Michael Perrone v. Johnson & Johnson ( 2022 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 21-1885
_____________
MICHAEL PERRONE; TOM TARANTINO; ROCHELLE
ROSEN, as participants in and on behalf of the Johnson &
Johnson Savings Plan, and on behalf of a class of all others
who are similarly situated,
Appellants
v.
JOHNSON & JOHNSON; PETER FASOLO; DOMINIC J.
CARUSO; JOHN DOES 1-20
__________
On Appeal from the United States District Court
For the District of New Jersey
(D.C. Nos. 3-19-cv-00923 and 3-19-cv-01115)
District Judge: Honorable Freda L. Wolfson
_______________
Argued
January 20, 2022
Before: JORDAN, RESTREPO and SMITH, Circuit Judges
(Filed: September 7, 2022)
_______________
Kyle G. Bates
James A. Bloom
Todd Schneider
Schneider Wallace Cottrell Konecky
2000 Powell Street – Suite 1400
Emeryville, CA 94608
Samuel E. Bonderoff [ARGUED]
Jacob H. Zamansky
Zamansky
50 Broadway – 32nd Floor
New York, NY 10004
Todd S. Collins
Ellen T. Noteware
Berger Montague
1818 Market Street – Suite 3600
Philadelphia, PA 19103
Joseph J. DePalma
Lite DePalma Greenberg & Afanador
570 Broad Street – Suite 1201
Newark, NJ 07201
Counsel for Appellants
2
Mark B. Blocker [ARGUED]
Christopher Y. Lee
Abigail Molitor
Kristen R. Seeger
Sidley Austin
One South Dearborn Street
Chicago, IL 60603
Keith J. Miller
Robinson Miller
110 Edison Place
19th Floor, Suite 302
Newark, NJ 07102
Counsel for Appellee
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
Johnson & Johnson (“J&J”) offers an Employee Stock
Ownership Plan (“ESOP”) as an investment option within its
retirement savings plans. The ESOP invests solely in J&J
stock, which declined in price following a news report
accusing J&J of concealing that its popular baby powder was
contaminated with asbestos. J&J denied both that its product
was contaminated and that it had concealed anything about the
product. What’s important here, however, is the stock market
ramifications of the allegation. The Plaintiffs, J&J employees
who participated in the ESOP, allege that the ESOP’s
administrators, who are senior officers of J&J, violated their
fiduciary duties by failing to protect the ESOP’s beneficiaries
3
from a stock price drop. According to the Plaintiffs, those
fiduciaries, being corporate insiders, should have seen the price
drop coming because of the baby powder controversy.
Specifically, the Plaintiffs allege that the corporate-insider
fiduciaries violated the duty of prudence imposed on them by
the Employee Retirement Income Security Act (“ERISA”), 29
U.S.C. §§ 1002-1003.
In Fifth Third Bancorp v. Dudenhoeffer, the Supreme
Court held that a plaintiff seeking to bring such a claim must
plausibly allege “an alternative action that the defendant could
have taken that would have been consistent with the securities
laws,” and, further, “that a prudent fiduciary in the same
circumstances would not have viewed [the proposed
alternative action] as more likely to harm the fund than to help
it.” 573 U.S. 409, 428 (2014). The Plaintiffs here propose two
alternative actions that they say the Defendants should have
taken before the stock price dropped. First, they say that the
Defendants could have used their corporate powers to make
public disclosures that would have corrected J&J’s artificially
high stock price earlier rather than later. Second, they say that
the fiduciaries could have stopped investing in J&J stock and
simply held onto all ESOP contributions as cash.
The District Court rejected those alternative actions as
failing the Dudenhoeffer test, and we agree. A reasonable
fiduciary in the Defendants’ circumstances could readily view
corrective disclosures or cash holdings as being likely to do
more harm than good to the ESOP, particularly given the
uncertainty about J&J’s future liabilities and the future
movement of its stock price. We will therefore affirm the
dismissal of the Plaintiffs’ complaint.
4
I. BACKGROUND1
A. Baby Powder, Talc, and Asbestos
J&J sells hundreds of products in a variety of categories,
but perhaps none is better known than Johnson’s Baby Powder.
Since 1894, J&J has sold and marketed its baby powder for
many uses. The main ingredient in the baby powder is talc, an
underground mineral that is extracted by mining. The problem
with mining talc, however, is that talc deposits can be located
dangerously close to a different and notorious mineral:
asbestos. Asbestos is a carcinogen linked to ovarian cancer and
mesothelioma, among other serious ailments. Some
governmental and non-governmental organizations have
suggested that talc may be contaminated with asbestos and
have warned of a link between talc usage and ovarian cancer.
The Plaintiffs assert that, for decades, J&J has known
that Johnson’s Baby Powder might contain asbestos.
According to the Plaintiffs, J&J has repeatedly suppressed
unfavorable research about asbestos in talc, disregarded
internal company concerns about asbestos in its baby powder,
1
The following background section is taken from the
allegations in the Plaintiffs’ amended class action complaint.
When reviewing a district court’s decision on a motion to
dismiss, we accept all well-pleaded allegations as true and
draw all reasonable inferences in favor of the non-moving
party. Geness v. Admin. Off. of Pa. Cts., 974 F.3d 263, 269 (3d
Cir. 2020).
5
and undermined efforts to regulate asbestos in talc products
generally.
Over the years, thousands of plaintiffs have filed
products liability lawsuits alleging that J&J’s talc products
caused cancer. Those plaintiffs have had mixed success. J&J
has always denied liability and publicly affirmed that its
products are asbestos-free and safe for everyday use. In its
Form 10-Ks for fiscal years 2012 through 2016, it professed its
“commit[ment] to investing in research and development with
the aim of delivering high quality and innovative products,”
and it asserted that it had “substantial defenses” to talc-related
products liability claims. (App. at 65-77.) In December 2016,
J&J proclaimed on its website that it continued to use talc in its
baby powder “because decades of science have reaffirmed its
safety.” (App. at 74.) In late 2017, J&J spokespeople told the
press that its talc products “are, and always have been, free of
asbestos, based on decades of monitoring, testing[,] and
regulation,” and that Johnson’s Baby Powder “does not contain
asbestos or cause mesothelioma or ovarian cancer[.]” (App. at
77.) As recently as January 2019, J&J touted its talc as being
“carefully selected, processed[,] and tested to ensure that [it] is
asbestos free, as confirmed by regular testing conducted since
the 1970s.” (App. at 78.)
Market pressure on J&J increased on December 14,
2018, when Reuters published an investigative report titled
J&J Knew For Decades That Asbestos Lurked In Its Baby
Powder. The article asserted that J&J knew but concealed that
the talc in its baby powder likely contained asbestos. It also
accused J&J of attempting to influence government regulation
and scientific research on the issue. The article was picked up
by other news sources and received wide distribution. J&J’s
6
stock price “declined more than 10% following the Reuters
report[.]” (App. at 52.)2
B. The Products Liability Action and the
Securities Fraud Action
The accusations about J&J’s baby powder led to two
significant lawsuits that, like this one, are pending in the U.S.
District Court for the District of New Jersey. The first, which
we will call the “Products Liability Action,” is actually fifty-
four different actions centralized from at least twenty-three
district courts under the federal rules permitting multi-district
litigation. 28 U.S.C. § 1407; In re Johnson & Johnson Talcum
Powder Prod. Mktg., Sales Pracs. & Prod. Liab. Litig., 220 F.
Supp. 3d 1356, 1357 (J.P.M.L. 2016). All of those cases
involve claims that asbestos in J&J’s talc products caused
personal injuries. Id. The MDL proceeded to discovery after
J&J filed an answer to the amended master complaint in April
2017.
The second case, the “Securities Fraud Action,” is a
putative class action alleging that J&J and its senior executive
officers violated federal securities disclosure laws, based on
many of the same facts described above. Hall v. Johnson &
Johnson, 2019 WL 7207491, at *1-8 (D.N.J. Dec. 27, 2019).
J&J moved to dismiss it, but the District Court denied that
motion in part in December 2019. Id. at *30.
2
The complaint does not provide any timeframe to give
clarity to that assertion.
7
C. The ERISA Plans
Also in 2019, the Plaintiffs here filed their proposed
class action.3 Rather than bring a products liability or
securities fraud claim, they assert that the Defendants are liable
for a third type of legal violation: a breach of fiduciary duties
under ERISA.
J&J sponsors several defined contribution plans into
which its employees can invest a portion of their salaries for
retirement.4 Those defined contribution plans include the
Johnson & Johnson Savings Plan (the “Savings Plan”), the
Johnson & Johnson Savings Plan for Union Represented
Employees, and the Johnson & Johnson Retirement Savings
Plan (collectively, the “Plans”). The Plans are all governed by
the provisions of ERISA. 29 U.S.C. §§ 1002-1003. The Plans’
fiduciaries – the individual Defendants here – constitute J&J’s
3
Plaintiff Michael Perrone filed a complaint on
January 22, 2019. Plaintiffs Tom Tarantino and Rochelle
Rosen filed a complaint on January 25, 2019. The two
complaints asserted substantively identical claims, and they
were consolidated on June 20, 2019.
4
A defined contribution plan, as defined by ERISA, is
“a pension plan which provides for an individual account for
each participant and for benefits based solely upon the amount
contributed to the participant’s account, and any income,
expenses, gains and losses, and any forfeitures of accounts of
other participants which may be allocated to such participant's
account.” 29 U.S.C. § 1002(34).
8
Pension and Benefits Committee, which has general authority
over the management and administration of the Plans.
Each of the Plans includes an investment option
allowing employees to place their contributions in an ESOP,
which invests exclusively in J&J stock. The ESOP
additionally includes a small cash buffer, which provides the
cash necessary for daily liquidity. The Plaintiffs here were
participants in the Savings Plan and invested in J&J stock
through the ESOP.5 In particular, they participated in the
Savings Plan during the proposed Class Period, namely,
between April 11, 2017 (when discovery commenced in the
Products Liability Action) and December 14, 2018 (when the
Reuters report allegedly drove down the J&J stock price).
D. The District Court’s Decisions
The Plaintiffs’ consolidated class action complaint
alleged that the members of the Pension and Benefits
Committee breached their fiduciary duties by not acting
prudently in the administration of the Plans. More specifically,
according to the Plaintiffs, those fiduciaries knew or should
have known that J&J was concealing the truth about its
dangerous talc products and that J&J’s stock price was
therefore overvalued, yet they continued holding and
purchasing J&J stock. The Plaintiffs asserted that the
Defendants should have instead protected the ESOP
5
The Plaintiffs were participants in the Savings Plan,
but they purport to bring this class action on behalf of
participants in all Plans.
9
participants from the inevitable stock price decline by issuing
corrective public disclosures.
The Defendants moved to dismiss, and the District
Court granted their motion. Applying the Dudenhoeffer
standard, the Court held that the Plaintiffs had not adequately
pleaded a viable alternative action that the individual
Defendants, as ERISA fiduciaries, could have taken, because
they could only have issued corrective disclosures in their
corporate capacities and not in their ERISA-fiduciary
capacities. It also concluded that the Plaintiffs failed to allege
particularized facts to support their argument that earlier
disclosure of the potential asbestos liabilities would have been
less harmful to the ESOP and its participants than the later
disclosure that occurred. The Court accordingly dismissed the
ERISA claims, but it did so without prejudice, allowing the
Plaintiffs an opportunity to allege other actions that the
individual Defendants could have taken.
In June 2020, the Plaintiffs filed an amended class
action complaint that largely duplicated the prior one. They
reiterated their theory that the ERISA fiduciaries should have
issued corrective disclosures, but they added reasons for why
the Defendants could have issued disclosures in their capacities
as ERISA fiduciaries. The Plaintiffs also presented another
alternative: they said that the fiduciaries should have protected
the ESOP participants from the J&J stock price decline by
directing new contributions to the ESOP’s cash buffer instead
of buying overvalued J&J stock.
The Defendants again moved to dismiss, and the
District Court granted their motion. It was still unpersuaded
by the Plaintiffs’ corrective-disclosure theory, concluding, as
10
before, that the Defendants could only have issued corrective
disclosures in their corporate capacities. It also rejected both
the corrective-disclosure theory and the cash-buffer theory on
the ground that it was not clear either alternative action would
have avoided doing more harm than good to the ESOP. The
Plaintiffs have timely appealed.
II. DISCUSSION6
ERISA requires fiduciaries to “discharge [their] duties
with respect to a plan … with the care, skill, prudence, and
diligence under the circumstances then prevailing that a
prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like
character and with like aims.” 29 U.S.C. § 1104(a)(1)(B).
Congress has encouraged ESOPs as a means for employees to
invest in the employer’s securities. 29 U.S.C. § 1107(d)(6);
Dudenhoeffer, 573 U.S. at 416. Due to the unique purpose and
composition of ESOPs, ERISA exempts ESOPs from some
obligations that are part of the general duty of prudence. For
example, plan fiduciaries need not diversify assets in an ESOP.
29 U.S.C. § 1104(a)(2). Based on those exemptions, we and
other circuit courts had at one time concluded that the
fiduciaries of an ESOP should be afforded a presumption of
prudence. Moench v. Robertson, 62 F.3d 553, 571 (3d Cir.
1995).
6
The District Court had jurisdiction under 28 U.S.C.
§ 1331 and 29 U.S.C. § 1132(e)(1). We have appellate
jurisdiction pursuant to 28 U.S.C. § 1291.
11
In Dudenhoeffer, however, the Supreme Court
definitively rejected that presumption. 573 U.S. at 415-25. It
acknowledged the need for balance between “ensuring fair and
prompt enforcement of rights under a plan” and “encourag[ing]
… the creation of [ESOPs].” Id. at 424 (quotation omitted).
But it concluded that the presumption applied by the courts of
appeals was “[not] an appropriate way to weed out meritless
lawsuits or to provide the requisite ‘balancing[,]’” because it
made it “impossible for a plaintiff to state a duty-of-prudence
claim, no matter how meritorious, unless the employer is in
very bad economic circumstances.” Id. at 425. Instead, it held
that the better way to “divide the plausible sheep from the
meritless goats” was through “careful, context-sensitive
scrutiny of a complaint’s allegations.” Id.
The Dudenhoeffer Court provided some detail about
how that is to be done. Id. at 425-30. It called Rule 12(b)(6)
an “important mechanism for weeding out meritless claims”
and again emphasized that “the appropriate inquiry will
necessarily be context specific.” Id. at 425. Addressing
allegations that the ESOP fiduciaries “behaved imprudently by
failing to act on the basis of nonpublic information that was
available to them because they were [corporate] insiders[,]” the
Court prescribed new pleading requirements to be applied in
that context:
To state a claim for breach of the duty of
prudence on the basis of inside information, a
plaintiff must plausibly allege an alternative
action that the defendant could have taken that
would have been consistent with the securities
laws and that a prudent fiduciary in the same
12
circumstances would not have viewed as more
likely to harm the fund than to help it.
Id. at 427-28 (emphasis omitted).
The Dudenhoeffer Court then presented a few
“additional considerations[.]” Id. at 428-30. When a
complaint alleges that the fiduciaries should have used their
inside information to refrain from making additional stock
purchases, the court should consider whether that action would
conflict with the requirements and objectives of insider trading
laws. Id. at 429. Similarly, when the complaint alleges that
the fiduciaries should have publicly disclosed the inside
information, the court should consider whether that action
would conflict with the substance and objectives of corporate
disclosure requirements imposed by the federal securities laws.
Id. Finally, in the case of disclosure as an alleged alternative
action, the court should also consider whether a prudent
fiduciary could have concluded that disclosing the negative
information – either expressly by public disclosure or
implicitly by stopping purchases – “would do more harm than
good to the fund by causing a drop in the stock price and a
concomitant drop in the value of the stock already held by the
fund.” Id. at 429-30. The Supreme Court has twice reaffirmed
Dudenhoeffer’s guidance. Amgen Inc. v. Harris, 577 U.S. 308,
310-11 (2016) (per curiam); Ret. Plans Comm. of IBM v.
Jander, 140 S. Ct. 592, 594-95 (2020) (per curiam).
The Plaintiffs here allege two alternative actions that,
according to them, meet the Dudenhoeffer standard. The first
is that the Defendants could have corrected the price inflation
by “caus[ing] truthful or corrective disclosures to be made
much earlier to cure the Company’s misrepresentations and
13
material omissions[.]” (App. at 83.) According to the
Plaintiffs, “the disclosure would be that [J&J has] known about
[its] talc product having asbestos in it for quite some time [and
that it is] aware of scientific studies that asbestos has been
linked to cancer[.]” (Oral Arg. at 2:53-3:09.) The Plaintiffs
also would have had the Defendants admit on J&J’s behalf that
its companies’ talc products were not “completely, 100 percent
safe.” (Oral Arg. at 3:18-3:22.) The second alternative the
Plaintiffs propose is that the “Defendants could have …
direct[ed] new ESOP investments … to be used to increase the
ESOP’s cash buffer rather than to buy inflated Johnson &
Johnson stock.” (App. at 92.) As discussed below, however,
neither suggested alternative action satisfies Dudenhoeffer,
because a prudent fiduciary in the Defendants’ position could
have concluded that either action would harm more than help
the ESOP.7
7
The Plaintiffs argue that it is “frankly[] baffling” that
some of the claims in the Securities Fraud Action can survive
a motion to dismiss while an ERISA claim based on the same
facts cannot. (Opening Br. at 39-40.) But there is nothing
incongruous about a set of facts satisfying one pleading
standard (e.g., under the Private Securities Litigation Reform
Act) but not another (e.g., under Dudenhoeffer). See Saumer
v. Cliffs Nat. Res., Inc., 853 F.3d 855, 865 n.2 (6th Cir. 2017)
(“[A]lleged securities law violations do not necessarily trigger
a valid ERISA claim.” (quoting Jander v. Int’l Bus. Mach.
Corp., 205 F. Supp. 3d 538, 546 (S.D.N.Y. 2016))). Indeed,
we commend Chief Judge Freda L. Wolfson – who is presiding
over the Products Liability Action, the Securities Fraud Action,
and this ERISA case – for her skillful management of all three.
14
A. Corrective Disclosures
The Plaintiffs first propose that the Defendants should
have taken the alternative action of making public disclosures
to correct the stock’s artificial inflation. We will assume
without deciding that the corrective disclosures the Plaintiffs
suggest are ones that would satisfy Dudenhoeffer’s first prong
– i.e., that they would constitute a viable alternative action that
Defendants “could have taken that would have been consistent
with the securities laws[.]” Dudenhoeffer, 573 U.S. at 428.
Nevertheless, we agree with the District Court that the
Plaintiffs’ proposed alternative action still fails at
Dudenhoeffer’s second prong.8
A plaintiff must plausibly allege that “a prudent
fiduciary in the same position ‘could not have concluded’ that
the alternative action ‘would do more harm than good.’”
Amgen, 577 U.S. at 311 (quoting Dudenhoeffer, 573 U.S. at
411). As the Fifth Circuit has summarized, that standard places
on the plaintiff “the significant burden of proposing an
alternative course of action so clearly beneficial that a prudent
fiduciary could not conclude that it would be more likely to
harm the fund than to help it.” Whitley v. BP, P.L.C., 838 F.3d
523, 529 (5th Cir. 2016). That is a high bar to clear, even at
the pleadings stage, especially when guesswork is involved, as
it is when estimating the effect of earlier versus later public
disclosure of information which is itself fluid.
8
We therefore need not address the Defendants’
additional argument that they cannot be held liable in their
ERISA-fiduciary capacities for an action that they could only
have taken in their corporate-insider capacities.
15
Under Dudenhoeffer, the plaintiff must do more than
allege a general economic theory for why earlier disclosure
would have been preferable. Dormani v. Target Corp., 970
F.3d 910, 915 (8th Cir. 2020) (“[A]llegations based on general
economic principles are too generic to meet the requisite
pleading standard.” (cleaned up)); Wilson v. Craver, 994 F.3d
1085, 1093 (9th Cir. 2021) (“[I]f all that is required to plead a
duty-of-prudence claim is recitation of generic economic
principles that apply in every ERISA action, every claim,
regardless of merit, would go forward.”). Instead, “where
general economic principles are alleged, the complaint must
also include context-specific allegations explaining why an
earlier disclosure was so clearly beneficial[.]” Wilson, 994
F.3d at 1093. “Because the content of the duty of prudence
turns on the circumstances prevailing at the time the fiduciary
acts, the appropriate inquiry will necessarily be context
specific.” Hughes v. Nw. Univ., 142 S. Ct. 737, 742 (2022)
(cleaned up).
Furthermore, the plaintiff must plausibly allege that the
circumstances do not justify a prudent fiduciary’s preference
to await the results of a thorough investigation into the matter
before making public disclosure. See, e.g., Wilson, 994 F.3d at
1095 (allegations insufficient because they did not allege that
a “prudent fiduciary could not have concluded that deferring a
disclosure until after the completion of investigations into the
nature of the alleged fraud … would cause more harm than
good”); Allen v. Wells Fargo & Co., 967 F.3d 767, 774-75 (8th
Cir. 2020) (“[A] prudent fiduciary – even one who knows
disclosure is inevitable and that earlier disclosure may
ameliorate some harm to the company’s stock price and
reputation – could readily conclude that it would do more harm
16
than good to disclose information about Wells Fargo’s sales
practices prior to the completion of the government’s
investigation.”), cert. denied, 141 S. Ct. 2594 (2021); Martone
v. Robb, 902 F.3d 519, 527 (5th Cir. 2018) (“[A]n unusually-
timed disclosure [of fraud] risks ‘spooking the market,’
creating the potential for an outsized stock drop.”). Where it is
“uncertain” whether earlier disclosure would be superior to
potential later disclosure, a reasonably prudent fiduciary could
still believe that early disclosure is “the more dangerous of the
two routes.” Dormani, 970 F.3d at 915.
Only one post-Dudenhoeffer decision from our sister
circuits has held that a plaintiff plausibly alleged that corrective
disclosures were so clearly beneficial that no prudent
corporate-insider fiduciary could have concluded that earlier
corrective disclosures would have done more harm than good.9
In Jander v. Retirement Plans Committee of IBM, 910 F.3d
620, 623 (2d Cir. 2018), IBM had sought to sell its
microelectronics business, which was having financial trouble
9
Numerous other courts have concluded that “a prudent
fiduciary could readily conclude that disclosure would do more
harm than good ‘by causing a drop in the stock price and a
concomitant drop in the value of the stock already held by the
fund.’” Allen v. Wells Fargo & Co., 967 F.3d 767, 773 (8th
Cir. 2020); see also Wilson v. Craver, 994 F.3d 1085, 1095 (9th
Cir. 2021); Dormani v. Target Corp., 970 F.3d 910, 915 (8th
Cir. 2020); Singh v. RadioShack Corp., 882 F.3d 137, 149 (5th
Cir. 2018); Martone v. Robb, 902 F.3d 519, 525-27 (5th Cir.
2018); Saumer, 853 F.3d at 864; Whitley v. BP, P.L.C., 838
F.3d 523, 529 (5th Cir. 2016); Rinehart v. Lehman Bros.
Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016).
17
and was on track to incur annual losses of $700 million.
Nevertheless, IBM did not disclose those problems and instead
publicly valued the business at $2 billion. Id. at 623. Once it
found a buyer, however, IBM finally disclosed that it would
pay $1.5 billion to have the buyer take the business off its
hands and that it would also incur “a $4.7 billion pre-tax
charge, reflecting in part an impairment in the stated value” of
the business being sold. Id. IBM’s stock price steeply
declined, and participants in its ESOP brought a lawsuit
alleging that the plan’s corporate-insider fiduciaries knew
about the undisclosed problems with the microelectronics
business but imprudently continued to invest in shares of IBM
stock, the price of which reflected the market’s lack of
knowledge of microelectronics’ troubles. Id. The plaintiffs
alleged that the corporate-insider fiduciaries should have made
an early corrective disclosure. Id. at 628.
The Second Circuit held that the plaintiffs had met
Dudenhoeffer’s standard for a duty-of-prudence claim based
on inside information. Id. In the court’s view, it was
“particularly important” that the defendants allegedly knew
that disclosure of the financial problems was inevitable. Id. at
630. Unlike in the “normal case,” where a prudent fiduciary
might compare the benefits of disclosure versus non-
disclosure, a prudent fiduciary in the Jander defendants’
circumstances could only compare earlier disclosure versus
later disclosure, because once IBM knew its sale of its
microelectronics business was inevitable, “non-disclosure of
IBM’s troubles was no longer a realistic option[.]” Id. at 630-
31. Thus, the court concluded that “a stock-drop following
early disclosure would be no more harmful than the inevitable
stock drop that would occur following a later disclosure.” Id.
at 631.
18
The Plaintiffs ask that we follow Jander, but their
complaint relies too much on general economic theory and too
little on specific allegations that would establish that no
prudent fiduciary in the Defendants’ circumstances would
believe that making corrective disclosures would do more
harm than good. They allege that “[if the] Defendants had
caused corrective public disclosure near the very beginning of
J&J’s misrepresentations and material omissions … almost all
of the artificial inflation of J&J’s stock price that occurred
could have been avoided, and virtually no Plan participants
who purchased inflated shares of the Fund would have been
harmed. But as the concealment went on, more and more Plan
participants made purchases at artificially high prices, [and] the
harm to Plan participants steadily increased.” (App. at 84.)
They also allege that the Defendants’ failure to make corrective
disclosures “ma[de] the eventual collapse worse” and that their
“prolonged misrepresentation” caused increasingly greater
“reputational damage” to J&J. (App. at 84-85.) While
couched in “context specific” terms of the J&J ESOP,
Dudenhoeffer, 573 U.S. at 425, all of that is in actuality just a
recitation of general economic theory and cannot by itself
support a duty-of-prudence claim consistent with the
Dudenhoeffer standard. Dormani, 970 F.3d at 915.
Perhaps recognizing the insufficiency of their
generalized allegations, the Plaintiffs argue that they have also
made specific factual allegations “to support the contention
that the disclosure of the dangers posed by [J&J’s] talc
products was inevitable,” just like in Jander. (Opening Br. at
36.) Their theory of inevitability is as follows: “[A]s the
lawsuits against J&J over illness caused by its talc products
proliferated, and the possibility of those lawsuits surviving
19
motions to dismiss and reaching discovery increased, [it
became] more and more likely that fact discovery in one or
more of those cases would lead to the disclosure of J&J’s
internal memos about its longstanding knowledge of asbestos
in its talc.” (Opening Br. at 36.)
But that theory has a fatal shortcoming. Even if
disclosure of some unfavorable documents was likely once
discovery commenced in products liability litigation, it is to
this day uncertain whether J&J should be liable in tort for
dangers relating to its talc products. The products liability
actions are, after all, ongoing. It would make no sense for us
to resolve the question of tort liability, still undetermined in
that case, in this collateral ERISA litigation.
Nor has J&J admitted that its talc products contain
asbestos. By contrast, in the events leading up to Jander, IBM
allegedly did take steps suggesting that the prior public
valuations of its microelectronics businesses were overinflated,
although it took those steps somewhat later than the allegedly
prudent time to disclose. 910 F.3d at 623, 630. Here, because
J&J has not and likely will not make the disclosure proposed
by the Plaintiffs, it can hardly be said that all prudent
fiduciaries would have concluded in 2017 that such disclosure
was “inevitable.” Id. at 630. And while the Plaintiffs say that
“internal documents showing the perpetration of [a] massive
coverup and misrepresentation” (App. at 86) were sure to come
out, J&J has already prevailed in some products liability trials,
demonstrating that there is no consensus that J&J ever had any
talc-related issues to cover up. Furthermore, early disclosures
to the press, necessarily shorn of context, could cause the stock
market to overreact, misunderstanding the legal significance of
the information and believing that J&J would be subject to
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more legal liability than it really would be. Thus, a reasonably
prudent fiduciary in the Defendants’ circumstances could
conclude that corrective disclosures would do more harm than
good to the ESOP.
B. Redirection of Contributions to the Cash
Buffer
The Plaintiffs also assert that, instead of using new
ESOP contributions to purchase J&J stock at artificially
inflated prices, the Defendants should have taken the
alternative action of redirecting contributions into the ESOP’s
cash buffer. A cash buffer is a common component of an
ERISA retirement savings plan. E.g., George v. Kraft Foods
Glob., Inc., 641 F.3d 786, 793 (7th Cir. 2011). It “allows
participants to quickly sell their interests in the funds” without
having to wait for the sale of stock to obtain cash and “allows
the [p]lan to save transaction costs by ‘netting’ participant
transactions” – that is, matching one participant’s sale with
another’s purchase – avoiding brokerage commissions being
charged to the plan each time a request to buy or sell stock is
made. Id. The Plaintiffs suggest that a prudent fiduciary would
additionally use the cash buffer as a hedging instrument. But
that is not a fair conclusion.
The option of redirecting funds to an ESOP’s cash
buffer “leaves a fiduciary ‘between a rock and a hard place’
and likely to be sued for imprudence either way if he guesses
wrong about where the stock is headed.” Dormani, 970 F.3d
at 915 n.4 (quoting Dudenhoeffer, 573 U.S. at 424). If
fiduciaries increase the cash buffer and then the stock price
rises, plan participants might assert a duty-of-prudence claim
against them for allowing the cash buffer to generate
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“investment drag.” George, 641 F.3d at 793. On the other
hand, under the Plaintiffs’ theory, if the fiduciaries hold the
cash buffer steady or reduce it and then the stock price drops,
plan participants might assert a duty-of-prudence claim for not
increasing the cash buffer to mitigate losses.
While there may be circumstances in which a
reasonably prudent fiduciary would find it advantageous to
increase the cash buffer rather than buy the company’s stock,
the Plaintiffs have not adequately pleaded that those
circumstances exist here. As discussed already, it was a guess
that J&J’s stock price would drop significantly, and there was
even less certainty about the timing and degree of such a drop.
A prudent fiduciary in the Defendants’ position reasonably
could have anticipated that J&J’s stock price was not bound to
tumble, or could have believed that any price drop would be
outweighed by gains accrued prior to the drop or by a rapid
rebound. It is simply too much of a stretch to say that a prudent
fiduciary in the Defendants’ position “could not have
concluded” that redirecting contributions to the ESOP’s cash
buffer “would do more harm than good.” Amgen, 577 U.S. at
311.10
III. CONCLUSION
For the foregoing reasons, the Plaintiffs have failed to
meet the high standard for pleading a claim under ERISA for
10
We need not address the Defendants’ arguments that
redirecting ESOP contributions to the cash buffer would have
required, or otherwise resulted in, public disclosure.
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breach of the duty of prudence based on inside information.11
We will therefore affirm.
11
Nothing in this opinion should be construed as
providing any comment on the merits of the Products Liability
Action or the Securities Fraud Action.
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