7th Circuit Stock-Drop Rulings Seen as Helping Employers

January 31, 2011 (PLANSPONSOR.com) – A federal appellate court recently issued two rulings in stock-drop cases that a law firm client alert said are important for potential employer defendants.

The Seyfarth Shaw memo said the stock-drop rulings by the 7th U.S. Circuit Court of Appeals “severely undermine plaintiffs’ ability to challenge fiduciary decisions related to 401(k) plans on a class-wide basis.”

According to the memo, in Howell v. Motorola, Inc. (Case No. 07-3837) and Lingis v. Dorazil (Case No. 09-2796), the court concluded that the Employment Retirement Income Security Act (ERISA) safe harbor shielded fiduciaries from claims that the defendants failed to disclose sufficient information about an allegedly bad business transaction and that certain defendants failed to monitor the conduct of fiduciaries they had appointed. The court also determined that the fiduciaries did not violate ERISA’s duty of prudence by including the Motorola Stock Fund as an investment option in the 401(k) plan, because Motorola stock never performed so poorly as to make it an imprudent investment option.

The court found that Section 404(c) safe harbor was a defense to plaintiffs’ nondisclosure and monitoring claims. The court rejected plaintiffs’ arguments that the safe harbor did not apply because the plan had provided insufficient information, concluding instead that the plan provided detailed disclosures about the risk associated with investments and the defendants never intentionally misled participants. According to the court, “there is no support for the view that Plan fiduciaries were required to provide all information about Motorola’s business decisions in real time to Plan participants.”

The Court concluded that the 404(c) safe harbor applied to the failure to monitor claim with equal force. And even if the 404(c) safe harbor did not apply to the failure to monitor claim, the Court rejected the plaintiffs’ suggested standard for monitoring, which seemingly would require “every appointing Board member to review all business decisions of Plan administrators.”

The law firm memo is at http://www.seyfarth.com/MA13111/.