Santomenno v. John Hancock Life Ins. Co.

768 F.3d 284

Danielle SANTOMENNO, for the use and benefit of the JOHN HANCOCK TRUST and the John Hancock Funds II; Karen Poley and Barbara Poley for the use and benefit of the John Hancock Funds II; Danielle Santomenno, Karen Poley and Barbara Poley individually and on behalf of Erisa employee benefit plans that held, or continue to hold, group variable annuity contracts issued/sold by John Hancock Life Insurance Company (U.S.A.), and the participants and beneficiaries of all such Erisa covered employee benefit plans; and Danielle Santomenno individually and on behalf of any person or entity that is a party to, or has acquired rights under, an individual or group variable annuity contract that was issued/sold by John Hancock Life Insurance Company (U.S.A.) where the underlying investment was a John Hancock proprietary fund contained in the John Hancock Trust.

Danielle Santomenno; Karen Poley; Barbara Poley, Appellants

v.JOHN HANCOCK LIFE INSURANCE COMPANY (U.S.A); John Hancock Investment Management Services, LLC ; John Hancock Funds; LLC, John Hancock Distributors, LLC.

No. 13–3467.

United States Court of Appeals, Third Circuit.

Argued June 12, 2014.

Filed: Sept. 26, 2014.

Arnold C. Lakind, Esq., Robert L. Lakind, Esq., Robert E. Lytle, Esq., Moshe Maimon, Esq., Stephen Skillman, Esq., Argued, Szaferman, Lakind, Blumstein & Blader, Lawrenceville, NJ, for Appellants.

Daniel P. Condon, Esq., Alison V. Douglass, Esq., James O. Fleckner, Esq., Argued, Goodwin Procter, Boston, MA, for Appellees.

Jonathon B. Lower, Esq., Brian J. McMahon, Esq., Gibbons, Newark, NJ, for Appellees.

Radha Vishnuvajjala, Esq., Argued, United States Department of Labor, Washington, DC, for Amicus Curiae Secretary United States Department of Labor.

Eric S. Mattson, Esq., Sidley Austin, Chicago, IL, for Amicus Curiae American Council of Life Insurers.

Before: FISHER, VAN ANTWERPEN and TASHIMA,^* Circuit Judges.

OPINION OF THE COURT

FISHER, Circuit Judge.

Plaintiff–Appellants Danielle Santomenno, Karen Poley, and Barbara Poley (collectively, “Participants”) invested money in 401(k) benefit plans. They brought suit on behalf of themselves and a putative class of benefit plans and plan participants that have held or continue to hold group annuity contracts with Defendant–Appellees John Hancock Life Insurance Company (U.S.A.), John Hancock Investment Management Services, LLC, John Hancock Funds, LLC, and John Hancock Distributors, LLC (collectively, “John Hancock”). They allege that John Hancock charged excessive fees for its services in breach of its fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq. The District Court granted John Hancock's motion to dismiss, ruling that John Hancock was not a fiduciary with respect to the alleged breaches. We will affirm.

I.

A.

Participants were enrolled in the J & H Berge, Inc. 401(k) Profit Sharing Plan (the “Berge Plan”) and the Scibal Associates, Inc. 401(k) Plan (the “Scibal Plan,” and together with the Berge Plan, the “Plans”). 401(k) plans are a type of “defined contribution” plan governed by ERISA. Each of the Plans had a trustee, and the trustees contracted with John Hancock to provide a product known as a group variable annuity contract. As part of this product, John Hancock assembled for the Plans a variety of investment options into which Participants could direct their contributions. This collection of investment options was referred to as the “Big Menu,” and was composed primarily of John Hancock mutual funds, such as the John Hancock Trust–Money Market Trust (“Money Market Trust”), but also included independent funds offered by other companies.

From the Big Menu created by John Hancock the trustees selected which investment options to offer to their Plan participants, known as the “Small Menu.” Participants could then select from the options on the Small Menu where to invest their 401(k) contributions. Rather than investing each Participant's contributions directly into an investment option (for example, a mutual fund), John Hancock directed plan participants' contributions into separate sub-accounts, each of which was correlated with an underlying investment option. John Hancock would pool the contributions in the sub-accounts, and then invest them in the corresponding investment option. Plan trustees could select for their Small Menus any option off the Big Menu, as well as investments offered by companies other than John Hancock. See JA at 219, Berge Contract § 1 (defining “Competing Investment Option” as a fund “available under the Plan, either in the Contract or elsewhere”).

As part of its agreement with the Plans, John Hancock offered a product feature called the Fiduciary Standards Warranty (“FSW”). Plan trustees received this feature if they selected for their Small Menus at least nineteen funds offered by John Hancock, rather than independent funds. Under the FSW, John Hancock “warrants and covenants that the investment options Plan fiduciaries select to offer to Plan participants: Will satisfy the prudence requirement of ... ERISA.” JA at 59, Second Amended Complaint (“Complaint” or “SAC”) ¶ 170. If a trustee constructed its Small Menu in accordance with the FSW, John Hancock agreed that it would reimburse the plan for any losses arising out of litigation challenging the prudence of the plan's investment selections, including litigation costs. In the FSW, John Hancock stated that it was “not a fiduciary,” and that the FSW “does not guarantee that any particular Investment option is suited to the needs of any individual plan participant and, thus, does not cover any claims by any Individual participant based on the needs of, or suitability for, such participant.” JA at 414. John Hancock also offered a service called the “Fund Check Fund Review and Scorecard.” Through this program, John Hancock monitored the performance of all investment options on the Big Menu, distributed copies of its evaluations to plan trustees, and informed them as to changes in the Big Menu made in response to these evaluations.

When Participants invested in a particular sub-account, they were subject to three fees: an Administrative Maintenance Charge (“AMC”); a Sales & Service (“S & S”) fee; and the fee charged by the underlying mutual fund, known as a 12b–1 fee after the provision in the securities regulations that authorizes their payment out of plan assets. See 17 C.F.R. § 270.12b–1. The sum of these fees is referred to as the “expense ratio” for each sub-account.

John Hancock retained the authority to add, delete, or substitute the investment options it offered on the Big Menu. Under what it referred to as its “Underlying Fund Replacement Regimen,” John Hancock reviewed investment options “on a daily, monthly, quarterly, and annual basis” and replaced them “[i]f it ... determined that the investment option is no longer able to deliver its value proposition to [John Hancock's] clients and there is a viable replacement option.” JA at 63, SAC ¶¶ 189–90. For example, in 2009, John Hancock removed the “John Hancock Classic Value Fund” and replaced it with the “T. Rowe Price Equity Income Fund.” JA at 57, SAC ¶ 158. John Hancock also retained the authority to change the share class for each fund into which the Participants' contributions were invested. The expense ratio of a fund will depend, in part, on the share class in which it invests. Notwithstanding John Hancock's authority over the construction of the Big Menu and its selection of share classes, the trustees retained the responsibility for selecting investment options for inclusion in the Small Menu and for offering to Participants.

B.

Participants filed this suit on March 31, 2010, and filed a second amended complaint on October 22, 2010. Counts I through VII were brought under ERISA. Counts VIII and IX were brought under two provisions of the Investment Company Act of 1940 (“ICA”), 15 U.S.C. § 80a–1 et seq. John Hancock moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), which the District Court granted in its entirety. With respect to the ERISA claims, the District Court concluded that dismissal was proper because Participants did not make a pre-lawsuit demand and did not join the plan trustees in the suit. Participants appealed, and we affirmed dismissal of the I CA claims, but vacated the portion of the District Court's order dismissing the ERISA claims and remanded for further proceedings. Santomenno v. John Hancock Life Ins. Co. (U.S.A.), 677 F.3d 178 (3d Cir.2012). We concluded that the District Court's reliance on the common law of trusts to engraft pre-suit demand and mandatory joinder requirements was inconsistent with ERISA's intent. Id. at 189.

On remand, John Hancock renewed its motion to dismiss, raising a variety of arguments. Some of John Hancock's arguments were raised in its first motion to dismiss and some were not, and Participants asserted that John Hancock was barred from raising new arguments in its renewed motion. John Hancock's lack of fiduciary status, however, had been raised in the first motion, and the District Court decided the case solely on that basis. See Santomenno v. John Hancock Life Ins. Co. (U.S.A.), No. 10–1655, 2013 WL 3864395, at *4 n. 2 (D.N.J. July 24, 2013). The District Court granted the motion to dismiss, concluding that John Hancock was not an ERISA fiduciary with respect to any of the misconduct alleged in the complaint. Participants timely appealed. The Secretary of Labor filed an amicus brief in support of Participants urging reversal, and the American Council of Life Insurers (“ACLI”), filed an amicus brief in support of John Hancock urging affirmance.

II.

The District Court had jurisdiction pursuant to 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e). We have appellate jurisdiction over the District Court's final order of dismissal pursuant to 28 U.S.C. § 1291, and our review of that order is plenary. Fowler v. UPMC Shadyside, 578 F.3d 203, 206 (3d Cir.2...