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EDS Amicus Brief Case No. 04-41760 ___________ IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT ___________ RICHARD LANGBECKER, et al., Plaintiffs-Appellees, v. ELECTRONIC DATA SYSTEMS CORPORATION, et al., Defendants-Appellants. ___________ ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS, TYLER DIVISION Civil Action No. 6:03-MD-1512; 6:03-CV-126 (ERISA) ___________ CORRECTED BRIEF OF THE SECRETARY OF LABOR, ELAINE L. CHAO, AS AMICUS CURIAE IN SUPPORT OF PLAINTIFFS-APPELLEES REQUESTING AFFIRMANCE OF THE DISTRICT COURT'S DECISION ___________ HOWARD M. RADZELY Solicitor of Labor
TIMOTHY D. HAUSER Associate Solicitor
Elizabeth Hopkins Counsel for Appellate and Special Litigation United States Department of Labor Plan Benefits Security Division P.O. Box 1914 Washington, D.C. 20013-1914 Phone: (202) 693-5600 Fax: (202) 693-5610
TABLE OF CONTENTS
INTEREST OF THE SECRETARY OF LABOR
I. Plaintiffs' Claims Alleging That Defendants' Imprudence With Regard To The Company Stock Fund Caused Millions Of Dollars In Plan Losses State A Derivative Claim On Behalf Of The Plan Under ERISA Sections 409 And 502(a)(2)
II. The District Court Correctly Held That ERISA Section 404(c) Does Not Provide A Defense To Plaintiffs' Allegations That The Fiduciaries Imprudently Maintained The EDS Stock Fund As A Plan Investment Option
TABLE OF CONTENTS
Federal Cases: Allison v. Bank One-Denver, 289 F.3d 1223 (10th Cir. 2002)
Auer v. Robbins, 519 U.S. 452 (1997)
Best v. Cyrus, 310 F.3d 932 (6th Cir. 2002)
Central States, Southeast & Southwest Areas Pension Fund v. Central Transp. Inc., 472 U.S. 559 (1985)
Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984)
Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978)
In re Elec. Data Sys. Corp. "ERISA" Litig., 305 F. Supp. 2d 658 (E.D. Tex. 2004)
In re Elec. Data Sys. Corp. "ERISA" Litig., 224 F.R.D. 613 (E.D. Tex. 2004)
Fink v. Nat'l Sav. & Trust Co., 772 F.2d 951 (D.C. Cir. 1985)
Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995
Laborers Nat'l Pension Fund v. N. Trust Quantitative Advisors, Inc., 173 F.3d 313 (5th Cir. 1999)
Louisiana Env't Action Network v. EPA, 382 F.3d 575 (5th Cir. 2004)
Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985)
Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999)
Metzler v. Graham, 112 F.3d 207 (5th Cir. 1997)
Milofsky v. American Airlines, Inc., No. 03-11087, 2005 WL 605754 (5th Cir. Mar. 16, 2005)
Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995)
Rankin v. Rots, 278 F. Supp. 2d 853 (E.D. Mich. 2003)
Rego v. Westvaco Corp., 319 F.3d 140 (4th Cir. 2003)
In re Schering-Plough Corp. ERISA Litig., No. Civ. A. 03-1204, 2004 WL 1774760 (D.N.J. June 28, 2004)
In re Schering-Plough Corp., No. 04-3073 (3d Cir. filed Oct. 20, 2004)
Skidmore v. Swift & Co., 323 U.S. 134 (1944)
Steinman v. Hicks, 352 F.3d 1101 (7th Cir. 2003)
Strom v. Goldman, Sachs & Co., 202 F.3d 138 (2d Cir. 1999)
Tittle v. Enron Corp., 284 F. Supp. 2d 511 (S.D. Tex. 2003)
Tittle v. Enron Corp., No. 01-3913 (S.D. Tex. filed Aug. 30, 2002)
In re Unisys Sav. Plan Litig., 74 F.3d 420 (3d Cir. 1996)
Varity Corp. v. Howe, 516 U.S. 489 (1996)
In re WorldCom, Inc., 263 F. Supp. 2d 745 (S.D.N.Y. 2003) Federal Statutes and Rules: Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §1001, et seq.: Section 2(a), 29 U.S.C. § 1001(a) Section 2(b), 29 U.S.C. § 1001(b) Section 3(21)(A), 29 U.S.C. § 1002(21)(A) Section 3(34), 29 U.S.C. § 1002(34) Section 403, 29 U.S.C. § 1103 Section 403(a), 29 U.S.C. § 1103(a) Section 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B) Section 404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D) Section 404(c), 29 U.S.C. § 1104(c) Section 404(c)(1), 29 U.S.C. § 1104(c)(1) Section 404(c)(1)(B), 29 U.S.C. § 1104(c)(1)(B) Section 406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D) Section 406(b)(1), 29 U.S.C. § 1104(b)(1) Section 406(b)(3), 29 U.S.C. § 1104(b)(3) Section 407(d)(3), 29 U.S.C. § 1107(d)(3) Section 409, 29 U.S.C. § 1109 Section 409(a), 29 U.S.C. § 1109(a) Section 502(a)(2), 29 U.S.C. § 1132(a)(2) Section 502(a)(3), 29 U.S.C. § 1132(a)(3) Securities Act: Section 5, 15 U.S.C. 77e(a)(2) I.R.C. § 401(a) I.R.C. § 401(k) 29 C.F.R. § 2550.404c-1 29 C.F.R. § 2550.404c-1(b)(2)(B)(1)(i) 29 C.F.R. § 2550.404c-1(c)(2) 29 C.F.R. § 2550.404c-1(d)(2)(E)(4) Fed. R. Civ. P.: Rule 9(b) Rule 23 Rule 23(a) Other Authorities: Rev. Rul. 89-52, 1989-1 C.B. 110, 1989 WL 572038 (Apr. 10, 1989) DOL Letter No. 98-04A, 1998 WL 326300 (May 28, 1998) DOL Opinion Letter No. 83-6A, 1983 WL 22495 (Jan. 24, 1983)
DOL Opinion Letter No. 90-05A, 1990 WL 172964 (Mar. 29, 1990)
Letter from the Pension and Welfare Benefits Administration, U.S. Department of Labor to Douglas O. Kant, 1997 WL 1824017 (Nov. 26, 1997) 57 Fed. Reg. 46,906 (1992) David A. Littell et al., Retirement Savings Plans: Design, Regulation, and Administration of Cash or Deferred Arrangements 6 (1993)
The Secretary's brief as amicus curiae addressed the following two issues: 1. Whether plaintiffs' claims alleging that defendants' imprudence with regard to the company stock fund caused millions of dollars in plan losses state a derivative claim on behalf of the plan under ERISA sections 409 and 502(a)(2). 2. Whether the district court correctly held that ERISA section 404(c) does not provide a defense to plaintiffs' allegations that the fiduciaries imprudently maintained the EDS Stock Fund as an investment option for the plan. INTEREST OF THE SECRETARY OF LABOR The Secretary of Labor is charged with interpreting and enforcing Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1001, et seq. As the federal agency with primary interpretation and enforcement authority for Title I of ERISA, the Department of Labor has a strong interest in ensuring that courts correctly interpret ERISA. This case presents questions concerning the requirements for maintaining a class action under Rule 23 in a case involving an individual account plan under ERISA. The view espoused by defendants, although ostensibly limited to class certification issues, if accepted fully by this Court, would undermine the duties of fiduciaries with regard to individual account plans, and likely eliminate the ability of participants in such plans (and perhaps the Secretary) to bring suit on behalf of the plan under section 502(a)(2) to remedy fiduciary breaches. Despite defendants' disclaimer that this case is factually distinguishable from the Enron and WorldCom ERISA cases in that EDS did not go bankrupt, a broad decision accepting defendants' views would undermine if not eliminate the ability of both private plaintiffs and the Secretary to bring suit for fiduciary breach in the context of an individual account plan, even in cases, such as Enron, of significant fiduciary malfeasance leading to catastrophic losses.[1] The Secretary has a strong interest in ensuring that this Court does not reach such a result.
EDS is a corporation that provides information technology services. It sponsors a defined contribution retirement savings plan. This Plan is an "eligible individual account plan" under ERISA section 407(d)(3), 29 U.S.C. § 1107(d)(3), and also a "qualified cash or deferred" arrangement under I.R.C. § 401(k). As such, the Plan offers an array of investment options to the participating employees. The employees could invest up to 20% of their salary in the Plan, and could direct the Plan fiduciaries to invest these funds in one or more of the offered investment options, including an EDS Stock Fund, which invested up to 99% of its assets in EDS stock. The company also made matching contributions to employee investments, which were invested in the Stock Fund. These matching contributions were required to remain in that fund for two years. Plaintiffs, current and former Plan participants and beneficiaries, brought suit in the Eastern District of Texas under ERISA after EDS stock steeply declined in value following announcements by EDS in September 2002 that the company would suffer a revenue decrease rather than an increase, and that its expected earnings per share would be roughly one-quarter of what it had predicted earlier. They named as defendants EDS, the company's chief executive officer, the EDS Compensation and Benefits Committee and its members, the EDS Benefits Administration Committee and its members, and the EDS Investment Committee and its members. Plaintiffs claim that because of defendants' access to company information regarding undisclosed and improperly accounted for risks associated with the company's large outsourcing contracts, they should have known that EDS stock was overvalued and an imprudent investment at the time, and could have avoided the millions of dollars in Plan losses that occurred following the earnings restatement. More specifically, they allege that defendants were Plan fiduciaries, either because they had authority over Plan assets or because they appointed and had a duty to monitor the other fiduciaries, and they breached their duties of prudence and loyalty with regard to the Stock Fund.[2] On February 2, 2004, the district court issued a decision denying defendants' motion to dismiss. In re Elec. Data Sys. Corp. "ERISA" Litig., 305 F. Supp. 2d 658 (E.D. Tex. 2004). The court held, among other things, that all of defendants were ERISA functional fiduciaries, either by virtue of their exercise of discretion or control over the Plan investments, or by virtue of their appointment of other Plan fiduciaries. Id. at 666-67. The court also held that the heightened pleading standard of Rule 9(b), Fed. R. Civ. P., was inapplicable to plaintiffs' misrepresentation claims. Id. at 672. Shortly thereafter, plaintiffs moved for class certification under Fed. R. Civ. P. 23, of a class consisting of "all participants in the Plan and their beneficiaries, excluding the Defendants, for whose accounts the Plan made or maintained investments in EDS stock through the EDS Stock Fund." Defendants objected, arguing that the claims could not be brought on behalf of the Plan under section 502(a)(2), but were instead individual claims under section 502(a)(3) that did not meet the typicality and adequacy requirements of Rule 23(a). On November 8, 2004, the district court issued an order certifying, for purposes of the prudence claims, a class of all participants and beneficiaries whose accounts included investments in the company fund between September 9, 1999 and October 9, 2002. In re Elec. Data Sys. Corp. "ERISA" Litig., 224 F.R.D. 613 (E.D. Tex. 2004).
Defendants' primary argument
is that plaintiffs are not entitled to proceed with a class action under
Rule 23 because they are not entitled to bring a claim for monetary relief
to the Plan for fiduciary breaches under ERISA section 502(a)(2). They
argue that, as participants in a defined contribution plan, the individual
plaintiffs, rather than the Plan, bore the risk of investment losses, and
their claim under 502(a)(2) on behalf of the Plan consequently must fail.
Instead, defendants contend, plaintiffs' claims are merely individual claims
of harm that must be brought, if at all, under ERISA section 502(a)(3),
where the relief for fiduciary breach is limited, in defendants' view, to
injunctive relief (or disgorgement of unjust gains by the fiduciary), and
does not encompass the restoration of losses that plaintiffs seek. These
individual claims, defendants argue, conflict with each other in various
ways and thus do not meet Rule 23's requirements that the named plaintiffs
be adequate class representatives and that their claims be typical of the
class. This argument not only fundamentally misconstrues the nature of
defined contribution plans under ERISA, but also misreads the case law
interpreting the scope of ERISA's remedial provisions in general, and the
scope of section 502(a)(2) in particular. No decision of the Fifth Circuit
or the Supreme Court requires this Court to eviscerate the protections of
section 502(a)(2) in this manner. I. Plaintiffs'
Claims Alleging That Defendants' Imprudence With Regard To The Company Stock
Fund Caused Millions Of Dollars In Plan Losses State A Derivative Claim On
Behalf Of The Plan Under ERISA Sections 409 And 502(a)(2)
Under section 3(34) of ERISA, a defined
contribution pension plan 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). Defendants argue that because the Plan, like any defined
contribution plan, allocates any money it holds between individual accounts,
"the 401(k) Plan itself is thus indifferent as to how much money it holds
and owes as benefits." Original Brief of Defendants-Appellants (Def. Br.)
at 24. From this premise, defendants argue that plaintiffs in a defined
contribution plan do not have standing to bring a derivative action for plan
losses under section 502(a)(2), and therefore cannot bring a class action to
assert such claims. This argument misconstrues the nature of defined
contribution plans and their assets, and would, in effect, remove such
plans, which currently hold the majority of all pension plan assets
(approximately $2.3 trillion), from ERISA's fiduciary protections.
Section 403 of ERISA requires that the plan's
assets – consisting of all contributions and earnings – be held in trust by
one or more trustees who have authority and discretion to manage and control
the assets of the plan. See 29 U.S.C. § 1103(a); I.R.C. § 401(a).
Upon receipt of the employee contributions weekly, bi-weekly or monthly, the
plan fiduciary or custodian allocates, through accounting or bookkeeping
entries, the plan assets to the various individual participant "accounts."
Regardless of the allocation, these assets retain their nature as plan
assets and the plan fiduciary retains its obligation to perform its
fiduciary duties with respect to those assets. Thus, "contributions are
made to a single funding vehicle, usually a trust," and "as amounts are
contributed to the trust, they are allocated to the participant's account."
David A. Littell et al., Retirement Savings Plans: Design,
Regulation, and Administration of Cash or Deferred Arrangements 6
(1993).
Although the plan assets are allocated to
individual "accounts," the participants do not have ownership of their
accounts; legal title to all of the trust assets is held by the trustee.
See Rev. Rul. 89-52, 1989-1 C.B. 110, 1989 WL 572038 (Apr. 10, 1989)
("While a qualified trust may permit a participant to elect how amounts
attributable to the participant's account-balance will be invested, it may
not allow the participant to have the right to acquire, hold and dispose of
amounts attributable to the participant's account balance at will.")
(citations omitted). The total amount of assets held in the plan are not
only used to pay plan benefits, but are also used to defray operating costs,
including recordkeeping, legal, auditing, annual reporting, claims
processing and similar administrative expenses.
The prudence claims brought by plaintiffs here
seek millions of dollars in Plan losses stemming from alleged fiduciary
breaches. These claims clearly fall within the express language of section
409, 29 U.S.C. § 1109, which requires a plan fiduciary that breaches its
duties to make good "any losses" to the plan, and section 502(a)(2), which
provides that an action may be brought "for appropriate relief under
§1109." 29 U.S.C. § 1132(a)(2). Nothing in sections 409 or 502(a)(2)
exempts defined contribution pension plans from their scope. Thus, a plain
reading of the statute allows for the precise kind of loss claim that
plaintiffs have brought here.
Moreover, this plain reading of the fiduciary
breach and remedy provisions set forth in sections 409 and 502(a)(2) is
entirely consistent with the statute's purpose and structure. First, in
enacting ERISA, Congress expressly found that "the continued well-being and
security of millions of employees and their dependents are directly
affected" by employee benefits plans. 29 U.S.C. § 1001(a). Given the
concomitant impact of these plans on employment stability and interstate
commerce, Congress declared it the policy of ERISA to protect these
interests by, among other things, "establishing standards of conduct,
responsibility, and obligations for fiduciaries of employee benefit plans,
and by providing for appropriate
remedies, sanctions, and ready access to
the Federal courts." Id. at § 1001(b).
Considering these statements in the statute, it defies common sense to
suggest that Congress intended, without saying so expressly, to exempt the
largest segment of pension plans, which, it bears repeating, hold some $2.3
trillion in assets, from ERISA's primary remedial provision governing
fiduciary breaches with respect to plans.
Ironically, section 404(c), which defendants cite
as supporting their position that certification was improper, also bolsters
what the plain language of sections 409 and 502(a)(2) provide: that plan
participants in individual account plans may sue breaching fiduciaries for
losses. Section 404(c) provides that where an individual account plan
"permits a participant or beneficiary to exercise control over assets of his
account," and where the participant or beneficiary does so in accordance
with the Secretary's regulations, "no person who is otherwise a fiduciary
shall be liable under this part for any loss, or
by reason of any breach, which results from such participant's . . .
exercise or control." 29 U.S.C. § 1104(c)(1)(B). This exemption from
liability for loss makes no sense if defendants are correct that fiduciaries
to individual account plans have no such liability. But defendants are not
correct. Instead, both ERISA's general statement
of purpose, and its one provision that deals expressly with individual
account plans, clarify that the statute gives a loss remedy to defined
contribution plan participants that have been harmed by fiduciary
mismanagement or malfeasance.
The decision issued by this Court last week in
Milofsky v. American Airlines, Inc., No. 03-11087, 2005 WL 605754
(5th Cir. Mar. 16, 2005), is not to the contrary. In Milofsky, 218
pilots who were participants in one 401(k) plan brought suit under section
502(a)(2) after their company was acquired by a subsidiary of American
Airlines and their account balances were transferred in an allegedly
untimely and imprudent manner. Id. at *1. They sued the fiduciaries
of the American plan, as well as the benefits consulting firm for the plan,
alleging that they were misled about how the transfer would be accomplished,
and that because of fiduciary breaches with regard to the timeliness of the
transfer, the value of their accounts, and thus the overall value of the
plan, decreased. Id. They requested actual damages to be paid to
the plan and allocated among their individual accounts. Id.
On appeal, this Court affirmed the district
court's dismissal of the case. Relying on Massachusetts Mutual Life Ins.
Co. v. Russell, 473 U.S. 134 (1985), the Court held that "plaintiffs
lack standing because this case in essence is about an alleged
particularized harm targeting a specific subset of plan beneficiaries . . .
who seek only to benefit themselves and not the entire plan as required by §
502(a)(2)." 2005 WL 605754, at *7. The Court compared the pilots' claims
to those of the plaintiff in Matassarin v. Lynch, 174 F.3d 549 (5th
Cir. 1999), reasoning that in both cases "the plaintiffs have alleged
breaches of fiduciary duty that uniquely concern only their individual
accounts." 2005 WL 605754, at *3.[3]
The Court held that because the plaintiffs in Milofsky sought relief
"channeled only to the individual accounts of the plaintiff class members,"
and their claims did "not otherwise seek to vindicate rights of the entire
plan – given that the alleged fiduciary breaches occurred only as to the
members of the plaintiff class and were not directed to the whole plan
membership – this claim does not benefit the entire plan." Id. at
*4. The Court expressly stopped "short, however, of saying that there is no
standing unless all plan participants would benefit from the litigation."
Id. at *12 n.16. Instead, the Court noted that "[t]he central
question, in the context of an individual account plan, is whether the suit
inures to the benefit of the plan, which occurs whenever all plan
participants would directly benefit (by all having increased balances in
their individual accounts) or when the suit seeks to vindicate the rights of
the plan as an entity when alleged fiduciary breaches targeted the plan as a
whole – whether the suit is filed by all plan participants or only a subset
thereof." Id.
Thus, the Court refused to "speculate on every
possible situation in which a suit that demands relief beneficial to a large
proportion of the beneficiaries can reasonably be said to 'protect the
entire plan.'" 2005 WL 605754, at *5. Rather, the Court concluded that "it
is enough to say, for present purposes, that the specific relief here
requested, affecting only 218 individual accounts out of a much larger plan
[with presumably thousands of participants], is much too narrow to
qualify." Id.
Accordingly, the decision in Milofsky does
not support defendants' position here. First, plaintiffs here allege that
the fiduciary defendants breached their ERISA duties by imprudently and
disloyally retaining the EDS Stock Fund as an investment option at a time
when they had reason to know that the financial statements of the company
did not properly reflect the company's worth. These allegations concern
breaches that, by their nature, affect the Plan as a whole, because they
concern the imprudent nature of a particular investment option, not for any
one individual, but for the Plan as a whole. In other words, because the
fiduciaries' actions or inactions made the allegedly imprudent option
available to all participants in the Plan, whether or not they chose to
invest in that option, the fiduciaries breached their duties owed to all the
participants. Thus, the claim here is akin to the failure to diversify
claim in Steinman v. Hicks, 352 F.3d 1101 (7th Cir. 2003), which the
Milofsky court recognized "inured to the benefit of the entire plan,"
and was thus distinguishable from the claims of "misrepresentations and
untimely transfers made with respect to a specific [and small] subclass of
participants" at issue in the Milofsky case. 2005 WL 605754, at *6.
Second, and relatedly, the Stock Fund was not
merely an investment option available for Plan participants to choose, it
was also the vehicle through which EDS made its matching contributions to
each of the participants. For this reason, as the district court found,
nearly all of the approximately 61,000 participants were likely to have had
an interest in EDS stock for at least part of the class period. 224 F.R.D.
at 621 Thus, every participant (or nearly every one) is likely to "directly
benefit (by all having increased balances in their individual accounts)."
Milofsky, 2005 WL 605754, at *12 n.16. Far from supporting
defendants' position that plaintiffs lack standing to bring a section
502(a)(2) claim in these circumstances, the decision in Milofsky
appears to assume that such an action is available.
Nor can the Supreme Court's decision in
Russell be read to exempt defined contribution plans from the scope of
section 502(a)(2). Unlike this case, Russell involved a claim by a
plaintiff for a direct recovery of individual damages stemming from a
benefit denial. In Russell, a plan's disability committee terminated
and then reinstated a participant's disability benefits. Claiming losses
from the interruption in benefit payments, the participant brought suit
under section 502(a)(2) for compensatory and punitive damages, payable not
to the plan for a loss of plan assets, but directly to the individual
participant for injuries she personally sustained. 473 U.S. at 137-38.
After reviewing the text of section 409, the provisions defining the duties
of a fiduciary and the provisions defining the rights of a beneficiary, the
Supreme Court held that the participant did not have standing to seek
extra-contractual compensatory or punitive damages for improper or untimely
processing of a benefit claim under sections 409 and 502(a)(2) of ERISA.
Although sections 409 and 502(a)(2) of ERISA provide for the recovery of
plan losses, those remedial provisions did not create an extra-contractual
remedy for the individual injuries sustained by the participant in
connection with her benefit claim. In so holding, the court stated "that
recovery for a violation of § 409 inures to the benefit of the plan as a
whole." Id. at 140.
Russell
carefully distinguished relief to be paid to a plan as damages for the
mismanagement of plan assets, as sought here, from relief to be paid to an
individual as damages for personal pain and suffering caused by a benefit
payment delay, as sought in Russell, 473 U.S. at 143-44. In
Russell, the plaintiff sought individualized relief, payable to herself,
for alleged injuries that she personally incurred without regard to whether
the plan had suffered any loss or diminution of assets. She did not allege
any injury to the plan or reduction of its assets, nor did she seek a
recovery payable to the plan. Thus, Russell cannot in any way be
read to exclude from the scope of section 409(a) an action on behalf of a
plan to recover losses caused by fiduciary breaches related to plan
management.
Indeed, as the Supreme Court noted in Russell,
"the principal statutory duties imposed on the trustees relate to the proper
management, administration, and investment of . . . assets, the maintenance
of proper records, the disclosure of specified information, and the
avoidance of conflicts of interest." 473 U.S. at 142-43. Thus, the Court
pointed out in Varity Corp. v. Howe, 516 U.S. 489 (1996), that the
specific purpose of section 502(a)(2) is to allow suits to enforce
"fiduciary obligations related to the plan's financial integrity," id.
at 512, in accordance with "a special congressional concern about plan asset
management" reflected in section 409, id. at 511; see also
Russell, 473 U.S. at 140 n.8 ("the crucible of congressional concern
was [the] misuse and mismanagement of plan assets by plan administrators and
. . . ERISA was designed to prevent these abuses in the future").
There is, therefore, no basis for reading
Russell so broadly that losses to a defined contribution plan caused by
fiduciary mismanagement, which significantly diminish the retirement
security of participants or the amount of assets held in trust, cannot be
recovered. The fact that the Plan, like all defined contribution plans,
provides for individual accounts, does not remove it from the protection of
ERISA, or make any less applicable Congress' goal to protect retirement
plans and their participants, as many courts have explicitly or implicitly
held. See, e.g., Steinman v. Hicks, 352 F.3d 1101
(clarifying that a claim for losses relating to financial mismanagement is
properly brought under section 502(a)(2) even if the relief ultimately flows
to individuals); In re WorldCom, Inc., 263 F. Supp. 2d 745, 765 (S.D.N.Y.
2003) (allowing claim under section 502(a)(2) based on allegations that
401(k) plan fiduciaries "were obligated to but failed to act with prudence
regarding the Plan's continued offer of WorldCom stock as a Plan
investment"); Tittle v. Enron Corp., 284 F. Supp. 2d 511 (S.D. Tex.
2003) (allowing claims against 401(k) and ESOP fiduciaries to proceed under
section 502(a)(2)).[4] Defendants
argue that the claim is in reality an individual claim for "appropriate
equitable relief" for fiduciary breach under ERISA section 502(a)(3), 29
U.S.C. § 1132(a)(3), and that such relief is limited to injunctive relief or
disgorgement of unjust enrichment. Def. Br. at 17-18, 27-29.
Although the Secretary has argued on numerous
occasions that participants can recover under section 502(a)(3) for their
direct monetary losses caused by fiduciary breaches, the courts have not
been uniform in their approach to such relief. Compare, e.g.,
Rego v. Westvaco Corp., 319 F.3d 140, 144-46 (4th Cir. 2003) with
Strom v. Goldman, Sachs & Co., 202 F.3d 138, 143-44 (2d Cir. 1999).
If this court were to find that a section 502(a)(2) action is not permitted
in this case, defined contribution plan participants would be without a
monetary remedy unless this court holds that make-whole relief of this kind
is available under section 502(a)(3), an issue the Fifth Circuit has not yet
addressed. Cf. Milofsky, 2005 WL 605754, at *7 & n.23 (noting
that section 502(a)(3) "might deny the plaintiffs the particular remedy they
desire," and that the "Supreme Court has indicated that compensatory and
punitive damages may not be available"). However, even if there may be an
available remedy under section 502(a)(3), ERISA's "catch-all" provision,
ERISA sections 409(a) and 502(a)(2) expressly provide that plan participants
may bring suit for losses to the plan resulting from fiduciary breaches.
There is simply no basis for the denial of such a remedy here. See
Varity, 516 U.S. at 515 ("We are not
aware of any ERISA-related purpose that denial of a remedy would serve.").
In essence, defendants imply that a defined
contribution plan, such as a 401(k) plan, itself holds no plan assets, but
instead is little more than an administrative device to hold, invest, and
pay out benefits from the investment accounts of the numerous participants.
If this is true, ERISA cannot meet its goal of protecting the
security of retirement benefits promised by individual account plans. Not
only would the defendants' argument effectively remove more than $2 trillion
of plan assets from the scope of section 502(a)(2), but if taken to its
logical extreme, would eliminate ERISA's stringent fiduciary
responsibilities with respect to those assets. ERISA imposes no obligation
of prudence or loyalty with respect to assets which do not belong to the
plan. Similarly, ERISA's trust requirement applies only to the "assets of
an employee benefit plan (ERISA section 403);" ERISA defines fiduciaries as
persons with control over plan assets (ERISA section 3(21)(A)); and many of
ERISA's prohibitions on self dealing are limited to "assets of the plan" (ERISA
sections 406(a)(1)(D), 406(b)(1), and (b)(3)). Under the defendant's
logic, fiduciary defendants would be exempt from these important duties, as
well as from the losses caused by their failure to adhere to ERISA's
dictates, inasmuch as the only interests at stake are individuals'
interests, rather than the plan interests protected by these essential ERISA
safeguards. Rather than read these provisions out of the statute, however,
the court should reject the defendants' argument and hold that the
plaintiffs' allegations, if true, caused a loss to the Plan, notwithstanding
the allocation of the loss between individual accounts. Such a
reading comports with the statute's express language, and gives meaning to
the protections Congress promised retirees when it enacted ERISA.
Here, the district court correctly viewed
plaintiffs' prudence claims, not as a collection of individual claims of
harm, but as an overarching claim that the Plan was economically injured by
the imprudence of the fiduciaries in managing the stock fund. Viewed in
this light, the court was correct to treat as irrelevant defendants'
contentions that individual members of the class had conflicting claims
because of when, if ever, they divested their accounts of company stock.
II.
The District Court Correctly Held That
ERISA Section 404(c) Does Not Provide A Defense To Plaintiffs' Allegations
That The Fiduciaries Imprudently Maintained The EDS Stock Fund As A Plan
Investment Option Defendants
argue that the claims are not subject to class treatment because the Court
must make individual determinations as to the applicability of ERISA section
404(c), which in some circumstances relieves the fiduciary of responsibility
for participant-directed investments. ERISA section 404(c) applies to
individual account plans that are designed and operated so that participants
exercise independent control over the assets in their accounts. Under ERISA
section 404(c)(1)(B), 29 U.S.C. § 1104(c)(1)(B), a "person who is otherwise
a fiduciary" is not liable for losses to the plan resulting from the
participant's selection of investments in his own account, provided that
[the] participant . . . exercised control over the assets in his account (as
determined under regulations of the Secretary)." Id. at §
1104(c)(1). Thus, to be exempt under section 404(c), the fiduciary must
show that the plan met the detailed requirements of the Department of
Labor's regulations. See 29 C.F.R. § 2550.404c-1. As an
initial matter, it is difficult to see why, given the particular claims here
that the fiduciaries breached their duties by retaining the Stock Fund as an
option for the Plan and continuing to make the employer match in that Fund
when it was no longer prudent to do so, there will be any need for the
district court to make particularized determinations with regard to
individual participants. Rather, it seems much more likely that the
disagreements between the parties concerning the Plan's section 404(c)
status will center on Plan-wide questions, such as whether the fiduciaries
"concealed material non-public facts regarding the investment" not from any
particular participant, but from all the participants. See Original
Brief of Plaintiffs-Appellees (Plaintiff's Br.) at 37 n.25, quoting 29 C.F.R.
§ 2550.404c-1(c)(2). Furthermore, section 404(c) is an affirmative defense
on which plaintiffs bear the burden of proof. See In re Unisys,
74 F.3d at 446; Allison v. Bank One-Denver, 289 F.3d 1223, 1238 (10th
Cir. 2002). If the district court decides as a general matter that the Plan
does not qualify under the Secretary's regulation, for instance, because of
a failure to disclose accurate information, it will never have to decide
whether any participants exercised individual control.[5] In any
event, defendants' section 404(c) argument fails for another, more
fundamental reason. As the district court correctly held, even if the Plan
is a 404(c) plan, defendants cannot escape liability for alleged imprudence
with regard to offering the company stock fund. See, e.g.,
Enron, 284 F. Supp. 2d at 577. By its terms, ERISA section 404(c)
provides relief from ERISA's fiduciary responsibility provisions that is
both conditional and limited in scope. The scope of ERISA section 404(c)
relief is limited to losses or breaches "which resulted from" the
participant's exercise of control. The
preamble to the regulation states that "a fiduciary is relieved of
responsibility only for the direct and necessary consequences of a
participant's exercise of control." See 57 Fed. Reg. 46,906, 46,924
(1992). A clarifying footnote explains that the act of designating a plan
investment option is not a direct and necessary result of any participant
direction and section 404(c) plan fiduciaries are thus still obligated by
ERISA's fiduciary responsibility provisions to prudently select the
investment options under the plan and "to periodically evaluate the
performance of such vehicles to determine . . . whether [they] should
continue to be available as participant investment options." Id. at
n.27. The Secretary has reiterated this interpretation on numerous
occasions, see DOL Letter No. 98-04A, 1998 WL 326300, at *3 n.1 (May
28, 1998), and Letter from the Pension and Welfare Benefits Administration,
U.S. Department of Labor to Douglas O. Kant, 1997 WL 1824017, at *2 (Nov.
26, 1997), most recently in her amicus briefs in Tittle v. Enron Corp.,
No. 01-3913 (S.D. Tex. filed Aug. 30, 2002), and In re Schering-Plough
Corp., No. 04-3073, at 17 & n.17 (3d Cir. filed Oct. 20, 2004). In its amicus brief
in support of defendants, the Business Roundtable argues (Brief at 12) that
this interpretation is entitled to deference only to the extent that it has
the power to persuade under the Supreme Court's decision in Skidmore v.
Swift & Co., 323 U.S. 134, 140 (1944). It cites this Court's
decision in Louisiana Environmental Action Network v. EPA, 382 F.3d
575 (5th Cir. 2004), for the proposition that the Secretary's position is
only entitled to Skidmore deference because it was first set forth in
the preamble to her regulation. The argument is wrong. Under the Supreme
Court's decision in Auer v. Robbins, 519 U.S. 452, 457, 462 (1997),
an agency's interpretation of its own regulation is entitled to the highest
deference under Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837.
Louisiana Environmental holds that an interpretation set forth in a
proposed regulation is only entitled to Skidmore deference. 382
F.3d at 583. Here, the statute expressly delegated to the Secretary the
task of promulgating a regulation governing when a participant will be
viewed as having exercised independent control over the assets in his
account for purposes of section 404(c). See 29 U.S.C. § 1104(c) ("if
a participant or beneficiary exercise control over his account (as
determined under regulations of the Secretary)"). The Secretary's
contemporaneous interpretation of the final notice-and-comment
regulation as preserving the fiduciary's duty to prudently select and
monitor the investment options – published in the federal register with the
regulation, and uniformly adhered to in numerous public pronouncements – is
reasonable and entitled to controlling weight. Chevron, 467 U.S. at
845. Thus,
although the participants in defined contribution plans are given a measure
of control over investment decisions, the plan fiduciaries nevertheless
retain the duty to prudently choose and monitor the investment options.
See Enron, 284 F. Supp. 2d at 577. Contrary to defendants'
argument, Def. Br. at 37-38, this is true even where, as here, the Plan
terms require that the Plan offer a company stock fund. Fink v. Nat'l
Sav. & Trust Co., 772 F.2d 951, 955-56 (D.C. Cir. 1985); Eaves v.
Penn, 587 F.2d 453, 458-60 (10th Cir. 1978). A "fiduciary is not
required to blindly follow the Plan's terms," but, under ERISA section
404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D), must "act 'in accordance with the
documents and instruments governing the plan' insofar as those documents are
consistent with the provisions of ERISA." Rankin v. Rots, 278 F.
Supp. 2d 853, 878 (E.D. Mich. 2003), quoting Best v. Cyrus,
310 F.3d 932, 935 (6th Cir. 2002). Thus, fiduciaries have a duty under
section 404(a)(1)(D) to decline to follow the terms of the plan document
where those terms require them to act imprudently in violation of ERISA
section 404(a)(1)(B). Central States, Southeast & Southwest Areas
Pension Fund v. Central Transp. Inc., 472 U.S. 559, 568 (1985) ("trust
documents cannot excuse trustees from their duties under ERISA"); Fink,
772 F.2d at 954-56 (ERISA's prudence and loyalty requirements apply to all
investment decisions made by employee benefit plans, including those made by
plans that may invest 100% of their assets in employer stock). It follows
that plan fiduciaries are obligated to act prudently and solely in the
interest of the participants and beneficiaries in deciding whether to
purchase or retain employer securities despite language requiring the plan
to purchase employer securities. See, e.g., Laborers Nat'l
Pension Fund v. N. Trust Quantitative Advisors, Inc., 173 F.3d 313, 322
(5th Cir. 1999); Kuper v. Iovenko, 66 F.3d 1447, 1457 (6th Cir.
1995); Moench v. Robertson, 62 F.3d 553, 569 (3d Cir. 1995); DOL
Opinion Letter No. 90-05A, 1990 WL 172964, at *3 (Mar. 29, 1990); DOL
Opinion Letter No. 83-6A, 1983 WL 22495, at *1-*2 (Jan. 24, 1983). There is
no merit to the argument that the Secretary's interpretation of her
regulation implementing section 404(c) effectively eliminates the statutory
exemption because there would never be a scenario where it would be
applicable. Brief of Amici Curiae Business Roundtable, et al., in Support
of Appellants Seeking Reversal of the Ruling Below Granting Class
Certification (Roundtable Br.) at 13. In a 404(c) plan, a fiduciary that
oversees appropriate investment funds has no responsibility for the
participant's own decisions as to how to allocate investments between
funds. For example, even if a participant chooses to invest his entire
account in a particularly volatile fund, or in a mix of funds that was
wholly incompatible with the participant's particular retirement
needs, 404(c) makes clear that the fiduciary is not responsible for the
participant's poor judgment. What it does not do is relieve the fiduciary
of its liability for choosing or retaining the investment options for the
plan, a task over which the fiduciary, and not the participant, has
control. Far from rendering section 404(c) meaningless, the Secretary's
interpretation sensibly allocates liability (and relief from liability)
based on whether the fiduciary or the participant has and exercises control
over the choice. Nor is
there merit to the Business Roundtable's argument (Roundtable Br. at 15 &
n.3) that modern portfolio theory, or the Fifth Circuit's embrace of that
theory, N. Trust Quantitative Advisors, Inc., 173 F.3d at 317-18 ,
322, is in any way inconsistent with a suit alleging that a particular
investment was an imprudent option for an employee benefits plan. While it
may be perfectly prudent, as a general matter, to include a relatively risky
investment in a well-diversified portfolio of investments, this is only true
where the risk associated with that investment is commensurate with the
likely returns. It is certainly not the case where the investment is
overvalued, as plaintiffs allege was the case here, because of improper
accounting practices and false or misleading financial statements. Second
Amended Consolidate Class Action Complaint at ¶ ¶ 124-127 (material but
undisclosed risks in EDS's IT outsourcing contracts related to
benchmarking), ¶ 139 (misleading SEC filings incorporated into summary plan
descriptions), ¶ 152 (defendants should have EDS stock not a suitable
investment because "EDS's inappropriate accounting and business practices").
For
similar reasons, although the Secretary takes the position that plan
participants may not recover under section 502(a)(2) to recover losses that
result from a mere downturn, even a sharp one, in the price of a stock,
see
Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997) ("[p]rudence is
evaluated at the time of the investment without the benefit of hindsight"),
the allegations here are not merely that the stock price dropped due to a
number of "common business setbacks." Def. Br. at 8-9. Rather, contrary to
the picture painted by defendants, plaintiffs allege that the fiduciary
defendants, as corporate insiders, had reason to know that the company's
financials were overstated. See Amended Complaint at ¶ 139,
¶ 152. Consequently, if,
as alleged, defendants violated their fiduciary duties when they continued
to offer EDS stock as an investment option, section 404(c) provides no
defense to their own fiduciary misconduct, and the district court was
correct to disregard the effect of section 404(c) in determining whether the
prudence claims should be certified as a class action. Instead, plaintiffs
have the right, as determined by Congress, to seek relief on behalf of the
Plan under section 502(a)(2) of ERISA, 29 U.S.C. § 1132(a)(2). Although
defendants argue that this reading of section 404(c) is "inconsistent with
the Congressional policy of personal responsibility embodied in" that
section, Def. Br. at 42, in fact, their reading of section 404(c) (and
indeed of sections 409 and 502(a)(2)) is inconsistent with the policy of
fiduciary responsibility that is the cornerstone of ERISA. For the
reasons stated above, the Secretary of Labor urges this Court to affirm the
district court's class certification order.
Respectfully submitted,
HOWARD M. RADZELY
Solicitor of Labor
Associate Solicitor Plan Benefits Security Division
________________________ ELIZABETH HOPKINS Counsel for Appellate and Special Litigation United States Department of Labor Office of the Solicitor Plan Benefits Security Division 200 Constitution Avenue, NW Room N4611 Washington, DC 20210 (202) 693-5600 (202) 693-5610 (fax)
CERTIFICATE OF SERVICE In accordance with Fed. R. App. P. 25(d) and 5th Cir. R. 31.1, I hereby certify that on this 26th day of April, 2005, I served (sent via Federal Express) one paper copy of the Unopposed Motion of the Secretary of Labor for Leave to File a Corrected Copy of Her Brief as Amicus Curiae on the following counsel:
Susman Godfrey, L.L.P. Barry C. Barnett Jonathan Bridges 901 Main Street, Suite 4100 Dallas, Texas 75202-3775 Tel: (214) 754-1900 Fax: (214) 754-1933
Proskauer, Rose, L.L.P. Robert Rachal Rene E. Thorne 909 Poydras Street, Suite 1100 New Orleans, La. 70112 Tel: (504) 310-4088 Fax: (504) 310-2022
________________________ Elizabeth Hopkins Counsel for Appellate and Special Litigation United States Department of Labor Plan Benefits Security Division P.O. Box 1914 Washington, D.C. 20013-1914 Phone: (202) 693-5600 Fax: (202) 693-5610
CERTIFICATE OF COMPLIANCE I hereby certify that the Corrected Brief of the Secretary of Labor, Elaine L. Chao, as Amicus Curiae in Support of Plaintiffs-Appellees Requesting Affirmance of the District Court's Decision complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) and contains 6,994 words, excluding the parts of the brief exempted by Fed. R. App. 32(a)(7)(B)(iii) . Also, this brief complies with the typeface requirements of Fed. R. App. 32(a)(5) and the type style requirements of Fed. App. P. 32(a)(6) and has been prepared in a proportionally-spaced typeface using Microsoft XP in Times New Roman 14-point font size.
_____________________________ Elizabeth Hopkins Counsel for Appellate and Special Litigation United States Department of Labor Plan Benefits Security Division P.O. Box 1914 Washington, D.C. 20013-1914 Phone: (202) 693-5600 Fax: (202) 693-5610
Footnotes [1] The Secretary has brought her own suit under Section 502(a)(2) against fiduciaries of the Enron individual account plan in a district court within this Circuit, and thus has a direct interest in the proper resolution of this issue. [2] Plaintiffs also brought a claim for rescission under section 5 of the Securities Act, 15 U.S.C. § 77e(a)(2). In Count V of the Complaint, they allege that EDS issued unregistered stock to the plan in violation of that provision. That claim is not at issue in this appeal. [3] The plaintiff in Matassarin brought suit under section 502(a)(2) alleging that her account balance was miscalculated, that she should be entitled to an immediate cash distribution and that the plan fiduciaries had breached their duties by failing to comply with the tax code, which jeopardized the plan's tax qualified status. As the court correctly noted, only the allegation concerning the tax-qualified status of the plan was properly brought under section 502(a)(2) because it involved the interest of the plan as a whole. 174 F.3d at 565-66. The other allegations could not be brought under section 502(a)(2) because, unlike in this case, they did not concern an alleged injury to the plan, such as the diminution of current participants' accounts and the resulting diminution of the amount of plan assets held in trust. Id. at 567-68. Accordingly, Matassarin provides no support for the proposition that participants in a 401(k) or other defined contribution plan may not sue for relief under section 502(a)(2) for fiduciary mismanagement of plan assets. [4] The district court in In re Schering-Plough Corp. ERISA Litig., No. Civ. A. 03-1204, 2004 WL 1774760 (D.N.J. June 28, 2004), held, we believe erroneously, that participants in individual account plans cannot sue under section 502(a)(2) to recover losses sustained by the plan as a result of fiduciary breaches where the losses will be distributed to individual accounts, and where the contributions to the accounts came solely from employees, which the court believed were not plan assets. This case is currently on appeal and the Secretary has filed an amicus brief urging reversal. On the other hand, In re Unisys Savings Plan Litigation, 74 F.3d 420 (3d Cir. 1996), said nothing about the ability to sue under section 502(a)(2), but instead addressed the affirmative defense in section 404(c), which we discuss more fully below. See, infra, at 22-30. The Unisys court held that a defendant has the heavy affirmative burden of showing that section 404(c) applies. However, the court also held, in a case that arose before the effective date of the Secretary's 404(c) regulation, that if a defendant proves such control, a plaintiff may not recover his investment losses, even if the investment option was imprudently selected. Id. at 443-46. [5] The Secretary's regulation imposes detailed requirements for a plan to qualify as a section 404(c) plan, and many of them are plan-wide requirements. For instance, to qualify as a 404(c) plan, the participants must be provided an "explanation that the plan is intended to constitute a plan described in section 404(c) and [the regulations], and that the fiduciaries of the plan may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by such participant or beneficiary." 29 C.F.R. § 2550.404c-1(b)(2)(B)(1)(i). Moreover, the regulation contains extensive provisions relating to the acquisition or sale of employer securities, including requirements relating to the dissemination of information to participants on the same basis as to shareholders, pass-through voting rights, and confidentiality of information relating to pass-through voting rights, all of which would not require any individualized determinations. See 29 C.F.R. § 2550.404c-1(d)(2)(E)(4).
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