Westlaw News

1st Circuit upholds Fidelity win in mutual fund fees lawsuit

A federal appeals court in Boston upheld a victory for Fidelity Management & Research Co in a lawsuit by retirement plan participants who claimed they paid more for mutual funds because Fidelity charged the funds fees that were then passed on to plan participants.

A three-judge panel of the 1st U.S. Circuit Court of Appeals ruled on Friday that plan participants whose employers use Fidelity to provide benefit plans cannot revive their proposed class action alleging Fidelity, represented by O’Melveny & Myers, violated its duties under the Employee Retirement Income Security Act. U.S. Circuit Judge William Kayatta Jr wrote for the court that a Boston federal judge was right to reject the plan participants’ “pass through” theory.

“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,” he wrote.

James Miller of Shepherd, Finkelman, Miller & Shah represented the plan participants and did not immediately respond to a request for comment on Monday.

Fidelity Investments spokesman Michael Aalto said Monday that Fidelity is pleased with the court’s decision.

Plan participants including Andre Wong had sued the Boston-based brokerage in 2019 over its practice of charging third-party mutual funds “infrastructure fees” in order to be listed among the options that plans could make available to participants. The lawsuit characterized the fees as “kickbacks” from the funds whose cost was passed on to plan participants.

U.S. District Judge Leo Sorokin in Boston dismissed the lawsuit in February 2020, writing that Fidelity was not a fiduciary with respect to the fees it charged mutual funds in part because it had no control over whether the funds passed the fees on to the plans.

The plan participants argued on appeal that the judge had been wrong to focus on what the funds did instead of their claim that Fidelity was raking in compensation off its relationship with the plans without having obtained their permission.

The argument was rejected by Kayatta and his colleagues, U.S. Circuit Judge David Barron and U.S. District Judge William Smith of Rhode Island, sitting by designation.

The court pointed out that there are multiple inflection points between Fidelity’s fees to mutual funds and the mutual funds fees to plan participants.

“This series of independent decisions precludes us from agreeing with plaintiffs that the infrastructure fees are compensation paid to Fidelity by the plans,” Kayatta wrote.

The case is In Re: Fidelity ERISA Fee Litigation, 1st U.S. Circuit Court of Appeals, No. 20-1286.

For the plan participants: James Miller and Laurie Rubinow of Shepherd, Finkelman, Miller & Shah; and David Pastor of Pastor Law Office

For Fidelity: Brad Garcia, Jonathan Hacker and Brian Boyle of O’Melveny & Myers.