In re Electronic Data Systems Corp. "Erisa" Lit.

• Citation: 305 F.Supp.2d 658
• Decision Date: 02 February 2004
• Docket Number: No. 6:03-MD-1512-LED.,6:03-MD-1512-LED.
• Parties: In re ELECTRONIC DATA SYSTEMS CORP. "ERISA" LITIGATION.
• Court: U.S. District Court — Eastern District of Texas

305 F.Supp.2d 658

In re ELECTRONIC DATA SYSTEMS CORP. "ERISA" LITIGATION.

No. 6:03-MD-1512-LED.

United States District Court, E.D. Texas, Tyler Division.

February 2, 2004.

COPYRIGHT MATERIAL OMITTED

Barry C. Barnett, Jonathan Bridges, Susman Godfrey, LLP, Dallas, TX, Lynn Sarko, Elizabeth A. Leland, Gary Gotto, Keller Rohrback LLP, Seattle, WA, E. Glenn Thames, Jr., Potter Minton, PC, Tyler, TX, Robert A. Izard, Schatz & Nobel, Hartford, CT, Jeffrey S. Abraham, Abraham & Associates, New York City, James D. Baskin III, Baskin Law Firm, Austin, TX, for plaintiffs.

Howard Shapiro, Robert Rachal, Shook, Hardy & Bacon LLP, New Orleans, LA, for defendants.

PRACTICE AND PROCEDURE ORDER NO 5 (ERISA LITIGATION)

DAVIS, District Judge.

This suit is half of an action transferred to this Court for resolution of preliminary issues in multidistrict litigation ("MDL").¹ In this portion of the MDL case, Plaintiffs have brought a civil enforcement action pursuant to § 502 of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1132, and an action for relief pursuant to § 12(a)(1) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77l(a)(1).² The Court has received several motions to dismiss. Defendants Electronic Data Systems Corporation ("EDS"), former EDS Chief Executive Officer Richard H. Brown ("CEO Brown"), the EDS Benefits Administration Committee³ ("BAC"), the Investment Committee⁴ for EDS plans ("IC"), former EDS employee Kim L. McMann, and current EDS employee Joy Chandler (collectively the "EDS Defendants") have filed a Motion to Dismiss ERISA Claims. (Docket No. 47).⁵ Additionally, Defendants C. Robert Kidder, Ray J. Groves and William H. Gray III, who serve on the EDS Compensation and Benefits Committee, (collectively the "Board Defendants") have also filed a Motion to Dismiss under Rules 12(b)(6) and 9(b). (Docket No. 46). Finally, the Court has also received a Motion to Dismiss Rescission Claims (Docket No. 45) from Defendants EDS and CEO Brown. Having considered the parties' submissions and oral argument the Court DENIES all three motions.

BACKGROUND⁶

Defendant EDS is a world-wide provider of information technology services. Although EDS provides a wide range of services to its clients, its Information Solutions business line is by far its largest component.⁷ The Information Solutions business line, allegedly contributing 75 percent ($16.2 billion) of EDS' total reported revenue in 2001, became the cornerstone of EDS' business model under CEO Brown's direction.⁸ After being appointed CEO in 1999, Brown restructured the then-"foundering" company around Information Solutions. To anchor the Information Solutions line, Brown based the company's new business model around so called "mega-deals."

The "mega-deals" are multi-year information technology ("IT") outsourcing contracts negotiated for over $250 million each. Mega-deal contracts frequently had terms of 8-10 years and potential revenue streams running into the billions of dollars. In 2000 and 2001 EDS announced a string of new mega-deals and in 2001 the company declared that it had an $80 billion backlog of contracts.⁹ Based on these mega-deals and EDS' business model, EDS made numerous positive statements during the class period regarding its business prospects. Allegedly, Brown and other Defendants represented that these large IT contracts were safe, annuity-like deals.

However, Plaintiffs allege that in contrast to EDS' representations, the "mega-deals" were inherently risky. Plaintiffs allege that the contracts were subject to substantial risks from benchmarking and milestone contract provisions which, if triggered, negatively affected EDS. Also, the "mega-deal" contracts included early termination provisions that allowed clients to leverage renegotiated terms unfavorable to EDS.

Plaintiffs further allege that EDS' accounting procedures and certain contractual obligations exacerbated the "mega-deal" contracts' inherent risk. EDS employed percentage of completion ("POC") accounting on its large contracts, which allowed it to recognize a dollar of revenue for every dollar of cost incurred.¹⁰ Although POC can be a legitimate accounting procedure, it can magnify problems associated with increased costs or pricing reductions. Additionally, some of EDS' exceptionally large government contracts required large up-front capital investments that reduced EDS' liquidity.¹¹ And finally, EDS' exposure to high-risk industries, such as the airline industry, allegedly made the company's investment in the mega-deals a risk.

Plaintiffs further allege that EDS defendants were, or should have been, aware of the company's risks during the proposed class period. Allegedly, CEO Brown and 125 top executives discussed various business units in detail during monthly conference calls. Also, individual Defendants allegedly had constant access to the web-based "Service Excellence Dashboard," which displayed the status of over ninety percent of EDS' accounts.

EDS' business risks are relevant because EDS' stock value affected Plaintiffs' interests in the EDS 401(k) retirement plan ("Plan"). The Plan is allegedly an "eligible individual account plan" under ERISA which allows EDS employees to contribute up to 20 percent of their income into one or more various investment options. One of the offered investment options was the EDS Stock Fund, which invested up to 99 percent of its assets in EDS stock. Not only did the Plan offer the EDS Stock Fund as an investment option, but whenever EDS made matching contributions on employee investments, those matching contributions were invested in the EDS Stock Fund. Plaintiffs allege that the EDS Stock Fund represented over 20.8 percent of total Plan assets on December 31, 2000.

Because of Defendants' access to company information, Plaintiffs allege that Defendants should have foreseen the September 19, 2002 drop in EDS stock price which allegedly harmed Plaintiffs' Plan interests. On September 18, 2002 EDS issued a press release announcing that its earlier estimate of a 4-6 percent revenue increase was incorrect, and that the company would actually suffer a 2-5 percent revenue decrease. Also, EDS announced that the expected 74 cents earnings per share for third quarter 2002 would actually be 12-15 cents per share. The next day, Plaintiffs allege "EDS's stock price plummeted over fifty percent to close at $17.20, wiping out some $8 billion in market value, including significant Plan value for shares held by Plan participants and beneficiaries in the EDS stock fund."

EDS' business setbacks underpin Plaintiffs' allegations that Defendants breached their fiduciary duties under ERISA by continuing to invest Plan funds in EDS stock despite knowledge that the stock was an inherently risky investment. Plaintiffs allege that all Defendants were ERISA fiduciaries with various duties, including the duty to prudently manage Plan investments.¹² Plaintiffs claim that Defendants breached their fiduciary duty of prudence by continuing to invest Plan assets in high-risk EDS stock. Furthermore, Plaintiffs allege that Defendants misled Plaintiffs, and thus breached their fiduciary duties, by issuing false and misleading Summary Plan Descriptions ("SPDs") to Plan beneficiaries. Finally, Plaintiffs allege that Defendants failed to disclose inherent risks in EDS' IT outsourcing contracts and in its association with the airline industry.

To effectuate their claims, Plaintiffs have sued on behalf of a proposed class and subclass. The named plaintiffs are current and former EDS employees who are or were beneficiaries of the EDS 401(k) plan ("Plan"). They have sued on behalf of "all participants in the Plan and their beneficiaries, excluding the Defendants, for whose accounts the Plan made or maintained investments in EDS stock through the EDS Stock Fund between September 7, 1999 and the present" (the "Class"). Additionally, they have brought the Securities Act claims on behalf of a subclass of "all participants in the Plan and their beneficiaries, excluding the Defendants, for whose accounts the Plan purchased EDS stock through the EDS Stock fund between October 20, 2001 and November 18, 2002, inclusive" (the "Rescission Class").

STANDARD OF REVIEW

The Court's standards of review for Defendants' Rule 12(b) motion are well established.¹³ The Court construes the complaint in Plaintiffs' favor and takes all well-pleaded facts as true. Kane Enters. v. MacGregor (USA), Inc., 322 F.3d 371, 374 (5th Cir.2003). However, conclusory allegations and legal conclusions will not prevent a motion to dismiss. In re MasterCard Int'l Inc., 313 F.3d 257, 261 (5th Cir.2002). Most importantly, the purpose of a plaintiff's pleadings are to provide notice, and "a court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 513-14, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002).

Because pleadings are only required to give notice of a claim, Federal Rule of Civil Procedure 8 generally does not require plaintiffs to plead every fact that they must ultimately prove. See id.; Woodfield v. Bowman, 193 F.3d 354, 362 (5th Cir.1999) (holding that a pleading may give proper "fair notice" even where only the title of the theory is pled); Bennett v. Schmidt, 153 F.3d 516, 518 (7th Cir.1998) ("Complaints need not plead law or match facts to every element of a legal theory...."); Abdoh v. City of Chicago, 930 F.Supp. 311, 313 (N.D.Ill.1996). Rule 8's requirement of a "short and plain" statement of a plaintiff's claims is in fact defeated when plaintiffs choose to, or courts require plaintiffs to, plead excessive facts. Bennett, 153 F.3d at 518. Indeed, complaints

are supposed to be succinct.... Any need to plead facts that, if true, establish each element of a "cause of action" was abolished by the Rules of Civil Procedure in 1938, which...