by Anthony S. Cacace, Proskauer Rose LLP
In Bacon v. Stiefel Laboratories, No. 09-CV-21871, 2011 BL 190100 (S.D. Fla. July 21, 2011), a federal district court denied plaintiffs' motion for class certification in a lawsuit alleging that plan fiduciaries and the corporate plan sponsor breached their fiduciary duties under ERISA and federal securities laws by, among other things, allegedly engaging in a fraudulent scheme to convince plaintiffs to sell their shares in the company to defendants in advance of a merger that would yield large profits for shareholders. In a thoroughly reasoned opinion, the court analyzed why certification of the putative class was not warranted, holding that "for a case largely predicated on alleged fraud, class treatment is inappropriate in the context of investment decisions [made] in reliance upon that fraud."
This case is a useful tool for ERISA defense practitioners because it provides a roadmap for defending against class certification motions in cases where the participant claims are deemed to require a showing of individual reliance. The case also illustrates the essential relationship between the adjudication of class certification motions in ERISA cases and the underlying determination of the substantive elements of the claims for which certification is sought.
— Factual Background
After recapturing many of the Stiefel Labs' shares that were previously held in the Plan, Stiefel Labs notified its shareholders of a merger with GlaxoSmithKline in April of 2009. GlaxoSmithKline purchased Stiefel Labs at a price of $65,515.29 for each share of common or preferred stock, significantly more than the price that participants received for the shares of stock that they had earlier liquidated.
Plaintiffs also alleged that the defendants attempted to recapture shares from the Plan at a discounted price by: (1) offering participants the "optional diversification" program, thus enabling participants to sell their shares in Stiefel Labs back to the company; (2) enacting a reduction in force, which resulted in many terminated employees putting their shares to Stiefel Labs; and (3) compensating the participants who diversified or took distributions of company stock at the per-share-value calculated by Stiefel Labs' so-called "independent appraiser," rather than at fair market value. Plaintiffs alleged that, once defendants controlled an increased number of shares of the company, they merged Stiefel Labs into GlaxoSmithKline in exchange for a stock price that was significantly higher than the price defendants paid for the shares that were sold back to the company by Plan participants. According to plaintiffs' complaint, these actions by defendants constituted a "fraudulent cover-up by Defendants that was created to mask the individual motives of the Board and certain individuals in maximizing the value of their own holdings in the company."
In adjudicating plaintiffs' motion for class certification, the Court thoroughly examined whether the putative class satisfied the four criteria of Fed. R. Civ. P.23(a), namely: numerosity, commonality, typicality, and adequacy of representation. With respect to those criteria, the court ruled as follows:
As the Court acknowledged, the inquiry into predominance "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation."AmChem Products, Inc. v. Windsor, 521 U.S. 591, 623 (1997). "When common questions present a significant aspect of the case and they can be resolved for all members of the class in a single adjudication, there is clear justification for handling the dispute on a representative rather than on an individual basis."Hanlon v. Chrysler Corp., 150 F.3d 1011, 1022 (9th Cir. 1988). Defendants dedicated much of their opposition brief to the predominance issue, claiming that the plaintiffs sought "to lump together incongruous claims and issues in the same classes." Plaintiffs argued that there were several common questions of law and fact that predominated over any individual questions of law or fact, including, among others, whether defendants "caused, or took advantage of, the merger or amendment of the Employee Plan for the purpose of obtaining for their benefit the value of the Company Stock held by the Employee Plan participants upon the sale of the Company."
The Court ultimately determined that "one of the greatest barriers to satisfying the predominance standard, and thus for class certification, is the issue of reliance. Reliance is a required element of Plaintiffs' claims …. Therefore, a central question for this Court to address is whether class certification is appropriate where, as here, proof of individual reliance may be necessary."
Plaintiffs argued that the determination of reliance need not require individual inquiry. Based on theories advanced in securities law claims, plaintiffs contended that the court could presume reliance in the instances of omission and the existence of a "common scheme or plan." See e.g., Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972); Kennedy v. Tallant, 710 F.2d 711, 717 (11th Cir. 1983). The Court explored the merits of plaintiffs' arguments and ultimately found them unconvincing.1 The Court ruled that Rule 23(b)(3) "is unequivocal: any class action certified thereunder must be capable of resolution on a class-wide basis…[and] [n]otwithstanding Plaintiffs' allegations of a 'common scheme' here, the Court finds that individual issues predominate over those of the class." The Court opined:
Plaintiffs argue that Defendants' misrepresentations and omissions have been uniform. However, Plaintiffs' subsequent actions in reliance upon those misrepresentations cannot be similarly uniform across the proposed classes. At the heart of their claims, Plaintiffs seek recovery for damages suffered after individual decisions to put shares to Stiefel Laboratories, even though individual determinations made in reliance upon Defendants' omissions and misrepresentations likely varied with each individual's needs. Plaintiffs ignore this hurdle, asking the Court to presume reliance on Defendants' omissions and misrepresentations as the basis for each of the Plaintiffs' individual determinations to retain or to put shares to Stiefel Laboratories. "This, in effect, places on the defendants the burden of proving plaintiff's nonreliance, that is, proving that the plaintiffs' decision would not have been affected even if defendants had disclosed the omitted facts" (citations omitted).
The Court also found that questions of reliance, investment strategy, and damages necessitate individual inquiry and "[s]imply put, for a case largely predicated on alleged fraud, class treatment is inappropriate in the context of investment decisions [made] in reliance upon that fraud." Accordingly, the Court ruled that the putative class claims did not predominate over the areas of individual inquiry.
With respect to superiority, the Court held that plaintiffs would be better served by controlling their own personal litigation, as opposed to participating in a class, because in cases where there are allegations of fraud, individual showings of proof are appropriate. The court stated: "[r]equiring each individual Plaintiff to detail any relevant omissions and misrepresentations pertinent to them alone—as well as the resulting decision as to whether to put the Stiefel Laboratories' shares to the company—will result in more desirable individualized treatment." Additionally, the Court observed that individualized treatment will not prevent plaintiffs from pursuing their claims for substantial monetary damages.
The Court's ruling appears to be consistent with the principles recently enunciated by the Supreme Court in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541(2011), wherein the Supreme Court emphasized the need for class claims to be cohesive, and, therefore, that the need for individualized evaluations of claims can defeat class certification.
Whether rulings like this one will have widespread applicability will depend largely on whether the Court's views on the substantive requirements for misrepresentation claims are endorsed in other jurisdictions and in other contexts. For many claims brought under ERISA, there is still a lack of clarity as to the participant's burden of proof with respect to causation and harm. Under those circumstances where participants are required to make individualized showings of reliance – or at least some showing of individualized harm – as a condition for prevailing, the chances of defeating class certification will be substantially enhanced.
Mr. Cacace is an associate in Proskauer Rose's Employee Benefits, Executive Compensation & ERISA Litigation Practice Center, resident in Proskauer's New York office. His practice focuses on ERISA litigation.
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