THE LATEST IN ERISA LITIGATION

Transcription

1 THE LATEST IN ERISA LITIGATION DOL SPEAKS: THE 2009 EMPLOYEE BENEFITS CONFERENCE Gregory C. Braden Morgan Lewis & Bockius, LLP 1111 Pennsylvania Avenue, N.W. Washington, D.C David S. Preminger Keller Rohrback L.L.P. 770 Broadway Second Floor New York, NY September 14-15, 2009 Copyright 2009 All rights reserved

2 I. KEY DECISIONS IN THE 401(k) FEES CASES Over the past three years several class action lawsuits have been filed alleging that 401(k) plans paid excessive investment management and administrative fees. Most were filed on September 11, 2006 by a St. Louis law firm. Many of the original complaints attacked revenue sharing among service providers, alleging that it was prima facie evidence of excessive fees. Many of the complaints have been amended to add claims of investment losses and widely varied alleged breaches of fiduciary duty. At the same time, plaintiffs have begun amending the ever popular 401(k) employer stock drop class actions to add allegations of excessive fees under 401(k) plans. The cases have resulted in a number of decisions but only a few on the merits. Observable trends so far are: Courts are generally granting motions to certify classes in the fees cases. Courts are generally dismissing allegations that failure to disclose revenue sharing is a breach of fiduciary duty. Defendants are prevailing in final adjudications on the merits. Plaintiffs are generally surviving, at least in part, Rule 12 motions to dismiss. Courts are granting motions to strike juries. A. Hecker v. Deere & Co. et al., No & (7th Cir. Feb. 12, 2009) Seventh Circuit affirmed the district court s grant of defendants Rule 12 motion to dismiss claims that defendants breached their fiduciary duties by: (1) failing to disclose revenue sharing, (2) offering retail mutual funds that engaged in revenue sharing as 401(k) investment options, and (3) limiting the investment options to Fidelity products. The district court dismissed the claims, holding that there was no fiduciary or other duty to disclose revenue sharing, Deere had complied with ERISA 404(c) and the participants were, therefore, liable for choosing high cost funds, and plaintiffs had not sufficiently alleged Fidelity s fiduciary status. In a 33-page opinion, the Seventh Circuit affirmed all aspects of the District Court s judgment and awarded a total approximately $220,000 in costs to the defendants. The court held: It was insufficient to merely allege that Fidelity played a role or furnished advice in the selection of investment options under the Deere plan. Plaintiffs must allege that Fidelity had final authority to sufficiently plead its fiduciary status. There is no general or specific fiduciary duty under ERISA to disclose revenue sharing paid in connection with mutual fund investment options. Deere s arguably misleading suggestion 1

3 that it was paying administrative costs that were actually covered by revenue sharing does not state a claim. The omission of information in participant disclosures about revenue sharing was immaterial because Deere disclosed the total administrative fees charged by each of the funds and [t]he total fee, not the internal post-collection distribution of the fee, is the critical figure for someone interested in the cost of including a certain investment in her portfolio. Deere did not breach its duty by selecting allegedly high cost retail mutual funds as investment options. Combined with the brokerage window, the plan offered a wide-range of expense ratios and all of the funds were sold to the general public against the backdrop of market competition... nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund... It was not a breach of fiduciary duty for Deere to limit the investment options to Fidelity products, [w]e see nothing in the statute that requires plan fiduciaries to include any particular mix of investment vehicles in their plan. The plaintiffs enabled the Court to consider the 404(c) affirmative defense on their Rule 12 motion by specifically pleading that Deere failed to comply with two of the requirements in the regulations. The court need not rule on the validity of the footnote in DOL s regulations suggesting that, notwithstanding 404(c), fiduciaries are responsible for the selection of the investment options offered under self-directed plans. It is clear that Deere offered a prudent selection of funds because it offered 23 investment options ranging in price from 7 to over 100 basis points and an additional 2,500 funds through the brokerage window. Because participants had the ability to chose from among a broad range of investment options, any losses they incurred were the result of their own choices and defendants are not liable. Petition for rehearing en banc denied, June 24, Court modifies panel decision by clarifying that it did not decide the question of whether fiduciary duties apply to the selection of investment options for 401(k) plans even where a broad range of options is made available. 2

4 B. Young, et al. v General Motors Investment Management Corporation, et al., 46 EBC 2278 (2d Cir. 2009) District Court granted Defendants Rule 12 Motion to Dismiss excessive fees and investment loss claims based on ERISA s three year statute of limitations ( 413(1)). On Appeal, the Second Circuit held that the complaint failed to state a claim because Plaintiffs only alleged that individual Funds within the Plan were undiversified... rather than the Plan as a whole. The Court noted further that ERISA 404(a) does not specifically address excessive fee claims, and applied the standard adopted under the Investment Company Act to the Plaintiffs excessive fee claims. That standard required Plaintiffs to plead that the fees paid were so disproportionally large that [they bear] no reasonable relationship to the services rendered and could not have been the product of arms-length bargaining. The Court concluded that the Plaintiffs had failed to plead facts stating a claim under that standard. Finally, the Second Circuit concluded that, because it had determined that the Plaintiffs had failed to state cognizable claims for relief, it did not need to address the District Court s statute of limitations ruling and affirmed the dismissal of all claims for failure to state a claim under Rule 12. C. Abbott v Lockheed Martin, et al., No. 06-CV-0701-MJR (S. D. Ill., March 31, 2009) On the defendants motion for summary judgment, Court held: Revenue sharing claims are dismissed because under the holding of Deere, there is nothing illegal about revenue sharing and defendants did not intentionally mislead participants about it or omit to disclose material information about it. Plaintiffs float claims are dismissed because they failed to plead them in their amended complaint. Plaintiffs claim that the inclusion of the American Century Growth Fund ( ACGF ) as an investment option under the 401(k) plan was imprudent are dismissed for failure to adequately plead them. Even if adequately pled, the prudence claims concerning the ACGF are dismissed under Deere because defendants offered a wide variety of investment options. All claims accruing prior to September 11, 2000 are barred by ERISA s six year statute of limitations because plaintiffs amended complaint fails to plead fraud as required by FRCP 9(b). 3

5 Plaintiffs have standing to bring their claims even though there is no evidence that they invested in the challenged investment options. Fact issues preclude dismissal of plaintiffs claims that overall fees paid by the Plan were excessive. Fact issues preclude dismissal of claims that the Stable Fund investment option was imprudently managed resulting in Plan losses. Fact issues preclude entry of summary judgment dismissing plaintiffs claim that the unitized employer stock fund was imprudently managed through the maintanence of excessive cash cushions, reducing its returns. Fact questions remain as to whether the defendant s satisfied all of the requirements of the ERISA 404 (c) safe harbor. In a separate Order, the Court granted class certification on all claims except claims relating to the unitized employer stock fund. The Court found that the stock fund claims could not be certified because of conflicts among plan participants who benefited from the cash cushion through day-trading and participants who were harmed by the cash cushion. Defendants filed a Rule 23(f) appeal of the class certification order and subsequently moved to disqualify class counsel. That motion was denied and the Rule 23(f) appeal remains pending before the Seventh Circuit. D. Tibble v. Edison International (C.D. Ca. July 16, 31, 2009) On cross motions for summary judgment the Court held in two separate orders: Edison did not commit a 406(b)(3) prohibited transaction by receiving a reduction in its recordkeeping costs through revenue sharing because it did not control the selection of mutual funds paying revenue sharing. Rather, a committee appointed by Edison s CEO selected the mutual funds. Edison did not violate the plan document, which stated that it would pay 401(k) plan administrative fees, by including mutual funds that paid revenue sharing resulting in a reduction in the fees otherwise paid by Edison. Even if Edison breached its fiduciary duties by receiving revenue sharing in contravention of the plan document, there was no loss to the plan because the mutual fund expense ratios were fixed and would have been charged whether or not Edison received revenue sharing. There is no per se breach of fiduciary duty that arises from the selection of retail mutual funds as 401(k) plan investment options. The test is whether 4

6 plan participants would have agreed to the selections at the time they were made. Here, Edison s unions had requested retail mutual funds in negotiations; therefore no breach of the exclusive benefit rule occurred. There is no per se breach of fiduciary duty that arises from the practice of revenue sharing. Rather, the question is whether the individuals who selected the mutual funds acted under a conflict of interest and breached their duties by selecting mutual funds based on the amount of revenue sharing paid, rather than overall performance. The Court holds that a trial is necessary to decide this issue because of the existence of disputed facts. The plan offered a broad range of investment options, including lower cost separately managed accounts; therefore the fact that funds with lower expense ratios could have been selected does not establish the Defendants imprudence. Plaintiffs claim that the technology sector fund was imprudent because it had underperformed is dismissed because Defendants discharged their duty of prudence by placing the fund on a watch list and there is no evidence that Defendants selected the fund for revenue sharing purposes. Plaintiffs claim that Defendants breached their duty of prudence by offering a money market fund rather than a stable value fund is dismissed because Defendants evaluated the risks and returns associated with money market and stable funds in making their decision to offer a money market fund. Plaintiffs claim that Defendants breached their duty of prudence by offering a unitized employer stock fund is dismissed because Defendants evaluated the benefits of the unitized fund design and monitored the cash cushion. The Court also noted that the unitized fund would benefit participants in a down market. Plaintiffs claim that the Trustees retention of float violated the plan document is dismissed because the plan document is silent. Plaintiffs prohibited transaction claim relating to float is dismissed (in the July 31, 2009 Order) because the Trustee s retention of float is not a transaction in which Edison was involved. Moreover, Plaintiffs 406(b) prohibited transaction claim relating to float is barred by ERISA six-year statute of limitations. The six-year statute of limitations bars any breach of the duty of prudence claims arising out of decisions to add retail mutual funds made more than six years prior to the filing of the Complaint. Thus, Plaintiffs are entitled to trial only on the question of whether mutual funds selected within the sixyear period were selected by Defendants because of revenue sharing rather than performance. 5

7 Defendants are not entitled to summary judgment based on an ERISA 404(c) defense because it does not protect Defendants against possible conflict of interest in the selection of investment options. Plaintiffs are entitled to a trial on the factual question of whether the money market fund investment option paid excessive fees. E. Taylor, et al. v. United Technologies Corporation, et al., No. 3:06cv1494 (D. Conn. March 3, 2006) Court granted summary judgment dismissing all claims including: Claim that offering actively managed mutual funds is a breach of fiduciary duty because active managers are more expensive and never out-perform the market, i.e., index funds. The Court held that the question is not whether index funds might do better, it is whether defendants pursued a prudent process for selecting actively managed funds. Here, defendants followed a prudent process and subsequently monitored the selected funds. Plaintiffs claim that defendants breached their duties by offering retail mutual funds rather than lower cost separately managed accounts. The Court held that fiduciaries are not required to take any particular course of action as long as they satisfy their duty of procedural prudence. Plaintiffs claim that Fidelity received excessive recordkeeping fees through direct payments of $ $47.00 per participant plus revenue sharing from non-fidelity mutual funds. The Court found that defendants had considered competing proposals for recordkeeping services and, in so doing, discharged their duty of procedural prudence. Plaintiffs claim that offering a unitized Employer Stock Fund was a breach of fiduciary duty because the cash cushion caused performance to lag that of actual shares. The Court found that defendants had prudently considered the unitized structure and although an expert might come up with a better option defendants had discharged their duty of procedural prudence. Plaintiffs claim that defendants had failed to capture float on liquidated accounts pending distribution. The Court found plaintiffs had failed to point to facts suggesting they could meet their burden of proof. The Court s grant of summary judgment on procedural prudence grounds is somewhat unusual since procedural prudence is typically a fact intensive inquiry often resulting in disputed facts and requiring trial. Appeal pending and fully briefed before the Second Circuit. 6

8 F. Kanawi v. Bechtel Corp., No (N.D. Cal. Nov. 3, 2008) that: Court granted summary judgment to defendants on statute of limitations grounds, holding ERISA s six-year statute of limitations barred plaintiffs claims that accrued more than six years before action was initiated and rejecting plaintiffs attempt to toll the limitations period by alleging misrepresentations and fraud. The fiduciaries had discharged their duty of procedural prudence by periodically reviewing the performance of the investment options, even though some investments under-performed their benchmarks. The company not the plan paid the majority of plan-level fees; therefore no breach occurred. Court declined to dismiss claims for approximately $100,000 in fees paid by the plan. Plaintiffs have appealed to the Ninth Circuit. G. Braden v. Wal-Mart Stores, Inc., No (W.D. Mo. Oct. 28, 2008) On Rule 12(b)(6) motion, Court dismissed plaintiffs claims that defendants breached fiduciary duties and engaged in prohibited transactions by selecting retail class mutual funds with allegedly excessive fees. Court found that Plaintiffs failed to plead that defendants did not adequately investigate the funds they selected and rejected the argument that the existence of less expensive funds was evidence of a breach of fiduciary duty. The court also dismissed plaintiffs prohibited transaction claims, citing a lack of pleading that revenue sharing was unreasonable or that kickbacks were received. Finally, the Court dismissed Plaintiffs nondisclosure claims finding that there was no duty to disclose revenue sharing and any other nondisclosure was immaterial. The Court dismissed the entire case with prejudice and did not allow Plaintiffs the opportunity to replead. Currently on appeal to the Eighth Circuit and fully briefed. H. Gipson v. Wells Fargo & Company, No (D. Minn. March 13, 2009) The Court denied defendants motion to dismiss claims that defendants proprietary funds: (i) underperformed peer funds, (ii) charged excessive investment management and administrative fees, and (iii) involved prohibited transactions by failing to comply with PTCBE The Court appeared to depart from Wal-mart (below) and held that pleading availability of lower cost alternatives was sufficient to state a claim, especially where plaintiffs also alleged the lower cost alternatives had a higher investment return: Plaintiffs claim that the Committee should have invested in other Funds that outperformed the Wells Fargo Funds. This is plainly sufficient to withstand a motion to dismiss. The Court also rejected defendants statute of limitations defense, finding that dispositive facts outside the Complaint s allegations required development in discovery. 7

9 I. Columbia Air Servs. Inc. v. Fidelity Mgmt. Trust Co., No (D. Mass. Sept. 30, 2008) Court granted Fidelity s motion to dismiss claims that it breached its fiduciary duties, acting as a directed trustee in a bundled arrangement, because it received revenue sharing from mutual funds selected as plan investment options by the plaintiff plan sponsor. Plaintiff alleged Fidelity received the revenue sharing as a result of its fiduciary decisions, a prohibited transaction. Court held that Fidelity was not acting as a fiduciary when it negotiated the bundled arrangement that limited the plaintiff s fund choices to Fidelity funds and noted the complaint did not allege Fidelity picked the plan s funds. Since the plaintiff failed to plead facts that supported a conclusion that defendant was acting as a fiduciary and exercised its fiduciary powers to select funds paying it revenue sharing, plaintiff had failed to state a claim. J. Spano v. The Boeing Co., No (S.D. Ill. Sept. 26, 2008) Court granted class certification, focusing on derivative nature of plaintiffs claims, which alleged that defendants breached fiduciary duties under ERISA by allowing excessive and unreasonable fees to be charged to the plans, by offering allegedly imprudent investment options, and by providing allegedly misleading information to participants. The court held that the primary focus of plaintiffs claims was defendants fiduciary conduct, and claims were being asserted on behalf of the plan, therefore the individualized nature of plaintiffs investment decisions and misrepresentation claims did not defeat commonality and typicality. In 2007, Court denied defendants motion to dismiss but granted defendants motion to strike the jury demand. Class certification granted in October, 2008, Rule 23(f) petition granted by the Seventh Circuit August 10, 2009, appeal consolidated with the Beesley Rule 23(f) appeal (see below). K. Beesley v. International Paper Co., No (S.D. Ill. Sept. 30, 2008) Applying the same rationale used in Boeing, the same Judge certified plaintiffs excessive fees/misrepresentation claims by holding that the central issue in the case was defendants conduct and, since claims were asserted on behalf of the plan commonality and typicality were not defeated by individual issues of proof. Order entered denying jury/advisory jury trial (Feb. 4, 2009). Rule 23(f) petition to appeal class certification order filed with the Seventh Circuit in October, Petition granted August 10, Rule 23(f) appeal consolidated with Boeing (above). L. Shirk v. Fifth Third Bancorp, No (S.D. Ohio. Sept. 26, 2008) Court denied defendants Rule 12 motion to dismiss plaintiff s claims that that defendants failed to disclose to plan participants individual fees and expenses (per account) and the annual operating expenses of investment options. Court rejected Defendants argument that ERISA s specific disclosure requirements do not require disclosure of individualized fees and expenses. The court held that plaintiffs pled a causal nexus between the plan s losses and defendants alleged nondisclosure because ERISA fiduciary duties require the disclosure of material information and plaintiffs alleged non-disclosure of certain information that may be material. The court also held that whether defendants actually disclosed annual operating expenses for the plan s investment options was a disputed fact that could not be resolved on a motion to dismiss. 8

10 M. Martin v. Caterpillar, Inc., No (C.D. Ill. Sept. 25, 2008) Following initial dismissal with leave to replead, court denied defendants second Rule 12 motion to dismiss, holding that plaintiffs adequately pled elements of breach of fiduciary duty claims. The court agreed with defendants that ERISA does not require the disclosure of revenue sharing payments but declined to dismiss the nondisclosure allegations because the documents relied on by defendants were not incorporated into the complaint. Court also denied defendants motion to dismiss on 404(c) grounds, holding that this affirmative defense was not ripe for a Rule 12 motion. 2008) N. Ruppert v. Principal Life Insurance Co., No (S.D. Iowa, Aug. 27, Court denied plaintiffs motion for class certification of claim against insurance company that it was a fiduciary to every retirement plan it serviced and that it breached those fiduciary duties by retaining revenue sharing payments and not providing dollar-for-dollar credits to those plans. The court determined that class certification was not appropriate because commonality and typicality were not met, as the administrative packages offered to plan sponsors were not cookie cutters but were individually tailored to elements such as the involvement of an independent financial advisor and the size, needs, sophistication of the client. Court found that any examination of defendant s fiduciary status would entail individualized factual inquiry on a plan-by-plan basis which in the court s view defeats class certification. O. George v. Kraft Foods Global, Inc., No (N.D. Ill. Jul. 17, 2008) Court granted plaintiffs motion for class certification, rejecting defendants argument that issues of detrimental reliance and ERISA 404(c) defenses created individual issues that superseded claims of typicality necessary for class certification. Prior to transferring venue, the SD Ill had denied defendants motion to dismiss/strike and for more definite statements, holding that ERISA 404(c) defense was affirmative and defendant bore the burden of establishing it. P. Tussey v. ABB, Inc., No (W.D. Mo. Feb. 11, 2008) Court denied defendants Rule 12 motion to dismiss, holding that record was too thin to establish ABB s 404(c) defense and the complaint adequately pled excessive fees to Fidelity through revenue sharing. Court denied defendants motion to dismiss on statute of limitations grounds and holds that Fidelity s fiduciary status was also adequately pled. Court granted ABB s motion to dismiss claim for on disclosure of revenue sharing. Court had previously granted defendants motion to strike jury trial demand and granted plaintiffs motion for class certification. Trial scheduled for November 2, Q. Boeckman v. A.G. Edwards, Inc., No (S.D. Ill. Aug. 31, 2007) Court granted defendants motion for summary judgment in part, dismissing claims that revenue sharing is a prohibited transaction and finding that defendant had established it complied with prohibited transaction class exemption. Court allowed breach of fiduciary duty of prudence claims to proceed. Court stays ruling on class certification motion until the Seventh Circuit decides whether the 404(c) defense defeats class certification. 9

11 R. Loomis v. Exelon Corp., No (N.D. Ill. Jun. 26, 2007) Court granted class certification motion, holding that plaintiffs brought suit in a representative capacity to recover losses for a plan as a whole based on actions that took place on a plan-wide basis. Court previously granted in part, denied in part defendants motion to dismiss, striking plaintiffs investment losses claims for failure to show causal connection between fees charged to participants and investment losses, and granted defendants motion to strike jury demand. S. In re Northrop Grumman Corp. ERISA Litig., No (C.D. Cal. Feb. 26, 2007) Court granted defendants motion to dismiss with prejudice in one action for one plaintiff (who lacked standing) and without prejudice as to other defendants with leave to re-file. The other action was dismissed on May 23, 2007 because plaintiffs failed to establish that company and other defendants had/exercised fiduciary duty (no reporter citation available). Motion for class certification denied on August 6, 2007, as court held case better taken care of by administrative agencies (no reporter citation available). T. Renfro, et al. v. Unisys Corp., Fidelity Management Trust Company, et al., No. 2:07cv0298 (E.D. Pa.) Proceeding stayed pending motion to transfer venue (filed March 15, 2007). U. Nolte v. CIGNA Corp., et al., No. 2:07cv02046 (C.D. Ill.) Defendants motion for summary judgment pending, action stayed April 9, II. RETIREE MEDICAL LITIGATION: NO END IN SIGHT A. Poore et al v. Simpson Paper Company No (9th Cir. Sept. 22, 2008) The collective bargaining agreement incorporated by reference a SPD stating that the defendant would provide post retirement medical coverage to retirees from age 55 to 65. The SPD further stated that the defendant reserved the right to amend or terminate the coverage subject to negotiation with the Union. During the term of the agreement, defendant notified the retirees that it would phase out and eventually terminate the post retirement coverage. The defendant did not attempt to negotiate with the Union over the change. The retirees sued and the District Court granted summary judgment for the defendant, finding that the post retirement medical coverage had not vested and could, therefore, be terminated unilaterally by the employer. On appeal, the Ninth Circuit reviewed the language of the collective bargaining agreement and SPD and concluded that the retirees consent was not required to amend or terminate the Plan and, therefore, the benefits were not vested. Addressing the language requiring the employer to negotiate with the Union, the court held that the obligation to negotiate was not an obligation to procure the consent of the Union and, notwithstanding the language, the employer had the right to unilaterally change or terminate the coverage. The Court went on to conclude that, because the plaintiffs had no colorable right to vested benefits under the post 10

12 retirement medical plan, they lacked standing to bring claims for benefits under ERISA and the Court dismissed the ERISA claims for lack of subject matter jurisdiction. Addressing the plaintiffs claim under 301 of the Labor Management Relations Act, the Court found that the contract under which the plaintiffs were suing had expired and the plaintiffs contractual rights under the agreement had expired with the agreement; therefore, the plaintiffs had no standing to assert their claims under the LMRA. B. Tackett v MG Polymers (No )(6th Cir., April 3, 2009) The collective bargaining agreement included language designed to reduce the employer s FAS 106 liability. It provided that retirees whose age and years of service equaled or exceeded 95 will receive a full company contribution toward the cost of [medical] benefits. Retirees with less than 95 points received a reduction in the contribution of 2% for every point less than 95. The defendant announced that it was implementing premium contributions for all retirees and the retirees and their union sued. The District Court held that, because the language of the collective bargaining agreement did not confer vested benefits, it lacked subject matter jurisdiction. The District Court alternatively held, on defendants Rule 12 Motion, that Plaintiffs had failed to state a claim for vested benefits. On appeal, the 6th Circuit held that the existence of a claim under LMRA section 301 was not a jurisdictional prerequisite. The Court relied on an interpretation of Supreme Court precedent as well as notions of judicial efficiency and concluded that the statute did require a violation as a prerequisite to jurisdiction and requiring it would be judicially inefficient. While not explicitly disagreeing with the Ninth Circuit s Poore decision, the Sixth Circuit clearly came to a different conclusion on jurisdiction. The Court went on to hold that the plaintiffs had stated a claim because the language of the collective bargaining agreement providing that the employees with 95 or more points will receive a full company contribution suggests that the parties intended for the employer to cover the full cost of health care benefits [and] we find it unlikely that Plaintiff [United Steel Workers Union] would agree to [the] language if the company could unilaterally change the contribution if the Defendant s argument were accepted, the company presumably could lower the contribution to zero without violating this language. Finally, the Court found that ERISA 502(a)(1)(B) provided a basis for all of the relief sought by Plaintiffs injunction restoring their benefits and payment of back benefits therefore the ERISA 502(a)(3) claim should be dismissed unless the Plaintiffs were permitted to amend their Complaint to assert breach of fiduciary duty misrepresentation claims. C. Exelon Generation Company, LLC v Local 15 IBEW, 590 F.3d 640 (7th Cir. 2008) Employer made unilateral changes to collectively bargained retiree medical benefits. The Union filed a grievance under the collective bargaining agreement and the employer participated in the four step grievance procedure but, after participating in the selection of an arbitrator and a hearing date, the employer balked at arbitration arguing that the dispute was not subject to arbitration and the Union could not represent the retirees. These claims were asserted in a declaratory judgment action filed by the employer against the Union. The District Court concluded that the presumption of arbitrability favored an interpretation of the collective 11

13 bargaining agreement that subjected the dispute to arbitration. The Court further found that the Union could represent the seven retirees who had consented to be represented by the Union in arbitration (but not all the retirees affected by the changes) and at the consent of all retirees was not required for the Union to represent the seven retirees. On appeal, the Seventh Circuit affirmed, distinguishing its prior decision in Rosetto v Pabst Brewing Co. 128 F 3rd 538 (Seventh Cir. 1997). The Court found that the arbitration clause in Pabst covered only disputes between the company and employees, not retirees. The present agreement, on the other hand, applied broadly to all disputes arising under the agreement and, in any event, [a]ny doubt about whether [the employer] agreed to arbitrate disputes brought on behalf of retirees as resolved by application of the presumption of arbitrability. As for the employer s contention that the Union could not represent any retirees without the consent of all retirees, the Court again distinguished Pabst, holding that, in that case the retirees had filed a class action lawsuit and the Union was seeking to preempt that lawsuit through arbitration. Here no such lawsuit existed and, therefore, the Union could represent the seven (and only seven) retirees who had consented to be represented in arbitration by the Union. D. International Brotherhood of Electrical Workers, AFL-CIO Local 1245 v Citizens Telecommunications Co. of California, 599 F 3d 781 (9th Cir. 2008) The collective bargaining agreement between the parties provided medical coverage for active and retired employees and allowed the employer to make changes to the medical plan provided the changes do not reduce the overall level of benefits. The collective bargaining agreement stated that any dispute over whether a reduction in the overall level of benefits occurred would be subject to expedited arbitration. The employer announced that it was terminating retiree medical coverage for any retiree who was eligible for Medicare. The Union filed two grievances, one on behalf of active employees (future retirees) and the second under the expedited arbitration provision contending that the termination of coverage for Medicare eligible retirees resulted in an overall reduction in medical benefits. The employer refused to arbitrate the second grievance, contending that it was pursued solely on behalf of existing retirees and the Union could not represent the retirees without their consent -- the same issued raised in Exelon. The District Court held that the weight of authority addressing the question of retiree consent to Union representation endorsed the rule requiring consent. However, the District Court declined to adopt the rule and granted the Union s motion to compel arbitration. On appeal, the Ninth Circuit noted that the collective bargaining agreement clearly imposed a duty on the employer to arbitrate the question of whether an overall reduction in the medical benefits had occurred. While the general rule required consent of the retirees, the rule ignores the fact that changes in post retirement medical benefits also affect active employees, who may become eligible for the reduced benefits in the future. Based upon this funding, the Court held that consent of the retirees was unnecessary and that arbitration should be required. The Court also rejected defendant s contention that the Union lacked standing because where, as here, the Union has associational standing to bring a suit to compel arbitration on behalf of its current members, we know of no rule depriving it of standing solely because it may lack standing to bring suit on behalf of non-members. 12

14 E. Cole v ArvinMeritor, Inc., 599F. 3d 1064 (6th Cir. 2008) The parties in the litigation were also parties to a collective bargaining agreement providing for post retirement medical benefits. Following the expiration of the collective bargaining agreement the employer reduced the level of medical benefits provided and then announced that it would terminate the benefits altogether. The Union and retirees filed suit seeking an injunction against reduction or termination of the post retirement coverage. The District Court granted a preliminary and permanent injunction, then entered summary judgment for the plaintiffs holding that language in the collective bargaining agreement stating that medical benefits shall be continued after retirement vested the benefits. On appeal the Sixth Circuit recited, as it usually does, that retiree medical benefits vest only if the parties intended to vest the benefits and the collective bargaining agreements so provide. The Court then noted that in Sixth Circuit there is an inference in favor of vesting only if the context and other available evidence indicate an intent to vest. The Court looked first to the collective bargaining agreement and found that the language stating that coverage would be continued after retirement provided that suitable arrangement can be made with the Carrier(s)... unambiguously promises lifetime health benefits. The Court rejected the defendants argument that the obligation to provide retiree medical benefits had terminated because the collective bargaining agreement provided that this [retiree medical] agreement and [retiree medical] Program has modified and supplemented... shall continue in effect until the termination of the Collective Bargaining Agreement of which this is a part. The Court found that the durational clause did not mention the retiree medical benefits with sufficient specificity to evince an intent that they would terminate at expiration of the collective bargaining agreement. Finally, the Court noted that the language vesting the benefits was unambiguous and, therefore, the Court need not consider extrinsic evidence on that question. III. EMPLOYER STOCK DROP CLAIMS: THE LATEST AND GREATEST A. Bunch v. W.R. Grace & Co. No (1st Cir. Jan. 29, 2009) W.R. Grace offered its own stock under its 401(k) plan and engaged State Street Bank & Trust Company as independent fiduciary to monitor the stock. Like many large manufactures, Grace fell victim to asbestos litigation and was driven into bankruptcy. From September 1999 to the bankruptcy filing in April 2001, Grace s stock dropped from $19 per share to $1.50 per share. During bankruptcy the stock stabilized, trading between $2 and $5 per share. In December 2003 State Street was appointed and proceeded to promptly obtain a valuation opinion from Duff & Phelps, which concluded that the midpoint of the expected range of value for the stock was $1.88 per share. State Street proceeded to sell the stock for between $2.86 and $3.50 per share. The Plaintiff brought a class action lawsuit against Grace, State Street, and others alleging that the only prudent course for the defendants to follow was to hold the stock and allow the efficient market to run its course. More specifically, the Plaintiff alleged that the defendants had no business assigning a different value to the Grace stock than the market assigned. This is the opposite of what plaintiffs often argue in company stock actions, when they 13

15 sue fiduciaries for failing to prudently and loyally manage the plan s assets as the company s stock collapses. The District Court accepted the notion that the stock traded on an efficient market but held that fact nondispositive. Instead the Court found that the real question is whether the defendants took into account all relevant information in making their decisions and concluded that State Street had done so and, therefore, had acted prudently. On appeal the First Circuit affirmed, holding that the efficient market is not the standard by which State Street s actions are to be judged. The Court went on to find that the actions of the defendants were dispositive and concluded that Grace s action in hiring State Street, State Street s procurement of extensive expert advice, and it s consideration ad nauseam [of] the pros and cons of retaining or selling the stock discharged the duty of prudence. The Court rejected Plaintiffs argument that the presumption of prudence, often applied to the decisions of fiduciaries to hold employer stock, should be applied to effectively establish a presumption against selling stock, holding that it would effectively lead us to judge a fiduciary s actions in hindsight. B. In Re Merck & Co., Inc. Securities Derivative & ERISA Litigation, MDL No (SRC) (D. N.J. Feb. 9, 2009) The court granted in part, denied in part, plaintiffs motion for class certification in this company stock case. The court granted class certification of plaintiffs prudence claims under Rule 23(b)(1)(A) & (B), though excluding from the class definition those who executed postseparation settlement agreements that released their claims under ERISA. In granting certification of the prudence claims under Rule 23(b)(1)(B), the court noted: [Rule 23(b)(1)(B)] requires that individual adjudications of the prudence claim be dispositive of the interests of the other members or substantially impair or impede the ability of other members to protect their interests. This is true for this case. ERISA 409(a) expressly empowers this Court to provide relief by removing a fiduciary. If the prudence claims proceeded individually, and one court removed a Plan fiduciary, this would be, as a practical matter, dispositive of the interests of the other Plan members in that particular regard. And in certifying the prudence claims under Rule 23(b)(1)(A), the court rejected defendants argument that certification not appropriate under this subsection when primary relief sought is money damages, and also rejects arguments based on ERISA 404(c), intra-class conflicts, and differences related to statute of limitations defenses. The court denied class certification of plaintiffs communications claims on the ground that such claims affecting defined contribution plans under ERISA 502(a)(2) require individualized determinations and therefore are not conducive to efficient litigation on a classwide basis. Plaintiffs communications claims turned on whether the defendant made misrepresentations to 401(k) plan participants that induced them to invest in company stock. In seeking class certification, plaintiffs argued that all class members claims met the typicality requirement of Rule 23(a)(2) because the aggrieved party was the plan, rendering individual 14

16 reliance on the misrepresentations unnecessary. Citing LaRue, Judge Chesler noted that the Supreme Court rejected the proposition that only a plan, as opposed to an individual, could be an aggrieved party under 502(a)(2). Moreover, the Judge noted that, after LaRue, suits for losses to defined contribution plans require proof of individual losses. Because the communications at issue occurred between the fiduciaries and the individual participants and because each participant was required to prove detrimental reliance, the alleged fiduciary breaches could not have uniformly affected the potential class members. As such, plaintiffs failed to satisfy the typicality requirements under Rule 23 in regards to their communications claim. C. In re Huntington Bancshares ERISA Litig., No. 2:08-cv-0165 (S.D. Ohio Feb. 9, 2009) Court dismissed ERISA company stock claim under Rule 12(b)(6), holding that plaintiffs allegation that Huntington s merger with Sky Financial Group, Inc., which greatly increased Huntington s risk of loss by subjecting Huntington to $1.5 billion of subprime exposure, did not state a claim under ERISA. Case has been appealed to the Sixth Circuit Court of Appeals. D. In Re Pfizer Inc. ERISA Litigation, No. 04 Civ (LTS) (S.D.N.Y. March 20, 2009) Normal company stock allegations Defendants knew that Pfizer s stock was artificially inflated because of the cardiovascular risks created by Celebrex and Bextra before disclosure to the market and defendants should have acted on this knowledge by removing Pfizer stock from Pfizer s 401(k) plan. The Court denies defendants motion to dismiss, finding that: address[ing] the scope or the applicability of the Moench presumption [at the] pleading stage would be inappropriate... The Court further finds that, even if the consideration of such a presumption were appropriate at this stage, Plaintiffs have alleged sufficient facts in the Complaint to render plausible their causes of action [because] Plaintiffs cite the substantial losses the ERISA Plan suffered as evidence that Defendants should have been aware, or put on inquiry notice, of the serious problems associated with the Company Stock [and] Defendants knew or should have known of risky business and marketing practices with respect to Celebrex and Bextra that artificially inflated the value of Company Stock... E. In Re Avon Products, Inc. Securities Litigation, No. 05 Civ (MHD) (S.D.N.Y. March 3, 2009) (Magistrate Report and Recommendation), Adopted In Re Avon Products, Inc. Securities Litigation, (Id.) (March 30, 2009) Normal company stock allegations defendants allegedly knew that the price of Avon stock held in the 401(k) plan was inflated as evidenced by a series of negative earnings and business condition announcements and should have acted in advance of the ensuing decline in stock price to remove Avon stock from the 401(k) plan. On defendants Rule 12(b)(6) motion, the Magistrate recommends that the complaint be dismissed based upon the Plaintiffs failure to adequately plead that Avon was in the grip of... a long term and serious slide [stock drop of 15

17 24%]... compelling the fiduciaries to deprive the Plan participants of the Avon-investment option... Plaintiffs identify no long-term stastemic crises in the company s operations... Thus, the Court applies the Moench presumption of prudence on Defendants Rule 12 Motion and holds the plaintiffs failed to overcome it. F. In Re Tyco International Ltd Multidistrict Litigation, MDL No PB (D. N.H. April 3, 2009) In response to allegations concerning artificial/fraudulent inflation in the value of employer securities and associated breach of fiduciary duties for retaining employer securities in a 401(k) Plan, the defendants argued that they were protected by ERISA 404(c) because the participants independently decided to invest their funds in Tyco stock. The Court disagrees with Langbecker and John Deere and holds the DOL s regulations indicating that fiduciaries are responsible for the selection of plan investment options reflect a reasonable interpretation of the statute. G. In re First American Corp. ERISA Litig., No. SACV JVS (C.D. Cal. June 10, 2009) In company stock case, court denied class certification under Rule 23(b)(1)(A), holding that Zinser v. Accufix, 253 F.3d 1180, as amended, 273 F.3d 1266 (9th Cir. 2001), a non-erisa case, stands for the proposition that Rule 23(b)(1)(A) cannot be used in an action for damages. Additionally, the court denied certification under Rule 23(b)(1)(B), holding that there is no danger that one plaintiff s claim will affect the rights of others because of the Supreme Court s decision in LaRue. According to the district court, LaRue says that one can sue for one s own losses, albeit through the surrogate of suing for the plan s losses. Therefore, holds the district judge, there is no danger that participant A s case will adversely affect Participant B. H. Brieger v. Tellabs, Inc. No. 06 C 1882 (N.D. Ill. June 26, 2009) Following bench trial, after finding that the plan documents required Tellabs stock, court found that plaintiffs failed to establish by a preponderance of evidence that defendants breached their duty of prudence (both procedural and substantive). The court also dismissed the other claims (communications, duty of loyalty, and duty to monitor), and also held that even if plaintiffs had established their claims, defendants would still be entitled to judgment because this lawsuit was not filed within the three year status of limitations period. In this case, Tellabs stock fell from $63.19 to $6.58 during the Class Period, though court noted that was never in danger of insolvency or bankruptcy. I. Lingis v. Motorola, Inc., No. 03 C 5044 (N.D. Ill. June 17, 2009) Court grants defendants motion for summary judgment. Court follows Hecker rather than the DOL s interpretation of its own regulation and holds that ERISA 404(c) is a defense to claims that an investment option is imprudent. Even if 404(c) did not apply, the court just does not see anything imprudent about Motorola stock. Fiduciaries cannot be expected to jump in and out of company stock. The only circumstance in which moving in and out of company stock might be prudent would be impending collapse or other extraordinary circumstances. 16

18 In this case, the stock fell from $30 to $15 a share during the class period, due in large measure to a failed transaction with a Turkish company, Telsim. J. In re CSC ERISA Litig., No (C.D. Cal. July 13, 2009) Court grants Defendants motion to dismiss in company stock case involving backdating options, where stock temporarily declined 12% following the company s announcement regarding an SEC investigation, and where plaintiffs did not present evidence that the entire 12% drop was caused by the announcement. K. Shanehchian v. Macy s Inc., No. 1:07-CV (S.D. Ohio August 14, 2009) Court rejected defendants attempt to dismiss the case on a Rule 12(b)(6) motion. Court held that plaintiff s allegations that despite Macy s difficulties in integrating May Department stores, Macy s continued to reassure the market and plan participants that the merger with May was a success, which resulted in an artificial inflation of the company stock was sufficient to rebut the Moench presumption of prudence. Court also rejected Macy s contention that plaintiff s failure to disclose claim would have required defendants to violate securities insider trading rules. The court held that ERISA plan fiduciaries cannot use the securities laws to shield themselves from potential liability under ERISA. IV. DEPARTMENT OF LABOR ASSET VALUATION ISSUES A. Chao v. Couturier The Secretary of Labor filed suit in November 2008 alleging that various defendants violated their fiduciary duties to an ESOP in 2004 by failing to properly value compensation granted to a defendant executive and in a 2007 sale of the ESOP s assets, which the complaint alleged was structured to only pay the ESOP s participants after individual defendants were indemnified in the event they were sued for, among other things, fiduciary breach. In February 2009, the court denied the defendant executive s motion to transfer venue and alternative motion to dismiss based on statute of limitations grounds because a related case, Johnson v. Couturier, was filed in October 2005 and gave the Secretary notice of possible ERISA claims more than three years before they filed suit the court held that the defendant executive was impermissibly forum-shopping and that the Johnson complaint did not give the Secretary actual knowledge to start the clock on the statute of limitations. In June 2009, the court denied defendant David Johanson and his firm s motion to dismiss, finding that claims against both were timely, that Johanson s firm could be sued under ERISA section 502(a)(5) for disgorgement of fees paid out of corporate assets, that plaintiffs could pursue a claim under ERISA section 502(a)(5) to enjoin Johanson and his firm from fiduciaries or service providers to the plan, and that Johanson can be held liable for a failure to monitor under ERISA. In August 2009, Johanson and his firm petitioned the Ninth Circuit for a writ of mandamus to grant the firm s motion to dismiss and to dismiss the Secretary s demand for a broad permanent injunction. 17