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Abbott v. Lockheed Martin Corp.

March 31, 2009


The opinion of the court was delivered by: Reagan, District Judge


I. Introduction and Factual Background

Plaintiffs, Anthony Abbott, Eric Fankhauser, Lloyd DeMartini, Jack Jordan and Dennis Tombaugh, individually and on behalf of all similarly situated persons, filed this action pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1002 et seq. ("ERISA"). Specifically, Plaintiffs allege that Defendants, Lockheed Martin Corporation ("LMC"), as Administrator for the Plans, and Lockheed Martin Investment Management Company ("LMIMCo"), which handles investment matters, breached their fiduciary duties under ERISA with regard to two employee benefits plans: the LMC Salaried Savings Plan ("SSP") and the LMC Hourly Savings Plan ("HSP") ("the Plans"). Abbott is a participant in the HSP and seeks to represent the HSP Class; Fankhauser, DeMartini, Jordan and Tombaugh, are participants in the SSP and seek to represent the SSP class.

Since 1995, State Street Bank & Trust Company ("State Street"), with its affiliates, has served as trustee and recordkeeper for the Plans as well as the investment manager for several of the Plans' investment fund offerings. In 2000, State Street assigned its recordkeeping responsibilities to CitiStreet, a partly-owned subsidiary. State Street received direct compensation from LMC as well as indirect compensation, revenue sharing, from certain of the Plans' outside investment managers.

The Plans offer an array of investment choices, including core funds, asset allocation funds and a self-managed account. The core funds, which generally included 11 options, ranged in risk from the conservative Stable Value Fund to the more aggressive Company Stock Fund and Employee Stock Ownership Plan Funds (collectively, "company stock funds"). Three asset allocation funds provided diversified asset portfolios offering conservative, moderate and aggressive risk options. In 2001, the Plans added the self-managed account ("SMA"), which allowed participants to invest up to half of their retirement savings in a portfolio of their own choosing, including stocks, bonds and more than 9,000 mutual funds from more than 300 fund families.

The Stable Value Fund ("SVF") invests in United States Treasury bills, commercial paper, banker's acceptances and notes, savings bank deposits, money market funds and other short-term fixed securities. It also invests in contracts with insurance companies, known as guaranteed investment contracts ("GICs"), wherein the insurer promises to repay the principal and a contractually-fixed rate of interest over a specified period of time.

The company stock funds are structured as unitized funds, i.e., each investor owns "units" of the stock funds rather than actual shares of stock. Unit trades are settled in one day rather than in the three-day settlement period typical of selling stock in open market trading. A portion of the funds' assets are held in cash to provide liquidity for daily processing of fund transfers and withdrawals.

Information about the various funds' objectives, composition, past performance, expected fees and disclosures are provided in periodic Summary Plan Descriptions ("SPDs") as well as in formal and informal updates to the SPDs, annual reports and periodic personal statements. Additionally, information is available on a website accessible to Plan participants, which includes quarterly reports by the fund-rating agency Morningstar regarding the composition of each fund as well as an analysis of its risk and return.

Defendants have moved for summary judgment (Doc. 145), and Plaintiffs have moved for partial summary judgment (Doc. 149). The parties have fully briefed these motions, and they were the subject of a hearing held on March 6, 2009. First setting forth the standards that guide its analysis, the Court now rules as follows.

II. Legal Standards

Summary judgment is proper if the pleadings, depositions, interrogatory answers, admissions, and affidavits leave no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c). The moving party bears the burden of establishing both the absence of fact issues and entitlement to judgment as a matter of law. Santaella v. Metropolitan Life Ins. Co., 123 F.3d 456, 461 (7th Cir. 1997). In determining whether a genuine issue of material fact exists, the Court reviews the record in the light most favorable to the non-moving party and makes all reasonable inferences in the non-movant's favor. Anderson, 477 U.S. at 255; Ulichny v. Merton Community School Dist., 249 F.3d 686, 699 (7th Cir. 2001); Miranda v. Wisconsin Power & Light Company, 91 F.3d 1011, 1014 (7th Cir. 1996).

Because the primary purpose of summary judgment is to isolate and dispose of factually unsupported claims, the non-movant may not rest on the pleadings but must respond, with affidavits or otherwise, setting forth specific facts showing that there is a genuine issue for trial. Oest v. IDOC, 240 F.3d 605, 610 (7th Cir. 2001); Moore v. J.B. Hunt Transport, Inc., 221 F.3d 944, 950 (7th Cir. 2000).

"ERISA section 404 imposes standards of fiduciary duty, including the fiduciary's duty to act 'with the care, skill, prudence, and diligence' as would a prudent man under the same circumstances." Jenkins v. Yager, 444 F.3d 916, 924 (7th Cir. 2006) (citing 29 U.S.C. § 1104(a)(1)(B)). "To state a claim for a violation of fiduciary duty, the plaintiff must 'establish: (1) that the defendants are plan fiduciaries; (2) that the defendants breached their fiduciary duties; and (3) that the breach caused harm to the plaintiff.'" Id. (quotingBrosted v. Unum Life Ins. Co. of America, 421 F.3d 459, 465 (7th Cir. 2005) (citing Kamler v. H/N Telecomm. Serv., Inc., 305 F.3d 672, 681 (7th Cir. 2002)).

The first prong of the test is satisfied because it is undisputed that Defendants are plan fiduciaries under ERISA section 3(21)(A). See 29 U.S.C. § 1002(21)(A). Under the second prong, a plan administrator is held "to a duty of loyalty akin to that of a common-law trustee" and "must act as though [he] were a reasonably prudent businessperson with the interests of all the beneficiaries at heart." Id. (quoting Ameritech Benefit Plan Comm. v. Comm. Workers of America, 220 F.3d 814, 825 (7th Cir. 2000)). The third prong requires Plaintiffs to establish the requisite causation to state a claim for breach of fiduciary duty and that the breach of that duty caused harm to Plaintiffs. Id. at 928.

III. Analysis

A. Revenue sharing

Both parties have filed for summary judgment on the issue of revenue sharing. Plaintiffs claim that the facts establish that LMC and LMIMCo breached their fiduciary duties under 29 U.S.C. §§ 1104(a)(1) and 1106(a)(1)(C) by failing to monitor and determine the reasonableness of fees that State Street received from the assets of LMC's 401(k) Plans and by allowing State Street to receive unreasonable compensation for its services. Citing DOL Advisory Opinion 97-16A, Plaintiffs submit that LMC and LMIMCo had a duty to regularly monitor all revenue sharing to ensure that compensation paid directly or indirectly for plan services, such as administration and record-keeping, were reasonable.

Plaintiffs contend that LMC and LMIMCo did not perform this duty or even attempt to determine what revenue sharing payments the Plans' service providers - State Street and CitiStreet - received from State Street Global Advisors ("SSgA") mutual funds and investments. As a consequence, according to Plaintiffs, Lockheed failed to determine that service provider fees for State Street and CitiStreet were reasonable. Specifically, Plaintiffs claim that "[l]umping all Plan fees together to determine reasonableness does not satisfy ERISA's fiduciary duties because that allows reasonable fees to balance out unreasonable fees and gives license to fiduciaries to allow unreasonable compensation to one service provider so long as other service providers receiving [sic] reasonable compensation."

LMC and LMIMCo submit that Plaintiffs' allegations regarding revenue sharing do not give rise to a claim for fiduciary breach. They claim that it is well established that revenue sharing does not inherently violate ERISA. According to LMC and LMIMCo, all fees paid by the Plans were disclosed, and there is no legal basis for Plaintiffs' contention that Plan fiduciaries must disclose internal revenue allocation separately. Additionally, LMC and LMIMCo state that LMC purchased bundled services from State Street, and, in a bundled arrangement, a fiduciary monitors whether total costs are reasonable for the total services provided.

The briefing of this issue was completed prior to the Seventh Circuit Court of Appeals's decision in Hecker v. Deere & Co., 2009 WL 331285 (7th Cir. 2009).*fn1 The parties filed supplemental briefs addressing the impact of Hecker on Plaintiffs' claims. Plaintiffs' attempt to distinguish the appellate court's decision fails.

Indeed, distinguishing Hecker on the issue of revenue sharing is an uphill battle that Plaintiffs cannot win. A line-by-line comparison of the Second Amended Complaint ("SAC") in Hecker and the FAC in the current proceeding reveals that, taking into account certain factual differences that are not material to the Court's analysis, the complaints are the same - the same claims regarding hard dollar payments and revenue-sharing payments, total fees, foregone revenue sharing and undisclosed revenue sharing arrangements. Cf. Doc. 137, FAC ¶¶ 58-87, Doc. 187, Exhibit 2, SAC ¶¶ 62-90.

In Hecker, the appellate court agreed with the district court that the type of revenue-sharing arrangement described by Plaintiffs "violates no statute or regulation." Hecker, 2009 WL 331285 at 9. The Court explained that "the participants were told about the total fees imposed by the various funds, and the participants were free to direct their dollars to lower-cost funds if that was what they wished to do." Id. (emphasis added). The Court then reasoned, "The total fee, not the internal, post-collection distribution of the fee, is the critical figure for someone interested in the cost of including a certain investment in her portfolio and the net value of that investment." Id.

The undersigned Judge also finds no evidence that LMC and LMIMCo breached the general fiduciary duty imposed on them by 29 U.S.C. § 1104(a)(1) either by an intentionally misleading statement or a material omission. See id. First, Plaintiffs herein were told about the total fees through SPDs and other plan documents. The FAC does not allege that any representation in the SPDs was an intentional misrepresentation. Second, because the total fee is the critical figure, the omission of information about the revenue-sharing arrangement is not material. See id.

In light of the Seventh Circuit's decision in Hecker, Plaintiffs' motion for partial summary judgment based on revenue sharing must be denied, and LMC's and LMIMCo's motion for summary judgment must be granted on this issue.

B. Notice-Pleading Requirements

Before considering Plaintiffs' remaining claims, the Court will address claims regarding "float" and the American Century Growth Fund ("ACGF"), also referred to as the American Century Fund.

"[C]laims of breach of fiduciary duty under ERISA are subject to no pleading standard more stringent than Rule 8 of the Federal Rules of Civil Procedure, which requires a plaintiff to present only 'a short and plain statement of the claim showing that the pleader is entitled to relief' and states that '[e]ach averment of a pleading shall be simple, concise, and direct.'" Spano v. Boeing Co., WL 1149192, 2 (S.D.Ill. 2007) (citing FED.R.CIV.P. 8(a)(2), (e)(1); In re Enron Corp. Sec., Derivative & ERISA Litig., 284 F.Supp.2d 511, 652 (S.D.Tex. 2003) ("ERISA does not have heightened pleading requirements, but is subject to the notice pleading standard of [Rule 8], i.e.,... a short and plain ...

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