Howell v. Motorola Inc.

• Citation: 633 F.3d 552
• Decision Date: 21 January 2011
• Docket Number: 09–2796.,Nos. 07–3837,s. 07–3837
• Parties: Bruce G. HOWELL, Plaintiff–Appellant,v.MOTOROLA, INC., et al., Defendants–Appellees.Stephen Lingis, et al., Plaintiffs–Appellants,v.Rick Dorazil, et al., Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

633 F.3d 552

50 Employee Benefits Cas. 1865

Bruce G. HOWELL, Plaintiff–Appellant,

v.MOTOROLA, INC., et al., Defendants–Appellees.Stephen Lingis, et al., Plaintiffs–Appellants,

v.Rick Dorazil, et al., Defendants–Appellees.

Nos. 07–3837

09–2796.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 23, 2008 & May 27, 2010.Decided Jan. 21, 2011.

Edwin J. Mills, Attorney (argued), Stull, Stull & Brody, New York, NY, for Plaintiffs–Appellants.Ada W. Dolph, Attorney, Ian Hugh Morrison, Attorney, Seyfarth Shaw LLP, Chicago, IL, John T. Murray, Attorney (argued), Seyfarth Shaw, Atlanta, GA, for Defendants–Appellees.Jeffrey W. Sarles, Mayer Brown LLP, Chicago, IL, Stephen Silverman, Department of Labor, Washington, DC, for Amici Curiae.Before BAUER, WOOD, and TINDER, Circuit Judges.WOOD, Circuit Judge.

The two cases that we have consolidated for decision in this opinion both deal with the responsibilities of a company with respect to a defined-contribution pension plan that it offers to its employees. The company in each instance is Motorola, Inc., and the disputes concern employees' retirement accounts in the Motorola 401(k) Savings Plan (the “Plan”). Bruce Howell was the original plaintiff when this litigation began in 2003; later, Stephen Lingis, Peter White, and Donald Smith intervened as plaintiffs. All were employees of Motorola who participated in the Plan. In 2007, the district court certified a plaintiff class of all persons for whose individual accounts the Plan purchased or held shares of Motorola common stock, from May 16, 2000, through May 14, 2001. (The court later excluded from that class the defendants, Motorola officers and directors, and persons who signed valid releases of their claims against Motorola. Since no issue pertaining to the class certification or definition is before us, we have no other comment on those points.) The defendants include not only Motorola itself, but also the Profit Sharing Committee of Motorola, Inc., and a number of individual defendants who allegedly served as fiduciaries for the Plan. We describe the facts in detail below. It is enough here to say that Motorola entered into a business transaction that turned out very badly; the fallout from that transaction caused the price of Motorola's stock to decline; that decline led to litigation against Motorola under the securities laws; and finally, because a Motorola Stock Fund was among the permissible investments for the Plan, this litigation ensued.

Relying on the Employment Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq., known to all as ERISA, the plaintiffs seek relief for three alleged breaches of fiduciary duty committed by the defendants: (1) imprudence, by selecting and continuing to offer the Motorola Stock Fund to Plan participants despite the defendants' knowledge of Motorola's bad business transaction; (2) either negligent or intentional misrepresentation of material information about the bad business transaction or failure to disclose that information to Plan participants; and (3) failure to appoint competent fiduciaries to the committee that ran the Plan, failure to monitor those fiduciaries, and failure to provide adequate information to the fiduciaries themselves. The district court granted summary judgment in favor of all the defendants on all claims, ruling first that no one had breached any duty imposed by ERISA, and second, that all defendants were entitled to rely on the safe harbor established in section 404(c) of the statute, 29 U.S.C. § 1104(c). We conclude that the safe harbor is available for the plaintiffs' disclosure and monitoring theories (the latter two listed above), but not for the imprudence theory. Nevertheless, we also conclude that the Plan fiduciaries did not breach any duty imposed by ERISA through their inclusion of the Motorola Stock Fund as a Plan investment option. We therefore affirm the judgments of the district court.

I. General Background

A. Telsim

Motorola is a large telecommunications company. During the boom years of the 1990s, its stock price increased ten-fold, as the company expanded throughout the world. The seeds of the present case were planted when, on April 24, 1999, a Motorola affiliate called the Motorola Credit Corporation (“Credit”) signed an agreement to provide financing to a Turkish company, Telsim Mobil Telekomunikasyon Hizmetleri A.S. (“Telsim”), for a project to improve the infrastructure for mobile telephone service in Turkey. Over time, Telsim borrowed more than $1.8 billion from Credit; to secure the debt, it pledged a number of shares then equaling 66% of its stock as collateral. Telsim's promise unfortunately did not turn out to be worth very much. In April 2001, it missed its first repayment deadline, and the next month Credit issued a notice of default. Unbeknownst to Credit or Motorola, around the same time Telsim tripled the number of its outstanding shares, thus diluting Credit's collateral to about 22% of Telsim's shares.

The parties in the cases before us dispute how forthcoming Motorola was about its problems with Telsim in its filings with the Securities and Exchange Commission during this period. Almost a year earlier, on May 16, 2000, Motorola had filed a 10–Q quarterly report with the SEC in which it reported that it had an agreement with Telsim. (That date marks the beginning of the class period defined by the district court.) The May 16 report optimistically estimated the sales potential from the agreement to be $1.5 billion over three years; it said nothing about the fact that Credit had loaned the lion's share of the funding for the project to Telsim. Motorola said nothing more about Telsim in its SEC filings until a proxy statement filed on March 30, 2001. In that document, Motorola remarked that it had received several large contracts, including one “for Telsim's countrywide network in Turkey.” Ten pages later, in an unrelated section, the report explained that Motorola was owed $2.8 billion as the result of financing it had provided for wireless infrastructure. “[A]pproximately $1.7 billion of the $2.8 billion,” said the company, “related to one customer in Turkey.” The 10–Q that Motorola filed on May 14, 2001, was slightly more direct: it acknowledged that “[a]s of March 31, 2001, approximately $2.0 billion of [Motorola's] $2.9 billion in gross long-term finance receivables related to one customer, Telsim, in Turkey....” The report mentioned Telsim's pledge of 66% of its shares to secure repayment of that debt, and it said vaguely that “Motorola has other creditor remedies.” Finally, the 10–Q report disclosed Telsim's failure to make the payment of $728 million that was due on April 30, 2001. (The May 14, 2001, filing date of Motorola's quarterly report marks the end of the district court's class period.)

The only other disclosures that Motorola made between May 16, 2000, and May 14, 2001, did not mention Telsim by name. Instead, they offered generic references to Motorola's practice of vendor financing. For example, Motorola's November 2000 10–Q warned that certain factors could affect the company's financial results; one factor it listed was “the demand for vendor financing and the Company's ability to provide that financing in order to remain competitive.” Defendant Carl Koenemann, Motorola's Chief Financial Officer, discussed potential problems with Telsim with KPMG, Motorola's accounting firm, during this time. He also raised the subject with defendant Christopher Galvin, the Chairman of Motorola's Board and the Chief Executive Officer during the relevant time, and with defendant Robert Growney, a director and Motorola's Chief Operating Officer. The district court noted that the record contains no evidence that any of the other defendants had any knowledge of problems with the Telsim deal.

As we have noted, Motorola's stock price increased significantly throughout the 1990s. On April 24, 1999, shares were trading at a price close to $30. Although the price spiked to about $40 per share by May 1, 2000, it had slipped back to just over $30 per share by May 16, 2000—the day when Motorola filed the 10–Q announcing the planned sales to Telsim (but not mentioning the corresponding financing) and the start date of the class period. Motorola's stock price continued to decline during the class period. The price was steady through the fall, but as of December 31, 2000, it had fallen to $20 per share. On that date, Motorola announced that it had net income for the fiscal year of $2.2 billion.

In January 2001, Motorola gave a Summary Plan Description (“SPD”) to all of its employees who were participating in the Plan. That SPD warned participants that there was some risk in investing in the Motorola Stock Fund. The Plan had explained this risk on two separate occasions during the preceding year in documentation handed out to Plan participants. Moreover, Motorola's March 30, 2001, proxy statement, which we discussed above, reiterated the risk of the Motorola Stock Fund, noting that $1.7 billion of the company's $2.8 billion in gross long-term finance was tied up with “one customer in Turkey.” By the time that statement was filed, Motorola stock had dropped to $14.26 per share. A week later, on April 6, 2001, Bloomberg News broke the story of the Telsim deal, identifying Telsim as “the customer in Turkey” that owed Motorola billions. Motorola stock sank 23% in one day, going from $14.95 to $11.50 per share. Interestingly, however, it had recovered a bit (to just above $15) by May 14, 2001—the end date of the class period and the day on which Motorola filed the 10–Q with the SEC that discussed the Telsim problems in some detail. Credit issued a notice of default on May 22, 2001. The stock then edged up to $19 a share by the end of July, but it fell back to $15 a share by December 31, when Motorola reported a net loss of $5.5 billion for the year.

B. The Motorola 401(k) Savings Plan

The Plan is a...