X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:The plaintiffs in the case were current and former employees of Electronic Data Systems who participated in the company’s 401(k) defined contribution retirement plan. The plan’s trustees, who are subject to the rigorous fiduciary requirements of the Employee Retirement Income Security Act (ERISA), manage the plan, select and monitor the investment options, and handle each participant’s account. Significantly, the plan also invokes 29 U.S.C. �1104(c), a part of ERISA that relieves plan fiduciaries of liability for any loss or breach “which results from such participant’s or beneficiary’s exercise of control [over the assets in his account].” During the class period, EDS offered plan participants between 13 and 18 investment options, including an EDS stock fund. Plan documents rated the fund options on a scale of one to five for risk (one being the least risky and five being the riskiest). Plan documents rated the EDS stock fund as “5+” on the risk scale and warned participants that investing in only one stock violated the diversification principle of portfolio management. The plan documents also explained that EDS agreed to match up to 25 percent of each employee’s annual investment, up to six percent of salary, with an investment in the EDS stock fund. EDS required the matched investments to remain in the stock fund for two years, after which the employee could move the funds. On Sept. 18, 2002, EDS published an earnings warning, which precipitated a substantial drop in its stock price (from $36.46 to $17.20 a share). Although the stock price rebounded somewhat in the short term and more in the longer term, a flurry of suits commenced. Plan participants sought to form a class for a class-action suit alleging various breaches of fiduciary duties. The participants requested reimbursement to “make good” the losses on behalf of the plan, but they concede such damages must eventually be allocated among the participants’ accounts. They also sought injunctive relief either to remove the EDS stock fund as an optional investment or to replace the current fiduciaries with one or more independent fiduciaries. The district court certified a class under Federal Rule of Civil Procedure 23(b)(2) for the claims consisting of all plan participants and their beneficiaries, excluding the defendants, for whose accounts the plan made or maintained investments in EDS stock through the EDS stock fund between Sept. 7, 1999, and Oct. 9, 2002. As framed, the class included up to 85,000 members. The court granted the EDS defendants interlocutory review pursuant to Rule 23(f). HOLDING:The court vacated the class certification and remanded the matter to the district court. The court reviewed the district court’s certification decision for abuse of discretion. The district court’s discretion must be exercised within the boundaries of Rule 23, the court stated. The party seeking class certification, the court stated, bears the burden of meeting all the Rule 23 requirements. The requirements fall into two general groups: the four Rule 23(a) requirements (numerosity, commonality, typicality and representativeness), which must be met by all proposed class actions; and the three groups of Rule 23(b) requirements, one of which must be met by the proposed class. Courts should not confuse rulings on the merits of claims with the class certification decision, the court noted. In this case, however, the district court’s threshold legal rulings are essential to its conclusion that this case may be maintained as a class action, the court stated. Accordingly, the court considered whether 1. ERISA entitled plan participants to seek derivative relief for “the plan as a whole” to recover “plan losses” that allegedly resulted from the EDS defendants’ fiduciary duty breaches; and 2. whether either ERISA or the releases executed by about 9,000 participants bar class certification. First, the court stated, possibility of a suit on behalf of the plan as a whole is not eliminated simply by the fact that any recovery would have to be allocated among individual participants’ 401(k) accounts. But the court found that the district court incorrectly eliminated a defense under ERISA in its analysis, the court held it must vacate and remand the matter. Section 404(c), 29 U.S.C. �1104(c), relieves a fiduciary from liability “for any loss” or “by reason of any breach” if the plan is an individual account plan and the loss “results from” a participant’s exercise of control over assets in his account. Moving on to the issue of the 9,000 releases, the court noted that holders of releases could become a subclass if a class action is otherwise deemed appropriate. The court stressed that it did not hold that the releases foreclose any suit on behalf of the plan or foreclose any class certification. Rather, the court stated that the district court must consider the releases more thoroughly on remand. The court also addressed the two Rule 23(a) class certification issues challenged directly by the EDS defendants typicality of the representative plaintiffs’ claims and adequacy of their representation as well as the court’s ultimate authorization of a Rule 23(b)(1) and (2) no-notice, no-opt-out class action. The court concluded that the class representatives held sufficiently typical claims, but stated that on remand the district court must reconsider whether they are adequate representatives in light of inherent intraclass conflicts. Finally, the court stated that a Rule 23(b)(2) class action was improper. Certification of a class under Rule 23(b)(2) is appropriate where “the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole.” The court stated that this theory was inappropriate, because some plan participants want to remain in the EDS stock fund and a successful suit would eventually entail individualized hearings on damages for each participant. Finally, Rule 23(b)(1)(A), the court stated, authorizes a class action where the party opposing the class would be subject to “incompatible standards” if separate actions were brought. A Rule 23(b)(1) class action may be proper, the court stated, but the district court must do a less superficial analysis of the 23(b)(1) alternative on remand. OPINION:Jones, C.J., and Garza, J. DISSENT:Reavley, J. “I would affirm the order certifying the class action. The majority decides that plaintiffs must return to the district court for further pondering of whether Title 29 U.S.C. �1104(c)(1) relieves the fiduciary of liability, that certification under Rule 23 (b)(2) would be inappropriate because of conflict between members of the class, and that Rule 23(b)(1) is”conceptually unclear.’ As I understand the opinion, it misapplies �1104(c)(1), reflects an incorrect view of conflict, and ignores the unique applicability of Rule 23(b)(1) in this case.”

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.