In Re Schering-Plough Corp. Erisa Litigation

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
8-19-2005
In Re: Schering
Precedential or Non-Precedential: Precedential
Docket No. 04-3073
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-3073
IN RE: SCHERING-PLOUGH CORPORATION ERISA
LITIGATION,
JINGDONG ZHU, on behalf of
himself and all other similarly
situated; ADRIAN FIELDS, on
behalf of himself/herself and all
others similarly situated,
Appellants
On Appeal from the United States District Court
for the District of New Jersey, Newark
(D.C. Civil Action No. 03-cv-01204)
District Judge: Honorable Katharine S. Hayden
Argued June 7, 2005
Before: AMBRO, STAPLETON, and
ALARCÓN * , Circuit Judges
(Filed: August 19, 2005)
Richard S. Schiffrin, Esq.
Joseph H. Meltzer, Esq.
Schiffrin & Barroway LLP
280 King of Prussia Road
Radnor, PA 19087
Joseph DePalma, Esq.
Lite DePalma Greenberg & Rivas, LLC
Two Gateway Center, 12th Floor
Newark, NJ 07102
Peter H. LeVan, Jr. Esq. (Argued)
Hangley, Aronchick, Segal & Pudlin
One Logan Square, 27th Floor
Philadelphia, PA 19103
Counsel for Appellants
*
The Honorable Arthur L. Alarcón, Senior Judge, United
States Court of Appeals for the Ninth Circuit, sitting by
designation.
2
Douglas S. Eakeley, Esq.
Gavin J. Rooney, Esq.
Lowenstein Sandler, PC
65 Livingston Avenue
Roseland, N.J. 07068
Ethan M. Posner, Esq. (Argued)
Peter J. Nickles, Esq.
Amy N. Moore, Esq.
Caroline M. Brown, Esq.
Frederick G. Sandstrom, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 2004
Jonathan A. Wasserman, Esq.
Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, N.J. 07033
Counsel for Appellees
Howard M. Radzely
Timothy D. Hauser
Elizabeth Hopkins, Esq.
Theresa S. Gee, Esq. (Argued)
United States Department of Labor
Plan Benefits Security Division
200 Constitution Avenue, N.W.
3
Room –4611
Washington, D.C. 20210
Counsel for Amicus Curiae U.S. Department of Labor
Mary Ellen Signorille, Esq.
Melvin Radowitz, Esq.
601 E. Street, N.W.
Washington, D.C. 20049
Counsel for Amicus Curiae AARP
Kent A. Mason, Esq.
Jason K. Bortz, Esq.
Davis & Harman, LLP
1455 Pennsylvania Ave., NW
Washington, D.C. 20004
Robert G. Chambers, Esq.
Jack W. Campbell IV, Esq.
Helms, Mulliss & Wicker
201 North Tryon Street
Charlotte, N.C. 28202
Counsel for Amicus Curiae American Benefits Council
OPINION OF THE COURT
4
ALARCÓN, Circuit Judge
We must decide in this matter whether, under the
Employee Retirement Income Security Act of 1974 (“ERISA”),
the District Court erred in ruling that former employees, who
were participants in a defined contribution plan, may not
prosecute a derivative action on behalf of an employees’ savings
plan to recover losses sustained by the savings plan because of
alleged breaches of fiduciary duty. We conclude that the
Plaintiffs may seek money damages on behalf of the fund,
notwithstanding the fact the alleged fiduciary violations affected
only a subset of the saving plan’s participants.
Accordingly, we will reverse and remand for further
proceedings.
I
A
The complaint alleges the following facts. Jingdong Zhu
and Adrian Fields (the Plaintiffs) are former employees of
Schering-Plough Corporation (“Schering”). During their
employment with Schering, the Plaintiffs elected to participate
in the Schering-Plough Employees’ Savings Plan (“the Savings
Plan” or “the Plan”). Under the Savings Plan, a Schering
5
employee agreed to reduce his or her take-home compensation
in order to invest that amount in one or more investment funds
on a pre-tax basis 1 . The Savings Plan authorized a participant to
select from different investment funds. One of the investment
funds was the Schering Plan Company Stock Fund (“the
Company Stock Fund”), which consisted of company stock.
Under the Savings Plan, a participant was not permitted to invest
more than 50% of his or her future contributions in Schering
stock. Some of the Plaintiffs’ deferred compensation included
an investment in the Company Stock Fund.
As of December 31, 2001, Schering stock made up
approximately 31% of the value of the Saving Plan’s assets.
More than 60% of the employees who participated in the Saving
1
An employee who participates in a deferred
compensation plan to save for retirement qualifies for tax
benefits pursuant to 26 U.S.C. § 401(k). The type of deferred
compensation plan offered to Schering employees is referred to
in ERISA as an “individual account plan” or a “defined
contribution plan.” 29 U.S.C. § 1002(34). These terms refer to
“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.” Id.6
Plan had at least some of their assets allocated to the Company
Stock Fund. In fiscal year 2001 the loss in the value of Schering
stock constituted 87% of the drop in value of the Saving Plan’s
assets, and in 2002 the loss in Schering’s stock’s value
constituted 50% of the Saving Plan’s net loss. The loss to the
Savings Plan was approximately $138,000,000. By June of 2003
the price of Schering stock had fallen below $20 per share from
a class-period high of better than $60 a share.
B
On October 6, 2003, the Plaintiffs filed this class action
pursuant to 29 U.S.C. § 1132(a)(2) on behalf of the Savings Plan
and “[a]ll persons who were participants in or beneficiaries of
the Saving Plan at any time between July 29, 1998 and the
present (the ‘Class Period’), and whose accounts included
investments in Schering stock.” The complaint named as
defendants and as fiduciaries of the Savings Plan Schering,
Richard Kogan, its former CEO, members of the Schering
Board’s Pension Committee, the Schering-Plough Employees
Benefits Committee and one of its members, the Schering-
Plough Benefits Investment Committee and three of its
members, the counsel of the Investment Committee, and
Vanguard Group, Inc., the Trustee of the Savings Plan
(collectively “the Defendants”).
7
The complaint alleges that the Defendants breached their
fiduciary duties of prudence, care, and loyalty by continuing to
offer the Company Stock Fund as one of the Savings Plan
alternatives when they knew that Schering’s stock price was
unlawfully and artificially inflated. Additionally, the Plaintiffs
alleged that the Defendants failed to disclose negative material
information about Schering, which induced participants in the
Savings Plan to elect to invest in the Company Stock Fund. The
complaint also alleges that some of the Defendants did not
loyally serve the Saving Plan participants by taking steps to
avoid a conflict of interest such as making appropriate public
disclosures, divesting the Savings Plan of Schering stock,
discontinuing further investments in Schering stock, consulting
independent fiduciaries, or resigning as Savings Plan fiduciaries.
In lieu of answering the complaint, the Defendants filed
a motion to dismiss the action for failure to state a claim under
§ 1109(a).2 The Defendants argued that “[b]ecause [Section
2
29 U.S.C. § 1109 reads as follows:
Liability for breach of fiduciary duty
(a) Any person who is a fiduciary with respect to a plan
who breaches any of the responsibilities, obligations, or
duties imposed upon fiduciaries by this title shall be
personally liable to make good to such plan any losses to
the plan resulting from each such breach, and to restore
8
1109(a)] authorizes relief only for ‘the plan’, a participant can
state a claim only if he proceeds in a representative capacity on
behalf of ‘the plan as a whole’ and seeks to recover for all plan
participants allegedly injured by the fiduciary breach.”
(Emphasis in the original.). In addition, they asserted that the
Plaintiffs do not seek relief on behalf of the Plan as a whole
because the complaint allegedly excludes current employees
who were part of the sub-group that invested in the Company
Stock Fund.
They further maintained that the consolidated complaint
improperly seeks “individual relief for each Plan participant”
because it prays for “an allocation ‘among the Participants’
individualized accounts in proportion to the accounts’ losses.’”
(Emphasis added in the Defendants’ motion.). Finally, the
Defendants contended that the Plaintiffs failed to allege facts
to such plan any profits of such fiduciary which have
been made through use of assets of the plan by the
fiduciary, and shall be subject to such other equitable or
remedial relief as the court may deem appropriate,
including removal of such fiduciary. A fiduciary may
also be removed for a violation of 29 USCS § 1111.
(b) No fiduciary shall be liable with respect to a breach
of fiduciary duty under this title if such breach was
committed before he became a fiduciary or after he
ceased to be a fiduciary.
9
showing detrimental reliance by the Saving Plan’s participants
on the Defendants’ alleged misrepresentations and non-
disclosures.
The District Court granted the Defendant’s motion and
dismissed the consolidated complaint with prejudice. It held that
the Plaintiffs lacked standing to prosecute this action under 29
U.S.C. §§ 1109(a) and 1132(a)(2) 3 because the consolidated
complaint alleges only “harm suffered by the individual Plan
Participants and not the Savings Plan, and seeks relief measured
by the harm to individuals and tailored for the benefit of
individuals, and not the Savings Plan.” The District Court
summarized its conclusion in these words:
Even assuming that each defendant
is an ERISA fiduciary, that each of
plaintiffs’ allegations concerning
defendants’ conduct were true, and
that this conduct rose to a level to
breach ERISA’s fiduciary duties
(without the Court opining as to
3
29 U.S.C. § 1132(a)(2) reads as follows: “A civil action
may be brought . . . by the Secretary, or by a participant,
beneficiary or fiduciary for appropriate relief under section 1109
of this title.”
10
merits of these assumptions),
plaintiffs cannot demonstrate how
any defendant would be “personally
liable for damages (‘to make good
to [the] plan any losses to the plan
resulting from each such breach’)”
to the Saving Plans because it is
only Plan Participants who might
be able to show that they suffered
individualized losses.
The District Court commented further that because
“plaintiffs can point to no set of facts that would demonstrate
losses to the plan. . . . the Court need not reach defendants’
further arguments in favor of dismissal.”
The Plaintiffs have timely appealed. The District Court
had subject matter jurisdiction pursuant to 29 U.S.C. §
1132(e)(1) of ERISA. This Court has appellate jurisdiction
under 28 U.S.C. §§ 1291, 1294(1).
II
A
The Plaintiffs contend that “[t]he district court erred in
11
failing to distinguish between the plan-wide nature of the losses
caused by defendants’ fiduciary breaches, and the fact that the
losses caused by those breaches are reflected in the Plan’s
individual participant accounts.” They argue that the District
Court erred in concluding that their contributions were kept in
separate, segregated accounts and never became a part of the
Saving Plan’s assets. Instead, the Plaintiffs maintain that the
Savings Plan was a unitary trust that purchased and maintained
stock in the Company Stock Fund, which was one of the
fourteen investment alternatives in a defined contribution
employee benefit plan. The Plaintiffs also assert that the District
Court erred in determining that the Company Stock Fund was an
individual account plan and an Employee Stock Ownership Plan
(“ESOP”).
We exercise de novo review over
the dismissal of claims under
Federal Rule of Civil Procedure
12(b)(6). A.D. Bedell Wholesale
Co. v. Philip Morris Inc., 263 F.3d
239, 249 n.25 (3d Cir. 2001).
Furthermore, we must take all
factual allegations and reasonable
inferences as true and view them in
the light most favorable to
Plaintiffs. Id. The District Court
12
properly dismissed Plaintiffs’
complaint only if Plaintiffs could
have proved no set of facts entitling
them to relief. Id.Mariana v. Fisher, 338 F.3d 189, 195 (3d Cir. 2003) (full
citation provided).
Under § 1002(21)A of ERISA, 29 U.S.C. § 1002(21)A,
those having discretionary authority or discretionary
responsibility in the administration of a plan are fiduciaries.
Section 1104 imposes upon them fiduciary duties including the
duties of “care, skill, prudence, and diligence under the
circumstances.” 29 U.S.C. § 1104. Section 1109(a) makes plan
fiduciaries “personally liable to make good to [the] plan any
losses to the plan resulting from each . . . breach” of fiduciary
duty. 29 U.S.C. § 1109(a). And, finally, § 1132(a)(2) provides
that a “civil action may be brought . . . by a participant or
beneficiary . . . for appropriate relief under section 1109.” 29
U.S.C. § 1109.
The issue presented here is whether the complaint states
a claim under § 1109 – i.e., whether the complaint seeks relief
for the Schering-Plough Employees’ Savings Plan based on
allegations that there were “losses to the plan resulting from [a]
breach” of fiduciary duty. We believe it clearly does.
13
The complaint alleges that “[a]s a consequence of the
defendants’ breaches [of fiduciary duty], the Plan suffered
significant losses” and seeks “a monetary payment to the Plan to
make good to the Plan the losses to the Plan resulting from
[those] breaches of fiduciary duty.” Section 1109 allows the
Plan to recover “any losses” from a breach of fiduciary duty. 29
U.S.C. § 1109 (emphasis added). The fiduciary’s liability is not
limited to plan “losses that will ultimately redound to the benefit
of all participants.” The Plan held Schering-Plough stock as an
asset and that asset was greatly reduced in value allegedly
because of breaches of fiduciary duty. This clearly was a “loss”
to the Plan within the meaning of § 1109.4
Just as the fact that the assets at issue were held for the
ultimate benefit of Plaintiffs does not alter the fact that they
were held by the Plan, so, too, the fact that Plaintiffs may have
to show individual reliance on the defendants’ alleged
4
The Supreme Court did not hold otherwise in
Massachusetts Mutual Life Insurance Company v. Russell, 473
U.S. 134 (1985). While the Court did observe in that case that
§ 1132(a)(2) actions seek remedies which provide a benefit “to
the plan as a whole,” the issue presented here was not before the
Court. Moreover, the recovery in this case would go to the Plan
as a whole to be held in accordance with the terms of the plan,
including the payment of operating expenses and the like, which
would redound to the benefit of all participants.
14
misrepresentations to prevail on some claims does not mean they
do not seek recovery for Plan losses. As the Court aptly put it in
In re Honeywell Int’l ERISA Litigation, Civil No. 03-1214
(D.N.J., June 14, 2004) at 30:
[L]osses to the Plan may have resulted from
decisions by individual participants, but that does
not mean that those losses were not losses of the
Plan; it simply means that some of the decision
making for Plan investments was conducted by
the participants who contributed to it.
It is a non sequitur to say, as the District Court did, that
Plaintiffs cannot demonstrate any losses to the Plan because it
is an “individual account plan which includes an ESOP
investment alternative.” First, while the Plan is, indeed, an
“individual account plan,” this does not preclude the Plan from
having losses. Second, the Plan is not an “employee stock
ownership plan” or an “ESOP.” Under § 1107(d)(6)(A), an
“employee stock ownership plan” is “designed to invest
primarily in qualifying employer securities.” 29 U.S.C. §
1107(d)(6)(A). As this Court explained in Moench v. Robertson,
62 F.3d 553, 568 (3d Cir. 1995):
[ESOPs are] “device[s] for expanding the national
capital base among employees – an effective
15
merger of the roles of capitalist and worker.”
Donovan v. Cunningham, 716 F.2d at 1458. Thus,
the concept of employee ownership constituted a
goal in and of itself. To accomplish this end,
“Congress . . . enacted a number of laws designed
to encourage employers to set up such plans.” Id.
The Plan before us was designed to provide opportunities
for saving and investment. It was not designed to invest
primarily in securities of the employer. Indeed, the Plan was not
required to offer Schering-Plough stock as one of its investment
opportunities.
The District Court’s conclusions (1) that Plaintiffs’
contributions were never assets of the Savings Plan and never
aggregated, and (2) that Plaintiffs only seek damages for their
individualized losses, directly conflict with the express terms of
the Savings Plan as well as other allegations of the complaint.
The Savings Plan provides in Article 4.01(a) that
contributions to the Savings Plan
shall be invested in one or more
Investment Funds authorized by the
Investment Committee, which,
from time to time, may include
16
such equity funds, international
equity funds, fixed income funds,
money market funds, a Company
Stock Fund, and other funds or
investm ent veh icles as the
Investment Committee elects to
offer.
Article 4.02 provides as follows:
A participant shall make one
investment election covering his or
her Accounts in accordance with
the following options:
(a) 100 percent in
one of the available
Investment Funds;
(b) in more than one
Investm e n t F u n d
allocated in multiples
of 1 percent;
17
provided, however, that in no event
may a Participant allocate more
than 50 percent of future
contributions to the Company Stock
Fund. If a Participant fails to make
an investment election with respect
to 100 percent of his or her
Accounts, the portion of such
Accounts not subject to the
Participant’s investment election
shall be invested in a money market
fund or equivalent investment
vehicle.
Section 4.03 reads as follows:
Each Participant is solely
responsible for the selection of his
or her investment options. The
Trustee, the Committee, the
Investm e nt C o m m itte e , a ny
Employer, and the officers,
supervisors and other employees of
any Employer are not empowered
to advise a Participant as to the
manner in which his or her
18
accounts shall be invested. The fact
that an Investment Fund is
available to Participants for
investment under the Plan shall not
be construed as a recommendation
for investment in that Investment
Fund.
Pursuant to Article 4.05,
[a] participant may elect to
reallocate his or her Accounts
among the Investment Funds, in
multiples of 1 percent, by giving
such Notice as the Committee or its
delegate shall prescribe; provided,
however, that in no event may a
Participant allocate more than 50
percent of the value of his or her
Accounts at the time of the
reallocation to the Company Stock
Fund. The reallocation shall be
effective as soon as
administratively practicable after
the Trustee receives such Notice.
19
Article 5.01 requires the trustee of the Savings Fund to
value each of the Investment Funds each business day. “On each
Valuation Date there shall be allocated to the Accounts of each
Participant his or her proportionate share of the increase or
decrease in the fair market value of his or her Accounts in each
of the Investment Funds.” Article 5.03 requires the trustee to
furnish each participant with a statement setting forth the value
of his or her Accounts each calendar quarter.
Article 9.06 provides that until the accounts of a
participant who is entitled to distribution because of the
termination of employment or after the 65th anniversary of the
Participant’s date of birth, are completely distributed, “the
Accounts of a Participant who is entitled to a distribution shall
continue to be invested as part of the funds of the Plan . . . .”
In Section 10.09, the Savings Plan provides that “[t]he
Committee or its delegate shall maintain, or cause to be
maintained, records showing the individual balances in each
Participant’s Accounts. However, maintenance of those records
and Accounts shall not require any segregation of the funds of
the Plan.”
In Section 11.01, the Savings Plan provides that “[a]ll the
funds of the Plan shall be held by the Trustee appointed from
time to time by the Investment Committee or its delegate under
20
a trust agreement adopted, or as amended, by the Board of
Directors.”
Pursuant to Article 11.03, “Company Stock held by the
Trustee shall be voted by the Trustee at each annual meeting and
at each special meeting of stockholders of the Company as
directed by the Participant to whose Accounts such Company
Stock is credited.” (emphasis added).
Thus, contrary to the District Court’s interpretation of the
provisions of the Savings Plan, each participant’s deferred
payroll compensation was held in trust as the assets of the
Savings Plan. Each participant in the Savings Plan was provided
with an individualized account and periodically informed of the
individual balance in his or her account. The Savings Plan also
makes clear the fact that each participant has an individual
account does not “require any segregation of the funds of the
Plan.” Article 10.09.
The District Court cited this Court’s decision in Moench
in support of its determination that a plan that permits
employees to become part owners of their employer is an ESOP
and not a traditional pension plan governed by ERISA. As noted
above, the Defendants have conceded that the Savings Plan we
are considering is not an ESOP. In Moench, this Court held that
“in limited circumstances, ESOP fiduciaries can be liable under
21
ERISA for continuing to invest in employer stock according to
the plan’s direction . . . .” Id. at 556. It went on to say that
“[w]hile fiduciaries of pension benefit plans generally must
diversify investments of the plan assets . . ., fiduciaries of
ESOPS are exempted from this duty.” Id. at 568. In reversing
the District Court’s holding that an ESOP cannot be held liable
for investing solely in employer common stock, this Court
explained that “an ESOP fiduciary who invests the assets in
employer stock is entitled to a presumption that it acted
consistently with ERISA by virtue of that decision. However,
the plaintiff may overcome that presumption by establishing that
the fiduciary abused its decision by investing in employer
securities.” Id. at 571. The principle announced in Moench has
no application to the duty of a fiduciary of pension benefit plans
to diversify investments “so as to minimize the risk of large
losses.” Id. at 568. “ESOPs, unlike pension plans, are not
intended to guarantee retirement benefits, and indeed, by its very
nature, ‘an ESOP places employee retirements assets at much
greater risk than does the typical diversified ERISA plan.’” Id.
at 568. Because the Savings Plan in this case was not an ESOP,
the Moench decision does not resolve the issue presented in this
matter.
In a letter to this Court filed pursuant to Rule 28(j) of the
Federal Rules of Appellate Procedure, the Defendants cited a
recent decision of the Fifth Circuit, Milofsky v. American
22
Airlines, Inc., 404 F.3d 338 (5th Cir. 2005) reh’g en banc
granted, No. 03-11087, 2005 U.S. App. LEXIS 15122, (5th Cir.
July 19, 2005)5 in support of their argument that a participant
lacks standing to bring an action on behalf of an individual
account pension plan if he or she does not seek plan-wide relief.
In Milofsky, the plaintiffs were employed as pilots by
Business Express, Inc. (“BEX”) when it was acquired by AMR
Eagle Holding Corporation, the holding company of American
Eagle, Inc. (“American Eagle”). While employed by BEX, the
plaintiffs participated in its individual account pension plan. Id.
at 340. At the time of the acquisition of BEX, the plaintiffs were
given notice that the balance of their accounts in the BEX plan
would be transferred to a comparable American Eagle 401k
plan. The notices advised the plaintiffs when the transfers would
occur. The transfers did not occur, however, until months after
the time written in the notice. Id. at 340-41.
The plaintiffs filed a class action against American
Airlines and Towers Perrin, a benefits consulting firm hired by
American Airlines to render administrative services in
5
Fifth Circuit Rule 41.3 states that “[u]nless otherwise
expressly provided, the granting of a rehearing en banc vacates
the panel opinion and judgment of the court and stays the
mandate.”
23
connection with the plan. Id. at 340. The action, which was filed
under 29 U.S.C. § 1132(a)(2), alleged that American Airlines
and Towers Perrin had violated fiduciary duties in
misrepresenting how and when their accounts would be
transferred to the American Eagle 401(k) plan. Id. “They alleged
that because of the failure to effect the transfer of the class
members’ account balances in a timely and prudent manner, the
values of their accounts decreased because the assets remained
invested in the floundering BEX Plan longer than expected.” Id.
at 341. The plaintiffs requested “actual damages to be paid to
the [American Eagle] $ uper $ aver Plan, to be allocated among
their individual accounts proportionately to their losses resulting
from the alleged breach.” Id.The majority of the three-judge panel in Milofsky held
that “plaintiffs lack standing because this case in essence is
about an alleged particularized harm targeting a specific subset
of plan beneficiaries, with claims for damages to benefits [sic]
members of the subclass only, and not the plan generally.” Id. at
347.
The facts in Milofsky are clearly distinguishable from
those in the matter sub judice. In Milofsky, the plaintiffs alleged
that the value of their investments in the BEX plan decreased
because of the failure of the defendants to transfer the funds to
the American Eagle 401(k) plan. Id. at 351. Thus, this alleged
24
loss occurred prior to the transfer of the BEX plan participants’
investments to the American Eagle 401(k) plan. In Milofsky, the
plaintiffs sought damages on behalf of the BEX plan members,
and did not seek to restore assets of the American Eagle 401(k)
fund. Here, the Plaintiffs seek damages from the fiduciaries for
their violation of their duty to a subclass which had transferred
its funds to the trustee of the Savings Fund.
In Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995), the
Sixth Circuit held that a subset of employee benefit participants
has standing to bring an action for breach of fiduciary duty
under 29 U.S.C. §1109. The Court rejected the same argument
presented by the Defendants in this matter that “an action under
29 U.S.C. § 1109 must be brought on behalf of a plan as a whole
and that a claim brought by a subclass of plan participants fails
to satisfy this requirement.” Id. at 1452. The Sixth Circuit in
Kuper concluded that the plaintiffs had standing to bring this
action pursuant to §1132(a)(2). Citing Moench, however, it
affirmed the dismissal of the action on the merits, adopting this
Court’s rule that a fiduciary who invests in an employer’s stock
is entitled to a rebuttable presumption that it acted consistently
with ERISA in continuing to invest in an employer’s securities.
Kuper, 66 F.3d at 1458-59. The Sixth Circuit affirmed because
it concluded that the plaintiffs had failed “to rebut the
presumption that defendants acted reasonably in continuing to
hold Quantum stock.” Id. at 1459. In sum, the court concluded
25
in Kuper that § 1132(a)(2) does not authorize a plaintiff to
recover damages on his or her own behalf. Instead, a plaintiff
must seek to have the fiduciary reimburse the plan. Id. at 1453.6
6
At least one other circuit court, and several district
courts, have reached a similar conclusion. In Roth v. Sawyer-
Cleator Lumber Co., 61 F.3d 599 (8th Cir. 1995), the Eighth
Circuit addressed the issue of whether plaintiffs were bringing
their action under Section 1132(a)(2) individually or on behalf
of the plan. Id. at 605. The court explained that the defendants’
breach of fiduciary duty resulted in two types of loss: individual
loss to the beneficiaries, which is not actionable under Russell,
and a loss to the plan, which is actionable under Section
1132(a)(2), because the plan itself was also harmed due to the
breach. Id; see also In re Honeywell International ERISA Litg.,
No. 03-1214, 2004 U.S. Dist. LEXIS 21585, at *51-52. (D.N.J.
Sept. 14, 2004) (holding that even though plaintiffs could
choose the investment vehicles in which their funds were
invested, those funds were still held by the plan, and therefore
plaintiffs were permitted to bring their claim under Section
1132(a)(2)); In re CMS Energy ERISA Litg., 312 F. Supp. 2d
898, 913 (E.D. Mich. 2004) (citing Kuper in support of the
Court’s decision to reject defendant’s argument that a claim
must be dismissed under Section 1132(a)(2) unless it alleges
harm to all of a plan’s participants); Kayes v. Pac. Lumber Co.,
Nos. C-89-3500 SBA, C-91-1812 SBA, 1993 U.S. Dist. LEXIS
21090, *6-7 (N.D. Cal. Mar. 8, 1993), aff’d in part and rev’d in
part on other grounds, 51 F.3d 1449, 1462 (9th Cir. 1995)
26
The majority in Milofsky stated that the Court’s reasoning
in Kuper is directly contrary to the principle announced in
Supreme Court’s decision in Massachusetts Mutual Life
Insurance Company v. Russell, 473 U.S. 134 (1985), that a
participant’s action filed pursuant to § 1132(a)(2) must seek
remedies that provide a “benefit to the plan as a whole . . . .”
Milofsky, 404 F.3d at 346. In her dissent, Chief Judge Carolyn
Dineen King wrote that
Russell never reached the
conclusion that the majority
reaches, i.e., that standing can exist
under [§ 1132(a)(2)] only if all plan
participants would benefit from the
litigation. Instead, it only held that
a single plan participant, seeking
individual recovery for extra-
contractual damages payable
directly to her, could not proceed
with her lawsuit under [§
(holding that a plaintiff who sues under Section 1132(a)(2)
“does so on behalf of the plan and not in his individual capacity.
While the individual has standing to bring the suit, and stands to
gain if the suit is successful, his benefit is secondary or
derivative of the plans [sic] gain”).
27
1132(a)(2)]. Russell, 473 U.S. at
134, 105 S.Ct. 3085. Accordingly,
the majority’s holding goes far
beyond the holding of Russell.
Id. at 349 (emphasis added) (footnote omitted).
In footnote 4 of her opinion, Chief Judge King also
stated:
The majority correctly notes that
Russell distinguishes between relief
for individuals and relief for the
plan as a whole. Majority Opinion,
[344-45]. Russell does not,
however, stand for the proposition
that the ‘plan as a whole’ is
synonymous with ‘all participants
of the plan,’ and several courts
have rejected this definition of the
‘plan as a whole.’
Id. We agree with Chief Judge King’s interpretation of Russell,
and decline to follow the majority’s opinion in Milofsky.
In Russell, the plaintiff was a beneficiary under two
28
employee health benefit plans funded by her employer and
governed by ERISA. 473 U.S. at 136. She became disabled and
received plan benefits until October 17, 1979. She requested
internal review of the termination decision. The plan
administrator reinstated her benefits on March 11, 1980, and she
was paid retroactive benefits in full. Id.The plaintiff in Russell filed an action in state court
seeking damages for mental and emotional distress under state
law and ERISA claims resulting from the interruption of her
benefit payments, as well as punitive damages. Id. at 137. The
defendant removed the action to the District Court and moved
for summary judgment. The District Court granted the motion.
It held that the state-law claims were preempted by ERISA, and
that ERISA barred claims for extra-contractual and punitive
damages. Id. The Ninth Circuit affirmed the District Court’s
determination that the state law claims were pre-empted by
ERISA, but also concluded that the complaint alleged a cause of
action under §1132(a)(2) and that punitive damages could be
awarded. Id. at 138.
The Supreme Court reversed the judgment of the Ninth
Circuit. It held that § 1109 does not authorize extracontractual
or punitive damages. The Court also rejected the plaintiff’s
argument that a private right of action for extracontractual
damages was implied in § 1109. Id. at 148. In rejecting the
29
employee’s claims, the Court stated that “[a] fair contextual
reading of the statute makes it abundantly clear that its
draftsmen were primarily concerned with the possible misuse of
plan assets, and with remedies that would protect the entire plan,
rather than with the rights of an individual beneficiary.” Id. at
142.
Unlike the circumstances presented in this matter, in
Russell the plaintiff did not file a class action on behalf of an
ERISA employee benefits plan to require the defendants to pay
damages to the health benefit plan because of their alleged
breach of their fiduciary duty. Instead, she filed a private cause
of action for extracontractual and punitive damages.7 The Court
did not hold in Russell that a subgroup of plan participants
cannot file derivative action on behalf of an ERISA employee
benefits plan if the fiduciaries’ alleged breach did not affect the
investments of participants in other subgroups. That issue
simply was not before the Court.
The District Court relied in part on Russell and its
progeny in holding that
7
Thus, Russell involved an action brought by one
individual who erroneously sought to recover extra contractual
damages under ERISA.
30
[a]lthough individual employees’
contributions were never
aggregated and all employees
remained capable of investing on
an individualized basis, plaintiffs
now seek to theoretically aggregate
these individualized losses into
losses by “the plan.” Such an
after-the-fact aggregation by
individuals in order to sue on
behalf of the plan is not permitted
under the language of Sections
1104, 1109 or, most importantly
1132(a)(2).
The District Court based this holding on its misreading of the
Savings Plan. While employees were able to choose which fund
to invest their assets in, the Savings Plan makes clear that its
assets are aggregated and are held in trust by the Savings Plan
trustees at all times. The District Court’s reliance on Russell and
its progeny in support of its holding in this particular case was,
therefore, misplaced.
The Defendants cite the Ninth Circuit’s decision in
Horan v. Kaiser Steel Retirement Plan, 947 F.2d 1412 (9th Cir.
1991), in support of their argument that the Plaintiffs’ cause of
31
action in this case should be dismissed because the remedies
they seek are for their own benefit, and not on behalf of the
Savings Plan. In Horan, former employees of Kaiser Steel
sought to force it to use plan assets in order to purchase
annuities for the benefit of each former employee. Id. at 1415.
The Ninth Circuit held that the plaintiffs could not state a claim
because “[t]he remedies sought by the plaintiffs are for their
own benefit, and not for the benefit of the Plan. The objective of
the plaintiffs’ suit is to recover an annuity for each individual
plaintiff.” Id. at 1418.
Horan is easily distinguishable from this case. Unlike the
plaintiffs in Horan, the Plaintiffs in this case do not seek to
force the Savings Plan to purchase annuities for their individual
benefit. Instead, they seek to force the Defendants to make
payments to the Savings Plan for the Defendants’ alleged failure
to fulfill their fiduciary obligations, in order to remedy the
damage their actions caused to the Savings Plan. The fact that
damages paid to the Savings Plan for breaches of fiduciary
duties will also indirectly benefit its participants does not bar a
derivative action under §§ 1109 and 1132(a)(2). Smith v.
Sydnor, 184 F.3d 356, 363 (4th Cir. 1999).
We are persuaded that the District Court erred in
concluding that the complaint fails to state a claim on behalf of
the Savings Plan pursuant to §1109.
32
B
The Defendants contend that the “individualized nature”
of Plaintiffs’ claims is reflected in the fact that the consolidated
complaint “expressly excludes all Plan participants currently
employed by Schering” in the class definition. While this
statement is literally true, it seems to us more likely than not that
the referenced allegation was inadvertent, given the other
allegations of the complaint making it clear that this action was
brought for the ultimate benefit of “[a]ll persons who were
participants in . . . the Plan at any time [during the class period],
and whose accounts included investments in Schering stock.”
App. at 67. Compare Complaint paragraph 62, App. at 67, with
paragraph 3, App. at 48 (“Defendants, as fiduciaries of the Plan,
breached their duties to [the Plaintiffs] and to other participants
and beneficiaries of the Plan . . . particularly with regard to
holdings of Schering stock.”) At this point, however, any
ambiguity thus created is not significant8 and can be clarified by
amendment on remand.
8
The District Court has yet to address the propriety of
this suit being maintained as a class action and we, of course
express no view thereon.
33
III
In their motion to dismiss, the Defendants requested that
the District Court dismiss the action on the merits because the
Plaintiffs failed to allege facts showing a breach of duty by any
of the fiduciaries named in the consolidated complaint. The
District Court expressly declined to determine the merits of
Plaintiffs’ allegations that the Defendants breached their
fiduciary duties, or whether the counts against Mr. Kogan
should be dismissed “because the complaint failed to allege that
Mr. Kogan performed any specific fiduciary acts.”
The issues raised by the Defendants regarding the merits
of the claims of breaches of fiduciary duties involve complex
legal and factual questions. This matter was dismissed for lack
of standing prior to the filing of an answer, or any other pre-trial
proceedings. We decline to review the merits of the Defendants’
alternative bases for dismissing this action because “the record
as presented to us is not sufficiently adequate for us to give the
careful and thoughtful consideration these issues merit. Since
the case must go back to the District Court, we think these issues
would benefit from further elaboration there in the first
instance.” Callahan v. A.E.V., Inc., 182 F.3d 237, 249 (3d Cir.
1999). Additional discovery proceedings and possible
amendments to the pleadings may clarify the issues should
further appellate review become necessary to finally dispose of
34
this matter.
Conclusion
We conclude that the District Court erred in dismissing
this action on the sole ground that the Plaintiffs failed to state a
claim under § 1109 on behalf of the Savings Plan. Accordingly,
we reverse the judgment dismissing this action with prejudice
and remand with instructions to the District Court to conduct
further proceedings regarding the merits of the claims asserted
in the consolidated complaint.
35