In the case of Abbott v. Lockheed Martin, the 7th U.S. Circuit Court of Appeals reversed a district court ruling denying class certification on the claim that Lockheed Martin mismanaged the stable value fund offered in two defined contribution plans (see “ERIC Urges Rejection of Class in Stable Value Suit”). The appellate court noted that in denying class certification, the U.S. District Court for the Southern District of Illinois was concerned that the reference in the class definition to the Hueler Index improperly prejudged the merits of the stable value fund (SVF) claim. The District Court appears to have assumed that accepting the class definition also required it to accept the conclusion that the fund was mismanaged because it underperformed relative to the Hueler Index. However, the appellate court noted, plaintiffs are not arguing that the fund was imprudently managed in violation of the Employee Retirement Income Security Act (ERISA) because it did not match or outperform the Hueler Index; rather, the court said, they allege that it was imprudently managed because its mix of investments was not structured to allow the fund to beat inflation and therefore that it could not serve as a prudent retirement investment for Lockheed employees.
The appellate court explained that if the plaintiffs prevail on their claim, they may offer the Hueler Index as one basis for calculating damages, but the reference to the Hueler Index in the class definition in no way binds the District Court to use it as the damages measure should the plaintiffs prevail. “If the court concludes that a different measure would be better, it is free to use one,” the appellate court wrote in its opinion.
On the merits, Lockheed argues that the real problem with the proposed class definition is that it attempts to sneak into the case a theory of liability that was rejected at summary judgment. Lockheed contends that the plaintiffs are precluded from raising any claim that the stable value fund was imprudently managed. As the company sees things, the sole theory still in the case is that Lockheed allegedly inadequately disclosed the nature of the stable value fund to plan participants. Because many misrepresentation claims are poorly suited to class treatment, Lockheed urges the appellate court to find that the stable value fund claim is unsuitable for class treatment no matter how the class is defined.
The 7th Circuit found that Lockheed distorts the plaintiffs’ stable value fund claim when it characterizes their theory as one in which the fund was imprudently managed because it deviated from the mix of investments held by other funds bearing the “stable value” label. They aim to show that the fund was not structured to beat inflation, that it did not conform to its own plan documents and that Lockheed failed to alter the fund’s investment portfolio even after members of its own pension committee voiced concerns that the fund was inadequately structured to provide a suitable retirement asset. “The fact that the SVF’s investment mix apparently deviated from that of other, similarly named funds may be relevant evidence on which plaintiffs will rely, but it does not exhaust their theory of imprudence,” the court wrote.
According to the court opinion, Lockheed’s argument that the District Court rejected plaintiffs’ imprudent management claim at summary judgment is belied by the record. The District Court’s order denying summary judgment on the stable value fund claim claim reads in its entirety: “Defendants’ motion is DENIED as to their claim that the stable value fund was properly disclosed to plan participants and was a prudent investment option for them.” All this order says is that the imprudent management claim survives. “Lest there be any doubt, the District Court referred again to the imprudent management claim in its class certification decision when it stated that, among plaintiffs’ surviving claims, was the question ‘whether the stable value fund  was properly disclosed to plan participants and was a prudent investment option for them,’” the opinion said.
The case involves a proposed class of plaintiffs who are participants in two defined contribution (DC) plans run by Lockheed Martin. Among the investment options Lockheed offered retirement plan participants was the “stable value fund,” which the appellate court defined as a fund that typically invests in “a mix of short- and intermediate-term securities” and that, because they hold longer-duration instruments, “SVFs generally outperform money market funds.”
Plaintiffs allege that the fund Lockheed offered failed to conform to this general description, with Lockheed’s stable value fund heavily invested in short-term money market investments. According to the plaintiffs, “This resulted in a low rate of return, such that in Lockheed’s own words, the SVF did not beat inflation by a sufficient margin to provide a meaningful retirement asset.”
The full text of the court’s decision can be found here.