UNITED STATES COURT
OF APPEALS
FOR THE THIRD CIRCUIT
_____________
CASE NO. 04-3073
____________
IN RE SCHERING-PLOUGH CORPORATION ERISA LITIGATION
JINGDONG ZHU,
on behalf of himself and all others similarly situated;
ADRIAN
FIELDS, on behalf of himself and all others similarly situated,
Appellants.
____________
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
OF NEW JERSEY
____________
BRIEF OF AMICUS
CURIAE ELAINE L. CHAO, SECRETARY OF THE UNITED STATES DEPARTMENT OF LABOR
SUPPORTING THE PLAINTIFFS-APPELLANTS AND REQUESTING REVERSAL OF THE DISTRICT
COURT'S DECISION
____________
HOWARD M. RADZELY THERESA
S. GEE
Solicitor of Labor Senior
Trial Attorney
U.S.
Department of Labor
TIMOTHY D. HAUSER Office
of the Solicitor
Associate Solicitor Plan
Benefits Security Division
200 Constitution Avenue,
N.W
Room
N-4611
ELIZABETH HOPKINS Washington, D.C.
20210
Counsel for Appellate and
Special Litigation (202)
693-5600 Telephone
(202)
693-5610 Facsimile
STATEMENT OF
SECRETARY OF LABOR AS AMICUS CURIAE
Elaine L. Chao, Secretary of Labor, United States Department of Labor,
is entitled to file a brief as amicus curiae without the consent of the parties
or leave of court, pursuant to Fed. R. App. P. 29(a).
TABLE
OF CONTENTS
Statement of Secretary
of Labor as Amicus Curiae
Statement of Issue
Interest of the
Secretary of Labor
Statement of the Case
Summary of Argument
Argument
I. Contributions To The Plan, Including Employee
Contributions,
Are Allocated to Individual
Accounts,
But Remain Plan Assets
II.
The Plaintiffs Seek Appropriate Relief for Losses
To
The Plan Within The Meaning Of Sections
409(a)
And 502(a)(2)
III.
The District Court's Opinion Eviscerates The
Protections
Of Sections 409(a) And 502(a)(2)
For
401(k) Plans And Could Leave Participants
In
Such Plans Without Any Means To Remedy
Fiduciary
Breaches
Conclusion
Certificate of Service
Certificate of
Compliance
TABLE OF AUTHORITIES
Cases:
Allison
v. Bank One-Denver, 289 F.3d 1223 (10th Cir. 2002)
Bowerman
v. Wal-Mart Stores, Inc., 226
F.3d 574 (7th Cir. 2000)
Brandon v. Aetna
Servs., Inc., 156
F. Supp. 2d 167 (D. Conn.
2000)
Carducci
v. Aetna U.S.
Healthcare, 247
F. Supp. 2d 596 (D.N.J. 2003)
Courson
v. Bert Bell NFL Player Retirement Plan, 214
F.3d 136 (3d Cir. 2000)
In
re: Dynegy, Inc. ERISA Litig., 309
F. Supp. 2d 861 (S.D. Tex.
2004)
In
re Enron Corp. Sec., Derivative & ERISA Litig., 284
F. Supp. 2d 511 (S.D. Tex.
2003)
FMC
Med. Plan v. Owens, 122
F.3d 1258 (9th Cir. 1997)
Franklin v. First Union, 84 F. Supp. 2d 720 (E.D. Va. 2000)
Great-West
Life & Annuity Ins. Co. v. Knudson, 534
U.S. 204 (2002)
Helfrich
v. PNC Bank, Kentucky, Inc., 267
F.3d 477 (6th Cir. 2001), cert. denied, 535
U.S. 928 (2002)
Kerr
v. Charles F. Vatterott & Co., 184
F.3d 938 (8th Cir. 1999)
Kling v. Fid. Mgmt. Trust Co., 270 F. Supp. 2d 12, modified, 291
F. Supp. 2d 1 (D. Mass. 2003)
Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995)
Livers v. Wu, 6 F. Supp. 2d 921 (N.D. Ill. 1998)
McLeod
v. Hartford Life & Accident Ins. Co., 372
F.3d 618 (3d Cir. 2004)
Massachusetts
Mut. Life Ins. Co v. Russell, 473
U.S. 134 (1985)
Matassarin
v. Lynch, 174
F.3d 549 (5th Cir. 1999)
Mertens
v. Hewitt Assocs., 508
U.S. 248 (1993)
Mitchell
v. Eastman Kodak Co., 113
F.3d 433 (3d Cir. 1997)
PBGC v. Solmsen, 671 F. Supp. 938 (E.D.N.Y. 1987)
Professional Helicopter Pilots
Ass'n v. Denison, 804 F. Supp. 1447 (M.D. Ala. 1992)
Rego
v. Westvaco Corp., 319
F.3d 140 (4th Cir. 2003)
In
re Sears, Roebuck & Co. ERISA Litig., No.
02 C 8324, 2004 WL 407007 (N.D.
Ill. Mar. 3, 2004)
In
re Schering-Plough Corp. ERISA Litig., No.
03-1204, 2004 WL 1774760 (D.N.J.
June 28, 2004)
Steinman
v. Hicks, 352
F.3d 1101 (7th Cir. 2003)
Strom
v. Goldman, Sachs & Co., 202
F.3d 138 (2d Cir. 1999)
Turner
v. Fallon Cmty. Health Plan, 127
F.3d 196, 198 (1st Cir. 1997)
In
re Unisys Sav. Plan Litig., 74
F.3d 420 (3d Cir. 1996)
U.S. v. Grizzle, 933 F.2d 943 (11th Cir. 1991)
Varity Corp. v. Howe, 516 U.S. 489 (1996)
In
re WorldCom, Inc. ERISA Litig., 263
F. Supp. 2d 745 (S.D.N.Y. 2003)
Statutes and
Regulations:
Employee Retirement Income Security
Act of 1974, as amended,
29 U.S.C. § 1001, et seq.
Sections 404-409, 29 U.S.C. §§
1104-1109
Section
3(34), 29 U.S.C. § 1102(34)
Section
403, 29 U.S.C. § 1103
Section
403(a), 29 U.S.C. § 1103(a)
Section 404(c), 29 U.S.C. §
1104(c)
Section
409, 29 U.S.C. § 1109 passim
Section
409(a), 29 U.S.C. § 1109(a) passim
Section
502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B)
Section
502(a)(2), 29 U.S.C. § 1132(a)(2) passim
Section
502(a)(3), 29 U.S.C. § 1132(a)(3)
Section
502(a)(5), 29 U.S.C. § 1132(a)(5)
29 C.F.R. § 2510.3-102(a), (b)
29 C.F.R. § 2510.3-102(f)(1)-(3)
29 C.F.R. § 2550.404c-1
Internal
Revenue Code § 401(a)
Internal
Revenue Code § 401(k)
Fed. R. App. P. 29
Rev. Rul. 89-52, 1989-1 C.B. 110, 1989
WL 572038 (Apr. 10, 1989)
Other Authorities:
Fed. Res. Bd., Flow of Funds
Accounts of the United States: Flows and Outstandings, Second Quarter 2004,
Fed. Res. Statistical Release Z.1, at
113 (Sept. 16, 2004)
47th
Annual Survey of Profit Sharing and 401(k)
Plans, Profit Sharing/401k Council of America,
Overview of Survey Results, www.psca.org/DATA/47th.html
Dana Muir, ERISA and Investment Issues,
65 Ohio St. L. J.
199 (2004)
Dan
M. McGill, et al., Fundamentals of Private Pensions
(7th ed. 1996)
See 1 Michael J. Canan, Qualified
Retirement Plans,
¶ 3.1 (Practitioner ed. 1999)
David A. Littell, et al., Retirement
Savings Plans: Design,
Regulation, and Administration of Cash
or Deferred Arrangements (1993)
STATEMENT OF ISSUE
Whether
participants in a defined contribution pension plan have standing to sue plan
fiduciaries under sections 409(a) and 502(a)(2) of the Employee Retirement
Income Security Act ("ERISA"), 29 U.S.C. §§ 1109(a) and 1132(a)(2),
to recover losses sustained by the plan as a result of fiduciary breaches,
where such losses will be allocated to individual accounts within the defined
contribution plan.
INTEREST OF THE
SECRETARY OF LABOR
The Department of Labor is the federal agency with primary
interpretation and enforcement authority over the provisions of Title I of the
Employee Retirement Income Security Act of 1974 ("ERISA"), as
amended, 29 U.S.C. § 1001, et seq. As such, the Department of Labor has a strong
interest in ensuring that courts correctly interpret ERISA. This case presents an important and recurring
issue – whether participants in individual account plans may obtain relief to
the plan under sections 409(a) and 502(a)(2) of ERISA, 29 U.S.C. §§ 1109(a) and
1132(a)(2), when the alleged fiduciary violations affected some, but not all,
of the plan participants' accounts. At
the end of 2003, over $2 trillion of all private pension plan assets were held
in individual account plans, representing well over half of all pension plan
assets. Fed. Res. Bd., Flow of Funds
Accounts of the United States: Flows and
Outstandings, Second Quarter 2004, Fed. Res. Statistical Release Z.1, at
113 (Sept. 16, 2004). In fact, according
to one major survey conducted in 2003, 82.2 percent of eligible employees
participated in 401(k) plans. 47th
Annual Survey of Profit Sharing and 401(k) Plans, Profit Sharing/401k
Council of America, Overview of Survey Results, www.psca.org/DATA/47th.html. If the district court opinion is affirmed,
scores of participants in individual account plans, including many who have
been harmed by plan investments in employer stock, may be unable to recover
losses caused by fiduciary breaches.
The Secretary
believes that the district court erred in dismissing the case below and,
therefore, pursuant to Fed. R. App. P. 29, respectfully submits this brief as
amicus curiae.
STATEMENT OF THE CASE
The plaintiffs were former employees of Schering-Plough
Corporation ("Schering-Plough" or "Company"), a
pharmaceutical research, development and production company. Appellants' Appendix ("A") A48, ¶
3; A49, ¶¶ 9, 10; A69-70, ¶¶ 69, 70. The
Company sponsored the Schering-Plough Corporation Employees' Savings Plan
("Plan"), a defined contribution plan within the meaning of ERISA and
Internal Revenue Code section 401(k).
A47-48, ¶¶ 1, 2; A56-57, ¶¶ 31, 32, 34.
The Plan offered a variety of investment options, including a fund
comprised of Company stock. A48, ¶ 2;
A56-57, ¶ 34. Plan participants
contributed a portion of their compensation to the Plan and directed the Plan
to place the funds in the investments selected by the participants, which
included the Company stock fund. A56-57,
¶ 34. The Consolidated Complaint does
not allege whether Schering-Plough made any employer contributions to the Plan.
The plaintiffs allege that the Company's struggle to develop
and introduce a new allergy medication to the public resulted in considerable
capital expenditures, substantial losses in revenue and extensive fines imposed
by the Food and Drug Administration and the Securities and Exchange Commission. A72-73, ¶¶ 76-78; A78, ¶ 91; A78-79, ¶ 95;
A83-84, ¶ 106. As a result, the
plaintiffs allege that the value of Schering-Plough's stock fell from over $60
per share to less than $20 per share.
A84-85, ¶ 109. As of December 31,
2001, employer stock constituted approximately 31 percent of Plan assets, and
accounted for more than 87 percent of the reduction in the value of the Plan's
investments for that fiscal year. A57, ¶ 36.
The following year, the Plan lost another $110,000,000, with more than
half of that amount due to losses from Company stock. A57, ¶ 36.
Through the Complaint, the plaintiffs seek to recover the
losses suffered by the Plan as a result of the investments in Company stock
during the period in question. A48, ¶ 4;
A110, ¶ 168; A111, ¶ 172; A112, ¶ 175; A113-14, Prayer for Relief. The plaintiffs brought suit on behalf of the
Plan and a class consisting of its participants and beneficiaries. A48, ¶¶
1, 3; A48-49, ¶¶ 6, 9, 10; A67, ¶ 62.
The class members consist of all plan participants whose accounts
included employer stock after July 28, 1998. A67, ¶ 62.
The defendants are the Company; its individual officers and directors,
in their corporate capacities and as Plan fiduciaries; and The Vanguard Group,
as directed trustee of the Plan. A49-56,
¶¶ 11-29.
The plaintiffs
alleged that the defendants made material misrepresentations or omitted or
concealed material facts about the Company's profitability that induced Plan
participants to buy or continue to hold employer stock. A66-67, ¶¶ 59-60; A85-89, ¶¶ 111-122. Additionally, the plaintiffs alleged that
although defendants knew or should have known that the value of the Company
stock was inflated, they continued to offer it as an investment option. A66-67, ¶¶ 59-60; A85-89, ¶¶ 111-122.
Based on this conduct, the plaintiffs asserted that the
defendants breached their fiduciary duties of loyalty and prudence, and their
duty to diversify plan investments.
A91-112, ¶¶ 131-176. The
plaintiffs sought, inter alia, an "[o]rder compelling the defendants
to make good to the Plan all losses to the Plan resulting from defendants'
breaches of their fiduciary duties, . . . all profits the defendants made
through use of the Plan's assets, and . . .
all profits which the Participants would have made if the defendants had
fulfilled their fiduciary obligations."
A113, Prayer for Relief.
The defendants filed a motion to dismiss the entire
complaint, arguing that, although the complaint was brought under section
502(a)(2), the plaintiffs only sought individual, not plan-wide relief. The defendants also made a number of other
arguments for dismissal of the complaint.
On June 28, 2004, the district court granted the defendants' motion to
dismiss, ruling that the plaintiffs lacked standing to bring their claim under
sections 409 and 502(a)(2) of ERISA because they sought recovery of
individualized losses, not Plan-wide relief.
In re Schering-Plough Corp. ERISA Litig., 2004 WL 1774760, at
**8, 14, 15. Based on this ruling, the
district court did not reach the defendants' other arguments in favor of
dismissal. Id. at *15.
SUMMARY OF ARGUMENT
All defined contribution plans hold assets of the plans in
trust for the benefit of their participants and beneficiaries. The amount of plan assets fluctuates as a
result of contributions, gains, losses, expenses and distributions. Plan assets are allocated among individual
accounts as a means of accounting for each participant's retirement benefit. Any contributions to the plan, whether made
by the employer or the employees, once received by the plan, become and remain
plan assets for as long as they are held in the plan, without regard to any
subsequent allocation among "individual accounts." Similarly, whether investment decisions are
made by the plan or its participants, the monies held in the plan and its
accounts are plan assets. A loss to
those funds constitutes a loss to the plan.
ERISA section 409(a) expressly provides for recovery of
"any losses" to the plan caused by a fiduciary breach. ERISA section 502(a)(2), 29 U.S.C. §
1132(a)(2), in turn, permits an action to be brought for "appropriate
relief under §409," 29 U.S.C. § 1109(a).
Thus, a plan fiduciary who breaches his duties and causes a loss to the
plan is subject to liability under ERISA sections 409(a) and 502(a)(2), and
must restore the losses to the plan. In
this case, assuming the allegations in the complaint to be true, the
plaintiffs' action under 502(a)(2) to recover losses for the Plan is proper and
the district court erred in dismissing the complaint.
The Supreme Court's decision in Massachusetts Mut. Life
Ins. Co v. Russell, 473 U.S. 134 (1985), made clear that sections 409 and
502(a)(2) were intended to give relief directed to the plan, rather than to
individual plan participants, for fiduciary violations. Id. at 140 (the relief must
"inure[] to the benefit of the plan as a whole"). The Supreme Court did not hold that losses
are only recoverable under sections 409 and 502(a)(2) if they are allocated to
every participant in the plan. It would
be contrary to the intent and text of those sections to hold that plan
fiduciaries who violate ERISA's fiduciary standards are not liable simply
because their violation did not affect the accounts of every single (or even
most) plan participants. That result
would leave participants in 401(k) plans covered by ERISA potentially unprotected
from fiduciary violations.
ARGUMENT
I.
Contributions To The Plan, Including Employee
Contributions, Are Allocated To Individual Accounts, But Remain Plan Assets
The erroneous
result reached by the district court in this case appears to have resulted from
the court's fundamental misconception of the structure, under ERISA, of defined
contribution plans, such as this one, and the nature of such plans' assets. First, the existence of individual accounts
within defined contribution plans does not change the nature of the assets as
plan assets. See Kuper v.
Iovenko, 66 F.3d 1447 (6th Cir. 1995).
Defined contribution plans hold assets in trust for the participants and
beneficiaries and, in all such plans, the value of those plan assets increase
or decrease as a result of contributions, gains, losses, expenses or benefit
distributions. The individual accounts
do not provide for individual ownership, but rather serve the administrative
purpose of accounting for each participant's retirement benefit within the
plan. Second, the district court was
under the misperception that only employer contributions to a defined
contribution plan constitute plan assets.
To the contrary, all contributions from the employer and the employee
alike, as well as all income and gains, constitute assets of and belong to the
plan. See 29 C.F.R. §
2510.3-102. Any reduction in
those assets is a loss to the plan.
Under section
3(34) of ERISA, 29 U.S.C. § 1102(34), 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). Although each participant in a
defined contribution pension plan has his own "account," the account
is simply a bookkeeping device to record the participant's interest in the
plan. The actual plan assets consist of
the total of the amounts recorded in each individual "account." Dan M. McGill, et al., Fundamentals of
Private Pensions, p. 247 (7th ed. 1996) ("the sum of all of the
account balances . . . equals the total market value of the plan's
assets"). For example, employee
contributions may be invested in one mutual fund or certificate of deposit, yet
are allocated among separate individual "accounts." See 1 Michael J. Canan, Qualified
Retirement Plans, ¶ 3.1
(Practitioner ed. 1999) ("even though employer contributions . . . [are]
credited to separate accounts for each employee, the trustee invests all of the
funds in one certificate of deposit.").
The plan's assets
– consisting of all contributions and earnings – are required to be held in
trust by one or more trustees who have authority and discretion to manage and
control the assets of the plan. See
ERISA § 403(a), 29 U.S.C. § 1103(a); IRC § 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, p. 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 the cost of operating the plan, including recordkeeping, legal,
auditing, annual reporting, claims processing and similar administrative
expenses. Accordingly, whenever there is
a loss to an individual "account" in a defined contribution benefit
plan, such as the Plan here, there is a corresponding loss to the plan as a
whole. As Professor Dana Muir, a noted
commentator on ERISA, has pointed out, "[i]n [defined contribution] plans,
fiduciary breaches that cause loss to the plan typically cause that loss by
affecting the value of individual participants' accounts." Dana Muir, ERISA and Investment Issues,
65 Ohio St.
L. J. 199, 235 (2004).
II.
The Plaintiffs Seek Appropriate Relief For Losses To
The Plan Within The Meaning Of Sections 409(a) And 502(a)(2)
Given this
understanding of the nature of defined contribution plans, it is clear that the
relief sought by the plaintiffs in this case falls within the express language
of sections 409 and 502(a)(2) of ERISA, 29 U.S.C. §§ 1109 and 1132(a)(2), which
require a plan fiduciary that breaches its duties to make good "any
losses" to the plan, not only losses that affect every participant's
account. Section 502(a)(2) provides that an action may
be brought "for appropriate relief under §409." 29 U.S.C. § 1132(a)(2). The Complaint here seeks millions of dollars
in losses to the Plan allegedly stemming from fiduciary breaches under these
provisions. Nothing in sections 409 or
502(a)(2) exempts defined contribution pension plans from their scope.
The Supreme Court's decision in
Massachusetts Mut. Life Ins. Co v.
Russell, 473 U.S.
134, is not to the contrary. Unlike this
case, Russell involved a claim by a plaintiff for a direct recovery of
individual damages stemming from a denial of benefits. In Russell, a plan's disability
committee terminated and then reinstated a participant's disability
benefits. Claiming losses as a result of
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. Id. 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 abuses in the
future").
In this case, the allegations of the complaint fall
precisely within this area of special congressional concern at which sections
409 and 502(a)(2) of ERISA are aimed.
The complaint alleges that the Plan fiduciaries mismanaged plan assets
and abused their fiduciary positions by placing corporate interests above those
of the Plan. As a direct result of their
misconduct, the Plan holds millions of dollars less in trust for its
participants and beneficiaries. To
interpret section 409(a) as disallowing relief where losses will be allocated
to the individual accounts that make up all defined benefit plans, or as
limiting relief to losses that affect every participant's account, would
contradict the Supreme Court's admonition in Russell that courts should
be "reluctant to tamper with an enforcement scheme crafted with such
evident care as the one in ERISA."
473 U.S. at 147.
There is, therefore, no basis for reading Russell so
broadly that losses caused by fiduciary mismanagement, that significantly
diminish the retirement security of participants or the amount of assets held
in trust, cannot be recovered unless all of the participants are affected. Here, as in the typical 401(k) plan,
participants are given several investment options with differing degrees of
risk and return. See, e.g.,
In re Unisys Sav. Plan Litig., 74 F.3d 420, 426 (3d Cir. 1996)
(describing the various investment options in the Unisys Savings Plan). If the district court and the defendants'
broad arguments are correct, participants in 401(k) plans and other individual
account plans, such as the Enron plans, would be unable to recover losses to
the plan caused by fiduciary breaches, at least under section 502(a)(2), even
if the majority of the plans' participants lost most of their retirement
savings as a direct result of such breaches.
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 choose those options prudently, to
monitor the options, and to communicate truthfully with plan participants and
beneficiaries concerning the options. See In re Unisys, 74 F.3d at
442 (the duty to speak truthfully and to convey complete and accurate
information about investment options applies when participants are charged with
directing the investment of their contributions among a plans' various funds); Franklin
v. First Union, 84 F. Supp. 2d 720, 735 (E.D. Va. 2000) (fiduciary had
"a duty to notify the plaintiffs of the changes in the investment funds in
such a manner as to prevent any misinformation to and misleading of the
plaintiffs regarding their options"); Enron, 284 F. Supp. 2d
511. If, as the plaintiffs allege, the
fiduciaries have breached those duties, the 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).
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.
The Sixth Circuit's analysis in Kuper v. Iovenko, 66
F.3d 1447 (6th Cir. 1995) is precisely on point. In Kuper, the defendants alleged that
the plaintiff class failed to state a claim for breach of fiduciary duty under
section 409 because the class did not include all of the plan's
beneficiaries. Id. at 1452. The Sixth Circuit cited cases holding that
recovery under section 409 must go to the plan, and stated that the cases
"distinguish between a plaintiff's attempt to recover on his own behalf
and a plaintiff's attempt to have the fiduciary reimburse the plan." Id. at 1452-53. The Sixth Circuit concluded that a subclass
of plan participants may sue for a breach of fiduciary duty under section 409
and noted the policy reasons for the result:
Defendants'
argument that a breach must harm the entire plan to give rise to liability
under § 1109 would insulate fiduciaries who breach their duty so long as the
breach does not harm all of a plan's participants. Such a result clearly would contravene
ERISA's imposition of a fiduciary duty that has been characterized as "the
highest known to law."
Id. at 1453 (citations
omitted). Accord Kling v. Fid. Mgmt. Trust Co.,
270 F. Supp. 2d 121, 126-27, modified, 291 F. Supp. 2d 1 (D. Mass. 2003)
("Kling does sue on behalf of the Plan, and thus meets the requirements of
§ 409 as interpreted by the Supreme Court in Russell. That the
harm alleged did not affect every single participant does not alter this
conclusion. To read such a requirement
into § 409 that the harm alleged must affect every plan participant would, as
the Sixth Circuit observed, 'insulate fiduciaries who breach their duty so long
as the breach does not harm all of a plan's participants.'"). See also Steinman v. Hicks,
352 F.3d 1101 (7th Cir. 2003) (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. ERISA Litig.,
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").
Nor is the Fifth Circuit opinion in Matassarin v. Lynch,
174 F.3d 549 (5th Cir. 1999), to the contrary.
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. Id.
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
567-78; see Kling, 270 F. Supp. 2d at 126 (distinguishing Matassarin
as involving "a group of plaintiffs who had been treated differently than
other participants in the same plan").
Accordingly, Matassarin provides no support for the
proposition that relief under section 502(a)(2) for fiduciary mismanagement of
plan assets must inure to the benefit of every participant in a 401(k)
plan. Instead, because any recovery here
will increase the overall assets of the pension plan, such recovery will inure
to the benefit of the plan and must be allowed under section 502(a)(2), even if
the recovery is allocated to individual accounts and not every participant
benefits.
The District Court's Opinion Eviscerates The Protections Of
Sections 409(a) And 502(a)(2) For 401(k) Plans And Could Leave Participants In
Such Plans Without Any Means To Remedy Fiduciary Breaches
The majority of pension plan assets today, over $2
trillion in such assets, are held by defined contribution, or individual
account plans – pension plans in which the entire trust corpus is held in trust
by one or more trustees, see section 403, 29 U.S.C. § 1103, and the
plan's investment income, expenses, gains, and losses are allocated to
participant accounts. See section
3(34) of ERISA, 29 U.S.C. § 1002(34). Of
eligible employees, 82.2 percent participate in 401(k) plans. If the district court's view of the law is
correct, participants of these plans would be left without a loss remedy under
section 502(a)(2). This result is
unsupported by the statute and could leave untold numbers of plan participants
with no legal protection from plan losses caused by breaching fiduciaries, a
result Congress could not have intended.
The district court below mistakenly suggests that the
plaintiffs here could have brought an action under ERISA section 502(a)(1)(B),
29 U.S.C. § 1132(a)(1)(B). Schering-Plough,
2004 WL 1774760, at *9. Section
502(a)(1)(B) permits actions "by a participant or beneficiary . . . to
recover benefits due to him under the terms of his plan, to enforce his rights
under the terms of the plan, or to clarify his rights to future benefits under
the terms of the plan." 29 U.S.C. §
1132(a)(1)(B).
This court has repeatedly recognized that a benefits claim
under section 502(a)(1)(B) must be brought against a plan or plan administrator
for recovery from the plan for benefits due under the Plan. See e.g., McLeod v. Hartford
Life & Accident Ins. Co., 372 F.3d 618 (3d Cir. 2004) (section 502(a)(1)(B) claim for benefits to
be paid from plan); Courson v. Bert Bell NFL Player Retirement Plan, 214
F.3d 136 (3d Cir. 2000) (same); Mitchell v. Eastman Kodak Co., 113 F.3d
433 (3d Cir. 1997) (same); Carducci v. Aetna U.S. Healthcare, 247 F.
Supp. 2d 596 (D.N.J. 2003) (502(a)(1)(B) claim can be brought against a plan
and plan administrator); see also Russell, 473 U.S.
143-44; Turner v. Fallon Cmty. Health Plan, 127 F.3d 196, 198 (1st Cir.
1997) ("The relief expressly provided is to secure benefits under the plan
rather than damages for a breach of the plan."); Brandon v. Aetna
Servs., Inc., 156 F. Supp. 2d 167, 171 (D. Conn. 2000) ("§ 1132(a)(1)(B)
only permits a participant to recover benefits directly from the Plan as an
entity.").
These cases make clear that claims brought under section
502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), must either challenge a determination
of benefits, as decided by the plan administrator or fiduciary, or seek an
adjudication of benefits under the terms of a plan. A recovery in such a case would come from the
plan. In this case, the plaintiffs are
not contesting a benefit determination under the Plan and do not seek recovery
from the Plan. Rather, they seek relief
for losses to the Plan resulting from a fiduciary breach, and request the court
to award the losses to the Plan.
Accordingly, the plaintiffs' claim here is properly brought under
section 502(a)(2), not section 502(a)(1)(B).
Apart from section 502(a)(2), the only other basis for
relief from a fiduciary breach would be ERISA section 502(a)(3), 29 U.S.C. §
1132(a)(3) (or section 502(a)(5), 29 U.S.C. § 1132(a)(5), in a case brought by
the Secretary). The Secretary contends
that participants can recover under sections 502(a)(2) for losses to a plan and
also under section 502(a)(3) for direct monetary losses to an individual
participant caused by a fiduciary breach.
The Secretary can also sue for losses resulting from a fiduciary breach
under section 502(a)(5). The courts,
however, have not been uniform in their approach to such relief under section
502(a)(3). This court has not considered
the question. The Fourth, Sixth, Eighth
and Ninth Circuits, relying on the Supreme Court decisions in Great-West
Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) and Mertens
v. Hewitt Assocs., 508 U.S. 248 (1993), have held that participants cannot
obtain such relief. Rego v. Westvaco
Corp., 319 F.3d 140 (4th Cir. 2003); Helfrich v. PNC Bank, Kentucky,
Inc., 267 F.3d 477 (6th Cir. 2001), cert. denied, 535 U.S.
928 (2002); Kerr v. Charles F. Vatterott & Co., 184 F.3d 938 (8th
Cir. 1999); FMC Med. Plan v. Owens, 122 F.3d 1258 (9th Cir. 1997). The Second and Seventh Circuits, however,
have held that such relief is available.
Strom v. Goldman, Sachs & Co., 202 F.3d 138, 144 (2d Cir.
1999); Bowerman v. Wal-Mart Stores, Inc., 226 F.3d 574, 592 (7th Cir.
2000). If this court were to find that a
section 502(a)(2) action is not permitted in this case, private plaintiffs and
the Secretary would be without a remedy unless this court holds that make-whole
relief of this kind is available under sections 502(a)(3) and 502(a)(5).
However, regardless of whether 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.").
CONCLUSION
For the
reasons stated above, the decision of the district court should be reversed.
Respectfully
submitted,
HOWARD
M. RADZELY
Solicitor
of Labor
TIMOTHY
D. HAUSER
Associate
Solicitor
ELIZABETH
HOPKINS
Counsel
for Appellate and Special
Litigation
_________________________
THERESA
S. GEE
Senior Trial Attorney
U.S.
Department of Labor
Office
of the Solicitor
Plan
Benefits Security Division
200 Constitution Avenue, N.W.
Room
N-4611
Washington, D.C.
20210
(202)
693-5600 Telephone
(202) 693-5610 Facsimile
Dated: October 20, 2004
CERTIFICATE OF
SERVICE
I
hereby certify that two (2) copies of the Brief of Amicus Curiae Elaine L.
Chao, Secretary of the United States Department of Labor Supporting the
Plaintiffs-Appellants and Requesting Reversal of the District Court's Decision
were mailed, via federal express overnight or regular delivery, on this 20th
day of October, 2004, to the following parties:
Richard S. Schiffrin Joseph
DePalma
Joseph H. Meltzer Lite
DePalma Greenberg
Edward W. Ciolko &
Rivas, LLC
Katherine B. Bornstein Two Gateway
Center
Schiffrin & Barroway LLP 12th
Floor
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Jersey 07102
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& Burling Lowenstein
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Jersey 07068
____________________________
Theresa
S. Gee
Certificate Of
Compliance With Type-Volume Limitation,
Typeface
Requirements, And Type Style Requirements
1. This
brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B)
because:
This brief
contains 5160 words, excluding the parts of the brief exempted by Fed. R. App.
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_____________________________
Theresa
S. Gee
Attorney for Amicus Curiae
ELAINE L. CHAO, Secretary of Labor
U.S.
DEPARTMENT OF LABOR
Dated: October 20, 2004