Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

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GEORGE v. KRAFT FOODS GLOBAL, INC. (April 11, 2011)

Kraft Foods Global, Inc. sponsored an ERISA defined contribution plan for its employees. Each participating employee had an account and was able to choose where to invest. The plan offered up to nine different funds, including two company stock funds and a number of multi-stock funds. The plan contracted with Hewitt & Associates to track the accounts and transactions and State Street Bank to manage the fund's assets. A number of Plan participants filed suit against seven defendants in 2006, alleging that the defendants mismanaged the company stock funds and paid excessive fees to the service providers. The original fact discovery deadline was March of 2008. The parties completed the class certification motion briefing by January 2008. In May 2008, plaintiffs sought to amend their complaint to add 21 defendants and to add claims challenging a number of investment decisions. Magistrate Judge Schenkier (N.D. Ill.) denied the motion, concluding that the plaintiffs had known about the facts in support of the amendment for quite some time, that the plaintiffs never advised the court of their desire to amend, and that the new claims were substantially different from the original claims. The court then certified a class and granted summary judgment to the defendants. Plaintiffs appeal.

In their opinion, Circuit Judges Cudahy (concurring in part and dissenting in part) and Rovner and District Judge Adelman affirmed in part and reversed and remanded in part. The Court first addressed the district court's denial of the motion to amend. The district court found that the plaintiffs were aware of the facts supporting the amendment early on, that they never asked for a amendment deadline, and that the addition of the new defendants and claims would prejudice both the defendants and the court. The Court found no abuse of discretion. The Court also found no error in the district court's refusal to allow an expert witness. The expert's opinion related only to the claims in the amended complaint and was not relevant to the case without it. On the merits, the Court first addressed the plaintiffs allegations with respect to the company stock funds. The plaintiffs complained of the defendants' decision to operate these funds on a unitized basis. The benefits of unitization are that it allows transactions to consummate more quickly and it allows the Plan to save on transaction costs by offsetting purchase orders with sell orders. Two alleged downsides of unitization are: a) the Fund gets lower returns when the stock appreciates because of the need to keep a portion of the fund in cash or other liquid investments, and b) unitization incentivizes more transactions and higher transaction costs, since transaction costs are deducted from the fund value rather than allocated to individual traders. Plaintiffs' legal theory is that defendants breached their fiduciary duty by not eliminating unitization or at least adopting measures to limit the number of transactions. Notwithstanding contrary conclusions by the district court, the Court could find nothing in the record establishing that a decision was ever made. But a failure to make a decision, one way or the other, when a prudent man would have done so, is also a breach of ERISA’s fiduciary obligation. The Court therefore reversed and remanded for further consideration. The Court turned to the allegations regarding the Hewitt and State Street fees. With respect to Hewitt, the Court reversed the summary judgment in defendants' favor. Plaintiffs' allegations are that the fiduciaries should have, but did not, solicit competitive bids before extending the Hewitt contract. Plaintiffs’ expert testified to that opinion and further opined that the plan overpaid Hewitt. Defendants assert that they received consultants’ opinions that the Hewitt contract was prudent. The district court erred when it weighed the expert opinion at the summary judgment stage and also erred when it concluded that reliance on experts was sufficient for judgment as a matter of law. With respect to the State Street claims, the court affirmed summary judgment for defendants. Plaintiffs' allegations here are that the fiduciaries allowed State Street to retain as income interest from "float" without even knowing the amount of that income. The Court noted, however, that the defendants submitted a declaration that they received annual income reports. Plaintiffs did not contradict the declaration. Plaintiffs point to no other breach of duty evidence. Summary judgment for the defendants was appropriate.

Judge Cudahy concurred in part and dissenting in part. He would have affirmed the district court decision in its entirety. First, unitization is a "universally accepted investment practice" and whether or not to adopt it is a routine investment consideration. Nothing in ERISA requires a fiduciary to create a record of the balancing of its pluses and minuses. Second, with respect to the Hewitt claim, Judge Cudahy agreed with the district court that the long relationship between the Fund and Hewitt and the Fund's reliance on consultants to evaluate the fee’s prudence satisfies its fiduciary duties.