Daniels-Hall v. National Education Ass'n

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JERRE DANIELS-HALL; DAVID 

HAMBLEN,

Plaintiffs-Appellants,

v.

NATIONAL EDUCATION ASSOCIATION,

a Washington, D.C. corporation;

NEA MEMBER BENEFITS

CORPORATION, a Delaware

corporation; SECURITY BENEFIT

CORPORATION, a Kansas

intermediate stock holding

company; SECURITY BENEFIT LIFE

INSURANCE COMPANY, a Kansas

stock life insurance company; 

SECURITY BENEFIT GROUP, a Kansas

holding company and management

and financial services company;

SECURITY DISTRIBUTORS, INC., a

Kansas corporation; DENNIS BERNIE

VAN ROEKEL, Director of NEA

Member Benefits Corporation;

NATIONWIDE LIFE INSURANCE

COMPANY, an Ohio corporation;

WILLIAM BJORK, Director of NEA

Member Benefits Corporation; AL

MANCE, Director of NEA Member

Benefits Corporation;



20271

20272 DANIELS-HALL v. NEA

SHERIDAN PEARCE, Director of NEA 

Member Benefits Corporation;

TERRI SANDERS, Director of NEA

Member Benefits Corporation;

SUSAN KUZIAK, Director of NEA No. 08-35531

Member Benefits Corporation;

SARAH BORGMAN, Director of NEA  D.C. No.

3:07-cv-05339-RBL

Member Benefits Corporation; OPINION

LILY ESKELSEN, Chairman of the

Board of Directors of NEA

Member Benefits Corporation,

Defendants-Appellees.



Appeal from the United States District Court

for the Western District of Washington

Ronald B. Leighton, District Judge, Presiding

Argued and Submitted

July 10, 2009—Seattle, Washington

Filed December 20, 2010

Before: Cynthia Holcomb Hall, Diarmuid F. O’Scannlain and

Marsha S. Berzon, Circuit Judges.

Opinion by Judge O’Scannlain

DANIELS-HALL v. NEA 20275

COUNSEL

Derek W. Loeser, Keller Rohrback LLP, Seattle, Washington,

argued the cause for plaintiffs-appellants. Karin B. Swope,

Keller Rohrback LLP, Seattle, Washington, filed the briefs.

Lynn Lincoln Sarko, Tana Lin, and Ian J. Mensher, all of Kel-

ler Rohrback LLP, Seattle, Washington, also were on the

briefs, as was Jeffrey C. Engerman, Los Angeles, California.

Julia Penny Clark, Bredhoff & Kaiser, PLLC, Washington,

D.C., argued the cause for all defendants-appellees and filed

the brief for defendant-appellee NEA. Jonathan Hacker,

O’Melveny & Myers LLP, Washington, D.C., signed the

20276 DANIELS-HALL v. NEA

same brief on behalf of defendant NEA MBC and the individ-

ual defendants. Douglas L. Greenfield and Abigail V. Carter,

both of Bredhoff & Kaiser, PLLC, Washington, D.C., also

were on the brief for defendant NEA, and Bob Eccles,

O’Melveny & Myers LLP, Washington, D.C., also was on the

brief for defendant NEA MBC and the individual defendants.

Nicholas T. Christakos, Sutherland Asbill & Brennan LLP,

Washington, D.C., filed the brief for defendants-appellees

Security Benefit Life Insurance Company, Security Distribu-

tors, Inc., Security Benefit Corporation, and Security Benefit

Group, Inc. Steuart H. Thomsen, W. Mark Smith, and Phillip

E. Stano, all of Sutherland Asbill & Brennan LLP, Washing-

ton, D.C., also were on the brief.

David J. Burman, Perkins Coie LLP, Seattle, Washington,

filed the brief for defendant-appellee Nationwide Life Insur-

ance Company. Charles Platt and Emily Meyers, both of Wil-

mer Cutler Pickering Hale and Dorr LLP, New York, New

York, also were on the brief, as were David Bowker and Mark

Bieter, both of Wilmer Cutler Pickering Hale and Dorr LLP,

Washington, D.C.

Melissa Bowman, U.S. Department of Labor, filed a brief for

the Secretary of Labor as amicus curiae in support of the

defendants-appellees. Nathaniel I. Spiller, Counsel for Appel-

late and Special Litigation, Timothy D. Hauser, Associate

Solicitor, and Carol A. De Deo, Deputy Solicitor of Labor for

National Operations, all of the U.S. Department of Labor, also

were on the brief.

OPINION

O’SCANNLAIN, Circuit Judge:

We must decide whether the National Education Associa-

tion established or maintained an employee pension benefit

DANIELS-HALL v. NEA 20277

plan under the Employee Retirement Income Security Act of

1974 by endorsing and aggressively marketing certain tax-

sheltered annuities.

I

A

Both Jerre Daniels-Hall and David Hamblen (collectively,

“Plaintiffs”) are members of the National Education Associa-

tion (“NEA”) and employees of local public school districts.

Daniels-Hall is an employee of the South Kitsap School Dis-

trict in Washington, and Hamblen is an employee of El

Dorado Union High School District in California.

The NEA is a public employee labor union, consisting of

over 3.2 million teachers, administrators, and other educators

in public schools throughout the United States. The NEA pro-

vides numerous benefits to its members, including insurance

coverage, discounts, and other services. Many of those bene-

fits are provided through NEA’s Member Benefits Corpora-

tion (“NEAMBC”), a wholly owned subsidiary of the NEA.

According to the Complaint, in the 1990s, the NEA,

through the NEAMBC, worked with defendant Nationwide

Life Insurance Co. (“Nationwide”) and, after 2000, with

defendant Security Benefit Life Insurance Company and its

subsidiaries (collectively, “Security Benefit”) to offer the

NEA “Valuebuilder Plan” (the “Plan”) to its members.1 The

Plan is “purported to be a section 403(b) retirement plan.”2

1

The facts in this section are taken from the Complaint. We assume they

are true for the purpose of determining whether the district court erred in

granting Defendants’ motion to dismiss.

2

The Department of Labor (“DOL”) describes section 403(b) retirement

plans as follows:

A tax-sheltered annuity (TSA) program under section 403(b) of

the Internal Revenue Code (Code), also known as a “403(b) plan”

20278 DANIELS-HALL v. NEA

The NEA “selected Nationwide, and then Security Benefit as

the exclusively endorsed” providers of the Plan. After select-

ing Nationwide and Security Benefit, NEA designed certain

annuities in conjunction with them. These annuities were cal-

led “Valuebuilder annuities.” NEA negotiated the terms of the

Valuebuilder annuities, exclusively endorsed the Valuebuilder

annuities as favorable retirement savings vehicles, and aggres-

sively marketed the Valuebuilder annuities to NEA members.

NEA also monitored and managed the Valuebuilder annuities

for its participants.

In exchange for the NEA’s role in marketing the Value-

builder annuities, Nationwide and Security Benefit paid royal-

ties and annual fees to the NEA, took on the salaries of 110

NEAMBC representatives, and contributed to NEA charitable

foundations. NEA’s royalty income from Security Benefit

alone amounted to approximately $2 million per year. Nation-

wide and Security Benefit, in turn, received fees from invest-

ment companies whose mutual funds were made available

through the Valuebuilder annuities.

The NEA did not fully disclose to its members the nature

or amount of the payments it received from Nationwide and

Security Benefit, or the fact that Nationwide and Security

Benefit received payments from investment companies whose

is a retirement plan for employees of public schools, employees

of certain tax-exempt organizations, and certain ministers. Under

a 403(b) plan, employers may purchase for their eligible employ-

ees annuity contracts or establish custodial accounts invested

only in mutual funds for the purpose of providing retirement

income. Annuity contracts must be purchased from a state

licensed insurance company, and the custodial accounts must be

held by a custodian bank or IRS approved non-bank trust-

ee/custodian. The annuity contracts and custodial accounts may

be funded by employee salary deferrals, employer contributions,

or both.

DOL Field Assistance Bulletin No. 2007-02, *1 (July 24, 2007).

DANIELS-HALL v. NEA 20279

mutual funds were included in the Valuebuilder annuities.

Instead, the NEA marketed the Valuebuilder annuities pro-

vided by Nationwide and Security Benefit as the most favor-

able retirement option for its members, despite the fact that

Valuebuilder annuities charged fees that were as much as ten

times those charged on comparable annuity contracts. Plain-

tiffs participated in their school district employers’ section

403(b) retirement plans, and selected Valuebuilder annuities

—instead of other annuities made available by their

employers—because of the NEA’s enthusiastic endorsement.

In essence, Plaintiffs allege that the NEA knowingly duped

them into purchasing unattractive annuities by “creating an

atmosphere of trust and confidence that was exploited by

Defendants for their financial gain.” Plaintiffs purport to rep-

resent a class of more than 57,000 similarly situated NEA

members on whose behalf public school district employers

across the country purchased Valuebuilder annuities totaling

over $1 billion.

B

Plaintiffs’ theory of the case is that by negotiating, endors-

ing, marketing, and promoting the NEA Valuebuilder annui-

ties, the NEA “established or maintained” an “employee

pension benefit plan” within the coverage of Title I of the

Employee Retirement Income Security Act of 1974

(“ERISA”), 29 U.S.C. § 1001 et seq. See 29 U.S.C.

§ 1002(2)(A). Plaintiffs contend that the NEA and NEAMBC

are “plan fiduciaries” under ERISA, and that by, inter alia,

failing to ensure that the fees charged by Nationwide and

Security Benefit in connection with the annuity contracts were

reasonable, NEA and NEAMBC breached their fiduciary

duties. Plaintiffs allege that Nationwide and Security Benefit

were plan fiduciaries as well, and that they also breached their

duties by, inter alia, selecting unreasonably high-cost mutual

funds for inclusion in the Valuebuilder annuities. Plaintiffs

brought this action for breach of fiduciary duties, and other

20280 DANIELS-HALL v. NEA

violations of ERISA, against NEA, NEAMBC, NEAMBC’s

directors, Nationwide, Security Benefit, and Security Bene-

fit’s involved subsidiaries (collectively, “Defendants”), seek-

ing damages, equitable relief, costs, and fees.

In their motions to dismiss the Complaint pursuant to Fed-

eral Rules of Civil Procedure 12(b)(1) and 12(b)(6), Defen-

dants argued that ERISA does not cover section 403(b)

retirement plans that public school systems provide for their

employees. More specifically, Defendants argued that, as a

matter of law, tax-deferred section 403(b) plans cannot be

“established or maintained” by employee organizations such

as the NEA.

The district court was “convinced that if the NEA could

legally establish or maintain” § 403(b) annuity plans, then

Plaintiffs would have “demonstrat[ed] that it did so as a fac-

tual matter.” But the court then explained that “employee

organizations simply cannot, as a matter of law, establish or

maintain § 403(b) annuity plans.” The court concluded that

since “the § 403(b) Annuities” were “not ‘plans’ under

ERISA,” the court lacked subject matter jurisdiction “over the

Plaintiffs’ claim arising out of those annuities.” On May 23,

2008, the court dismissed Plaintiffs claims pursuant to Federal

Rule of Civil Procedure 12(b)(1). Plaintiffs timely appealed.3

3

The Secretary of Labor has primary authority to interpret and to

enforce the fiduciary, reporting and disclosure provisions of Title I of

ERISA. See 29 U.S.C. §§ 1002(2)(B), 1002(13), 1002(14). After oral

argument, we solicited the views of the Department of Labor on the ques-

tion of whether the NEA was legally capable of establishing a plan subject

to Title I of ERISA offering section 403(b) annuities. On September 8,

2009, the Secretary of Labor submitted an amicus brief answering that

question in the negative.

DANIELS-HALL v. NEA 20281

II

A

Before addressing the merits, we must express a disagree-

ment with the district court’s analysis of jurisdiction. It dis-

missed Plaintiffs’ claims for lack of subject matter jurisdiction

because it concluded that the “Valuebuilder Plan” was not an

employee benefit pension plan subject to ERISA. But to ask

whether the alleged Plan is subject to ERISA is a merits ques-

tion. “Subject-matter jurisdiction, by contrast, refers to a tri-

bunal’s power to hear a case.” Morrison v. Nat’l Austl. Bank

Ltd., 130 S. Ct. 2869, 2877 (2010) (internal quotation marks

omitted) (holding that the scope of federal securities law

raises a question on the merits, not an issue of subject-matter

jurisdiction). Whether a particular “Plan” is an employee ben-

efit pension plan, and thus whether a particular defendant is

subject to ERISA, “is [therefore] a question on the merits of

the claim, not an issue of subject matter jurisdiction.” Trs. of

the Screen Actors Guild-Producers Pension & Health Plans

v. NYCA, Inc., 572 F.3d 771, 775 (9th Cir. 2009); see also

Morrison, 130 S. Ct. at 2877. Because Plaintiffs alleged a

cause of action arising under ERISA, it is clear that the dis-

trict court had subject matter jurisdiction pursuant to 28

U.S.C. § 1331. This court has jurisdiction pursuant to 28

U.S.C. § 1291.

However, we need not remand because of the district

court’s error. “Since nothing in the analysis of the court[ ]

below turned on the mistake, a remand would only require a

new Rule 12(b)(6) label for the same Rule 12(b)(1) conclu-

sion.” Morrison, 130 S. Ct. at 2877. Instead, “we proceed to

address whether [plaintiff]s’ allegations state a claim.” Id.

B

We review de novo the district court’s dismissal for failure

to state a claim. Vaughn v. Bay Envtl. Mgmt., Inc., 567 F.3d

20282 DANIELS-HALL v. NEA

1021, 1024 (9th Cir. 2009). We accept as true all well-pleaded

allegations of material fact, and construe them in the light

most favorable to the non-moving party. Manzarek v. St. Paul

Fire & Marine Ins. Co., 519 F.3d 1025, 1031-32 (9th Cir.

2008). We are not, however, required to accept as true allega-

tions that contradict exhibits attached to the Complaint or

matters properly subject to judicial notice, or allegations that

are merely conclusory, unwarranted deductions of fact, or

unreasonable inferences. Id. at 1031. We can affirm “on any

ground raised below and fairly supported by the record.”

Proctor v. Vishay Intertechnology Inc., 584 F.3d 1208, 1226

(9th Cir. 2009); see also Williamson v. General Dynamics

Corp., 208 F.3d 1144, 1149 (9th Cir. 2000) (“If support exists

in the record, a dismissal may be affirmed on any proper

ground, even if the district court did not reach the issue or

relied on different grounds or reasoning.”).

Although generally the scope of review on a motion to dis-

miss for failure to state a claim is limited to the Complaint,

a court may consider evidence on which the “complaint ‘nec-

essarily relies’ if: (1) the complaint refers to the document; (2)

the document is central to the plaintiff’s claim; and (3) no

party questions the authenticity of the copy attached to the

12(b)(6) motion.” Marder v. Lopez, 450 F.3d 445, 448 (9th

Cir. 2006) (quoting Branch v. Tunnell, 14 F.3d 449, 453-54

(9th Cir. 1994)). The court may “treat such a document as

‘part of the complaint, and thus may assume that its contents

are true for purposes of a motion to dismiss under Rule

12(b)(6).’ ” Id. (quoting United States v. Ritchie, 342 F.3d

903, 908 (9th Cir. 2003)).

In addition to the Complaint itself, we have taken into con-

sideration two documents on which the Complaint necessarily

relies. First, we have taken into consideration the prospectus

for the “NEA Valuebuilder Variable Annuity” distributed by

Security Benefit on May 1, 2007. Plaintiffs quoted this pro-

spectus in their Complaint and provided the web address

where the prospectus could be found online. Plaintiffs thereby

DANIELS-HALL v. NEA 20283

incorporated the prospectus into the Complaint by reference.

See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.

308, 322 (2007) (explaining that courts ruling on 12(b)(6)

motions to dismiss may take into consideration “documents

incorporated into the complaint by reference”). Second, we

take into consideration information posted on certain NEA

and NEAMBC web pages that Plaintiffs referenced in the

Complaint and included in the record on appeal. Plaintiffs

directly quoted the material posted on these web pages,

thereby incorporating them into the Complaint. Id.

We also have taken into consideration the list of approved

403(b) vendors displayed publicly on the respective web sites

of the South Kitsap and El Dorado School Districts. It is

appropriate to take judicial notice of this information, as it

was made publicly available by government entities (the

school districts), and neither party disputes the authenticity of

the web sites or the accuracy of the information displayed

therein. See Fed. R. Evid. 201 (allowing a court to take judi-

cial notice of a fact “not subject to reasonable dispute in that

it is . . . capable of accurate and ready determination by resort

to sources whose accuracy cannot reasonably be questioned”);

Tellabs, 551 U.S. at 322 (noting that courts ruling on 12(b)(6)

motions to dismiss may take into consideration “matters of

which a court may take judicial notice”); see also In re Amgen

Inc. Sec. Litig., 544 F. Supp. 2d 1009, 1023-24 (C.D. Cal.

2008) (taking judicial notice of drug labels taken from the

FDA’s website); County of Santa Clara v. Astra USA, Inc.,

401 F. Supp. 2d 1022, 1024 (N.D. Cal. 2005) (taking judicial

notice of information posted on a Department of Health and

Human Services web site).

III

[1] ERISA was enacted to protect, inter alia, “the interests

of participants in employee benefit plans and their beneficia-

ries.” 29 U.S.C. § 1001(b). ERISA applies to “any employee

benefit plan if it is established or maintained . . . by any

20284 DANIELS-HALL v. NEA

employer . . . or . . . by any employee organization . . . or by

both.” Id. § 1003(a)(1)-(3).4 “Employee benefit plans” cov-

ered by ERISA come in two types. Id. § 1002(3). The first

type, the “employee welfare benefit plan,” provides medical

benefits and any benefits “other than pensions on retirement

or death.” Id. § 1002(1). By contrast, the second type, the

“employee pension benefit plan,” “provides retirement

income” or “results in a deferral of income [until retirement].”

Id. § 1002(2)(A)(i)-(ii). The second type of benefit plan is at

issue in this case.

[2] An “employee pension benefit plan” is:

any plan, fund, or program which was heretofore or

is hereafter established or maintained by an

employer or by an employee organization, or by

both, to the extent that by its express terms or as a

result of surrounding circumstances such plan, fund,

or program

(i) provides retirement income to employ-

ees, or

(ii) results in a deferral of income by

employees . . . .

Id.5 ERISA imposes strict fiduciary duties on persons who

4

ERISA defines the term “employee organization” to mean “any labor

union or any organization . . . , [or] association . . . in which employees

participate and which exists for the purpose . . . of dealing with employers

concerning an employee benefit plan, or other matters incidental to

employment relationships.” 29 U.S.C. § 1002(4). It is not disputed that the

NEA is an employee organization.

5

The ERISA definition of “employee pension benefit plan” specifies

additional details not relevant to this appeal, involving the methods of cal-

culating contributions, benefits and distribution timing. The provision also

grants the Secretary the power to prescribe rules treating severance pay

arrangements and supplemental retirement income payments as welfare

plans rather than pension plans. 29 U.S.C. § 1002(2)(A)-(B).

DANIELS-HALL v. NEA 20285

administer “employee pension benefit plans.” See, e.g., id.

§ 1002(21)(A) (defining persons qualifying as plan fidu-

ciaries); see also id. § 1101 et seq. (establishing specific fidu-

ciary duties and liability for breaches of these duties).

Although ERISA’s definition of “employee pension benefit

plan” is quite broad, there are several important exceptions.

Section 1003(b), for example, exempts “governmental plans”

from ERISA’s regulatory sphere. Id. § 1003(b)(1) (“The pro-

visions of [Title I] shall not apply to any employee benefit

plan if—such plan is a governmental plan.”). ERISA defines

a “governmental plan” as a plan “established or maintained

for its employees by the Government of the United States, by

the government of any State or political subdivision thereof,

or by any agency or instrumentality of the foregoing.” Id.

§ 1002(32) (emphasis added).

[3] The Department of Labor (“DOL”) has created a sepa-

rate regulatory safe harbor that exempts certain section 403(b)

retirement plans from ERISA’s requirements. This safe harbor

provides that “a program for the purchase of an annuity con-

tract or the establishment of a custodial account described in

section 403(b) of the Internal Revenue Code of 1954 (the

Code), pursuant to salary reduction agreements . . . which

meets the requirements of 26 C.F.R. 1.403(b)-1(b)(3) shall

not be ‘established or maintained by an employer’ as that

phrase is used in [Title I].” 29 C.F.R. § 2510.3-2(f) (emphasis

added). Employers wishing to take advantage of the safe har-

bor must ensure that participation in the plan “is completely

voluntary for employees,” and must comply with the various

requirements set forth in 29 C.F.R. § 2510.3-2(f). Id.6

6

For example, if the “sole involvement of the employer” is “limited to

. . . [p]ermitting annuity contractors (which term shall include any agent

or broker who offers annuity contracts or who makes available custodial

accounts within the meaning of section 403(b)(7) of the Code) to publicize

their products to employees,” the employer will not have “established or

maintained” an ERISA plan. 29 C.F.R. § 2510.3-2(f)(3)(i).

20286 DANIELS-HALL v. NEA

IV

Plaintiffs allege in the first sentence of their Complaint that

they are “participants and beneficiaries of the [NEA] Value-

builder Plan, an Internal Revenue Code section 403(b) tax

deferred annuity program established and maintained by

Defendants NEA and NEAMBC.” Plaintiffs urge us to find

that this “Valuebuilder Plan” is an employee pension benefit

plan subject to ERISA. But before we can make any determi-

nation about whether this Plan is a employee pension benefit

plan, we must figure out exactly what the “Plan” is. And the

central difficulty in this case is Plaintiffs’ inability to explain

what they mean by “Valuebuilder Plan.” Although the Com-

plaint repeatedly refers to the “Plan” as if it were a discrete

entity, the Complaint never defines the Plan in any detail.

Rather than describing what the Plan is, the Complaint

describes what the Plan allegedly does: “the Plan provides

retirement income to employees and results in a deferral of

income by employees for a period extending to the termina-

tion of covered employment or beyond.” But this recital sim-

ply parrots ERISA’s definition of an employee pension

benefit plan. See 29 U.S.C. § 1002(2)(A)(i)-(ii). And instead

of describing the contours of the Plan, the Complaint alleges

who is behind it—namely the NEA and NEAMBC. In short,

although the Complaint alleges that the “NEA and NEAMBC

communicated extensively with Plan participants regarding

the Plan, Plan assets, and Plan benefits, endorsed the Plan,

and aggressively marketed and promoted the Plan,” it utterly

fails to explain what the “Valuebuilder Plan” is.

Nevertheless, if there is any interpretation of the term “Va-

luebuilder Plan” that would render the “Plan” an “employee

pension benefit plan,” Plaintiffs would have successfully

stated a claim capable of surviving a 12(b)(6) motion. Look-

ing at the facts alleged in the Complaint, we conclude that the

“Valuebuilder Plan” could refer to three entirely different

entities: it could refer to (1) the “Valuebuilder Program”

DANIELS-HALL v. NEA 20287

launched by the NEA to help its members save for retirement,

(2) the section 403(b) retirement plans administered by vari-

ous school districts, or (3) the specific “Valuebuilder” annui-

ties offered by Nationwide and Security Benefit. We address

each of these possibilities in turn.

A

[4] The first possible interpretation of the Complaint is that

the “Valuebuilder Plan” refers to NEA’s “ValueBuilder Pro-

gram.” According to its website, “NEA established the NEA

Valuebuilder Program to encourage its members to save for

retirement.” And in their opening brief, Plaintiffs explain that

according to “Webster’s Third New International Dictionary

(1976) . . . ‘program’ refers somewhat circularly to ‘plan,’ and

is generally defined as a ‘plan of procedure: a schedule or a

system under which action may be taken toward a desired

goal: a proposed project or scheme.’ ” However, the Value-

builder Program referenced in the NEA website is not a retire-

ment plan. The “Valuebuilder Program” appears to be the

name of a comprehensive marketing campaign launched by

the NEA and NEAMBC.7 This well-executed marketing plan

was apparently designed to convince thousands of NEA mem-

bers to invest in section 403(b) annuities sold by Nationwide

and Security Benefit. Pursuant to their agreements with the

NEA and NEAMBC, Nationwide and Security Benefit

labeled these annuities “Valuebuilder annuities” and marketed

7

The NEA’s website defines the program as follows:

NEA established the NEA Valuebuilder Program to encourage its

members to save for retirement. [Security Benefit] make[s] avail-

able retirement products under the NEA Valuebuilder Program

pursuant to an agreement with NEA’s wholly-owned subsidiary,

[NEAMBC]. Security Benefit pays an annual fee for services to

[NEAMBC] under the agreement. NEA and [NEAMBC] are not

affiliated with Security Benefit. Neither NEA nor [NEAMBC] is

a registered broker/dealer. All securities brokerage services are

performed exclusively by your sales representatives broker/dealer

and not by NEA or [NEAMBC].

20288 DANIELS-HALL v. NEA

them as part of the “Valuebuilder Program.”8 The NEA, for

its part, trademarked the name “Valuebuilder.” The NEA

apparently intended to establish “Valuebuilder” as a popular

brand name with its members. The NEA could then sell this

brand to broker/dealers such as Nationwide and Security Ben-

efit. After purchasing the brand from NEA, Nationwide and

Security Benefit could sell annuities with names like “The

NEA Valuebuilder Variable Annuity” to NEA members.

[5] In any event, a marketing plan designed to build brand

loyalty is not, under any reasonable definition of the term, a

retirement plan. The Valuebuilder Program certainly pro-

motes various retirement plans, but the Valuebuilder Program

itself does not “provide[ ] retirement income” or “result[ ] in

a deferral of income.” 29 U.S.C. § 1002(2)(A)(i)-(ii). The

Valuebuilder Program is not, therefore, an “employee pension

benefit plan.” Accordingly, insofar as the “Plan” refers to the

NEA’s Valuebuilder Program, Plaintiffs fail to state an

ERISA claim.

B

[6] Given the language of the Complaint, it seems more

likely that Plaintiffs used the term “Valuebuilder Plan” to

refer to the section 403(b) annuity plans offered by Plaintiffs’

school district employers. The Complaint describes the Value-

builder Plan as an “Internal Revenue Code section 403(b) . . .

tax deferred annuity program.” The Complaint also states that

“[t]he Plan is purported to be a section 403(b) retirement

plan.” The lengthy discussion in the district court opinion

about whether the section 403(b) annuity plans were “govern-

8

The prospectus for the NEA Valuebuilder Variable Annuity explains

that the annuity contract “is made available under the NEA Valuebuilder

Program pursuant to an agreement between [Security Benefit] and

[NEAMBC].” Neither the prospectus nor the NEA’s website, however,

indicates that the Valuebuilder Program is anything other than the name

of NEA’s comprehensive marketing plan.

DANIELS-HALL v. NEA 20289

mental plans” indicates that the district court read the “Value-

builder Plan” to refer to the school districts’ section 403(b)

annuity plans. This construction of the term is also more

promising for Plaintiffs, since, unlike the “Valuebuilder Pro-

gram,” the school districts’ various section 403(b) defined-

contribution plans are retirement plans. We must determine

whether they are employee pension benefit plans subject to

ERISA, and whether they were “established or maintained”

by an employee organization—i.e., the NEA.

Section 403(b) of the Internal Revenue Code provides

employees of public schools, churches, and section 501(c)(3)

organizations with the ability to invest in tax-sheltered annui-

ties. 26 U.S.C. § 403(b)(1)(A).9 Employees make pre-tax con-

tributions toward the purchase of these annuities through

salary-reduction agreements, see id. § 403(b)(1)(E), but in

order to obtain preferential tax treatment for those contribu-

tions, the employer must purchase the selected annuities for

its employees, id. § 403(b)(1)(A)(ii). Employers can also

choose to make voluntary contributions to these plans. See id.

§ 403(b)(1); 26 C.F.R. § 1.403(b)-3(a).10 As with optional

9

Section 403(b) is titled “Taxability of beneficiary under annuity pur-

chased by section 501(c)(3) organization or public school,” and provides,

in relevant part:

(1) If

(A) an annuity contract is purchased —

(i) for an employee by an employer described in section

501(c)(3) which is exempt from tax under section 501(a),

(ii) for an employee. . .who performs services for an edu-

cational organization. . . , by an employer which is a State,

a political subdivision of a State, or an agency or instru-

mentality of any one or more of the foregoing, or

(iii) for [a minister]. . .

then contributions and other additions by such employer for

such annuity contract shall be excluded from the gross

income of the employee for the taxable year. . .

10

There is nothing in Title I of ERISA that expands the scope or focus

of section 403(b) by allowing employee organizations, or any employers

other than public school districts, churches, or section 501(c)(3) tax-

exempt employers, to establish or maintain section 403(b) plans.

20290 DANIELS-HALL v. NEA

retirement savings plans established by private employers

pursuant to 26 U.S.C. § 401(k), each public school district

devises its own section 403(b) plan, presenting its employees

with a menu of different vendors offering various individual

annuity contracts or custodial accounts for the purchase of

mutual funds.11 See 26 U.S.C. § 403(b)(1), (7). Each school

district determines which vendors and annuity contracts to

include in its menu of options, and provides the list of “ap-

proved” vendors to its employees.12 Employees then choose

the vendor with whom they want to invest and sign individual

annuity contracts with the vendor.

[7] However, while a section 403(b) plan is clearly a retire-

ment plan, and would be considered an “employee pension

benefit plan” if established or maintained by a 501(c)(3) tax-

exempt employer, section 403(b) plans established by school

districts are exempted from ERISA by the “governmental

plan” exception. 29 U.S.C. § 1003(b)(1). As noted earlier,

ERISA defines “governmental plans” as plans “established or

maintained for its employees by . . . the government of any

State or political subdivision thereof.” Id. § 1002(32). It is

undisputed that public school districts are political subdivi-

sions of the various states and are therefore governmental

entities. The only issue is whether the school districts “estab-

lished or maintained” the plans, thus bringing the plans within

the “governmental plan” exception.

11

According to South Kitsap’s website, there were six “District

Approved Vendors” on the South Kitsap list. The El Dorado school dis-

trict website indicates that the district made available eighty-six “403b

Approved Vendors.” Both lists included Nationwide and Security Benefit

as approved vendors.

12

In California, the State Teachers Retirement Board (“STRB”) is

required to “determine” which investment options may be offered consis-

tent with section 403(b). Cal. Educ. Code § 24950(b)(3). Local school dis-

tricts are then free to establish their own menu of section 403(b) products

that are approved for employees who choose to participate in the plan. See

403bCompare (Oct. 12, 2010), https://www.403bCompare.com/

Default.aspx (listing section 403(b) vendors approved by the STRB).

DANIELS-HALL v. NEA 20291

Plaintiffs make two separate arguments that the school dis-

trict employers did not establish or maintain the plans. First,

Plaintiffs allege that the school districts did not make any con-

tributions to their annuity accounts, and suggest that the lack

of direct governmental funding precludes a finding that their

employers’ section 403(b) plans are “governmental plans.”13

However, the structure of a section 403(b) plan necessarily

implicates governmental action, regardless of the presence of

direct governmental funding. The creation of a governmental

employer’s section 403(b) plan generally begins, as here, with

a state law requiring the creation of such plans by a public

school district or some other state or local governmental

agency. See Wash. Rev. Code § 28A.400.250; Cal. Educ.

Code § 24950. Even if funded entirely by employee salary

reduction contributions, the school district must agree to

create the plan, and must set up a system for purchasing the

annuities chosen by each employee, making salary deductions

to pay for the public school employees’ investments in their

choice of section 403(b) annuities and transmitting payments

to the chosen vendor. See, e.g., Cal. Educ. Code

§ 24950(b)(5); Wash. Rev. Code § 28A.400.250(2)-(3). Some

states require the public school district employer to decide

which vendors it wants to include in its plan and to provide

this information to its employees. See Cal. Educ. Code

§ 24950(b)(4). A state might also make determinations about

how and when the marketing of these products will be

allowed. See Wash. Rev. Code § 28A.400.250(5). Finally, in

some instances the school district employer can terminate the

offering of an annuity. See Cal. Educ. Code § 24951. The lack

of governmental funding, when considered in light of the nec-

essary governmental involvement in establishing and main-

taining section 403(b) plans, does not prevent these plans

from falling within the “governmental plan” exemption.

13

Plaintiffs allege that all of the money used to purchase the various

annuity contracts came from Plaintiffs’ deferred salary.

20292 DANIELS-HALL v. NEA

Plaintiffs’ second argument is more creative. Plaintiffs con-

tend the school district employers did not “establish or main-

tain” the section 403(b) plans—and that the plans are

therefore not governmental plans—because the plans are

exempted from ERISA under a different exemption. Specifi-

cally, Plaintiffs allege that the section 403(b) plans fall within

the safe harbor provided in 29 C.F.R. § 2510.3-2(f), which

provides that in certain situations, employer-sponsored sec-

tion 403(b) plans are not, as a matter of law, “established or

maintained” by the employer. Id. The district court was per-

suaded by this argument, and held that the section 403(b)

plans were not governmental plans because they fell within

the safe harbor.

The safe harbor provision applicable to “employee pension

benefit plans,” 29 C.F.R. § 2510.3-2, is part of a DOL regula-

tion intended to “clarif[y] the limits of the defined terms

‘employee pension benefit plan’ and ‘pension plan’ for pur-

poses of title I of the Act . . . by identifying specific plans,

funds and programs which do not constitute employee pen-

sion benefit plans for those purposes.” Id. § 2510.3-2(a). As

explained in Part II, an employer that qualifies for the 29

C.F.R. § 2510.3-2(f) safe harbor is considered not to have “es-

tablished or maintained” an employee pension benefit plan

under ERISA. Such a plan would therefore not be considered

an “employee pension benefit plan” for purposes of Title I.

[8] It is clear, however, from the DOL’s regulations and

opinions that the regulatory safe harbor for “employee pen-

sion benefit plans” was designed for only one subset of tax-

exempt employers: namely, private tax-exempt employers

organized pursuant to 26 U.S.C. § 501(c)(3)—other than

churches—that would otherwise be subject to the require-

ments of Title I. It was never intended to apply to section

403(b) plans provided by public school districts, which are

“governmental plans” and, thus, already exempt from Title I

of ERISA. For example, the preamble to 29 C.F.R. § 2510.3-

2(f) provides that “[c]ertain ‘governmental plans’ defined in

DANIELS-HALL v. NEA 20293

section 3(32) of the Act, and ‘church plans’ defined in section

3(33) of the Act are not affected by the [safe harbor] regula-

tion because they are excepted from the requirements of Title

I of the Act by virtue of section 4(b)(1) and (2) of the Act.”

Definitions and Coverage Under the Employee Retirement

Income Security Act of 1974, 44 Fed. Reg. 23525, 23525 n.1

(April 20, 1979) (emphasis added). Importantly, this DOL

interpretation of its own regulation is afforded even more def-

erence than that which courts normally give agency interpre-

tations of statutes. See Udall v. Tallman, 380 U.S. 1, 16

(1965) (“When the construction of an administrative regula-

tion rather than a statute is in issue, deference is even more

clearly in order.”); see also Auer v. Robbins, 519 U.S. 452,

461 (1997); Kraus v. Presidio Trust Facilities Div. / Residen-

tial Mgmt. Branch, 572 F.3d 1039, 1045 (9th Cir. 2009).14

The IRS came to the same conclusion in 2007, after con-

sulting with the DOL on the interaction between Title I of

ERISA and section 403(b) of the IRC. See Revised Regula-

tions Concerning Section 403(b) Tax-Sheltered Annuity Con-

tracts, 72 Fed. Reg. 41128, 41136 (July 26, 2007). The

consultation “focused on whether the requirements imposed

on employers in these regulations would exceed the scope of

the Department of Labor’s safe harbor regulation at 29 C.F.R.

2510.3-2(f) and result in all section 403(b) programs spon-

sored by tax-exempt employers (other than governmental

plans and certain church plans) falling under the purview of

ERISA.” Id. (emphasis added);15 see also Montoya v. ING Life

14

DOL Field Assistance Bulletin No. 2009-02 states that “[u]nder

ERISA § 4(b)(1) and (2), ‘governmental plans’ and ‘church plans’ gener-

ally are excluded from coverage under Title I of ERISA.” DOL Field

Assistance Bulletin No. 2007-02 makes a similar point: Ҥ 403(b) con-

tracts and custodial accounts purchased or provided under a program that

is [ ] a ‘governmental plan’ under § 3(32) of ERISA . . . are not subject

to Title I.”

15

The preamble to the released section 403(b) regulations explains that

“[t]he [DOL] promulgated a regulation in 1975, 29 C.F.R. § 2510.3-2(f),

20294 DANIELS-HALL v. NEA

Ins. and Annuity Co., 653 F. Supp. 2d 344, 348-50 (S.D.N.Y.

2009) (holding that the DOL’s safe harbor provided in 29

C.F.R. § 2510.3-2(f) does not apply to “governmental plans”).

[9] Plaintiffs cite a Seventh Circuit opinion, Otto v. Vari-

able Annuity Life Insurance Co., 814 F.2d 1127, 1135 (7th

Cir. 1986), as support for their position that the safe harbor

should apply to the school districts’ section 403(b) plans. In

Otto, the court held that a certain plan was not a “governmen-

tal plan” because it fell within the section 2510.3-2(f) safe

harbor. In the DOL’s invited brief, the Secretary argues that

Otto (and the district court in this case) put the cart before the

horse. The Secretary contends that a court should first deter-

mine whether a plan is a governmental plan, and that it should

only proceed to apply the safe harbor if it concludes that a

plan is not a governmental plan. We agree with the Secre-

tary’s reasoning: only private section 501(c)(3) employers

require the additional protection of the regulatory safe harbor,

because governmental and church plans already enjoy sepa-

rate and specific statutory exemptions from ERISA. See 29

U.S.C. §§ 1002(32), (33); id. §§ 1003(b)(1), (2). The Secre-

tary also suggests that the Otto court’s error was harmless

because the result in that case would have been the same

whether the court relied on the “safe harbor” or on the “gov-

ernmental plan” exemption; under either exemption, the plan

in that case was not “established or maintained” by the gov-

ernment employer. Therefore, we conclude that the school

districts’ section 403(b) annuity plans are “governmental

plans” exempt from Title I.” Accordingly, insofar as the

“Plan” refers to the school districts’ section 403(b) annuity

plans, Plaintiffs fail to state a claim upon which relief can be

granted.

describing circumstances under which an employer’s program for the pur-

chase of section 403(b) contracts for its employees, which is not otherwise

excluded from coverage under Title I, will not be considered to constitute

the establishment or maintenance of an ‘employee pension benefit plan’

under Title I of ERISA.” 72 Fed. Reg. at 41136-37.

DANIELS-HALL v. NEA 20295

C

[10] Finally, the “Valuebuilder Plan” could be construed as

referring to the individual Valuebuilder annuities offered by

Nationwide and Security Benefit. According to the district

court’s dismissal order, Plaintiffs claimed that “the annuity

contracts are employee pension benefit plans within the

meaning of ERISA, and that they were established or main-

tained by the NEA, an employee organization.” The district

court agreed with Plaintiffs’ first contention—that the annui-

ties were “plans” within the meaning of ERISA—but ulti-

mately held that the annuities were not “established or

maintained” by the NEA.16 We agree that the Valuebuilder

annuities were not “established or maintained” by the NEA,

and that they are not therefore “employee pension benefit

plans” subject to ERISA.

[11] It is clear from the NEA’s website and the prospec-

tuses offered by Nationwide and Security Benefit that these

annuities were not established or maintained by either Plain-

tiffs’ school district employers or by the NEA. The NEA’s

website explains that the “NEA Valuebuilder Variable Annu-

ity is a flexible purchase payment deferred variable annuity

issued by Security Benefit Life Insurance Company and dis-

tributed by Security Distributors, Inc.” The NEA’s website

directed teachers to “obtain a prospectus from Security Dis-

16

The district court held that “the annuities promoted by the NEA and

offered uniformly to the school district employees are a ‘program’

designed for th[e] purpose [of providing retirement income], and would be

seen as such by a reasonable employee.” By describing the annuities as a

program, it seems the district court considered the Valuebuilder annuities,

when taken together, to constitute a single “program.” However, the

Valuebuilder annuities were discrete investment contracts that were sold

to individual employees by two separate insurance companies pursuant to

various school districts’ section 403(b) plans. Even though the NEA mar-

keted these annuities as part of its “Valuebuilder Program,” the individual

annuities themselves do not constitute a single program. Our focus, at this

stage, is whether each individual annuity constitutes an ERISA plan.

20296 DANIELS-HALL v. NEA

tributors, Inc.” before investing. The prospectus for the NEA

Valuebuilder Variable Annuity explained that “[n]either the

NEA nor NEAMBC is registered as a broker-dealer and does

not distribute the Contract or provide securities brokerage ser-

vices.” We are therefore satisfied that the NEA, which is not

even registered to sell securities, did not “establish or main-

tain” the annuity contracts in question.17 These annuity con-

tracts cannot, therefore, be “employee pension benefit plans”

covered by ERISA. Insofar as Plaintiffs used the term “Value-

builder Plan” to refer to these individual section 403(b) annui-

ties, they have failed to state an ERISA claim.

V

[12] Plaintiffs argue in their opening brief that the district

court’s dismissal order “shelters the Defendants’ improper

activity” However, the district court merely held that the

Defendants’ activity was not subject to ERISA. Plaintiffs

have only themselves to blame for trying to fit the square peg

of Defendants’ alleged misconduct into the round hole of an

ERISA suit. The annuities at issue in this case are not regu-

lated by ERISA, but by the securities laws. And the compa-

nies issuing these securities are regulated by the Securities

and Exchange Commission (“SEC”) and various state insur-

ance regulators, not the Department of Labor. Variable annui-

ties are investment contracts that are considered “securities”

within the meaning of the Securities Act of 1933.18 See 15

17

The fact that Nationwide and Security Benefit paid NEA for the use

of NEA’s trademark, “Valuebuilder,” is irrelevant. The situation can be

analogized to the well-known phenomenon of celebrity endorsements. If

Security Benefit paid Hall-of-Fame quarterback Joe Montana for the use

of his name—perhaps hoping to sell an annuity contract to wealthy Notre

Dame alumni—the resulting “Joe Montana Variable Annuity” would still

be established or maintained by Security Benefit, not Joe Montana. Even

if Joe Montana starred in television commercials endorsing the annuity, it

would make little sense to say that Joe Montana, who might know nothing

about the contract’s details, established or maintained it.

18

Section 2(1) of the Securities Act provides: “When used in this sub-

chapter, unless the context otherwise requires—[t]he term ‘security’

means any note, stock, . . . or . . . investment contract.” 15 U.S.C.

§ 77b(a)(1).

DANIELS-HALL v. NEA 20297

U.S.C. § 77b(a)(1); see also SEC v. Variable Annuity Life Ins.

Co., 359 U.S. 65, 71-73 (1959) (holding that variable annui-

ties are securities that may be regulated by the SEC). Accord-

ingly, Security Benefit filed the NEA Valuebuilder Variable

Annuity prospectus with the SEC. The sale of securities is

subject to the anti-fraud provisions of sections 10(b) and 20(a)

of the Securities and Exchange Act of 1934, 48 Stat. 891, 15

U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17 C.F.R

§ 240.10b-5 (2009). Furthermore, NEAMBC is registered as

an investment adviser with the SEC. See 15 U.S.C. § 80b-3.19

As such, NEAMBC is subject to all the requirements of the

Investment Advisor Act. Id. § 80b-1 et seq. The mere fact that

Defendants are not subject to ERISA’s fiduciary duty and

reporting requirements does not mean that the district court’s

decision sheltered Defendants’ alleged activity. Rather, by

choosing to sue under ERISA, it is Plaintiffs who have simply

pled themselves out of court.

VI

[13] Plaintiffs allege that the NEA, an employee organiza-

tion, “established and maintained” the “Valuebuilder Plan.”

Viewing the Complaint in the light most favorable to the

Plaintiffs, we are satisfied that there is no scenario in which

this “Plan” fits the definition of an employee pension benefit

plan subject to Title I of ERISA. Plaintiffs therefore fail to

state an ERISA claim. The judgment of the district court is

AFFIRMED.

19

The prospectus states that NEAMBC:

promotes the NEA Valuebuilder Program to employers of NEA

members and to NEA members and provides certain services in

connection with the NEA Valuebuilder Program (e.g., evaluating

the effectiveness of the NEA Valuebuilder Program, monitoring

the satisfaction of NEA members with the NEA Valuebuilder

Program, conducting quality assurance work, and providing feed-

back concerning customer satisfaction with the NEA Value-

builder Program).