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Teets v. Great-West Life & Annuity Insurance Co.

United States Court of Appeals, Tenth Circuit

March 27, 2019

JOHN TEETS, Plaintiff - Appellant,

          Appeal from the United States District Court for the District of Colorado (D.C. No. 1:14-CV-02330-WJM-NYW)

          Peter K. Stris, Stris & Maher LLP, Los Angeles, California (Rachana A. Pathak, John Stokes, Stris & Maher LLP, Los Angeles, California; Nina Wasow, Todd F. Jackson, Feinberg, Jackson, Worthman & Wasow LLP, Oakland, California; Todd Schneider, Mark Johnson, James Bloom, Schneider Wallace Cottrell Konecky Wotkyns LLP, Emeryville, California; Scot Bernstein, Law Offices of Scot D. Bernstein, P.C., Folsom, California; Garret W. Wotkyns, Michael McKay, Schneider Wallace Cottrell Konecky Wotkyns LLP, Scottsdale, Arizona; Erin Riley, Matthew Gerend, Keller Rohrback LLP, Seattle, Washington; Jeffrey Lewis, Keller Rohrback LLP, Oakland, California, with him on the brief), for the Plaintiff - Appellant.

          Carter G. Phillips, Sidley Austin LLP, Washington, D.C. (Michael L. O'Donnell, Edward C. Stewart, Wheeler Trigg O'Donnell LLP, Denver, Colorado; Joel S. Feldman, Mark B. Blocker, Sidley Austin LLP, Chicago, Illinois, with him on the brief), for the Defendant -Appellee.

          William Alvarado Rivera, (Mary E. Signorille, AARP Foundation Litigation, Washington, D.C. with him on the brief) for AARP and AARP Foundation Litigation, Amici Curiae.

          James F. Jorden, (Waldemar J. Pflepsen, Jr., Carlton Fields Jorden Burt, P.A., Washington D.C.; and Michael A. Valerio, Carlton Fields Jorden Burt, P.A., Hartford, Connecticut with him on the brief), for American Council of Life Insurers, Amicus Curiae.

          Nancy G. Ross, Mayer Brown LLP, Chicago, Illinois, (Jed W. Glickstein, Mayer Brown LLP, Chicago, Illinois; Brian D. Netter, Mayer Brown LLP, Washington, D.C.; Steven P. Lehotsky, U.S. Chamber Litigation Center, Washington, D.C.; Janet M. Jacobson, Washington, D.C., with her on the brief), for the Chamber of Commerce of the United State of America and the American Benefits Council, Amici Curiae.

          Before MATHESON, BACHARACH, and McHUGH, Circuit Judges.

          MATHESON, Circuit Judge

         Great-West Life Annuity and Insurance Company ("Great-West") manages an investment fund that guarantees investors will never lose their principal or the interest they accrue. It offers the fund to employers as an investment option for their employees' retirement savings plans, which are governed by the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq.

         John Teets-a participant in an employer retirement plan-invested money in Great-West's fund. He later sued Great-West under ERISA, alleging Great-West breached a fiduciary duty to participants in the fund or that Great-West was a non-fiduciary party in interest that benefitted from prohibited transactions with his plan's assets.

         After certifying a class of 270, 000 plan participants like Mr. Teets, the district court granted summary judgment for Great-West, holding that (1) Great-West was not a fiduciary and (2) Mr. Teets had not adduced sufficient evidence to impose liability on Great-West as a non-fiduciary party in interest. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

         I. BACKGROUND

         Great-West is a Colorado-based insurance company that provides "recordkeeping, administrative, and investment services to 401(k) plans." Aplt. App., Vol. II at 149. It qualifies as a service provider-a "person providing services to [a] plan"-under ERISA. See ERISA § 3(14)(B), 29 U.S.C. § 1002(14)(B).

         Mr. Teets participated through his employment in the Farmer's Rice Cooperative 401(k) Savings Plan ("the Plan"). Under the Plan, employees contribute to their own retirement accounts and choose how to allocate their contributions among the investment options offered. When employees invest in a particular fund, they become "participants" in that fund. Great-West contracts with the Plan and other comparable employer plans to offer the investment fund that is the subject of this case. Great-West is not in a contractual relationship with participants.

         In this section, we first provide an overview of the ERISA legal framework governing this appeal. We then detail the factual background of the case and the proceedings in the district court.

         A. Statutory Background

         1. ERISA Protections Against Benefit Plan Mismanagement

         ERISA regulates employee benefit plans, including health insurance plans, pension plans, and 401(k) savings plans. It is a "comprehensive and reticulated statute, the product of a decade of congressional study of the Nation's private employee benefit system." Mertens v. Hewitt Assocs., 508 U.S. 248, 251 (1993) (quotations omitted). It governs employers that create and administer benefit plans as well as third parties that provide services for plans. See 29 U.S.C. § 1002(1), (4), (14), (16).

         ERISA seeks to protect employees against mismanagement of their benefit plans. See Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 15 (1987) ("The focus of the statute thus is on the administrative integrity of benefit plans."). "[T]o ensure that employees will not be left empty-handed," Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996), ERISA imposes fiduciary duties on those responsible for plan management and administration. See ERISA §§ 404, 406, 29 U.S.C. §§ 1104, 1106. "Congress commodiously imposed fiduciary standards on persons whose actions affect the amount of benefits retirement plan participants will receive." John Hancock Mut. Life Ins. Co. v. Harris Tr. & Sav. Bank, 510 U.S. 86, 96 (1993) ("Harris Trust ").

         2. ERISA Fiduciaries

         a. Establishing fiduciary status-named and functional fiduciaries

         Under ERISA, a party involved in managing a benefit plan takes on fiduciary obligations in one of two ways. See In re Luna, 406 F.3d 1192, 1201 (10th Cir. 2005). First, the instrument establishing a plan must specify at least one fiduciary-typically the employer or a trustee-that will have the "authority to control and manage the operation and administration of the plan." ERISA § 402(a), 29 U.S.C. § 1102(a). These are "named fiduciaries." See Maez v. Mountain States Tel. & Tel, Inc., 54 F.3d 1488, 1498 (10th Cir. 1995) (defining "named fiduciary"). Second, a party not named in the instrument can nonetheless be a "functional fiduciary" by virtue of the authority the party holds over the plan. See Santomenno v. Transamerica Life Ins. Co., 883 F.3d 833, 837 (9th Cir. 2018) ("Transamerica Life Insurance"); David P. Coldesina, D.D.S, P.C., Emp. Profit Sharing Plan & Tr v. Estate of Simper, 407 F.3d 1126, 1132 (10th Cir. 2005) ("Coldesina ") (describing the "functional" approach to evaluating fiduciary status). Under § 3(21)(A) of ERISA, [1] a party becomes a functional fiduciary when

(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).[2]

         Functional fiduciaries' obligations are limited in scope: "Plan management or administration confers fiduciary status only to the extent the party exercises discretionary authority or control." Coldesina, 407 F.3d at 1132. And they must actually exercise their authority or control over the plan's assets.[3] Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905, 914 (7th Cir. 2013) (explaining that a decision not to exercise control over a plan's assets does not confer fiduciary status). Any alleged breach of a functional fiduciary's obligations must arise out of an exercise of that authority or control. See id. at 913; Assocs. in Adolescent Psychiatry, SC v. Home Life Ins. Co., 941 F.2d 561, 569 (7th Cir. 1991).

         As the following discussion illustrates, although named fiduciaries and functional fiduciaries obtain fiduciary status in different ways, they are bound by the same restrictions and duties under ERISA.[4]

         b. Fiduciary duties and prohibited transactions

         Section 404 of ERISA imposes general duties of loyalty on fiduciaries, requiring them to "discharge [their] duties with respect to a plan solely in the interest of the participants and beneficiaries" and "for the exclusive purpose of . . . [1] providing benefits as to participants and their beneficiaries; and [2] defraying reasonable expenses of administering the plan." 29 U.S.C. § 1104(a)(1).

         In addition to imposing general duties, ERISA prohibits fiduciaries from engaging in certain specific transactions. First, it restricts transactions between plans and fiduciaries. Under § 406(b)(1), a fiduciary may not "deal with the assets of the plan in his own interest or for his own account." 29 U.S.C. § 1106(b)(1). Second, ERISA restricts transactions between fiduciaries and non-fiduciary third parties, referred to as "parties in interest." The latter can include service providers. See ERISA § 3(14)(B), 29 U.S.C. § 1002(14)(B). Under § 406(a), a fiduciary may not allow a plan to engage in a transaction the fiduciary knows or should know is (1) a "sale or exchange, or leasing, of any property between the plan and a party in interest"; (2) "lending of money or other extension of credit between the plan and a party in interest"; (3) "furnishing of goods, services, or facilities between the plan and a party in interest"; (4) "transfer to, use by or for the benefit of, a party in interest, of any assets of the plan"; or (5) "acquisition, on behalf of the plan, of any employer security or employer real property in violation of [§] 1107(a)." 29 U.S.C. § 1106(a)(1)(A)-(E).

         If a fiduciary engages in one of these prohibited transactions under § 406, ERISA's civil enforcement provision, § 502, allows plan participants to sue the fiduciary "to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan" or "to obtain other appropriate equitable relief." ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3). Fiduciaries can avoid liability for a prohibited transaction if they qualify for certain exemptions under § 408 of ERISA.

         3. ERISA Non-Fiduciary Parties in Interest and Prohibited Transactions

         Although parties in interest have no fiduciary obligations to a plan or its participants, the Supreme Court has read § 502(a)(3) to allow a suit against a party in interest for its participation in a prohibited transaction. Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241 (2000) ("Salomon ") ("[Section] 502(a)(3) admits of no limit . . . on the universe of possible defendants"). A party in interest is liable if it "had actual or constructive knowledge of the circumstances that rendered the transaction unlawful"-that is, prohibited under § 406(a). Id. at 251. We discuss this standard in detail below.

         B. Factual Background

         1. The Key Guaranteed Portfolio Fund

         a. Overview

         Great-West offers an investment product called the Key Guaranteed Portfolio Fund ("KGPF"). The KGPF is a stable-value fund. It "guarantees capital preservation." Aplt. App., Vol. II at 150. This means KGPF participants will never lose the principal they invest or the interest they earn, which is credited daily to their accounts. Id. The KGPF was one of 29 investment options the Farmer's Rice Cooperative Plan's fiduciaries chose to offer participants like Mr. Teets.

         b. Great-West's management of the KGPF and the Credited Interest Rate

         Great-West deposits the money that participants have invested in the KGPF into its general account. That account, in turn, is invested in fixed-income instruments such as treasury bonds, corporate bonds, and mortgage-backed securities. Great-West employs a self-described "conservative investment strategy." Id. at 157, 173. Its investments earn lower interest rates than some higher-risk instruments or funds.

         Money invested in the KGPF earns interest at the "Credited Interest Rate" (the "Credited Rate"). Under the contracts it executes with employer plans, Great-West sets the Credited Rate quarterly, announcing the new rate at least two business days before the start of each quarter. Its contract with Mr. Teets's Plan provides, "Interest earned on the Key Guaranteed Portfolio Fund value is compounded daily to the effective annual interest rate. The interest rate to be credited to the Group Contract holder [the Plan] will be determined by [Great-West] prior to the last day of the previous calendar quarter." Aplt. App., Vol. I at 129. "The effective annual interest rate will never be less than 0%." Id.

         Great-West retains as revenue the difference between the total yield on the KGPF's monetary instruments and the Credited Rate, also known as the "margin" or the "spread." Some portion of the margin goes toward Great-West's operating costs. Great-West publicly discloses an administrative fee of .89 percent, but claims that figure does not capture all the costs associated with maintaining the KGPF. Great-West retains as profit whatever portion of the margin exceeds its costs. The parties dispute the total KGPF-associated profit Great-West has earned, but all agree that as of 2016 it was greater than $120 million.

         The Credited Rate dropped from 3.55 percent before the financial crisis in 2008 to 1.10 percent in 2016. During that time, the Credited Rate increased only once, in 2013. At the same time, Great-West's margin remained relatively constant, between approximately two and three percent.[5]

         c. Exiting the KGPF

         Plans may terminate their relationship with Great-West based on changes to the Credited Rate. If they do, Great-West "reserves the right to defer payment" of participants' KGPF money back to the plan-presumably to reinvest with another provider-"not longer than 12 months."[6] Id. There is no evidence Great-West has ever exercised the option to impose that waiting period.

         Participants who have placed their money in the KGPF may withdraw their principal and accrued interest at any time without paying a fee. Great-West does, however, prohibit plans offering the KGPF from also offering any other stable value funds, money market funds, or certain bond funds-in other words, products with comparable risk profiles.[7]

         C. Procedural Background

         Mr. Teets sued Great-West in the United States District Court for the District of Colorado on behalf of all employee benefit plan participants who had invested in the KGPF since 2008, as well as those participants' beneficiaries. The district court certified the class under Federal Rule of Civil Procedure 23(b)(3). See Teets v. Great-West Life & Annuity Ins. Co., 315 F.R.D. 362, 374 (D. Colo. 2016). At certification, the class included approximately 270, 000 KGPF participants spread across more than 13, 000 plans.[8] Id. at 369. None of the plans' named fiduciaries is a named plaintiff or a member of the class.

         1. Mr. Teets's ERISA Claims

         Mr. Teets alleged three ERISA violations. His first two claims alleged Great-West had violated ERISA's fiduciary duty provisions. First, Mr. Teets claimed that Great-West had breached its general duty of loyalty under § 404 by (1) setting the Credited Rate for its own benefit rather than for the plans' and participants' benefit, (2) setting the Credited Rate artificially low and retaining the difference as profit, and (3) charging excessive fees. Second, he claimed that Great-West, again acting in its fiduciary capacity, had engaged in a prohibited transaction under § 406(b) by "deal[ing] with the assets of the plan in [its] own interest or for [its] own account." 29 U.S.C. § 1106(b).

         As a prerequisite to bring both of these claims, Mr. Teets alleged that Great-West is an ERISA fiduciary because it exercises authority or control over the quarterly Credited Rate and, by extension, controls its compensation. The district court limited its review of these two fiduciary duty claims by addressing only this prerequisite-that is, whether Mr. Teets had sufficiently established Great-West's fiduciary status. Because the court found that Great-West was not a fiduciary, it did not address whether Great-West had breached any fiduciary obligations. Great-West's fiduciary status is thus the focus of our review of Mr. Teets's fiduciary duty claims.

         Mr. Teets's third claim, raised in the alternative, was based on Great-West's having non-fiduciary status. He alleged that Great-West was a non-fiduciary party in interest to a non-exempt prohibited transaction under § 406(a) insofar as it had used plan assets for its own benefit.

         On all three claims, Mr. Teets sought declaratory and injunctive relief and "other appropriate equitable relief," including restitution and an accounting for profits. Aplt. App., Vol. I at 37.

         2. Summary Judgment Ruling

         After discovery, the parties filed cross-motions for summary judgment. The district court denied Mr. Teets's motion and granted summary judgment for Great-West. It disposed of Mr. Teets's first two claims at the same time, concluding that Great-West was not acting as a fiduciary of the Plan or its participants. It held that Great-West's contractual power to choose the Credited Rate did not render it a fiduciary under ERISA because participants could "veto" the chosen rate by withdrawing their money from the KGPF. Id. at 99. As to Great-West's ability to set its own compensation, the court held that Great-West did not have control over its compensation and thus was not a fiduciary because the ultimate amount it earned depended on participants' electing to keep their money in the KGPF each quarter.[9]

         The district court also granted summary judgment on Mr. Teets's third claim, concluding that Great-West was not liable as a non-fiduciary party in interest because Mr. Teets had failed to establish a genuine dispute as to whether Great-West had "actual or constructive knowledge of the circumstances that rendered the transaction unlawful." Id. at 105 (quoting Salomon, 530 U.S. at 251). Mr. Teets timely appealed.

         Our review thus focuses on (1) whether Great-West is a functional fiduciary because it "exercises . . . authority or control" over Plan assets, ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), when its sets the Credited Rate or its compensation; and (2) whether, if Great-West is not a fiduciary, it is liable as a non-fiduciary party in interest for its participation in a transaction prohibited under ERISA.

         We will add further factual and procedural background as it becomes relevant.

         D. Summary Judgment Background

         "We review a grant of summary judgment de novo, applying the same legal standard as the district court." Coldesina, 407 F.3d at 1131. "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). We view the evidence and draw reasonable inferences in the light most favorable to the nonmoving party. Bryant v. Farmers Ins. Exch., 432 F.3d 1114, 1124 (10th Cir. 2005).

         "The movant bears the initial burden of making a prima facie demonstration of the absence of a genuine issue of material fact and entitlement to judgment as a matter of law." Libertarian Party of N.M. v. Herrera, 506 F.3d 1303, 1309 (10th Cir. 2007) (citing Celotex, 477 U.S. at 323). A movant that does not bear the burden of persuasion at trial may satisfy this burden "by pointing out to the court a lack of evidence on an essential element of the nonmovant's claim." Id. (citing Celotex, 477 U.S. at 325).

         "If the movant meets this initial burden, the burden then shifts to the nonmovant to set forth specific facts from which a rational trier of fact could find for the nonmovant." Id. (quotations omitted). To satisfy this burden, the nonmovant must identify facts "by reference to affidavits, deposition transcripts, or specific exhibits incorporated therein." Id. (citation omitted). These facts "must establish, at a minimum, an inference of the presence of each element essential to the case." Bausman v. Interstate Brands Corp., 252 F.3d 1111, 1115 (10th Cir. 2001).

         "Where, as here, we are presented with cross-motions for summary judgment, we must view each motion separately, in the light most favorable to the non-moving party, and draw all reasonable inferences in that party's favor." United States v. Supreme Ct. of N.M., 839 F.3d 888, 906-07 (10th Cir. 2016) (quotations omitted).


         Mr. Teets argues that (A) Great-West is a fiduciary because it has the authority to set the Credited Rate each quarter and, by extension, to determine its own compensation; and (B) even if Great-West is not a fiduciary, it is nonetheless liable as a party in interest because it benefitted from a transaction prohibited under ERISA.

         A. Fiduciary Duty Claims-Great-West's Fiduciary Status

         The threshold question for the two fiduciary duty claims is whether Great-West is a functional fiduciary under ERISA. Mr. Teets argues it is because Great-West exercises "authority or control" over the Plan or its assets by changing the Credited Rate without plan or participant approval. Aplt. Br. at 17-19, 25-26. He also contends Great-West has sufficient control over its own compensation to render it an ERISA fiduciary. We conclude that Mr. Teets did not make an adequate showing in response to Great-West's summary judgment motion to support these points.

         The following discussion describes the pertinent legal background, summarizes the district court's ruling, and analyzes the evidence of Great-West's authority in relation to plans and participants.

         1. Legal Background

         As noted above, a service provider can be a functional fiduciary under § 3(21)(A) of ERISA when it exercises authority or control over plan management or plan assets. See 29 U.S.C. § 1002(21)(A). Courts consider an employee benefit plan contract-like the one between Mr. Teets's Plan and Great-West-to be an asset of the plan, such that a service provider's authority or control over the plan contract can give rise to fiduciary status. See Chicago Bd. Options Exch, Inc. v. Conn. Gen. Life Ins. Co., 713 F.2d 254, 260 (7th Cir. 1983) ("CBOE") ("[T]he policy itself is a plan asset."); accord ERISA § 401(b)(2), 29 U.S.C. § 1101(b)(2) (providing that a contract for a guaranteed-benefit policy is an asset of the plan to which it is issued).

         The case law points to a two-step analysis to determine whether a service provider is a functional fiduciary when a plaintiff alleges it has acted to violate a fiduciary duty.[10] First, courts decide whether the service provider's alleged action conformed to a specific term of its contract with the employer plan. By following the terms of an arm's-length negotiation, the service provider does not act as a fiduciary. See, e.g., Schulist v. Blue Cross of Iowa, 717 F.2d 1127, 1132 (7th Cir. 1983) (holding service provider was not fiduciary where its compensation was established through successive negotiations). Second, if the service provider took unilateral action beyond the specific terms of the contract respecting the management of a plan or its assets, [11] the service provider is a fiduciary unless the plan or perhaps the participants in the plan (see below) have the unimpeded ability to reject the service provider's action or terminate the relationship with the service provider. See, e.g., Midwest Cmty. Health Serv., Inc. v. Am. United Life Ins. Co., 255 F.3d 374, 377-78 (7th Cir. 2001) (holding service provider was fiduciary when it could make changes to plan contract without plan approval and would assess a fee for plans withdrawing funds).

         Thus, to establish a service provider's fiduciary status, an ERISA plaintiff must show the service provider (1) did not merely follow a specific contractual term set in an arm's-length negotiation; and (2) took a unilateral action respecting plan management or assets ...

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