On Appeal from the United States District Court for the District of New Jersey, Newark (D.C. Civil Action No. 03-cv-01204). District Judge: Honorable Katharine S. Hayden.
The opinion of the court was delivered by: Alarcon, Circuit Judge
Before: AMBRO, STAPLETON, and ALARCON*fn1, Circuit Judges.
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.
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.
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).
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. ...