PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT __________ No. 08-4814 __________ IN RE: SCHERING PLOUGH CORPORATION ERISA LITIGATION Schering Plough Defendants, Appellants (Amended pursuant to the Clerk’s Order dated 01/15/09) _________ On Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 03-cv-01204) District Judge: Honorable Katharine S. Hayden __________
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PRECEDENTIAL UNITED STATES CO URT OF APPEALS FOR THE … · 2009-12-21 · PRECEDENTIAL UNITED STATES CO URT OF APPEALS FOR THE THIRD CIRCUIT _____ No. 08-4814 _____ IN RE: SCHERING
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 08-4814
__________
IN RE: SCHERING PLOUGH CORPORATION
ERISA LITIGATION
Schering Plough Defendants,
Appellants
(Amended pursuant to the Clerk’s Order dated 01/15/09)
_________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 03-cv-01204)
District Judge: Honorable Katharine S. Hayden
__________
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Argued on September 29, 2009
Before: RENDELL AND AMBRO, Circuit Judges,
and McVERRY,* District Judge
(Filed: December 21, 2009)
Eric C. Bossett, Esq. [ARGUED]
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, DC 20004
Douglas S. Eakeley, Esq.
Lowenstein Sandler
65 Livingston Avenue
Roseland, NJ 07068
Counsel for Appellant
Schering Plough Defendants
(continued)
__________________
* Honorable Terrence F. McVerry, Judge of the United
States District Court for the Western District of
Pennsylvania, sitting by designation.
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Kent A. Mason, Esq.
Davis & Harman
1455 Pennsylvania Avenue,l N.W., Suite 12300
Washington, DC 20004
Counsel for Amicus - Appellant
American Benefits Council
Katherine B. Bernstein, Esq.
Edward W. Ciolko, Esq.
Peter H. LeVan, Jr., Esq. [ARGUED]
Joseph H. Meltzer, Esq.
Barroway, Topaz, Kessler, Meltzer & Check
280 King of Prussia Road
Radnor, PA 19087
Joseph J. DePalma, Esq.
Jennifer Sarnelli, Esq.
Lite, DePalma, Greenberg & Rivas
Two Gateway Center, 12th Floor
Newark, NJ 17102
(continued)
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Susan D. Pontoriero, Esq.
Premier Executive Suites
Suite 250
Brook 35 Plaza
2150 Highway 35
Sea Girt, NJ 08750
Counsel for Appellees
Michele Wendel, Adrian Fields,
Jingdong Zhu, on behalf of himself and
All others similarly situated.
Elizabeth Hopkins, Esq. [ARGUED]
U.S. Department of Labor
N-4611
200 Constitution Avenue, N.W.
Washington, DC 20210
Counsel for Amicus Appellee
Secretary of Labor
Jay E. Sushelsky, Esq.
American Association of Retired Persons
Room B4-250
601 E Street, N.W.
Washington, DC 20049
Counsel for Amicus Appellee
American Association of Retired Persons
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Agnieszka Fryszman, Esq.
Cohen Milstein, Sellers & Toll
1100 New York Avenue, N.W.
West Tower, Suite 500
Washington, DC 20005
Counsel for Amicus Appellee
Pension Rights Center
__________
OPINION OF THE COURT
__________
RENDELL, Circuit Judge.
Michele Wendel is a former employee of Schering-
Plough who participated in the Schering-Plough Corporation
Employees’ Savings Plan, a defined contribution savings plan
sponsored by Schering-Plough. Wendel and two other former
Schering-Plough employees brought a class action against
Schering-Plough and certain of its officers and directors under
ERISA § 502(a)(2) arising out of the offering and management
of the Plan. The two other plaintiffs were dismissed by
stipulation in 2006 and Wendel is now the sole class
representative. The District Court concluded that a release
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Wendel signed in connection with her separation from Schering-
Plough violated ERISA and was therefore void. It then found
the requirements of Rule 23 to be satisfied and certified a class
consisting of Plan investors. On appeal, a host of issues relating
to ERISA, Wendel’s release, and class certification are before
us. We will vacate the order certifying the class and remand for
proceedings consistent with this opinion.
I.
The Schering-Plough Corporation Employees’ Savings
Plan is an “individual account plan” under the Employee
Retirement Income Security Act of 1974 (“ERISA”) 29 U.S.C.
§§ 1001-1461. The Plan allows participants to choose among a
variety of investment funds, including the Schering-Plough
Stock Fund, and to contribute as much as 50% of their pre-tax
compensation to one or more of these funds. As the name
suggests, the Schering-Plough Stock Fund is comprised
primarily of shares of Schering-Plough common stock. It was
one of fourteen funds offered by the company as investment
options for the employees’ pension contribution. The value of
Schering-Plough common stock declined during fiscal years
2001 and 2002, falling from a high of $60 per share to a low of
below $20 per share in June 2003. Wendel alleges that this
decline was the result of Schering-Plough’s violations of Food
and Drug Administration (“FDA”) regulations, delays in FDA
approval of new products, and Schering-Plough’s participation
in illegal kickback schemes.
Liability for a fiduciary’s breach of duty is established by1
ERISA § 409(a), 29 U.S.C. § 1109(a), which provides: “Any
person who is a fiduciary with respect to a plan who breaches
any of the responsibilities, obligations, or duties imposed upon
fiduciaries by this subchapter shall be personally liable to make
good to such plan any losses to the plan resulting from such
breach.”
The defendants are (1) Schering-Plough Corporation2
(“Schering-Plough”), as sponsor of the Plan; (2) Schering-
Plough’s former CEO, Richard J. Kogan, and individual
members of the Schering-Plough Board’s Pension Committee
(collectively, the “Director Defendants”); (3) Schering-Plough’s
Employee Benefits Committee and its members (collectively,
the “Benefits Committee”); and (4) Schering-Plough’s
Employee Benefits Investment Committee and its members
(collectively, the “Investment Committee”).
Section 502(a)(2), 29 U.S.C. §§ 1132(a)(2), provides for civil3
enforcement of ERISA’s fiduciary provisions “by a participant,
beneficiary or fiduciary for appropriate relief under [ERISA
§ 409].”
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Initially, three plaintiffs, Jingdong Zhu, Adrian Fields,
and Michele Wendel, filed a class action under ERISA § 409(a)1
asserting four claims of breach of fiduciary duty against
numerous defendants based on facts relating to this decline in2
value. Their complaint asserted claims on behalf of the Plan
under ERISA § 502(a)(2) and sought to restore losses sustained3
Wendel’s Separation Agreement provides, in pertinent part:4
In exchange for the “enhanced” severance
payment, I release the Company (which includes
Schering-Plough, and all of its subsidiaries,
affiliates, officers, directors, and employees) from
all claims and liabilities which I have or may have
against it as of the date on which I sign this
Agreement . . . . Furthermore, I promise that I
will not file a lawsuit against the Company in
connection with any aspect of my employment or
termination. I also waive the right to all remedies
in any such action that may be brought on my
behalf.
(Joint App. 331.)
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by the Plan as a result of defendants’ breaches of their fiduciary
obligations. Zhu and Fields are no longer parties.
On July 20, 2000, after ten years of employment with
Schering-Plough, Wendel entered into a Separation Agreement
that included an enhanced severance package (specifically, an
additional severance payment of $13,943.60) in consideration
for a general release and a covenant not to sue the company.4
Because Wendel is the sole remaining class representative, one
of the central issues we must consider is what effect, if any,
Wendel’s release and covenant not to sue have on her ability to
The complaint asserted four counts. The District Court5
concluded that Rule 23 could not be satisfied as to one count
that was based on the alleged failure to disclose information,
because questions pertaining to individual reliance rendered a
class action inappropriate as to that count. Wendel did not
cross-appeal on this issue.
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bring this action under ERISA § 502(a)(2) and to represent the
class in accord with Rule 23.
Wendel pursues three claims stemming from defendants’
alleged role in and knowledge of the alleged causes of the
decline in the value of Schering-Plough stock, and from
defendants’ decision to continue to maintain the Plan’s
significant investment in Schering-Plough stock and to offer the
Schering-Plough Stock Fund as an investment option despite
this knowledge. Wendel alleges that, since 1998, defendants5
knew or should have known that Schering-Plough stock was
overvalued and an imprudent investment because of undisclosed
problems with its FDA compliance systems and because of
expected delays in rolling out its anticipated “blockbuster” drug,
Clarinex. Wendel alleges that Schering-Plough disclosed these
problems in a press release in 2001, immediately after which
shares fell 15% in heavy trading and analysts dropped ratings
and projected earnings for the company. She further alleges that
defendants knew or should have known that Schering-Plough
was engaged in illegal kickbacks and fraud against the
Government, which ultimately resulted in substantial settlement
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payments by the company. Finally, Wendel alleges that the
decline in the value of Schering-Plough common stock was a
result of these problems, causing the Plan to suffer tens of
millions of dollars in losses.
Wendel makes three breach-of-fiduciary-duty claims
based on these facts. First, she alleges that defendants failed to
prudently and loyally manage the Plan’s assets. Second, Wendel
alleges that Schering-Plough, the Director Defendants, and the
Benefits Committee Defendants failed to adequately monitor
and inform the appointed fiduciaries, the Investment Committee
Defendants. Third, she alleges that defendants breached their
fiduciary duty to avoid conflicts of interest, which prevented
defendants from acting exclusively in the best interests of the
Plan participants and beneficiaries.
Wendel moved for class certification pursuant to Fed. R.
Civ. P. 23(a) and either 23(b)(1) or 23(b)(2). The proposed
class included all participants and beneficiaries of the Plan since
July 29, 1998. The District Court decided, as an initial matter,
that the release executed by Wendel was void under ERISA
§ 410(a) because it relieved fiduciaries of their obligations.
Therefore, the impact of her release on the class certification
issue was not considered. The District Court concluded that
class certification was appropriate for all three of the above
Having so found, the District Court did not consider whether6
they satisfied Rule 23(b)(2).
The District Court had jurisdiction under 28 U.S.C. §§ 13317
and 1337. We have jurisdiction under 28 U.S.C. § 1292(e) and
Fed. R. Civ. P. 23(f).
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claims under Rule 23(a) and Rule 23(b)(1)(B). The District6
Court defined the class as “[a]ll persons who were participants
in or beneficiaries of the Schering-Plough Corporations
Employees’ Savings Plan at any time between July 29, 1998 to
the present and whose accounts included investments in
Schering stock.” (Joint App. 35.) In so doing, the District Court
adopted and incorporated the Report and Recommendation of
Magistrate Judge Falk, in addition to offering its own opinion.
(Joint App. 35.) Defendants petitioned for leave to appeal the
class certification decision on an interlocutory basis pursuant to
Fed. R. Civ. P. 23(f). We granted defendants’ petition for an
interlocutory appeal. 7
II.
As noted above, Wendel is now the sole representative of
the class, and she signed a Separation Agreement with Schering-
Plough that includes both a release and a covenant not to sue.
As the existence of her release has been a focus of the parties’
arguments, we first confront two preliminary issues regarding
her release: (1) was the District Court correct in concluding that
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ERISA § 410(a) renders the release and the covenant not to sue
void as against public policy, and thus of no force? As we
answer this question in the negative, we will address an
additional question: (2) do the release and covenant not to sue
bar Wendel from being able to maintain an action under ERISA
§ 502(a)(2), as defendants urge?
A. ERISA § 410(a)
ERISA § 410(a) provides that “any provision in an
agreement or instrument which purports to relieve a fiduciary
from responsibility or liability for any responsibility, obligation,
or duty under this part shall be void as against public policy.”
29 U.S.C. § 1110(a). The District Court concluded that, in light
of this provision, “the release and covenant not to sue at issue
here do not extinguish Wendel’s claims and have no bearing on
the typicality inquiry.” (JA 31.) In reaching this conclusion, the
District Court relied on Baker v. Kingsley, No. 03-1750, 2007
WL 1597654, at *4 (N.D. Ill. May 31, 2007), where the district
court stated that “ERISA itself prohibits parties from waiving
claims for breaches of fiduciary duty,” and used this as an
alternative ground for rejecting a typicality challenge against
plaintiffs who had signed releases.
We disagree with the District Court’s application of
§ 410(a) to an individual release and covenant not to sue,
because we conclude that § 410 applies only to instruments that
purport to alter a fiduciary’s statutory duties and responsibilities,
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whereas an individual release or covenant not to sue merely
settles an individual dispute without altering a fiduciary’s
statutory duties and responsibilities. We agree with the view of
the Eighth Circuit Court of Appeals in Leavitt v. Northwestern
Bell Telephone Co., 921 F.2d 160 (8th Cir. 1990):
In our view, a release is not an ‘agreement or
instrument’ within the meaning of section
1110(a). Section 1110(a) prohibits agreements
that diminish the statutory obligations of a
fiduciary. A release, however, does not relieve a
fiduciary of any responsibility, obligation, or duty
imposed by ERISA; instead, it merely settles a
dispute that the fiduciary did not fulfill its
responsibility or duty on a given occasion.
Id. at 161-62; see also Boeckman v. A.G. Edwards, Inc., 461 F.
Supp. 2d 801, 808 (S.D. Ill. 2006) (ERISA § 410(a) does not
create a “ blanket prohibition of the release of claims for breach
of fiduciary duty”).
Baker appears to be the only instance of a court’s
applying § 410(a) to invalidate an individual release. It is an
unreported opinion in which this appears as mere dicta with no
supporting reasoning. Leavitt and Boeckman are considerably
more persuasive. We adopt their reasoning and read § 410(a) to
extend only to contractual or other devices that purport to alter
the statutory obligations of a fiduciary under ERISA, and not to
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reach a release of claims signed by an individual claiming the
breach of a fiduciary duty. Otherwise, individuals could never
amicably resolve litigation over these issues.
Accordingly, ERISA § 410(a) does not render Wendel’s
individual release and covenant not to sue void against public
policy, and the effect of her release, therefore, must be
considered.
B. Wendel’s Release as a Bar
Defendants contend that Wendel’s release is a bar to the
instant action. We disagree. Section 502(a)(2) claims are, by
their nature, plan claims. See, e.g., Graden v. Conexant Sys.,