The District Court for the Eastern District of Texas recently rejected a settlement submitted to the Court for approval in the case of In Re Electronic Data Systems Corp. ERISA Litigation. You can access the Memorandum Opinion and Order of the Court rejecting the settlement here [pdf]. The plaintiff-participants had sued EDS and its officers and directors for various fiduciary breaches and alleged, in general, violations of ERISA pursuant to a "stock-drop" scenario.
You can read about the important procedural issues which have developed in this case in a previous post here. The Fifth Circuit had granted the defendants’ petition for interlocutory appeal under Rule 23(f) of the Federal Rules of Civil Procedure. However, after presenting oral arguments to the Fifth Circuit in April of 2005, the parties apparently engaged in a "day-long mediation session" that resulted in a proposed settlement. However, the Court rejected the settlement, stating as follows:
The Court concludes that this settlement is not in the best interests of the proposed class members. Under the proposed settlement the class members would only receive two or three cents on the dollar of their losses. For example, a plan participant who had a $10,000 loss under the settlement proposal would receive only $200 to $300, a mere pittance of his or her actual loss. The Court is of the opinion that such a plaintiff would consider the risk of an adverse ruling by the Fifth Circuit to be a risk worth taking in comparison with the small benefit to be received from the settlement. This is particularly true in the present case, given that a class member would not be much worse off losing the appeal and receiving nothing than he would be receiving the de minimis recovery that each Plan participant would receive under the proposed settlement. This may be a good settlement for Plaintiffs’ counsel in that they would recoup 100% of their $5.0 million in attorneys’ fees and expenses, and it may be a good settlement for EDS in that for a relatively nominal sum it would remove whatever risk it has, but it is not a fair settlement for the Plaintiff class who would only be receiving a few pennies on the dollar. Given the Court’s skepticism that class members would ultimately find the proposed settlement to be fair to them, the Court believes issuing a notice and holding a final fairness hearing would be an expensive and unjustifiable effort.Although not a factor in determining whether the proposed settlement is fair, reasonable, and adequate, the Court is also of the opinion that broader interests of justice would be served by denying preliminary approval. There is a vacuum of precedent on 502(a)(2) issues in the Fifth Circuit, as well as other circuits. The Fifth Circuit recognized this in Milofsky and, implicitly, in taking the unusual step of granting an interlocutory appeal under Rule 23(f). See Milofsky v. Am. Airlines, Inc., 404 F.3d 338, 345 (5th Cir. 2005) (refusing to “speculate on every possible situation” yet to be answered). In light of the de minimis settlement before the Court, it is therefore in the interests of justice to push forward in this dispute, so issues can be resolved by the Fifth Circuit and procedural clarity can be brought to ERISA litigation surrounding defined contribution plans.
Furthermore, approving this settlement could send the wrong message to the United States Department of Labor, the administrative agency charged with overseeing and enforcing pension plans. The United States Department of Labor is presently investigating this Plan and has clearly stated its position in its amicus curiae brief at the Fifth Circuit. The Court believes that investigation should run its due course and not be prematurely influenced by the Court approving what it has found to be an unfair de minimis settlement to the class members.
You can access the following amicus briefs filed in the appeal:
For Your Benefit has comments on the case here.
UPDATE: See also this recent article from the Washington Legal Foundation entitled "ERISA-Related Securities Litigation Imposes Undue Burden on Pension Plans and Participants."
In today's posting at Jottings By an Employer's Lawyer, Michael Fox discusses a recent 7th Circuit opinion written by Judge Richard Posner on a procedural issue involving an ERISA section 510 case--In In Re: Allstate Insurance Company (7th Cir. 3/28/05) [pdf]. The plaintiffs in the case allege that the employer who had decided to replace its employee insurance agents with independent contractors harassed them so that they would quit so as not to qualify for severance benefits. The class seeks a judgment declaring that the members are entitled to the benefits they would have received under the employer's ERISA severance plan "had they been fired rather than quitting." The former employees allege that the employer harassed them by "extending office hours, imposing burdensome reporting requirements, reducing or eliminating reimbursement for office expenses, and setting unrealistic sales quotas."
The end of 2004 brought an important development in the ERISA employer stock litigation arena. A federal appellate court granted a discretionary petition on December 29, 2004 to consider some critical questions, including whether such cases may be maintained as class actions under Fed.R.Civ. P. 23. In the case of In re Electronic Data Systems Corp. ERISA Litig, Case No. 6:03-MD-1512 (filed March 14, 2003, E.D.Tex), plaintiffs filed a class action against EDS after its stock fell from 36.46 to $17.20 a share in a day following an earnings warning. Plaintiffs asserted claims that it was imprudent for the fiduciaries to permit participants to invest any funds in EDS stock and that the fiduciaries misrepresented certain information regarding the company and its stock to participants.
Following the district court's denial of defendants' motions to dismiss, plaintiffs moved for class certification. The district court granted the motion in part, holding that the prudence claims could be maintained by the plan as a class action, but refusing to certify the misrepresentation claims. The district court reasoned that the misrepresentation claims could not be certified because the class representatives lacked commonality and typicality. It also reasoned that the investments were made by investors in their individual capacity and that section 404 of ERISA, 29 U.S.C. sec. 1104(c) provided fiduciaries with a defense against such claims arising from participants' investment election.
Defendants filed a petition to review the district court's decision on class certification and the United States Court of Appeals for the Fifth Circuit granted the discretionary petition on December 29, 2004. EDS is arguing that the claims are not certifiable under Rule 23 because they are not held by the plan, but are really asserted by participants. If so, defendants argue that the claims are for individualized relief under section 502(a)(3) of ERISA, 29 U.S.C. sec 1102(a)(3) and that section does not allow for monetary damages, only equitable relief. Defendants also assert that the class representatives continued to invest their retirement savings into EDS stock, which has somewhat recovered and are therefore estopped from complaining about the fiduciaries conduct.
Courts have recently struggled with ERISA's civil enforcement provisions and plaintiffs' ability to recover for such claims under them. A district court in New Jersey held that plaintiffs could not recover damages for defendants' alleged breaches of fiduciary duty because such recovery was really for individual participants rather than the plan. In re Schering-Plough Corp. ERISA Litig., 2004 WL 1774760 at 6 (D.N.J. June 28, 2004). Most courts have held that plaintiffs are seeking such recovery for the plan which is authorized to file actions for breach of fiduciary duty and recover damages on such claims. The fact that the Fifth Circuit granted discretionary petition to review these claims is extremely noteworthy. If the Fifth Circuit, in fact, decides the case, it will shed considerable light on whether these claims may be maintained as class actions.
Read more about employer stock litigation at the Jenner & Block website entitled "ERISA Fiduciary and Company Stock Update Center."
A previous post here at ERISAblog entitled "Perils for Plan Fiduciaries: Deciding When and How to Sue For Losses" discussed some worrisome news in the In re WorldCom, Inc. Securities Litigation case about how certain fiduciaries of pension funds had possibly jeopardized their claims on behalf of plan participants by filing individual actions prior to a decision on class action certification and how the judge in the case had followed up with tough criticism of the law firm that represented the fiduciaries. I noted how "there is much for ERISA plan fiduciaries to be wary of in contemplating individual and class action lawsuits on behalf of plan participants." Apparently, the Department of Labor thinks so too as evidenced in their issuance of final Prohibited Transaction Exemption 2003-39 (pdf version) (html version) covering issues pertaining to the settlement of litigation by employee benefits plans with parties in interest. The main purpose of the exemption is to permit plans to release claims against "parties in interest" in connection with settlements of ongoing or threatened litigation where the DOL is not a party to the litigation. The exemption is an important one for the benefits community in light of the fact that, as discussed previously, many plans will be, or already are, bringing lawsuits on behalf of plan participants trying to recoup losses from recent corporate scandals as well as mutual fund scandals.
Why does the DOL need to issue an exemption for a plan fiduciary to enter into a settlement on behalf of a plan? When plan fiduciaries enter into such agreements on behalf of plans which are suing such entities as the employer, an investment provider, etc, those entities are normally "parties in interest" (i.e. related to the plan under ERISA and DOL regulations). And without going into detail about all of the complicated prohibited transaction rules, suffice it to say that the DOL views a potential claim or "chose in action" as a type of property and that a plan's release of its claim against such party in interest may constitute a prohibited sale or exchange with the plan, as well as a prohibited transfer or use of plan assets for the benefit of a party in interest. (See DOL Opinion Letter 95-26A which provides some guidance regarding how this type of prohibited transaction can occur. Also, see PTE 1999-31.)
However, in spite of its views, the DOL notes the confusion surrounding the issue and that "some attorneys may have advised their clients that the settlement of litigation with a party in interest is not the type of transaction intended to be covered by section 406 of the Act." With this in mind, here is what the DOL says about the reason for its issuance of the exemption:
As the Department noted in proposing this exemption, the fact that a transaction is subject to an administrative exemption is not dispositive of whether the transaction is, in fact, a prohibited transaction. Rather, the exemption is being granted in response to uncertainty expressed on the part of plan fiduciaries charged with the responsibility under ERISA for determining whether it is in the interests of a plan's participants and beneficiaries to enter into a settlement agreement with a party in interest. The comments have confirmed the department's earlier conclusion that there was considerable uncertainty surrounding this issue. After considering all of the comments, the Department has determined that the exemption, as revised, appropriately balances the concerns of these commentators while allowing plan fiduciaries to properly carry out their responsibilities under ERISA.
The exemption is really narrowly tailored to address those settlement agreements which result in prohibited transactions. However, there is DOL guidance in the exemption which really has application for fiduciaries on a broader scale so that the exemption can serve somewhat as a "manual" for ERISA plan fiduciaries who find themselves having to enter into settlements on behalf of plan participants.
However, I wish to note one aspect of the exemption which is troubling from the standpoint of the effect it will have on the cost of litigation and trying to make plan participants whole--that is, the DOL's requirement in the exemption that the plan must obtain the opinion of an attorney representing the plan that a "genuine controversy exists." (i>Formal legal opinions are almost always a costly endeavor.) Now I suppose I should be singing' Dixie and praising the DOL for enhancing the flow of work to benefits and ERISA attorneys around the country, but I get concerned when I think of all that is going on here. When you think about the fact that participants have already been harmed in the matter and that attorneys representing the plan will receive a sizable portion of any settlement, and when you add to that, the requirement that the plan engage an "independent fiduciary" as well as this requirement that the plan engage an attorney to write an opinion that there is a "genuine controversy," all of this adds up to a great deal of cost which will eat away at any recovery for plan participants. Apparently, according to language in the original proposed exemption, the purpose of the attorney opinion requirement is as follows:
The Department believes that this condition is necessary to prevent the plan and parties in interest from engaging in a sham transaction purporting to fall within this class exemption, thus shielding a transaction, such as an extension of credit, that would otherwise be prohibited. The existence of a genuine controversy must be determined by an attorney retained to advise the plan. That attorney must be independent of the other parties to the litigation.
In the preamble to the final exemption, the DOL notes one commenter who recommended retaining the requirement for a genuine controversy, but without requiring an attorney opinion so that the attorney review would be permitted, but not required, as a safe harbor in certain situations. To me, this makes much more sense and would avoid needless cost for the majority of plans which find themselves in the position of having to recoup losses in litigation, for which the issue of "genuine controversy" is a far-gone conclusion. In other words, requiring all plans to obtain the opinion of counsel to avoid the possible abuse which can occur in the minority of cases is rather like trying to kill a fly with a bazooka. Nevertheless, this final exemption will require the opinion of counsel, except in situations where the case has been certified for class-action.
Some additional comments about the exemption:
(1) The DOL has eliminated the requirement that the independent fiduciary "negotiate" the settlement because it realizes that in class action settlements, the "plan fiduciary's role in negotiating the terms of the settlement may be limited." However, the DOL warns that "even where negotiation does not take place between the plan and the defendant, a fiduciary will be compelled, consistent with ERISA's fiduciary responsibility provisions, to make a decision regarding the settlement on behalf of the plan, even if that decision is merely to accept or reject a proposed settlement negotiated by other class members."
(2) Regarding class action lawsuits, the DOL had much to say in the exemption. A Plan fiduciary, faced with a non-opt out class action settlement, "must take such actions as are appropriate under the particular circumstances" and "object to its terms" where necessary on behalf of plan participants. "If the fiduciary takes no action, and the case is settled for far less than the full value of the plan's losses, the burden will be on the fiduciary to justify its inaction."
(3) The original proposed exemption only allowed the receipt of cash in exchange for a release. The final exemption permits "assets other than cash" where necessary to rescind a transaction that is the subject of the litigation, or where such assets are qualifying employer securities for which there is a generally recognized market and value.
(5) The final exemption provides that the settlement must be reasonable in light of the plan's likelihood of full recovery, the risks and costs of litigation, and the value of claims foregone.
(6) Finally, the DOL addresses the fact that it is not uncommon for the same transactions to give rise to both ERISA and securities fraud claims and that participants and/or fiduciaries have been able to modify the terms of a release to permit the plan to receive a share of the securities fraud settlement without releasing its ERISA claims against the parties in interest. The DOL notes "that plan fiduciaries should consider whether additional relief may be available for the ERISA claims before agreeing to a broad release."
With all of the fallout from corporate, accounting and now mutual fund scandals pointing to possible lawsuits by pension and 401(k) plans seeking to recover losses, there is much discussion about whether, when and how ERISA plan fiduciaries must pursue recovery of losses for plan participants in possible lawsuits against the alleged wrongdoers. The Securities Litigation Watch (here) and the 10b-5 Daily (here) have both had discussions about the recent WorldCom decisions in which claims by public pension funds have been dismissed. An article at Law.com entitled "U.S. Judge Dismisses Several Claims in WorldCom Securities Class Action" (referred to at the Securities Law Beacon) states: "The federal judge overseeing securities litigation over accounting fraud at the former WorldCom Inc. has followed up tough criticism of the tactics of [a certain law firm] by dismissing several claims the plaintiff's firm has brought on behalf of groups that have opted out of the class action." In the decision--In State of Alaska Dept. of Revenue v. Ebbers, 2003 WL 22738546 (S.D.N.Y. Nov. 21, 2003)--the judge threw out claims brought by the State of Alaska Department of Revenue and the Alaska State Pension Investment Board, saying the claims were time-barred.
In a previous post entitled "Lessons for ERISA Plan Fiduciaries From a District Court Case, Part II," I noted that there is much for ERISA plan fiduciaries to be wary of in contemplating individual and class action lawsuits on behalf of plan participants. The aforementioned decision is a case which illustrates how not getting the proper advice and how not taking action in a timely fashion can end up with institutional investors losing out entirely from any recovery. The court notes:
Plaintiffs who choose, as is their right, to pursue separate litigation may not enjoy the benefits of that separate litigation without bearing its burdens. One of the burdens plaintiffs bear is the obligation to commence their actions within the applicable statute of limitations . . .Having chosen to pursue an individual action prior to a decision on class certification, the Alaska Plaintiffs are not protected by the American Pipe tolling doctrine. Since they failed to amend their pleading with the period provided by Section 13, the Alaska Plaintiffs' claims against the Additional Underwriter Defendants and the Individual Defendants are time-barred and dismissed with prejudice.
In another twist to the story, the Securities Litigation Watch in this post links to this letter by lead plaintiff's counsel in the In re WorldCom, Inc. Securities Litigation in which he argues that Individual Action plaintiffs whose claims will be dismissed as being time-barred (like the Alaska claims) should instead be allowed to participate in the Class Action instead of having their claims dismissed with prejudice as to the Class Action:
[T]here is a significant risk that the Individual Action plaintiffs who filed cases . . . may not have understood the risks associated with filing that action, including that such action could be time-barred. Indeed, the Court has already determined that counsel to certain Individual Action plaintiffs engaged in an active campaign to solicit plaintiffs to file individual actions by inducing confusion and misunderstanding regarding the benefits of an individual action and by derogating the class action option. . . This is further reason for fashioning an outcome which refrains from punishing these otherwise innocent investors for a decision that may have been the product of a misguided solicitation campaign.
On a related issue, the Securities Litigation Watch also has this article: "Puncturing the Myths of Opting Out."
Also, the Securities Law Beacon refers to this press release--"WorldCom Investors and Employees Choose Arbitration Over Class Action"--in which it is announced that a law firm is "pursuing claims in excess of $50 million against Salomon Smith Barney, on behalf of present and former WorldCom investors and employees whose portfolios were concentrated in WorldCom stock and who do not wish to participate in any class actions." The press release points to some helpful information for those institutional investors weighing litigation options against brokerage firms. You can access some information entitled "Understanding the Securities Arbitration Process" as well as "Securities Class Action Lawsuits Against Wall Street Brokerages vs. Securities Arbitration Claims: A Study to Determine the Appropriate Path for Securities Dispute Resolution."