UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION

Transcription

1 UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION ) IN RE NORTEL NETWORKS CORP. ) ERISA LITIGATION ) No. 3:03-md ) Judge Nixon/Bryant ) To: The Honorable John T. Nixon, District Judge REPORT AND RECOMMENDATION I. Introduction Plaintiffs bring this action against Nortel Networks, Inc. ( Nortel or the Company ) pursuant to the Employee Retirement Income Security Act of 1974, 29 U.S.C ( ERISA ), on behalf of the proposed class of participants and beneficiaries of Nortel s Long- Term Investment Plan who held shares of the Nortel Stock Fund. Plaintiffs allege breaches of fiduciary duty, and seek, among other things, to restore the Nortel Long-Term Investment Plan for losses. Currently pending is Plaintiffs motion for class certification pursuant to Fed. R. Civ. P. 23. Plaintiffs filed their original motion for class certification on March 30, 2004 (Docket Entry No. 37). An amended motion was filed on November 28, 2006 (Docket Entry No. 97), and supplemental authorities in support of the motion were filed on December 5, 2006 (Docket Entry No. 98). Plaintiffs further amended their motion to propose the class period of March 7, 2000 though October 15, 2007 (Docket Entry Nos. 199, 229, 230). Defendants filed response briefs, and pursuant to an Agreed Order (Docket Entry No. 225), Defendants and Plaintiffs briefed the matter further. (Docket Entry Nos , 244). Case 3:03-md Document 264 Filed 09/02/2009 Page 1 of 35

2 On July 2, 2009, this motion was referred to the undersigned for a Report and Recommendation under 28 U.S.C. 636(b)(1) and Fed. R. Civ. P. 72. (Docket Entry No. 259). Upon consideration of these papers and for the reasons given below, the Magistrate Judge provisionally recommends that Plaintiffs motion for class certification be GRANTED. II. Factual Background Plaintiffs Zafarano, Kauffman, and Felts seek to recover under ERISA 502(a)(2) for losses to the Nortel Long-Term Investment Plan ( the Plan ), which are alleged to have occurred in connection with the sudden drop in Nortel stock in early They claim that Defendants breached their fiduciary duties by providing the Nortel Stock Fund as an option in the Plan and representing Nortel stock as a prudent investment, even though its value was artificially inflated. Plaintiffs seek to represent the class of Plan Participants who invested in the Nortel Stock Fund during the relevant period and suffered losses to their individual 401(k) accounts. A. The Nortel Long-Term Investment Plan The Nortel Long Term Investment Plan is an eligible individual account plan under ERISA 407(d)(3), 29 U.S.C. 1107(d)(3). The Plan is exempted from ERISA s diversification requirements that otherwise limit the amount of employer stock the Plan is permitted to hold. See ERISA 404(a)(2), 29 U.S.C. 1104(a)(2). Plan Participants have individual defined contribution accounts, and are permitted to invest their own contributions and the contributions of the Company in any of several investment funds, including the Nortel Stock Fund. (Docket Entry No. 104 at 3). During the proposed class period, the Plan offered seventeen investment funds as options. Id. All investment options were diversified mutual funds, except the Nortel Stock Fund, which was a pool of money invested in Nortel stock. (Docket Entry No. 95 at 3). 2 Case 3:03-md Document 264 Filed 09/02/2009 Page 2 of 35

3 Nortel employees have sole discretion in determining whether to participate in the Plan and how to invest the Company s contribution. (Docket Entry No. 104 at 3). Because the Company matches employee contributions in cash, participants may invest up to 100% of contributions in the Nortel Stock Fund, but are not required to invest in any Company stock. Id. Plan fiduciaries have sole discretion in selecting the Plan s investment options, and Plan Participants are limited to these options. (Docket Entry No. 95 at 2). B. Plaintiffs Claims Plaintiffs allege that in 2000 and 2001, Nortel engaged in accounting fraud that artificially inflated the value of the Nortel Stock Fund by approximately three billion dollars. (Docket Entry No. 233 at 32). According to Plaintiffs, many of the architects of the Nortel revenue fraud were top Nortel executives and members of the Pension Investment Committee, which was responsible for the 401(k) Plan. Id. On February 15, 2001, Nortel announced that the industry was witnessing a drastic downturn in business, and issued a press release lowering its guidance for business performance. (Docket Entry No. 104 at 4). Upon Nortel s announcement, its stock price decreased dramatically. Id. Nortel s stock price on the New York Stock Exchange plunged from a splitadjusted high in July 2000 of $867.22, to a low in October 2002 of $4.40. (Docket Entry No. 233 at 31 n.47). At the time of the crash and throughout the time of the alleged accounting fraud, the Nortel Stock Fund was the largest holding of the Long-Term Investment Plan. (Docket Entry No. 95 at 3). Nortel employees who participated in the Plan and invested in the Nortel Stock Fund lost significant portions of their retirement savings. (Docket Entry No. 233 at 31 n.47). Plaintiffs allege that Nortel executives continued to assure Plan Participants of the 3 Case 3:03-md Document 264 Filed 09/02/2009 Page 3 of 35

4 prudence in investing in Company stock even though its value was artificially high. Id. at 32. According to Plaintiffs, Nortel failed to disclose the company s widespread accounting fraud and the risks associated with Nortel stock in several Plan-wide communications, including a Summary Plan Description and public filings with the Securities and Exchange Commission (SEC). Id. at Plaintiffs allege that Plan fiduciaries failed to disclose the full extent of the risks even after the crash in Id. Even though the Plan s fiduciaries knew Nortel stock to be unsuitable, they failed to remove the Nortel Stock Fund as a retirement investment option. Id. Plaintiffs filed their Second Amended Complaint on June 17, (Docket Entry No. 104 at 4). At the core of Plaintiffs claims are these allegations that Nortel engaged in business improprieties to artificially inflate the value of Nortel Stock. (Docket Entry No. 95 at 3). Specifically, Plaintiffs allege that Defendants violated ERISA 404(a) by breaching their duties of loyalty, prudence, communication, and investigating and monitoring investment alternatives and appointed fiduciaries. Id. Plaintiffs seek to recover losses on behalf of the Plan. C. The Proposed Class In bringing this action, Plaintiffs propose a class of all participants and beneficiaries in the Nortel Long Term Investment Plan who held Nortel stock in their 401(k) individual accounts from March 7, 2000 through October 15, (Docket Entry No. 233 at 35). The proposed class includes approximately 30,000 members, some of whom cashed out of the Plan during the class period. (Docket Entry No. 104 at 5-6). Several class members also executed Release and Acknowledgment Agreements with Nortel during the proposed class period, agreeing to hold Nortel harmless in exchange for severance benefits. Id. at 6. Plaintiffs proposed class representatives are Michael Zafarano, James Kauffman, and 4 Case 3:03-md Document 264 Filed 09/02/2009 Page 4 of 35

5 Carol Felts. Mr. Zafarano and Mr. Kauffman both signed Release and Acknowledgment Agreements during the proposed class period, whereas Ms. Felts did not. Id. at Mr. Kauffman has expressed that he no longer wishes to continue as a class representative if that means that he would be faced with a lawsuit by Nortel requiring him to return the benefits he received in exchange for the release agreement. Id. at 8. Unlike Mr. Kauffman and Ms. Felts, Mr. Zafarano was a former participant of the Plan at the time that he filed suit. Id. at 6. All three representatives invested 100% of their individual 401(k) accounts in Nortel stock, and lost significant portions of their retirement savings. Id. at III. Conclusions of Law A. Legal Standard The principal purpose of class actions is to achieve efficiency and economy of litigation, both with respect to the parties and the courts. See Gen. Tel. Co. v. Falcon, 457 U.S. 147, 155, 159 (1982). Because individual litigants might not have the resources and motivation to pursue certain claims on their own, class relief is peculiarly appropriate when the issues involved are common to the class as a whole, and when they turn on questions of law applicable in the same manner to each member of the class. Id. at 155 (quoting Califano v. Yamasaki, 442 U.S. 682, 701 (1979)). Even so, due process concerns call for the district court to conduct a rigorous analysis of the prerequisites of Rule 23 of the Federal Rules of Civil Procedure. Id. at 161; Sprague v. Gen. Motors Corp., 133 F.3d 388, 397 (6th Cir. 1998) (en banc)). Although a court considering class certification may not inquire into the merits of the underlying claim, a class may not be certified merely on the basis of its designation as such in the pleadings. Kerns v. Caterpillar, Inc., 2007 WL , at *3 (M.D. Tenn. July 12, 2007) (citing Eisen v. Carlisle 5 Case 3:03-md Document 264 Filed 09/02/2009 Page 5 of 35

6 & Jacquelin, 417 U.S. 156, 178 (1974)). The district court is required to examine the precise nature of the plaintiffs claims as well as the proof required to establish those claims. Reeb v. Ohio Dep t of Rehabilitation & Correction, 435 F.3d 639, 644 (6th Cir. 2006). [A]ny doubt as to certification should be resolved in favor of plaintiffs. Eddleman v. Jefferson County, 1996 WL , at *3 (6 th Cir. Aug. 29, 1996) (citing Cross v. National Trust Life Ins. Co., 553 F.2d 1026, 1029 (6 th Cir. 1977)). B. Analysis Because Plaintiffs claims meet the requirements for class certification under a rigorous analysis of Rule 23, the Magistrate Judge recommends that Plaintiffs motion be granted. Under Rule 23(a), a party seeking class certification must show that (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. In addition to establishing numerosity, commonality, typicality, and adequacy of representation, a party seeking class certification must also satisfy one of the three subsections of Rule 23(b). In this case, Plaintiffs move for certification under any of the three subsections. For the reasons discussed herein, Plaintiffs meet the prerequisites of Rule 23(a) and should be certified under Rule 23(b)(1). 1. Plaintiffs meet the requirements for threshold individual standing. As a threshold matter, it is necessary to determine whether the named Plaintiffs have standing to bring suit before conducting a Rule 23 analysis. Fallick v. Nationwide Mut. Ins. Co., 6 Case 3:03-md Document 264 Filed 09/02/2009 Page 6 of 35

7 162 F.3d 410, 423 (6th Cir. 1998) (citing O Shea v. Littleton, 414 U.S. 488, 494 (1974)). Threshold individual standing is a prerequisite for all actions, including class actions. O Shea, 414 U.S. at 494. Finding that a named plaintiff lacks standing is sufficient to deny class certification. Defendants argue that class certification is inappropriate because Mr. Zafarano cashed out of the Plan before the proposed class period and lacks standing to bring suit under ERISA 502(a)(2). 1 (Docket Entry No. 104 at 12-13). However, in Bridges v. Am. Elec. Power Co., the Sixth Circuit held that former employees who cash out of their defined contribution accounts are participants under the meaning of ERISA and have statutory standing to bring suit. 498 F.3d 442, 445 (6th Cir. 2007); see also LaRue v. DeWolff, Boberg, & Assocs., Inc., 128 S. Ct. 1020, 1026 n.6 (2008) ( A plan participant, as defined by 3(7) of ERISA, 29 U.S.C. 1002(7), may include a former employee with a colorable claim for benefits. ); Tullis v. UMB Bank, N.A., 515 F.3d 673, 680 n.8 (6th Cir. 2008) ( The fact that [a former plan participant] already received a distribution from the plan does not affect the analysis. ). The Bridges court reversed the district court s finding that class certification was inappropriate due to lack of standing, and remanded the case for further consideration. Even though Mr. Zafarano cashed out of the Plan before the proposed class period, he has standing to bring suit under ERISA. A Rule 23 analysis is appropriate. 1 Plaintiffs point out in their reply brief that Defendants have likely abandoned this argument. At the time that Defendants filed their original opposition brief, Bridges and LaRue had not yet been decided. Defendants relied heavily on the District Court opinion which Bridges reversed, In re AEP ERISA Litigation. 7 Case 3:03-md Document 264 Filed 09/02/2009 Page 7 of 35

8 2. Plaintiffs have demonstrated numerosity under Rule 23(a)(1). Rule 23(a)(1) requires that a class be so numerous that joinder of all members is impracticable. Fed. R. Civ. P. 23(a)(1). There is no specific number below which class action relief is automatically precluded. Senter v. Gen. Motors Corp., 532 F.2d 511, 523 n.24 (6th Cir. 1976). However, the sheer number of potential litigants, especially if it is more than several hundred, can be the only factor needed to satisfy Rule 23(a)(1). Bacon v. Honda of Am. Mfg. Inc., 370 F.3d 565, 570 (6th Cir. 2004) (finding that a class of 800 was well beyond the point that joinder would be feasible ). In their original complaint, Plaintiffs alleged the number of class members to be in the thousands based on publically available information. (Docket Entry No. 37 at 10). Since then, Plaintiffs have expanded the proposed class and Defendants estimate the class number at roughly 30,000 members, likely scattered across the nation. (Docket Entry No. 104 at 5-6). Plaintiffs proposed class exceeds the minimum requirements for numerosity in the Sixth Circuit. 3. Plaintiffs have demonstrated commonality under Rule 23(a)(2). Rule 23(a)(2) requires that there must be questions of law or fact common to the class. In the Sixth Circuit, the test for satisfying this rule is qualitative rather than quantitative: there need be only a single issue common to the members of the class, but this issue s resolution must advance the litigation. Sprague v. Gen. Motors Corp., 133 F.3d 388, 397 (6th Cir. 1998); Kerns, 2007 WL , at *4; William B. Rubenstein, Alba Conte & Herbert Newberg, 1 Newberg on Class Actions 3:10 (4th ed. 2009) (hereinafter Newberg ). The commonality requirement is particularly easy to meet when the defendant has engaged in a course of conduct which gives rise to a single cause of action. Sixth Circuit courts have consistently held that the 8 Case 3:03-md Document 264 Filed 09/02/2009 Page 8 of 35

9 commonality element is satisfied when such a course of conduct exists, despite potential factual differences among class members. See, e.g., Senter, 532 F.2d at (finding commonality where the class members had been allegedly affected by the same racially discriminatory employment policies, even though promotional decisions involved individual consideration); Kerns, 2007 WL , at *4 (finding the issue of whether the defendants violated vested rights under ERISA sufficient to satisfy commonality, despite distinctions in the facts supporting class members claims ). Plaintiffs allegations that Defendants breached their fiduciary duties of loyalty, prudence, communication, investigation, and monitoring break down into two general claims: the prudence claim and the communication claim, both of which arise from the allegations of inflation. (Docket Entry No. 37 at 2-3). At the core of the Plaintiffs prudence claim is the allegation that Defendants, as fiduciaries, acted imprudently towards the Plan and Plan Participants by including Nortel stock as an option in the Plan when they knew that its value was artificially inflated. Id. The communication claim similarly alleges that Defendants breached their fiduciary duties by failing to disclose the level of risk associated with investing in the inflated Nortel stock. Id. For both of these claims, Plaintiffs assert that Defendants had the same duty towards all Plan Participants under ERISA and that the misleading communications were available Plan-wide. Each of Plaintiffs claims therefore stems from a common nucleus of operative fact: the accounting fraud which artificially inflated the value of Nortel stock, the fiduciaries failure to protect the Plan and Plan Participants from the risk of Nortel Stock, and the loss of value to the Plan. Accordingly, the class members share several common questions of law and fact that would be necessary for resolving their claims: (1) whether Defendants were 9 Case 3:03-md Document 264 Filed 09/02/2009 Page 9 of 35

10 fiduciaries, (2) whether Defendants owed fiduciary duties to the Plan and Plan Participants, and (3) whether Defendants actions and omissions constituted a breach of fiduciary duty. See Shirk v. Fifth Third Bancorp, 2008 WL , at *2 (S.D. Ohio Sept. 30, 2008) (finding issues of whether defendants acted as fiduciaries, whether they breached their duties, whether they violated ERISA, and whether the Plan was injured sufficient for commonality). Defendants argue that, because key issues of causation and reliance will have to be proven on an individualized basis, Plaintiffs have failed to demonstrate commonality. However, though these concerns are certainly valid, they do not change the fact that, for purposes of Rule 23(a)(2), the proposed class satisfies the requirement that all its members have at least one issue in common. See Bacon, 370 F.3d at 570. Because the issues that the proposed class members have in common are necessary to advance their claims under ERISA, Plaintiffs have satisfied commonality. 4. Plaintiffs have demonstrated typicality under Rule 23(a)(3). Rule 23(a)(3) requires that the claims or defenses of the representative parties are typical of the claims or defenses of the class. Fed. R. Civ. P. 23(a)(3). While the commonality and typicality elements tend to merge, Gen. Tel. Co. v. Falcon, 457 U.S. at 158 n.13, typicality focuses on the characteristics of the proposed class representatives. Typicality determines whether a sufficient relationship exists between the injury to the named plaintiff and the conduct affecting the class, so that the court may properly attribute a collective nature to the challenged conduct. Newberg 3:13. In Sprague, the Sixth Circuit gave the following summary of the premise of the typicality requirement: as goes the claim of the named plaintiff, so go the claims of the class. 133 F.3d at Case 3:03-md Document 264 Filed 09/02/2009 Page 10 of 35

11 As with commonality, the test for typicality is not demanding. Kerns, 2007 WL , at *5 (citing, e.g., Bittinger v. Tecumseh Prods. Co., 123 F.3d 877, 884 (6th Cir. 1997)). A representative s claim is typical if it arises from the same course of conduct that gives rise to the claims of other class members, and if his claims are based on the same legal theory. In re Am. Med. Sys. Inc., 75 F.3d at 1082 (quoting Newberg 3:13). Even so, typicality has been defeated when the plaintiffs legal theory requires individualized proof, as the named plaintiffs evidence could not advance the interests of the entire [absent] class. Sprague, 133 F.3d at 399. Claims with individualized proof can only advance the interests of each party individually, frustrating the purpose and economy of class certification. Id. Therefore, for a rigorous analysis, it is not sufficient to find that the plaintiffs claims arose from some general policy. Reeb, 435 F.3d at The court must address the typicality prerequisite in terms of the proof required for each claim and defense. Id. Plaintiffs argue that the interests of the representatives necessarily advance the interests of the class because of the derivative nature of claims brought under ERISA 502(a)(2). (Docket Entry No. 233 at 13). That is, because all of the potential class members bring this suit on behalf of the Plan, they share the same interests by definition. Plaintiffs rely on the language of ERISA 409(a) and 502(a)(2), which provide that a breach of fiduciary duty causes injury to the plan, and that plan participants may bring suit on behalf of the plan to restore the plan for any losses. See Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 (1985) (finding that the representative nature of a 502(a)(2) claim is supported by the text of 409, by the statutory provisions defining the duties of a fiduciary, and by the provisions defining the rights of a beneficiary ). Defendants argue that the Supreme Court s recent decision in LaRue v. DeWolff, Boberg 11 Case 3:03-md Document 264 Filed 09/02/2009 Page 11 of 35

12 & Associates undermines Plaintiffs characterization of ERISA 502(a)(2). 128 S.Ct (2008). In LaRue, the Court found that individual account holders in a defined contribution plan could bring suit under 502(a)(2) for recovery to their individual accounts. Id. at The LaRue plaintiffs did not need to bring suit on behalf of the entire plan in order to have standing under ERISA 502(a)(2). Id. Defendants seem to argue that, because an individual can bring suit under ERISA 502(a)(2) to recover losses to his individual account, analysis of Plaintiffs claims is individualized, which means that individual proof is required for each claim and defense. For the purposes of class certification, however, both parties arguments miss the mark. First, even though a suit under ERISA 502(a)(2) is a suit on behalf of the entire Plan, merely arguing that the derivative nature of a 502(a)(2) claim makes it such that plaintiffs satisfy typicality will not be sufficient under a Rule 23 rigorous analysis. [T]he requirements of Rule 23(a) cannot be waived away by artful characterization. Langbecker v. Electronic Data Systems Corp., 476 F.3d 299, 314 (5th Cir. 2007) (remanding for further Rule 23 analysis); see also Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1463 (9th Cir. 1995) (finding that whether the representatives have any unique claims or defenses is the proper inquiry for typicality, not whether the suit is derivative or direct). Even though Plaintiffs seek relief as representatives of the Plan, Plaintiffs still must show that their claims represent the absent participants. Id. This will require a thorough evaluation of the proof required for each specific claim and defense, and not just an evaluation of 502(a)(2) claims in general. Even so, the derivative nature of an ERISA 502(a)(2) claim ought to be considered in the Rule 23(a) analysis. The LaRue Court ruled narrowly on the ability of individual account holders to seek recovery to their defined contribution accounts. 128 S. Ct. at In LaRue, 12 Case 3:03-md Document 264 Filed 09/02/2009 Page 12 of 35

13 the defendants used the language of Russell as a shield, arguing that the plaintiffs did not have standing under ERISA unless they sought a remedy for all plan participants. Id. at The LaRue Court held that individual account holders could seek relief under ERISA 502(a)(2) so long as they were not seeking individualized relief, but relief to their accounts through the Plan. Id. at (finding that 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries). The Court distinguished between an individualized injury and standing for an individual account holder: plaintiffs may not seek damages for individual injuries under ERISA 502(a)(2), but they may seek recovery for losses to their individual accounts to the extent that such losses result from injuries to Plan assets which are allocated to those accounts. Id.; see also id. at 1029 (Thomas, J., concurring) ( [T]he allocation of a plan s assets to individual accounts for bookkeeping purposes does not change the fact that all the assets in the plan remain plan assets. ); Tullis v. UMB Bank, 515 F.3d 673, 680 (6th Cir. 2008) (finding that any assets recovered from the defendant under 502(a)(2) would first be paid into the plan, then allocated to [the plaintiffs ] individual accounts ). LaRue did not disturb the notion that an ERISA 502(a) claim is brought in a representative capacity on behalf of the plan. Plaintiffs in this case assert the interests of the Plan, which will weigh heavily in a Rule 23(a)(3) analysis of the parties claims and defenses. 13 Case 3:03-md Document 264 Filed 09/02/2009 Page 13 of 35

14 a. The Prudence Claim 2 Defendants first argue that Plaintiffs claims lack typicality because they will require individualized proof of causation. (Docket Entry No. 232 at 7). According to Defendants, an individual analysis is necessary to evaluate whether alleged losses incurred by an individual plan participant were the result of the claimed breach of fiduciary duty or the circumstances and [decisions] of each Plan Participant. Id. However, because Plaintiffs bring this claim on behalf of the Plan, Plaintiffs need not prove causation individually. To prevail on a breach-of-fiduciary duty claim under ERISA, a plaintiff must generally prove that the defendant not only breached its fiduciary duty, but also caused harm by that breach. Kuper v. Iovenko, 66 F.3d 1447, 1459 (6th Cir. 1995). Where, as here, plaintiff s claims are on behalf of the Plan, a plaintiff must show a causal link between the [breach of fiduciary duty] and the harm suffered by the plan. Kuper, 66 F.3d at 1459 (emphasis added). In other words, plaintiffs with ERISA 502(a)(2) claims must show that the plan in which they had invested their retirement savings would have had greater assets but for the defendant s actions. Tullis, 515 F.3d at 680. For many claims, this showing of but-for causation will focus on the actions of the defendant. For example, when evaluating the duty to investigate, the Kuper court found that [i]n order to establish [a] causal link, a plaintiff must demonstrate that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was 2 In addition to the prudence claim, Plaintiffs also claim that Defendants breached their fiduciary duty of loyalty, and the duty to monitor and investigate alternatives and plan fiduciaries. As many courts point out, however, the duty to monitor and investigate are derivative of the prudence claim and the analysis at this stage will be the same. The analysis for the loyalty claim is also the same in all relevant respects. All of Plaintiffs claims, except for the communication claim, are grouped together under the prudence claim. 14 Case 3:03-md Document 264 Filed 09/02/2009 Page 14 of 35

15 improvident. Kuper, 66 F.3d at Plaintiffs here would be able to establish causation without proof of the circumstances and [decisions] of each Plan Participant. Plaintiffs claim that Defendants breached their fiduciary duty by including the Nortel Stock Fund as an option in the Plan, even though they knew the Nortel stock to be unsuitable. Even though Plan Participants made individualized choices about how to invest, they could not have invested in funds that were not included as options. In other words, but for the Defendants decision to include the Nortel Stock Fund as an investment option, the Plan Participants would not have been able to invest in Nortel stock. Likewise, but for Defendants alleged breaches of duty, the Plan would have had greater assets. 3 Plaintiffs do not need individualized proof of causation to establish the prudence claim under ERISA 502(a)(2). The other elements of the prudence claim (that the defendants are fiduciaries, and that they breached their fiduciary duty) are focused solely on Defendants and their actions, and will require the same proof for all class members. The issue of whether a defendant breached its fiduciary duty is analyzed in terms of the defendant s actions and information, not in terms of the plan participants actions. In re Ikon Office Solutions, Inc., 191 F.R.D. 457, 465 (E.D. Pa. 2000). Disregarding Defendants possible defenses, named Plaintiffs will advance the interests of the absent class members by putting on evidence for this claim. Plaintiffs satisfy typicality with 3 In their first response brief, Defendants state that the losses could not have occurred but for two separate acts: the fiduciaries inclusion of bad stocks into the pot, and the participants choices to invest in those bad stocks. However, the existence of multiple but-for causes does not destroy the causal connection between Defendants actions and harm to the Plan, which is all that is required to establish causation in a breach of fiduciary duty claim under Sixth Circuit precedent. While there may be different requirements for a 404(c) defense, courts have largely rejected more stringent causal connections for establishing a breach-of-fiduciary-duty claim. 15 Case 3:03-md Document 264 Filed 09/02/2009 Page 15 of 35

16 respect to the prudence claim. b. The Communication Claim Defendants also argue that Plaintiffs misrepresentation claim lacks typicality because Plaintiffs will have to prove reliance individually. (Docket Entry No. 104 at 32). Even though Plaintiffs allege that the same misleading communications were made Plan-wide, Defendants urge that each named Plaintiff considered different communications in making his or her investment decision. Id. at However, because of the nature of Plaintiffs misrepresentation claim, Defendants argument fails to defeat typicality. To establish a breach of fiduciary duty claim based on misrepresentations about the assets in an ERISA plan, a plaintiff must show: (1) that the defendant was acting in a fiduciary capacity when it made the representations; (2) that these constituted material misrepresentations; and (3) that the plaintiff relied on those misrepresentations to his detriment. Pfahler v. National Latex Products Corp., 517 F.3d 816, 830 (6 th Cir. 2007) (citing James v. Pirelli Armstrong Tire Corp., 305 F.3d 439, 449 (6th Cir. 2002)). Even though reliance is an element of an ERISA misrepresentation claim, it does not appear that this element requires a showing of actual, individualized reliance that would defeat typicality, particularly where, as here, the alleged misrepresentation takes the form of a failure to disclose material information to all plan participants, or any of them. See Shirk v. Fifth Third Bank Corp., 2008 WL , at *3 n.11 (collecting cases) (finding, post-larue, that courts have consistently rejected the position that individualized reliance in a 502(a)(2) claim precludes class certification); In re CMS Energy ERISA Litig., 225 F.R.D. 539, 544 (E.D. Mich. 2004); cf. Sprague, 133 F.3d at (reversing class certification where the representations themselves were not uniform, and the claims were 16 Case 3:03-md Document 264 Filed 09/02/2009 Page 16 of 35

17 brought under bilateral contract and estoppel theories). As to the question of whether, for purposes of establishing the merit of their communication claim, plaintiffs must demonstrate individual reliance by affirmative proof, the answer remains unclear. Plaintiffs argue that such reliance may be presumed under a fraud-onthe-market theory borrowed from securities law. However, regardless of whether or when such reliance must be proved, 4 it is clear to the undersigned that these matters need not affect the class certification issue. See, e.g., Shirk, supra; In re CMS, supra. Accordingly, the undersigned finds that Plaintiffs have demonstrated typicality for the communication claim at this stage. If this court finds in the future that actual, individualized reliance is a necessary element of Plaintiffs misrepresentation claim under ERISA 502(a)(2), the court should change the composition of the class accordingly. c. Defendants possible Plan-wide defenses Defendants also argue that, because the lack of 404(c) status does not preclude defenses arising from individualized inquiries, Plaintiffs have failed to prove typicality. (Docket Entry No. 104 at 22-23). ERISA 404(c) relieves plan fiduciaries of liability for any loss or breach which results from such participant s or beneficiary s exercise of control [over the assets in his own account]. 29 U.S.C. 1104(c). Even though the Plan in this case lacks 404(c) status, Defendants argue that ERISA does not preclude similar safe harbor defenses because of permissive language in the statute and implementing regulation. (Docket Entry No. 104 at 23) 4 See Pfahler v. National Latex Products Co., 517 F.3d at 831 (inferring reliance from the materiality of the misrepresentation, at the summary judgment stage); In re Cardinal Health, Inc. ERISA Litig., 424 F.Supp.2d 1002, (S.D. Ohio 2006) (declining to decide applicability of fraud-on-the-market theory to ERISA 502(a)(2), but finding mere allegation of reliance sufficient at the motion to dismiss stage). 17 Case 3:03-md Document 264 Filed 09/02/2009 Page 17 of 35

18 However, Defendants fail to show how the claims of named Plaintiffs are not typical of the absent class members simply because there is a possibility that Defendants may bring a defense that requires individualized proof. In making this argument, Defendants do not list any specific defenses that they have asserted or plan on asserting that the court can properly evaluate under Rule 23. Most courts have found that, even when a plan has 404(c) status, a 404(c) affirmative defense does not defeat class certification, in part because it is applicable to many members of the class. See, e.g., Kanawi v. Bechtel Corp., 254 F.R.D. 102, 109 (N.D. Cal. 2008); Lively v. Dynegy, Inc., 2007 WL , at *10 (S.D. Ill. Mar. 2, 2007); Langbecker, 476 F.3d at 314 (explaining that susceptibility to a 404(c) defense does not preclude a finding of typicality under Rule 23(a)(3)). Plaintiffs have demonstrated that they share the same claims on behalf of the Plan under ERISA 502(a)(2), and that, despite factual differences between class members, the named Plaintiffs will advance the claims of the absent class members by advancing their own claims on behalf of the Plan. Because Plaintiffs claims require Plan-wide, rather than individualized proof, Plaintiffs have demonstrated typicality under 23(a)(3). 5. Plaintiffs have demonstrated adequacy of representation under Rule 23(a)(4). Federal Rule 23(a)(4) requires that the representative parties will fairly and adequately protect the interests of the class. The Sixth Circuit has recognized that this requirement encompasses two criteria: (1) the representative plaintiffs must have common interests with unnamed members of the class; and (2) it must appear that the representative plaintiffs will vigorously prosecute the interests of the class through qualified counsel. Senter, 532 F.2d at The first criterion requires that there be no antagonism or conflict between representative 18 Case 3:03-md Document 264 Filed 09/02/2009 Page 18 of 35

19 plaintiffs and the other members of the class that they seek to represent. See In re Am. Med. Sys., 75 F.3d at The second criterion inquires into the competency of counsel. 5 See id. Defendants do not dispute that Plaintiffs have satisfied the second prong of the adequacy requirement. Plaintiffs counsel has pursued discovery, successfully opposed Defendants motion to dismiss, and prepared this class certification motion. Plaintiffs also assert that counsel is highly experienced in ERISA class action litigation, and the court has no reason to doubt counsel s qualifications. (Docket Entry No. 37 at 17). Plaintiffs satisfy the second prong of the adequacy requirement. See Kerns, 2007 WL , at *7 (finding counsel s activity throughout the case and experience in the field to be good evidence of adequacy). Defendants argue that Plaintiffs have not satisfied the first criterion of Rule 23(a)(4) because conflicts exist between class members 6, and because the proposed class representatives demonstrate a lack of knowledge about the case. However, because prudence in breach of fiduciary duty claims is defined only in terms of the defendant s conduct, and because Plaintiffs seek to recover losses on behalf of the Plan, Plaintiffs individual investment variance does not defeat adequacy. The proposed class representatives actions have not been antagonistic to the interests of the absent class members. Plaintiffs have demonstrated adequacy under Rule 5 Following Senter, courts in this circuit continue to evaluate the competency of counsel under Rule 23(a)(4), see, e.g., Jenkins v. Hyundai Motor Finan. Co., 2008 WL , at *5 (S.D. Ohio Mar. 24, 2008) and Eversole v. EMC Mortg. Co., 2007 WL , at *11 (E.D. Ky. May 29, 2007), despite the addition of subdivision (g) to Rule 23 in 2003, which was intended to guide the court in assessing proposed class counsel as part of the certification decision, while narrowing the focus of Rule 23(a)(4) to scrutiny of the proposed class representative. Fed. R. Civ. P. 23, Adv. Comm. Notes. 6 Defendants argue that these intra-class conflicts defeat typicality as well as adequacy. The undersigned addresses this argument only under the adequacy prong, as it is better suited for an adequacy no antagonism or conflict analysis. 19 Case 3:03-md Document 264 Filed 09/02/2009 Page 19 of 35

20 23(a)(4). a. Individual investment patterns do not undermine the prudence claim because prudence is an objective standard. Defendants argue that variance in class members investment patterns creates conflicting accounts of whether the investment was prudent because some participants invested in Nortel stock well into the proposed class period, and participants who chose to invest in the Nortel Stock Fund presumably regarded it to be prudent. (Docket Entry No. 104 at 28). Under ERISA, the prudent man obligation imposes an unwavering duty to act both as a prudent person would act in a similar situation and with single-minded devotion to plan participants and beneficiaries. Kuper, 66 F.3d at As several courts have observed, this standard is objective. E.g., Gregg v. Transp. Workers of Am. Int l, 343 F.3d 833, 840 n.3 (6 th Cir. 2003). [T]he focus of the inquiry is how the fiduciary acted in his selection of the investment, and how he should have acted given the information reasonably available to him. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5 th Cir. 1983). Because the prudent man obligation focuses on the fiduciary s decision in selecting an investment, the perceptions and investment patterns of plan participants are not relevant to the prudence inquiry. Unlike plan fiduciaries, plan participants are not charged with these same high standards under ERISA, and may not be operating with the benefit of the same amount of information. 7 See Kuper, 66 F.3d at Although, as Defendants allege, some of the named Plaintiffs continued to invest in Nortel stock well into the proposed class period, this investment behavior is not antagonistic to Plaintiffs prudence claim. (Docket Entry No. 104 at 35). In making its determination about 7 The core of Plaintiffs communication claim is that Plaintiffs were not operating under the same amount of information as Plan fiduciaries. 20 Case 3:03-md Document 264 Filed 09/02/2009 Page 20 of 35

21 whether Defendants breached the prudent man obligation under ERISA, the court will not consider how Plaintiffs presumably perceived the risks of investing in the Nortel Stock Fund. Plaintiffs investment patterns will not defeat adequacy. b. Multiple optimal breach dates do not create sufficient intraclass conflict because this suit is on behalf of the Plan. Relying on the Fifth Circuit s decision in Langbecker v. Electronic Data Sys. Corp. and the expert testimony of Mr. David Ross, Defendants similarly argue that the class members variance in investment patterns creates multiple optimal breach dates. (Docket Entry No. 104 at 26). According to Mr. Ross, a class member s optimal breach date is the date that an alleged breach of fiduciary duty would create the greatest return in benefits, based on when they bought and sold Nortel stock. Id. at Because there are over 50 estimated optimal breach dates among class members, and because this will affect Plaintiffs incentive for conducting discovery and defining the breach, Defendants argue that significant intra-class conflicts exist. Id. In so arguing, Defendants urge the court s adoption of the theory of seller-purchaser conflicts, which originates in securities law. See Brieger v. Tellabs, Inc., 245 F.R.D. 345, 355 (N.D. Ill. 2007) (citing Lively, 2007 WL , at *12-13). Under this theory, no holder of stock is capable of representing another holder in a class action, as individual holders will have necessarily bought and sold the stock at different times and thus will differ with respect to what they contend would have been the stock s unmanipulated price. Id. Even though courts have overwhelmingly rejected the seller-purchaser conflicts theory as precluding class certification in securities fraud cases, see Lively, 2007 WL , at *12, Defendants contend that ERISA cases are different. Unlike a securities fraud lawsuit, in which class members have a uniform purpose in proving material misrepresentations by company defendants at specific points in time, 21 Case 3:03-md Document 264 Filed 09/02/2009 Page 21 of 35

22 here the goal is to second-guess judgments made by the [defendants] involving a multitude of considerations over a period of years. Langbecker, 476 F.3d at 315. As the Langbecker court recognized, [t]he facts, once known, may bear out different theories as to when [the stock] became an imprudent investment[.] Id. Holding that the district court should more fully consider the implications of seller-purchaser conflicts, the Langbecker court found that subclasses may be necessary to represent the participants with conflicting interests. Id. at 316. While Defendants raise valid concerns about the conflicts inherent in ERISA stock-drop cases, this conflict is not sufficient to overcome Plaintiffs showing of adequacy. Recovery in an ERISA 502(a)(2) claim is a two step process: first, the Plan as a whole is restored for losses, and then the losses are allocated into the individual accounts. Tullis, 515 F.3d at 680 (finding that any assets recovered from the defendant under 502(a)(2) would first be paid into the plan [] then allocated to [the plaintiffs ] individual accounts ). In determining liability, Plaintiffs claims will focus on the first step of recovery, as the injury they assert is injury to the Plan. Id. Because of this representative nature of a 502(a)(2) claim, the majority of courts have found that seller-purchaser conflict theory does not pose a serious threat to adequacy of representation. See, e.g., In re First American Corp. ERISA Litig., 2009 WL , at *3 (C.D. Cal. Apr. 2, 2009) (citing In re Aquilla ERISA Litig., 237 F.R.D. 202, 210 (W.D. Mo. 2006); In re Merck & Co., Inc. Secs. Derivative & ERISA Litig., 2009 WL , at *14 (D.N.J. Feb. 10, 2009); Breiger, 245 F.R.D. at 355; Lively, 2007 WL , at *13. Moreover, as argued above, adopting seller-purchaser conflict theory in ERISA stock-drop cases would contravene the remedial purpose of ERISA, as it would eliminate the possibility of class certification altogether. Lively, 2007 WL , at * Case 3:03-md Document 264 Filed 09/02/2009 Page 22 of 35

23 As discovery progresses and issues arise from the allocation of differing degrees of damages to the plaintiffs, this court should be prepared to monitor conflicts that may arise within the class, considering the corresponding need for subclasses[.] Breiger, 245 F.R.D. at 356; see also Beattie v. CenturyTel, Inc., 511 F.3d 554, 562 (6 th Cir. 2007). In this case, the proposed class members and representatives have a unified interest in seeking recovery to the Plan and advancing the same claims based on a common set of facts. Plaintiffs have demonstrated adequacy of representation. c. Plaintiffs lack of interest or independence does not defeat adequacy. Finally, Defendants contend that Plaintiffs are not adequate representatives because they have little understanding of the case and rely too heavily on class counsel. To demonstrate adequacy of representation under Rule 23(a)(4), a plaintiff must show that the representative plaintiffs actions are not antagonistic to or conflicting with the interests of the absent class members. See In re Am. Med. Sys., 75 F.3d at When considering the named Plaintiffs involvement in the case, the threshold for establishing adequacy is quite low. In re AEP ERISA Litig., 2008 WL , at *2 (S.D. Ohio Sept. 8, 2008). As long as a plaintiff s involvement shows that he is not merely a pawn of the class lawyers, and that he will be able to protect the class from the possibility of competing class counsel interests, a plaintiff will satisfy the adequacy requirement. Id. (citing Moeller v. Taco Bell Corp., 220 F.R.D. 604, 611 (N.D. Cal. 2004); Murray v. E*Trade Fin. Corp., 240 F.R.D. 392, (N.D. Ill. 2006); and Larry James Oldsmobile-Pontiac-GMC Truck Co. v. GMC, 175 F.R.D. 234, 240 (N.D. Miss. 1997)). The Supreme Court has held that a plaintiff need not demonstrate extensive knowledge about the legal or factual details of their cause of action. Surrowitz v. Hilton Hotels Corp., 383 U.S. 363, 23 Case 3:03-md Document 264 Filed 09/02/2009 Page 23 of 35

24 (1966). Rather, the key inquiry is whether the named Plaintiff is indifferent, and whether his lack of involvement may injure the absent class members. See In re AEP ERISA Litig., 2008 WL , at *3-4 (finding that a plaintiff with professed indifference for the outcome of the case was not an adequate class representative). In this case, named Plaintiffs lack of knowledge about their ERISA claim does not rise to the level of indifference or antagonism. For example, in his deposition, Mr. Zafarano explained that he spoke numerous times with counsel over the phone before the deposition, and that he had an opportunity to comment on the complaint. (Docket Entry No. 248 at 63). Even though Mr. Zafarano knew nothing about the attorneys fees, he expressed understanding about the core of Plaintiffs complaint, noting that the fiduciaries would have to decide [on employees investment options] and make sure that [they] invest in the right things. (Docket Entry Nos. 244 at 5; 248 at 63). Although Defendants note that Mr. Zafarano stated that he did not specifically rely on the 2002 Summary Plan Description because by that time he had cashed out of the Plan, Defendants argument here seems to be about standing, and not adequacy. (Docket Entry No. 244 at 5-6). As argued above, Mr. Zafarano has standing to bring suit as a former plan participant. He need not be identical to the absent class members to be an adequate representative. Mr. Kauffman is also an adequate representative under Rule 23(a)(4). Unlike the Plaintiff in AEP, 2008 WL , who was unwilling to read the complaint, Mr. Kauffman read a draft of the amended complaint before it was filed, and asserted that he engaged in multiple communications with Class Counsel. (Docket Entry No. 248 at 66). Further, Mr. Kauffman s statement that the failure-to-inform claim doesn t apply to [him] may undermine reliance, but 24 Case 3:03-md Document 264 Filed 09/02/2009 Page 24 of 35

25 is not antagonistic to Plaintiffs basic claim. (Docket Entry No. 244 at 4). Mr. Kauffman did not imply in the deposition that the alleged breach itself did not occur. Id. Rather, he claimed that he already knew one fact that plan fiduciaries had failed to disclose to him. Id. This answer does not contradict Plaintiffs claim unless actual reliance is an element of the communication claim, as discussed above. ERISA claims are particularly complex, and named Plaintiffs cannot be expected to know the details of their claims. Kanawi, 254 F.R.D. at 111 (quoting George v. Kraft Foods Global, Inc., 251 F.R.D. 338, 351 (N.D. Ill. 2008) (finding that it is not surprising that plaintiffs cannot articulate the nature of their claims since ERISA is a complicated area of the law ). Plaintiffs have demonstrated adequacy under Fed. R. Civ. P. 23(a)(4) Plaintiffs may maintain class certification under Rule 23(b)(1) After fulfilling the requirements of Rule 23(a), plaintiffs must also meet one of the subsections of Rule 23(b). In re Am. Med. Sys., 75 F.3d at Plaintiffs contend that they meet both the requirements of Rule 23(b)(1) and Rule 23(b)(2). Defendants, however, argue that the intra-class conflicts make certification under either Rule 23(b)(1) or 23(b)(2) inappropriate, as class members would not be able to opt out of the suit. (Docket Entry No. 104 at 34). Because Plaintiffs bring this suit on behalf of the Plan, certification under Rule 23(b)(1) is appropriate. Rule 23(b)(1) allows for certification of the class if the prosecution of separate actions by or against individual members of the class would create a risk of: (A) (B) inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for the party opposing the class; or adjudications with respect to individual class members that, as a 8 Defendants do not dispute the adequacy of Ms. Felts as a class representative. 25 Case 3:03-md Document 264 Filed 09/02/2009 Page 25 of 35

26 practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests[.] Subsection A attempts to avoid possible prejudice to Defendants, while subsection B attempts to avoid possible prejudice to class members. See In re Ikon, 191 F.R.D. at 466. Because Rule 23(b)(1) does not provide opt-out protections, the Rule is interpreted narrowly. See Ortiz v. Fibreboard Corp., 527 U.S. 815, 833 n.13, 842 (1999). While giving notice of certification to the class is not mandatory, it is within the court s discretion to order that notice be given. See Fed. R. Civ. P. 23(c)(2)(A). a. Rule 23(b)(1)(B) applies here. Many ERISA class action cases are certified under Rule 23(b)(1)(B), which considers the possibility of prejudice to the putative class members. See, e.g., Kanawi, 254 F.R.D. at ; In Re Merck, 2009 WL , at *10. The Advisory Committee Notes for Rule 23(b)(1)(B) provide that certification under this subsection is particularly appropriate in cases charging a breach of trust by a [fiduciary to] a large class of [beneficiaries], and which requires an accounting or like measures to restore the subject of the trust. Fed. R. Civ. P. 23, Adv. Comm. Notes; see also Ortiz, 527 U.S. at (citing this as a classic example for 23(b)(1)(B) certification). The shared character of rights claimed or relief awarded [in these types of claims] entails that any individual adjudication by a class member disposes of, or substantially affects, the interests of absent class members. Ortiz, 527 U.S. at 834. Plaintiffs in this case charge a breach of trust by a fiduciary, affecting a large class of beneficiaries, which requires an accounting to restore the subject of the trust. Because of the nature of claims under 502(a)(2), Plaintiffs share the same rights as Plan Participants, and seek 26 Case 3:03-md Document 264 Filed 09/02/2009 Page 26 of 35