The ERISA Litigation Newsletter - March 2011

EDITORS' OVERVIEW

This month we highlight the Seventh Circuit's recent decision in Spano v. Boeing Co. and Beesley v. International Paper (consolidated cases), Nos. 09-3001 & 09-3018, -- F.3d --, 2011 WL 183974 (7th Cir. Jan. 21, 2011). In this opinion, the Seventh Circuit vacated and remanded for further proceedings the certification of two classes of defined-contribution plan participants in "excessive-fee" breach of fiduciary duty cases. The decision suggests that although class claims by 401(k) plan participants alleging breach of fiduciary duty under ERISA § 502(a)(2) are possible, a district court must conduct a careful analysis to determine whether class treatment is appropriate, and must narrowly define the classes to prevent intra-class conflicts of interest that may arise naturally due to the characteristics of defined-contribution plans.

A second article reviews how, in the aftermath of the decision in Metropolitan Life Insurance Co. v. Glenn, 128 S. Ct. 2343 (2008), courts have struggled to interpret and apply the Supreme Court's instructions regarding whether a conflict of interest exists with respect to the benefit claim decision-making entity, and, if so, the extent of permissible discovery related to that conflict of interest. The article includes a discussion of the application of Glenn's principles to Taft-Hartley plans.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest. This month we include reports on multiple class action settlements, the fiduciary exception to attorney-client privilege, preemption, breach of fiduciary duty, and some interesting procedural rulings.

SPANO V. BOEING CO.: SEVENTH CIRCUIT VACATES CLASS CERTIFICATION OF EXCESSIVE-FEE CASES, BUT REMANDS FOR POSSIBLE CERTIFICATION OF "BETTER- DEFINED AND MORE-TARGETED CLASSES"1

Contributed by Kara L. Lincoln

Recently, the Supreme Court held that although ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2), does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize a participant to maintain a breach of fiduciary duty claim for harm to his individual 401(k) plan account. LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008). In the context of class certification motions, the plaintiffs' bar asserts that LaRue affirmed that relief under ERISA § 409, 29 U.S.C. § 1109, is "singularly to the plan," finding that a breach of fiduciary duty even as to just one participant is nonetheless a breach concerning the financial integrity of the plan. As such, plaintiffs argue that LaRue did not change the nature of ERISA § 502(a)(2) claims or the certifiability of those claims as class actions. The defense bar, on the other hand, asserts that LaRue sends a clear message that courts can no longer simply assume that an action is brought on behalf of a plan "as a whole," and its participants collectively, just because it is pled under ERISA § 502(a)(2). Instead, defendants argue that a class certification ruling must account for the fact that every participant's claim is, as LaRue allows, based on unique facts that must be individually proven.

According to the Seventh Circuit, LaRue actually tells us "very little" about whether a participant in a defined contribution plan asserting a breach of fiduciary duty claim pursuant to ERISA § 502(a)(2) can proceed on behalf of a class under Federal Rule of Civil Procedure 23. In Spano v. Boeing Co., -- F.3d --, 2011 WL 183974 (7th Cir. Jan. 21, 2011), the Seventh Circuit vacated class certification of ERISA § 502(a)(2) breach of fiduciary duty claims concerning individual participants' 401(k) plan investments. The Court rejected Defendants' position that such claims were too individualized ever to be appropriate for class certification, but nevertheless vacated the two district court decisions certifying classes of all past, present, and future plan participants as being too broad.

Factual Background and Procedural History

The Court's opinion addressed the appeals of class certification rulings in two very similar "excessive fee" cases, Spano v. Boeing Co., 2008 WL 4449516 (S.D. Ill. Sept. 29, 2008), and Beesley v. International Paper Co., 2008 WL 4450319 (S.D. Ill. Sept. 30, 2008). The Spano case involved The Boeing Company Voluntary Investment Plan (Boeing Plan), which permitted approximately 200,000 participants to direct their investments among 11 investment options, including the Boeing Stock Fund. The Beesley case involved two 401(k) plans sponsored by International Paper, the International Paper Hourly Savings Plan, and the International Paper Salaried Savings Plan (IP Plans), in which approximately 72,000 participants directed their investments among 12 investment fund options, a company stock fund, and over 11,000 publicly traded mutual funds available through a brokerage window.

In both Spano and Beesley, the participants in the respective plans alleged three main breaches of fiduciary duty: (i) causing the plan to pay excessive fees; (ii) offering imprudent investment options; and (iii) failing to disclose to participants material information regarding fees, expenses, and investment options. Some of the allegedly excessive fees were specific to certain investment options, while others were imposed equally on all participants.

The district court certified a class in each case for all claims asserted by Plaintiffs pursuant to Rule 23(b)(1). The class in each case was defined as:

All persons . . . who are or were participants or beneficiaries of the Plan and who are, were or may have been affected by the conduct set forth in this Complaint, as well as those who will become participants or beneficiaries of the Plan in the future.

The classes excluded "the Defendants and/or other individuals who are or may be liable for the conduct described in this Complaint," but were not limited to only those participants who held the specific investment options at issue, or who were harmed by the alleged fiduciary misconduct. Defendants in both cases sought interlocutory review, which the Seventh Circuit granted before consolidating the appeals.

Class Treatment of Individual ERISA § 502(a)(2) Claims

The Seventh Circuit began its ruling by summarizing the Supreme Court's decision in LaRue, which held that an individual 401(k) plan participant could maintain a breach of fiduciary duty claim under ERISA § 502(a)(2) for harm to his individual account, regardless of whether any other plan participants suffered harm from the alleged breach. As to whether and under what circumstances a participant may maintain an ERISA § 502(a)(2) claim as a class claim, the Court stated:

To determine whether class treatment is appropriate, we must distinguish between an injury to one person's retirement account that affects only that person, and an injury to one account that qualifies as a plan injury. The latter kind of injury potentially would be appropriate for class treatment, while the former would not.

For example, the Court explained the plaintiff's injury in LaRue, which occurred as a result of the plan fiduciary's failure to implement his investment instructions, would be inappropriate for class treatment if the facts proved that the plan fiduciaries carried out all other investment instructions promptly, but could be suitable for class treatment if the facts established that the plan fiduciaries failed to implement any participant's instructions for a period of time. Essentially, the propriety of class treatment would depend on the factual circumstances of each case.

Criteria for Class Certification under Rule 23

In analyzing the class certification issues raised in Spano, the Court found instructive the reasoning of In re Schering Plough Corporation ERISA Litigation, 589 F.3d 585 (3d Cir. 2009). In that case, the Third Circuit vacated certification of a class of 401(k) plan participants alleging that defendants breached their fiduciary duties by continuing to offer company stock as an investment option in the plan. The district court certified a class of all participants or beneficiaries in the 401(k) plan who held investments in the company stock fund. In vacating that decision, the Third Circuit found that because the class representative signed a release, she could not establish typicality and adequacy of representation. In particular, the Third Circuit found that the release created possible defenses unique to her, as well as incentives and a willingness to pursue the litigation that were different from those of the rest of the class. The Third Circuit, however, remanded the case for further proceedings, noting that certification under Rule 23(b)(1)(B) appeared feasible because the case would significantly impact other participants' claims.

Rule 23(a)

The Court reviewed the specific criteria for class certification. Under Rule 23, a properly-certified class must meet the four requirements of numerosity, commonality, typicality, and adequacy of representation in Rule 23(a), and fall within one of three general categories in Rule 23(b). Before certifying a class, a district court must evaluate Rule 23's requirements, making whatever factual and legal inquiries are necessary. This requires the court to "do more than review a complaint and ask whether . . . the case seems suitable for class treatment;" it must investigate the facts that are relevant to class certification. If the court determines class treatment is proper, it must issue a detailed certification order. A certification order should specify the issues being certified, and why the Rule 23 requirements are satisfied for those issues. Moreover, the order should precisely define the class. As explained by the Seventh Circuit in Spano, the class definition is a "vital step" upon which the scope of the litigation and the res judicata effect of the final judgment both depend.

In Spano, the Court ultimately concluded that the classes, which it deemed "breathtaking...