The end of 2004 brought an important development in the ERISA employer stock litigation arena. A federal appellate court granted a discretionary petition on December 29, 2004 to consider some critical questions, including whether such cases may be maintained as class actions under Fed.R.Civ. P. 23. In the case of In re Electronic Data Systems Corp. ERISA Litig, Case No. 6:03-MD-1512 (filed March 14, 2003, E.D.Tex), plaintiffs filed a class action against EDS after its stock fell from 36.46 to $17.20 a share in a day following an earnings warning. Plaintiffs asserted claims that it was imprudent for the fiduciaries to permit participants to invest any funds in EDS stock and that the fiduciaries misrepresented certain information regarding the company and its stock to participants.
Following the district court’s denial of defendants’ motions to dismiss, plaintiffs moved for class certification. The district court granted the motion in part, holding that the prudence claims could be maintained by the plan as a class action, but refusing to certify the misrepresentation claims. The district court reasoned that the misrepresentation claims could not be certified because the class representatives lacked commonality and typicality. It also reasoned that the investments were made by investors in their individual capacity and that section 404 of ERISA, 29 U.S.C. sec. 1104(c) provided fiduciaries with a defense against such claims arising from participants’ investment election.
Defendants filed a petition to review the district court’s decision on class certification and the United States Court of Appeals for the Fifth Circuit granted the discretionary petition on December 29, 2004. EDS is arguing that the claims are not certifiable under Rule 23 because they are not held by the plan, but are really asserted by participants. If so, defendants argue that the claims are for individualized relief under section 502(a)(3) of ERISA, 29 U.S.C. sec 1102(a)(3) and that section does not allow for monetary damages, only equitable relief. Defendants also assert that the class representatives continued to invest their retirement savings into EDS stock, which has somewhat recovered and are therefore estopped from complaining about the fiduciaries conduct.
Courts have recently struggled with ERISA’s civil enforcement provisions and plaintiffs’ ability to recover for such claims under them. A district court in New Jersey held that plaintiffs could not recover damages for defendants’ alleged breaches of fiduciary duty because such recovery was really for individual participants rather than the plan. In re Schering-Plough Corp. ERISA Litig., 2004 WL 1774760 at 6 (D.N.J. June 28, 2004). Most courts have held that plaintiffs are seeking such recovery for the plan which is authorized to file actions for breach of fiduciary duty and recover damages on such claims. The fact that the Fifth Circuit granted discretionary petition to review these claims is extremely noteworthy. If the Fifth Circuit, in fact, decides the case, it will shed considerable light on whether these claims may be maintained as class actions.
Read more about employer stock litigation at the Jenner & Block website entitled “ERISA Fiduciary and Company Stock Update Center.”