Tatum v. RJR Pension Inv. Comm.

• Decision Date: 04 August 2014
• Docket Number: No. 13–1360.,13–1360.
• Citation: 761 F.3d 346
• Parties: Richard G. TATUM, individually and on behalf of a class of all other persons similarly situated, Plaintiff–Appellant, v. RJR PENSION INVESTMENT COMMITTEE; RJR Employee Benefits Committee; R.J. Reynolds Tobacco Holdings, Inc.; R.J. Reynolds Tobacco Company, Defendants–Appellees. AARP; National Employment Lawyers Association; Thomas E. Perez, Secretary of the United States Department of Labor, Amici Supporting Appellant, v. Chamber of Commerce of the United States of America; American Benefits Council, Amici Supporting Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

761 F.3d 346

Richard G. TATUM, individually and on behalf of a class of all other persons similarly situated, Plaintiff–Appellant,

v.RJR PENSION INVESTMENT COMMITTEE; RJR Employee Benefits Committee; R.J. Reynolds Tobacco Holdings, Inc.; R.J. Reynolds Tobacco Company, Defendants–Appellees.

AARP; National Employment Lawyers Association; Thomas E. Perez, Secretary of the United States Department of Labor, Amici Supporting Appellant,

v.Chamber of Commerce of the United States of America; American Benefits Council, Amici Supporting Appellees.

No. 13–1360.

United States Court of Appeals,Fourth Circuit.

Argued: March 18, 2014.

Decided: Aug. 4, 2014.

ARGUED: Catha Worthman, Lewis, Feinberg, Lee, Renaker & Jackson, P.C., Oakland, California, for Appellant. Adam Howard Charnes, Kilpatrick Townsend & Stockton LLP, Winston–Salem, North Carolina, for Appellees. Michael R. Hartman, United States Department of Labor, Washington, D.C., for Amicus Thomas E. Perez, Secretary of the United States Department of Labor. ON BRIEF:Jeffrey G. Lewis, Lewis, Feinberg, Lee, Renaker & Jackson, P.C., Oakland, California; Robert M. Elliot, Helen L. Parsonage, Elliot Morgan Parsonage, Winston–Salem, North Carolina; Kelly M. Dermody, Daniel M. Hutchinson, Lieff Cabraser Heimann & Bernstein, LLP, San Francisco, California, for Appellant. Daniel R. Taylor, Jr., Richard D. Dietz, Chad D. Hansen, Thurston H. Webb, Kilpatrick Townsend & Stockton LLP, Winston–Salem, North Carolina, for Appellees. Ronald Dean, Ronald Dean ALC, Pacific Palisades, California; Rebecca Hamburg Cappy, National Employment Lawyers Association, San Francisco, California; Mary Ellen Signorille, AARP Foundation Litigation, Washington, D.C.; Melvin Radowitz, AARP, Washington, D.C., for Amici AARP and National Employment Lawyers Association. Hollis T. Hurd, The Benefits Department, Bridgeville, Pennsylvania; Kathryn Comerford Todd, Steven P. Lehotsky, Jane E. Holman, National Chamber Litigation Center, Washington, D.C.; Janet M. Jacobson, American Benefits Council, Washington, D.C., for Amici Chamber of Commerce of the United States of America and American Benefits Council. M. Patricia Smith, Solicitor of Labor, Timothy D. Hauser, Associate Solicitor for Plan Benefits Security, Elizabeth Hopkins, Counsel for Appellate and Special Litigation, Stephanie Lewis, United States Department of Labor, Washington, D.C., for Amicus Thomas E. Perez, Secretary of the United States Department of Labor.

Before WILKINSON, MOTZ, and DIAZ, Circuit Judges.

Affirmed in part, vacated in part, reversed in part, and remanded by published opinion. Judge MOTZ wrote the majority opinion, in which Judge DIAZ joined. Judge WILKINSON wrote a dissenting opinion.

DIANA GRIBBON MOTZ, Circuit Judge:

This is an appeal from a judgment in favor of R.J. Reynolds Tobacco Company and R.J. Reynolds Tobacco Holdings, Inc. (collectively “RJR”). Richard Tatum brought this suit on behalf of himself and other participants in RJR's 401(k) retirement savings plan (collectively “the participants”). He alleges that RJR breached its fiduciary duties under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., when it liquidated two funds held by the plan on an arbitrary timeline without conducting a thorough investigation, thereby causing a substantial loss to the plan.

After a bench trial, the district court found that RJR did indeed breach its fiduciary duty of procedural prudence and so bore the burden of proving that this breach did not cause loss to the plan participants. But the court concluded that RJR met this burden by establishing that “a reasonable and prudent fiduciary could have made [the same decision] after performing [a proper] investigation.” Tatum v. R.J. Reynolds Tobacco Co., 926 F.Supp.2d 648, 651 (M.D.N.C.2013) (emphasis added). We affirm the court's holdings that RJR breached its duty of procedural prudence and therefore bore the burden of proof as to causation. But, because the court then failed to apply the correct legal standard in assessing RJR's liability, we must reverse its judgment and remand the case for further proceedings consistent with this opinion.

I.

A.

In March 1999, fourteen years after the merger of Nabisco and R.J. Reynolds Tobacco into RJR Nabisco, Inc., the merged company decided to separate its food business, Nabisco, from its tobacco business, R.J. Reynolds. The company determined to do this through a spin-off of the tobacco business. The impetus behind the spin-off was the negative impact of tobacco litigation on Nabisco's stock price, a phenomenon known as the “tobacco taint.” As the district court found, “[t]he purpose of the spin-off was to ‘enhance shareholder value,’ which included increasing the value of Nabisco by minimizing its exposure to and association with tobacco litigation.” Id. at 658–59.

Prior to the spin-off, RJR Nabisco sponsored a 401(k) plan, which offered its participants the option to invest their contributions in any combination of eight investment funds. The plan offered six fully diversified funds—some containing investment contracts, fixed-income securities, and bonds; some containing a broad range of domestic or international stocks; and some containing a mix of stocks and bonds. The plan also offered two company stock funds—the Nabisco Common Stock Fund, which held common stock of Nabisco Holdings Corporation, and the RJR Nabisco Common Stock Fund, which held stock in both the food and tobacco businesses. After the spin-off, the RJR Nabisco Common Stock Fund was divided into two separate funds: the Nabisco Group Holdings Common Stock Fund (“Nabisco Holdings”), which held the stock from the food business, and the RJR Common Stock Fund, which held the stock from the tobacco business.¹

The 401(k) plan at issue in this case (“the Plan”) was created on June 14, 1999, the date of the spin-off, by amendment to the existing RJR Nabisco plan. The Plan expressly provided for the retention of the Nabisco Funds as “frozen” funds in the Plan. Freezing the Nabisco Funds permitted participants to maintain their existing investments in the Nabisco Funds, but prevented participants from purchasing through the Plan additional shares of those funds. As the district court found, “[t]here was no language in the [Plan] eliminating the Nabisco Funds or limiting the duration in which the Plan would hold the funds.” Id. at 657–58. The Plan also retained as investment options the six diversified funds offered in the pre-spin-off plan, as well as the RJR Common Stock Fund.

The Plan named as Plan fiduciaries two committees composed of RJR officers and employees: the Employee Benefits Committee (“Benefits Committee”), responsible for general Plan administration, and the Pension Investment Committee (“Investment Committee”), responsible for Plan investments. The Plan vested the Benefits Committee with authority to make further amendments to the Plan by a majority vote of its members at any meeting or by an instrument in writing signed by a majority of its members.

Notwithstanding the requirement in the governing Plan document that the Nabisco Funds remain as frozen funds in the Plan, RJR determined to eliminate them from the Plan. RJR further determined to sell the Nabisco Funds approximately six months after the spin-off. These decisions were made at a March 1999 meeting by a “working group,” which consisted of various corporate employees. Id. at 656–57. But, as the district court found, the working group “had no authority or responsibility under the then-existing Plan documents to implement any decision regarding the pre-spin[-off] RJR Nabisco Holdings Plan, nor [was it] later given authority to make or enforce decisions in the [RJR] Plan documents.” Id. at 655.

According to testimony from members of the working group, the group spent only thirty to sixty minutes considering what to do with the Nabisco Funds in RJR's 401(k) plan. The working group “discussed reasons to remove the funds [from the plan] and assumed that [RJR] did not want Nabisco stocks in its 401(k) plan due to the high risk of having a single, non-employer stock fund in the Plan.” Id. at 656. The members of the working group also discussed “their [incorrect] belief that such funds were only held in other [companies'] plans as frozen funds in times of transition.” Id. Several members of the working group “believed that a single stock fund in the plan would be an ‘added administrative complexity’ and incur additional costs.” Id. But the group “did not discuss specifically what the complexities were or the amount of costs of keeping the fund in the Plan, as balanced against any benefit to participants.” Id. The working group agreed that the Nabisco Funds should be frozen at the time of the spin-off and eventually eliminated from the Plan. In terms of the timing of the divestment, a member of the working group testified that “[t]here was a general discussion, and different ideas were thrown out, would three months be appropriate, would a year be appropriate, and everybody got very comfortable with six months.” Id. There was no testimony as to why six months was determined to be an appropriate timeframe.

The working group's recommendation was reported back to Robert Gordon, RJR's Executive Vice President for Human Resources and a member of both the Benefits Committee and the Investment Committee. Gordon testified at trial that the members of the Benefits Committee agreed with the working group's recommendation. But the district court found that aside from this testimony, there was no evidence that the Benefits Committee “met, discussed, or voted on the issue of eliminating the Nabisco Funds or otherwise signed a required consent in lieu of a meeting authorizing an amendment that would do so.” Id. at 657.²

In the months immediately following the June 1999 spin-off, the Nabisco Funds declined precipitously in value. Markets reacted sharply to numerous class action tobacco...