Summary Judgment in Favor of Defense in ERISA Class Action Proper because Class Action Claims that Defendants should not have Invested in Company Stock ran Counter to Terms of Eligible Individual Account Plan (EIAP) and because Negligent Misrepresentations Alleged in Class Action Complaint were not made in Fiduciary Capacity Fifth Circuit Holds
Plaintiff filed a class action against his employer, Reliant Energy, Inc. (REI) and the Benefits Committee of his employer’s savings plan alleging violations of ERISA (Employee Retirement Income Security Act). The Plan is an Eligible Individual Account Plan (EIAP) under ERISA, and the class action complaint alleged that defendants breached fiduciary duties owed to current and former participants in the Plan in that defendants “had a fiduciary duty to liquidate the Common Stock Fund and cease purchasing REI shares, notwithstanding the Plan’s express contrary requirements.” Kirschbaum v. Reliant Energy, Inc., ___ F.3d ___, 2008 WL 1838324, *1 (5th Cir. April 25, 2008). The district court granted plaintiff’s motion to certify the litigation as a class action, id. Defense attorneys moved for summary judgment on the ground that defendants satisfied their legal duties to the class: The district court granted summary judgment as to all class action claims, and entered judgment in favor of defendants on the class action complaint. Id. Plaintiff appealed, and the Fifth Circuit affirmed.
Under the Plan participants were permitted to invest up to 16% of their compensation in a number of funds, “ranging from riskier, growth-oriented funds to more stable mutual funds”; one of these options was the REI Common Stock Fund which essentially consisted of REI common stock. Kirschbaum, at *1. Moreover, “REI agreed to match up to the first six percent of an employee’s contribution with shares of REI common stock allocated to the employee’s Common Stock Fund account,” but the matching contributions had to stay in Common Stock Fund until the employee was 55 years old and had 10 years of service with the company. Id. After the disclosure of certain “sham transactions” by REI employees and another energy trader, the stock dropped 40% causing a substantial loss in the value of the Common Stock Fund, id. REI later admitted that the trades in question inflated REI’s revenue by 10% over a three-year period. Id. Plaintiff filed his class action complaint alleging that defendants were “responsible under ERISA to make good the losses the Plan sustained on REI common stock.” Id., at *2. Specifically, the class action alleged that defendants knew REI stock “was not a prudent investment” and that they owed a fiduciary duty to discontinue purchasing REI stock, to sell the Plan’s holdings of REI stock, and to discontinue the Common Stock Fund. Id. The district court certified the litigation as a class action, but agreed with defense attorneys that summary judgment was appropriate as to each of the class action claims because “the Plan afforded [defendants] no discretion to terminate the fund or halt investments in it” and, accordingly, “defendants had no fiduciary duty to do so.” Id.
The Fifth Circuit affirmed. First, the Circuit Court held that despite efforts to recast the claim on appeal, “Count 1 clearly states a failure to diversify.” Kirschbaum, at *3. ERISA, however, “exempts an EIAP from the duty to diversify with regard to the purchase or holding of company stock.” Id. (citing 29 U.S.C. § 1104(a)(2)). Count II went further, alleging that the Plan should not have held a single share of REI stock during the period when the stock price had been inflated artificially. Id., at *4. The Circuit Court observed at page *4, “Three significant issues are presented by these allegations. First, do the terms of the REI Plan mandate that company common stock be an available investment option for participants, and that it must be the exclusive vehicle for company matching contributions? Second, what, if any, fiduciary duties pertain to REI or the Benefits Committee with respect to investments in the REI Common Stock Fund? Third, if such duties exist, by what standard should a court review the alleged breaches of duties?” In addressing these issues, the Fifth Circuit first held that the Plan required that employees be permitted to invest in the Common Stock Fund and that “REI common stock be the basis for the company’s matching contributions.” Id., at *4. To engage in the actions required by the class action complaint, the Plan first would have to have been amended. Id. Thus, defendants did not have authority to discontinue purchases of REI common stock or to invest Common Stock Fund holdings in other assets. Id., at *5. The Circuit Court also agreed with the district court that defendants did not breach any fiduciary duties because they were required only to follow the terms of the Plan and “the Plan’s requirements to invest in REI stock are mandatory and were treated as such by REI and the Benefits Committee.” Id., at *7. And based on the analysis contained at pages *8-*11, the Court rejected plaintiff’s argument that defendants had both the authority and the legal (fiduciary) duty to stop investing in REI common stock, which it “bluntly” summarized as an argument that “[defendants] had a fiduciary duty to disobey the plain terms of the Plan – and Congress’s sanction for company stock purchase plans – in order to comply with ERISA’s equal duties to invest prudently and not to violate the statute.” Id., at *8 (citations omitted).
Finally, with respect to the negligent misrepresentation claim in Count III of the class action complaint, the Fifth Circuit observed that plaintiff was seeking recovery under ERISA rather than the securities laws, which means that plaintiff “must demonstrate that the representations were made in a fiduciary capacity.” Kirschbaum, at *11. Because plaintiff “failed to identify any misrepresentations made by the REI defendants in a fiduciary capacity,” the district court properly granted summary judgment, id., at *11-*12. Accordingly, the Fifth Circuit affirmed the lower court ruling. Id., at *12.