Graden v. Conexant Systems Inc.

• Decision Date: 31 July 2007
• Docket Number: No. 06-2337.,06-2337.
• Citation: 496 F.3d 291
• Parties: Howard GRADEN, individually and on behalf of all others similarly situated, Appellant v. CONEXANT SYSTEMS INC.; Dwight W. Decker; Armando Geday; Robert McMullan; Michael Vishny; Plan Committee Members; John Does 1-10 fictitious names; J. Scott Blouin; Balakrishnan S. Iyer; Dennis E. O'Reilly; Kerry K. Petry; Bradley W. Yates.
• Court: U.S. Court of Appeals — Third Circuit

496 F.3d 291

Howard GRADEN, individually and on behalf of all others similarly situated, Appellant v. CONEXANT SYSTEMS INC.; Dwight W. Decker; Armando Geday; Robert McMullan; Michael Vishny; Plan Committee Members; John Does 1-10 fictitious names; J. Scott Blouin; Balakrishnan S. Iyer; Dennis E. O'Reilly; Kerry K. Petry; Bradley W. Yates.

No. 06-2337.

United States Court of Appeals, Third Circuit.

Argued April 19, 2007.

Opinion filed July 31, 2007.

Robert Harwood, Esquire, Jeffrey M. Norton, Esquire (Argued), Wechsler Harwood, New York, NY, Lisa J. Rodriguez, Esquire, Trujillo Rodriguez & Richards LC, Haddonfield, NJ, for Appellant.

Richard A. Rosen, Esquire, Robyn F. Tarnofsky, Esquire (Argued), Kerry L. Quinn, Esquire, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, Gregory B. Reilly, Esquire, Deborah A. Silodor, Esquire, Lowenstein Sandler, Roseland, NJ, for Appellees.

Jay E. Shushelsky, Esquire, Melvin R. Radowitz, Esquire, American Association of Retired Persons, Washington, DC, Howard M. Radzely, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor, Karen Handorf, Esquire, Appellate and Special Litigation, Elizabeth Goldberg, Esquire (Argued), United States Department of Labor, Washington, DC, for Amicus-Appellant.

Jan S. Amundson, Esquire, National Association of Manufacturers, Washington, DC, for Amicus-Appellee.

Before: McKEE, AMBRO and MICHEL^*, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

We decide whether the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461, gives an ostensibly cashed-out former employee the right to sue the administrator of his former employer's 401(k) plan for allegedly mismanaging plan assets and thus reducing his share of benefits. Because ERISA includes such a plaintiff in its definition of "participant," he has statutory standing to assert his claim.

I. Facts and Procedural History

Howard Graden was a Conexant employee until September 2002 and a participant in the Conexant Retirement Saving Plan until October 2004. Like most 401(k) plans, Conexant's is a "defined contribution" one in which participants and the employer contribute money into the participants' individual accounts. Participants elect to invest their money in various predetermined investment packages. Here, Graden directed his money into Conexant Stock Fund B, a package composed entirely of Conexant common stock.

Conexant develops semiconductor devices for broadband communications equipment, and its common stock trades on the NASDAQ. Graden's claim centers on the period between March and October 2004. On March 5, 2004, Conexant's common stock closed at a 52-week high of $7.42 per share. By October 4, 2004 (when Graden voluntarily cashed out), it had plummeted to $1.70 per share. According to Graden, the March-to-October drop was the result of a risky and ultimately failed merger. Conexant,¹ he alleges, breached its fiduciary duties to him and other plan participants by (1) offering the stock fund as an investment option despite the fact that it was not (and was known not to be) a prudent investment, and (2) making false and misleading statements about the merger that caused him to invest in the fund.

The District Court dismissed Graden's action for lack of statutory standing, ruling that he was not a "participant" for purposes of ERISA because he had already cashed out of the plan. Because statutory standing is an issue of subject matter jurisdiction, the Court stopped after concluding that it had none and did not consider Conexant's alternative argument that Graden failed to state a claim on which relief could be granted.

Graden appeals to us.² With him are two amici curiae: the Secretary of Labor and AARP.³ Filing an amicus brief on Conexant's side is the National Association of Manufacturers.

II. Statutory Standing

As noted, the question presented is one of statutory standing. There is no dispute about Article III or prudential standing. Though all are termed "standing," the differences between statutory, constitutional, and prudential standing are important. Constitutional and prudential standing are about, respectively, the constitutional power of a federal court to resolve a dispute and the wisdom of so doing. See Presbytery of N.J. of the Orthodox Presbyterian Church v. Florio, 40 F.3d 1454, 1462 (3d Cir.1994); Amato v. Wilentz, 952 F.2d 742, 748 (3d Cir.1991). Statutory standing is simply statutory interpretation: the question it asks is whether Congress has accorded this injured plaintiff the right to sue the defendant to redress his injury. To answer the question, we employ the usual tools of statutory interpretation. We look first at the text of the statute and then, if ambiguous, to other indicia of congressional intent such as the legislative history. See In re Mehta, 310 F.3d 308, 311 (3d Cir.2002).

Graden alleges that Conexant's mismanagement of plan assets caused a loss to the plan that ultimately harmed him and other plan participants. At the pleadings stage (where we accept Graden's allegations as true), this allegation clearly qualifies as a concrete injury traceable to Conexant and redressable by a court. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). Moreover, we see no prudential concerns that would prevent us from exercising jurisdiction.

It is undisputed that the Conexant plan is an employee benefit plan governed by ERISA. In addition, we assume for purposes of this appeal that the defendants are fiduciaries of the Conexant plan. Graden brought this action under 29 U.S.C. § 1132(a)(2), which accords various parties the right to sue ERISA plan fiduciaries for breaches of their fiduciary duties. Section 1109(a) provides the following remedies for such breaches:

[ (1) ] mak[ing] good to such plan any losses to the plan resulting from each such breach, . . . [ (2) ] . . . restor[ing] to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and [ (3) ] . . . such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

As § 1132(a)(2) addresses losses to ERISA plans resulting from fiduciary misconduct, the Supreme Court has held that suits under it are derivative in nature—that is, while various parties are entitled to bring suit (participants, beneficiaries,⁴ fiduciaries, and the Secretary of Labor), they do so on behalf of the plan itself. Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 144, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985); see also In re Schering-Plough Corp. ERISA Litigation, 420 F.3d 231, 241 (3d Cir.2005). Consequently, the plan takes legal title to any recovery, which then inures to the benefit of its participants and beneficiaries.

The analogy that comes to mind quickest is to shareholder derivative litigation, but the trust-law roots of § 1132(a)(2) run far deeper.⁵ When a common-law trustee commits a breach of trust that results in a loss, any beneficiary whose beneficial interests were affected may sue to compel the trustee to make good on the loss. RESTATEMENT (SECOND) OF TRUSTS § 214 & cmt. b (1959). When the trustee does so, he restores money to the trust for the benefit of the plaintiff/beneficiary. See AUSTIN W. SCOTT & WILLIAM F. FRATCHER, THE LAW OF TRUSTS § 214 (4th ed. 1988); P.V. BAKER & P. ST. J. LANGAN, SNELL'S EQUITY 284 (29th ed. 1990) (citing Bartlett & Others v. Barcaly's Bank Tr. Co. Ltd., [1980] Ch. 514, 543); cf. UNIF. TR. CODE § 1002(a)(1) (measuring trustee liability by "the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred"). Thus, § 1132(a)(2) merely codifies for ERISA participants and beneficiaries a classic trust-law process for recovering trust losses through a suit on behalf of the trust.⁶

Graden claims that he may bring suit as a current "participant" in the Conexant plan.⁷ ERISA defines a participant as "any employee or former employee . . . who is or may become eligible to receive a benefit of any type from an employee benefit plan." 29 U.S.C. § 1002(7). Applying this definition, the Supreme Court has held that the term covers a former employee with a colorable claim for "vested benefits." Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 118, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989) (quoting Saladino v. I.L. G.W.U. Nat'l Ret. Fund, 754 F.2d 473, 476 (2d Cir.1985)). Graden's argument is that because Conexant's breaches improperly reduced the value of plan assets allocable to him, he is entitled to additional benefits that will become available once Conexant makes good the loss to the plan.

To evaluate Graden's argument, we begin with the definition of "benefit." The term is not expressly defined in ERISA, so we look to its ordinary meaning. A relevant definition is a "payment or service provided for under an annuity, pension plan, or insurance policy." MERRIAM-WEBSTER'S ONLINE DICTIONARY, http://www.m-w.com/dictionary/benefit. Essentially, "benefits" are simply the money to which a person is entitled under an ERISA plan. In this context, is what Graden seeks a benefit?

The Conexant plan is an "individual account plan."⁸ See 29 U.S.C. § 1002(34). This means that a participant's vested benefits are the contents of his account: contributions (from both the participant and employer) plus investment gains minus investment losses and any allocable expenses. 29 U.S.C. § 1002(34). In addition, ERISA imposes fiduciary duties on plan administrators, 29 U.S.C. § 1104, so part of a participant's entitlement is the value of his account unencumbered by any fiduciary impropriety. In other words, ERISA entitles individual-account-plan participants not only to what is in their accounts, but also to what should be there given the terms of the plan and ERISA's fiduciary obligations.

From this, it is not difficult to conclude...