Perrone v. Johnson & Johnson
| Decision Date | 07 September 2022 |
| Docket Number | 21-1885 |
| Citation | 48 F.4th 166 |
| Parties | Michael PERRONE ; Tom Tarantino; Rochelle Rosen, as participants in and on behalf of the Johnson & Johnson Savings Plan, and on behalf of a class of all others who are similarly situated, Appellants v. JOHNSON & JOHNSON; Peter Fasolo; Dominic J. Caruso; John Does 1-20 |
| Court | U.S. Court of Appeals — Third Circuit |
Kyle G. Bates, James A. Bloom, Todd Schneider, Schneider Wallace Cottrell Konecky, 2000 Powell Street – Suite 1400, Emeryville, CA 94608, Samuel E. Bonderoff [ARGUED], Jacob H. Zamansky, Zamansky, 50 Broadway – 32nd Floor, New York, NY 10004, Todd S. Collins, Ellen T. Noteware, Berger Montague, 1818 Market Street – Suite 3600, Philadelphia, PA 19103, Joseph J. DePalma, Lite DePalma Greenberg & Afanador, 570 Broad Street – Suite 1201, Newark, NJ 07201, Counsel for Appellants
Mark B. Blocker [ARGUED], Christopher Y. Lee, Abigail Molitor, Kristen R. Seeger, Sidley Austin, One South Dearborn Street, Chicago, IL 60603, Keith J. Miller, Robinson Miller, 110 Edison Place, 19th Floor, Suite 302, Newark, NJ 07102, Counsel for Appellee
Before: JORDAN, RESTREPO and SMITH, Circuit Judges
Johnson & Johnson ("J&J") offers an Employee Stock Ownership Plan ("ESOP") as an investment option within its retirement savings plans. The ESOP invests solely in J&J stock, which declined in price following a news report accusing J&J of concealing that its popular baby powder was contaminated with asbestos. J&J denied both that its product was contaminated and that it had concealed anything about the product. What's important here, however, is the stock market ramifications of the allegation. The Plaintiffs, J&J employees who participated in the ESOP, allege that the ESOP's administrators, who are senior officers of J&J, violated their fiduciary duties by failing to protect the ESOP's beneficiaries from a stock price drop. According to the Plaintiffs, those fiduciaries, being corporate insiders, should have seen the price drop coming because of the baby powder controversy. Specifically, the Plaintiffs allege that the corporate-insider fiduciaries violated the duty of prudence imposed on them by the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1002 - 1003.
In Fifth Third Bancorp v. Dudenhoeffer , the Supreme Court held that a plaintiff seeking to bring such a claim must plausibly allege "an alternative action that the defendant could have taken that would have been consistent with the securities laws," and, further, "that a prudent fiduciary in the same circumstances would not have viewed [the proposed alternative action] as more likely to harm the fund than to help it." 573 U.S. 409, 428, 134 S.Ct. 2459, 189 L.Ed.2d 457 (2014). The Plaintiffs here propose two alternative actions that they say the Defendants should have taken before the stock price dropped. First, they say that the Defendants could have used their corporate powers to make public disclosures that would have corrected J&J's artificially high stock price earlier rather than later. Second, they say that the fiduciaries could have stopped investing in J&J stock and simply held onto all ESOP contributions as cash.
The District Court rejected those alternative actions as failing the Dudenhoeffer test, and we agree. A reasonable fiduciary in the Defendants' circumstances could readily view corrective disclosures or cash holdings as being likely to do more harm than good to the ESOP, particularly given the uncertainty about J&J's future liabilities and the future movement of its stock price. We will therefore affirm the dismissal of the Plaintiffs' complaint.
J&J sells hundreds of products in a variety of categories, but perhaps none is better known than Johnson's Baby Powder. Since 1894, J&J has sold and marketed its baby powder for many uses. The main ingredient in the baby powder is talc, an underground mineral that is extracted by mining. The problem with mining talc, however, is that talc deposits can be located dangerously close to a different and notorious mineral: asbestos. Asbestos is a carcinogen linked to ovarian cancer and mesothelioma, among other serious ailments. Some governmental and non-governmental organizations have suggested that talc may be contaminated with asbestos and have warned of a link between talc usage and ovarian cancer.
The Plaintiffs assert that, for decades, J&J has known that Johnson's Baby Powder might contain asbestos. According to the Plaintiffs, J&J has repeatedly suppressed unfavorable research about asbestos in talc, disregarded internal company concerns about asbestos in its baby powder, and undermined efforts to regulate asbestos in talc products generally.
Over the years, thousands of plaintiffs have filed products liability lawsuits alleging that J&J's talc products caused cancer. Those plaintiffs have had mixed success. J&J has always denied liability and publicly affirmed that its products are asbestos-free and safe for everyday use. In its Form 10-Ks for fiscal years 2012 through 2016, it professed its "commit[ment] to investing in research and development with the aim of delivering high quality and innovative products," and it asserted that it had "substantial defenses" to talc-related products liability claims. (App. at 65-77.) In December 2016, J&J proclaimed on its website that it continued to use talc in its baby powder "because decades of science have reaffirmed its safety." (App. at 74.) In late 2017, J&J spokespeople told the press that its talc products "are, and always have been, free of asbestos, based on decades of monitoring, testing[,] and regulation," and that Johnson's Baby Powder "does not contain asbestos or cause mesothelioma or ovarian cancer [.]" (App. at 77.) As recently as January 2019, J&J touted its talc as being "carefully selected, processed[,] and tested to ensure that [it] is asbestos free, as confirmed by regular testing conducted since the 1970s." (App. at 78.)
Market pressure on J&J increased on December 14, 2018, when Reuters published an investigative report titled J&J Knew For Decades That Asbestos Lurked In Its Baby Powder. The article asserted that J&J knew but concealed that the talc in its baby powder likely contained asbestos. It also accused J&J of attempting to influence government regulation and scientific research on the issue. The article was picked up by other news sources and received wide distribution. J&J's stock price "declined more than 10% following the Reuters report[.]" (App. at 52.)2
The accusations about J&J's baby powder led to two significant lawsuits that, like this one, are pending in the U.S. District Court for the District of New Jersey. The first, which we will call the "Products Liability Action," is actually fifty-four different actions centralized from at least twenty-three district courts under the federal rules permitting multi-district litigation. 28 U.S.C. § 1407 ; In re Johnson & Johnson Talcum Powder Prod. Mktg., Sales Pracs. & Prod. Liab. Litig. , 220 F. Supp. 3d 1356, 1357 (J.P.M.L. 2016). All of those cases involve claims that asbestos in J&J's talc products caused personal injuries. Id. The MDL proceeded to discovery after J&J filed an answer to the amended master complaint in April 2017.
The second case, the "Securities Fraud Action," is a putative class action alleging that J&J and its senior executive officers violated federal securities disclosure laws, based on many of the same facts described above. Hall v. Johnson & Johnson , 2019 WL 7207491, at *1-8 (D.N.J. Dec. 27, 2019). J&J moved to dismiss it, but the District Court denied that motion in part in December 2019. Id. at *30.
Also in 2019, the Plaintiffs here filed their proposed class action.3 Rather than bring a products liability or securities fraud claim, they assert that the Defendants are liable for a third type of legal violation: a breach of fiduciary duties under ERISA.
J&J sponsors several defined contribution plans into which its employees can invest a portion of their salaries for retirement.4 Those defined contribution plans include the Johnson & Johnson Savings Plan (the "Savings Plan"), the Johnson & Johnson Savings Plan for Union Represented Employees, and the Johnson & Johnson Retirement Savings Plan (collectively, the "Plans"). The Plans are all governed by the provisions of ERISA. 29 U.S.C. §§ 1002 - 1003. The Plans' fiduciaries – the individual Defendants here – constitute J&J's Pension and Benefits Committee, which has general authority over the management and administration of the Plans.
Each of the Plans includes an investment option allowing employees to place their contributions in an ESOP, which invests exclusively in J&J stock. The ESOP additionally includes a small cash buffer, which provides the cash necessary for daily liquidity. The Plaintiffs here were participants in the Savings Plan and invested in J&J stock through the ESOP.5 In particular, they participated in the Savings Plan during the proposed Class Period, namely, between April 11, 2017 (when discovery commenced in the Products Liability Action) and December 14, 2018 (when the Reuters report allegedly drove down the J&J stock price).
The Plaintiffs' consolidated class action complaint alleged that the members of the Pension and Benefits Committee breached their fiduciary duties by not acting prudently in the administration of the Plans. More specifically, according to the Plaintiffs, those fiduciaries knew or should have known that J&J was concealing the truth about its dangerous talc products and that J&J's stock price was therefore overvalued, yet they continued holding and purchasing J&J stock. The Plaintiffs asserted that the Defendants should have instead protected the ESOP participants from the inevitable stock...
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