Rogers, David E. v. Baxter Int'l Inc ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-3241
DAVID E. ROGERS, et al.,
Plaintiffs-Appellees,
v.
BAXTER INTERNATIONAL INC., et al.,
Defendants-Appellants.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 6476—Joan B. Gottschall, Judge.
____________
ARGUED NOVEMBER 2, 2007—DECIDED APRIL 2, 2008
____________
Before EASTERBROOK, Chief Judge, and POSNER and
RIPPLE, Circuit Judges.
EASTERBROOK, Chief Judge. Plaintiffs are participants in
the retirement plan for Baxter International’s employees.
Each participant exercises some control over the invest-
ments in an individual account in this defined-contribu-
tion plan, though the plan and its trustees may limit what
assets an account may contain and when trading may
occur. In this suit under the Employee Retirement In-
come Security Act, plaintiffs contend that Baxter and
some of the plan’s trustees have violated §409(a), 29 U.S.C.
2 No. 06-3241
§1109(a), in their capacity as fiduciaries. The defendants’
failing, according to the complaint, is that they allowed
participants to invest in Baxter’s stock, despite knowing
that it was overpriced in the market and hence a bad deal.
The complaint points to two episodes of decline in the
price of Baxter’s stock. One occurred in July 2002,
when Baxter announced second-quarter results that fell
short of the firm’s projections and the price of its stock
immediately fell from $43 to $32. The other occurred in
July 2004, when Baxter announced that it would restate
recent financial results to correct for a fraud at its Brazilian
subsidiary; that announcement led to a drop of $1.48
a share.
Both of these episodes precipitated suits under the
securities laws. With respect to the 2002 episode, Asher v.
Baxter International Inc., 377 F.3d 727 (7th Cir. 2004), held
that the complaint could not be dismissed under the
defense for forward-looking statements in the Private
Securities Litigation Reform Act of 1995, see 15 U.S.C.
§78u–5(c). Since then the district court has held that none
of the plaintiffs is eligible to represent a class, see Asher v.
Baxter International Inc., 505 F.3d 736 (7th Cir. 2007), so
that suit is limping along on behalf of a few individual
investors. With respect to the 2004 episode, a class was
certified in the district court, but Higginbotham v. Baxter
International Inc., 495 F.3d 753 (7th Cir. 2007), held that
plaintiffs failed to satisfy the standard that PSLRA estab-
lishes for pleading scienter. 15 U.S.C. §78u-4(b)(2); Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007).
PSLRA applies, however, only to the Securities Act of 1933
and the Securities Exchange Act of 1934. (Section
§78u–4(b)(2), for example, applies only to a “private action
arising under this chapter” of Title 17—the 1934 Act.) ERISA
No. 06-3241 3
is a different statute, in a different title of the United States
Code. Plaintiffs seek to use ERISA to recover for events
that as a result of PSLRA could not support an action on
behalf of shareholders at large.
In order to pursue a claim under §409(a) of ERISA, the
participants first need a private right of action. They in-
voked §502(a)(2) of ERISA, 29 U.S.C. §1132(a)(2), which
says that suit may be brought “by the Secretary [of Labor],
or by a participant, beneficiary or fiduciary for appro-
priate relief under section 1109 of this title”. Relying
on Massachusetts Mutual Life Insurance Co. v. Russell, 473
U.S. 134 (1985), defendants asked the district court to
dismiss the suit. Russell holds that participants in a
defined-benefit plan may use §502(a)(2) only when the
loss is incurred by the plan as an entity. These participants
suffered losses in their individual accounts; other partici-
pants whose accounts did not contain Baxter’s stock
were unaffected. The district court denied the motion to
dismiss, 417 F. Supp. 2d 974 (N.D. Ill. 2006), but certified
the decision for interlocutory review under 28 U.S.C.
§1292(b), and we accepted the appeal. Proceedings were
put on hold while Higginbotham was under advisement.
Then, after the Supreme Court granted certiorari in a case
that presented questions about the application of Russell
to defined-contribution plans, we called for supple-
mental briefs. Oral argument was held last fall, but we
deferred action until the Supreme Court released its
opinion. This appeal is at last ready for decision.
LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020
(2008), holds that §502(a)(2), and thus §409(a), may be
used by the beneficiary of a defined-contribution account
that suffers a loss, even though other participants are
uninjured by the acts said to constitute a breach of fidu-
4 No. 06-3241
ciary duty. See also Harzewski v. Guidant Corp., 489 F.3d 799
(7th Cir. 2007). That pretty much disposes of this appeal.
All that remains is defendants’ insistence that partici-
pants not be allowed to use ERISA to get around limits
added to the securities laws by PSLRA. Defendants are
wrong, for two reasons.
First, this is not a securities suit. It is an action against
fiduciaries of a pension plan. To prevail, the participants
must show that defendants breached the duties they owed
as fiduciaries of pension funds, not whatever duties
Baxter and its managers owed to investors at large. The
sets of potentially responsible parties overlap only in-
cidentally. The defendants in securities actions are those
who made the fraudulent statements to the public or
caused them to be made; the defendants in this action
are those empowered to take decisions on behalf of the
pension plan. Pension fiduciaries are liable, or not, depend-
ing on what they know and what duties they have under
trust law; that Baxter may have tried to deceive investors
as a whole would not translate directly to liability
for trustees of Baxter’s pension plan. Baxter itself is a
defendant, and its liability in a securities action may
depend on what its managers knew collectively, or what
it is responsible for under 15 U.S.C. §78t(a); the rules
for attributing knowledge under ERISA may or may not
be the same, an issue that the parties have not addressed.
Second, PSLRA does not amend or supersede ERISA. It is
limited, as we have mentioned, to the securities laws.
Unless one law expressly repeals or supersedes another,
or the two create inconsistent demands, both must be
enforced. See, e.g., Branch v. Smith, 538 U.S. 254, 273 (2003);
J.E.M. Ag Supply, Inc. v. Pioneer Hi-Bred International, Inc.,
534 U.S. 124, 141–44 (2001); Randolph v. IMBS, Inc., 368
No. 06-3241 5
F.3d 726 (7th Cir. 2004). Nothing in the 1995 amendments
to the securities laws either refers to ERISA or affects
how trustees fulfil their duties under §409(a).
All we hold today is that participants in defined-contri-
bution plans may use §502(a)(2), and thus §409(a), to
obtain relief if losses to an account are attributable to a
pension plan fiduciary’s breach of a duty owed to the
plan. Plaintiffs will need to establish that defendants
knew the bad news in 2002 and 2004 and that, as a result,
they had a duty under ERISA (which incorporates normal
rules of trust law) to prevent participants from investing
retirement funds in Baxter’s stock. One question will be
whether pension fiduciaries are obliged to allow or pre-
vent investments for blocks of weeks or months at a time
(when Baxter or some other stock is “overpriced”),
rather than making decisions based on long-run con-
siderations. People who pursue a buy-and-hold strategy,
one particularly appropriate for pension investments,
are unaffected by the volatility in market prices that
accompanies the announcement of particular pieces of
good and bad news. (Although retirees who draw on
their pension portfolio in the immediate wake of bad news
may be injured, plaintiffs have not advanced any argu-
ments directed to this subclass of all pension participants.)
Plaintiffs maintain that defendants should not have
allowed investment in Baxter’s stock at any time. That
avoids the problem we have mentioned, but to recover
on this theory plaintiffs must demonstrate that Baxter’s
stock always is overpriced, and that defendants know
it. That amounts to an assertion that pension fiduciaries
have a duty to outsmart the stock market, a contention
with little prospect of success. See Nelson v. Hodowal,
512 F.3d 347 (7th Cir. 2008). Anyway, if Baxter’s stock is
6 No. 06-3241
always priced too high, pension participants will be the
winners. Plaintiffs fear a collapse tomorrow, but if profes-
sional investment managers can’t outsmart the stock
market, judges can’t either.
This is not to say that the price of all well-followed stocks
is efficient in the sense of being right; it is only to say that
investment managers who lack inside information rarely
beat the market consistently. See Burton G. Malkiel &
John G. Cragg, Expectations and the Structure of Share Prices
(1982). Perhaps the defendants in this litigation did have
inside information, but could they use it for plaintiffs’
benefit? Plaintiffs’ position seems to be that pension
trustees are obligated to adopt a policy under which
employees invest in a stock during periods of good news
for the issuer but not during periods of bad news. The
implication is that someone else (which is to say,
investors at large) must bear the loss when bad news is
announced, because the pension participants will have
bailed out. Corporate insiders cannot trade on their own
behalf using material private information, good or bad. See
generally United States v. O’Hagan, 521 U.S. 642 (1997);
Dirks v. SEC, 463 U.S. 646 (1983). In Harzewski we raised
the question whether they may act on such information
in their role as fiduciaries for pension plans. 489 F.3d at
808. That question remains unanswered but must be
resolved in plaintiffs’ favor if they are to prevail.
AFFIRMED
No. 06-3241 7
RIPPLE, Circuit Judge, concurring in the judgment. David
E. Rogers, a participant in Baxter’s defined-contribution
retirement plan (the “Baxter Plan”), filed this class action
under section 502(a)(2) of the Employee Retirement
Income Security Act (“ERISA”), 29 U.S.C. § 1132(a)(2). The
class alleges that the fiduciaries of the Baxter Plan vio-
lated their duties under ERISA, among other things, by
selecting Baxter stock as an investment option when the
fiduciaries knew or should have known that the stock’s
price was inflated. See ERISA § 409, 29 U.S.C. § 1109(a).
Baxter filed a motion to dismiss, claiming that the Su-
preme Court’s decision in Massachusetts Mutual Life
Insurance Co. v. Russell, 473 U.S. 134 (1985), prevented the
class from suing under ERISA § 502(a)(2). In Russell, the
Court held that, in the context of a defined-benefit plan,
an individual plaintiff who does not sue to recover for
a breach that harmed the entire plan may not use ERISA’s
private right of action provision, ERISA § 502(a)(2),
29 U.S.C. § 1132(a)(2).
The panel opinion appropriately concludes that the
Supreme Court’s recent decision in LaRue v. DeWolff, Boberg
& Associates, Inc. et al., 128 S. Ct. 1020 (2008), disposes of
Baxter’s argument that Russell prevents this suit. In LaRue,
the Court held that the concerns that it had expressed
in Russell, a case which dealt with defined-benefit plans,
do not apply in the context of defined-contribution plans.
The Court held that, in defined-contribution plans,
“[w]hether a fiduciary breach diminishes plan assets
payable to all participants and beneficiaries, or only to
persons tied to particular individual accounts, it creates
the kind of harms that concerned the draftsmen of § 409.”
Id. at 1025.
8 No. 06-3241
The majority’s opinion also correctly disposes of Baxter’s
argument that the PSLRA1 prevents this action. As the
opinion explains, this action is not a securities suit, and
the PSLRA does not amend or supercede ERISA.
The remainder of the panel’s opinion comments on the
class plaintiffs’ theory of the case. As the panel frankly
admits, this discussion is unnecessary to the disposition
of the appeal before us. For that reason, I respectfully
decline to join this discussion. This interlocutory appeal on
a certified question is here on the denial of a motion to
dismiss. We have affirmed the denial of that motion, and
the case should now return to the district court where
the lawyers ought to develop their case without any fur-
ther counsel from judges of the court of appeals. The advice
contained in the panel opinion is given without
any adversarial briefing or oral argument and suggests
strongly that no other view is possible or at least worthy
of acceptance by the district court or by the other judges
of this court. In my view, a more restrained prediction of
what might develop in the course of this litigation is
appropriate until the attorneys and the district court
have had an opportunity to develop this case.
1
Private Securities Litigation Reform Act of 1995, Pub. L.
No. 104-67, 109 Stat. 737 (codified at 15 U.S.C. § 78u-4).
USCA-02-C-0072—4-2-08