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The Right to Sue for Harm Caused by Breach of Fiduciary Duty

The Third Circuit Court of Appeals In Re Schering-Plough granted standing to a group of participants who trusted their employer by investing in company stock which subsequently lost tremendous value.  The participants filed suit claiming that the company, its officers and directors breached fiduciary duties to the plan by continuing to offer employer securities knowing the price was “unlawfully and artificially inflated”.  Many individual participants directed their individual assets into employer stock, however the lower court reasoned that a person filing a claim against the plan, does so on behalf of all participants, but because not all participants were harmed by the employer’s actions there was no valid claim under the law.  The Third Circuit Court of Appeals reversed the lower court explaining that the law allows the plan to recover from fiduciaries for “any losses” to the plan from a breach of fiduciary duty.  Plan sponsors cannot escape by arguing that the loss must harm the benefit of all participants because as a whole the actions of the fiduciaries caused the entire plan to dramatically decrease in value.

The Fifth Circuit Court of Appeals reversed its own decision in Milofsky v. American Airlines [PDF]. The original ruling dismissed the participant’s case because they were not seeking “plan wide relief.” The original ruling reasoned that simply because the damages would be paid into the plan rather than the respective plaintiffs did not change the nature of the case that it was individual rather than plan-wide.  Upon a rehearing en banc the court reversed itself by simply stating that the participants were entitled to go forward with their claims. Read the PRC’s amicus brief supporting the plaintiffs.

Most recently the US District Court for the Southern District of Illinois addressed the issue in a ruling permitting the participants to continue with their claim Lively v. Dynegy Inc. (No. 05-cv-00630MJR, U.S. Dist. S.D.Ill. 2/15/06).  In Lively three participants filed suit against their employer for breach of fiduciary duty because the employer allowed the participants to invest in employer stock while the employer was engaged in illegal accounting.  The court refused to dismiss the plaintiff’s lawsuit despite the employer’s claim that the participants sought individual remedies rather than plan-wide relief.

The three above cases have all agreed that although a breach of fiduciary duty may only harm some of the plan participants in a defined contribution plan, that the plan itself is ultimately harmed by that breach, and therefore the participants have a valid claim under ERISA.  Without these important rulings, plans would be able to get courts to throw out cases even where plan fiduciaries commit wrongdoings so long as not every participant is harmed.