Harzewski v. Guidant Corp.

• Citation: 489 F.3d 799
• Decision Date: 05 June 2007
• Docket Number: No. 06-3752.,06-3752.
• Parties: Erica HARZEWSKI, et al., on their own behalf and on behalf of all other persons similarly situated, Plaintiffs-Appellants, v. GUIDANT CORPORATION, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

489 F.3d 799

Erica HARZEWSKI, et al., on their own behalf and on behalf of all other persons similarly situated, Plaintiffs-Appellants, v. GUIDANT CORPORATION, et al., Defendants-Appellees.

No. 06-3752.

United States Court of Appeals, Seventh Circuit.

Argued April 10, 2007.

Decided June 5, 2007.

Mark C. Rifkin (argued), Wolf, Haldenstein, Adler, Freeman & Herz, New York, NY, Kathleen A. Delaney, Delaney & Delaney, Indianapolis, IN, for Plaintiffs-Appellants.

Brian T. Ortelere (argued), Morgan, Lewis & Bockius, Philadelphia, PA, Boris Feldman, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA, John R. Schaibley, III, Baker & Daniels, Indianapolis, IN, for Defendants-Appellees.

Elizabeth Hopkins (argued), Department of Labor, Office of the Solicitor, Washington, DC, for Amicus Curiae.

Before BAUER, POSNER, and RIPPLE, Circuit Judges.

POSNER, Circuit Judge.

This is a class action on behalf of participants and beneficiaries in a pension plan for employees of Guidant Corporation. A manufacturer of cardiovascular devices, Guidant was bought last year by Boston Scientific, which paid for each share of Guidant stock $42.28 in cash plus 1.6799 shares (worth $37.78 at the time, as each share was worth $22.49) of stock in Boston Scientific, for a total value of $80.06. The plan's portfolio included stock in Guidant held by an ESOP (employee stock ownership plan), and the suit claims that the pension plan's fiduciaries acted imprudently in failing to dispose of that stock between October 1, 2004, and November 3, 2005. The fiduciaries are various employees and board members of Guidant, all of whom were under the company's control (as ERISA permits, see 29 U.S.C. §§ 1102(c)(1), 1103(a)(1); Geddes v. United Staffing Alliance Employee Medical Plan, 469 F.3d 919, 923-24 (10th Cir.2006); U.S. Department of Labor, "Meeting Your Fiduciary Responsibilities," www.dol.gov/ ebsa/publications/fiduciaryresponsibility. html (visited May 17, 2007)), as was the ESOP. So for the sake of simplicity we shall pretend that Guidant is the only defendant and the only fiduciary.

October 2004 to November 2005 was a period, prior to Boston Scientific's acquisition of Guidant (which took place in April 2006), when according to the complaint the price of Guidant stock was inflated by a fraud committed by the company's management. The alleged fraud consisted of the concealment of information about defects in the company's implantable defibrillators, which accounted for nearly half its revenues. Very shortly after Boston Scientific's acquisition of Guidant, the full gravity of Guidant's problems came to light and the revelation contributed to the drop in the price of Boston Scientific stock from $22.49 when Boston Scientific bought Guidant to $16.33 on May 3 of this year.

The district court dismissed the complaint on the ground that the named plaintiffs have no "standing" to bring this suit because they retired from Guidant and cashed out their pension benefits before the filing of the amended complaint, and so ceased to be participants in the pension plan. The lawyers for the class could, to keep the class action alive, have substituted as named plaintiffs members of the class who remained participants in the plan — current employees. But being unwilling to abandon the claims of class members in the situation of the named plaintiffs, they decided instead to appeal the district court's ruling.

To make the issue of "standing," as the parties call it, intelligible, we must say a bit more about the plan and the allegations. The plan is a defined-contribution plan, meaning that it does not specify the pension benefits to which participants are entitled. Rather, it establishes retirement accounts for each participant and a scheme for determining the character, amount, timing, etc., of contributions to those accounts by employer and employee. When a participant retires, his pension benefit is simply the balance in his account. Contributions to the Guidant pension plan and hence to the retirement accounts were to come from both a 401(k) plan and the ESOP, the former funded by employee contributions and matching employer contributions and the latter funded by Guidant's issuing common stock to the ESOP usually amounting to five percent of the employee's monthly salary. Apparently the ESOP component of the pension plan accounted for most of the value in most of the retirement accounts.

In December 2004, Guidant agreed to be sold to Johnson & Johnson for $76 a share. But before the deal could be consummated, problems with Guidant's products came to light. It was forced to recall hundreds of thousands of defibrillators and pacemakers; Johnson & Johnson began to get cold feet; and the Attorney General of New York filed a fraud complaint (still pending) against Guidant. (On Guidant's woes, see Barry Meier & Andrew Ross Sorkin, "Price Tag of Guidant Is Lowered," N.Y. Times, Nov. 16, 2005, at C1.) But although Guidant was thus in trouble toward the end of the period (which, remember, ran from October 2004 to November 2005) in which the plaintiffs contend that the pension plan's fiduciaries should have disposed of the plan's Guidant stock, it bounced back shortly afterwards, rising steadily until the company's sale to Boston Scientific in April 2006 (after Johnson & Johnson, having earlier lost interest, made a new offer, of $71 per share) for, as we said, a total consideration of $80.06 a share. (See accompanying charts graphing Guidant's share price from the beginning of 2004 to the acquisition by Boston Scientific, and Boston Scientific's share price thereafter.).

NOTE: OPINION CONTAINING TABLE OR OTHER DATA THAT IS NOT VIEWABLE

NOTE: OPINION CONTAINING TABLE OR OTHER DATA THAT IS NOT VIEWABLE

Had the pension plan been divested of its Guidant stock no later than November 2005, as the plaintiffs claim it should have been, the members of the class would have missed out on the sale of Guidant to Boston Scientific. It is unlikely that they would have done better from whatever substitute investment Guidant would have put them in. Even after Boston Scientific's stock tanked following the acquisition of Guidant, anyone who owned Guidant stock at the time of the acquisition received $42.28 per share in cash plus 1.6799 shares of Boston Scientific worth $27.43 as of May 3 of this year. The total of $69.71 exceeds the price of Boston Scientific on the last day of the class period ($57.57) and also the revised offer of $63 per share that Johnson & Johnson submitted twelve days after the class period ended. And it falls only slightly short of the $71 that Johnson & Johnson ultimately offered — an offer that the plaintiffs claim was inflated by that company's ignorance of the fraudulent overvaluation of Guidant. So, had there been no fraud, the price that Johnson & Johnson and Boston Scientific would have offered for a share of Guidant stock would have been less than either the $80.06 that Boston Scientific eventually paid or the $69.71 in cash and stock that shareholders in Guidant when it was acquired by Boston Scientific still have. But whether the class was injured by Guidant's alleged imprudence in its capacity as the plan fiduciary (or whether, for that matter, Guidant was imprudent) has not been considered by the district court or raised as an issue in this appeal, and so we shall not try to resolve it.

The issue that has been raised and pressed is whether the plaintiffs are within the group of persons who are authorized to seek relief under ERISA. Section 502(a)(2) of the statute authorizes a participant in an ERISA-governed plan to sue "for appropriate relief under section 1109 [of Title 29]." 29 U.S.C. § 1132(a)(2). Section 1109 makes ERISA fiduciaries personally liable for breaches of their fiduciary duties. The named plaintiffs, however, cashed out of the plan during the course of the suit. That they cashed out after the complaint was filed, and before the amended complaint was filed, is immaterial. The parties' preoccupation with those filing dates is a product of the confusing use of the word "standing" to denote both a right to invoke the aid of the courts and a right to obtain a particular form of judicial relief.

Obviously the named plaintiffs have standing to sue in the sense of being entitled to ask for an exercise of the judicial power of the United States as that term in Article III of the Constitution has been interpreted, because if they win they will obtain a tangible benefit. But there is also a nonconstitutional doctrine of standing to sue, one aspect of which is the requirement that the plaintiff be within the "zone of interests" of the statute or other source of rights under which he is suing. See, e.g., Air Courier Conference of America v. American Postal Workers Union, 498 U.S. 517, 523-26, 111 S.Ct. 913, 112 L.Ed.2d 1125 (1991); Clarke v. Securities Industry Ass'n, 479 U.S. 388, 395-400, 107 S.Ct. 750, 93 L.Ed.2d 757 (1987). The requirement has been used to bar some ERISA suits. E.g., Miller v. Rite Aid Corp., 334 F.3d 335, 340-41 (3d Cir.2003). If someone brought a suit for ERISA benefits who had no possible legally protected interest in the pension plan (suppose he was merely a creditor of a plan participant), he would be outside the statute's domain, and the court would dismiss the case for want of jurisdiction even if the defendant had made no issue of the remoteness of the plaintiff's interest from the interests that ERISA protects, namely the interests of plan participants and beneficiaries. See, e.g., Western Shoshone Business Council v. Babbitt, 1 F.3d 1052, 1055-56 (10th Cir. 1993); Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1109 (9th Cir.1992); National Union of Hospital & Health Care Employees v. Carey, 557 F.2d 278, 280-81 (2d Cir.1977).

But if "zone of interests" were interpreted too broadly, standing and merits would merge, since any time a plaintiff failed to prove that the statute under which he was suing...