The Seventh Circuit has issued its decision in the much-anticipated case of Divane v. Northwestern.  The district court below had refused to allow plaintiffs to proceed with breach of fiduciary duty and prohibited transaction claims based on the recordkeeper’s use of participant data for purposes of “cross-marketing” non-plan services to plan participants.  The issue arose in a unique procedural posture, a motion for leave to amend the complaint near the close of discovery. The district court found that the proposed new counts, including the cross-marketing claim, were untimely (for being raised six days before the close of discovery) and futile (for failing to state a claim).

In affirming the district court decision, the Seventh Circuit agreed that the allegations based on cross-marketing were untimely and “failed to state claims for relief.” This is the first time the issue of cross-marketing participant data has been decided at the circuit court level. Going forward, this precedent will pose a significant obstacle for plaintiffs who wish to pursue cross-marketing claims.

Plaintiffs’ Counsel Has Been Focusing on Cross-Marketing Claims

For a few years now plaintiffs have been challenging fiduciaries who allow service providers, usually recordkeepers, to utilize participant data to offer non-plan financial services to participants. For example, in their second amended complaint in Cassell v. Vanderbilt University, plaintiffs alleged that plan fiduciaries breached their fiduciary duties by allowing the plan’s recordkeeper “to use its position as the plan’s recordkeeper to obtain access to participants, gaining valuable, private and sensitive information including participants’ contact information, their choices of investments, the asset size of their accounts, their employment status, age, and proximity to retirement, among other things.” Further, plaintiffs alleged, the plan fiduciaries allowed the recordkeeper to use this valuable and confidential information to sell the recordkeepers’ products and wealth management services to the plan’s participants and “failed to even attempt to determine the value of this marketing benefit.”

Similar cross-marketing claims were brought against Johns Hopkins, MIT and Northwestern.

The District Court Rejects a Claim Based on Cross-Marketing Participant Data

In many ways Divane v. Northwestern was a typical ERISA fee case, with plaintiffs challenging the (allegedly) excessive fees and underperformance of various investment options in the university’s defined contribution plan. Near the close of discovery, however, the plaintiffs tried to add a claim that the plan fiduciaries should be liable for allowing the plan’s recordkeeper to market products to plan participants using participants’ contact information, their choices of investments, the asset size of their accounts, their employment status, age, and proximity to retirement.

The district court refused to allow plaintiffs to pursue this cross-marketing claim, finding that it should have and could have been raised earlier in the case. In addition to the issue of timeliness, the district court addressed the futility of allowing an amended pleading based on allegations of cross-marketing:

  • It is not imprudent to allow the recordkeeper to have access to this kind of participant information.
  • Disclosure of such information to the recordkeeper does not implicate ERISA fiduciary functions.
  • Not a single court has held that releasing confidential information or allowing someone to use confidential information is a breach of fiduciary duty, and “[t]his Court will not be the first, particularly in light of Congress’s hope that litigation would not discourage employers from offering plans.”

The district court also found that the recordkeeper’s use of participant data for cross-marketing was not a prohibited transaction because the court was “not convinced” such information is a plan asset. Thus, plaintiffs’ proposed claim based on using participant data for cross-marketing failed to state a claim.

Plaintiffs’ counsel appealed.

Some Defendants Settle and Agree to Prohibit Cross-Marketing

While the Divane v. Northwestern appeal was pending, and with a lack of controlling precedents specifically addressing cross-marketing issues in this context, defendants in some other ERISA cases hedged their bets by settling the cross-marketing claims asserted against them. For example, Vanderbilt University settled its case by paying $14.5 million and agreeing, among other things, to prevent any future cross-marketing by the plan’s recordkeeper. Specifically, Vanderbilt agreed that going forward the plan fiduciaries shall contractually prohibit the recordkeeper from using information about plan participants acquired in the course of providing recordkeeping services to market or sell products or services unrelated to the plan to plan participants unless initiated by a plan participant.

Subsequently, Johns Hopkins and MIT settled their ERISA fee cases by agreeing, among other things, to forbid cross-selling by their plans’ service providers.

The Seventh Circuit Affirms, Adopting the District Court’s Reasoning

After these settlements, the Seventh Circuit issued its opinion in the Divane v. Northwestern case. The Court of Appeals affirmed the district court decision to not allow plaintiffs’ leave to amend their complaint to add the “participant data” claims on the eve of trial.  The appellate court laid out the district court’s rationale (too late, and no precedent for treating participant data as a plan asset) and concluded, “We agree.”  Importantly, the Seventh Circuit wrote that the proposed data claim “fails to state a claim for relief.”  Such a conclusion is independent of the timeliness of the proposed claim and provides a significant hurdle for future plaintiffs to overcome if they seek to bring cross-marketing claims against plan fiduciaries.

Takeaways

Plaintiffs’ counsel are unlikely to give up their quest to pursue claims against fiduciaries who do not prevent service providers from cross-marketing participant data just because one circuit court has rejected such claims. This is especially true if defendants continue to show a willingness to settle such claims for a mixture of monetary and non-monetary concessions. Nevertheless, the Seventh Circuit’s opinion in Divane v. Northwestern will be a significant impediment to cross-marketing claims unless plaintiffs get it reversed on rehearing or in the Supreme Court. (On April 22, 2020, plaintiffs filed a petition for rehearing or rehearing en banc, which did not specifically address their proposed cross-marketing claim, but instead focused on the pleading standard in ERISA fee/investment cases.)

 

 

Photo of Brian J. Lamb Brian J. Lamb

Brian is the leader of the firm’s Business Litigation practice group.  He represents companies and their directors and officers in complex business disputes, including ERISA litigation, securities and shareholder litigation, corporate governance and fiduciary disputes, and litigation arising out of mergers, acquisitions and…

Brian is the leader of the firm’s Business Litigation practice group.  He represents companies and their directors and officers in complex business disputes, including ERISA litigation, securities and shareholder litigation, corporate governance and fiduciary disputes, and litigation arising out of mergers, acquisitions and tender offers, and complex contract disputes. Brian also has significant experience litigating tax controversies against the federal government.