Distortion of Evidence in Excess Fee Cases: The Davita Example

SUMMARY OF RULING:  Colorado Court Allows Davita Excess Fee Case Brought By Participants With Tiny Accounts Who Each Paid Between 12 Cents and $10.56 in Annual Plan Costs

By Daniel Aronowitz

The excess fee lawsuit brought by the Capozzi Adler law firm against Davita, Inc. complains that three investment options cost too much, and that the plan fiduciaries incurred “unreasonable” recordkeeping fees.  But the three participants serving as plaintiffs never invested in the three challenged investments, had tiny positions in high-performing target-date funds, and never paid more than $10.56 in annual plan administration costs – nowhere close to the false and inflated $50-96 amount alleged in the complaint.  The Capozzi law firm was shown fee disclosures with the correct recordkeeping fee charged to participants after the initial complaint was filed, but the law firm filed an amended complaint with more false excess recordkeeping fee claims.  As Davita’s motion to dismiss demonstrated, the Capozzi law firm was not interested in the truth.  It was focused only on what the Court might be persuaded to “accept as true,” “through liberties taken with source materials, misleading fee comparisons and unsupported inferences.”

The Capozzi law firm filed a misleading excess fee lawsuit because this tactic works.  Not every time, as it did not work in the Barrick Gold case filed in the same circuit [and is now up on appeal].  But it works often enough to generate huge fees for this business model.  Alas, it worked in the Davita case.  The Colorado Court acknowledged that no participant named as a plaintiff had paid the amount alleged to be the plan’s recordkeeping fee, but accepted as “true” for purposes of a motion to dismiss that the plan paid between $50-96 for recordkeeping for services worth between $14-21.  Both the fee and purported benchmark are false.  But again, excess fee cases are not about the truth, but are crafted to leverage the cost of defense and risk of litigation to enable plaintiff law firms like Capozzi Adler to prosper.

The Davita case is worth a closer look, because it demonstrates how many meritless excess fee cases are designed to get past  motion to dismiss – even when the alleged facts are objectively false.  It shows how ERISA has been weaponized to create false liability against America’s plan sponsors, even when the plans have low fees and offer high-performing, quality investments like the Davita plan.

The Initial Filing of the Davita Excess Fee Lawsuit:  On March 23, 2022, the Capozzi Adler law firm filed a fiduciary imprudence lawsuit against Davita in the District Court of Colorado in a case captioned Teodosio v. Davita, Inc., No. 1:22-cv-00712 (07/08/22 D. Colo.).  The complaint first alleged that the $2.68 billion plan with 67,104 participants in 2020 contained three investments options (out of twenty-three) that were imprudent because the investment fees were higher than the ICI total-plan median and average.  Second, the complaint alleged that the plan fiduciaries imprudently paid excessive recordkeeping fees to Voya in the amounts of $41.62 to $96.14 per year, compared to the $14-21 that Fidelity stipulated in a discovery proceeding in a case involving its own plan, and compared to the 401k plans sponsored by Dow Chemical, Rite Aid and two other companies.

Morgan Lewis Responds:  Davita hired Morgan Lewis as defense counsel, and the law firm provided extensive information to Capozzi Adler proving that its excessive fee and investment performance claims were inaccurate:

• The plan’s recordkeeping contract and fee disclosures revealing that the plan’s recordkeeping fee was $37 per participant, until 2020 when the fee was reduced to $34.50;
• The recordkeeping fee was paid for through a combination of revenue sharing from certain plan investment options and direct participant charges, with Voya refunding any “excess” revenue sharing it received to the plan above the maximum fee [in other words, the fee to Voya was capped at $37.00, and then $34.50];
• This same recordkeeping fee information has been posted for years on a publicly-available plan website for years;
• Each year, quarterly rule 404a-5 participant fee disclosures told participants how much could be charged to their individual accounts for recordkeeping services. [Example:  the 2016 Participant Disclosure indicated a $37 maximum fee];
• The $34.50 fee is lower and/or consistent with the four purported comparator plans in the initial complaint.
• The plan has twenty-three investment options, including twelve T. Rowe Price target-date retirement funds (that have no revenue sharing, and are the only investments by the four plaintiffs in the lawsuit); and
• The asset-weighted average expense ratio of the investment options was .1579% – not the .28% much higher amount alleged in the complaint.

The First Amended Complaint:  Capozzi Adler ignored this evidence and doubled-down with an expanded amended complaint on July 8, 2022, asserting the same imprudent investment and excessive recordkeeping fee claims:

• The first claim challenges the prudence of the $120 million in plan assets invested in the T. Rowe Price Large Cap Growth Fund (.56%); Voya Small Cap Fund (.77%); and the Dodge & Cox Stock Fund (.52%). The complaint compares these three individual funds to the ICI median of .31% and .37% ICI Average for jumbo plans with more than one billion in assets.
• The second claim reasserts claims for excessive recordkeeping fees. Plaintiffs assert that Voya overcharged the plan with fees between $49.86 and $96.14 between 2016 and 2020, compared to what plaintiffs claim should have been between $19-30 per participant.  The complaint adds the service codes in the recordkeeping column from the Form 5500:  37 (loans); 38 (communication); 49 (other services); and 64 (recordkeeping).  In addition to expanded charts of purported comparator plans, the complaint alleges that Fidelity has established the value of recordkeeping services at $14-21 based on a discovery stipulation in the Moitoso case involving excess fee claims against Fidelity’s own sponsored plan.
• Finally, the third claim alleges excessive total plan costs, which is alleged to be .53% in 2019, including “astronomical” .28% in investment expenses.

The Colorado Court Denies the Motion to Dismiss on the Excess Recordkeeping Claims:  Ruling on Davita’s motion to dismiss the First Amended Complaint in a July 26, 2023 decision, the Colorado District Court dismissed the excess fee challenge to the three investment options because none of the plaintiffs invested in any of the challenged funds [as they were all invested in a single glide path of T. Rowe Price target-date funds].  But the Court allowed the recordkeeping fee claims to proceed to discovery, notwithstanding that plaintiffs never paid more than $10.56 in any year during the putative class period.  The court found that plaintiffs’ comparator-plan allegations “fail to plausibly allege imprudence” because the comparisons offered an “attempt to allege imprudence through an apples-to-oranges comparison when an ‘apples-to-apples’ comparison is necessary.”  But the Court found that the “fact-intensive nature of comparing the recordkeeping services actually received by the Plan to those Fidelity valued at $14-21 makes it inappropriate for the Court to disregard the First Amended Complaint’s well-pleaded allegations at this stage of the litigation.”  The Court assumed the truth of the allegations that the plan was paying approximately $50 (and in one year $96) per participant for a service that “was worth as little as $14-21.”  The Court recognized that the defense had submitted the Voya recordkeeping contract to show that any revenue sharing was rebated and capped at $34.50 per participant, but the Court stated in a footnote that the defense had failed to explain how to interpret the contract.  In sum, the Court allowed the recordkeeping claim to proceed to discovery by assuming the truth of plaintiffs’ allegations in the complaint regarding (1) what was charged and (1) how it compared to Fidelity’s discovery stipulation in the Moitoso case.

The Euclid Perspective

The Davita case is worth studying because it shows the gamesmanship and dubious ethics of the plaintiffs’ bar.  The strategy is to create factual issues based on misleading evidence in order to get past a motion to dismiss and create settlement leverage.  The disingenuous playbook is designed to avoid the truth – it is only about creating an issue of fact, even if it requires dishonest and misleading tactics.  Sadly, it worked in the Davita case.

• STEP ONE: FIND PLAINTIFFS WITH MARGINAL ACCOUNTS TO LEVERAGE CLASS ACTION STATUS:  The four plaintiffs maintained tiny accounts and suffered no injury:  they paid miniscule fees – between twelve cents and $10.56 per year; and had excellent investment returns in the single T. Rowe Price target-date investment option chosen by each participant.

The Court granted standing to challenge the recordkeeping fees, but these plaintiffs did not pay the inflated amount alleged by the Capozzi firm.  To the contrary, the account statements attached to the motion to dismiss prove that fee for small accounts are capped and are not charged the $34.50 maximum fee.  It does not appear that Morgan Lewis made this argument, but there should be no standing for tiny accounts capped below the maximum payment.  Nor should there be standing for revenue sharing claims when participants suing chose investment funds without revenue sharing.  The tiny accounts maintained by the Davita plaintiffs never had the chance to be charged $34.50 per year, let alone the $50 to $90+ fake amounts alleged by Capozzi Adler.

These participants with tiny accounts are not qualified to represent over 64,000 participants in the Davita plan.  This is a lawyer-driven case designed to enrich the plaintiff law firm, and has nothing to do with helping plan participants.

• STEP TWO: ALLEGE A FALSE RECORDKEEPING FEE FROM FORM 5500 DATA THAT OVERSTATES THE TRUE RECORDKEEPING FEE BY (a) INCLUDING NON-RECORDKEEPING TRANSACTION FEES AND (b) NOT DISCOUNTING REVENUE SHARING RETURNED TO THE PLAN:  As Morgan Lewis describes in their motion to dismiss, Plaintiffs use two methodologies to “estimate” recordkeeping fees:  one designed to overstate the Plan’s fees, and another designed to understate their comparator-plan fees.  Plaintiffs first misrepresent the plan recordkeeping fees.  The recordkeeping contract, plan disclosures, and public website confirm that the plan’s annual recordkeeping fee was $37 per participant, until 2020 when it was reduced to $34.50.  Capozzi Adler instead uses the Form 5500 disclosure and divides by the number of participants to arrive at $49.86 and $96.14.  This includes transaction fees that do not constitute recordkeeping.  Plaintiffs cite the Form 5500 transaction codes that includes loan fees and other transaction fees that are not recordkeeping, which proves this point.Additionally, plaintiffs distort the revenue sharing that applied on just a few plan investments [and appears to be less than $15,000 in 2020 and 2021], to create a false perception that the recordkeeping fee is higher, even when the recordkeeping contract caps the fee amount.  Any small amount of revenue sharing was returned to participants as the total recordkeeping fee was capped at $34.50.  Plaintiffs’ allegations that the Plan paid more than the $34.50 specified in the recordkeeping contract is rank speculation.  Although Plaintiffs admit the contractual fee in a footnote of the complaint, they estimate that the Plan might have paid more.  But their “estimates” include direct and indirect compensation for recordkeeping and non-recordkeeping services.  Compounding that problem, Plaintiffs ignore all “indirect” compensation (i.e., revenue sharing) Voya refunded back to the plan.

  The allegation regarding whether Davita fiduciaries conducted a RFP for recordkeeping services demonstrates the disingenuous nature of this complaint.  The typical Capozzi Adler complaint alleges that the plan failed to conduct a RFP for recordkeeping services, based on claims that the fees are too high and that the plan stayed with the same recordkeeper for many years.  Never mind how difficult it is to switch recordkeepers.  But this case is different, because Morgan Lewis informed Capozzi Adler that the plan had conducted a RFP.  So instead, the complaint asserts that “there is little to suggest” that the plan committee “conducted an appropriate RFP” for recordkeeping services.  (emphasis added).  Morgan Lewis calls the addition of the word “appropriate” to be “linguistic gimmickry.”  It stops short of suggesting the Committee conducted no RFP, which Plaintiffs know to be false, but still offers no facts plausibly inferring that the Committee mishandled the RFP.

• STEP THREE:  COMPARE THE OVERSTATED RECORDKEEPING FEE TO FORM 5500 DATA FROM COMPARATOR PLANS THAT UNDERSTATE THE FEES PAID BY THESE PLANS:  Like nearly every excess recordkeeping fee case, Plaintiffs use a chart of random plans to show that other large plans pay less in recordkeeping fees.  When estimating the amount of fees paid by the Davita plan, plaintiffs add transaction fees and indirect fees to inflate the estimate.  But plaintiffs take a different approach when “estimating” their comparator plan fees – subtracting all indirect compensation.  These self-serving estimates that ignore all indirect compensation are flawed and intentionally inaccurate.  Plaintiffs’ only excuse for this tactic is that their comparator plans supposedly “have little to no revenue sharing.”  But Morgan Lewis includes the Form 5500 data from these comparator plans to prove that this is both unsupported and untrue.  For example, the recordkeeper for the Publicis comparator plan received over $515,00 in revenue sharing from just three investment options in a single year.  Morgan Lewis reports that “[t]he truth is, according the Forms 5000 Plaintiffs relied upon, all of their comparator-plan recordkeepers received indirect compensation – Plaintiffs just don’t know how much.”The other problem for plaintiffs is that under their own self-serving and flawed methodology, several of their comparator plans paid more than $23-36 per participant in direct recordkeeping fees that Capozzi Adler claims is the benchmark for $2b asset plans:  the Sanofi plan paid $43 to $44 in 2018-20; the S. Cal. Permanente plan paid $41 to $48 in 2019-20; the Health First plan paid $51 to $55 in 2019-20; and the Vibra plan paid $53 to $58 in 2019-20.  We note that Capozzi Adler repurposes the same exact plans in most of their cases, with the same inaccurate estimation of recordkeeping fees.  These comparators are not entitled to any benefit of “truthfulness.”

• STEP FOUR: MISTATE THE FIDELITY DISCOVERY STIPULATION:  The Capozzi law firm continues to represent to courts that the Fidelity stipulation in the Moitoso case proves that large-plan recordkeeping fees are worth $14-21.  It worked on the Davita court that took the claim at face value for the purposes of a motion to dismiss.  But this is still a farce.The argument that Fidelity has somehow conceded that its recordkeeping services are only worth $14-21 is used in many excessive fee cases.  Nevertheless, it is a false and prejudicial narrative.  The Moitoso case alleged excessive fees in Fidelity’s own plan.  The parties in that case entered into a stipulation for the limited purpose of resolving a discovery dispute.  Like many stipulations, the Moitoso stipulation reflected a compromise between the parties to that case about the value of the recordkeeping services that Fidelity provided to its own plan.  The stipulation stated on its face that it was “offered for the purposes of the [Moitoso] litigation only,” and the parties agreed not to “contest the validity of the stipulation[] in the context of this litigation only.”  It is not relevant to the allegations in any other case, and it does not reflect the value of the recordkeeping services that Fidelity provides to different plans pursuant to different recordkeeping contracts for a different set of services.

  99 percent of all large plans pay more than $14 per participant for recordkeeping services; and 95+ percent of all large plans pay more than $21.  The Euclid recordkeeping database shows that most $1B+ plans still pay more than $30 per participant.  If a court is going to allow the Fidelity stipulation to serve as legitimate evidence of the value of recordkeeping services that must be taken as “true” for purposes of a motion to dismiss, then all plans in America are in the cross hairs of class action litigation.  It is just plain wrong.

The Investment Claims Are Also Disingenuous:  Like the recordkeeping claims, the investment claims were also disingenuous and misleading, but were dismissed because no plaintiff has invested in these options.  In Davita, Capozzi Adler sued on three ancillary investment in the plan, and failed to disclose that more than half of the plan’s investments were in the highly regarded T. Rowe Price target-date funds that have experienced outstanding returns over many years.  The fees for these funds were .38% or lower during the class period, which is lowest available fee for institutional investors of this plan size.  Instead, the complaint asserted that three actively managed funds had “astronomical” fees because they were higher than the .37% median and .31% average ICI Average – an average that applies to the entire fund portfolio, not individual investments.  To this point, Capozzi Adler fails to disclose that the total plan fees were below .16% in 2020 – well below the ICI average.  The complaint applies the ICI Average to individual funds, and then fails to disclose that the total plan was below this same ICI median and average amounts.  Again, it is intentionally dishonest gamesmanship.  This type of disingenuous lawyering does not deserve any assumption of truth in pleading that the Davita court applied.  In a fair justice system, every allegation from a firm with this track record would be entitled to an assumption of untruthfulness.

The lesson of the Davita case:  The Davita case shows, once again, that the determinative factor as to whether the plan sponsor will successfully win a motion to dismiss in an excess fee case is whether the court will allow plan sponsor defendants to rebut false excess fee claims with evidence of the correct fees and investments at the pleading stage.  In Matney v. Barrick Gold, the court allowed the defense to use fee disclosures and the recordkeeping contract to rebut the false evidence of excessive fees, including the revenue sharing claim.  By contrast, in CentraCare, and now here in Davita, the court allowed misleading claims about the fees charged compared to distortions about the value of the same services from Fidelity’s stipulation in the Moitoso case.  Capozzi Adler knows that they are using misleading and distorted evidence.  It is their playbook.

If plaintiff law firms are allowed to knowingly file false claims based on false benchmarks because these claims will be assumed to be “true,” it is inviting law firms to sue any and every plan in America.  This make all plan sponsors vulnerable, even when they have low or reasonable fees.  The Davita plan has reasonable plan administration and investment fees, particularly for a plan with tens of thousands of participants, which is more costly to administer.  There is no legitimate claim of excessive fees in the Davita case.  Even the court seems skeptical of the claims, but felt constrained by how it applied the pleading rules to assume the “truth” of claims in a federal court complaint.  But this type of decision has real consequences and real harm.  Davita and its insurers are now forced to pay millions of dollars to defend a frivolous lawsuit, and will face serious pressure to settle to eliminate defense costs and potential liability.  No one can claim that this is what Congress intended ERISA to allow.  But it is how plaintiff lawyers have hijacked ERISA to create false liability in what is recurring scam in the federal courts.