State and Federal Regulators Open Probe into 403(b) Plans for TeachersIn what appears to be a growing trend, state and federal regulators are launching investigations into the sales practices and administration of 403(b) retirement plans for school districts.

Two weeks ago, on January 10, 2020, Delaware Attorney General Kathy Jennings announced a settlement with Horace Mann Investors, Inc., concluding the state’s multi-year investigation into the facts and circumstances relating to over 120 403(b) retirement accounts opened by teachers in 2016 and 2017. The accounts were opened with Horace Mann during the state’s transition of its deferred compensation plans from numerous 403(b) independent service providers to a sole provider, Voya Financial. The Delaware Attorney General’s Investor Protection Unit (IPU) alleged and concluded that one of Horace Mann’s registered representatives engaged in dishonest and unethical practices in violation of the Delaware Securities Act by taking unfair advantage of his customers, who were confused about the transition to Voya Financial, by providing them with inadequate or inaccurate information. IPU also alleged and concluded that Horace Mann failed to sufficiently supervise its registered representative. As part of the settlement, Horace Mann and its registered representative will each pay a fine of $250,000 and make a $50,000 payment for investor education for Delaware educators. Horace Mann will also be required to make settlement payments, compensating over 120 teachers for potential loss earnings.

Delaware’s investigation is the most recent in what appears to be a growing trend by state and federal regulators in cracking down on teacher pension plans. In 2014, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Merrill Lynch, Pierce, Fenner & Smith Inc. $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts and required the firm to make over $24 million in restitution to more than 13,000 small business retirement accounts and over 3,100 403(b) retirement accounts. A year later, the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations announced a multi-year Retirement-Targeted Industry Reviews and Examinations Initiative (ReTIRE Initiative) that will focus on high-risk areas of registrants’ sales, investment, and oversight processes, with emphasis on select areas where retail investors’ savings for retirement may be harmed.  To that end, in late 2019, the SEC launched a broad investigation into the compensation and sales practices of companies that administer 403(b) retirement plans for school districts. Specifically, the agency is seeking details on how administrators, which serve critical roles in selecting investments for 403(b) plans for teachers, choose investment options and police themselves when conflicts of interest arise. The SEC’s announcement came on the heels of New York’s investigation into whether life insurers and their agents were taking advantage of teachers by selling them potentially high-cost and inappropriate investments in 403(b) retirement savings programs.

Though it is difficult to predict how many other states will follow the lead of the SEC, New York and Delaware, with the ReTIRE Initiative in place and the increased activity by both state and federal regulators, investment advisors and broker dealers should review and reflect upon their policies, procedures and practices relating to the sale and management of their 403(b) plans and consider stepping up their focus in this area.

The Eleventh Circuit last month issued a significant class action opinion in Cordoba v. DirectTV, LLC, vacating a class certified in a TCPA class action and remanding the case.    The issue “I told you never to call me here”: Eleventh Circuit Decertifies TCPA Class Containing Absent Class Members Without Article III Standingunderlying the court’s decision was whether large parts of the class as certified had standing.  Because the plaintiff did not establish that common issues regarding class members’ standing predominated over individualized issues, class certification could not stand.

Plaintiff Cordoba alleged that defendants DirectTV and Telecel (a company hired to do telemarketing for DirectTV) failed to maintain “internal do-not-call lists” and called him 18 times, even after he had demanded not to be contacted.  He sued DirectTV and Telecel under the TCPA and sought to represent two classes, one of which comprised all individuals who received more than one telemarketing call from Telecel on behalf of DirectTV during the time period in which Telecel failed to maintain an internal do-not-call list.  The district court certified both putative classes.  DirectTV sought interlocutory review under Rule 23(f), which the Eleventh Circuit granted as to the internal do-not-call list class.

In reversing class certification, the Eleventh Circuit focused on two main issues: Article III standing and predominance under Rule 23(b)(3).

Standing:  The defendants raised two standing challenges.  First, the defendants argued that under the Supreme Court’s decision in Spokeo, the receipt of an unwanted phone call was not, in and of itself, a sufficiently concrete, particularized injury to satisfy Article III’s “injury-in-fact” requirement.  Second, the defendants argued that even if receipt of an unwanted phone call was an “injury in fact,” that injury was not “fairly traceable” to the alleged violation of the TCPA, i.e., the defendants’ failure to maintain an internal do-not-call list.

On the first issue, the Eleventh Circuit ultimately concluded that receiving an unwanted phone call is by itself, an injury in fact, even if such an injury “might not be significant in the grand scheme of things.”  As the court reasoned, in much the same way as the receipt of an unwanted fax can be an injury in fact by tying up resources and diverting attention, unwarranted phone calls also can be injuries in fact because they “use[] some of the phone owner’s time and mental energy, both of which are precious.”

As for whether that injury was “fairly traceable” to the defendants’ failure to maintain a do-not-call list, the court concluded that the named plaintiff had asked not to be called, so he could fairly trace his injury to Telecel’s failure to maintain an internal do-not-call list.  But the court did not stop with the named plaintiff.  It carried its analysis into the certified class and noted that if an individual “never asked Telecel not to call them again, it doesn’t make any difference that Telecel hadn’t maintained an internal do-not-call list.  Telecel could and would have continued to call them even if it had meticulously followed the TCPA and FCC regulations.”  Thus, for class members that did not request to be added to a do-not-call list, their alleged injuries would not be “fairly traceable” to Telecel’s challenged conduct, and they, therefore, would lack Article III standing.

The court rejected the notion that an “unrestricted telemarketing campaign,” standing alone, could give rise to standing.  It found that such a campaign is the kind of bare procedural harm that Spokeo disallows, and it further found that the critical fact for traceability was whether the class member requested to be added to a do-not-call list.  Each class member’s conduct was therefore relevant (and dispositive on the class certification issue).

Predominance:  Having concluded that members of the class who did not ask DirectTV to stop calling them would lack standing, the court then turned to the “more difficult question” of what role “standing” “plays in the class certification analysis.”  In other words, the court then asked so what?

The court began its analysis by noting that proving absent class member standing is not a requirement of class certification.  Instead, the court held that the case as a whole is justiciable if the named plaintiff has standing and that a class can be certified where the named plaintiff has demonstrated his or her standing, even if it is apparent that absent class members may not have standing.  In so holding, the court departed from the majority of circuits, including the Second, Fifth, Eighth, and D.C. Circuits, which have held that a class that includes members who do not have standing cannot be certified.  Instead, the court seemingly joined the minority rule of the Seventh and Third Circuits, which do not require that absent class members have standing as a prerequisite for class certification.

But that was not the end of the inquiry.  Even though not a prerequisite to class certification, the court recognized that proving the standing of absent class members was still relevant to the analysis because absent class members cannot ultimately recover unless they have standing.  At some point, “each plaintiff will likely have to provide some individualized proof that they have standing — i.e., each plaintiff will have to provide some evidence that he or she called Telecel or otherwise communicated that they did not wish to be called, and their injury is therefore traceable to Telecel’s violation of the law.”  The court recognized that the individualized nature of proving standing posed a “powerful problem” to predominance under Rule 23(b)(3), particularly given that the evidence showed that as few as 5% of the putative class members may have asked Telecel not to call them.

Having identified this problem, the court then found that the district court wholly failed to address it.  The lower court made no findings about how to address traceability, and the Eleventh Circuit found this failure to be an abuse of discretion.

Takeaways: We note several main points from Cordoba.

First, in Cordoba, the Eleventh Circuit has seemingly adopted the approach of the First Circuit in dealing with absent class member standing.  That is, although eschewing the adoption of the bright-line rule that operates in the majority of circuits, whereby a class cannot be certified if it includes absent members without standing, the court nevertheless made clear that individualized issues related to absent class member standing could still defeat predominance; but as in many cases, whether predominance is defeated turns on a determination of how much individual litigation would be too much.  A court could potentially certify a class that includes a few members without standing, provided that sorting the wheat from the chaff will not require too much individualized fact-finding.  (However, as we’ve discussed elsewhere, any procedure whereby class members without standing are not removed until post-judgment could run afoul of the Seventh Amendment.)  But it’s a different story for “a class with potentially many more, even a majority, who do not have Article III standing,” and where identifying those with standing and those without will require individualized proof.

Second, standing challenges under Spokeo, as we have noted before, can be the gift that keeps on giving in class cases, and may have more value at class certification than at the motion to dismiss stage. Spokeo can be a powerful tool to defeat statutory class actions, but it is not necessarily a tool that can be used to obtain a dismissal in all cases.  Instead, by requiring class representatives to demonstrate standing across a class of allegedly similarly-situated members, it makes class certification more fact-intensive and thus more difficult.

Third, this case heightens the importance of ascertainability.  Defendants may consider emphasizing that a plaintiff must demonstrate how it will solve concrete standing problems for the people that fall within the class definition, and a plaintiff cannot carry that burden without producing a class definition that draws clear lines between who is in and who is out. At the same time, though, Cordoba highlights that it may not be sufficient to oppose certification merely by arguing that predominance or ascertainability problems exist, without actually proving that those problems are real. Many courts have rejected defendants’ predominance objections as speculative or hypothetical; be prepared, if possible, to prove that the putative class as defined will include a substantial number of members who lack standing or injury and that it will require lots of individualized proof to determine who is a proper class member.

It’s None of Your Business: Sixth Circuit Says Arizona Lacks Article III Standing to Intervene to Challenge a Class SettlementDoes a state, whose citizens are among the absent class members in a class action settlement, have Article III standing to challenge the supposed unfairness of the settlement? In Chapman v. Tristar Products, Inc., the Sixth Circuit said no.

The Trial Court’s Decision

Chapman involved a product liability class action against the manufacturer of allegedly defective lids for pressure cookers, which may have exposed users to possible injury. Some of the plaintiffs’ class claims were dismissed, but others survived. The trial court certified three state classes (none of which included Arizona residents), and the case proceeded to trial.

During trial, the parties agreed to a settlement of the case on a global basis with a nationwide class (which did include Arizona residents). The settlement entitled class members to receive a coupon for purchase of a different Tristar product and a warranty extension, provided they watched a safety video; the trial court valued this relief at approximately $1 million. The defendant agreed not to oppose a request for attorneys’ fees and expenses (not to exceed $2.5 million) by class counsel; the trial court ultimately approved an award of just under $2 million.

At the fairness hearing, the State of Arizona appeared as an amicus, arguing that the proposed settlement was unfair to the plaintiff class. Arizona did not argue that the settlement compensation was unfair or unreasonable in total, but instead that the division of the settlement proceeds resulted in too much being paid to class counsel and too little to class members. When the trial court indicated its willingness to approve the settlement (with some modifications), Arizona sought to intervene under Fed. R. Civ. P. 24, and alternatively requested that the court recognize it as an objector to the settlement (in either case to preserve a right to appeal). The trial court denied both requests, holding that Arizona lacked Article III standing, and the state appealed.

The Sixth Circuit’s Decision

A unanimous panel of the Sixth Circuit dismissed Arizona’s appeal for lack of jurisdiction, upholding the trial court’s finding that the state lacked Article III standing. Arizona’s asserted three bases for standing: (1) that it had standing under the parens patriae doctrine to assert the rights of its individual citizens; (2) that CAFA conferred standing on it; and (3) that it possessed a “participatory interest” in class action settlement proceedings sufficient to quicken standing. The appeal court rejected all three.

Under the parens patriae doctrine, a state must assert an injury to a “quasi-sovereign interest” in order to have standing, which necessitates an interest apart from the interest of “particular private parties.” The appeals court concluded that Arizona’s objections to the settlement were indistinguishable from the objections individual Arizonans might raise and did not implicate any “quasi-sovereign interests” of the state.

As to CAFA, the Sixth Circuit held that while the statute does require parties to notify state attorneys general of proposed settlements and requires a period of at least 90 days after such notice before any final approval of a settlement, nothing in CAFA grants a state any right to intervene. The appeals court noted that while portions of CAFA’s legislative history might support Arizona’s position, the statute itself explicitly declines to “expand the authority of … Federal or State officials.” Thus, said the court, it would not “resort to legislative history to cloud a statutory text that is clear.”

Arizona’s final argument, that its regular participation in class action settlement proceedings on behalf of its citizens created a right to intervene, fared no better. Even if such an interest qualified as a “substantial legal interest” for purposes of intervention, said the court, the state nonetheless failed to show an injury-in-fact to confer Article III standing. Arizona’s interest in participating made it no more than a “concerned bystander” to the proceedings; the state’s disagreement with the settlement on policy grounds resulted in no concrete or particularized harm that would support standing.


  • The outcome in Tristar accords with generally accepted standing principles. Arizona’s arguments on parens patriae standing were, as a matter of optics, likely weakened by the fact that no Arizona consumer objected to the settlement, as well as the state’s acknowledgement that it had no interest in representing Arizona consumers in the litigation apart from its efforts to have the settlement disapproved. And other courts, for example the district courts in the Deepwater Horizon and Budeprion XL litigations, have similarly concluded that CAFA does not give Article III standing for state officials. (This is not to suggest that CAFA’s mandatory notice provisions to federal and state authorities need not be followed; failure to do so can still be fatal to settlement approval.)
  • Tristar does not, however, imply that state and federal regulators will lose enthusiasm for objecting to coupon-based consumer class settlements going forward; they doubtless will continue to scrutinize such settlements closely. Still, Tristar affords some comfort that regulators will have a difficult time taking on the status and rights of parties in objecting to private class action settlements (such as the potential right to engage in discovery and motion practice, and the right to appeal).
  • The case displays some of the potential perils of a coupon-based settlement, which here attracted challenges from not just Arizona, but 17 other attorneys general and the U.S. Department of Justice. The coupon component of the Tristar settlement required class members to apply separately for the coupons and then use them within 90 days. And the coupons offered only a discount and an extended warranty on the purchase of additional Tristar products. The coupons were not transferable, could not be converted to cash through a secondary market, and (at least according to the DOJ in its appellate brief) less than one-half of one percent of class members even requested a coupon. A review of the district court’s approval order seems more focused on weaknesses in the class’ claims at trial than value of the settlement for the class.
  • Even though the Sixth Circuit did not reach the issue given its jurisdictional ruling, we note a developing circuit split on how class counsel fees may be calculated in a coupon-based class settlement. The Ninth Circuit has held that only § 1712(a) of CAFA applies to such settlements, that attorney’s fees must be determined as a percentage of the value of the coupons redeemed by the class, and that a lodestar method of calculation is unavailable. The Seventh and Eighth Circuits, conversely, have held that § 1712 is permissive and allows for use of the lodestar method, and that only when the court uses the percentage-of-fund method must that fund be calculated based on the value of the coupons actually received.