Fifth Circuit Issues Important Decision on Class Certification in ERISA “Stock Drop” Fiduciary Breach Litigation

February 5, 2007

A recent decision of the U.S. Court of Appeals for the Fifth Circuit has addressed one of the most important issues in the recent wave of ERISA fiduciary breach “stock drop” litigation. Vacating and remanding a decision by the U.S. District Court for the Eastern District of Texas, the Fifth Circuit ruled that class certification may be inappropriate where, among other things, a company’s 401(k) plan is operated in accordance with ERISA § 404(c). On behalf of The Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers, Gibson Dunn & Crutcher had filed an amicus brief in the case, focusing on the Section 404(c) defense. Langbecker v. Electronic Data Systems Corp., No. 04-41760, slip op. (5th Cir. Jan. 18, 2007).

EDS maintained a 401(k) plan under which its employees could select from among numerous investment options, including the company’s stock. When the price of EDS stock dropped suddenly, plaintiffs sued and sought certification of a class of all plan participants (some 85,000 current and former employees) who had invested in the company stock fund. The district court certified the class, and the employer sought immediate appeal.

In a January 18th opinion by Chief Judge Edith H. Jones, the Fifth Circuit vacated and remanded. The court’s decision turned in substantial part on Section 404(c) of ERISA, which provides that a plan fiduciary is not liable for losses to a participant that result from the participant’s “exercise of control” over his account. The court ruled that the protection afforded to fiduciaries by Section 404(c) could extend to the fiduciaries’ decision to include a particular investment option in the plan, in circumstances where participants selected that option and then later experienced a loss. The Department of Labor had taken the position that Section 404(c) never protects fiduciaries from suit over their underlying decision to include or retain an investment option. Adopting the argument advanced in Gibson Dunn’s amicus brief, the Fifth Circuit found the Department’s interpretation unreasonable, even under a deferential Chevron standard, as it would “render the § 404(c) defense applicable only where plan managers breached no fiduciary duty, and thus only where it is unnecessary.”

The Fifth Circuit also found that (1) the district court gave insufficient consideration to the impact on class certification of the fact that up to 9,000 class members had signed releases of their claims; (2) the district court had improperly determined that the adequacy prong of the class action inquiry was met where many class members, including a named party, continued to invest in the company stock fund even after the stock price dropped; and (3) the district court’s certification of the class under Rules 23(b)(1) and 23(b)(2) was potentially improper under the Fifth Circuit’s Allison standard, because the claim was primarily one for monetary rather than injunctive relief and because certification in such a circumstance could violate the due process rights of class members, who would not be guaranteed notice or a right to opt-out.

The Fifth Circuit remanded the case to the district court for further consideration of whether class certification was appropriate in light of its opinion. (A petition for rehearing en banc has been filed.)

Circuit Judge Emilio M. Garza joined the opinion. Circuit Judge Thomas M. Reavley dissented.

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© 2007 Gibson, Dunn & Crutcher LLP

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