Highlights
- Three benefit companies recently requested that the U.S. Supreme Court review a decision by the U.S. Court of Appeals for the Fifth Circuit regarding the proper standard for determining Article III standing in excessive fee class action cases brought under the Employee Retirement Income Security Act (ERISA).
- The Fifth Circuit held that a Rule 23 plan participant has standing to bring claims on behalf of participants in other benefit plans, which will affect litigation involving ERISA benefit plans, employers and benefit plan service providers.
- The Fifth Circuit's decision also widens the split among the circuit courts regarding the proper test for determining constitutional standing in class actions, particularly in the benefit plan service provider industry.
Chavez v. Plan Benefit Services, Inc., 108 F.4th 297 (5th Cir. 2024), began when three employees of a single employer sued the service providers of their health and welfare benefit plan for allegedly charging excessive fees in connection with the services they provided in violation of the Employee Retirement Income Security Act (ERISA).
The defendant-providers specialize in employer benefit plans for employers who are seeking government contracts and are subject to the prevailing wage requirements of the McNamara-O'Hara Service Contract Act or Davis Bacon Act. The defendants offer a variety of services for group health plans and retirement benefit plans that are designed to satisfy these prevailing wage requirements. Employers can elect from a host of services offered by the defendants to create a unique benefit offering, which may be retirement-only benefits, health-only benefits or a combination of the two. The rates charged for these services vary depending on the services selected and the size of the employer.
Based on the services selected by the employer, the participant contributes to one or both of the following trusts operated by the defendants: 1) the Contractors and Employee Retirement Trust (CERT), which covers retirement plans, and 2) the Contractors Plan Trust (CPT), which covers health and welfare benefits. The defendants also provide administrative and marketing services to plans that participate in the trusts. More than 3,000 plans – comprising over 290,000 participants and sponsored by more than 2,200 unaffiliated employers – are in CERT and CPT.
The plaintiffs allege that the defendants charged "excessive compensation" for the services provided to their employer benefit plans and the thousands of other plans in CERT and CPT in violation of ERISA. The plaintiffs also alleged that the defendants breached their ERISA fiduciary duty of loyalty to all of the plan participants by paying its fees out of plan assets.
The plaintiffs moved for class certification under Federal Rule of Civil Procedure 23(b)(1)(B) and 23(b)(3), seeking to represent a class of more than 290,000 participants in more than 3,000 plans that provide benefits through CERT and CPT. The district court certified the class, which was subsequently vacated on appeal by the Fifth Circuit. On remand, the plaintiffs filed a second motion for class certification, and the district court again certified the class under Rules 23(b)(1) and 23(b)(3). This decision was appealed, and the Fifth Circuit ultimately affirmed the district court's finding that the plaintiffs had standing to pursue claims on behalf of the class and order granting class certification under Rule 23(b)(3) but reversed the district court's order granting class certification under Rule 23(b)(1).
The defendants filed a petition for a writ of certiorari to the U.S. Supreme Court, arguing that the Fifth Circuit's holding violated established principles of standing under Article III because the three plaintiffs failed to show they suffered the same harm as the participants in the thousands of unrelated plans in which the plaintiffs did not participate.
Circuit Split on Article III Standing
There is a circuit court split on the approaches and tests utilized by federal courts to decide Article III standing in class actions. In Chavez, the Fifth Circuit identified the various approaches and tests adopted by courts to determine whether a named plaintiff has the required Article III standing to bring an ERISA claim on behalf of others, including the "class certification" approach and "standing" approach.
According to the Fifth Circuit, under the "class certification" approach, a plaintiff must establish standing regarding only his or her own claims, as well as the commonality and typicality requirements of Rule 23, to bring claims on behalf of the class. This approach has been adopted by the U.S. Courts of Appeals for the First, Third, Fourth, Sixth and Tenth Circuits.
Under the "standing" approach, a plaintiff must show standing to his or her own claims, as well as the claims of absent class members before the court can turn to the Rule 23 analysis. This approach has been adopted by the U.S. Court of Appeals for the Second, Seventh and Eleventh Circuits.
The Fifth Circuit declined to affirmatively adopt either the standing approach or the class certification approach. Instead, it held that the plaintiffs in Chavez satisfied both approaches. In their petition for Supreme Court review, the defendants argue that the proper test is the standing approach and that the Fifth Circuit failed to properly apply the standing approach in affirming a class involving thousands of unrelated plans.
Potential Impact
If the petition for certiorari is denied, then the Fifth Circuit's decision will stand and support future arguments that participants may sue on behalf of participants in that same plan, as well as on behalf of participants in other unrelated plans.
Should the Supreme Court agree to review the Chavez decision, it will decide whether the proper test for determining Article III standing in ERISA class actions is the "standing" or "class certification" approach. Employers and service providers are hopeful that the petition will be granted and that much-needed clarity will be provided regarding the parameters of ERISA class actions and the potential scope of liability.
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