Kirschbaum v. Reliant Energy, Inc., No. 06-20157 (5th. Cir. 4/25/2008) (5th. Cir., 2008)

ERISA Class Action Defense Cases–Kirschbaum v. Reliant Energy: Fifth Circuit Affirms Summary Judgment In Favor Of Defense In ERISA Class Action Complaint Holding Class Action Claims discusses Kirschbaum v. Reliant Energy, Inc., No. 06-20157 (5th. Cir. 4/25/2008) (5th. Cir., 2008), a stock drop case that ruled in favor of the defense because the claims that they should not have invested in company stock ran counter to ERISA and because negligent misrepresentations were not made:

Plaintiff filed a class action against his employer, Reliant Energy, Inc. (REI) and the Benefits Committee of his employer's savings plan alleging violations of ERISA (Employee Retirement Income Security Act). The Plan is an Eligible Individual Account Plan (EIAP) under ERISA, and the class action complaint alleged that defendants breached fiduciary duties owed to current and former participants in the Plan in that defendants "had a fiduciary duty to liquidate the Common Stock Fund and cease purchasing REI shares, notwithstanding the Plan's express contrary requirements." Kirschbaum v. Reliant Energy, Inc., ___ F.3d ___, 2008 WL 1838324, *1 (5th Cir. April 25, 2008). The district court granted plaintiff's motion to certify the litigation as a class action, id. Defense attorneys moved for summary judgment on the ground that defendants satisfied their legal duties to the class: The district court granted summary judgment as to all class action claims, and entered judgment in favor of defendants on the class action complaint. Id. Plaintiff appealed, and the Fifth Circuit affirmed.

Kirschbaum v. Reliant Energy: Fifth Circuit Adds to Growing Body of Law Imposing Substantial Hurdles to Fraud-Based Employer Stock Drop Claims discusses how this decision builds on other recent Circuit Court decisions:

Reliant Energy builds on recent Circuit Court decisions that have suggested claims of fraud will not make out a fiduciary breach claim unless the fraud challenges the company's survival. For example, in Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir. 2007), the Third Circuit recently dismissed a claim that fiduciaries knew or should have known the stock was inflated prior to an earnings warning that resulted in a 25% one-day drop in the stock price, reasoning that this was not the type of "dire circumstance" that would overcome Moench's presumption of prudence. Similarly, in Pugh v. Tribune Co., 2008 WL 867739 (7th Cir. Apr. 2, 2008), discussed in last month's Newsletter, the Seventh Circuit concluded fiduciaries may reasonably rely on the company's investigation and reporting of fraud absent some reason to believe the corporate reporting process was broken. Although ERISA fiduciary suits continue to be filed when a company with an employer stock fund in its 401(k) plan suffers a substantial setback, these cases suggest that there will be substantial defenses to these claims.

Court Gives ERISA Plan Fiduciaries Presumption of Prudence discusses the following:

1. Stock Drop Led to ERISA Claims
2. Investment Policy May Have Created Fiduciary Discretion
3. Plaintiffs Must Bear a "Heavy Burden" to Override Plan Terms
4. Misrepresentation Claim Rejected Because Prospectus Was Not an SPD

It also discusses lessons for plan sponsors:

• Less discretion may be best. Plan sponsors whose 401(k) plan or ESOP features an employer stock fund should consider having their applicable investment policies, as well as the Plan documents, require that company stock be purchased for this fund. Companies that do so may have a stronger defense against claims that their plan's company stock fund should not have invested in company stock.
  
• Bailing out may be necessary when the ship is sinking. ERISA fiduciaries remain bound to override the plan's terms and divest holdings of employer stock when the plan sponsor's existence as a going concern is threatened or the stock is in danger of becoming essentially worthless.
  
• Consider issuing a separate SPD. Plan sponsors and fiduciaries should avoid the shortcut of using a 10(a) Prospectus as a Summary Plan Description. Instead, the plan should issue a separate SPD that does not incorporate by reference the plan sponsor's SEC filings.

The DOL also filed an Amicus Brief for this case.