On Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 03-cv-01204) District Judge: Honorable Katharine S. Hayden.
The opinion of the court was delivered by: Rendell, Circuit Judge.
(Amended pursuant to the Clerk's Order dated 01/15/09)
Argued on September 29, 2009
Before: RENDELL AND AMBRO, Circuit Judges, and McVERRY,*fn1 District Judge.
Michele Wendel is a former employee of ScheringPlough who participated in the Schering-Plough Corporation Employees' Savings Plan, a defined contribution savings plan sponsored by Schering-Plough. Wendel and two other former Schering-Plough employees brought a class action against Schering-Plough and certain of its officers and directors under ERISA § 502(a)(2) arising out of the offering and management of the Plan. The two other plaintiffs were dismissed by stipulation in 2006 and Wendel is now the sole class representative. The District Court concluded that a release Wendel signed in connection with her separation from ScheringPlough violated ERISA and was therefore void. It then found the requirements of Rule 23 to be satisfied and certified a class consisting of Plan investors. On appeal, a host of issues relating to ERISA, Wendel's release, and class certification are before us. We will vacate the order certifying the class and remand for proceedings consistent with this opinion.
The Schering-Plough Corporation Employees' Savings Plan is an "individual account plan" under the Employee Retirement Income Security Act of 1974 ("ERISA") 29 U.S.C. §§ 1001-1461. The Plan allows participants to choose among a variety of investment funds, including the Schering-Plough Stock Fund, and to contribute as much as 50% of their pre-tax compensation to one or more of these funds. As the name suggests, the Schering-Plough Stock Fund is comprised primarily of shares of Schering-Plough common stock. It was one of fourteen funds offered by the company as investment options for the employees' pension contribution. The value of Schering-Plough common stock declined during fiscal years 2001 and 2002, falling from a high of $60 per share to a low of below $20 per share in June 2003. Wendel alleges that this decline was the result of Schering-Plough's violations of Food and Drug Administration ("FDA") regulations, delays in FDA approval of new products, and Schering-Plough's participation in illegal kickback schemes.
Initially, three plaintiffs, Jingdong Zhu, Adrian Fields, and Michele Wendel, filed a class action under ERISA § 409(a)*fn2 asserting four claims of breach of fiduciary duty against numerous defendants*fn3 based on facts relating to this decline in value. Their complaint asserted claims on behalf of the Plan under ERISA § 502(a)(2)*fn4 and sought to restore losses sustained by the Plan as a result of defendants' breaches of their fiduciary obligations. Zhu and Fields are no longer parties.
On July 20, 2000, after ten years of employment with Schering-Plough, Wendel entered into a Separation Agreement that included an enhanced severance package (specifically, an additional severance payment of $13,943.60) in consideration for a general release and a covenant not to sue the company.*fn5 Because Wendel is the sole remaining class representative, one of the central issues we must consider is what effect, if any, Wendel's release and covenant not to sue have on her ability to bring this action under ERISA § 502(a)(2) and to represent the class in accord with Rule 23.
Wendel pursues three claims stemming from defendants' alleged role in and knowledge of the alleged causes of the decline in the value of Schering-Plough stock, and from defendants' decision to continue to maintain the Plan's significant investment in Schering-Plough stock and to offer the Schering-Plough Stock Fund as an investment option despite this knowledge.*fn6 Wendel alleges that, since 1998, defendants knew or should have known that Schering-Plough stock was overvalued and an imprudent investment because of undisclosed problems with its FDA compliance systems and because of expected delays in rolling out its anticipated "blockbuster" drug, Clarinex. Wendel alleges that Schering-Plough disclosed these problems in a press release in 2001, immediately after which shares fell 15% in heavy trading and analysts dropped ratings and projected earnings for the company. She further alleges that defendants knew or should have known that Schering-Plough was engaged in illegal kickbacks and fraud against the Government, which ultimately resulted in substantial settlement payments by the company. Finally, Wendel alleges that the decline in the value of Schering-Plough common stock was a result of these problems, causing the Plan to suffer tens of millions of dollars in losses.
Wendel makes three breach-of-fiduciary-duty claims based on these facts. First, she alleges that defendants failed to prudently and loyally manage the Plan's assets. Second, Wendel alleges that Schering-Plough, the Director Defendants, and the Benefits Committee Defendants failed to adequately monitor and inform the appointed fiduciaries, the Investment Committee Defendants. Third, she alleges that defendants breached their fiduciary duty to avoid conflicts of interest, which prevented defendants from acting exclusively in the best interests of the Plan participants and beneficiaries.
Wendel moved for class certification pursuant to Fed. R. Civ. P. 23(a) and either 23(b)(1) or 23(b)(2). The proposed class included all participants and beneficiaries of the Plan since July 29, 1998. The District Court decided, as an initial matter, that the release executed by Wendel was void under ERISA § 410(a) because it relieved fiduciaries of their obligations. Therefore, the impact of her release on the class certification issue was not considered. The District Court concluded that class certification was appropriate for all three of the above claims under Rule 23(a) and Rule 23(b)(1)(B).*fn7 The District Court defined the class as "[a]ll persons who were participants in or beneficiaries of the Schering-Plough Corporations Employees' Savings Plan at any time between July 29, 1998 to the present and whose accounts included investments in Schering stock." (Joint App. 35.) In so doing, the District Court adopted and incorporated the Report and Recommendation of Magistrate Judge Falk, in addition to offering its own opinion. (Joint App. 35.) Defendants petitioned for leave to appeal the class certification decision on an interlocutory basis pursuant to Fed. R. Civ. P. 23(f). We granted defendants' petition for an interlocutory appeal.*fn8
As noted above, Wendel is now the sole representative of the class, and she signed a Separation Agreement with ScheringPlough that includes both a release and a covenant not to sue. As the existence of her release has been a focus of the parties' arguments, we first confront two preliminary issues regarding her release: (1) was the District Court correct in concluding that ERISA § 410(a) renders the release and the covenant not to sue void as against public policy, and thus of no force? As we answer this question in the negative, we will address an additional question: (2) do the release and covenant not to sue bar Wendel from being able to maintain an action under ERISA § 502(a)(2), as defendants urge?
ERISA § 410(a) provides that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy."
29 U.S.C. § 1110(a). The District Court concluded that, in light of this provision, "the release and covenant not to sue at issue here do not extinguish Wendel's claims and have no bearing on the typicality inquiry." (JA 31.) In reaching this conclusion, the District Court relied on Baker v. Kingsley, No. 03-1750, 2007 WL 1597654, at *4 (N.D. Ill. May 31, 2007), where the district court stated that "ERISA itself prohibits parties from waiving claims for breaches of fiduciary duty," and used this as an alternative ground for rejecting a typicality challenge against plaintiffs who had signed releases.
We disagree with the District Court's application of § 410(a) to an individual release and covenant not to sue, because we conclude that § 410 applies only to instruments that purport to alter a fiduciary's statutory duties and responsibilities, whereas an individual release or covenant not to sue merely settles an individual dispute without altering a fiduciary's statutory duties and responsibilities. We agree with the view of the Eighth Circuit Court of Appeals in Leavitt v. Northwestern Bell Telephone Co., 921 F.2d 160 (8th Cir. 1990):
In our view, a release is not an 'agreement or instrument' within the meaning of section 1110(a). Section 1110(a) prohibits agreements that diminish the statutory obligations of a fiduciary. A release, however, does not relieve a fiduciary of any responsibility, obligation, or duty imposed by ERISA; instead, it merely settles a dispute that the fiduciary did not fulfill its responsibility or duty on a given occasion.
Id. at 161-62; see also Boeckman v. A.G. Edwards, Inc., 461 F. Supp. 2d 801, 808 (S.D. Ill. 2006) (ERISA § 410(a) does not create a " blanket prohibition of the release of claims for breach of fiduciary duty").
Baker appears to be the only instance of a court's applying § 410(a) to invalidate an individual release. It is an unreported opinion in which this appears as mere dicta with no supporting reasoning. Leavitt and Boeckman are considerably more persuasive. We adopt their reasoning and read § 410(a) to extend only to contractual or other devices that purport to alter the statutory obligations of a fiduciary under ERISA, and not to reach a release of claims signed by an individual claiming the breach of a fiduciary duty. Otherwise, individuals could never amicably resolve litigation over these issues.
Accordingly, ERISA § 410(a) does not render Wendel's individual release and covenant not to sue void against public policy, and the effect of her ...