Franklin Templeton Can’t Undo Class Ruling in 401(k) Fight

By Jacklyn Wille

A class action accusing Franklin Templeton of filling its 401(k) plan with high-fee, in-house mutual funds won’t be decertified despite prior signals from a federal judge that decertification may be warranted ( Cryer v. Franklin Res., Inc. , 2017 BL 356672, N.D. Cal., No. 4:16-cv-04265-CW, order denying motion for reconsideration 10/4/17 ).

Judge Claudia Wilken of the U.S. District Court for the Northern District of California on Oct. 4 refused to undo her July decision certifying a class of more than 5,000 participants in Franklin Templeton’s 401(k) plan. The company said class certification was a mistake because the plan participant who sued, Marlon Cryer, signed a separation agreement when he left the company that prohibited him from participating in class actions.

Wilken disagreed, explaining that because the class action was brought on behalf of the 401(k) plan itself, the right to bring a class action couldn’t be waived by an individual participant without the plan’s consent.

In August, Wilken signaled she was having second thoughts about class certification when she granted Franklin’s request to seek reconsideration. Wilken asked the parties to explain how to interpret the U.S. Court of Appeals for the Ninth Circuit’s 2016 decision in Morris v. Ernst & Young LLP. In that case, the Ninth joined the Seventh Circuit in holding that class action waivers signed as a condition of employment are barred by the National Labor Relations Act. The Fifth and Eighth circuits have held otherwise, and the U.S. Supreme Court heard arguments on this question on Oct. 2.

Here, Wilken appeared to agree with Franklin’s argument that Morris didn’t render the class action waiver unenforceable, because unlike the waiver Cryer signed upon leaving the company, Morris involved waivers signed as a condition of employment. Even so, Wilken said class certification was warranted for another reason; because Cryer brought his case on behalf of the 401(k) plan under Section 502(a)(2) of the Employee Retirement Income Security Act, the plan’s right to sue wasn’t limited by a waiver he signed in an individual capacity.

The lawsuit against Franklin accuses the company of investing hundreds of millions of its workers’ retirement dollars in funds managed by the company and its subsidiaries even though the funds carried fees much higher than those of funds offered by competitors. In the past three years, more than two dozen financial companies—including JPMorgan Chase Bank, Charles Schwab Corp., and Morgan Stanley—have been targeted by proposed class actions challenging the in-house investment products in their workers’ 401(k) plans. Many judges have ruled against the companies, refusing to dismiss cases against BB&T Corp., Insperity, Deutsche Bank, and Edward Jones. So far, only two defendants have emerged from these cases victorious: Putnam Investments LLC and Wells Fargo.

Wilken’s decision declining to decertify the Franklin Templeton class builds on a March decision by another California-based federal judge. In that case, the judge declined to force a dispute over the University of Southern California’s retirement plan into arbitration after finding that agreements signed by individual plan participant’s couldn’t limit the plan’s right to litigate. That ruling—which considered an issue of first impression within the Ninth Circuit—is currently on appeal to the U.S. Court of Appeals for the Ninth Circuit.

Creitz & Serebin LLP, Izard Kindall & Raabe LLP, and Bailey Glasser LLP represent the class. O’Melveny & Myers LLP represents Franklin Templeton.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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