Rogers v. Baxter International Inc.

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David E. ROGERS, et al., Plaintiffs-Appellees, v. BAXTER INTERNATIONAL INC., et al., Defendants-Appellants.

No. 06-3241.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 2, 2007. Decided April 2, 2008.

521 F.3d 702

The plaintiffs also focus on July 15 as the date Tribune began to more fully disclose the inflation, including an expected charge of $35 million. That day, the stock price dropped just 2.6 percent, from $43.12 to $42.00.

On September 10, another announcement was made, indicating there would be a total charge of up to $95 million against earnings. Three days later, Tribune stock closed at $39.72. The drop in price from July 15 to September 13 was $3.40, representing 7.9 percent of the July 15 pricе. As of November 30, however, the stock price had risen to $43.37—$0.25 above the July 15 price—even though there had been additional disclosures regarding circulation adjustments, but no additional reports of charges to income. Notably, the plaintiffs do not allege any disclosures in December 2004 that would have tied the $8.37 drop during that month to the circulation overstatements. This data refutes the plaintiffs’ allegation that the disclosures regarding the overstated circulation figures caused a 25 percent drop in the value of Tribune‘s stock.

As Judge Hart correctly observed, even if the defendants possessed the power of clairvoyance, they would have foreseen a $90-$95 million charge against earnings due to the circulation fraud, representing less than 2 percent of one year‘s revenues for Tribune. Such circumstances would not cause a reasonable fiduciary to believe that the plan‘s drafters would have intended that he cease compliance with the ESOP‘s direction to invest exclusively in Tribune securities. Accordingly, if it were necessary tо resolve this issue, we would likely find that the complaint fails to adequately allege that the defendants acted imprudently by not discontinuing the company stock fund.

In sum, the allegations are insufficient as to all three claims. The first claim was correctly dismissed because thе facts alleged do not support that the defendants should have been aware of obvious control deficiencies; thus, no duty to investigate was triggered. The second claim was also correctly dismissed because the facts alleged do not support thаt the defendants should have been aware of the circulation fraud; thus, they were not negligent in the allegedly inaccurate statements they made to plan participants. The third claim was correctly dismissed because it is premised on the first two rejected claims that the appointed fiduciaries breached their duties. Finally, we decline to discuss the plaintiffs’ argument that they be granted leave to amend their complaint because they first voiced it at oral argument.

Accordingly, the judgment of the district court in both casеs is AFFIRMED.

Thomas R. Meites (argued), Meites, Mulder, Mollica & Glink, Chicago, IL, for Plaintiff-Appellee.

Matthew R. Kipp (argued), Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Defendant-Appellant.

Elizabeth Hopkins (argued), Department of Labor, Office of the Solicitor, Washington, DC, Secretary Labor, Amicus Curiae.

Before EASTERBROOK, Chief Judge, and POSNER and RIPPLE, Circuit Judges.

EASTERBROOK, Chief Judge.

Plaintiffs are participants in the retirement plan for Baxter International‘s employees. Each particiрant exercises some control over the investments in an individual account in this defined-contribution plan, though the plan and its trustees may limit what assets an account may contain and when trading may occur. In this suit under the Employee Retirement Income Security Act, plaintiffs contend that Baxter and some ‍​​‌​​​‌‌‌​‌‌‌‌‌‌​‌‌‌‌‌​‌​​‌‌‌‌‌​​‌‌​‌​​​​​‌‌‌​​​‍of the plan‘s trusteеs have violated § 409(a), 29 U.S.C. § 1109(a), in their capacity as fiduciaries. The defendants’ failing, according to the complaint, is that they allowed participants to invest in Baxter‘s stock, despite knowing that it was overpriced in the market and hence a bad deal.

The comрlaint points to two episodes of decline in the price of Baxter‘s stock. One occurred in July 2002, when Baxter announced second-quarter results that fell short of the firm‘s projections and the price of its stock immediately fell from $43 to $32. The other occurred in July 2004, whеn Baxter announced that it would restate recent financial results to correct for a fraud at its Brazilian subsidiary; that announcement led to a drop of $1.48 a share.

Both of these episodes precipitated suits under the securities laws. With respect to the 2002 еpisode,

Asher v. Baxter International Inc., 377 F.3d 727 (7th Cir. 2004), held that the complaint could not be dismissed under the defense for forward-looking statements in the Private Securities Litigation Reform Act of 1995, see 15 U.S.C. § 78u-5(c). Since then the district court has held that none of the plaintiffs is eligible to represent a class, see

Asher v. Baxter International Inc., 505 F.3d 736 (7th Cir. 2007), so that suit is limping along on behalf of a few individual investors. With respect to the 2004 episode, a class was certified in the district court, but

Higginbotham v. Baxter International Inc., 495 F.3d 753 (7th Cir. 2007), held that plaintiffs failed to satisfy the standard that PSLRA establishes for pleading scienter. 15 U.S.C. § 78u-4(b)(2);

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). PSLRA applies, however, only to the Securities Act of 1933 and thе Securities Exchange Act of 1934. (Section § 78u-4(b)(2), for example, applies only to a “private action arising under this chapter” of Title 17—the 1934 Act.) ERISA is a different statute, in a different title of the United States Code. Plaintiffs seek to use ERISA to recover for events that as a rеsult of PSLRA could not support an action on behalf of shareholders at large.

In order to pursue a claim under § 409(a) of ERISA, the participants first need a private right of action. They invoked § 502(a)(2) of ERISA, 29 U.S.C. § 1132(a)(2), which says that suit may be brought “by the Secretary [of Labor], or by a participant, beneficiary ‍​​‌​​​‌‌‌​‌‌‌‌‌‌​‌‌‌‌‌​‌​​‌‌‌‌‌​​‌‌​‌​​​​​‌‌‌​​​‍or fiduciary for аppropriate relief under section 1109 of this title.” Relying on

Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), defendants asked the district court to dismiss the suit. Russell holds that participants in a defined-benefit plan may use § 502(a)(2) only when the loss is incurred by the plan as an entity. These participants suffered losses in their individual accounts; other participants whose аccounts did not contain Baxter‘s stock were unaffected. The district court denied the motion to dismiss,

417 F.Supp.2d 974 (N.D.Ill.2006), but certified the decision for interlocutory review under 28 U.S.C. § 1292(b), and we accepted the appeal. Proceedings were put on hold while Higginbotham was under advisement. Then, after the Supreme Court granted certiorari in a сase that presented questions about the application of Russell to defined-contribution plans, we called for supplemental briefs. Oral argument was held last fall, but we deferred action until the Supreme Court released its opinion. This appeal is at last ready for decision.

LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248, 128 S.Ct. 1020, 169 L.Ed.2d 847 (2008), holds that § 502(a)(2), and thus § 409(a), may be used by the beneficiary of a defined-contribution account that suffers a loss, even though other participants are uninjured by the acts said to constitute a breach of fiduciary duty. See also

Harzewski v. Guidant Corp., 489 F.3d 799 (7th Cir. 2007). That pretty much disposes of this appeal.

All that remains is defendants’ insistеnce that participants not be allowed to use ERISA to get around limits added to the securities laws by PSLRA. Defendants are wrong, for two reasons.

First, this is not a securities suit. It is an action against fiduciaries of a pension plan. To prevail, the participants must show that defendants breached the duties they owed as fiduciaries of pension funds, not whatever duties Baxter and its managers owed to investors at large. The sets of potentially responsible parties overlap only incidentally. The defendants in securities actions are those who made the fraudulent statements to the public or caused them to be made; the defendants in this action are those empowered to take decisions on behalf of the pension plan. Pension fiduciaries are liable, or not, depending on whаt they know and what duties they have under trust law; that Baxter may have tried to deceive investors as a whole would not translate directly to liability for trustees of Baxter‘s pension plan. Baxter itself is a defendant, and its liability in a securities action may depend on what its manаgers knew collectively, or what it is responsible for under 15 U.S.C. § 78t(a); the rules for attributing knowledge under ERISA may or may not be the same, an issue that the parties have not addressed.

Second, PSLRA does not amend or supersede ERISA. It is limited, as we have mentioned, to the securities laws. Unlеss one law expressly repeals or supersedes another, or the two create inconsistent demands, both must be enforced. See, e.g.,

Branch v. Smith, 538 U.S. 254, 273, 123 S.Ct. 1429, 155 L.Ed.2d 407 (2003);

J.E.M. Ag Supply, Inc. v. Pioneer ‍​​‌​​​‌‌‌​‌‌‌‌‌‌​‌‌‌‌‌​‌​​‌‌‌‌‌​​‌‌​‌​​​​​‌‌‌​​​‍Hi-Bred International, Inc., 534 U.S. 124, 141-44, 122 S.Ct. 593, 151 L.Ed.2d 508 (2001);

Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004). Nothing in the 1995 amendments to the securities laws either refers to ERISA or affects hоw trustees fulfil their duties under § 409(a).

All we hold today is that participants in defined-contribution plans may use § 502(a)(2), and thus § 409(a), to obtain relief if losses to an account are attributable to a pension plan fiduciary‘s breach of a duty owed to the plan. Plaintiffs will need to estаblish that defendants knew the bad news in 2002 and 2004 and that, as a result, they had a duty under ERISA (which incorporates normal rules of trust law) to prevent participants from investing retirement funds in Baxter‘s stock. One question will be whether pension fiduciaries are obliged to allow or prevent investments for blocks of weeks or months at a time (when Baxter or some other stock is “overpriced“), rather than making decisions based on long-run considerations. People who pursue a buy-and-hold strategy, one particularly appropriate for pension investments, are unaffected by the volatility in market prices that accompanies the announcement of particular pieces of good and bad news. (Although retirees who draw on their pension portfolio in the immediate wake of bad news may be injurеd, plaintiffs have not advanced any arguments directed to this subclass of all pension participants.)

Plaintiffs maintain that defendants should not have allowed investment in Baxter‘s stock at any time. That avoids the problem we have mentioned, but to recover on this theоry plaintiffs must demonstrate that Baxter‘s stock always is overpriced, and that defendants knew it. That amounts to an assertion that pension fiduciaries have a duty to outsmart the stock market, a contention with little prospect of success. See

Nelson v. Hodowal, 512 F.3d 347 (7th Cir. 2008). Anyway, if Baxter‘s stock is always priced too high, pension participants will be the winners. Plaintiffs fear a collapse tomorrow, but if professional investment managers can‘t outsmart the stock market, judges can‘t either.

This is not to say that the price of all well-followed stocks is effiсient in the sense of being right; it is only to say that investment managers who lack inside information rarely beat the market consistently. See Burton G. Malkiel & John G. Cragg, Expectations and the Structure of Share Prices (1982). Perhaps the defendants in this litigation did have inside information, but could they use it for plaintiffs’ benefit? Plaintiffs’ position seems to be that pension trustees are obligated to adopt a policy under which employees invest in a stock during periods of good news for the issuer but not during periods of bad news. The implication is that someone else (which is to say, investors at large) must bear the loss when bad news is announced, because the pension participants will have bailed out. Corporate insiders cannot trade on their own behalf using material private information, good or bad. See generally

United States v. O‘Hagan, 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997);

Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). In Harzewski we raised the question whether they may act on such information in their role as fiduciaries for pension plans.

489 F.3d at 808. That question remains unanswered but must be resolved ‍​​‌​​​‌‌‌​‌‌‌‌‌‌​‌‌‌‌‌​‌​​‌‌‌‌‌​​‌‌​‌​​​​​‌‌‌​​​‍in plaintiffs’ favor if they are to prevail.

AFFIRMED

RIPPLE, Circuit Judge, concurring in the judgment.

David E. Rogers, a participant in Baxter‘s defined-contribution retirement plan (the “Baxter Plan“), filed this class action under section 502(a)(2) of the Employee Retirement Income Security Act (“ERISA“), 29 U.S.C. § 1132(a)(2). The class alleges that the fiduciaries of the Baxter Plan violated their duties under ERISA, among other things, by selecting Baxter stock as an investment option when the fiduciaries knew or should have known that the stock‘s price was inflated. See ERISA § 409, 29 U.S.C. § 1109(a). Baxter filed a motion to dismiss, claiming that the Supreme Court‘s decision in

Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985), prevented the class from suing under ERISA § 502(a)(2). In Russell, the Court held that, in the context of a defined-benefit plan, an individual plaintiff who does not sue to recover for a breach that harmed the entire plan may not use ERISA‘S private right of аction provision, ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2).

The panel opinion appropriately concludes that the Supreme Court‘s recent decision in

LaRue v. DeWolff, Boberg & Associates, Inc. et al., 552 U.S. 248, 128 S.Ct. 1020, 169 L.Ed.2d 847 (2008), disposes of Baxter‘s argument that Russell prevents this suit. In LaRue, the Court held that the concerns that it had expressed in Russell, a case which dealt with defined-benefit plans, do not apply in the context of defined-contribution plans. The Court held that, in definеd-contribution plans, “[w]hether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of § 409.” Id. at 1025.

The mаjority‘s opinion also correctly disposes of Baxter‘s argument that the PSLRA¹ prevents this action. As the opinion explains, this action is not a ‍​​‌​​​‌‌‌​‌‌‌‌‌‌​‌‌‌‌‌​‌​​‌‌‌‌‌​​‌‌​‌​​​​​‌‌‌​​​‍securities suit, and the PSLRA does not amend or supersede ERISA.

The remainder of the panel‘s opinion comments on the class plaintiffs’ theory of the case. As the panel frankly admits, this discussion is unnecessary to the disposition of the appeal before us. For that reason, I respectfully decline to join this discussion. This interlocutory appeal on a certified question is here on the denial of a motion to dismiss. We have affirmed the denial of that motion, and the case should now return to the district court where the lawyers ought to develop their case without any further counsel from judges of the court of appeals. The advice contained in the panel opinion is given without any adversarial briefing or oral argument and suggests strongly that no other view is possible or at least worthy of acceptance by the district court or by the other judges of this court. In my view, a more restrained prediction of what might develop in the course of this litigation is appropriate until the attorneys and the district court have had an opportunity to develop this case.

Notes

1

Private Securities Litigation Reform Act of 1995, Pub.L. No. 104-67, 109 Stat. 737 (codified at 15 U.S.C. § 78u-4).

Case Details

Case Name: Rogers v. Baxter International Inc.

Court Name: Court of Appeals for the Seventh Circuit

Date Published: Apr 2, 2008

Citation: 521 F.3d 702

Docket Number: 06-3241

Court Abbreviation: 7th Cir.