Burke v. Boeing Company

• Decision Date: 01 August 2022
• Docket Number: 20-3389
• Citation: 42 F.4th 716
• Parties: Diane BURKE, et al., as participants in and on behalf of the Boeing Voluntary Investment Plan, and on behalf of a class of all others who are similarly situated, Plaintiffs-Appellants, v. The BOEING COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

42 F.4th 716

Diane BURKE, et al., as participants in and on behalf of the Boeing Voluntary Investment Plan, and on behalf of a class of all others who are similarly situated, Plaintiffs-Appellants,

v.The BOEING COMPANY, et al., Defendants-Appellees.

No. 20-3389

United States Court of Appeals, Seventh Circuit.

Argued May 21, 2021

Decided August 1, 2022

Todd S. Collins, Esq., Ellen Noteware, Attorneys, Berger Montague PC, Philadelphia, PA, Michael M. Mulder, Attorney, Law Offices of Michael M. Mulder, Evanston, IL, John J. Nestico, Attorney, Scheider, Wallace, Cottrell, Konecky, LLP, Charlotte, NC, for Plaintiffs-Appellants.

Christopher J. Boran, Deborah Shannon Davidson, Matthew A. Russell, Attorneys, Morgan, Lewis & Bockius LLP, Chicago, IL, Michael E. Kenneally, Attorney, Morgan, Lewis & Bockius LLP, Washington, DC, for Defendants-Appellees.

Before Sykes, Chief Judge, and Ripple and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

This appeal presents new variations on issues that often arise when the value of employer stock held by an employee stock ownership plan drops substantially. The Employee Retirement Income Security Act (ERISA) allows company insiders to serve as fiduciaries of employee benefit plans, so that they owe fiduciary duties both to plan participants and to the company. See Pub. L. No. 93-406, 88 Stat. 829 (1974) (codified in various sections of 29 U.S.C.); see also 29 U.S.C. § 1108(c)(3) ; Halperin v. Richards , 7 F.4th 534, 542 (7th Cir. 2021). Such insiders also have obligations to all shareholders under securities laws.

For decades, employees unhappy about dropping stock values in employee stock ownership plans have tried to use ERISA to obtain relief from the ERISA fiduciaries and their employers. At the foundation of the early efforts was a theory that when an employer's business ran into serious trouble that would cause the stock value to drop, company insiders with fiduciary duties under ERISA were obliged to use inside information about those troubles for the benefit of employee-shareholders at the (implicit) expense of other shareholders. That theory would conflict directly with federal securities laws. The Supreme Court made clear in Fifth Third Bancorp v. Dudenhoeffer , 573 U.S. 409, 134 S.Ct. 2459, 189 L.Ed.2d 457 (2014), that ERISA does not require fiduciaries to violate securities laws on insider trading.

In trying to reconcile ERISA and federal securities laws, however, Dudenhoeffer left open at least a theoretical possibility for employees to seek relief under ERISA on a theory that plan fiduciaries had a duty to disclose bad news to everyone. Yet as part of the balance between ERISA and securities law, Dudenhoeffer imposed demanding pleading standards for such claims, requiring plaintiffs to plausibly allege an alternative action the defendant could have taken that would have been consistent with securities law and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the employee stock ownership fund than to help it. 573 U.S. at 428, 134 S.Ct. 2459. Since Dudenhoeffer , plaintiffs in ERISA stock-drop cases have been trying to satisfy, limit, or avoid those pleading standards.

This court and others have long responded to ERISA fiduciaries' sometimes-conflicting interests by suggesting that the conflicted fiduciaries step aside in favor of new, independent fiduciaries who can focus exclusively on the interests of ERISA plan participants and beneficiaries. E.g., Leigh v. Engle , 727 F.2d 113, 125 (7th Cir. 1984) ; Donovan v. Bierwirth , 680 F.2d 263, 271-72 (2d Cir. 1982).

Many years ago, The Boeing Company adopted that approach for its employee stock ownership plan, also known as an "ESOP." Boeing plan fiduciaries delegated to an independent outside fiduciary the selection and management of investment options for the ESOP. The central question here is whether the delegation of those investment responsibilities protects the company and company insiders from liability for the plan's continued offering of Boeing stock as an investment option for employees before and during a time when the value of Boeing stock dropped significantly. The drop occurred after two fatal crashes of new Boeing 737 MAX airliners led to a worldwide grounding of those planes and a halt to production. We agree with the district court that the delegation of investment decisions to an independent fiduciary means that neither Boeing nor the other defendants acted in an ERISA fiduciary capacity in connection with the continued investments in Boeing stock. We affirm the district court's dismissal of the action.

I. Factual and Procedural Background

A. The Boeing Company's Employee Stock Ownership Plan

The Boeing Company designs and manufactures commercial jets and defense, space, and security systems. Plaintiffs are Boeing employees who participated in the Boeing Voluntary Investment Plan (the "Plan"), a 401(k) plan that Boeing sponsors for eligible employees.

The Plan is an employee benefit plan and employee pension benefit plan covered by ERISA. See 29 U.S.C. § 1002(2)(A). Boeing employees may allocate a percentage of their earnings to be invested in the Plan. See §§ 1002(34) & 1107(d)(3). At all relevant times, one investment option has been the Boeing Stock Fund. Plaintiffs are Plan participants whose savings were invested in the Boeing Stock Fund between November 7, 2018, and December 16, 2019 (the "Class Period"). The defendants are Boeing itself, its Employee Benefit Plans Committee (the "Plans Committee"), which is the Plan Administrator under 29 U.S.C. § 1002(16)(A), responsible for administering the Plan, and the Employee Benefit Investment Committee (the "Investment Committee"), which oversees the Plan's investment options, plus named and unnamed Boeing officials who served on one or both committees.

B. The Third-Party Delegation

In December 2007, the Investment Committee began contracting with an outside trust company to manage the Plan's investments in Boeing stock. During the Class Period for this case, the outside fiduciary was Newport Trust Company. The operative agreement between the Investment Committee and Newport Trust provided:

As investment manager, [Newport Trust] will at all times have the exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the [Boeing] Stock Fund is prudent under ERISA (either with respect to permitting new investments in the [Boeing] Stock Fund, continuing to hold [Boeing] Stock, or both).

The agreement further provided:

In exercising its authority and responsibility [as investment manager], [Newport Trust has] the authority to exercise any and all of the following powers, and to instruct the trustee of the Plan accordingly:

(i) to suspend or prohibit the investment of new participant or employer contributions in the [Boeing] Stock Fund;

(ii) to suspend or prohibit the transfer of participant account balances into the [Boeing] Stock Fund;

(iii) in connection with the determination that holding [Boeing] Stock is no longer prudent under ERISA, to liquidate the [Boeing] Stock Fund and to sell or otherwise dispose of all of the [Boeing] Stock held in the [Boeing] Stock Fund ....

The 2017 Financial Statements for the Plan said that the Plan had

authorized Newport with sole responsibility for deciding whether to restrict investment in the Boeing Stock Fund, or to sell or otherwise dispose of all or any portion of the stock held in the Boeing Stock Fund. In the event Newport determined to sell or dispose of stock in the Boeing Stock Fund, Newport would designate an alternative investment fund under the Plan for the temporary investment of any proceeds from the sale or other disposition of the Company's common stock.

Newport is not named as a defendant in this case.

C. Plaintiffs' Allegations

In October 2018, Boeing had for at least a year been selling the new 737 MAX version of its best-selling 737 series of airliners. On October 29, 2018, a Lion Air 737 MAX airliner crashed into the Java Sea, killing everyone aboard. Plaintiffs here allege that soon after the crash, and especially once the flight data recorder was retrieved, defendants knew or should have known that all 737 MAX planes were unsafe to fly because of known problems with a new automated flight control system that Boeing had added to the 737 MAX. On March 10, 2019, another 737 MAX crashed in Ethiopia, again killing everyone aboard. Plaintiffs here allege that the second crash also resulted from the known problems with the automated flight control system. The 737 MAX fleet was soon grounded worldwide. On December 16, 2019—the close of the Class Period—Boeing announced that it would suspend production of new 737 MAX jets beginning in January 2020.

The human, financial, and legal consequences of the 737 MAX crashes have been huge. This lawsuit presents a small and relatively narrow set of questions about whether Boeing employees are entitled to relief from some of the financial consequences of the 737 MAX disasters.

Plaintiffs allege here that defendants breached several duties imposed on plan fiduciaries by ERISA: (i) the duties of prudence and loyalty under ERISA § 404(a)(1); (ii) the duty to monitor investments under ERISA § 404(a)(1); and (iii) the co-fiduciary duty under ERISA § 405(a)(1)–(3). Plaintiffs' allegations rest on the theory that by November 7, 2018—one week after recovery of the flight data recorder from the first 737 MAX crash—defendants should have issued a corrective public disclosure saying that the 737 MAX was not safe to fly.

D. Proceedings Before the District Court

Plaintiffs filed this putative class action in March 2019, shortly after the second 737 MAX crash. The operative second amended complaint alleges that throughout the Class Period, from November 7, 2018 to December 16, 2019, Boeing's continuous concealment of material facts relating to the 737 MAX jets caused the price of Boeing stock to be...