Opinion
No. 10-1318.
Filed April 21, 2011.
ROBERT D. ALLISON, ROBERT D. ALLISON ASSOCIATES, CHICAGO, IL.
EDWIN J. MILLS. Counsel of Record STULL, STULL BRODY. NEW YORK, NY, (Attorneys for Petitioners.
THE QUESTION PRESENTED FOR REVIEW
Is intent to deceive an element of a claim for breach of ERISA's duty of loyalty?
PARTIES TO THE PROCEEDING
Pursuant to Rule 14.1(b), the following list identifies all of the parties before the United States Court of Appeals of the Seventh Circuit. The Petitioners (Plaintiffs/Appellants below) are:
Stephen G. Lingis
Donald L. Smith
Peter D. White
Bruce G. Howell
The Respondents (Defendants/Appellees below) are:
Carl F. Koenemann
Rick Dorazil
Motorola, Inc.
David Devonshire
The Profit Sharing Committee of Motorola, Inc.
Christopher B. Galvin
Richard Roes 1-30
Glenn Gienko
Garth L. Milne
William P. Declerck
Richard Enstrom
Robert L. Growney
H. Laurance Fuller
Anne P. Jones
Judy C. Lewent
Walter E. Massey
Nicholas Negroponte
John E. Pepper, Jr.
Samuel C. Scott III
Gary L. Tooker
John A. White
CORPORATE DISCLOSURE STATEMENT
Petitioners are individuals; Petitioners do not include any corporations.
TABLE OF CONTENTS
TABLE OF AUTHORITIES CASES
Adamczyk v. Lever Bros. Co. 991 F. Supp. 931 Adams v. Brink's Co. 261 Fed. Appx. 583 Beach v. Commonwealth Edison Co. 382 F.3d 656 Binder v. Gillespie 184 F.3d 1059 Charles Hughes Co. v. Securities Exch. Comm'n. 139 F.2d 434 Difelice v. U.S. Airways, Inc. 497 F.3d 410 Donovan v. Bierwirth 538 F. Supp. 463 680 F.2d 263 459 U.S. 1069 103 S. Ct. 488 74 L. Ed. 2d 631 Donovan v. Cunningham 716 F.2d 1455 Griggs v. E.I. DuPont de Nemours Co. 237 F.3d 371 Harte v. Bethlehem Steel Corp. 214 F.3d 446 121 S. Ct. 626 Harzewski v. Guidant Corp. 489 F.3d 799 In re Tyco Int'l 2004 U.S. Dist. LEXIS 24272 James v. Pirelli Armstrong Tire Corp. 305 F.3d 439 Krohn v. Huron Mem'l Hosp. 173 F.3d 542 LaRue v. DeWolff, Boberg Assocs. 552 U.S. 248 Leigh v. Engle 727 F.2d 113 Mass. Mut. Life Ins. Co. v. Russell 473 U.S. 134 Mathews v. Chevron Corp. 362 F.3d 1172 Motorola Credit Corp. v. Uzan 274 F. Supp. 2d 481 Pegram v. Herdrich 530 U.S. 211 Pfahler v. National Latex Prods. Co. 517 F.3d 816 Rogers v. Baxter Int'l, Inc. 521 F.3d 702 Tricontinental Indus. Ltd. v. Anixter 215 F.Supp.2d 942 Varity Corp. v. Howe 516 U.S. 489 STATUTES 28 U.S.C. § 1254 28 U.S.C. § 1331 29 U.S.C. § 1104 29 U.S.C. § 1107 29 U.S.C. § 1109 29 U.S.C. § 1110 29 U.S.C. § 1132 29 U.S.C. § 1132 OTHER AUTHORITIES Worker, Retiree Class Actions Surge available Unreliable Securities for Retirement Income Security: Certifying the ERISA Stock- Drop Class ERISA Practitioner Says Claims in Lower Courts Freedom To Choose Unwisely: Congress' Misguided Decision To Leave 401(k) Plan Participants to Their Own Devices THE QUESTION PRESENTED FOR REVIEW . . . i PARTIES TO THE PROCEEDING . . . . . . ii CORPORATE DISCLOSURE STATEMENT . . . iii TABLE OF CONTENTS . . . . . . . . . . iv TABLE OF AUTHORITIES . . . . . . . . viii PETITION FOR A WRIT OF CERTIORARI . . . 1 OPINION BELOW . . . . . . . . . . . . 1 NO ORDERS ON REHEARING . . . . . . . . .1 STATEMENT OF JURISDICTION . . . . . . . 2 BASIS FOR FEDERAL JURISDICTION IN THE COURT OF FIRST INSTANCE . . . . . . . . 2 RULE 29.4 NOTIFICATIONS . . . . . . . . 2 STATUTORY PROVISION INVOLVED . . . . . .2 STATEMENT OF THE CASE . . . . . . . . . 3 REASONS FOR GRANTING THE PETITION . . .13 A. The Seventh Circuit's Conclusion That Intent To Deceive is Required to Show A Breach of Loyalty Conflicts with the Decisions of Other Courts of Appeals . . . 14 B. Varity Corp. v. Howe and ERISA'S Duty Of Disclosure . . . . . . . . . . . . . . . . 15 C. The Seventh Circuit's Conclusion Has No Support In ERISA And Conflicts With Trust Law, Which Informs ERISA's Fiduciary Duties . . . . . . . . . . . . . . . . . . 21 D. The Issue Of Law Raised By This Petition Is A Recurring Issue In ERISA Litigations Involving 401(k) Plans . . . . . . . . . . 24 CONCLUSION . . . . . . . . . . . . . . . . . . 25 APPENDIX Appendix A: Decision, In the United States Court of Appeals for the Seventh Circuit (January 21, 2011) . . . . . . . . la Appendix B: Memorandum Opinion and Order, United States District Court, Northern District of Illinois, Eastern Division (June 17, 2009) . . . . . . . . . . 48a Appendix C: Chart, "Motorola Pension Plan, 401(k) Committee" . . . . . . . . . . . . . . 95a Appendix D: Letter from Motorola to Arnold Porter (July 20, 2001) . . . . . . . . . . 96a Appendix E: Letter and accompanying memo- randum from Arnold Porter to Motorola (September 17, 2001) . . . . . . . 99a Appendix F: Arnold Porter memorandum, "Accountability of Motorola Employees for the Telsim Problem" (February 25, 2002) . . . . . . . . 112a Appendix G: Chart, "telsim risk areas" (September 13, 1999) . . . . . . 118a Appendix H: "Rating Cut May Leave Motorola Gasping," Bloomberg News (April 6, 2001) . . . . . . . . . 122a Appendix I: "The Stupid Loan Bubble; the story of how Motorola and Nokia lost nearly § 3 billion," Newsweek (October 28, 2002) . . . . . . . . 129a Appendix J: Motorola, Inc., Schedule 14A, Information Required in Proxy Statement (excerpts) (April 2, 2001) . . . . . . . . 141a Appendix K: Motorola, Summary Plan Description (excerpts) (effective July 1, 2000) . . . . 149a Appendix L: Motorola, 401(k) Profit Sharing Plan Investment Funds, Prospectus (August 1, 2000) . . . . . . . . . 160a , (N.D. Ill. 1997) . . . . . . 20 , (4th Cir. 2008) . . . . . 15 , (7th Cir. 2004) . . . . . . . . 22 , (9th Cir. 1999) . . . . . . . . 21 , (2d Cir. 1943) . . . . . . . . . 21 , (4th Cir. 2007) . . . . . . . . 23 , (E.D.N.Y. 1981), aff'd as modified, (2d Cir.), cert. denied, , , (1982) . . . . . . . . . . . . . . . . . . . 23 , (5th Cir. 1983) . . . . . . . . 23 , (4th Cir. 2001) . . . . . . . . .15 , (3d Cir.), cert. denied, 148 L. Ed. 2d 535, (2000) . . . . . . . . 15 , (7th Cir. 2007) . . . . . . . . 18 , 02-1335-PB, (D.N.H. Dec. 2, 2004) . . . . . . . . . . . . 20 , (6th Cir. 2002) . . . . . . . . 14 , (6th Cir. 1999) . . . . . . . . 15 , (2008) . . . . . . . .3, 18, 22, 25 , (7th Cir. 1984) . . . . . . . . 23 , (1985) . . . . . . . . . . . . . 18 , (9th Cir. 2004) . . . . . . . . 14 , (S.D.N.Y. 2003) . . . . . .7 , (2000) . . . . . . . . . . . . . 18 , (6th Cir. 2007) . . . . . . .14, 15 , (7th Cir. 2008) . . . . . . . . .22 , (N.D. Ill. 2002) . . . . . .21 , (1996) . . . . . . . . . . . passim (1) . . . . . . . . . . . . . . 2 . . . . . . . . . . . . . . . 2 (a)(1) . . . . . . . . 2, 15, 21 (d)(3) . . . . . . . . . . . . 3 . . . . . . . . . . . . . . . 2 (a) . . . . . . . . . . . . . .23 (a)(2) . . . . . . . . . . . . .2 (e)(1) . . . . . . . . . . . . .2 Crimmins, : Chi, Daily L. Bull., Jan. 29, 2009, available at 2009 WLNR 22565321 . . . . . . . . . . . 24, 25 Department of the Treasury on Employer Stock in 401(k) Plans, February 28, 2002, at http://benefitslink.om/articles/treasurycaps.h tml . . . . . . . . . . . . . . . . . . . . .19 Fromme, , 64 Vand. L. Rev. 301 (January 2011) . . . . . . . . . . . . . . . . . . . .24 Meredith Z. Maresca, LaRue Will Give Rise to Misrepresentation , 35 Pens. Ben. Daily (BNA) 2305 (Oct. 7, 2008) . . . . . . . . . .25 Restatement (Second) of Trusts § 201 . . . . . 22 Restatement (Second) of Trusts § 205 . . . . . 23 Restatement (Second) of Trusts § 222 . . . . . 23 Susan J. Stabile, , 11 Cornell J.L. Pub. Pol'y 361 (2002) . . . . 19 PETITION FOR A WRIT OF CERTIORARI
Stephen G. Lingis, Peter D. White, Donald L. Smith and Bruce G. Howell hereby respectfully petition this Court to grant a writ of certiorari to review that portion of the Opinion of the United States Court of Appeals for the Seventh Circuit which concluded that, "[c]ontrary to . . . the position of other circuits" (App. 40a-41a), intent to deceive is a required element of a claim for breach of ERISA's duty of loyalty when the alleged breach is founded on a deception of pension plan participants by plan fiduciaries.
OPINION BELOW
The Opinion of the United States Court of Appeals for the Seventh Circuit affirming the grant of summary judgment to Defendants appears at App. la and is reported at Howell v. Motorola, Inc., No. 09-2796, 2011 U.S. App. LEXIS 1193 (7th Cir. Jan. 21, 2011). The final judgment entered by the Seventh Circuit on January 21, 2011 appears at App. 46a.
The decision of the district court granting Defendants' motion for summary judgment appears at App. 48a and is reported at 649 F. Supp. 2d 861 (N.D. Ill. 2009).
NO ORDERS ON REHEARING
There were no petitions for rehearing or rehearing en banc.
STATEMENT OF JURISDICTION
The Court has jurisdiction to act on this Petition for Writ of Certiorari under 28 U.S.C. § 1254(1).
BASIS FOR FEDERAL JURISDICTION IN THE COURT OF FIRST INSTANCE
Petitioners, Plaintiffs below, brought suit under Sections 409 and 502(a)(2) of ERISA, 29 U.S.C. §§ 1109 and 1132(a)(2). The district court had federal question jurisdiction under 28 U.S.C. § 1331 and exclusive federal court jurisdiction by virtue of Section 502(e)(1) of ERISA, codified at 29 U.S.C. § 1132(e)(1) ("Except for actions under subsection (a)(1)(B) of this section, the district courts of the United States shall have exclusive jurisdiction of civil actions under this subchapter").
RULE 29.4 NOTIFICATIONS
This Petition does not draw into question the constitutionality of an Act of Congress.
This Petition does not draw into question the constitutionality of any statute of a State.
STATUTORY PROVISION INVOLVED
Constitutional Provisions: None
Treaties: None
Statute: 29 U.S.C. § 1104(a)(1)(A)(i):
(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and —
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries . . .
Ordinances: None
Regulations: None
STATEMENT OF THE CASE
Petitioners, Plaintiffs below, alleged that fiduciaries of the Motorola 401(k) Savings Plan, a defined contribution retirement plan sponsored by Motorola, Inc. (the "Plan"), breached their fiduciary duties of prudence and loyalty owed to the Plan and to Plaintiffs as participants in the Plan. Plaintiffs alleged that Motorola's multi-billion dollar exposure to loss in connection with its vendor financing to Turkish telephone company "Telsim" rendered Motorola common stock, for a period of time, an imprudent investment for the Plan's retirement savings accounts. More significant to this Petition, Plaintiffs alleged that the Plan's fiduciaries, especially Defendant Carl F. Koenemann, the Chairperson of the Profit Sharing Committee which administered the Plan on a day-to-day basis and who was also Motorola's Chief Financial Officer, breached the duty of loyalty owed to the Plan's participants.
The Plan is a defined-contribution plan established pursuant to ERISA section 407, 29 U.S.C. § 1107(d)(3). (App. 7a) The Plan provided for individual accounts for each participant, with the amount of the participant's benefits to be determined by the amount contributed by the participants, and any gains or losses in the individual account (App. 7a-8a). See generally LaRue v. DeWolff, Boberg Assocs., 552 U.S. 248, 262 (2008)). The primary purpose of the Plan was to allow Motorola employees to save for retirement (App. 49a-50a, 56a).
Telsim Mobil Telekomunikasyon Hizmetleri A.S.
The Court of Appeals correctly found that Koenemann was a Plan fiduciary (App. 25a).
After discovery, both Plaintiffs and Defendants moved for summary judgment. The summary judgment record established that Koenemann had full knowledge of what discovery in this case termed "the Telsim Problem" (App. 112a). In addition to documentary "red flags" showing the risks of extending vendor financing to Telsim ( e.g., App. 115a), Koenemann also knew about the problems with the Telsim financing in his capacity as Chief Financial Officer and the record shows that he discussed the Motorola to other Motorola executives and with Motorola's external auditor, KPMG (App. 5a-6a, 26a, 55a). The evidence on summary judgment also established that Motorola and Koenemann repeatedly assured the Plan's participants (through proxy statements which discussed Motorola's business and were sent to all Plan participants and SEC filings which were incorporated by reference into fiduciary communications) that the indebtedness to Motorola was under control, that Motorola was not, in effect, throwing good money after bad by repeatedly extending new financings after initial defaults and that Telsim's obligations to Motorola would not have a material adverse effect on Motorola's financial condition.
The record established that proxy statements had to be transmitted to each holder of Motorola common stock, including Plan participants who held Motorola stock in the form of units of the Motorola Stock Fund in their Plan accounts. App. 159a. ("Before each stockholder's meeting, you will receive proxy instructions. You can direct the voting of any Motorola common stock credited to your account in the 401(k) Profit Sharing Plan as of the record date for a vote by stockholders. The Trustee will cast your votes according to your instructions on the form. How you vote your Motorola stock is entirely confidential.")
Motorola proxy statements were filed with the SEC on Schedule 14A, and these and other SEC filings discussing Motorola's business were incorporated by reference into a rewards@motorola prospectus sent to the Plan's participants. The prospectus informed participants that "[t]he documents incorporated by reference in Item 3 of Part 11 of the [Form S-8] registration statement are also incorporated by reference into this document and the prospectus under Section 10(a) of the Securities Act of 1933 of which this document is a part." App. 161a. Participants were advised to consult the prospectus for additional information about the Motorola Stock Fund. App. 156a.
Motorola's dealings with Telsim were disastrous. When the severity of the problem was first suggested publicly on April 6, 2001, the market price of Motorola common stock declined 23% in one day. (App. 2a, 7a) One author of a bond newsletter questioned whether Motorola could survive the Telsim-related losses (App. 122a-123a). "We're beginning to think the unthinkable about Motorola. . . . Motorola's liquidity has rapidly moved into crisis mode." (App. 122a-123a). Bloomberg's News April 6, 2001 article, entitled "Rating Cut May Leave Motorola Gasping Like Xerox", emphasized what Motorola had previously concealed: that one highly-disreputable customer in Turkey (Telsim) made up almost of all of Motorola's vendor financing loans, and that the Telsim debt had been "buried" in Motorola's proxy statement (App. 122a-123a).
Both the district court and Court of Appeals found that the market's reaction to the Telsim Problem proved the materiality of that information (App. 38a-39a).
To say that Motorola's April 2, 2001 proxy statement "buried" the fact that Telsim owed Motorola over $1 billion dollars and was unlikely to pay is an understatement. The proxy statement (App. 144a) stated only that Motorola's business required it to offer vendor financing to many customers, and that "[a]s of December 31, 2000, approximately $1.7 billion of the $2.8 billion in gross long-term finance receivables related to one customer in Turkey" (App. 144a). Telsim was not identified by name and, more importantly, there was no indication of Telsim's prior defaults and other facts, including those described in the document entitled "Telsim Problem Areas" (App. 144a), which made it highly unlikely that Motorola's loans to Telsim would be repaid. Both the district court and the Court of Appeals found, correctly (App. 5a-6a; App. 53a-56a), that the proxy statement provided only a generic description of Motorola's vendor financing problem and no hint that Motorola's exposure was in excess of one billion dollars to one borrower (Telsim), and that the borrower was, in effect, a criminal enterprise operated by the Uzan Family which had no intention, let alone capacity, to repay the loans.
Motorola's proxy statement "disclosures" concerning Telism appear at App. 145a-146a and Koenemann's signatures to these disclosures appear at App. 148a.
For a further discussion of the Uzan Family's character, and its misdeeds in connection with Motorola, see Motorola Credit Corp. v. Uzan, 274 F. Supp. 2d 481, 537-67 (S.D.N.Y. 2003) (findings of fact 193-365 detail the transactions between Motorola Credit Corp and the Uzan Family including "[t]he filing of false criminal charges is a tactic that the Uzans have used before to extort demands in their business dealings").
The Telsim debacle was so serious that the Audit Committee of Motorola's Board of Directors engaged law firm Arnold Porter in 2001 because of the Audit Committee's concerns about the handling of the Telsim relationship. (App. 96a-97a) In a September 17, 2001 memorandum, Arnold Porter concluded that "Motorola's vendor financing [had] become far more ambitious and complex" within the prior five years, that, as a result, "Motorola's policies and procedures appear largely inadequate for the current level of financing" and that "Motorola has clearly outgrown them." (App. 101a) Arnold Porter concluded that safeguards and internal controls for avoiding huge losses in Motorola's vendor financing program were wholly ignored or violated and that, among other things:
1. The Telsim loans were made at a time when Motorola was under intense pressure to perform. Telsim was keenly aware of this and successfully manipulated Motorolans who were not equal to the challenge. (App. 104a)
2. Motorola's policies and procedures appear largely inadequate, for the current level of financing. (App. 101a)
3. The authority to approve loans and commit the company appears to exceed reasonable limits. In some cases limits did not exist at all. (App. 102a)
4. Even when procedures existed and were adequate, they were not always followed. (App. 102a)
5. Important documentation and record retention requirements are not always followed. Key documents were missing. (App. 102a)
6. Employees were often inadequate to the tasks required of them. (App. 102a)
7. Motorola's vendor financing process appears to create the potential for conflicts of interest between the personal advancement of Motorola employees and Motorola's larger business interests. (App. 103a)
8. Individual business units or sales personnel have an incentive to continue to ship product in an effort to make their own numbers look good, notwithstanding the negative impact on the company as a whole. (App. 103a)
9. Vendor financing at this level creates the potential for regulatory or other legal obligations that do not appear to be a matter of concern for MCC. (App. 104a)
"MCC" was Motorola's wholly-owned finance subsidiary engaged principally in financing long-term commercial receivables arising out of equipment sales made by the Company throughout the United States and internationally. (App. 52a).
10. Because MCC's loans have reached amounts that may be material for disclosure purposes, Motorola may be at risk of being sued by shareholders who might allege that the existence of vendor financing was not adequately disclosed in a press release or if repayment problems are not reported. (App. 104a)
The adequacy of Motorola's disclosures in connection with its Telsim dealings was the subject of a separate securities fraud class action which was settled for $190 million. See In re Motorola Sec. Litig., N.D. Ill. Case No. 03-cv-287. See also http://www.motorolasecuritiessettlement.com/motorola/default. htm. See also App. 2a. For reasons not relevant to this Petition neither Petitioners nor the Plan have been allowed to share in the securities fraud case's settlement fund.
11. There was ample reliable evidence of serious problems with the ethical behavior and business history of Telsim and its affiliates. This evidence was communicated to the company by its outside consultants and employees of the company. Motorola's decision-makers now claim that this information would have made a difference in their conclusions, but that no one informed them of these facts. (App. 105a-106a) (emphasis added throughout)
The September 17, 2001 Arnold Porter memoranda also concluded that there had been many internal system wide control failures and inadequacies:
At several key points, normal controls were abandoned and commitments were made without the benefit of — or over the objections of — the finance organization and the law department. . . . [T]here was little indication that the decision makers in this case made informed judgments or understood the tradeoffs that were involved in their decision making process.
(App. 105a)
Arnold Porter concluded that a number of Motorola executives with responsibility for dealings with Telsim, including Koenemann, had committed either "Acts of Commission", "Acts of Omission", or "Acted Imprudently," and that "[m]any Motorolans took specific actions regarding Telsim that turned out to be imprudent." Arnold Porter identified Koenemann, in particular, as responsible for the Telsim Problem:
Carl Koenemann: MCC [Motorola Credit Corp.] did not report to Koenemann, but he knew or was in a position to know the details of several unauthorized financing transactions. He did nothing to intervene, or protect MCC employees from pressure, even after concerns were raised by the Law Department.
(App. 113a-115a).
The district court denied Plaintiffs' motion for summary judgment and granted Defendants' motion. As relevant to this Petition, the district court concluded that in the Seventh Circuit nothing less than intent to deceive is required to establish a breach of a ERISA fiduciary's duty of loyalty.
On appeal, the Seventh Circuit affirmed the grant of summary judgment to all Defendants, including Koenemann, agreeing with the district court that in the Seventh Circuit intent to deceive is a required element of a breach of loyalty claim under ERISA. The Court of Appeals held:
A violation of ERISA's disclosure requirement, which arises under the general fiduciary duties imposed by ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1), requires evidence of either an intentionally misleading statement, or a material omission where the fiduciary's silence can be construed as misleading . . . The plaintiffs do not point to any intentionally misleading statement issued by Galvin, Koenemann, or Growney. To the extent that they argue that the defendants negligently misrepresented information about Telsim in their SEC filings, that negligence would not be enough to show a violation of ERISA's disclosure duty. See Vallone v. CNA Financial Corp., 375 F.3d 623, 642 (7th Cir. 2004) ("[W]hile there is a duty to provide accurate information under ERISA, negligence in fulfilling that duty is not actionable")
(App. 40a) (emphasis added) (certain internal citations omitted).
The Court of Appeals' conclusions as to Defendants Galvin and Growney are not relevant to this Petition; the Court of Appeals' conclusions about Defendant Koenemann are central to this Petition. The Court of Appeals correctly found, based on the summary judgment record, that Koenemann knew about Motorola's exposure to loss in connection with Telsim during 2000 and 2001 while he was the Chairperson (at times) and a member (at other times) of the Profit Sharing Committee which administered the Plan:
Defendant Koenemann, Motorola's Chief Financial Officer, discussed potential problems with Telsim with KPMG, Motorola's accounting firm, during this time. He also raised the subject with defendant Christopher Galvin, the Chairman of Motorola's Board and the Chief Executive Officer during the relevant time, and with defendant Robert Growney, a director and Motorola's Chief Operating Officer.
* * *
Koenemann . . . served on the Committee during the entire class period and became its chair at the end of 2000. He worked on the Telsim deal from 1998 forward and knew of the problems that were brewing. He discussed his concerns with Galvin, Growney, and KPMG in September 2000.
App. 5a-6a, 26a.
The Court of Appeals thus found that Koenemann knew about the Telsim Problem and signed off on deceptive representations to Plan participants regarding it, but concluded that he did not breach ERISA's duty of loyalty because there was no proof that he intended to deceive Plan participants. Absent the erroneously-imposed burden of having to prove that Defendant Koenemann intended to deceive the Plan's participants, Koenemann would have (and should have) been found to have breached his duty of loyalty to the Plan's participants.
REASONS FOR GRANTING THE PETITION
In the Seventh Circuit, intent to deceive is a required element of a deception claim predicated on ERISA's duty of loyalty. This rule conflicts with the law in other Circuits, is not supported by ERISA or by trust law (which informs ERISA's fiduciary duties) and is a recurring issue in ERISA litigations involving 401(k) plans. Each of these factors supports granting the Petition. A. The Seventh Circuit's Conclusion That Intent To Deceive is Required to Show A Breach of Loyalty Conflicts with the Decisions of Other Courts of Appeals
In concluding that intent to deceive is required to prove a breach of ERISA's duty of loyalty, the Seventh Circuit acknowledged that its conclusion conflicted with the rule in other Circuits. The Court of Appeals wrote:
Contrary to the plaintiffs' position ( and to the position of other circuits, e.g., Pfahler v. National Latex Prods. Co., 517 F.3d 816, 830 (6th Cir. 2007); Mathews v. Chevron Corp., 362 F.3d 1172, 1183 (9th Cir. 2004)), this court has required some deliberate misstatement before it finds a violation of the ERISA duty to disclose material information.
(App. 40a-41a) (emphasis added).
Pfahler v. National Latex Prods. Co., 517 F.3d 816, 830 (6th Cir. 2007): (`"A fiduciary breaches his duties by providing plan participants with materially misleading information,' even when he does so negligently, rather than intentionally") (quoting James v. Pirelli Armstrong Tire Corp., 305 F.3d 439, 449 (6th Cir. 2002)); Mathews v. Chevron Corp., 362 F.3d 1172, 1183 (9th Cir. 2004) ("We fail to see the logic in transplanting the element of scienter from the tort of deceit into a statutory ERISA claim with roots in the law of fiduciaries and trusts").
The Seventh Circuit correctly observed that its conclusion of law conflicted with the law in the Sixth and Ninth Circuits. The conclusion that intent to deceive is an element of a breach of loyalty claim also conflicts with the rule in the Third and Fourth Circuits. See, e.g., Harte v. Bethlehem Steel Corp., 214 F.3d 446, 452 (3d Cir.) ("administrators generally have a fiduciary duty not to misinform employees through material misrepresentations and incomplete, inconsistent or contradictory disclosures") (citations omitted, internal quotation marks omitted), cert. denied, 148 L. Ed. 2d 535, 121 S. Ct. 626 (2000); Griggs v. E.I. DuPont de Nemours Co., 237 F.3d 371, 380 (4th Cir. 2001)("a fiduciary's responsibility when communicating with the beneficiary encompasses more than merely a duty to refrain from intentionally misleading a beneficiary"); Adams v. Brink's Co., 261 Fed. Appx. 583, 595 (4th Cir. 2008) ("The lack of intent to deceive does not insulate the Administrative Committee from liability based on the misrepresentation to Addington.").
In addition to Pfahler, see also Krohn v. Huron Mem'l Hosp., 173 F.3d 542, 547 (6th Cir. 1999) ("a fiduciary breaches its duties by materially misleading plan participants, regardless of whether the fiduciary's statements or omissions were made negligently or intentionally").
B. Varity Corp. v. Howe and ERISA'S Duty Of Disclosure 29 U.S.C. § 1104(a)(1) states ERISA's duty of loyalty, providing in relevant part:
[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and —
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries. . . .
This Court's most extensive discussion of the duty of loyalty appears in Varity Corp. v. Howe, 516 U.S. 489 (1996). In Varity, an employer sought by trickery to induce its employees to transfer to a different (and likely to fail) employer to avoid having to pay certain employee benefits:
To persuade the employees of the failing divisions to accept the change of employer and benefit plan, Varity called them together at a special meeting and talked to them about Massey Combines future business outlook, its likely financial viability, and the security of their employee benefits. The thrust of Varity's remarks . . . was that the employees' benefits would remain secure if they voluntarily transferred to Massey Combines. As Varity knew, however, the reality was very different. Indeed, the District Court found that Massey Combines was insolvent from the day of its creation and that it hid a $46 million negative net worth by overvaluing its assets and underestimating its liabilities.
After the presentation, about 1,500 Massey-Ferguson employees accepted Varity's assurances and voluntarily agreed to the transfer. . . . Masser Combines ended its first year with a loss of $88 million, and ended its second year in a receivership, under which its employees lost their nonpension benefits.
* * *
After trial, the District Court found, among other things, that Varity and Massey-Ferguson, acting as ERISA fiduciaries, had harmed the plan's beneficiaries through deliberate deception.
Varity, 516 U.S. at 493-94 (emphasis added).
This Court affirmed the district court's post-trial judgment that such "deliberate deception" by a plan fiduciary "to save the employer money at the beneficiaries' expense" breached the duty of loyalty:
ERISA requires a "fiduciary" to "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries." ERISA § 404(a). To participate knowingly and significantly in deceiving a plan's beneficiaries in order to save the employer money at the beneficiaries' expense is not to act "solely in the interest of the participants and beneficiaries." As other courts have held, "lying is inconsistent with the duty of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA" Peoria Union Stock Yards Co. v. Penn Mut. Life Ins. Co., 698 F.2d 320, 326 (C.A.7 1983). See also Central States, 472 U.S. at 570-571 . . . (ERISA fiduciary duty includes common-law duty of loyalty); Bogert Bogert, Law of Trusts and Trustees § 543, at 218-219 (duty of loyalty requires trustee to deal fairly and honestly with beneficiaries); 2A Scott Fratcher, Law of Trusts § 170, pp. 311-312 (same); Restatement (Second) of Trusts § 170 (same).
Varity, 516 U.S. at 506.
See also Pegram v. Herdrich, 530 U.S. 211, 223-225 (2000) ("In general terms, fiduciary responsibility under ERISA is simply stated. The statute provides that fiduciaries shall discharge their duties with respect to a plan `solely in the interest of the participants and beneficiaries . . . [and] for the exclusive purpose of [] providing benefits to participants and their beneficiaries. . .' . . . Thus, the common law (understood as including what were once the distinct rules of equity) charges fiduciaries with a duty of loyalty to guarantee beneficiaries' interests: The most fundamental duty owed by the trustee to the beneficiaries of the trust is the duty of loyalty. . . . It is the duty of a trustee to administer the trust solely in the interest of the beneficiaries'") (citations omitted); Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 143 n. 10 (1985) (generally discussing ERISA's duties of loyalty and care).
Here, the record shows that a fiduciary, Koenemann, knowingly deceived Plan participants about an important aspect of the Plan's benefits, namely the value of the Motorola stock which was offered to participants as a Plan investment option. The record here does not show what Koenemann's intent was when he concealed from participants the Telsim Problem. The record does not show whether he intended to personally benefit, or for his employer, Motorola, to financially benefit, from a deception that effectively maintained Motorola stock as Plan investment option. The question presented by this Petition is whether such a showing of intent — what the Court of Appeals termed an "intentionally misleading statement" or "some deliberate misstatement" (App. 40a-41a) — is required for deception by a fiduciary to constitute a breach of the duty of loyalty.
In a defined contribution plan, there is no distinction between "plan benefits" and the financial status of plan investments because "in a defined-contribution plan [benefits] are the value of the retirement account when the employee retires, and a breach of fiduciary duty that diminishes that value gives rise to a claim for benefits measured by the difference between what the retirement account was worth when the employee retired and cashed it out and what it would have been worth then had it not been for the breach of fiduciary duty." Harzewski v. Guidant Corp., 489 F.3d 799, 807 (7th Cir. 2007). See also LaRue, 552 U.S. at 255-56.
In other words, if a participant in a 401(k) plan has his entire account balance invested in employer stock, the employer stock is the plan benefit, and a deception about the employer stock is a deception about plan benefit.
Retirement plan literature establishes the many benefits to a corporation such as Motorola in having its stock as an investment option in a 401(k) plan which it sponsors, including keeping a large block of stock in presumably friendly hands in case of an unwanted takeover. E.g., Susan J. Stabile, Freedom To Choose Unwisely: Congress' Misguided Decision To Leave 401(k) Plan Participants to Their Own Devices, 11 Cornell J.L. Pub. Pol'y 361, 382 n. 11 (2002) ("an employer's desire to put company shares in friendly hands may lead to attempts at influencing participants to invest more of their funds in employer securities. . . . It is difficult to find any other source for an employer's desire to manipulate choices. Apart from a desire to encourage participants to hold more employer securities, the employer is likely to be agnostic regarding participant investment choices"); Report of the Department of the Treasury on Employer Stock in 401(k) Plans, February 28, 2002, available at http://benefitslink.om/articles/treasurycaps.html ("Companies may benefit from tax and cash flow advantages. Many companies believe that giving employees company stock builds their employees' loyalty to the company and gives them a greater economic incentive to work to promote the company's long-term economic prospects").
In Varity this Court did not have to decide and did not decide whether intent to deceive is necessary to prove a breach of loyalty, as a number of courts have recognized. See, e.g., In re Tyco Int'l, 02-1335-PB, 2004 U.S. Dist. LEXIS 24272, at *29 (D.N.H. Dec. 2, 2004) ("Although the Supreme Court has determined that a fiduciary can be held liable if it intentionally makes material misstatements to participants in an effort to profit at their expense, see Varity Corp., 516 U.S. at 502, neither the Supreme Court nor the First Circuit has yet determined whether a breach of fiduciary duty claim can be premised on negligent misrepresentations"); Adamczyk v. Lever Bros. Co., 991 F. Supp. 931, 938 (N.D. Ill. 1997) ( "Varity concerned intentional misrepresentation; the Supreme Court was not required to decide whether negligent misrepresentations fell within the scope of the statute"). As discussed below, several Courts of Appeals have concluded that a knowing deception of plan participants by a plan fiduciary is enough, and that there is no need to prove the fiduciary's subjective intention to deceive or that the fiduciary was lying in order to trick the beneficiaries out of benefits or to save the plan sponsor money. Petitioners believe that these other Circuit rulings are correct and that the contrary conclusion reached by the Seventh Circuit (and apparently only by that Court of Appeals) is not. C. The Seventh Circuit's Conclusion Has No Support In: ERISA And Conflicts With Trust Law, Which Informs ERISA's Fiduciary Duties 29 U.S.C. § 1104(a)(l)(A)(i) provides that "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries." There is no reference in the statute to a fiduciary's intent, and the Court of Appeals did not cite to any statutory language suggesting otherwise. There is, indeed, nothing in ERISA which limits breaches of the duty of loyalty to intentional deception. As Judge Ripple of the Seventh Circuit noted in dissent in another case, "[t]he courts that have considered the question with any specificity have rejected the invitation to graft onto ERISA's fiduciary duty provision fraud's scienter requirement." Beach v. Commonwealth Edison Co., 382 F.3d 656, 669 (7th Cir. 2004) (Ripple, J. dissenting) (internal citations omitted). Further, in Rogers v. Baxter Int'l, Inc., 521 F.3d 702 (7th Cir. 2008), even the Seventh Circuit had emphasized the distinction between the standards applicable in securities fraud cases brought under the Private Securities Litigation Reform Act of 1995 and ERISA actions. The Seventh Circuit noted in Rogers that to prevail in an ERISA case, all the participants must show is a breach of duty owed as fiduciaries, as distinguished from the intent to deceive investors required to prevail in a PSLRA case. See Rogers, 521 F.3d at 705.
The district court and Court of Appeals correctly found that the facts about the Telsim Problem were non-public until revealed by news sources on April 6, 2001 (App. 7a, 39a; App. 53a-56a). Varity, by contrast, involved affirmative misrepresentations of fact about the financial health of the proposed alternate employer. The distinction between concealed facts and affirmatively misrepresented facts, however, has no bearing on this Petition. First, this Petition seeks review of an entirely different question relating to the required state of mind of the fiduciary. Second, there is no meaningful distinction between representing, as Motorola's proxy statement did, that $1.7 billion was owed by one highly despicable customer in Turkey (while simultaneously concealing the true state of affairs) and an affirmative misrepresentation to the effect that "the loans will be repaid". See e.g., Binder v. Gillespie, 184 F.3d 1059, 1069 (9th Cir. 1999) ("In an omissions case, the plaintiff does not know the truth because the defendant said nothing; in a misrepresentations case the plaintiff does not know the truth because the defendant lied"); Tricontinental Indus. Ltd. v. Anixter, 215 F.Supp.2d 942, 948 (N.D. Ill. 2002) ("Rule 10b-5 prohibits more than statements that are facially false; it prohibits the omission of a material fact that would render statements made misleading") (citation omitted); Charles Hughes Co. v. Securities Exch. Comm'n., 139 F.2d 434, 437 (2d Cir. 1943) ("The law of fraud knows no difference between express representation on the one hand and implied misrepresentation or concealment on the other").
The "common law of trusts, which informs [the Court's] interpretation of ERISA's fiduciary duties" ( LaRue, 552 U.S. at 253, citing Varity, 516 U.S. at 496-97) also provides no support for any need to prove intent. Under the common law of trusts, "[a] breach of trust is a violation by the trustee of any duty which as trustee he owes to the beneficiary." Restatement (Second) of Trusts § 201. Comment a to Section 201 clarifies that intent to deceive is not a prerequisite to a breach of a common law trustee's breach of fiduciary duty: "Ordinarily a trustee does not commit a breach of trust if he does not intentionally or negligently do what he ought not to do or fail to do what he ought to do. In other words, he does not commit a breach of trust unless he is personally at fault. He may, however, commit a breach of trust where he is not personally at fault, as where he acts under a mistake of law or fact, as is stated in the comments which follow." Id. cmt. a; accord id., cmt c. ("in instances of "Mistake of fact or law in the exercise of powers or performance of duties" a trustee "is liable for breach of trust if he is negligent, but not if he acts with proper care and caution"); Restatement (Second) of Trusts § 205, illus. 1-4. Indeed, even to the extent that trust law would allow a trust instrument to contain provisions exonerating trustees from malfeasance, such as Restatement (Second) of Trusts § 222, ERISA is different and renders any such exculpatory provision void. 29 U.S.C. § 1110(a). See also Varity, 516 U.S. at 497 (trust law is only a starting point, and the language of ERISA may require departing from common law trust requirements).
In short, neither the statute nor trust law supports imposition of an intent to deceive requirement on ERISA's duty to act at relying the intents of the participants.
The Seventh Circuit's rule requiring intent to deceive is also inconsistent with other precedent holding that good faith is not a defense to a breach of loyalty claim. As the Seventh Circuit itself concluded in Leigh v. Engle, "issues of credibility and subjective good faith simply do not come into play. Good faith is not a defense to an ERISA fiduciary's breach of the duty of loyalty." Leigh v. Engle, 727 F.2d 113, 124 (7th Cir. 1984) (citing Donovan v. Bierwirth, 538 F. Supp. 463, 470 (E.D.N.Y. 1981), aff'd as modified, 680 F.2d 263 (2d Cir.), cert. denied, 459 U.S. 1069, 103 S. Ct. 488, 74 L. Ed. 2d 631 (1982)). Other circuits have reached the same conclusion. E.g., Difelice v. U.S. Airways, Inc., 497 F,3d 410, 418 (4th Cir. 2007)("Good faith does not provide a defense to a claim of a breach of these fiduciary duties"); Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983) ("a pure heart and an empty head are not enough [to satisfy ERISA's fiduciary duties]").
It is difficult if not impossible to square a rule whereby fiduciaries may breach their duty of loyalty even if they act in good faith with a rule that fiduciaries may not be liable unless they intend to deceive participants.
D. The Issue Of Law Raised By This Petition Is A Recurring Issue In ERISA Litigations Involving 401(k) Plans
The split in the Circuits regarding whether intent to deceive is required in ERISA cases alleging breaches of the duty of loyalty is not merely an academic concern. In recent years, there has been a proliferation of cases alleging breaches of the duty of loyalty (and often also the duty of prudence) as 401(k) plan participants seek to recoup some of their lost retirement savings resulting from a collapse in the value of employer stock funds which are offered as investment options in many 401(k) plans. See, e.g., Fromme, Unreliable Securities for Retirement Income Security: Certifying the ERISA Stock-Drop Class, 64 Vand. L. Rev. 301, 303 (January 2011); Crimmins, Worker, Retiree Class Actions Surge: Chi, Daily L. Bull., Jan. 29, 2009, at 1, available at 2009 WLNR 22565321 ("Class-action litigation over workplace retirement plans surged in 2008 both in filing and settlements as workers struggled to recoup 401(k) losses").
According to legal and financial analysts, ERISA `stock-drop' litigation is steadily on the rise. See Jerry Crimmins, Worker, Retiree Class Actions Surge: Report, Chi. Daily L. Bull., Jan. 29, 2009, at 1, available at 2009 WLNR 22565321 ("Class-action litigation over workplace retirement plans surged in 2008 both in filings and settlements as workers struggled to recoup 401(k) losses"). Many legal scholars have also predicted that the Supreme Court's 2008 decision in LaRue v. DeWolf [ sic] is likely to increase the number of stock-drop lawsuits brought as class actions. See, e.g., Meredith Z. Maresca, ERISA Practitioner Says LaRue Will Give Rise to Misrepresentation Claims in Lower Courts, 35 Pens. Ben. Daily (BNA) 2305 (Oct. 7, 2008) (noting likely "surge of litigation in lower federal courts" after LaRue); More Participant Claims Expected in Wake of LaRue Rule, Managing 401(K) Plans, Apr. 2008 (explaining that the LaRue decision expands the scope of participants who may bring suit under ERISA section 502(a)(2))").
This Court's guidance is needed to assure that the correct rule is uniformly applied in the many breach of loyalty cases involving employer stock funds pending throughout the country.
CONCLUSION
The Court should grant petition for writ of certiorari and reverse the decision of the Seventh Circuit Court of Appeals to the extent it concluded that intent to deceive is required to prove a breach of ERISA's duty of loyalty.