Abbott v. Lockheed Martin Corp.

• Decision Date: 07 August 2013
• Docket Number: No. 12–3736.,12–3736.
• Citation: 725 F.3d 803
• Parties: Anthony ABBOTT, et al., Plaintiffs–Appellants, v. LOCKHEED MARTIN CORPORATION and Lockheed Martin Investment Management Company, Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

725 F.3d 803

Anthony ABBOTT, et al., Plaintiffs–Appellants,

v.LOCKHEED MARTIN CORPORATION and Lockheed Martin Investment Management Company, Defendants–Appellees.

No. 12–3736.

United States Court of Appeals, Seventh Circuit.

Argued May 29, 2013.

Decided Aug. 7, 2013.

Jerome J. Schlichter, Michael A. Wolff, Schlichter, Bogard & Denton, St. Louis, MO, for Plaintiffs–Appellants.

Patrick J. Kenny, Armstrong Teasdale, St. Louis, MO, Brian David Netter, Mayer Brown LLP, Washington, DC, Jeffrey W. Sarles, Mayer Brown LLP, Chicago, IL, for Defendants–Appellees.

Before BAUER, WOOD, and TINDER, Circuit Judges.

WOOD, Circuit Judge.

In Spano v. Boeing Co., 633 F.3d 574 (7th Cir.2011), we confronted for the first time the question whether an action for breach of fiduciary duty under Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(a)(2), may be maintained as a class action when a defined-contribution retirement savings plan is at issue. We concluded in Spano that the answer was “maybe.” The proposed classes before us in that case, however, were too broad to meet the certification requirements of Federal Rule of Civil Procedure 23. Spano thus left for another day the resolution of many questions concerning the use of the class-action device for a Section 502(a)(2) claim about a defined-contribution plan.

This case requires us to take the next step. It involves a proposed class of plaintiffs who are participants in two defined-contribution plans run by Lockheed Martin. The class is more focused than those we rejected in Spano, and it reflects Spano 's guidance about how to define a certifiable Section 502(a)(2) class. Notwithstanding these improvements, the district court thought that it still came up short, and so the court declined to certify the class. We granted Plaintiffs' petition under Federal Rule of Civil Procedure 23(f) to appeal that ruling. We now reverse, and we hope that our explanation for doing so will further refine the discussion we began in Spano.

I

A

Plaintiffs have brought a number of claims against Lockheed Martin Corporation and Lockheed Martin Investment Management Company (collectively, Lockheed) regarding the management of Lockheed's two retirement savings plans, the Salaried Savings Plan and the Hourly Savings Plan. (The two plans are indistinguishable for purposes of this appeal, and we refer to them collectively as the “Plan” from here on unless the distinction is relevant.) In general they allege that Lockheed breached its fiduciary duty to the Plan in a number of ways, in violation of Sections 409 and 502 of ERISA, 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3). The Plan is a defined-contribution plan, often referred to as a 401(k), which allows employees to direct a portion of their earnings to a tax-deferred retirement savings account; the employee's contribution is often augmented by the employer. These plans offer a range of investment options to participants,who are permitted to allocate the funds in their accounts as they choose. Defined-contribution plans are common in this country, and they “play a vital role in the retirement planning of millions of Americans.” Spano, 633 F.3d at 576.

Among the investment options Lockheed offered Plan participants was something called the “stable-value fund” (SVF). SVFs are recognized investment vehicles that are available only through employer-sponsored retirement plans and some college-savings plans. See, e.g., Adam Zoll, For Safety–First Savers, Stable–Value Funds Are Tough to Beat, http:// news. morningstar. com/ articlenet/ article. aspx? id= 592164 (last visited Aug. 5, 2013). They typically invest in a mix of short- and intermediate-term securities, such as Treasury securities, corporate bonds, and mortgage-backed securities. Because they hold longer-duration instruments, SVFs generally outperform money market funds, which invest exclusively in short-term securities. Id. To provide the stability advertised in the name, SVFs are provided through “wrap” contracts with banks or insurance companies that guarantee the fund's principal and shield it from interest-rate volatility. Id.; see also Paul J. Donahue, Plan Sponsor Fiduciary Duty for the Selection of Options in Participant–Directed Defined Contribution Plans and the Choice Between Stable Value and Money Market, 39 Akron L.Rev. 9, 20–22 (2006).

Plaintiffs allege that the SVF that Lockheed offered through its Plan failed to conform to this general description. Rather than containing a mix of short- and intermediate-term investments, Lockheed's SVF was heavily invested in short-term money market investments. This resulted in a low rate of return, such that in Lockheed's own words, the SVF did “not beat inflation by a sufficient margin to provide a meaningful retirement asset.” Plaintiffs contend that structuring the SVF in this manner amounted to imprudent management and violated Lockheed's duty to manage the Plan “with [ ] care, skill, prudence, and diligence under the circumstances.” 29 U.S.C. § 1104(a)(1)(B).

B

Plaintiffs filed this suit in 2006. Lockheed eventually moved for summary judgment, and in March 2009 the district court granted the motion with respect to some claims and denied it for others. The SVF claim is one that survived. Several days later, the district court certified two classes under Federal Rule of Civil Procedure 23(b)(1)(A) and (B), one for the Salaried Savings Plan and one for the Hourly Savings Plan. Each class was certified for all claims. The Salaried Savings Plan class was defined as:

All persons, excluding from the class defendants and/or other individuals who are or may be liable for the conduct described in the First Amended Complaint, who were or are participants or beneficiaries of the Salaried Plan and who were or may have been affected by the conduct set forth in the First Amended Complaint, as modified by subsequent court orders, as well as those who will become participants or beneficiaries of the Plan in the future.

The Hourly Savings Plan class definition was materially identical. Lockheed petitioned for permission to appeal the certification orders under Rule 23(f), which permits the courts of appeals to accept an interlocutory review of the grant or denial of class certification. We held the petition pending our decision in Spano. After Spano was issued, we vacated the district court's certification order and remanded for further proceedings.

On remand, Plaintiffs moved to modify the class definitions and to amend their complaint to add additional named plaintiffsto serve as class representatives. To conform to our statement in Spano that “a class representative in a defined-contribution case would at a minimum need to have invested in the same funds as the class members,” id. at 586, Plaintiffs proposed separate classes for each of their remaining claims, with class membership in each one limited to those Plan participants who invested in the relevant funds during the class period. To conform to Spano 's warning that the class must not be “defined so broadly that some members will actually be harmed” by the relief sought, id. at 587, Plaintiffs limited their definition of the SVF class to those who suffered damages as a result of Lockheed's purportedly imprudent management of the fund. To achieve this latter result, Plaintiffs proposed to use as a benchmark for class certification purposes the Hueler FirstSource Universe index (Hueler Index). That index tracks the performance of a variety of stable value funds over time—as relevant here, throughout the class period. By providing a reference point for how an average, prudently managed stable value fund would have performed throughout the class period, Plaintiffs reasoned that the Hueler Index offered a reasonable counterfactual estimate of how Lockheed's SVF would have performed if not for Lockheed's imprudence. By limiting the SVF class to only those Plan participants who suffered harm under this measure, Plaintiffs further reasoned that they had avoided including anyone in the class who may have benefited from Lockheed's conduct. The new proposed class was as follows:

All participants and beneficiaries of the [Salaried and Hourly Savings Plans] whose accounts held units of the [SVF] from September 11, 2000 through September 30, 2006 and whose SVF units underperformed relative to the Hueler FirstSource Index. Excluded from this class are the Defendants, other [Lockheed] employees with responsibility for the Plans' investment or administrative functions, and members of the Lockheed Martin Board of Directors.

The district court was still not satisfied with this narrowed class definition. It acknowledged that the class was “better-defined and more targeted” than both the previous class certified in the case and the classes in Spano, but it found that the SVF claim was “not suitable for class treatment” nevertheless. In the district court's view, including the Hueler Index in the class definition was an improper attempt to “use class certification to ‘back door’ a resolution of this contested issue [i.e., the proper measure of loss] in [Plaintiffs'] favor.” The court concluded that Plaintiffs' SVF claims were not “typical” of those of the class, as required by Rule 23(a)(3). The district court also declined to certify the class provisionally under Rule 23(c)(1)(C), which enables the district court to alter or amend any class definition at any point prior to final judgment. It took the position that certifying a class containing a reference to the Hueler Index was not an “inherently tentative” decision amenable to later modification.

Plaintiffs petitioned for permission to appeal under Rule 23(f). We granted permission with respect to the SVF claims. For the reasons discussed below, we now reverse and remand for further proceedings.

II

At the outset, we must address standing. Lockheed insists that the district court lacked subject-matter jurisdiction...