Wong v. FMR LLC

United States Court of Appeals
For the First Circuit
No. 20-1286
IN RE: FIDELITY ERISA FEE LITIGATION
ANDRE W. WONG, on behalf of the T-Mobile USA, Inc. 401(k)
Retirement Savings Plan and Trust and on behalf of all other
similarly situated Employee Benefit Plans; JANICE ANDERSEN;
JASON BAILIS; NATALIE DONALDSON; CYNTHIA EDDY; MYRL JEFFCOAT;
THOMAS GOODRICH; KAYLA JONES; KAREN PETTUS; GINA SUMMERS;
HEATHER WOODHOUSE; REGINA CRYSTAL ROBINSON, on behalf of the
T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust and
on behalf of all other similarly situated Employee Benefit
Plans; TYLER WAYNE SILLS, on behalf of the T-Mobile USA, Inc.
401(k) Retirement Savings Plan and Trust and on behalf of all
other similarly situated Employee Benefit Plans; CATEENIA D.
JOHNSON, on behalf of the T-Mobile USA, Inc. 401(k) Retirement
Savings Plan and Trust and on behalf of all other similarly
situated Employee Benefit Plans,
Plaintiffs, Appellants,
BOARD OF TRUSTEES OF UFCW LOCAL 23 & GIANT EAGLE PENSION FUND,
Plaintiff,
v.
FMR LLC; FIDELITY MANAGEMENT & RESEARCH COMPANY; FIDELITY
MANAGEMENT TRUST COMPANY; FIDELITY BROKERAGE SERVICES LLC;
NATIONAL FINANCIAL SERVICES LLC; FIDELITY INVESTMENTS
INSTITUTIONAL OPERATIONS COMPANY, INC.,
Defendants, Appellees,
JOHN AND JANE DOES 1–10,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Leo T. Sorokin, U.S. District Judge]
Before
Kayatta and Barron, Circuit Judges,
and Smith, District Judge.
Alec J. Berin, with whom James E. Miller, Laurie Rubinow,
Shepherd, Finkelman, Miller & Shah, LLP, David Pastor, and Pastor
Law Office were on brief, for appellants.
Bradley N. Garcia, with whom Jonathan D. Hacker, Brian D.
Boyle, and O'Melveny & Myers LLP were on brief, for appellees.
March 5, 2021
 Of the District of Rhode Island, sitting by designation.
KAYATTA, Circuit Judge. The plaintiffs in this putative
class action are participants in 401(k) retirement plans sponsored
by their respective employers. They train our attention on fees
that the defendant, Fidelity,1 charges some mutual funds for the
privilege of being placed on the menu of investment options
Fidelity makes available to 401(k) plans that contract with it to
receive an array of services and investment opportunities. Seeking
equitable and remedial relief on behalf of themselves and the
retirement plans in which they participate, plaintiffs contend
that Fidelity's exaction and retention of those fees violate
fiduciary duties it owes to its customer plans and their
participants under the Employee Retirement Income Security Act
(ERISA), 29 U.S.C. § 1001 et seq. In granting a motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6), the district court
disagreed. For the following reasons, so do we.
I.
We resolve first a procedural dispute concerning the
scope of the record appropriate for our consideration in reviewing
the dismissal of a complaint under Federal Rule of Civil
Procedure 12(b)(6). When a complaint expressly cites and relies
upon a written contract in support of a claim, the drafter of the
1 Plaintiffs have sued FMR LLC and several related Fidelity
entities and affiliates, known and unknown. For ease of reference,
we refer to all of the defendants collectively as "Fidelity" or
"defendant."
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complaint cannot prevent the court from considering the written
contract in ruling on a motion under Rule 12(b)(6). See Beddall
v. State St. Bank and Tr. Co., 137 F.3d 12, 17 (1st Cir. 1998)
("When . . . a complaint's factual allegations are expressly
linked to -- and admittedly dependent upon -- a document (the
authenticity of which is not challenged), that document
effectively merges into the pleadings and the trial court can
review it in deciding a motion to dismiss under Rule 12(b)(6).");
see also Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 229 n.1
(1st Cir. 2013) (declining to accept truth of factual allegation
contradicted by rider to mortgage agreement). Here, plaintiffs'
Consolidated Amended Complaint ("the Complaint") devotes an entire
section to "the Contracts," a set of "standard form agreements"
between Fidelity and its customers. The Complaint then describes
the Contracts at some length, expressly labeling Fidelity's
authority as "[p]ursuant to the Contracts." So the Contracts are
undoubtedly central to plaintiffs' Complaint.
Quite unremarkably, Fidelity therefore filed with its
motion to dismiss a copy of relevant portions of its agreements
with T-Mobile USA, Inc., the employer of four of the plaintiffs,
as an example of the "standard form agreements" described in the
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Complaint.2 Fidelity also produced copies of the complete T-Mobile
Contracts to plaintiffs' counsel, allowing them to bring any other
sections to the court's attention. Plaintiffs then objected to
the court's consideration of the T-Mobile Contracts on the basis
of lack of authenticity. When the district court sought
clarification about the authenticity objection, plaintiffs
forthrightly conceded that they had no basis to say that the T-
Mobile Contracts were not what they purported to be. Rather, they
argued that they simply could not verify that for themselves
without discovery.
We see no error in the district court's decision to
consider the T-Mobile Contracts. Fidelity filed a declaration
under penalty of perjury signed by its Vice President of Contracts
authenticating the excerpts and the complete, current set of
agreements from which they were drawn. Were the declaration false,
it would be easily seen as such by the thousands of employers and
plan officials who have entered into these "standard form
agreements" with Fidelity, including the officials at T-Mobile who
administer the plan in which four of the named plaintiffs
participate. We see no good faith basis for disputing the T-
Mobile Contracts' authenticity.
2The excerpts were drawn from the Service Agreement and
Basic Plan Document for the T-Mobile USA, Inc., 401(k) Plan. We
refer to these excerpts collectively as "the T-Mobile Contracts."
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II.
So we turn now to the factual allegations of the
Complaint as supplemented by the T-Mobile Contracts. We describe
here the basic outline of the dealings at issue, adding further
detail later in this opinion where most relevant to our
consideration of plaintiffs' various claims.
Since 1989, Fidelity has maintained what it calls a
"supermarket" named the FundsNetwork. Rather than offering
groceries, the FundsNetwork stocks thousands of opportunities to
invest in mutual funds established by third parties other than
Fidelity.
Fidelity's customers include approximately 24,000
employer-established retirement plans. For each plan, Fidelity
performs recordkeeping, takes possession of plan assets, and
invests those assets at the direction of the plan or a plan
participant. Each plan selects from the FundsNetwork's offerings
the particular mutual funds in which each particular plan's
participants may invest. The plans pay Fidelity an agreed-upon
fee for its services.
Fidelity also charges some of the mutual fund managers
a so-called "infrastructure fee" for the privilege of being listed
as an investment opportunity in the FundsNetwork. In online
notices to which the Complaint directs us, Fidelity describes these
fees to its plan customers and their participants as "supermarket
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fees (paid by the fund company to Fidelity)," Understanding
Fidelity's FundsNetwork® Fees, Fidelity,
http://www.fidelity.com/mutual-funds/all-mutual-funds/fees (last
visited Mar. 4, 2021), or, more specifically, as "a fee from
unaffiliated product providers to compensate Fidelity for
maintaining the infrastructure to accommodate unaffiliated
products," Brokerage Commission and Fee Schedule, Fidelity,
http://www.fidelity.com/bin-
public/060_www_fidelity_com/documents/brokerage_commissions_fee_
schedule.pdf (last visited Mar. 4, 2021).
The pivotal question here is whether the Complaint's
allegations regarding this arrangement plausibly paint Fidelity as
a fiduciary for the plans (or their participants) with respect to
the collection of infrastructure fees from some of the fund
managers whose funds appear in Fidelity's FundsNetwork. We review
de novo the district court's negative answer to that question in
dismissing the complaint for failure to state a claim. See In re
Fid. ERISA Float Litig., 829 F.3d 55, 59 (1st Cir. 2016).
III.
The parties agree that under ERISA, a person may be a
fiduciary because he is so identified in a plan instrument or
pursuant to a procedure specified in that instrument. 29 U.S.C.
§ 1102(a). A person not named as a plan fiduciary may nevertheless
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become a "functional fiduciary" depending on his relationship with
the plan. Specifically, a person is a functional fiduciary
with respect to a plan to the extent
(i) he exercises any discretionary authority
or discretionary control respecting
management of such plan or exercises any
authority or control respecting management or
disposition of its assets,
(ii) he renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of
such plan, or has any authority or
responsibility to do so, or
(iii) he has any discretionary authority or
discretionary responsibility in the
administration of such plan.
29 U.S.C. § 1002(21)(A) (emphasis added).
This qualified language makes clear that functional
fiduciary status is not an all-or-nothing designation. See
Beddall, 137 F.3d at 18. A person or entity can be a fiduciary of
a plan for some purposes and not for others. See Pegram v.
Herdrich, 530 U.S. 211, 225 (2000). So "[i]n every case charging
breach of ERISA fiduciary duty . . . the threshold question
is . . . whether that person was acting as a fiduciary (that is,
was performing a fiduciary function) when taking the action subject
to complaint." Id. at 226.
Plaintiffs advance three arguments for treating Fidelity
as a functional fiduciary. We consider each in turn.
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A.
Plaintiffs argue first that Fidelity acted as a
fiduciary by exercising control over the factors affecting the
compensation it receives from the plans. Plaintiffs advance two
theories in support of this argument.
1.
Plaintiffs' first theory does not rely on the
infrastructure fees. Rather, plaintiffs assert that under the
T-Mobile Contracts (and other standard form agreements like them)
Fidelity retains discretion over the payments by the plans because
Fidelity may "unilaterally change its investment management and
administrative charges assessed under the Contracts." See, e.g.,
Golden Star, Inc. v. Mass. Mut. Life Ins. Co., 22 F. Supp. 3d 72,
81 (D. Mass. 2014) (finding that service provider was a fiduciary
where it "had the discretion to unilaterally set fees up to a
maximum and exercised that discretion"). But the T-Mobile
Contracts say no such thing. Rather, Fidelity sets the fees by
agreement. See T-Mobile Service Agreement, art. II, § 11.
Undeterred, plaintiffs reason that another clause allows Fidelity
to amend the T-Mobile Contracts "unilaterally." T-Mobile Service
Agreement, art. II, § 12. But that power is contingent on there
being "no impact on the fees set forth in this Agreement." T-
Mobile Service Agreement, art. II, § 12 (amended Apr. 1, 2016).
So plaintiffs retreat to their contention that we must turn a blind
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eye to what the T-Mobile Contracts actually say because they are
not attached to the Complaint. And that is a contention we have
already rejected.
2.
Plaintiffs' second theory in support of their argument
that Fidelity exercises discretionary control over its
compensation posits that in charging infrastructure fees to mutual
funds, Fidelity effectively increased the amount of compensation
it received from the plans, and thereby should be deemed to be a
fiduciary with respect to the collection of such fees. Of course,
the fees in question are paid by the mutual funds, not the plans.
But plaintiffs reason that the burden of any fee paid by a mutual
fund to Fidelity is passed through to the plan participants in the
form of increased fees charged by the mutual funds to participants
who chose those funds. Plaintiffs offer no example of any such
pass-through by any mutual fund. Rather, they contend it is
probable as a matter of "simple economics." We doubt that is so,
at least absent a basis to conclude that Fidelity charges fees in
a manner that affects a fund's expense ratio for every investor or
that both the law and the lack of market competition allow the
funds in question to charge different investors undisclosed
different amounts. But for Rule 12(b)(6) purposes we will assume
it is true.
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This theory for labeling the infrastructure fee a
payment by the plans stumbles initially because Fidelity provides
consideration in return for the payment of the fee by the funds --
access to the FundsNetwork. In this respect, Fidelity is like a
supermarket that charges a vendor a fee in return for favorable
shelf space. No one would deem that fee to be compensation from
the supermarket's customers.
Plaintiffs' theory also overlooks the numerous
intervening and independent decisions inherent in the so-called
pass-through to which they point. This series of independent
decisions precludes us from agreeing with plaintiffs that the
infrastructure fees are compensation paid to Fidelity by the plans.
Fidelity must negotiate the fee with the fund manager, who remains
free to agree or not. The fund manager -- not Fidelity -- then
decides whether or not to try to increase its fees charged to
investors -- and such fees must be disclosed. See Form N-1A
Registration Form for Open-End Management Investment Companies
(2021), General Instructions to Item 3,
http://www.sec.gov/files/formn-1a.pdf (requiring mutual funds to
disclose expense ratios in registration statements); 17 C.F.R.
§ 230.485 (requiring advance notice for post-effective date
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amendments to fund registration statements).3 Even then, the fund
would only be listed by Fidelity as an available option on the
FundsNetwork. It would remain for the plan's fiduciary investment
advisors to decide whether to make the fund available to that
plan's participants. In other words, even if Fidelity puts the
fund on FundsNetwork (sometimes called its "Big Menu"), a plan
must select that fund for its "Small Menu" before it becomes a
permissible investment option for the plan's participants. And it
would ultimately be up to the participants to decide whether to
invest in the fund. Only then would the theoretical pass-through
of infrastructure fees posited by the plaintiffs occur.
This theoretical pass-through is no less the product of
independent decisions if Fidelity negotiates infrastructure fees
with the mutual funds after a plan has already retained Fidelity
as a service provider and selected the fund for its Small Menu.
Fidelity and the fund would still have to agree on the fee, the
fund would still have to decide to raise its investment fees, and
3 At oral argument, plaintiffs' counsel acknowledged that
mutual funds must disclose their expense ratios up front but
suggested that funds may still pass through infrastructure fees by
charging transaction fees deducted from the fund's return.
Plaintiffs argue that this method of fee assessment obscures an
infrastructure fee's negative effect on the fund's performance
and, by extension, the participants. This argument does not alter
our conclusion. Rather, it underscores that funds -- not Fidelity
-- decide whether and how to charge fees to investors.
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the plan would still have to decide to continue offering the fund
on its Small Menu.
Plaintiffs point to no case treating such a series of
independent decisions as the equivalent of Fidelity controlling
its compensation from plans. One could just as easily say that by
charging infrastructure fees to funds, Fidelity lowers the costs
it incurs as a service provider, and thus can agree to charge plans
less; indeed, it likely would charge less unless it has market
power. Plaintiffs also overlook the significance of having other
fiduciaries in this chain of independent decision-making. It is
difficult to see what would be gained in the end for plan
participants by trying to deem Fidelity's attempt to sell shelf
space to fund managers to be a fiduciary function on behalf of
Fidelity's plan customers.
All in all, we see nothing here that calls for treating
Fidelity's charging of fees to some funds as an exercise of
authority or control over any plan assets, management, or
administration.
B.
Plaintiffs next argue that Fidelity acts as a fiduciary
in determining which mutual funds it includes or removes from its
FundsNetwork. Two circuits have rejected this argument as applied
to comparable "product design" decisions. See Santomenno v. John
Hancock Life Ins. Co. (USA), 768 F.3d 284, 295 (3d Cir. 2014);
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Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905, 911 (7th
Cir. 2013). Indeed, those courts have rejected this argument as
applied to Fidelity's actions as a service provider. See Renfro
v. Unisys Corp., 671 F.3d 314, 323 (3d Cir. 2011); Hecker v. Deere
& Co., 556 F.3d 575, 583 (7th Cir. 2009). So, too, have two
district courts in this circuit concluded that where the plan, not
Fidelity, made the final decision about which investment options
to offer participants, Fidelity was not a fiduciary with respect
to its receipt of revenue-sharing payments. See Fleming v. Fid.
Mgmt. Tr. Co., No. 16-cv-10918-ADB, 2017 WL 4225624, at *5 (D.
Mass. Sept. 22, 2017) (unpublished); Columbia Air Servs. Inc. v.
Fid. Mgmt. Tr. Co., No. 07-cv-11344-GAO, 2008 WL 4457861, at *4
(D. Mass. Sept. 30, 2008) (unpublished).
Plaintiffs' advocacy to the contrary ignores the nature
of the relative roles played in these transactions. The plans and
their investment advisors decide which investment opportunities
are made available to their participants. In making these
decisions, they have a variety of vendors from whom they might
obtain access to investment opportunities, either directly or
indirectly. Fidelity is just one of those options. Should a plan
choose Fidelity, it then chooses which funds to select from
Fidelity's Big Menu of offerings, which include Fidelity and non-
Fidelity funds. With knowledge of their participants' investment
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goals, the plan and its investment advisors assemble the Small
Menu from which the participants pick.
Nothing in this arrangement suggests that Fidelity must
automatically be treated as if it were also a fiduciary advising
which options to select. See 29 U.S.C. § 1002(21)(A) (designating
as a fiduciary a person who "renders investment advice for a fee
or other compensation"). ERISA does not treat as a fiduciary one
who offers without advice numerous investment options from which
an investment advisor might select investments. To rule otherwise
would be to deprive plan fiduciaries of the benefit of having
vendors who need not themselves bear the expense of duplicating
the investment advisor's fiduciary role.
As we have noted, case law almost directly on point
flatly rejects plaintiffs' notion that Fidelity acts as a fiduciary
in selecting funds for its FundsNetwork. In an effort to transform
their claim into a version less vulnerable to this accumulating
authority, plaintiffs in their brief argue that Fidelity also
controls which funds are actually offered to plan participants on
each plan's Small Menu. This argument, though, finds no footing
in the Complaint. While the Complaint alleges repeatedly that
Fidelity controls which funds are made "available to the Plans,"
there is no claim that Fidelity has control over which funds a
plan selects for the menu available to the plan's participants.
Moreover, the T-Mobile Contracts belie the assertion raised in
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plaintiffs' briefs. The T-Mobile Contracts make clear that
"Fidelity shall have no responsibility for the selection of
Permissible Investments for the Plan" and that "[a]ll Plan assets
must be invested in the Permissible Investments selected by the
Employer . . . ." T-Mobile Service Agreement, art. II, § 5; see
also T-Mobile Basic Plan Document, § 8.01 ("The Accounts of
Participants shall be invested and reinvested only in Permissible
Investments designated in the Service Agreement. The Trustee shall
have no responsibility for the selection of Permissible
Investments . . . ."). As Fidelity persuasively argues, these
provisions show that Fidelity cannot take actions that affect a
participant's existing investment in an option on a plan's Small
Menu.
What plaintiffs may mean to say is that the very decision
to list or delist a fund on the FundsNetwork itself indirectly
controls whether it can be chosen when a plan designs its Small
Menu. In an advisory opinion, the Department of Labor has opined
that a service provider does not become a fiduciary "solely as a
result of deleting or substituting a fund from a program of
investment options and services offered to plans, provided that
the appropriate plan fiduciary in fact makes the decision to accept
or reject the change" after being given "advance notice of the
change" and "a reasonable period of time within which to decide
whether to accept or reject the change and, in the event of a
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rejection, secure a new service provider." Dep't of Labor Pension
& Welfare Benefit Programs, Op. 97-16A, 1997 WL 277979, at *5
(May 22, 1997). One district court in this circuit has concluded
that the prerequisites identified in the DOL's guidance are
necessary to ensure "that the Plan has the final authority on which
investment options are available." Golden Star, Inc., 22 F. Supp.
3d at 82. Plaintiffs claim that Fidelity makes changes to its
fund offerings without such notice or opportunity for rejection.
We need not decide whether the ability to change
unilaterally the Small Menu offerings by changing the Big Menu's
offerings per se turns the service provider into a fiduciary absent
the notice and rejection opportunities noted in the DOL opinion.
Here, the Complaint contains no allegation that Fidelity's
decision to stop offering a fund in its FundsNetwork removes that
fund from those already selected by a plan for its Small Menu.
The absence of such an allegation from the Complaint is
unsurprising because, as noted already, the T-Mobile Contracts
preclude Fidelity from having any "responsibility for the
selection of Permissible Investments for the Plan." And, adding
belt to suspenders, if a plan or its investment advisors become
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dissatisfied with Fidelity's Big Menu offerings, they could opt to
shop elsewhere.4
C.
Plaintiffs' final fiduciary status argument trains on
the fact that Fidelity can successfully impose infrastructure fees
only because it has in its hands lots of plan assets to be invested.
As directed trustee for the plans, Fidelity is obligated to
safeguard and allocate assets in accordance with participants'
investment directions. See T-Mobile Basic Plan Document, § 20.04
("The Trustee shall have no discretion or authority with respect
to the investment of the Trust Fund but shall act solely as a
directed trustee of the funds contributed to it."); 29 U.S.C.
§ 1103(a)(1) (permitting plan assets to be managed and controlled
by a trustee "subject to proper directions" of a named fiduciary).
According to the Complaint, Fidelity performs its directed trustee
duties by pooling participants' investments in a particular fund
into an "Omnibus Account." Plaintiffs argue that Fidelity's acts
4 Plaintiffs suggest that their ability to take their
business elsewhere could be restricted by an inappropriate
termination fee. See Rozo v. Principal Life Ins. Co., 949 F.3d
1071, 1074–75 (8th Cir. 2020) (holding that fee for leaving the
plan and year-long delay in fund withdrawal were impediments to
exit that made service provider a fiduciary). But plaintiffs
acknowledge that the motion to dismiss record is "devoid of any
evidence either way" about whether Fidelity charges plans a
termination fee. This gap in the record is plaintiffs' problem,
as they bear the burden of setting forth allegations that state a
plausible claim for relief.
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as a directed trustee relate to its collection of infrastructure
fees because funds pay those fees to gain access to the Omnibus
Account assets. But Fidelity is able to charge funds a fee because
it has lots of customers, not because it controls those customers
or their assets in any meaningful manner. The fund simply gets on
the store's shelves, and the participant has the final say on
whether the fund also gets in the grocery cart.
None of this is to ignore the fact that Fidelity does
have some fiduciary duties vis-à-vis the plans and their
participants. Rather, the point is that Fidelity's actions in a
fiduciary capacity are not the subject of plaintiffs' complaint.
See Pegram, 530 U.S. at 226; see also Leimkuehler, 713 F.3d at
912–14 (explaining that service provider's management of assets in
accordance with participant instructions did not make the service
provider a fiduciary with respect to challenged action); Renfro,
671 F.3d at 323 ("Fidelity's limited role as a directed
trustee . . . does not encompass the activities alleged as a breach
of fiduciary duty."). Fidelity's fiduciary responsibilities as a
directed trustee are distinct from and do not extend to Fidelity's
charging of an infrastructure fee.
D.
Plaintiffs also argue that the district court improperly
dismissed the Complaint as to several unnamed defendants when it
invoked Federal Rule of Civil Procedure 4(m). We may affirm the
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dismissal of a complaint "on any basis available in the record."
Yan v. ReWalk Robotics Ltd., 973 F.3d 22, 30 (1st Cir. 2020)
(quoting Lemelson v. U.S. Bank Nat'l Ass'n, 721 F.3d 18, 21 (1st
Cir. 2013)). Plaintiffs offer no theory of liability applicable
to the unnamed defendants that we have not already rejected above.
We therefore dismiss the Complaint as to all of the defendants,
named and unnamed. Cf. Rodríguez-Reyes v. Molina-Rodríguez, 711
F.3d 49, 57–58 (1st Cir. 2013) (affirming dismissal of claims
against unnamed defendants where plaintiffs did not develop
argument as to sufficiency of claims against those defendants).
IV.
For the foregoing reasons, we affirm the dismissal of
plaintiffs' Consolidated Amended Complaint.
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