In Brown v. Medtronic, Inc., et al., Case No. 09-2524
(8th Cir. Dec. 13, 2010), the U.S. Court of Appeals for the Eighth
Circuit affirmed dismissal of a putative class action complaint
filed by a former participant in an employee stock ownership plan
sponsored by a medical device manufacturer (the
"Sponsor").
The complaint, filed against the Sponsor, several of its directors,
a retirement plan committee and various other alleged fiduciaries,
asserted that the defendants breached ERISA fiduciary duties by
imprudently continuing to invest in Sponsor stock after receipt of
adverse information regarding the performance of certain of the
Sponsor's medical products, and by making material
misrepresentations and nondisclosures concerning those
products. The plaintiff further alleged that the plan
purchased Sponsor stock at artificially inflated prices, and that
the stock price dropped following The Wall Street
Journal's publication of an article regarding the product
issues.
In the decision, the U.S. District Court for the
District of Minnesota looked at the dates of share-price changes
and the dates of the plaintiff's purchases and sales of shares
and determined that plaintiff benefited from any artificial price
inflation allegedly caused by the defendants' actions or
failures to act. Because the plaintiff had suffered no cognizable
injury fairly traceable to any of the defendants' alleged
breaches of duty, the district court dismissed the complaint on the
ground that the plaintiff lacked constitutional standing. On
appeal, the Eighth Circuit affirmed the dismissal, but on slightly
different grounds.
The appellate court agreed with the district court that the plaintiff pleaded no injury fairly traceable to any alleged breach of duty with respect to one of the Sponsor's product lines where, by the plaintiff's own allegations, the negative information about that product line did not reach the public until after the plaintiff had liquidated his plan account. Accordingly, the plaintiff had not realized any share price inflation caused by the allegedly improper promotion of that product line. In so holding, the appellate court agreed with the district court that a plaintiff must allege a "net loss" in investment value in order to maintain suit. Under a net loss theory, a plan participant has suffered no cognizable injury if the participant sold shares at an inflated price and, therefore, was a net beneficiary of the inflated share price. Here, where the alleged breach "actually conferred a financial benefit," the plaintiff had pleaded no net loss, and any "abstract injury" he asserted was insufficient to give rise to standing because it could not be redressed by the court.
While other of the plaintiff's claims survived the standing challenge, the Eighth Circuit ultimately dismissed the case in its entirety, concluding that the complaint failed to state a claim for relief where the plaintiff made no plausible allegation that the Sponsor stock became an imprudent investment merely because the Sponsor received adverse information regarding the performance of certain of its products. In dismissing the complaint, the court declined to reach the question of whether the Eighth Circuit should adopt the presumption applied by the court in Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995) that investments in company stock are entitled to a rebuttable presumption of prudence. Noting that several other circuits had adopted the Moench presumption, and that no circuit has expressly rejected the presumption on its merits, the Eighth Circuit nonetheless concluded that it did not need to reach the question of whether plan fiduciaries were entitled to any presumption of prudence where the plaintiff at bar failed to meet his threshold burden of stating a plausible imprudence claim. This contrasts with a decision by the Ninth Circuit on December 2, 2010, denying a petition for rehearing and rehearing en banc in Quan v. Computer Sciences Corp., et al, 623 F.3d 870 (9th Cir. 2010) over objection by the Department of Labor and other amici. In Quan, the Ninth Circuit joined the Fifth and Sixth Circuits in expressly adopting the Moench presumption.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2011 Goodwin Procter LLP. All rights reserved.