Summary
The United States Court of Appeals for the Third Circuit reviewed an interlocutory class-certification decision in an ERISA fiduciary-duty action involving the Schering-Plough Corporation Employees’ Savings Plan. The court held that ERISA § 410(a) does not invalidate an individual release or covenant not to sue, and that the release did not bar the plaintiff from asserting claims on behalf of the plan under ERISA § 502(a)(2). The court vacated class certification and remanded for a more rigorous analysis of the plaintiff’s typicality and adequacy, including the effect of her release and the presence of similar agreements among class members.
Topics
Practice areas
Questions Presented
- Whether ERISA § 410(a) renders an individual release and covenant not to sue void as against public policy.
- Whether Wendel's individual release and covenant not to sue bar her from bringing an ERISA § 502(a)(2) claim on behalf of the plan.
- Whether Wendel satisfied Rule 23(a)'s typicality and adequacy requirements despite the release and covenant not to sue.
- Whether the District Court properly certified an open-ended class period without conducting a rigorous analysis or preliminary factual inquiry into when Schering-Plough stock ceased to be an imprudent investment.
- Whether the possibility of an individualized ERISA § 404(c) defense precluded certification under Rule 23(b)(1)(B).
Holdings
- ERISA § 410(a) applies to agreements or instruments that alter a fiduciary's statutory duties and responsibilities, not to an individual release or covenant not to sue that settles a dispute concerning an alleged breach. Wendel's release and covenant were therefore not void under § 410(a).
- Wendel's individual release and covenant not to sue do not bar her from bringing an ERISA § 502(a)(2) claim on behalf of the plan.
- The District Court was required to conduct a more rigorous inquiry into whether Wendel's release and covenant not to sue create unique defenses, affect her financial stake and incentives, or otherwise make her atypical or inadequate to represent the class. The existing record was insufficient to decide those questions.
- The District Court abused its discretion by accepting the complaint's allegation that Schering-Plough stock remained imprudent through the present without conducting the required rigorous analysis. On remand, it must reconsider the class period and may conduct preliminary factual inquiries into the merits to determine the appropriate end date.
- The potential for individualized § 404(c) defenses did not preclude certification under Rule 23(b)(1)(B). Rule 23(b)(1)(B) does not impose the predominance and superiority requirements applicable to Rule 23(b)(3), and the derivative nature of the plan-wide fiduciary-duty claims makes them paradigmatic Rule 23(b)(1) claims.
Key quotations
“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.” (594)
“From the foregoing we glean the proper consideration in assessing typicality to include three distinct, though related, concerns: (1) the claims of the class representative must be generally the same as those of the class in terms of both (a) the legal theory advanced and (b) the factual circumstances underlying that theory; (2) the class representative must not be subject to a defense that is both inapplicable to many members of the class and likely to become a major focus of the litigation; and (3) the interests and incentives of the representative must be sufficiently aligned with those of the class.” (600)
“In light of the derivative nature of ERISA § 502(a)(2) claims, breach of fiduciary duty claims brought under § 502(a)(2) are paradigmatic examples of claims appropriate for certification as a Rule 23(b)(1) class.” (605)
Factual background
Michele Wendel participated in Schering-Plough's defined-contribution Employees' Savings Plan, which offered a Schering-Plough Stock Fund. The value of Schering-Plough common stock declined substantially after alleged FDA-compliance problems, delays involving a major drug, and alleged kickback and fraud issues. Wendel alleged that company and plan fiduciaries breached their duties by continuing to invest plan assets in Schering-Plough stock, continuing to offer the Stock Fund, failing to monitor fiduciaries, and failing to avoid conflicts of interest. In connection with her separation from Schering-Plough, Wendel signed a general release and covenant not to sue in exchange for enhanced severance.
Procedural history
Wendel and two other former Schering-Plough employees filed an ERISA fiduciary-duty class action on behalf of the Schering-Plough Corporation Employees' Savings Plan. The other plaintiffs were dismissed, leaving Wendel as the sole proposed class representative. The District Court held that Wendel's separation-agreement release and covenant not to sue were void under ERISA § 410(a), certified a Rule 23(b)(1)(B) class, and adopted an open-ended class period. The Third Circuit held that the release was not void under § 410(a), but remanded for a rigorous analysis of its effects on typicality and adequacy and for reconsideration of the class period.
Remand instructions
Vacate the class-certification order and remand for a rigorous analysis of the effect of Wendel's release and covenant not to sue on typicality and adequacy, an inquiry into the releases and covenants held by other class members, and reconsideration of the appropriate class period under the correct legal standard, including any necessary preliminary factual inquiries.