In re Tyco MDL MD-02-1335-B 04/03/09
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re Tyco International. Ltd. Multidistrict Litigation (MDL 1335) MDL DOCKET NO. 02-1335-PB ERISA Action Case N o . 02-1357-PB Opinion No. 2009 DNH 046
MEMORANDUM AND ORDER
Section 404(c) of ERISA provides certain fiduciaries with an
affirmative defense against ERISA claims brought by plan
participants or beneficiaries who exercise control over the
assets in their individual account pension plans. Plaintiffs
argue in a motion for summary judgment that this defense is
unavailable to fiduciaries who are sued because of a decision to
designate the investment options that are available to plan
participants. Because I agree with the plaintiffs on this point,
I grant their motion to the extent that it is directed at
defendants’ section 404(c) defense.
I. THE CASE
The named plaintiffs in this class action are participants
in retirement plans (“Plans”) sponsored by Tyco International
(US) Inc. (“Tyco U S ” ) . Plaintiffs invoke ERISA in asserting
breach of fiduciary duty claims against Tyco U S , its parent corporation, Tyco International Ltd. (“Tyco International”), the
committee that administered the Plans, several former officers
and directors of Tyco U S , and its parent corporation. The claims
concern the Tyco Stock Fund, which holds Tyco International stock
and is one of the Plans’ investment options. Plaintiffs charge
in Count I that defendants made material misstatements and
omissions to participants concerning Tyco International’s
financial condition and the risk characteristics of the fund.
They allege in Count II that defendants were negligent in
designating the Tyco Stock Fund as an investment option and
allowing participants to invest in the fund. Defendants have
responded by denying plaintiffs’ claims and asserting an
affirmative defense based on section 404(c).
II. BACKGROUND
Tyco US sponsors the seven retirement plans that are at
issue in this case. All seven plans are “individual account
plans.” 29 U.S.C. § 1002(34). Accordingly, each participant is
assigned an individual account and the participant’s benefits are
“based solely upon the amount contributed to the participant’s
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be
-2- allocated to such participant’s account.” Id. Participants are
permitted to contribute to their accounts and Tyco US is required
to make matching contributions in amounts equal to a specified
percentage of a participant’s regular compensation. Participants
may choose from among several different investment options and
may transfer funds from one investment to another at any time.
The Tyco Stock Fund is one of several investment options
that are available under the Plans. The fund holds shares in
Tyco International stock. Because it is a “unitized fund,” a
trustee designated by Tyco US holds title to the stock and
participants are assigned units in the fund. The trustee
acquires stock by purchasing it on the open market. Participants
are not permitted to invest more than twenty-five percent of
their Plan assets in the fund.
The Tyco US Retirement Committee (“Committee”) is both the
administrator and a “named fiduciary” for all seven Plans. The
Board of Directors of Tyco US is responsible for appointing and
removing members of the Committee.
Plaintiffs claim that the price of Tyco International’s
stock was grossly inflated during the class period as a result of
undisclosed looting and pervasive accounting fraud by its senior
management. As a result, class members who held units in the
Tyco Stock Fund during the class period allegedly suffered
-3- substantial losses when the company’s true financial condition
was exposed.
III. ANALYSIS1
Plaintiffs argue that section 404(c) does not apply to
claims such as theirs, which are based on a fiduciary’s
designation of the investment options that are available to plan
participants. Their argument involves the following steps:
First, they note that section 404(c) provides fiduciaries with an
affirmative defense only with respect to losses that “result[]
from such participant’s or beneficiary’s exercise of control . .
. ” over the assets in the participant’s account. 29 U.S.C. §
1104(c)(1)(A)(ii). Next, they rely on regulations adopted by the
Department of Labor (“DOL”) which state that losses do not result
from a participant’s exercise of control over his assets unless
the losses are “the direct and necessary result of that
participant’s or beneficiary’s exercise of control.” 29 C.F.R. §
2550.404c-1(d)(2)(i) (emphasis added). Finally, they point to
the DOL’s statement in the preamble to the regulations that “the
1 Plaintiffs base their summary judgment argument on a pure question of law. Because the underlying facts that bear on this question are not in dispute, I resolve the motion on the legal issue without engaging in an extended discussion of the summary judgment standard.
-4- act of limiting or designating investment options which are
intended to constitute all or part of the investment universe of
an ERISA 404(c) plan is a fiduciary function which, whether
achieved through fiduciary designation or express plain language,
is not a direct or necessary result of any participant direction
of such plan.” Final Regulations Regarding Particular Directed
Individual Account Plans (ERISA Section 404(c) Plans), 57 Fed.
Reg. 46906-01, 46924 n.27 (Oct. 1 3 , 1992) (General Preamble).
Relying on these provisions, plaintiffs argue that defendants
are not entitled to a section 404(c) defense because the claims
at issue challenge defendants’ designation of the Tyco Stock Fund
as an investment option and the DOL has determined that
fiduciaries are not shielded by section 404(c) from losses which
result from such designation decisions.
Defendants respond by noting that in Langbecker v . Elec.
Data Sys. Corp., 476 F.3d 299, 310-13 (5th Cir. 2007), a divided
Fifth Circuit panel declined to give effect to the DOL’s
interpretation of its own regulations.2 I am unpersuaded by the
Fifth Circuit’s reasoning, however, and instead agree with the
dissent in that case that the DOL’s interpretation of its own
2 Defendants also cite the Third Circuit’s decision in In re Unisys Sav. Plan Litig., 74 F.3d 420 (3d Cir. 1996). This case is not relevant because it did not consider the DOL regulations.
-5- regulations is reasonable and should not be ignored. See id. at
320-22 (Reavley, J., dissenting).
Several factors lead me to this conclusion. First, section
404(c) is unclear as to whether it can be used to bar a claim
based on a fiduciary’s designation of investment options.
Second, section 404(c) requires the DOL to adopt regulations
explaining when a participant or beneficiary has sufficient
Free access — add to your briefcase to read the full text and ask questions with AI
In re Tyco MDL MD-02-1335-B 04/03/09
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re Tyco International. Ltd. Multidistrict Litigation (MDL 1335) MDL DOCKET NO. 02-1335-PB ERISA Action Case N o . 02-1357-PB Opinion No. 2009 DNH 046
MEMORANDUM AND ORDER
Section 404(c) of ERISA provides certain fiduciaries with an
affirmative defense against ERISA claims brought by plan
participants or beneficiaries who exercise control over the
assets in their individual account pension plans. Plaintiffs
argue in a motion for summary judgment that this defense is
unavailable to fiduciaries who are sued because of a decision to
designate the investment options that are available to plan
participants. Because I agree with the plaintiffs on this point,
I grant their motion to the extent that it is directed at
defendants’ section 404(c) defense.
I. THE CASE
The named plaintiffs in this class action are participants
in retirement plans (“Plans”) sponsored by Tyco International
(US) Inc. (“Tyco U S ” ) . Plaintiffs invoke ERISA in asserting
breach of fiduciary duty claims against Tyco U S , its parent corporation, Tyco International Ltd. (“Tyco International”), the
committee that administered the Plans, several former officers
and directors of Tyco U S , and its parent corporation. The claims
concern the Tyco Stock Fund, which holds Tyco International stock
and is one of the Plans’ investment options. Plaintiffs charge
in Count I that defendants made material misstatements and
omissions to participants concerning Tyco International’s
financial condition and the risk characteristics of the fund.
They allege in Count II that defendants were negligent in
designating the Tyco Stock Fund as an investment option and
allowing participants to invest in the fund. Defendants have
responded by denying plaintiffs’ claims and asserting an
affirmative defense based on section 404(c).
II. BACKGROUND
Tyco US sponsors the seven retirement plans that are at
issue in this case. All seven plans are “individual account
plans.” 29 U.S.C. § 1002(34). Accordingly, each participant is
assigned an individual account and the participant’s benefits are
“based solely upon the amount contributed to the participant’s
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be
-2- allocated to such participant’s account.” Id. Participants are
permitted to contribute to their accounts and Tyco US is required
to make matching contributions in amounts equal to a specified
percentage of a participant’s regular compensation. Participants
may choose from among several different investment options and
may transfer funds from one investment to another at any time.
The Tyco Stock Fund is one of several investment options
that are available under the Plans. The fund holds shares in
Tyco International stock. Because it is a “unitized fund,” a
trustee designated by Tyco US holds title to the stock and
participants are assigned units in the fund. The trustee
acquires stock by purchasing it on the open market. Participants
are not permitted to invest more than twenty-five percent of
their Plan assets in the fund.
The Tyco US Retirement Committee (“Committee”) is both the
administrator and a “named fiduciary” for all seven Plans. The
Board of Directors of Tyco US is responsible for appointing and
removing members of the Committee.
Plaintiffs claim that the price of Tyco International’s
stock was grossly inflated during the class period as a result of
undisclosed looting and pervasive accounting fraud by its senior
management. As a result, class members who held units in the
Tyco Stock Fund during the class period allegedly suffered
-3- substantial losses when the company’s true financial condition
was exposed.
III. ANALYSIS1
Plaintiffs argue that section 404(c) does not apply to
claims such as theirs, which are based on a fiduciary’s
designation of the investment options that are available to plan
participants. Their argument involves the following steps:
First, they note that section 404(c) provides fiduciaries with an
affirmative defense only with respect to losses that “result[]
from such participant’s or beneficiary’s exercise of control . .
. ” over the assets in the participant’s account. 29 U.S.C. §
1104(c)(1)(A)(ii). Next, they rely on regulations adopted by the
Department of Labor (“DOL”) which state that losses do not result
from a participant’s exercise of control over his assets unless
the losses are “the direct and necessary result of that
participant’s or beneficiary’s exercise of control.” 29 C.F.R. §
2550.404c-1(d)(2)(i) (emphasis added). Finally, they point to
the DOL’s statement in the preamble to the regulations that “the
1 Plaintiffs base their summary judgment argument on a pure question of law. Because the underlying facts that bear on this question are not in dispute, I resolve the motion on the legal issue without engaging in an extended discussion of the summary judgment standard.
-4- act of limiting or designating investment options which are
intended to constitute all or part of the investment universe of
an ERISA 404(c) plan is a fiduciary function which, whether
achieved through fiduciary designation or express plain language,
is not a direct or necessary result of any participant direction
of such plan.” Final Regulations Regarding Particular Directed
Individual Account Plans (ERISA Section 404(c) Plans), 57 Fed.
Reg. 46906-01, 46924 n.27 (Oct. 1 3 , 1992) (General Preamble).
Relying on these provisions, plaintiffs argue that defendants
are not entitled to a section 404(c) defense because the claims
at issue challenge defendants’ designation of the Tyco Stock Fund
as an investment option and the DOL has determined that
fiduciaries are not shielded by section 404(c) from losses which
result from such designation decisions.
Defendants respond by noting that in Langbecker v . Elec.
Data Sys. Corp., 476 F.3d 299, 310-13 (5th Cir. 2007), a divided
Fifth Circuit panel declined to give effect to the DOL’s
interpretation of its own regulations.2 I am unpersuaded by the
Fifth Circuit’s reasoning, however, and instead agree with the
dissent in that case that the DOL’s interpretation of its own
2 Defendants also cite the Third Circuit’s decision in In re Unisys Sav. Plan Litig., 74 F.3d 420 (3d Cir. 1996). This case is not relevant because it did not consider the DOL regulations.
-5- regulations is reasonable and should not be ignored. See id. at
320-22 (Reavley, J., dissenting).
Several factors lead me to this conclusion. First, section
404(c) is unclear as to whether it can be used to bar a claim
based on a fiduciary’s designation of investment options.
Second, section 404(c) requires the DOL to adopt regulations
explaining when a participant or beneficiary has sufficient
control over his assets to be subject to a section 404(c)
defense. 29 U.S.C. § 1104(c)(1)(A). Third, the DOL’s
implementing regulations are themselves unclear as to whether
section 404(c) applies to a fiduciary’s decision to designate
investment options. Fourth, the DOL reasonably determined in the
preamble to its regulations that losses which result from a
fiduciary’s designation decision are neither a “direct” nor a
“necessary” result of a participant’s exercise of control over
plan assets. Finally, both the Supreme Court and the First
Circuit have recognized in similar circumstances that an agency’s
reasonable interpretation of its own regulations in a regulatory
preamble is entitled to deference. See Fidelity Fed. Sav. & Loan
Ass’n v . de la Cuesta, 458 U.S. 1 4 1 , 158 n.13 (1982); Rucker v .
Lee Holding Co., 471 F.3d 6, 12 (1st Cir. 2006). For all of
these reasons, I conclude that defendants are not entitled to a
-6- section 404(c) defense in this case.3 See DiFelice v . U.S.
Airways, Inc., 497 F.3d 4 1 0 , 418 n.3 (4th Cir. 2007) (Section
404(c) does not insulate fiduciaries from liability for
designation decisions).
IV. CONCLUSION
For the reasons set forth in this Memorandum and Order,
plaintiffs’ motion for summary judgment (Doc. N o . 1278) is
granted to the extent that it seeks a determination that
defendants are not entitled to an affirmative defense under
section 404(c). 4
SO ORDERED.
/s/Paul Barbadoro Paul Barbadoro United States District Judge
April 3 , 2009
cc: Counsel of Record
3 I need not decide whether the DOL’s interpretation of its own regulations should be given controlling weight, see, e.g., Long Island Care at Home, Ltd. v . Coke, 551 U.S. 1 5 8 , 127 S.Ct. 2339, 2349 (2007), because I would reach the same result even if the DOL’s interpretation is entitled to respect only to the extent that it has the “power to persuade,” see, e.g., Christensen v . Harris County, 529 U.S. 576, 586-87 (2000)(quoting Skidmore v . Swift & Co., 323 U.S. 1 3 4 , 140 (1944)). 4 To the extent that plaintiffs seek summary judgment on additional issues, their motion is denied without prejudice.
-7-