476 F.3d 299 (5th Cir. 2007), 04-41760, Langbecker v. Electronic Data Systems Corp.

Docket Nº:04-41760.
Citation:476 F.3d 299
Party Name:Richard LANGBECKER, et al., Plaintiffs-Appellees, v. ELECTRONIC DATA SYSTEMS CORP., et al., Defendants, Electronic Data Systems Corp., et al., Defendants-Appellants.
Case Date:January 18, 2007
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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476 F.3d 299 (5th Cir. 2007)

Richard LANGBECKER, et al., Plaintiffs-Appellees,

v.

ELECTRONIC DATA SYSTEMS CORP., et al., Defendants,

Electronic Data Systems Corp., et al., Defendants-Appellants.

No. 04-41760.

United States Court of Appeals, Fifth Circuit.

Jan. 18, 2007

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Barry Craig Barnett (argued), Jonathan Bridges, Ryan Laurence Nelson, Gretchen Sims Sween, Susman Godfrey, Dallas, TX, for Langbecker, ERISA, Vanderlip, Smith and Florer.

Joseph W. Wolfe, Wolfe, Clark, Henderson, Tidwell & McCoy, Sherman, TX, for Langbecker.

Ron Kilgard, Keller Rohrback, Phoenix, AZ, for Langbecker, ERISA, Vanderlip, Smith, Florer and Barnes.

Robert A. Izard, Jr., Schatz & Nobel, Hartford, CT, Jeffrey S. Abraham, Abraham Fruchter & Twersky, New York City, for ERISA.

James D. Baskin, III, The Baskin Law Firm, Austin, TX, for ERISA and Barnes.

Lynn Lincoln Sarko, Elizabeth A. Leland, Keller Rohrback, Seattle, WA, Gary A. Gotto, Keller Rohrback, Phoenix, AZ, for ERISA, Vanderlip and Smith.

Earl Glenn Thames, Jr., Potter Minton, Tyler, TX, for Vanderlip.

Brian Paul Sanford, Sheils, Winnubst, Sanford & Bethune, Richardson, TX, for Florer.

Howard Shapiro (argued), Robert Wilkinson Rachal, René E. Thorne, Proskauer Rose, New Orleans, LA, Otis W. Carroll, Deborah Johnson Race, Ireland, Carroll & Kelley, Tyler, TX, for Defendants-Appellants.

Timothy Francis Gavin, Fletcher L. Yarbrough, Michael Allen Birrer, Carrington, Coleman, Sloman & Blumenthal, Dallas, TX, for EDS Comp. & Ben. Com., Gray, Groves and Kidder.

Caroline Montrose Brown, John M. Vine, Joseph Zambuto, Jr., Covington & Burling, Washington, DC, for ERISA Industry Com., Am. Benefits Council, and ESOP Ass'n, Amici Curiae.

William J. Kilberg, Paul Blankenstein, Gibson, Dunn & Crutcher, Eugene Scalia, Acting Sol., U.S. Dept. of Labor, Washington, DC, for Business Roundtable, Chamber of Commerce of U.S. and Nat. Ass'n of Manufacturers, Amici Curiae.

Jeffrey G. Lewis, Claire Kennedy-Wilkins, Lewis, Feinberg, Renaker & Jackson, Oakland, CA, Robert Edward McKnight, Jr., Murphy & McKnight, New Orleans, LA, for Nat. Emp. Lawyers Ass'n, Amicus Curiae.

Mary Ellen Signorille, Michael Robert Schuster, American Ass'n of Retired Persons, Washington, DC, for AARP, Amicus Curiae.

Bruce F. Rinaldi, Cohen, Milstein, Hausfeld & Toll, John P. Holtz, Pension Rights Center, Washington, DC, Norman Stein, Tuscalousa, AL, Marc I. Machiz, Cohen, Milstein, Hausfeld & Toll, Philadelphia, PA, for Pension Rights Center, Amicus Curiae.

Elizabeth Hopkins (argued), U.S. Dept. of Labor, Washington, DC, for Chao, Secretary of Dept. of Labor, Amicus Curiae.

Appeal from the United States District Court for the Eastern District of Texas

Before JONES, Chief Judge, and REAVLEY and GARZA, Circuit Judges.

EDITH H. JONES, Chief Judge

Although legal remedies exist for the alleged wrongs committed by Electronic Data Systems ("EDS") and its associated defendants for allegedly mismanaging the

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company's 401(k) Retirement Plan, the Rule 23(b)(1) or (b)(2) class action certified by the district court is not among them. The district court erroneously interpreted the impact, inter alia, of intraclass conflicts and fact-specific defenses arising from ERISA § 404(c) and individual releases. Rule 23(b)(2) is unsuited to provide classwide relief, and Rule 23(b)(1) is conceptually unclear. As a result, we must VACATE and REMAND the class certification for further consideration.

I. BACKGROUND

Plaintiffs are current and former employees of EDS1 who participated in the company's 401(k) defined contribution Retirement Plan ("Plan").2 Like many employers, EDS offers its employees a menu of retirement options and agrees to match a portion of each employee's annual contribution to his 401(k) account. Participants then select their individual portfolios and decide when and whether to change the mix of investments. Participant accounts, commingled for management purposes, become the assets of the Plan. The Plan's trustees, who are subject to the rigorous fiduciary requirements of ERISA, manage the Plan, select and monitor the investment options, and handle each Participant's account. Significantly, the Plan also invokes ERISA § 404(c), which 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]." 29 U.S.C. § 1104(c). The tension between the fiduciary obligations and the employee-directed nature of the accounts provides the backdrop to the instant case.

During the class period, EDS offered Plan Participants between thirteen and eighteen investment options, including an EDS Stock Fund.3 Plan documents discussed the different funds, explained that employees could direct contributions to a fund or funds of their choice, and 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.4The Plan documents also explained that EDS agreed to match up to twenty-five percent of each employee's annual investment, up to six percent of salary, with an investment in the EDS Stock Fund. The matched investments had to remain in the Stock Fund for two years, after which the employee could move the funds as he chose.

On September 18, 2002, EDS published an earnings warning, which precipitated a

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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 lawsuits commenced.5

This case, while predicated on the same accounting and business irregularities as the securities actions, is brought on behalf of Participants in the Plan. (Participants may be members of the securities lawsuit class as well as the alleged Plan class.) The operative Class Complaint alleges three ERISA fiduciary violations relevant on appeal. In Count I, the Participants allege that the EDS Appellants6 breached their fiduciary duties of prudence when, despite knowledge of EDS's financial problems, Appellants continued to offer company stock as a Plan investment option; directed and approved investment in the stock rather than in safer alternatives; invested matching funds in EDS stock; failed to take adequate steps to prevent the Plan from suffering losses from its EDS stock investment; and failed to implement a strategy to compensate for the high risk of EDS stock as a Plan investment. Count II alleges that Appellants breached their fiduciary duties by failing to monitor the Benefits Administration Committee and Investment Committee members who supervised the Plan and by failing to provide the committees with accurate information about company problems. Count IV7 alleges breach of their duties of loyalty to the Plan because the Appellants failed to act solely in the Participants' interests and for the exclusive purpose of providing Plan benefits. All three Counts proceed under ERISA § 409 and § 502(a)(2) (29 U.S.C. § 1109 (a) and § 1132(a)(2)). The crux of the allegations is the imprudence of company stock as a retirement offering.

Participants request 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 seek 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 Fed.R.Civ.P. 23(b)(2) class for these 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 September 7, 1999, and October 9, 2002. As framed, the Class includes up to eighty-five thousand members.8

Appellants sought and were granted interlocutory review pursuant to Fed.R.Civ.P. 23(f).

A summary of the district court's closely reasoned opinion regarding certification of

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these claims is essential to further analysis. Several of the court's legal rulings underpin its conclusion that these claims are amenable to class certification. If the court erred in any of its threshold decisions, the class certification is put at risk.

First, the court rejected Appellants' contention that Appellees' claim should be characterized as individual claims for "other appropriate equitable relief" to redress breaches of fiduciary duty under ERISA § 502(a)(3).9 See Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). Instead, the court adopted the Participants' contention that theirs is a "derivative" suit brought on behalf of the Plan pursuant to ERISA § 502(a)(2), in which recovery must "inure[] to the benefit of the plan as a whole," Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140, 105 S.Ct. 3085, 3089, 87 L.Ed.2d 96 (1985).

Fastening on the derivative suit characterization, the court then ruled that ERISA § 404(c), which relieves fiduciaries of liability where loss results from a participant's exercise of direction and control of his own account, is inapplicable to a suit on "behalf of the plan as a whole." Finally, the court determined that post-employment releases of claims executed by up to nine thousand potential class members not only did not release claims for the Appellants' breached fiduciary duties but in any event were irrelevant to the maintenance of a classwide claim for derivative relief to the Plan.

Turning to the class action rule, the court emphasized and discussed in tandem the typicality and adequacy factors, 10 which bear on the...

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