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Class Action Approved in Excessive Fee Suit

Practice Management

An excessive fee suit has been granted class action status in federal court.

This time it’s a group of former participants in the JPMorgan Chase 401(k) Savings Plan, a plan that has approximately 266,000 to 300,000 participants and more than $14 billion in assets.

Suit ‘Case’

In considering the petition for class action status, Judge Jesse M. Furman of the U.S. District Court for the Southern District of New York noted that the five named Plaintiffs in this case – Antoinette Fondren, Ferdinand Orellana, William Stirsman, Sean Daly and James Monaghan – were all participants in the plan, all of whom invested in different funds, each with different fees. Fondren invested in the Target Date 2030 Fund, Orellana invested in the Core Bond Fund, the Mid Cap Growth Fund, the Small Cap Core Fund, the Target Date 2045 Fund and others; Stirsman invested in the Core Bond Fund, the Target Date 2015 Fund and others; Daly invested in the Target Date 2050 Fund and others; and Monaghan invested in the Large Cap Growth Index Fund and others.

Three of those plaintiffs – Fondren, Daly and Monaghan – signed arbitration agreements when accepting their employment with JPMorgan or its subsidiaries, in which they agreed to arbitrate all of their claims against Defendants except for “claims for benefits under a plan that is governed by [ERISA],” among others – agreements that also stated that “[n]o claims may be arbitrated on a class or collective basis.” 

As other of these excessive fee suits have done, this one – filed in January 2017 – took issue with the choice of active versus passive alternatives, but it was the prevalence of proprietary funds (“from years 2010 through 2015, approximately half of all the possible investment options were proprietary investment vehicles managed by the Bank or by another subsidiary of JPMorgan Chase,” according to the suit) and the alleged complicity of their arrangement with BlackRock (which managed seven of the funds in the plan, in addition to the target-date funds, which the suit says were mostly index funds managed by BlackRock) that dominated the concerns expressed.

Class, Backed 

The JP Morgan Chase defendants opposed class certification on several grounds, according to Judge Furman; they wanted to narrow the class definition to exclude funds in which the plaintiffs did not invest (because they lack standing to represent participants in those funds), that their arbitration agreements prevent three named Plaintiffs from acting as class representatives, and that it was not proper under Rule 23 for several reasons. 

With regard to the issue of standing with regard to funds in which they hadn’t invested, the court noted that “the allegedly disloyal and imprudent conduct of defendants implicates the same set of concerns for investors in all [of the funds]” because the conduct relates to “the process Defendants used to manage the Plan.” And, Judge Furman noted, “as other district courts in this Circuit have concluded … [b]ecause the alleged harms are premised on the process Defendants used to manage the Plan, the claims involve similar inquiries and proof, and thus implicate the same set of concerns. Plaintiffs have class standing to pursue the claims on behalf of the absent class members, including those who invested in ... funds offered by the Plan in which none of them invested.”

Arbitration ’Cause

As for the arbitration agreements, Judge Furman stated that the relevant factors to consider in the inquiry are: “(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice,” going on to conclude that the JP Morgan Chase defendants “waived any right to compel arbitration.” He noted that they “waited for more than a year to raise arbitration as an issue and now do so in briefing, not by motion,” that they “did not mention arbitration while litigating a motion to dismiss or when filing an answer with other affirmative defenses,” and that the parties had “conducted extensive discovery, including multiple depositions” – actions, Furman noted that not only “demonstrate an intent to litigate,” but that plaintiffs would be prejudiced if defendants now sought to compel arbitration. “Because Defendants waived any right to compel arbitration in this litigation, Plaintiffs are, in effect, not bound by the arbitration agreements,” he wrote. “In this context, the unenforceable agreements cannot preclude Plaintiffs from representing the proposed class.”
Judge Furman then turned to the issue of class certification and conditions under Rule 23, finding that the plaintiffs here cleared the conditions of numerosity (there were thousands of members), commonality (the claims arose from the investment lineup provided to all participants), typicality, and adequacy of representation, and determined that the requisite conditions for certification were met.

Class ‘Act’

Ultimately, the class certified consisted of “all persons, except Defendants and any other persons with responsibility for the Plan’s investment menu, who were participants in or beneficiaries of the Plan, at any time between January 25, 2011 and the present, and whose individual accounts were invested in one or more of the following funds: the Growth and Income Fund; the Mid Cap Value Fund; the Mid Cap Growth Fund; the Small Cap Core Fund, but only if the investment occurred before December 19, 2015; the Core Bond Fund, but only if the investment occurred before March 12, 2016; and any of the Target Date Funds, but only if the investment occurred before April 1, 2016.” The court appointed Daly, Fondren, Orellana and Stirsman – but not Monaghan (who hadn’t invested in the funds in question) as class representatives.

As an additional matter, Judge Furman noted that the parties wanted to keep under seal exhibits containing internal JPMorgan documents about the Plan and the parts of a brief that rely on them, specifically excerpts from the 2016 Investment Policy Statement of the JPMorgan Chase 401(k) Savings Plan, minutes from the June 18, 2015 EPIC meeting, and minutes from the Sept. 22, 2015 EPIC meeting, since – the defendants argued – they contain “proprietary information concerning JPMorgan Chase's internal governance and reflect private deliberations.” Judge Furman granted that motion to seal, directing that unredacted copies with the Court’s Sealed Records Department.

The case is Beach v. JPMorgan Chase Bank, N.A., 2019 BL 214751, S.D.N.Y., No. 1:17-cv-00563-JMF, 6/11/19. 

Why This Matters

The designation of a class, particularly one as large of this, certainly has to be of concern for defendants, but the big lesson here (not that it would have done much to dissuade the pursuit of the class action) would seem to be that arbitration agreements not promptly enforced/raised will be of little value.