Erisa Claim Permitted In re Schering-Plough Corporation Erisa Litigation,
420 F.3d 231 (3d Cir. 08/19/2005)
Argued June 7, 2005, Before: AMBRO, STAPLETON, and ALARCON*fn1,
Circuit Judges.
OPINION
We must decide in this matter whether, under the Employee Retirement Income
Security Act of 1974 ("ERISA"), the District Court erred in ruling that former
employees, who were participants in a defined contribution plan, may not
prosecute a derivative action on behalf of an employees' savings plan to recover
losses sustained by the savings plan because of alleged breaches of fiduciary
duty. We conclude that the Plaintiffs may seek money damages on behalf of the
fund, notwithstanding the fact the alleged fiduciary violations affected only a
subset of the saving plan's participants.
Accordingly, we will reverse and remand for further proceedings.
A. The complaint alleges the following facts. Jingdong Zhu and Adrian
Fields (the Plaintiffs) are former employees of Schering-Plough Corporation
("Schering"). During their employment with Schering, the Plaintiffs elected to
participate in the Schering-Plough Employees' Savings Plan ("the Savings Plan"
or "the Plan"). Under the Savings Plan, a Schering employee agreed to reduce his
or her take-home compensation in order to invest that amount in one or more
investment funds on a pre-tax basis*fn2. The Savings Plan authorized a
participant to select from different investment funds. One of the investment
funds was the Schering Plan Company Stock Fund ("the Company Stock Fund"), which
consisted of company stock. Under the Savings Plan, a participant was not
permitted to invest more than 50% of his or her future contributions in Schering
stock. Some of the Plaintiffs' deferred compensation included an investment in
the Company Stock Fund.
As of December 31, 2001, Schering stock made up approximately 31% of the value
of the Saving Plan's assets. More than 60% of the employees who participated in
the Saving Plan had at least some of their assets allocated to the Company Stock
Fund. In fiscal year 2001 the loss in the value of Schering stock constituted
87% of the drop in value of the Saving Plan's assets, and in 2002 the loss in
Schering's stock's value constituted 50% of the Saving Plan's net loss. The loss
to the Savings Plan was approximately $138,000,000. By June of 2003 the price of
Schering stock had fallen below $20 per share from a class-period high of better
than $60 a share.
B.
On October 6, 2003, the Plaintiffs filed this class action pursuant to 29 U.S.C.
§ 1132(a)(2) on behalf of the Savings Plan and "[a]ll persons who were
participants in or beneficiaries of the Saving Plan at any time between July 29,
1998 and the present (the 'Class Period'), and whose accounts included
investments in Schering stock." The complaint named as defendants and as
fiduciaries of the Savings Plan Schering, Richard Kogan, its former CEO, members
of the Schering Board's Pension Committee, the Schering-Plough Employees
Benefits Committee and one of its members, the ScheringPlough Benefits
Investment Committee and three of its members, the counsel of the Investment
Committee, and Vanguard Group, Inc., the Trustee of the Savings Plan
(collectively "the Defendants").
The complaint alleges that the Defendants breached their fiduciary duties of
prudence, care, and loyalty by continuing to offer the Company Stock Fund as one
of the Savings Plan alternatives when they knew that Schering's stock price was
unlawfully and artificially inflated. Additionally, the Plaintiffs alleged that
the Defendants failed to disclose negative material information about Schering,
which induced participants in the Savings Plan to elect to invest in the Company
Stock Fund. The complaint also alleges that some of the Defendants did not
loyally serve the Saving Plan participants by taking steps to avoid a conflict
of interest such as making appropriate public disclosures, divesting the Savings
Plan of Schering stock, discontinuing further investments in Schering stock,
consulting independent fiduciaries, or resigning as Savings Plan fiduciaries.
In lieu of answering the complaint, the Defendants filed a motion to dismiss the
action for failure to state a claim under § 1109(a).*fn3 The Defendants argued
that "[b]ecause [Section 1109(a)] authorizes relief only for 'the plan', a
participant can state a claim only if he proceeds in a representative capacity
on behalf of 'the plan as a whole' and seeks to recover for all plan
participants allegedly injured by the fiduciary breach." (Emphasis in the
original.). In addition, they asserted that the Plaintiffs do not seek relief on
behalf of the Plan as a whole because the complaint allegedly excludes current
employees who were part of the sub-group that invested in the Company Stock
Fund.
They further maintained that the consolidated complaint improperly seeks
"individual relief for each Plan participant" because it prays for "an
allocation 'among the Participants' individualized accounts in proportion to the
accounts' losses.'" (Emphasis added in the Defendants' motion.). Finally, the
Defendants contended that the Plaintiffs failed to allege facts showing
detrimental reliance by the Saving Plan's participants on the Defendants'
alleged misrepresentations and non-disclosures.
The District Court granted the Defendant's motion and dismissed the consolidated
complaint with prejudice. It held that the Plaintiffs lacked standing to
prosecute this action under 29 U.S.C. §§ 1109(a) and 1132(a)(2)*fn4 because the
consolidated complaint alleges only "harm suffered by the individual Plan
Participants and not the Savings Plan, and seeks relief measured by the harm to
individuals and tailored for the benefit of individuals, and not the Savings
Plan." The District Court summarized its conclusion in these words:
Even assuming that each defendant is an ERISA fiduciary, that each of
plaintiffs' allegations concerning defendants' conduct were true, and that this
conduct rose to a level to breach ERISA's fiduciary duties (without the Court
opining as to merits of these assumptions), plaintiffs cannot demonstrate how
any defendant would be "personally liable for damages ('to make good to [the]
plan any losses to the plan resulting from each such breach')" to the Saving
Plans because it is only Plan Participants who might be able to show that they
suffered individualized losses.
The District Court commented further that because "plaintiffs can point to no
set of facts that would demonstrate losses to the plan. . . . the Court need not
reach defendants' further arguments in favor of dismissal."
The Plaintiffs have timely appealed. The District Court had subject matter
jurisdiction pursuant to 29 U.S.C. § 1132(e)(1) of ERISA. This Court has
appellate jurisdiction under 28 U.S.C. §§ 1291, 1294(1).
II. A.
The Plaintiffs contend that "[t]he district court erred in failing to
distinguish between the plan-wide nature of the losses caused by defendants'
fiduciary breaches, and the fact that the losses caused by those breaches are
reflected in the Plan's individual participant accounts." They argue that the
District Court erred in concluding that their contributions were kept in
separate, segregated accounts and never became a part of the Saving Plan's
assets. Instead, the Plaintiffs maintain that the Savings Plan was a unitary
trust that purchased and maintained stock in the Company Stock Fund, which was
one of the fourteen investment alternatives in a defined contribution employee
benefit plan. The Plaintiffs also assert that the District Court erred in
determining that the Company Stock Fund was an individual account plan and an
Employee Stock Ownership Plan ("ESOP").
We exercise de novo review over the dismissal of claims under Federal Rule of
Civil Procedure 12(b)(6). A.D. Bedell Wholesale Co. v. Philip Morris Inc., 263
F.3d 239, 249 n.25 (3d Cir. 2001). Furthermore, we must take all factual
allegations and reasonable inferences as true and view them in the light most
favorable to Plaintiffs. Id. The District Court properly dismissed Plaintiffs'
complaint only if Plaintiffs could have proved no set of facts entitling them to
relief. Id. Mariana v. Fisher, 338 F.3d 189, 195 (3d Cir. 2003) (full citation
provided).
Under § 1002(21)A of ERISA, 29 U.S.C. § 1002(21) A, those having discretionary
authority or discretionary responsibility in the administration of a plan are
fiduciaries. Section 1104 imposes upon them fiduciary duties including the
duties of "care, skill, prudence, and diligence under the circumstances." 29
U.S.C. § 1104. Section 1109(a) makes plan fiduciaries "personally liable to make
good to [the] plan any losses to the plan resulting from each . . . breach" of
fiduciary duty. 29 U.S.C. § 1109(a). And, finally, § 1132(a)(2) provides that a
"civil action may be brought . . . by a participant or beneficiary . . . for
appropriate relief under section 1109." 29 U.S.C. § 1109.
The issue presented here is whether the complaint states a claim under § 1109 --
i.e., whether the complaint seeks relief for the Schering-Plough Employees'
Savings Plan based on allegations that there were "losses to the plan resulting
from [a] breach" of fiduciary duty. We believe it clearly does. The
complaint alleges that "[a]s a consequence of the defendants' breaches [of
fiduciary duty], the Plan suffered significant losses" and seeks "a monetary
payment to the Plan to make good to the Plan the losses to the Plan resulting
from [those] breaches of fiduciary duty." Section 1109 allows the Plan to
recover "any losses" from a breach of fiduciary duty. 29 U.S.C. § 1109 (emphasis
added). The fiduciary's liability is not limited to plan "losses that will
ultimately redound to the benefit of all participants." The Plan held
Schering-Plough stock as an asset and that asset was greatly reduced in value
allegedly because of breaches of fiduciary duty. This clearly was a "loss" to
the Plan within the meaning of § 1109.*fn5
Just as the fact that the assets at issue were held for the ultimate benefit of
Plaintiffs does not alter the fact that they were held by the Plan, so, too, the
fact that Plaintiffs may have to show individual reliance on the defendants'
alleged misrepresentations to prevail on some claims does not mean they do not
seek recovery for Plan losses. As the Court aptly put it in In re Honeywell
Int'l ERISA Litigation, Civil No. 03-1214 (D.N.J., June 14, 2004) at 30: [L]osses
to the Plan may have resulted from decisions by individual participants, but
that does not mean that those losses were not losses of the Plan; it simply
means that some of the decision making for Plan investments was conducted by the
participants who contributed to it.
It is a non sequitur to say, as the District Court did, that Plaintiffs cannot
demonstrate any losses to the Plan because it is an "individual account plan
which includes an ESOP investment alternative." First, while the Plan is,
indeed, an "individual account plan," this does not preclude the Plan from
having losses. Second, the Plan is not an "employee stock ownership plan" or an
"ESOP." Under § 1107(d)(6)(A), an "employee stock ownership plan" is "designed
to invest primarily in qualifying employer securities." 29 U.S.C. §
1107(d)(6)(A). As this Court explained in Moench v. Robertson, 62 F.3d 553, 568
(3d Cir. 1995):
[ESOPs are] "device[s] for expanding the national capital base among employees
-- an effective merger of the roles of capitalist and worker." Donovan v.
Cunningham, 716 F.2d at 1458. Thus, the concept of employee ownership
constituted a goal in and of itself. To accomplish this end, "Congress . . .
enacted a number of laws designed to encourage employers to set up such plans."
Id.
The Plan before us was designed to provide opportunities for
saving and investment. It was not designed to invest primarily in securities of
the employer. Indeed, the Plan was not required to offer Schering-Plough stock
as one of its investment opportunities.
The District Court's conclusions (1) that Plaintiffs' contributions were never
assets of the Savings Plan and never aggregated, and (2) that Plaintiffs only
seek damages for their individualized losses, directly conflict with the express
terms of the Savings Plan as well as other allegations of the complaint.
The Savings Plan provides in Article 4.01(a) that contributions to the Savings
Plan shall be invested in one or more Investment Funds authorized by the
Investment Committee, which, from time to time, may include such equity funds,
international equity funds, fixed income funds, money market funds, a Company
Stock Fund, and other funds or investment vehicles as the Investment Committee
elects to offer.
Article 4.02 provides as follows: A participant shall make one investment
election covering his or her Accounts in accordance with the following options:
(a) 100 percent in one of the available Investment Funds;
(b) in more than one Investment Fund allocated in multiples of 1 percent;
provided, however, that in no event may a Participant allocate more than 50
percent of future contributions to the Company Stock Fund. If a Participant
fails to make an investment election with respect to 100 percent of his or her
Accounts, the portion of such Accounts not subject to the Participant's
investment election shall be invested in a money market fund or equivalent
investment vehicle.
Section 4.03 reads as follows:
Each Participant is solely responsible for the selection of his or her
investment options. The Trustee, the Committee, the Investment Committee, any
Employer, and the officers, supervisors and other employees of any Employer are
not empowered to advise a Participant as to the manner in which his or her
accounts shall be invested. The fact that an Investment Fund is available to
Participants for investment under the Plan shall not be construed as a
recommendation for investment in that Investment Fund.
Pursuant to Article 4.05,
a participant may elect to reallocate his or her Accounts among the Investment
Funds, in multiples of 1 percent, by giving such Notice as the Committee or its
delegate shall prescribe; provided, however, that in no event may a Participant
allocate more than 50 percent of the value of his or her Accounts at the time of
the reallocation to the Company Stock Fund. The reallocation shall be e f fe c
tive as so o n a s administratively practicable after the Trustee receives such
Notice.
Article 5.01 requires the trustee of the Savings Fund to value each of the
Investment Funds each business day. "On each Valuation Date there shall be
allocated to the Accounts of each Participant his or her proportionate share of
the increase or decrease in the fair market value of his or her Accounts in each
of the Investment Funds." Article 5.03 requires the trustee to furnish each
participant with a statement setting forth the value of his or her Accounts each
calendar quarter. Article 9.06 provides that until the accounts of a
participant who is entitled to distribution because of the termination of
employment or after the 65th anniversary of the Participant's date of birth, are
completely distributed, "the Accounts of a Participant who is entitled to a
distribution shall continue to be invested as part of the funds of the Plan . .
. ."
In Section 10.09, the Savings Plan provides that "[t]he Committee or its
delegate shall maintain, or cause to be maintained, records showing the
individual balances in each Participant's Accounts. However, maintenance of
those records and Accounts shall not require any segregation of the funds of the
Plan." In Section 11.01, the Savings Plan provides that "[a]ll the
funds of the Plan shall be held by the Trustee appointed from time to time by
the Investment Committee or its delegate under a trust agreement adopted, or as
amended, by the Board of Directors." Pursuant to Article 11.03, "Company
Stock held by the Trustee shall be voted by the Trustee at each annual meeting
and at each special meeting of stockholders of the Company as directed by the
Participant to whose Accounts such Company Stock is credited." (emphasis added).
Thus, contrary to the District Court's interpretation of the provisions of the
Savings Plan, each participant's deferred payroll compensation was held in trust
as the assets of the Savings Plan. Each participant in the Savings Plan was
provided with an individualized account and periodically informed of the
individual balance in his or her account. The Savings Plan also makes clear the
fact that each participant has an individual account does not "require any
segregation of the funds of the Plan." Article 10.09.
The District Court cited this Court's decision in Moench in support of its
determination that a plan that permits employees to become part owners of their
employer is an ESOP and not a traditional pension plan governed by ERISA. As
noted above, the Defendants have conceded that the Savings Plan we are
considering is not an ESOP. In Moench, this Court held that "in limited
circumstances, ESOP fiduciaries can be liable under ERISA for continuing to
invest in employer stock according to the plan's direction . . . ." Id. at 556.
It went on to say that "[w]hile fiduciaries of pension benefit plans generally
must diversify investments of the plan assets . . ., fiduciaries of ESOPS are
exempted from this duty." Id. at 568. In reversing the District Court's holding
that an ESOP cannot be held liable for investing solely in employer common
stock, this Court explained that "an ESOP fiduciary who invests the assets in
employer stock is entitled to a presumption that it acted consistently with
ERISA by virtue of that decision. However, the plaintiff may overcome that
presumption by establishing that the fiduciary abused its decision by investing
in employer securities." Id. at 571. The principle announced in Moench has no
application to the duty of a fiduciary of pension benefit plans to diversify
investments "so as to minimize the risk of large losses." Id. at 568. "ESOPs,
unlike pension plans, are not intended to guarantee retirement benefits, and
indeed, by its very nature, 'an ESOP places employee retirements assets at much
greater risk than does the typical diversified ERISA plan.'" Id. at 568. Because
the Savings Plan in this case was not an ESOP, the Moench decision does not
resolve the issue presented in this matter.*fn6
In a letter to this Court filed pursuant to Rule 28(j) of the Federal Rules of
Appellate Procedure, the Defendants cited a recent decision of the Fifth
Circuit, Milofsky v. American Airlines, Inc., 404 F.3d 338 (5th Cir. 2005) reh'g
en banc granted, No. 03-11087, 2005 U.S. App. LEXIS 15122, (5th Cir. July 19,
2005)*fn7 in support of their argument that a participant lacks standing to
bring an action on behalf of an individual account pension plan if he or she
does not seek plan-wide relief.
In Milofsky, the plaintiffs were employed as pilots by Business Express, Inc. ("BEX")
when it was acquired by AMR Eagle Holding Corporation, the holding company of
American Eagle, Inc. ("American Eagle"). While employed by BEX, the plaintiffs
participated in its individual account pension plan. Id. at 340. At the time of
the acquisition of BEX, the plaintiffs were given notice that the balance of
their accounts in the BEX plan would be transferred to a comparable American
Eagle 401k plan. The notices advised the plaintiffs when the transfers would
occur. The transfers did not occur, however, until months after the time written
in the notice. Id. at 340-41.
he plaintiffs filed a class action against American Airlines and Towers Perrin,
a benefits consulting firm hired by American Airlines to render administrative
services in connection with the plan. Id. at 340. The action, which was filed
under 29 U.S.C. § 1132(a)(2), alleged that American Airlines and Towers Perrin
had violated fiduciary duties in misrepresenting how and when their accounts
would be transferred to the American Eagle 401(k) plan. Id. "They alleged that
because of the failure to effect the transfer of the class members' account
balances in a timely and prudent manner, the values of their accounts decreased
because the assets remained invested in the floundering BEX Plan longer than
expected." Id. at 341. The plaintiffs requested "actual damages to be paid to
the [American Eagle] $uper $aver Plan, to be allocated among their individual
accounts proportionately to their losses resulting from the alleged breach." Id.
The majority of the three-judge panel in Milofsky held that "plaintiffs lack
standing because this case in essence is about an alleged particularized harm
targeting a specific subset of plan beneficiaries, with claims for damages to
benefits [sic] members of the subclass only, and not the plan generally." Id. at
347. The facts in Milofsky are clearly distinguishable from those in
the matter sub judice. In Milofsky, the plaintiffs alleged that the value of
their investments in the BEX plan decreased because of the failure of the
defendants to transfer the funds to the American Eagle 401(k) plan. Id. at 351.
Thus, this alleged loss occurred prior to the transfer of the BEX plan
participants' investments to the American Eagle 401(k) plan. In Milofsky, the
plaintiffs sought damages on behalf of the BEX plan members, and did not seek to
restore assets of the American Eagle 401(k) fund. Here, the Plaintiffs seek
damages from the fiduciaries for their violation of their duty to a subclass
which had transferred its funds to the trustee of the Savings Fund.
In Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995), the Sixth Circuit held that a
subset of employee benefit participants has standing to bring an action for
breach of fiduciary duty under 29 U.S.C. §1109. The Court rejected the same
argument presented by the Defendants in this matter that "an action under 29
U.S.C. § 1109 must be brought on behalf of a plan as a whole and that a claim
brought by a subclass of plan participants fails to satisfy this requirement."
Id. at 1452. The Sixth Circuit in Kuper concluded that the plaintiffs had
standing to bring this action pursuant to §1132(a)(2). Citing Moench, however,
it affirmed the dismissal of the action on the merits, adopting this Court's
rule that a fiduciary who invests in an employer's stock is entitled to a
rebuttable presumption that it acted consistently with ERISA in continuing to
invest in an employer's securities. Kuper, 66 F.3d at 1458-59. The Sixth Circuit
affirmed because it concluded that the plaintiffs had failed "to rebut the
presumption that defendants acted reasonably in continuing to hold Quantum
stock." Id. at 1459. In sum, the court concluded in Kuper that § 1132(a)(2) does
not authorize a plaintiff to recover damages on his or her own behalf. Instead,
a plaintiff must seek to have the fiduciary reimburse the plan. Id. at 1453.*fn8
The majority in Milofsky stated that the Court's reasoning in Kuper is directly
contrary to the principle announced in Supreme Court's decision in Massachusetts
Mutual Life Insurance Company v. Russell, 473 U.S. 134 (1985), that a
participant's action filed pursuant to § 1132(a)(2) must seek remedies that
provide a "benefit to the plan as a whole . . . ." Milofsky, 404 F.3d at 346. In
her dissent, Chief Judge Carolyn Dineen King wrote that Russell never reached
the conclusion that the majority reaches, i.e., that standing can exist under [§
1132(a)(2)] only if all plan participants would benefit from the litigation.
Instead, it only held that a single plan participant, seeking individual
recovery for extra-contractual damages payable directly to her, could not
proceed with her lawsuit under [§ 1132(a)(2)]. Russell, 473 U.S. at 134, 105
S.Ct. 3085. Accordingly, the majority's holding goes far beyond the holding of
Russell. Id. at 349 (emphasis added) (footnote omitted).
In footnote 4 of her opinion, Chief Judge King also stated:
The majority correctly notes that Russell distinguishes between relief for
individuals and relief for the plan as a whole. Majority Opinion, [344-45].
Russell does not, however, stand for the proposition that the 'plan as a whole'
is synonymous with 'all participants of the plan,' and several courts have
rejected this definition of the 'plan as a whole.' Id. We agree with Chief Judge
King's interpretation of Russell, and decline to follow the majority's opinion
in Milofsky. In Russell, the plaintiff was a beneficiary under two
employee health benefit plans funded by her employer and governed by ERISA. 473
U.S. at 136. She became disabled and received plan benefits until October 17,
1979. She requested internal review of the termination decision. The plan
administrator reinstated her benefits on March 11, 1980, and she was paid
retroactive benefits in full. Id.
The plaintiff in Russell filed an action in state court seeking damages
for mental and emotional distress under state law and ERISA claims resulting
from the interruption of her benefit payments, as well as punitive damages. Id.
at 137. The defendant removed the action to the District Court and moved for
summary judgment. The District Court granted the motion. It held that the
state-law claims were preempted by ERISA, and that ERISA barred claims for
extra-contractual and punitive damages. Id. The Ninth Circuit affirmed the
District Court's determination that the state law claims were pre-empted by
ERISA, but also concluded that the complaint alleged a cause of action under
§1132(a)(2) and that punitive damages could be awarded. Id. at 138.
The Supreme Court reversed the judgment of the Ninth Circuit. It held that §
1109 does not authorize extracontractual or punitive damages. The Court also
rejected the plaintiff's argument that a private right of action for
extracontractual damages was implied in § 1109. Id. at 148. In rejecting the
employee's claims, the Court stated that "[a] fair contextual reading of the
statute makes it abundantly clear that its draftsmen were primarily concerned
with the possible misuse of plan assets, and with remedies that would protect
the entire plan, rather than with the rights of an individual beneficiary." Id.
at 142.
Unlike the circumstances presented in this matter, in Russell the plaintiff did
not file a class action on behalf of an ERISA employee benefits plan to require
the defendants to pay damages to the health benefit plan because of their
alleged breach of their fiduciary duty. Instead, she filed a private cause of
action for extracontractual and punitive damages.*fn9 The Court did not hold in
Russell that a subgroup of plan participants cannot file derivative action on
behalf of an ERISA employee benefits plan if the fiduciaries' alleged breach did
not affect the investments of participants in other subgroups. That issue simply
was not before the Court. The District Court relied in part on Russell and
its progeny in holding that
[a]lthough individual employees' contributions were never aggregated and all
employees remained capable of investing on an individualized basis, plaintiffs
now seek to theoretically aggregate these individualized losses into losses by
"the plan." Such an after-the-fact aggregation by individuals in order to sue on
behalf of the plan is not permitted under the language of Sections 1104, 1109
or, most importantly 1132(a)(2).
The District Court based this holding on its misreading of the Savings Plan.
While employees were able to choose which fund to invest their assets in, the
Savings Plan makes clear that its assets are aggregated and are held in trust by
the Savings Plan trustees at all times. The District Court's reliance on Russell
and its progeny in support of its holding in this particular case was,
therefore, misplaced. The Defendants cite the Ninth Circuit's decision in Horan
v. Kaiser Steel Retirement Plan, 947 F.2d 1412 (9th Cir. 1991), in support of
their argument that the Plaintiffs' cause of action in this case should be
dismissed because the remedies they seek are for their own benefit, and not on
behalf of the Savings Plan. In Horan, former employees of Kaiser Steel sought to
force it to use plan assets in order to purchase annuities for the benefit of
each former employee. Id. at 1415. The Ninth Circuit held that the plaintiffs
could not state a claim because "[t]he remedies sought by the plaintiffs are for
their own benefit, and not for the benefit of the Plan. The objective of the
plaintiffs' suit is to recover an annuity for each individual plaintiff." Id. at
1418.
Horan is easily distinguishable from this case. Unlike the plaintiffs in Horan,
the Plaintiffs in this case do not seek to force the Savings Plan to purchase
annuities for their individual benefit. Instead, they seek to force the
Defendants to make payments to the Savings Plan for the Defendants' alleged
failure to fulfill their fiduciary obligations, in order to remedy the damage
their actions caused to the Savings Plan. The fact that damages paid to the
Savings Plan for breaches of fiduciary duties will also indirectly benefit its
participants does not bar a derivative action under §§ 1109 and 1132(a)(2).
Smith v. Sydnor, 184 F.3d 356, 363 (4th Cir. 1999).
We are persuaded that the District Court erred in concluding that the complaint
fails to state a claim on behalf of the Savings Plan pursuant to §1109.
B.The Defendants contend that the "individualized nature" of Plaintiffs' claims
is reflected in the fact that the consolidated complaint "expressly excludes all
Plan participants currently employed by Schering" in the class definition. While
this statement is literally true, it seems to us more likely than not that the
referenced allegation was inadvertent, given the other allegations of the
complaint making it clear that this action was brought for the ultimate benefit
of "[a]ll persons who were participants in . . . the Plan at any time [during
the class period], and whose accounts included investments in Schering stock."
App. at 67. Compare Complaint paragraph 62, App. at 67, with paragraph 3, App.
at 48 ("Defendants, as fiduciaries of the Plan, breached their duties to [the
Plaintiffs] and to other participants and beneficiaries of the Plan . . .
particularly with regard to holdings of Schering stock.") At this point,
however, any ambiguity thus created is not significant*fn10 and can be clarified
by amendment on remand.
III.
] In their motion to dismiss, the Defendants requested that the District Court
dismiss the action on the merits because the Plaintiffs failed to allege facts
showing a breach of duty by any of the fiduciaries named in the consolidated
complaint. The District Court expressly declined to determine the merits of
Plaintiffs' allegations that the Defendants breached their fiduciary duties, or
whether the counts against Mr. Kogan should be dismissed "because the complaint
failed to allege that Mr. Kogan performed any specific fiduciary acts."
The issues raised by the Defendants regarding the merits of the claims of
breaches of fiduciary duties involve complex legal and factual questions. This
matter was dismissed for lack of standing prior to the filing of an answer, or
any other pre-trial proceedings. We decline to review the merits of the
Defendants' alternative bases for dismissing this action because "the record as
presented to us is not sufficiently adequate for us to give the careful and
thoughtful consideration these issues merit. Since the case must go back to the
District Court, we think these issues would benefit from further elaboration
there in the first instance." Callahan v. A.E.V., Inc., 182 F.3d 237, 249 (3d
Cir. 1999). Additional discovery proceedings and possible amendments to the
pleadings may clarify the issues should further appellate review become
necessary to finally dispose of this matter.
Conclusion
We conclude that the District Court erred in dismissing this action on the sole
ground that the Plaintiffs failed to state a claim under § 1109 on behalf of the
Savings Plan. Accordingly, we reverse the judgment dismissing this action with
prejudice and remand with instructions to the District Court to conduct further
proceedings regarding the merits of the claims asserted in the consolidated
complaint.
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Opinion Footnotes
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*fn1 The Honorable Arthur L. Alarcón, Senior Judge, United States Court of
Appeals for the Ninth Circuit, sitting by designation.
*fn2 An employee who participates in a deferred compensation plan to save for
retirement qualifies for tax benefits pursuant to 26 U.S.C. § 401(k). The type
of deferred compensation plan offered to Schering employees is referred to in
ERISA as an "individual account plan" or a "defined contribution plan." 29 U.S.C.
§ 1002(34). These terms refer to "a pension plan which provides for an
individual account for each participant and for benefits based solely upon the
amount contributed to the participant's account, and any income, expenses, gains
and losses, and any forfeitures of accounts of other participants which may be
allocated to such participant's account." Id.