Alert February 01, 2011

Seventh Circuit Vacates Class Certification in Two 401(k) Excessive Fee Cases and Affirms Dismissal in a Consolidated 401(k) Stock Drop Case

On January 21, 2010, a panel of the United States Court of Appeals for the Seventh Circuit issued two important decisions, one in the current wave of 401(k) fee cases, and another in the long-standing genre of retirement plan stock drop cases.  Each decision will likely impact future jurisprudence in these areas.

Class Decertification in Fee Cases

In one decision, the court addressed interlocutory appeals to decisions certifying classes in two excessive fee cases against large plan sponsors and the alleged fiduciaries of their 401(k) plans.  One plan had over 70,000 participants, the other over 180,000.  In each case, the district court had certified classes that included all current, former, and future participants and beneficiaries of those plans (excluding any defendant).  The court described the claims in each case similarly, that defendants:  (i) caused the plans to pay allegedly excessive fees, including revenue sharing payments; (ii) maintained allegedly imprudent investment options; and (iii) concealed material information from participants about the plans. 

The Seventh Circuit began its class certification analysis explaining that “[t]he propriety of class treatment . . . will turn on the circumstances of each case.”  The court first addressed the temporal aspect of the certified classes, finding that it was “breathtaking in its scope” where “[a]nyone, in the history of Time, who was ever a participant in the Boeing Plan, or who in the future may become a participant in the Boeing Plan, is swept into the class.”  The court next focused on plaintiffs’ allegations that certain funds made available to the plan were imprudent.  It noted that many past participants and unknown future participants may have never held precisely the same funds as named plaintiffs.  As such, the named plaintiffs could not meet the typicality and adequacy requirements for class certification under Federal Rule of Civil Procedure 23(a).  The court explained: “it seems that a class representative in a defined-contribution case would at a minimum need to have invested in the same funds as the class members” because “there must be a congruence between the investments held by the named plaintiff and those held by members of the class he or she wishes to represent.”  In part, the lack of congruence creates an impermissible conflict, where “the alleged conduct harmed some participants and helped others.”

As such, the court vacated the decisions certifying these classes and remanded for further proceedings.  The cases are Spano, et al v. The Boeing Co., et al, No. 09-3001 (7th Cir., Jan. 21, 2011) and Beesley, et al v. International Paper Co., et al, No. 09-3018 (7th Cir., Jan. 21, 2011).  

Dismissal in Stock Drop Cases

In its other decision, the court addressed final judgments in favor of defendants in two cases challenging the decision by a 401(k) plan sponsor and the alleged fiduciaries of its 401(k) plan to include a company stock fund as a plan investment option.  In this litigation, the district court had granted a motion to dismiss as to one plaintiffs’ claim, and summary judgment against the remaining plaintiffs, where participants challenged the decision to maintain a company stock fund.  The price of the challenged stock declined over 50% during the roughly one year class period, based largely on a single large transaction that, in the court’s words, “turned out very badly.”  Like many such stock drop suits, the plaintiffs alleged that defendants (i) improperly allowed the stock fund to be offered to the plan; (ii) misrepresented or failed adequately to disclose the transaction at issue; and (iii) failed to appoint, monitor, and provide adequate information to other plan fiduciaries.

The court first addressed an argument addressed to the dismissal of one plaintiff due to a release he signed which included a waiver of all ERISA claims; a release which expressly carved out “any claims for benefits” under the plans.  The court held that this release barred all ERISA claims for breach of fiduciary duty, because plaintiff received all “benefits that had already vested” when he signed the release.  

Turning to the merits of the claims brought by the non-releasing plaintiffs, the court began with an examination of the safe harbor created in ERISA Section 404(c), which relieves fiduciaries of liability where the loss results from a participant’s or beneficiary’s exercise of control.  The court agreed with the position taken by the U.S. Department of Labor that the safe-harbor would not apply to the “core decision” as to which investments will be presented to participants.  Instead, the court held that the safe harbor will apply to decisions over which the fiduciary has no control, such as participant allocation decisions. 

That said, the court held that by offering at various times three or eight other investment options, defendants allowed the plan to be adequately diversified such that “no participant’s retirement portfolio could be held hostage” to the fortunes of the company stock fund.  It also held that the stock drop at issue was not so significant as to demonstrate that the company was facing “imminent collapse” or that the stock was “so risky or worthless” that it had to be immediately withdrawn from the plan menu.  As such, regardless of the Section 404(c) defense, the court held that the lower court correctly dismissed the imprudence claims.      

The court then addressed the disclosure and monitoring claims.  As to disclosure, it held that allegations of a negligent misrepresentation were insufficient to make out a claim.  In the absence of an intentionally misleading statement or a material omission where silence may be construed as misleading, no claim is established.  The court explained that omitting information about an allegedly bad business decision is not enough to state a violation of ERISA.  As to the monitoring claim, the court explained that every board member is not required “to review all business decisions of Plan administrators,” and that the appointing fiduciaries did not breach any duties as they were not shown to have “pass[ed] the buck to another person and then turn[ed] a blind eye.”   

As such, the court affirmed judgment for defendants.  The cases are Howell v. Motorola, Inc., et al, No. 07-3837 (7th Cir., Jan. 21, 2011) and Lingis, et al v. Dorazil, et al, No. 09-2796 (7th Cir., Jan. 21, 2011).