiry of precisely what each class member read or heard “through fellow employees or [in] informal workplace discussion” prior to authorizing monetary relief. Amara, 131 S. Ct. at 1881-82. Such an inquiry should most certainly preclude Rule 23(b)(3) class actions, as the individual inquiries will predominate over any common issues, but should also preclude Rule 23(b)(2) class actions similar to Mezyk, where the class claim stems from the company's alleged misrepresentations. Whether the Mezyk holding will reach the Seventh Circuit Court of Appeals remains to be seen.

The Commonality Requirement

Another aspect of Dukes that has brought about changes in the lower courts' analysis is its holding regard Rule 23(a)'s commonality requirement, the rule requiring a putative class action plaintiff to show that “there are questions of law or fact common to the class.” Fed. R. Civ. P. 23(a). Prior to Dukes, plaintiffs needed only to show a common nucleus of operative facts among the claims of the proposed class members. In practice, commonality was nearly always deemed satisfied, as “[a]ny competently crafted class complaint literally raises common 'questions.'” Dukes, 131 S. Ct. at 2551 (citation omitted). Post-Dukes, plaintiffs must now demonstrate that the common contention is of “such a nature that it is capable of classwide resolution ' which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Dukes, 131 S. Ct. at 2551.

Groussman v. Motorola, Inc. , No. 10 C 911, 2011 U.S. Dist. LEXIS 134769 (N.D. Ill. Nov. 15, 2011), demonstrates the powerful effect of Dukes on the commonality requirement. There, the plaintiffs alleged that the defendant-company continued offering its stock as part of employees' 401(k) investments, when the company possessed negative information about its business, and failed to provide complete and accurate information to plan participants. Id. at *3-4. The Groussman plaintiffs failed the commonality test. Not surprisingly, the plaintiffs argued that the company's alleged violations arose from a common set of facts (i.e., all proposed class members were participants in the plan and all had invested in the company's stock) and common legal issues (i.e., whether the company violated ERISA or breached its fiduciary duties). The plaintiffs sought to ignore Dukes, arguing that courts in other cases of this type have found such cases to be “particularly suitable for class certification.” Id. at *10.

The district court did not agree with the plaintiffs' argument, noting that “the determination of whether the requirements are met in this case must be made based upon a detailed and rigorous evaluation of the facts and law in this case, not based on rulings in other cases, particularly pre-Dukes cases.” Id. “[F]or the commonality requirement more is required than merely some common aspects among class members.” Id. at *9-10. The plaintiffs failed to do so, instead alleging common facts and legal issues that were precisely “the type of loose factual connections among class members that does not suffice under Dukes.” Id. at *10.

By contrast, in Merrimon v. Unum Life Insurance Company of America, No. 1:10-CV-447-NT, 2012 U.S. Dist. LEXIS 15516 (D. Me. Feb. 3, 2012), the court determined that plaintiffs' breach of fiduciary duty claims could be determined on a classwide basis. There, the plaintiffs alleged that the insurance company breached its fiduciary duty by retaining and investing the plaintiffs' death benefits in retained asset accounts (RAAs) in a manner aimed at optimizing the company's own earnings, rather than the beneficiaries' earnings. The district court certified the class under Rule 23(b)(3), holding that the breach of fiduciary duty arose out of the company's discretionary choices to retain the assets behind the RAAs in its own general accounts and to set the features for these RAAs, including the applicable interest rates, in its own interest rather than solely in the interest of the beneficiaries. Id. at *39-40. “These choices affected all of the beneficiaries in a similar manner ' i.e., in the loss of additional interest to their accounts for the period of time in which they left their funds in the RAAs.” Id. at *40. While the plaintiffs' individual damages would be different based on how long they kept their money in the RAAs, the court found that plaintiffs' varying motivations for leaving money in these accounts was not relevant to the company's liability or the calculation of damages. Id.; see also Churchill v. Cigna Corporation, No. 10-06911, 2011 U.S. Dist. LEXIS 90716 (E.D. Pa. Aug. 12, 2011) (granting Rule 23(b)(2) class certification where the plaintiffs challenged the company's national policy of denying a certain type of treatment for autism; the commonality element was satisfied “[b]ecause the entire class was allegedly harmed by [the company's] uniform policy.”).

Conclusion

As the above cases make clear, obtaining class certification in the post-Dukes era is far more difficult, as district courts now must genuinely probe behind the pleadings and determine whether common issues will indeed answer critical questions and whether damages can be determined on a classwide basis. Amara adds an extra level of individualized inquiry. With the requirement of actual harm, plaintiffs must somehow show that all class members heard the same misrepresentation and reacted in the same manner. While ERISA fiduciary duty class actions will continue to be brought, the rate of success is expected to drastically decrease.

Darren E. Nadel is a shareholder in Littler Mendelson's Denver office, where he represents employers nationally in complex litigation and employment law. He represents clients in cases involving trade secrets and unfair competition, employee benefits litigation, and whistleblower and Sarbanes Oxley matters.
Allison R. Cohn is an associate in the same office.