Employee’s Lawsuit Release Could Imperil Class-Action Status

December 22, 2009 (PLANSPONSOR.com) – A former employee's signed release of legal claims against her employer may interfere with her ability to represent fellow members of a class-action stock drop lawsuit, a federal appellate court has ruled.

With that decision, the 3rd U.S. Circuit Court of Appeals overturned a ruling by U.S. District Judge Katharine S. Hayden of the U.S. District Court for the District of New Jersey that the legal release signed by plaintiff Michele Wendel was rendered void under Section 410 of the Employee Retirement Income Security Act (ERISA). Hayden ruled Wendel could represent other Schering-Plough Stock Fund participants and certified the case as a class action (see Schering-Plough Stock Drop Case Gets Class Action Status).

The ERISA section involved 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.”

In writing for the appellate court, Circuit Judge Marjorie O. Rendell asserted that Section 410 does not apply to individual legal releases such as the one Wendel signed when she left Schering-Plough., but only to agreements changing a fiduciary’s ERISA responsibilities. So, Rendell contended, Section 410 did not make Wendel’s release void.

However, the 3rd Circuit panel asserted, Wendel might not be the best person for lead plaintiff role since the employer could have specific legal defenses that could be asserted against her that may not similarly apply to other participants. The 3rd Circuit panel ordered Hayden to reconsider the issue of whether Wendel was qualified to represent the class using a more “rigorous analysis” of federal class certification rules.

Rendell also contended that Hayden was wrong when Hayden ruled Wendel could not bring a fiduciary breach claim on behalf of the plan under ERISA Section 502(a)(2) because of her promise not to sue Schering-Plough.

The case involves a stock drop suit against drugmaker Schering-Plough Corp., alleging the company kept company stock in its retirement savings plan after it was no longer prudent to do so. The heart of the allegations against the drugmaker concerned the company’s efforts to get Food and Drug Administration approval of a new allergy drug, Clarinex. The employees charged the efforts to get approval of Clarinex were hampered because of Schering-Plough’s failure to comply with FDA regulations regarding good manufacturing practices.

During this time, Schering-Plough stock dropped from approximately $60 per share to below $20 per share, according to the lawsuit.

The 3rd Circuit decision is available here.