- 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"
- March 8, 2011 | Author: Kara L. Lincoln
- Law Firm: Proskauer Rose LLP - New York Office
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.
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 in . . . scope,” failed to satisfy the typicality and adequacy of representation requirements. The numerosity requirement of Rule 23(a) was concededly met due to the sheer number of participants in each plan. With regard to commonality, the Court first noted that Rule 23(a)(2) does not require “that every member of the class have an identical claim. It is enough that there be one or more common questions of law or fact.” The Court then ruled that Plaintiffs’ assertions that the fiduciaries selected imprudent investment options, charged excessive fees to all participants, and misled participants met the commonality requirement. With regard to the misrepresentation claims, the Court disagreed with the IP Defendants’ argument “that the individual nature of each participant’s investment decisions, and also the individual response each person might have had to the alleged misrepresentation” precluded a finding of commonality. The Court ruled that it was sufficient there were common claims regarding, for example, the allegedly misleading nature of the communications.
As to typicality, the Court instructed “that there must be enough congruence between the named representative’s claim and that of the unnamed members of the class to justify allowing the named party to litigate on behalf of the group.” In the context of a class of 401(k) plan participants alleging imprudent investment options, the Court stated that “a class representative . . . would at a minimum need to have invested in the same funds as the class members.” Here, the Court found that it could not rationally assess this issue for the classes defined by the district court, which included participants in the past who “never held a single share in either or both of” the allegedly imprudent funds.
The Court did not rule on IP’s argument that Plaintiffs’ misrepresentation claims could not satisfy the typicality requirement because these claims required Plaintiffs to prove reliance on an individualized basis. The Court merely suggested “that some misrepresentations might be so central to the operation of a plan that injury to someone who held shares in the affected funds might be inferred[, although] other arguments . . . would require precisely the kind of individualized attention that would make it difficult to find a class representative with claims typical of enough people to justify class treatment.”
The Court also did not rule on IP’s arguments that, consistent with ERISA § 404(c), it should not be held liable “if a person opted to put her money in a riskier or more questionable fund,” and that because each participant chose his own investments, yielding a “close-to-infinite variety of combinations in each participant’s account—varying by which investment, when purchases were ordered, when money was shifted from one fund to another,” Plaintiffs’ claims were not typical of a class. Instead, the Court observed that in a related case decided the same day, Howell v. Motorola, -- F.3d --, 2011 WL 183966 (7th Cir. Jan. 21, 2011), it concluded that Section 404(c) of ERISA does not insulate a fiduciary from liability for selecting an imprudent investment option for a 401(k) plan. The Court nevertheless recognized that a participant’s ability to assert a fiduciary breach claim for the selection of imprudent investment options did not necessarily mean that such a claim could be asserted as a class claim. The Court then described the various obstacles a class representative would need to overcome to certify a class:
Here, if a proper class can be constituted on remand with a representative who personally held one or both of the allegedly imprudent funds, the question on the merits would be whether the mere existence of a fund that is undesirable taints the entire plan, or, if more is needed, what would that be? A showing of deliberate misrepresentations about soundness? A showing that participants had such a small number of options that they were forced into the bad fund? A showing that the menu of options included only, or mostly, imprudent options? Something else? An extra hurdle such a class representative or individual plaintiff would need to surmount in the IP litigation is the fact that IP, like Deere in the Hecker litigation, not only offers 12 pooled funds in addition to the IP Stock Fund, but it also makes available a brokerage window into over 11,000 publicly traded mutual funds. IP represents that participants are free to take advantage of any of these, in order to meet their own investment goals.
In support of their argument that they adequately represented the class, Plaintiffs contended that their claims challenged the structure of the plan as a whole. The Court, however, found their assertion insufficient in light of Defendants’ contention that many of the putative class members had no complaint about the funds. In fact, the Court acknowledged that significant intra-class conflicts among 401(k) plan participants could arise because an imprudent investment for one participant during one period of time could be a prudent investment for another.
The Court also concluded that the classes could not be certified under either Rule 23(b)(1)(A) or (B). With regard to Rule 23(b)(1)(B), for example, the Court found that there was no common interest among all class members because it appeared that some participants were harmed whereas others benefited. “Without the common interest, there is no reason to assume that an adjudication of one person’s claim ‘as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.’”