DIANE BURKE, et al., as participants in and on behalf of the Boeing Voluntary Investment Plan, and on behalf of a class of all others who are similarly situated, Plaintiffs-Appellants, v. THE BOEING COMPANY, et al., Defendants-Appellees.
No. 20-3389
United States Court of Appeals For the Seventh Circuit
ARGUED MAY 21, 2021 — DECIDED AUGUST 1, 2022
Before SYKES, Chief Judge, and RIPPLE and HAMILTON, Circuit Judges.
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:19-cv-02203 — Virginia M. Kendall, Judge.
For decades, employees unhappy about dropping stock values in employee stock ownership plans have tried to use ERISA to obtain relief from the ERISA fiduciaries and their employers. At the foundation of the early efforts was a theory that when an employer‘s business ran into serious trouble that would cause the stock value to drop, company insiders with fiduciary duties under ERISA were obliged to use inside information about those troubles for the benefit of employee-shareholders at the (implicit) expense of other shareholders. That theory would conflict directly with federal securities laws. The Supreme Court made clear in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), that ERISA does not require fiduciaries to violate securities laws on insider trading.
In trying to reconcile ERISA and federal securities laws, however, Dudenhoeffer left open at least a theoretical possibility for employees to seek relief under ERISA on a theory that plan fiduciaries had a duty to disclose bad news to everyone. Yet as part of the balance between ERISA and securities law, Dudenhoeffer imposed demanding pleading standards for such claims, requiring plaintiffs to plausibly allege an alternative action the defendant could have taken that would have been consistent with securities law and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the employee stock ownership fund than to help it. 573 U.S. at 428. Since Dudenhoeffer, plaintiffs in
This court and others have long responded to ERISA fiduciaries’ sometimes-conflicting interests by suggesting that the conflicted fiduciaries step aside in favor of new, independent fiduciaries who can focus exclusively on the interests of ERISA plan participants and beneficiaries. E.g., Leigh v. Engle, 727 F.2d 113, 125 (7th Cir. 1984); Donovan v. Bierwirth, 680 F.2d 263, 271−72 (2d Cir. 1982).
Many years ago, The Boeing Company adopted that approach for its employee stock ownership plan, also known as an “ESOP.” Boeing plan fiduciaries delegated to an independent outside fiduciary the selection and management of investment options for the ESOP. The central question here is whether the delegation of those investment responsibilities protects the company and company insiders from liability for the plan‘s continued offering of Boeing stock as an investment option for employees before and during a time when the value of Boeing stock dropped significantly. The drop occurred after two fatal crashes of new Boeing 737 MAX airliners led to a worldwide grounding of those planes and a halt to production. We agree with the district court that the delegation of investment decisions to an independent fiduciary means that neither Boeing nor the other defendants acted in an ERISA fiduciary capacity in connection with the continued investments in Boeing stock. We affirm the district court‘s dismissal of the action.
A. The Boeing Company‘s Employee Stock Ownership Plan
The Boeing Company designs and manufactures commercial jets and defense, space, and security systems. Plaintiffs are Boeing employees who participated in the Boeing Voluntary Investment Plan (the “Plan“), a 401(k) plan that Boeing sponsors for eligible employees.
The Plan is an employee benefit plan and employee pension benefit plan covered by ERISA. See
B. The Third-Party Delegation
In December 2007, the Investment Committee began contracting with an outside trust company to manage the Plan‘s investments in Boeing stock. During the Class Period for this case, the outside fiduciary was Newport Trust Company. The operative agreement between the Investment Committee and Newport Trust provided:
As investment manager, [Newport Trust] will at all times have the exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the [Boeing] Stock Fund is prudent under ERISA (either with respect to permitting new investments in the [Boeing] Stock Fund, continuing to hold [Boeing] Stock, or both).
The agreement further provided:
In exercising its authority and responsibility [as investment manager], [Newport Trust has] the authority to exercise any and all of the following powers, and to instruct the trustee of the Plan accordingly:
- to suspend or prohibit the investment of new participant or employer contributions in the [Boeing] Stock Fund;
- to suspend or prohibit the transfer of participant account balances into the [Boeing] Stock Fund;
- in connection with the determination that holding [Boeing] Stock is no longer prudent under ERISA, to liquidate the [Boeing] Stock Fund and to sell or otherwise dispose of all of the [Boeing] Stock held in the [Boeing] Stock Fund ….
authorized Newport with sole responsibility for deciding whether to restrict investment in the Boeing Stock Fund, or to sell or otherwise dispose of all or any portion of the stock held in the Boeing Stock Fund. In the event Newport determined to sell or dispose of stock in the Boeing Stock Fund, Newport would designate an alternative investment fund under the Plan for the temporary investment of any proceeds from the sale or other disposition of the Company‘s common stock.
Newport is not named as a defendant in this case.
C. Plaintiffs’ Allegations
In October 2018, Boeing had for at least a year been selling the new 737 MAX version of its best-selling 737 series of airliners. On October 29, 2018, a Lion Air 737 MAX airliner crashed into the Java Sea, killing everyone aboard. Plaintiffs here allege that soon after the crash, and especially once the flight data recorder was retrieved, defendants knew or should have known that all 737 MAX planes were unsafe to fly because of known problems with a new automated flight control system that Boeing had added to the 737 MAX. On March 10, 2019, another 737 MAX crashed in Ethiopia, again killing everyone aboard. Plaintiffs here allege that the second crash also resulted from the known problems with the automated flight control system. The 737 MAX fleet was soon grounded worldwide. On December 16, 2019—the close of the Class Period—
The human, financial, and legal consequences of the 737 MAX crashes have been huge. This lawsuit presents a small and relatively narrow set of questions about whether Boeing employees are entitled to relief from some of the financial consequences of the 737 MAX disasters.
Plaintiffs allege here that defendants breached several duties imposed on plan fiduciaries by ERISA: (i) the duties of prudence and loyalty under
D. Proceedings Before the District Court
Plaintiffs filed this putative class action in March 2019, shortly after the second 737 MAX crash. The operative second amended complaint alleges that throughout the Class Period, from November 7, 2018 to December 16, 2019, Boeing‘s continuous concealment of material facts relating to the 737 MAX jets caused the price of Boeing stock to be artificially inflated. By November 7, 2018, plaintiffs allege, defendants knew or should have known that public disclosure of these safety issues was inevitable and should have taken steps to disclose them to the public immediately.
In Count One, plaintiffs allege that the individual defendants, the Plans Committee, and the Investment Committee, as fiduciaries of the Boeing Stock Fund, breached the duty of
In Count Two, plaintiffs allege that defendants breached the duty to monitor investments under
The district court granted defendants’ motion to dismiss under
The district court also held that plaintiffs failed to state a claim for failure to monitor investments insofar as that claim was subject to the same pleading standard as the imprudence
II. Standard of Review
We review de novo the district court‘s dismissal for failure to state a claim, and we may affirm the district court‘s decision on any ground for dismissal contained in the record, at least as long as the losing parties had a fair opportunity to be heard on it. E.g., Larson v. United Healthcare Ins. Co., 723 F.3d 905, 910 (7th Cir. 2013); see also Ewell v. Toney, 853 F.3d 911, 919 (7th Cir. 2017); Dibble v. Quinn, 793 F.3d 803, 807 (7th Cir. 2015). We construe the complaint in the light most favorable to plaintiffs, accepting all well-pleaded facts as true and drawing reasonable inferences in plaintiffs’ favor. Bator v. District Council 4, 972 F.3d 924, 928 (7th Cir. 2020).
III. Analysis
A. Defendants’ Fiduciary Obligations Under the Plan
ERISA imposes on plan fiduciaries duties of prudence and loyalty. Plan fiduciaries have a duty to manage plan assets under a “prudent man standard of care,” that is, “solely in the interest of the participants and beneficiaries,” and “with the care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would
The core of the case is plaintiffs’ imprudence and disloyalty claims, which revolve around a theory of failure to disclose corrective information. We focus on the duties of prudence and loyalty and the tensions that employee stock ownership plans create at the intersection of ERISA, corporation law, and securities law. See generally Dudenhoeffer, 573 U.S. at 427−30 (explaining reasons for demanding pleading standard in ESOP stock-drop cases); Halperin v. Richards, 7 F.4th 534, 542 (7th Cir. 2021) (addressing tension between fiduciary duties under ERISA and state corporation law).
1. The Duty of Prudence
In Dudenhoeffer, the Supreme Court adopted a demanding pleading standard for duty of prudence claims involving fiduciaries for benefit plans invested in employer stock. 573 U.S. 409. A plaintiff must “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” Id. at 428. The Court explained that this standard reflected the competing congressional purposes of ERISA: to encourage the creation of employee stock ownership plans while ensuring that plan
To guide lower courts in applying the “more harm than good” standard, the Court emphasized three principles. 573 U.S. at 428. First, the duty of prudence does not demand that a fiduciary break the law: the duty of prudence “cannot require an ESOP fiduciary to perform an action—such as divesting the fund‘s holdings of the employer‘s stock on the basis of inside information—that would violate the securities laws.” Id. Second, where a complaint faults fiduciaries for failure to act on the basis of inside information or to disclose inside information to the public, courts should consider whether ERISA-based obligations implicating insider information “could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws.” Id. at 429. Third, courts should consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant‘s position could not have concluded that halting investment in the employer‘s stock or publicly disclosing damaging insider information would spook the market, causing the stock price to drop. Id. at 429–30.
2. The Duty of Loyalty
ERISA‘s more general duty of loyalty requires that plan fiduciaries perform their duties with respect to a plan solely in the interest of plan participants and beneficiaries.
B. Effects of the Delegations on Defendants’ Duties to the Plan
Before we wade more deeply into the duties owed by plan fiduciaries to plan participants, we must address a threshold question: whether any defendant was acting in a fiduciary capacity at the time he, she, or it took the actions that are the subject of the complaint. Pegram v. Herdrich, 530 U.S. 211, 226 (2000); Leimkuehler v. American United Life Ins. Co., 713 F.3d 905, 913 (7th Cir. 2013).
ERISA provides in relevant part that a person or entity is an ERISA fiduciary only
to the extent that he: (i) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
Fiduciary status thus depends not on formal titles but on “functional terms of control and authority over the plan.” Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993). To that effect, two types of fiduciaries exist under ERISA: “named” fiduciaries and “functional” fiduciaries. See id. at 251. Named fiduciaries refers to persons who are “named in the plan instrument, or who, pursuant to a procedure specified in the plan” are given express “authority to control and manage the operation … of the plan.”
Here, plaintiffs allege that defendants are or were either named or functional fiduciaries under ERISA and therefore owed “strict fiduciary duties of loyalty and prudence to the Plan and the participants in and beneficiaries of the Plan.” We divide our discussion into four principal parts: (1) the role of defendant Plans Committee; (2) the role of defendant Boeing; (3) defendant Investment Committee‘s delegation to Newport of fiduciary authority over the Boeing Stock Fund; and (4) plaintiffs’ theory that the Investment Committee retained
1. The Plans Committee
Plaintiffs contend that defendant Plans Committee was identified as the Plan Administrator in the Summary Plan Description, and that the “Plan Administrator” was identified in the Plan document as the Plan‘s named fiduciary under
As the district court correctly found, the Plans Committee had no fiduciary responsibility over the investment choices of the Boeing Stock Fund. As the Plan Administrator under
As the Plan document states, the Plans Committee‘s role as Plan Administrator did not vest it with any responsibility, authority, or discretion to make investment decisions with
2. The Claims Against The Boeing Company
Plaintiffs argue that the district court erred in concluding that the remaining defendants—Boeing itself and the Investment Committee—were not fiduciaries in any relevant capacity because the Investment Committee had previously delegated to Newport its fiduciary duties over the investment choices of the Boeing Stock Fund. We first address the claims against Boeing and then those against the Investment Committee and its members.
There were two steps to the key delegation of responsibility here to Newport, the third party that plaintiffs have not sued, for the Plan‘s investments and the choices available to plan participants. The first step occurred when The Boeing Company, as plan sponsor, delegated to the Investment Committee its authority to invest, reinvest, and manage assets of all Boeing employee benefit plans, and to select and monitor investment options for the Plan. Under the Independent
We see no legal problem with that first delegation of investment responsibilities from Boeing as plan sponsor to the Investment Committee, giving the committee the authority to manage assets of all Boeing employee benefit plans, and to select and monitor investment options for the Plan. That first delegation was subject, of course, to duties of prudence and loyalty on the part of Boeing. A plan sponsor could not delegate its duties to people or entities if it had reason to doubt their ability to carry out their duties competently or honestly. But there is no plausible claim here that the first delegation violated either of those duties.
Contrary to plaintiffs’ theories here, the mere exercise of some authority over Boeing employee benefit plans—here Boeing‘s retention of administrative corporate compliance duties with respect to Boeing stock—did not mean that Boeing was exercising fiduciary authority over the investment choices and holdings of the Boeing Stock Fund. Those powers and duties were clearly delegated to the Investment Committee. Boeing, like the Plans Committee, lacked
3. The Investment Committee‘s Delegation
The central issues in this case concern the second delegation at issue here: the Investment Committee‘s decision to delegate to an outside third party responsibility for choosing and managing the investments of the Boeing Stock Fund. In determining that the Investment Committee lacked fiduciary authority with respect to the investments of the Boeing Stock Fund, the district court relied on language in the Independent Fiduciary Agreement delegating to Newport “exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the [Boeing] Stock Fund is prudent under ERISA.” Burke, 500 F. Supp. 3d at 725. The district court further noted that Newport, as the fiduciary responsible for the investments of the Boeing Stock Fund, was required to “communicate with participants concerning their investment in the Boeing Stock Fund at such times as Newport reasonably determined to be necessary under ERISA or desirable in the discharge of Newport‘s duties and responsibilities under the Independent Fiduciary Agreement.” Id. (cleaned up).
Plaintiffs argue that the Independent Fiduciary Agreement was much more limited than the district court thought.
The Independent Fiduciary Agreement clearly delegated to Newport the decisions that are usually the focus of ESOP stock-drop cases: the decisions to allow the Plan and employees to continue to hold employer stock, and the decision to allow employees to continue making new investments in employer stock. In making those decisions, Newport was not a Boeing insider. It was making decisions like any outside investor, albeit one holding a massive, $11 billion stake in the company, on the basis of public information about the company and its prospects. As noted, a person is an ERISA fiduciary “only to the extent” that she acts in such a capacity in relation to the plan. Pegram, 530 U.S. at 225–26, quoting
The delegation to Newport anticipated exactly this sort of case, in which Boeing insiders would be accused of facing conflicting fiduciary loyalties. The delegation was designed to remove the dilemma that plaintiffs’ theory would force upon corporate insiders who exercise fiduciary responsibilities over ERISA plans invested in the employer‘s stock. We see no legal barrier to such a delegation, and decades of ESOP stock-drop litigation have provided powerful reasons for employers and fiduciaries for ESOPs to take this step.2
Newport retained “exclusive fiduciary authority and responsibility, in its sole discretion” (i) to restrict new investments into the Boeing Stock Fund; (ii) to prohibit transfers into and out of the Boeing Stock Fund; and (iii) in connection with the determination that holding Boeing Stock is no longer prudent under ERISA, to liquidate the Boeing Stock Fund and to designate an alternative temporary investment for the proceeds. Accordingly, the Investment Committee and its individual members, including defendants Dohnalek and Verbeck and the John Doe defendants, cannot be liable for breaching fiduciary duties that they simply did not have.
Plaintiffs, perhaps anticipating this result, lean more heavily on their theory that the defendants’ duty of loyalty included a non-delegable duty under ERISA (as opposed to federal securities law) to disclose non-public information to Plan participants, which after Dudenhoeffer would require full public disclosure—to all shareholders and potential investors. Defendants point out that plaintiffs’ own allegations recognize that the proposed disclosure would have caused “massive disruptions in the demand for the 737 MAX,” which plaintiffs themselves characterized as Boeing‘s “flagship” aircraft. And since the Plan held nearly $11 billion in Boeing stock in November 2018, even a modest ten percent decline would have caused a billion-dollar loss. Defendants argue that a prudent fiduciary could have readily concluded that immediate public disclosure of negative information would do more harm than good to the Boeing Stock Fund, especially in light of the multiple investigations—internal and external, foreign and domestic—that were just beginning in November 2018. See Allen v. Wells Fargo & Co., 967 F.3d 767, 773−76 (8th Cir. 2020) (affirming dismissal of claims based on theory that ERISA imposed duty to disclose adverse information about employer‘s business).
Plaintiffs have failed to identify any stand-alone fiduciary duty under ERISA to disclose non-public information about the employer‘s business to Plan participants or the general public. As we have said before, a “violation of ERISA‘s disclosure requirement, which arises under the general fiduciary duties imposed by
Further, even if the Investment Committee and its members were deemed to have been serving as
Most critically for our purposes here, we emphasized that adopting such a rule would create at least one problem: insider trading in violation of federal securities laws. 633 F.3d at 572. Federal securities law has long governed corporate insiders’ duties of disclosure of material information to investors and their duties when they trade corporate stock themselves. Securities laws try to balance several competing policies and duties, and we see no sound basis for saying that
At its core, that‘s what plaintiffs would demand of defendants. Defendants possessed material insider information, plaintiffs allege, so the
Indeed, plaintiffs go so far as to contend that corrective disclosure not only would not conflict with the federal securities laws, but that those laws actually required such immediate disclosure. While we do not express an opinion on the merits of this argument, we recognize that these plaintiffs are not alone in taking the position that the duties of prudence and loyalty require an ESOP fiduciary to publicly disclose
ESOP fiduciaries, who as Dudenhoeffer recognized are often company insiders, can find themselves in a double bind. See 573 U.S. at 423; see also Coburn v. Evercore Trust Co., N.A., 844 F.3d 965, 974 (D.C. Cir. 2016) (Rogers, J., concurring in
This double bind is precisely why the Investment Committee had a strong incentive to delegate the fiduciary power over investment decisions for the Boeing Stock Fund to an independent third-party fiduciary. By appointing Newport to manage the Boeing Stock Fund, the Investment Committee—and all other defendants, for that matter—extracted themselves from the bind. Of course, the Investment Committee did not extract itself from the bind altogether. Nor could it. Appointing fiduciaries, like the Investment Committee, have an ongoing fiduciary duty to monitor the activities of their appointees. See
Plaintiffs argue instead that defendants, as company insiders, failed to disclose to Newport inside information about safety issues with the 737 MAX, rendering Newport incapable of performing its fiduciary obligations under the Independent Fiduciary Agreement. In Howell, as noted above, we rejected plaintiffs’ argument that the duty to monitor appointees
The same logic applies here. The point of having an independent fiduciary is of course to give the fiduciary independence from the appointing fiduciaries. If the independent fiduciary relies on insider information to make investment decisions concerning the employer‘s stock, then the independent fiduciary would become mired in the very conflict of interest that she was appointed to avoid. The Second Circuit has thus explained that the duty to monitor appointees does not include a “duty to keep the plan managers apprised of material, non-public information regarding the soundness of [appointing fiduciaries’ company] as an investment.” Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016) (declining to alter this view in light of Dudenhoeffer) (citation omitted). After the Supreme Court noted in Dudenhoeffer that the SEC‘s views “may well be relevant” on an
Independent fiduciaries like Newport can serve a valuable and legitimate purpose in managing the tension between
It is not surprising that the practice by corporate insiders of delegating fiduciary duties under
“Limiting plan sponsor risk” is a practical and prudent objective for ESOP sponsors and corporate insiders. The appointment of an independent fiduciary does not completely release appointing fiduciaries of all responsibility. But where
It may be that some other source of law imposed a duty on Boeing and other defendants to come forward sooner by publicly disclosing information about the problems with the 737 MAX automated flight control system. No doubt the tort claims by the families of those who died in the second 737 MAX crash in Ethiopia contend that there were duties to prospective passengers to disclose such information earlier. We are not persuaded, however, that the combination of
The remainder of plaintiffs’ arguments against the Investment Committee‘s delegation to Newport of fiduciary authority over the Boeing Stock Fund may be dealt with briefly. Plaintiffs argue that the district court did not adequately consider their duty of loyalty claim. Plaintiffs’ allegations about the duty of loyalty add nothing to their flawed duty of prudence theory. As noted, we agree with our colleagues on the Eighth Circuit that plaintiffs cannot use the broader and more general duty of loyalty “‘to circumvent the demanding Dudenhoeffer standard’ for duty of prudence claims.” Dormani, 970 F.3d at 917, quoting Allen, 967 F.3d at 777.
The judgment of the district court is AFFIRMED.