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Texas court holds that participant data not plan assets

On March 30, 2021, in Harmon v. Shell Oil Company, the US District Court for the Southern District of Texas granted defendants’ motion to dismiss with respect to certain claims based on defendant plan recordkeeper’s use of plan participant data to “cross-sell” non-plan financial products to plan participants.

In this article we briefly review this decision.

Background – plaintiffs’ participant data claims

The plan at issue is the Shell Provident Fund 401(k) Plan, for which Fidelity Investments Institutional Operations Company, Inc. provides recordkeeping services.

The plaintiffs target participant data held by the recordkeeper that generally may be used by the recordkeeper’s affiliates to “cross-sell” other investment products. That data includes: participant names, ages, income, marital status, and contact information; Social Security Numbers; financial information such as investment history, account balances, and contribution amounts; call center notes (generated by recordkeeper employees whenever a participant calls the call center); and identification of “triggering events” (e.g., approaching retirement).

They allege that this data was used by the recordkeeper’s affiliates to “cross-sell” non-plan financial products to plan participants: in effect, that Fidelity was using plan data to generate participant-specific leads for non-plan products. Those products included: IRAs; credit cards; life insurance; banking products; advisory accounts; individual brokerage; and 529 accounts.

In their complaint, plaintiffs focus, particularly, on the sale of IRA rollovers to terminating/retiring participants, alleging that “[m]oving Plan participants’ assets out of the 401(k) into an IRA is often contrary to Plan participants’ best interest.” We note that this concern is one that has been a preoccupation of the Department of Labor and was the primary focus of its fiduciary advice initiative, most recently in its fiduciary advice Prohibited Transaction Exemption.

These allegations provided the basis for two basic ERISA fiduciary claims: 

(1) That Fidelity was a fiduciary by virtue of its control of a plan asset (the participant data) and as such breached its fiduciary duty of loyalty by not “restricting its use of Confidential Plan Participant Data solely to carrying out its Plan recordkeeping role, not using the data for nonplan purposes.”

(2) That this use of participant data for non-plan purposes by Fidelity constituted a prohibited transaction, for which both Fidelity (a fiduciary because of its control of a plan asset – the participant data) and Shell (because as a plan fiduciary it did nothing to stop Fidelity using that data) are liable.

Court’s decision: participant data is not a plan asset

Defendants filed a motion to dismiss plaintiffs’ complaint. In granting defendants’ motion, the court held that the participant data at issue was not a plan asset and therefore plaintiffs’ data-related claims failed. 

The court found that “[n]either of the promulgated [Department of Labor] regulations [defining plan assets] either expressly or by any plain-language interpretation includes participant data as plan assets under ERISA.”

In support of this conclusion, the court cited the decision in Divane v. Northwestern University (affirmed by the Seventh Circuit in 2020):

The Divane court noted that “[i]n considering what constitutes a plan asset, courts consider ‘ordinary notions of property rights under non-ERISA law.’” And though the court acknowledged that confidential participant information “has some value,” it could not “conclude that it is a plan asset under ordinary notions of property rights.”

Takeaways for sponsors

Currently, courts are rejecting the idea that participant data is a plan asset. This position has (thus far) defeated plaintiffs’ data-related claims.

Nevertheless, as the Divane court recognized, plan participant data has “some value.” And its use, particularly in the context of rollovers, has become a target not only of litigators but also DOL.

“Ordinary notions of property rights” are evolving as we adapt to a context in which data may be the primary asset in any online interaction.

Sponsors would do well to continue to follow this area of litigation – some courts may be open to hearing these sorts of complaints, based on an “evolving notion of property rights.” Sponsors will want to consult with counsel about whether, in anticipation of such “innovative” litigation, any preventative action should be taken.

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We will continue to follow this issue.

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