Class Actions, the Diamond Hypothetical and the Seventh Circuit

I have written before about the various implications of the Supreme Court broadening fiduciary duty claims in LaRue to allow individual participants to sue for losses only to their own accounts, rather than just for harms suffered by all participants, or in other words, by the plan as a whole; among other aspects, I have discussed its interplay with the class action rules, and the importance for the development of the law of ERISA of the Court’s distinction in that case between defined benefit plans and defined contribution plans.

On the first point, I have noted that the famous - to a small group of interested observers otherwise known as ERISA lawyers and scholars - role played in LaRue by the so-called (by me, anyway) diamond hypothetical may have a wide range of implications for the development of the law, not all of them either intended or even foreseeable. Under the diamond hypothetical, each participant’s account in a defined contribution plan can be understood to contain its own specific bunch of diamonds, which all together add up to make up the totality of the diamonds held by the plan; this is different than a defined benefit plan, in which the diamonds are not subdivided in that manner, but instead are merely held in their entirety as the plan’s assets. I have blogged before about the question of whether this meant that an individual plan participant who suffered no harm to his particular account - i.e., his diamonds didn’t vanish - could proceed as a class representative where other plan participants did suffer harm in their accounts - i.e, their diamonds did vanish - or could seek relief on a plan wide basis. Judge Gertner of the United States District Court for the District of Massachusetts has a nice discussion of the diamond hypothetical in the footnotes of her opinion that is discussed in this post.

In a decision interesting on a number of fronts, the Seventh Circuit has now addressed this same issue in detail, in the context of deciding whether class certification orders in excessive fee cases involving defined contribution plans were appropriate. In Spano v. Boeing, the Court focused on the implication of the diamond hypothetical structure of defined contribution plans (without mentioning the diamond hypothetical), finding that class certification can be proper, despite the fact that each plan participant has his or her own individual account and possible loss, after LaRue, but that the particular injury to the different participants’ accounts had to be examined to determine whether class certification was appropriate with regard to the particular theory being pursued by the class and the representative plaintiffs. In essence, class certification may not be appropriate if there is too much variance in the impact on different participants’ accounts of the challenged conduct. The opinion is a fascinating read on this question, and you can find it here.

The opinion is notable for a number of other reasons as well, some of which I may return to in further posts, but one of which I will mention here. I have posted in the past that the Supreme Court’s opinion in LaRue invited courts to revisit the rules in place with regard to defined benefit plans when instead evaluating claims concerning defined contribution plans, and emphasized that the rules applicable to the former may not properly fit the latter. I have pointed out as well that figuring out where or how the rules should diverge in the two contexts should open up avenues for participants’ lawyers to try to advance their cases when pressing claims involving defined contribution plans. The Seventh Circuit drives home both this point and this new reality in Spano, recognizing this dynamic put into play by the Supreme Court in LaRue.