The Wagner Law Group continues to monitor the recent flood of retirement plan “forfeiture” litigation. This alert is our eighth update reporting on and analyzing the nature of the claims raised by plaintiffs, the defenses asserted against them and the court opinions deciding the issues raised in these matters. To date, we count 25 forfeiture lawsuits filed in a variety of jurisdictions (11 in federal courts in California). Six decisions on motions to dismiss have been issued so far. Two motions were denied outright. One motion was granted without leave to refile. The remaining three motions were granted (including the latest in the Clorox matter discussed below), but with leave to plaintiffs to amend their complaints.
In this alert we discuss the latest decision in the Clorox matter. We also discuss an issue not yet directly addressed by any of the decisions published so far that we believe will impact future decisions in forfeiture cases – the recent Supreme Court opinion in Loper Bright Enters. v. Raimondo, 144 S.Ct. 2244, 291 L.Ed. 832 (2024). In particular, we consider how Loper Bright may impact a future court’s consideration of IRS guidance regarding the use of forfeited funds in cases arising under Title I of ERISA.
But, first, the Clorox decision.
McManus v. Clorox
On November 1, 2024, the United States District Court for the Northern District of California (Judge Rogers) issued a substantive decision, granting Clorox’s motion to dismiss – but without prejudice to plaintiff’s filing an amended complaint on some of the allegations. McManus v. The Clorox Company, et al., 23-cv-5325 (N.D. Cal. 11/1/2024). In a 13-page discussion that in many ways closely follows the reasoning of the decisions favoring HP Inc. (Hutchins v. HP Inc., et al., 23-cv-5875 (N.D. Cal. 6/17/2024)) and Thermo Fisher (Dimou v. Thermo Fisher Scientific Inc., et al., 23-cv-1743 (S.D. Cal. 9/19/2024)), Judge Rogers addresses both defendants’ and plaintiff’s arguments in a thorough and thoughtful fashion. Similar to the HP Inc. and Thermo Fisher decisions, Judge Rogers leaves the door open for the Clorox plaintiff to amend his complaint.
As an initial matter, the Clorox court addressed whether the plaintiff had constitutional standing to bring the action:
To establish standing, a plaintiff must demonstrate that he has (1) “suffered an injury in fact[,]” (2) “there [is] a causal connection between the injury and the conduct complained of” and (3) that it is “likely . . . that the injury will be redressed by a favorable decision.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992).
Clorox, at p 3. Having articulated this standard, Judge Rogers addressed each element and concluded that Plaintiff had met his burden and established standing. Of note, the Court distinguished plaintiff’s action from the factual predicate underlying the Supreme Court decision in Thole v. U.S. Bank N.A., 140 S.Ct. 1615 (2020). The Court also rejected defendants’ argument that plaintiff’s injury was not redressable because any recovered funds would go to the Plan: “The Ninth Circuit has foreclosed this argument, however, holding “that there is no lack of redressability merely because a plaintiff’s recovery under Section 502(a)(2) might first go to the defined contribution plan rather than directly to the plaintiff.” Harris v Amgen, Inc., 573 F.3d 728, 736 (9th Cir. 2009).” Clorox, p 4.
The court then rejected defendants’ arguments that 26 C.F.R. § 1.401-7(a) foreclosed plaintiff’s action:
26 C.F.R. section 1.401-7(a), however, does not apply to defendants’ Plan because the regulation applies to pension plans and not profit-sharing plans. . . .
Further, as applied here, the Department of Treasury proposed regulation is of little value. First, the proposed regulation applies only to plan years beginning on or after January 1, 2024, and therefore does not apply to plaintiff’s claims, which span from 2017 to 2022. See Use of Forfeitures in Qualified Retirement Plans, 88 Fed. Reg. at 12284. (See Compl. ¶¶ 26-31.) Second, an IRS revenue ruling from closer in time to the relevant rule’s drafting indicates that pension plans are treated differently from profit-sharing plans. In 1971, the IRS ruled that 26 C.F.R. § 1.401-7 “does not extend to profit-sharing and stock bonus plans.” Rev. Rul. 71-313, 1971 WL 26693 (1971).
Clorox, p 5.
The court also rejected arguments that decisions to allocate forfeitures in the manner alleged in the complaint were sponsor decisions not subject to ERISA’s fiduciary standards: “[T]his Court joins others in this district finding that allocating forfeiture amounts is a fiduciary, as opposed to a settlor, function. See Hutchins v. HP Inc., No. 23-CV-05875-BLF, 2024 WL 3049456, at *5 (N.D. Cal. June 17, 2024); Rodriguez v. Intuit Inc., No. 23-CV-05053-PCP, 2024 WL 3755367, at *5 (N.D. Cal. Aug. 12, 2024))”. Clorox, p 6. In addition, the court rejected defendants’ arguments that (a) they lacked discretionary authority sufficient to render them fiduciaries and (b) that the forfeited funds were not plausibly plan assets. Clorox, p 7.
Despite ruling in favor of the plaintiff on these preliminary issues, the Clorox court, like the HP Inc. court, declined to conclude that it was “necessarily a fiduciary breach” to use forfeited funds to reduce employer contributions rather than pay administrative costs. Clorox, p. 10; HP Inc., pp 10-13. Further, citing to the HP Inc., decision, the Clorox court also rejected plaintiff’s anti-inurement claims. Clorox, pp 10-11. Finally, the Clorox court rejected plaintiff’s prohibited transaction claims concluding that plaintiff had failed to identify an actual transaction. Clorox, pp 11-12.
The Clorox court ultimately concluded that plaintiff’s claims of violations of ERISA §§ 404(a)(1)(A) and (B) were “impermissibly broad.” Clorox, p 10. Even so, the court’s dismissal of those claims was made without prejudice in order to provide the plaintiff with an opportunity “to amend to plausibly allege disloyalty or imprudence based on more particularized facts or special circumstances.” Clorox, p 9. However, as to both the anti-inurement and prohibited transaction claims, the court declined to provide plaintiff with leave to amend because “plaintiff indicated on the record that he would not reassert this claim.” Clorox, pp 11 and 12.
Is Deference Owed to IRS Guidance Regarding Forfeitures?
With the Clorox decision in the books, to date, six district courts have now ruled on motions to dismiss in forfeiture cases. Each decision addressed and/or relied on IRS guidance regarding the use of forfeiture amounts. However, none of the decisions addressed the level of deference to which such guidance was entitled under the standards set forth in Loper Bright, ERISA’s statutory language or the IRS’s own pronouncements.
The decisions denying motions to dismiss simply rejected IRS guidance as relevant altogether. See Rodriguez v. Intuit, Inc., et al., 23-cv-05053, p 13 (N.D. Cal. Aug. 12, 2024) (“That Treasury regulations and DOL Guidance would generally permit employers to structure plans to allow forfeitures to cover contributions does not establish that Intuit’s implementation by using forfeitures to offset its mandatory Matching Contributions within the parameters of this specific Plan . . . was permissible, lawful, or inconsistent with a finding that Intuit violated ERISA’s anti-inurement provision“); Perez-Cruet v. Qualcomm Inc., et al., 23-cv-01890, pp 14-15 (S.D. Cal. May 24, 2024):
ERISA specifies that it is the Secretary of Labor who has authority to define what are assets of a pension plan. If adopted, the rule would certainly mean favorable tax treatment by the Internal Revenue Service of plan actions taken by fiduciaries in Defendants’ shoes. But the rule has not yet been adopted and has no force of law. What persuasive value it does have is not sufficient to persuade this Court that Plaintiff’s claim is implausible.
However, the decisions granting motions to dismiss have all given some level of deference or consideration to IRS guidance. See Hutchins, pp 5-6; 11-12 (noting that Treasury pronouncements “may be considered as persuasive authority in evaluating the plausibility of Plaintiff’s claims” and concluding that “The Court does not understand the general provisions of the fiduciary duty provision of ERISA to not only create a benefit to which Plaintiff is not entitled but also to abrogate Treasury regulations and settled rules regarding the use of forfeitures in defined contribution plans”); Thermo Fisher, pp 15-16 (concluding that the HP Inc. analysis is “persuasive”); Naylor v. BAE Systems, Inc., 24-cv-00536 (E.D. Va. Sep. 5 2024) p 10, n 7 (citing Treasury regulations in support of decision dismissing forfeiture claims); Clorox, pp 9-10 (“Plaintiffs do not persuasively explain how the Department of Treasury would now allow forfeitures to be used to reduce employer contributions if such a practice breached fiduciary duties”).
Last summer, in Loper Bright, the Supreme Court concluded that deference should not be accorded to agency views on legal questions, rejecting the type of deference previously accorded to executive branch agencies under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984): “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires.” Loper Bright, 144 S.Ct. at 2262. Despite this direction from the Supreme Court, however, none of the district court forfeiture decisions address whether IRS pronouncements fall within its authority to interpret Title I of ERISA or whether they are consistent with ERISA’s statutory language.
There are significant obstacles standing in the way of any court concluding that the IRS has authority to opine on the requirements of Title I of ERISA for a number of reasons. First, ERISA’s statutory provisions provide that the Department of Labor is the agency charged with administering and enforcing Title I of ERISA, not the IRS. See e.g., Rotherstein v. Am. Int’l Grp., Inc., 837 F.3d 195, (2d Cir. 2016) (“The Department of Labor, the agency charged with administering and enforcing Title I of ERISA . . .”) (internal citations omitted). Second, the IRS itself has consistently declaimed primary jurisdiction over Title I of ERISA. See e.g., “Section 403(b) Pre-Approved Plans Listing of Required Modifications and Information Package (LRM) Revised April 2022,” https://www.irs.gov/pub/irs-tege/403b-lrm-042022.pdf (“Pre-approved Plans may be covered by Title I of ERISA. Since the IRS does not have jurisdiction over Title I, this package does not contain sample Title I plan provisions”).
Indeed, on at least one occasion, the Department of Labor has chastised the IRS when it has stepped out of its lane with regard to the proper interpretation of Title I of ERISA. See “Information Letter 01-16-1996”, https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/01-16-1996 (“[T]he Department has received a number of inquiries as to how the Department’s analysis of the fiduciary provisions under Title I comports with the Service’s interpretation of Treasury regulations, as reflected in the subject TAM. Inasmuch as the Department’s analysis under Title I differs from the Service’s interpretation under the Code, we request that the Service reconsider its views on this matter”).
Again, to date, no court has discussed whether IRS pronouncements are entitled to deference under Loper Bright. We must, therefore, wait to further decisions to address this important question.
Thoughts:
The Clorox decision should be welcome news for the many defendants currently facing complaints alleging misuse of forfeited amounts. Like the HP Inc. decision on which its reasoning is most closely modeled, it addresses head-on the essence of the plaintiff’s case and provides further support to defendants seeking an early release from the complaints against them. We note that an amended complaint was filed in the HP Inc. case on July 17, 2024, and that a hearing on defendant’s motion to dismiss that amended complaint is currently set for hearing on January 30, 2025). The plaintiff in Clorox may certainly pursue a similar path.
At The Wagner Law Group, we are already considering whether, and how, the IRS’s pronouncements, when viewed under the standards articulated in Loper Bright, may impact future decisions and other more nuanced issues underlying forfeiture litigation. We will continue to watch closely as future litigants and/or courts address these matters to see how these issues unfold in the law. Regardless of the ultimate outcome, we predict that the uncertainties presented by the ongoing forfeiture litigation will continue to present a variety of vexing issues for fiduciaries, plan sponsors, litigants and the courts.
