Splitting with Other Circuit Courts, the Ninth Circuit Revives an ERISA Prohibited Transaction Claim

ERISA’s prohibited transaction rules are notoriously complex and opaque. On August 4, 2023, the Ninth Circuit issued an important decision on those prohibited transaction rules that arguably conflicts with decision from the Third and Seventh Circuits, setting the stage for potential review by the U.S. Supreme Court.

In this case, Bugielski v. AT&T Services, Inc., the plaintiffs raised prohibited transaction claims against fiduciaries of the AT&T retirement plan (the “Plan”). They alleged that, when the Plan fiduciaries entered into an amended service agreement with the Plan’s recordkeeper in 2012, that amounted to the “furnishing of goods, services, or facilities between the plan and a party in interest” and thus presumptively violated ERISA § 406(a)(1)(C). The plaintiffs also alleged that because the fiduciaries did not account for indirect revenue that the recordkeeper received from third parties, the exemption in ERISA § 408(b)(2) for services for “reasonable compensation” did not apply. (The plaintiffs also asserted other claims that are not discussed in this post.)

The Ninth Circuit reversed the district court’s summary judgment order dismissing the case. The Ninth Circuit reasoned that the amended contract was a prohibited transaction under ERISA § 406(a)(1)(C) because the recordkeeper was a “party in interest” and the expansion of that party’s role with, and compensation received from, the plan involved “furnishing of goods, services, or facilities between the plan and a party in interest.” And the Ninth Circuit concluded that it could not enforce the “reasonable compensation” exemption at this point in the case, because the fiduciaries failed to take into account revenue that the recordkeeper had received from third parties.

The Ninth Circuit recognized that its decision conflicted with rulings from the Third and (arguably) Seventh Circuits, which had limited the reach of ERISA’s prohibited transaction rules to transactions with third-party services providers. The Ninth Circuit found those decisions “unpersuasive” because, in its view, they conflicted with the clear language of ERISA, as well as underlying policy considerations.

Over the years, ERISA has generated a steady stream of cases that the Supreme Court has agreed to review. The sort of “circuit split” created by Bugielski is one of the most important factors that the Supreme Court looks too when deciding to review a case. There is therefore a substantial chance that the Supreme Court would review Bugielski, should the defendants file a petition for certiorari.

Nick Bullard

Nick is a trial partner in Dorsey’s office in Minneapolis. His practice focuses on complex and high-stakes commercial litigation at the trial and appellate levels. He has particular expertise in defending clients in ERISA class actions involving both retirement and health and welfare plans. In his ERISA practice, Nick has represented some of the largest companies in the world in industries ranging from banking to healthcare.

Andrew Holly

Andrew represents clients in a wide range of complex civil matters.

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