Pension & Benefits News Fiduciary breach claim dismissed where proposed corrective action would have required fiduciaries to act in corporate capacity
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Friday, August 28, 2020

Fiduciary breach claim dismissed where proposed corrective action would have required fiduciaries to act in corporate capacity

By Pension and Benefits Editorial Staff

A plan sponsor could be held vicariously liable, under respondeat superior theory, for the actions of its plans’ fiduciaries, according to a federal trial court in New Jersey. However, the plan fiduciaries were not required to make public corrective disclosures, in their corporate capacities, to satisfy their fiduciary obligations under ERISA. Accordingly, plan participants did not satisfy the Dudenhoeffer pleading standard, which requires the pleading of an alternative action that a fiduciary could have taken in its fiduciary capacity that would have not done more harm than good to the plan.

Failure to disclosed tainted products prior to stock drop. Participants in plans maintained by Johnson & Johnson (J & J) brought a class action suit against the company and individual executives on the plans’ benefit committee, alleging that the company’s stock, in which plan assets had been invested through an ESOP option, had been artificially inflated by the defendant’s active concealment of information indicating that the company’s products were tainted by asbestos. Specifically, the participants alleged that, while the company knew of the dangerous nature of its products as early as 1957, this information was concealed from the public until disclosed in a December 2018 report by Reuters.

Following the Reuters report, the price of J & J stock dropped 10 percent. The gravamen of the participants’ class action complaint was that corrective public disclosures made prior to December 2018 could have avoided or ameliorated the harm caused by the stock drop loss followed the Reuter’s report.

The company and the individual executive officers moved to dismiss the complaint for failure to state a claim under ERISA. Specifically, it was averred: (1) the fiduciaries could not have issued the corrective disclosure that the complaint pleads as an alternate course of action, (2) the issuance of the disclosure would have caused the plan more harm than good, and (3) J & J is not a plan fiduciary subject to liability under ERISA.

Corporate plan sponsor subject to fiduciary liability under respondeat superior theory. The initial issue addressed by the court was whether J & J was subject to liability as a plan fiduciary. The named fiduciary of the plan was the benefits committee, of which the individual executive officers were members. The participants asserted, however, that J& J was liable for the fiduciary breaches of the individual named fiduciaries because: (1) it employed the individuals who were acting within the scope of their employment when they engaged in fiduciary misconduct, and (2) actively and knowingly participated in the individual fiduciary breaches.

The participants relied on a case in which the Third Circuit, citing respondeat superior theory, found a plan sponsor liable for the failure of the named fiduciaries to collect delinquent pension plan contributions (McMahon v. McDowell, (CA-3 (1986), 794 F. 2d 100). J & J argued that the respondeat theory of liability espoused in McMahon could not be applied outside of the ERISA plan funding context. Moreover, the defendants maintained, the application of respondeat superior is inconsistent with ERISA’s functional concept of fiduciary responsibility.

The court, noting the ERISA indicates no intention to eliminate the vicarious liability of a corporation for the acts of its employees or agents, explained that applying the doctrine of respondeat superior serves to further ERISA’s protective purposes. Thus, the court concluded, to the extent that J & J employees breached their fiduciary duties, within the course and scope of their employment (i.e., by failing to make corrective disclosures), J &J may be held vicariously liable for the breach.

Fiduciary breach claim requires participants to plead alternative fiduciary action. The central issue before the court was whether the participants adequately alleged fiduciary breach by pleading, as required by the applicable Dudenhoeffer standard, an alternative action that the fiduciaries could have taken that would be consistent with securities laws and that a prudent fiduciary could not have concluded would do more harm than good. The participants asserted that the fiduciaries breached their ERISA duties by investing in inflated company stock and should have made corrective public disclosures (in regular securities filings) admitting to the existence of asbestos in the company’s products.

The defendants contended that the proposed alternative action (corrective disclosures in securities filings) was not an actually viable alternative action and would have done more harm than good to the plan. Moreover, the defendants argued that the proposed corrective disclosure would need to have been made by the fiduciaries in their corporate capacity and not as plan fiduciaries. The participants countered that the decision to not make corrective disclosures constituted a fiduciary decision, regardless of the mechanism by which the corrective disclosure would need to be made.

In rejecting the participants’ argument, the court first noted that ERISA fiduciaries generally cannot be held liable for fiduciary breaches based on statements made in a SEC filing. Accordingly, the court agreed with the defendants that the fiduciaries could not be held responsible for failing to issue a corrective disclosure, as that action could only be taken by the fiduciaries in their corporate capacity.

The court stressed that, while ERISA liability can be imposed on corporate officers for actions or omissions taken in connection with the plan, liability does not obtain for corporate actions. By extension, because duties owed to plan beneficiaries are separate and distinct from a fiduciary’s corporate obligations, a party may not allege, as an alternative action, that individual defendants must act in their corporate capacity in order to satisfy fiduciary obligations under ERISA. Thus, to the extent that the proposed alternative action required the fiduciaries to act in their corporate capacity, it could not satisfy the applicable pleading standard.

Leave to amend. The court granted the defendants’ motion to dismiss. However, the court also allowed the participants leave to amend their complaint in order to allege an adequate alternative course of action.

Source: Perrone v. Johnson & Johnson (DC NJ).

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