Recent Development by Lucas LaVoy
Electronic Data Systems Corporation (EDS) published an earnings warning on September 18, 2002. This publication caused a dramatic drop in EDS's stock price, from $36.46 to $17.20 per share. Among the repercussions of the collapse of the stock price was a drop in the value of retirement portfolios that included EDS stock among their investments. These portfolios were held by some EDS employees pursuant to the company's 401(k) defined contribution retirement plan (Plan). The Plan allows participants to direct their retirement savings into some combination of the several investment options that are selected and offered by the Plan's trustees, while providing that EDS will match some portion of the participants' contributions. One of the investment options offered by the Plan is an EDS Stock Fund. The Plan's trustees oversee its management and administer each participant's account.
Following the EDS stock price collapse, Plan participants brought an action alleging that the defendant trustees had knowledge of EDS's troubling financial situation, that notwithstanding this knowledge they continued to offer the EDS Stock Fund as an investment option, approved investments in the EDS Stock Fund, failed to compensate for the high level of risk attendant in investment in EDS stock, and that these actions amounted to a breach of the defendants' fiduciary duties under the Employee Retirement Income Security Act (ERISA). The participants sought reimbursement for losses sustained in the EDS stock price collapse, to be apportioned into individual participants' accounts, as well as injunctive relief either to curtail the inclusion of EDS stock as a Plan investment option or to replace the fiduciaries. The United States District Court for the Eastern District of Texas certified a plaintiff class under Federal Rule of Civil Procedure 23(b)(2) consisting of participants for whom the Plan made or maintained investments in the EDS Stock Fund during the relevant class period. Three rulings were critical to the district court's certification of the class. First, the court characterized the action as a “derivative” suit brought on behalf of the Plan under ERISA section 502(a)(2); under this framework, any recovery would have to benefit the Plan as a whole. Second, the district court ruled that ERISA section 404(c), which operates to shield fiduciaries from liability for a loss if the loss occurred through a participant's exercise of control over his or her account, provides no defense in a derivative suit brought on behalf of the plan. Third, the district court ruled that general releases signed by potentially 9000 class members did not release claims against the defendants for breach of their fiduciary duties, and in any event posed no challenge to the certification of the class. The defendants sought interlocutory appeal under Federal Rule of Civil Procedure 23(f), challenging the certification of the plaintiff class. The United States Court of Appeals for the Fifth Circuit held that even in a derivative action, the exercise of control over investment options by individual participants may shield Plan fiduciaries from liability under ERISA section 404(c), if the loss complained of results from such exercise of control, and that the necessarily individualized nature of this inquiry must be addressed when deciding whether to certify a class under Federal Rule of Civil Procedure 23. Langbecker v. Electronic Data Systems Corp., 476 F.3d 299, 303, 318-19 (5th Cir. 2007).
About the Author
Lucas LaVoy. J.D. candidate 2009, Tulane University School of Law; B.A. 2005, University of Michigan, Ann Arbor.
Citation
82 Tul. L. Rev. 2495 (2008)