Seventh Circuit Ruling Against Northwestern University Clarifies Pleading Standard for ERISA Fiduciary Duty Claims

On March 23, 2023, the U.S. Court of Appeals for the Seventh Circuit, on remand from the Supreme Court, explained how the “plausibility” pleading standard of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), should be applied to breach of fiduciary duty claims under the Employee Retirement Income Security Act (“ERISA”). The Court’s ruling reversed and remanded claims the district court had dismissed alleging Northwestern University (“Northwestern” or “Defendants”) violated ERISA by imprudently administering Northwestern’s two defined contribution 403(b) retirement plans.

At the preceding stage in the litigation, the Supreme Court directed the Seventh Circuit to evaluate the plaintiffs’ claims under the pleading standard enumerated in landmark Supreme Court decisions Twombly and Iqbal, rejecting Defendants’ argument that the heightened pleading standard in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014) should apply.  Reiterating previous guidance, the Supreme Court clarified that while analysis of duty of prudence claims must be “context-specific,” the stricter Dudenhoeffer standard is reserved for cases involving Employee Stock Ownership Plans.

The Seventh Circuit accordingly determined that, at the pleadings stage, plausibility of the claims is the basic test. The Court explained that “a plaintiff must provide enough facts to show that a prudent alternative action was plausibly available, rather than actually available.” This is because “if a course of action was only possibly unavailable, further factual development on the pleadings will be necessary to resolve the claim on that explanation.”

Further, Twombly and Iqbal establish that plaintiffs must address only obvious alternative explanations for their claims at the pleadings stage. Therefore, “whether a claim survives dismissal necessarily depends on the strength or obviousness of the alternative explanation that the defendant provides.”

Applying the pleading standard specified by the Supreme Court, the Seventh Circuit concluded that two claims in the action survived dismissal: (1) Defendants’ failure to monitor excessive recordkeeping fees, and (2) Defendants’ failure to substitute retail share class funds for cheaper institutional share classes. Specifically, the Court found that Plaintiffs plausibly alleged that Defendants’ “failure to obtain comparable recordkeeping services at a substantially lesser rate was outside the range of reasonable actions that the university could take as a plan fiduciary.” In other words, “plaintiffs have pleaded enough to cross the line from possibility to plausibility.”

Updates to this blog will be provided as the matter progresses. The ruling is captioned Laura Divane, et al., v. Northwestern University, et al., case number 18-2569, filed in the U.S. Court of Appeals for the Seventh Circuit. The originating case is Hughes, et al, v. Northwestern University, et. al., case number 1:16-cv-08157, filed in the U.S. District Court for the Northern District of Illinois. A previous blog post on this matter can be viewed here.

The legal team at Miller Shah LLP has extensive experience representing class action and ERISA matters. If you have any questions regarding this subject or this post, please contact Alec Berin (ajberin@millershah.com) or Jonathan Dilger (jadilger@millershah.com). The firm can also be reached toll-free at (866) 540-5505.