On December 1, 2022, the US Court of Appeals for the Second Circuit vacated a district court’s certification of a nationwide class of 8,000+ retirement plans serving hundreds of thousands of participants in an ERISA action filed against the US’s largest service provider for 403(b) retirement plans. The underlying complaint had alleged that the provider’s participant loan services — which allow a plan’s participants to borrow money using their retirement savings as collateral — violated ERISA. The appellate court held that in evaluating predominance before certifying the class, the district court should have taken into account ERISA’s statutory exemptions that permit participant loans to be offered to plan participants, and whether litigating those exemptions involves individualized issues. Accordingly, the appellate court vacated the district court’s class certification order.
The district court had certified a class of over 8,000 retirement plans whose fiduciaries contracted with Teachers Insurance and Annuity Association of America (TIAA) to offer, as part of each plan’s service offerings, participant loans secured by a participant’s retirement account. The plaintiff, a single participant in a single plan, alleged that the plan fiduciaries of each class member had committed an ERISA prohibited transaction by deciding to make TIAA’s loan services available to participants. The class challenged hundreds of thousands of individual participant loan transactions. The district court had previously held that TIAA is not an ERISA fiduciary with respect to its loan services, which the fiduciaries of each plan have discretion to select, but the plaintiff sought through this class action to hold TIAA liable as a non-fiduciary for “knowing participation” in thousands of alleged breaches by the fiduciaries of each class member.
In its decision vacating the district court’s class-certification order, the Second Circuit held that the district court should have taken into account the potentially individualized nature of statutory exemptions (which the court deemed to be affirmative defenses) that exist for the purpose of permitting retirement plans to offer loans and loan services to retirement-plan participants. For example, the appellate court noted that under ERISA, one relevant exemption applies if a plan paid and received “adequate consideration,” taking into account whether that plan’s fiduciaries exercised “good faith” in approving the amounts the paid and received. Another exemption applies if the loans were consistent with each plan’s governing documents and the loans “bear a reasonable rate of interest” and are “adequately secured.” The Second Circuit explained that resolving whether each exemption applied might require addressing factual issues specific to each plan, and that the district court should have taken that into account when it determined whether the putative class met the predominance requirement of Federal Rule of Civil Procedure 23(b)(3). The Second Circuit held that the district court should not have excluded consideration of these exemptions from the inquiry, notwithstanding that they are affirmative defenses. The Court explained, “[a]ffirmative defenses do not carry ‘less weight’ on the class certification issue simply because the defendant will bear the burden of proof at the merits stage.” It further explained that the fact “[t]hat certain of the exemption-related issues may overlap with the merits of this case does not absolve a district court from addressing them at the certification stage when such determinations bear on assessing a Rule 23 requirement.”