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Compliance January 19, 2017
Motion to Dismiss Denied in Self-Dealing Suit
A federal court rejected Franklin Templeton's arguments that the plaintiff in the case failed to state a claim.
Reported by Rebecca Moore
A federal court judge has refused to eliminate claims in a case alleging that Franklin Templeton Resources engaged in self-dealing in the administration of its defined contribution retirement plan.
Franklin Templeton moved for summary adjudication, arguing that the plaintiff’s complaint violates the covenant not to sue contained in the agreement he signed when he was terminated.
In her opinion, U.S. District Judge Claudia Wilken notes that the agreement releases claims, including “Claims the Employee might have under . . . the Employee Retirement Income Security Act of 1974, and all similar federal, state, or local laws.” The release contains a carve-out of “Rights not Released.” As relevant to this case, the carve-out provides that the plaintiff does not release “any right that relates to . . . the Employee’s vested participation in any qualified retirement plan.” The Agreement also contains a “Promise not to Litigate Released Claims,” prohibiting the plaintiff from bringing any action against the released parties. This covenant not to sue excepts all claims discussed in the “Rights not Released” carve-out.
The plaintiff, Marlon H. Cryer, took a distribution of all vested funds in his account on May 19, 2016. On July 28, 2016, Cryer filed the instant case individually and as the representative of a putative class of all other persons similarly situated and on behalf of the Franklin Templeton 401(k) Retirement Plan.
Cryer does not dispute that the agreement contained a valid covenant not to sue. Instead, he argues that the covenant not to sue cannot extend to his claim for breach of fiduciary duty because he makes that claim on behalf of the plan and its participants.
NEXT: Denial of summary adjudication and motion to dismissWilken cited a previous case, Bowles v. Reade, in which a district court dismissed “all claims against Ms. Reade belonging to Bowles” but found that “the agreement released ‘only those claims legally brought by Plaintiff Bowles and that Bowles [could not] and did not release the Plans’ claims against Defendant Reade.’” The 9th U.S. Circuit Court of appeals affirmed and also affirmed the district court’s decision that Bowles “remained as a plaintiff in her representative capacity on behalf of The Plans and the participants notwithstanding the release of her individual claims against Ms. Reade.”
Because Cryer cannot release the breach of fiduciary duty claims made on behalf of the plan, such claims are not covered by the covenant not to sue, Wilken concluded as she denied Franklin Templeton’s motion for summary adjudication.
In filing a motion to dismiss, Franklin Templeton first argues that Cryer’s breach of fiduciary duty claim fails as a matter of law because ERISA expressly permits a financial services organization to offer proprietary “common or collective trust fund[s] or pooled investment fund[s]” to their plans. However, Wilken notes that Cryer does not allege that Franklin Templeton was prohibited from offering its own mutual funds. Rather, he alleges that the company breached its fiduciary duty by offering only its own products, including mutual funds and the money market fund, which charged higher fees than and performed poorly as compared to available comparable non-proprietary funds and products. Cryer further alleges that these decisions were made in order to allow the firm to collect the excessive administrative and investment fees.
Franklin Templeton also argues that Cryer’s claim fails as a matter of law because his allegations that other, lower-cost, higher-performing alternatives existed do not support an inference of a breach of fiduciary duty. However, these arguments are based on the company’s contention that these alternatives were not, in fact, comparable or did not perform better. Wilken said the court may not resolve such factual questions at the motion to dismiss stage. She denied Franklin Templeton’s motion to dismiss.