Alert January 20, 2011

Federal Circuit Court Affirms Dismissal of Stock Drop Suit

In Brown v. Medtronic, Inc., et al., Case No. 09-2524 (8th Cir. Dec. 13, 2010), the U.S. Court of Appeals for the Eighth Circuit affirmed dismissal of a putative class action complaint filed by a former participant in an employee stock ownership plan sponsored by a medical device manufacturer (the “Sponsor”).

The complaint, filed against the Sponsor, several of its directors, a retirement plan committee and various other alleged fiduciaries, asserted that the defendants breached ERISA fiduciary duties by imprudently continuing to invest in Sponsor stock after receipt of adverse information regarding the performance of certain of the Sponsor’s medical products, and by making material misrepresentations and nondisclosures concerning those products. The plaintiff further alleged that the plan purchased Sponsor stock at artificially inflated prices, and that the stock price dropped following The Wall Street Journal’s publication of an article regarding the product issues.

In the decision, the U.S. District Court for the District of Minnesota looked at the dates of share-price changes and the dates of the plaintiff’s purchases and sales of shares and determined that plaintiff benefited from any artificial price inflation allegedly caused by the defendants’ actions or failures to act. Because the plaintiff had suffered no cognizable injury fairly traceable to any of the defendants’ alleged breaches of duty, the district court dismissed the complaint on the ground that the plaintiff lacked constitutional standing. On appeal, the Eighth Circuit affirmed the dismissal, but on slightly different grounds.

The appellate court agreed with the district court that the plaintiff pleaded no injury fairly traceable to any alleged breach of duty with respect to one of the Sponsor’s product lines where, by the plaintiff’s own allegations, the negative information about that product line did not reach the public until after the plaintiff had liquidated his plan account. Accordingly, the plaintiff had not realized any share price inflation caused by the allegedly improper promotion of that product line. In so holding, the appellate court agreed with the district court that a plaintiff must allege a “net loss” in investment value in order to maintain suit. Under a net loss theory, a plan participant has suffered no cognizable injury if the participant sold shares at an inflated price and, therefore, was a net beneficiary of the inflated share price. Here, where the alleged breach “actually conferred a financial benefit,” the plaintiff had pleaded no net loss, and any “abstract injury” he asserted was insufficient to give rise to standing because it could not be redressed by the court.

While other of the plaintiff’s claims survived the standing challenge, the Eighth Circuit ultimately dismissed the case in its entirety, concluding that the complaint failed to state a claim for relief where the plaintiff made no plausible allegation that the Sponsor stock became an imprudent investment merely because the Sponsor received adverse information regarding the performance of certain of its products. In dismissing the complaint, the court declined to reach the question of whether the Eighth Circuit should adopt the presumption applied by the court in Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995) that investments in company stock are entitled to a rebuttable presumption of prudence. Noting that several other circuits had adopted the Moench presumption, and that no circuit has expressly rejected the presumption on its merits, the Eighth Circuit nonetheless concluded that it did not need to reach the question of whether plan fiduciaries were entitled to any presumption of prudence where the plaintiff at bar failed to meet his threshold burden of stating a plausible imprudence claim. This contrasts with a decision by the Ninth Circuit on December 2, 2010, denying a petition for rehearing and rehearing en banc in Quan v. Computer Sciences Corp., et al, 623 F.3d 870 (9th Cir. 2010) over objection by the Department of Labor and other amici. In Quan, the Ninth Circuit joined the Fifth and Sixth Circuits in expressly adopting the Moench presumption.