United States Court of Appeals

Fifth Circuit

FILED

January 18, 2007

Charles R. Fulbruge III

Clerk

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________________

No. 04-41760

_______________________

RICHARD LANGBECKER, ET AL.,

Plaintiffs-Appellees,

versus

ELECTRONIC DATA SYSTEMS CORP., ET AL.,

Defendants,

ELECTRONIC DATA SYSTEMS CORP., ET AL.,

Defendants-Appellants.

Appeal from the United States District Court

for the Eastern District of Texas

Before JONES, Chief Judge, and REAVLEY and GARZA, Circuit Judges.

EDITH H. JONES, Chief Judge, joined by GARZA, Circuit Judge:

Although legal remedies exist for the alleged wrongs

committed by Electronic Data Systems (“EDS”) and its associated

defendants for allegedly mismanaging the company’s 401(k)

Retirement Plan, the Rule 23(b)(1) or (b)(2) class action certified

by the district court is not among them. The district court

erroneously interpreted the impact, inter alia, of intraclass

conflicts and fact-specific defenses arising from ERISA § 404(c)

and individual releases. Rule 23(b)(2) is unsuited to provide

classwide relief, and Rule 23(b)(1) is conceptually unclear. As a
1 The Plaintiffs-Appellees include both participants in the EDS Plan

and their beneficiaries. They are referenced collectively as Participants in our

discussion. The named Plaintiffs include Jeffrey Clay Smith and Richard Mizell.

2 More American employees now participate in defined contribution plans

such as 401(k) plans than in defined benefit plans. U.S. Department of Labor,

Bureau of Labor Statistics, Employee Participation in Defined Benefit and Defined

Contribution Plans, 1985-2000, http://www.bls.gov/opub/cwc/cm20030325tb01.htm

(last visited Apr. 27, 2006).

2

result, we must VACATE and REMAND the class certification for

further consideration.

I. BACKGROUND

Plaintiffs are current and former employees of EDS1 who

participated in the company’s 401(k) defined contribution

Retirement Plan (“Plan”).2 Like many employers, EDS offers its

employees a menu of retirement options and agrees to match a

portion of each employee’s annual contribution to his 401(k)

account. Participants then select their individual portfolios and

decide when and whether to change the mix of investments.

Participant accounts, commingled for management purposes, become

the assets of the Plan. The Plan’s trustees, who are subject to

the rigorous fiduciary requirements of ERISA, manage the Plan,

select and monitor the investment options, and handle each

Participant’s account. Significantly, the Plan also invokes ERISA

§ 404(c), which relieves plan fiduciaries of liability for any loss

or breach “which results from such participant’s or beneficiary’s

exercise of control [over the assets in his account].” 29 U.S.C.

§ 1104(c). The tension between the fiduciary obligations and the
3 Whether or to what extent the EDS Stock Fund qualified as an employee

stock ownership plan or an eligible individual account plan exempt from certain

fiduciary duties pursuant to, for example, 29 U.S.C. §§ 1104(a)(2), 1107(b), is

not at issue in this appeal.

4 As its name implies, the EDS Stock Fund could invest up to ninetynine percent of its assets in company stock.

3

employee-directed nature of the accounts provides the backdrop to

the instant case.

During the class period, EDS offered Plan Participants

between thirteen and eighteen investment options, including an EDS

Stock Fund.3 Plan documents discussed the different funds,

explained that employees could direct contributions to a fund or

funds of their choice, and rated the fund options on a scale of one

to five for risk (one being the least risky and five being the

riskiest). Plan documents rated the EDS Stock Fund as “5+” on the

risk scale and warned Participants that investing in only one stock

violated the diversification principle of portfolio management.4

The Plan documents also explained that EDS agreed to match up to

twenty-five percent of each employee’s annual investment, up to six

percent of salary, with an investment in the EDS Stock Fund. The

matched investments had to remain in the Stock Fund for two years,

after which the employee could move the funds as he chose.

On September 18, 2002, EDS published an earnings warning,

which precipitated a substantial drop in its stock price (from

$36.46 to $17.20 a share). Although the stock price rebounded
5 This court recently upheld Rule 23(b)(3) class certification in a

consolidated securities fraud suit brought against EDS concerning the same events

and alleging that the Defendants’ actions concealed accounting problems and

improperly inflated the value of EDS stock. Feder v. Elec. Data Sys. Corp.,

429 F.3d 125 (5th Cir. 2005).

6 The Defendants-Appellants include, inter alia, EDS executives charged

with monitoring the committees running the Plan, as well as members of the

Benefits Administration Committee and the Investment Committee.

4

somewhat in the short term and more in the longer term, a flurry of

lawsuits commenced.5

This case, while predicated on the same accounting and

business irregularities as the securities actions, is brought on

behalf of Participants in the Plan. (Participants may be members

of the securities lawsuit class as well as the alleged Plan class.)

The operative Class Complaint alleges three ERISA fiduciary

violations relevant on appeal. In Count I, the Participants allege

that the EDS Appellants6 breached their fiduciary duties of

prudence when, despite knowledge of EDS’s financial problems,

Appellants continued to offer company stock as a Plan investment

option; directed and approved investment in the stock rather than

in safer alternatives; invested matching funds in EDS stock; failed

to take adequate steps to prevent the Plan from suffering losses

from its EDS stock investment; and failed to implement a strategy

to compensate for the high risk of EDS stock as a Plan investment.

Count II alleges that Appellants breached their fiduciary duties by

failing to monitor the Benefits Administration Committee and

Investment Committee members who supervised the Plan and by failing

to provide the committees with accurate information about company
7 Count III, another fiduciary duty claim based on misrepresentation

under ERISA § 502(a)(3) (29 U.S.C. § 1132 (a)(3)), was not certified as a class

action by the district court, after it concluded that this claim rested on

disparate individual fact issues. The Plaintiffs have not cross-appealed this

ruling.

8 Appellants’ expert David Ross calculated about eighty-five thousand

class members through the Appellees’ original class cutoff date of February 24,

2004. Since the class as certified cuts off in October, 2002, the actual number

is probably lower.

5

problems. Count IV7 alleges breach of their duties of loyalty to

the Plan because the Appellants failed to act solely in the

Participants’ interests and for the exclusive purpose of providing

Plan benefits. All three Counts proceed under ERISA § 409 and

§ 502(a)(2) (29 U.S.C. § 1109 (a) and § 1132(a)(2)). The crux of

the allegations is the imprudence of company stock as a retirement

offering.

Participants request reimbursement to “make good” the

losses on behalf of the Plan, but they concede such damages must

eventually be allocated among the Participants’ accounts. They

also seek injunctive relief either to remove the EDS Stock Fund as

an optional investment or to replace the current fiduciaries with

one or more independent fiduciaries. The district court certified

a FED. R. CIV. P. 23(b)(2) class for these claims consisting of all

Plan participants and their beneficiaries, excluding the

Defendants, for whose accounts the Plan made or maintained

investments in EDS stock through the EDS Stock Fund between

September 7, 1999, and October 9, 2002. As framed, the Class

includes up to eighty-five thousand members.8
9 The court did, however, conclude that the claims for misrepresentation by the fiduciaries were more properly brought under § 502(a)(3) because

of the reliance element.

6

Appellants sought and were granted interlocutory review

pursuant to FED. R. CIV. P. 23(f).

A summary of the district court’s closely reasoned

opinion regarding certification of these claims is essential to

further analysis. Several of the court’s legal rulings underpin

its conclusion that these claims are amenable to class

certification. If the court erred in any of its threshold

decisions, the class certification is put at risk.

First, the court rejected Appellants’ contention that

Appellees’ claim should be characterized as individual claims for

“other appropriate equitable relief” to redress breaches of

fiduciary duty under ERISA § 502(a)(3).9 See Varity Corp. v. Howe,

516 U.S. 489, 116 S. Ct. 1065 (1996). Instead, the court adopted

the Participants’ contention that theirs is a “derivative” suit

brought on behalf of the Plan pursuant to ERISA § 502(a)(2), in

which recovery must “inure[] to the benefit of the plan as a

whole,” Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140, 105

S. Ct. 3085, 3089 (1985).

Fastening on the derivative suit characterization, the

court then ruled that ERISA § 404(c), which relieves fiduciaries of

liability where loss results from a participant’s exercise of

direction and control of his own account, is inapplicable to a suit
10 In order to merit class action treatment, the allegations of a

complaint must initially demonstrate numerosity, commonality of issues,

typicality of the class representatives’ claims among those of the class, and the

adequacy of the representatives and their counsel. See FED. R. CIV. P. 23(a);

Feder, 429 F.3d at 129. Neither numerosity nor commonality is at issue here, as

the district court noted.

7

on “behalf of the plan as a whole.” Finally, the court determined

that post-employment releases of claims executed by up to nine

thousand potential class members not only did not release claims

for the Appellants’ breached fiduciary duties but in any event were

irrelevant to the maintenance of a classwide claim for derivative

relief to the Plan.

Turning to the class action rule, the court emphasized

and discussed in tandem the typicality and adequacy factors,10 which

bear on the qualification of class representatives. Because of its

focus on the derivative nature of the claims, the court did not

consider as stumbling blocks to adequacy and typicality two

circumstances arguably at odds with the single-minded focus

required of class representatives. First, one of the representatives, Mizell, was a day-trader in EDS stock who continued to buy

and sell, to his occasional profit, throughout the tumultuous

period following the September 19 price decline. Yet both Mizell

and Smith, who also traded in EDS stock short-term, now contend, as

putative class representatives, that Appellants should have

withdrawn EDS stock as a permissible investment option for all Plan

Participants during the class period. Second, the court

discounted, also on its overarching derivative suit construct, the
11 It is undisputed that the Plan Participants who bought or sold EDS

stock are members of the class certified in Feder, supra.

8

highly individual nature of class members’ stock trading patterns.

In a securities fraud suit,11 class members seek recovery for

specific transactions affected by fraud. Here, in contrast, the

EDS Participants are joined as class members irrespective whether

they bought or sold any EDS stock during the relevant period;

irrespective whether they traded at a profit in shares that other

Participants (fellow class members) sold for a loss simultaneously;

and irrespective that some class cutoff dates would be vastly more

profitable for some Participants than others. Further, thousands

of class members remained invested in EDS stock notwithstanding

allegations that it was imprudent to offer or invest in EDS stock

during the class period. The court held that because this is a

derivative suit on the Plan’s behalf for losses “to the Plan as a

whole,” the class representatives are not asserting claims for

losses to individual accounts. Thus, the derivative characterization superseded conflicts among class members or between the class

representatives and the class itself.

To the extent that the releases of claims might raise

individual defenses, the court, while acknowledging this

possibility, reiterated that a plan-wide lawsuit need not be

defeated by the peculiarities of individual participants’ claims.

Similarly, the court attempted to reconcile the ERISA § 404(c)

defense with the derivative ERISA § 502(a)(2) action by concluding
9

that (1) the defense is inapplicable to a fiduciary duty breach

consisting of imprudent plan management and selection of investment

options, and (2) the defense, being personal and transactional to

a participant, cannot be applied where claims are made on behalf of

the plan.

Having disposed of objections to the maintenance of a

“derivative” suit for the Plan and to class action treatment, the

court concluded that certification under Rules 23(b)(1) and (2) was

appropriate.

Respecting Rule 23(b)(1), the court held that because the

claims are asserted on behalf of the Plan as a whole the Appellants

are “obligated to treat class members alike via their treatment of

the Plan itself.” Further, the court foresaw a risk of inconsistent adjudication if multiple separate § 502(a)(2) cases were

pursued against the Plan.

The court justified its Rule 23(b)(2) certification

reasoning that (1) the complaint seeks “predominately” injunctive

relief, i.e., removal of the EDS Stock Fund as an investment option

and/or removal of the current fiduciaries, and (2) the monetary

relief requested is a “group remedy” and “subservient” to the

injunctive relief. In a footnote attached to this paragraph, the

court acknowledged that a fiduciary would have to be appointed to

oversee allocation of any monetary recovery among Plan

Participants. Neither a Rule 23(b)(1) or (2) class action requires

notice to class members or the option to opt-out.
12 E.g., Stirman v. Exxon Corp., 280 F.3d 554, 558-59 (5th Cir. 2002).

10

II. DISCUSSION

This court reviews the district court’s certification

decision for abuse of discretion. Gulf Oil Co. v. Bernard,

452 U.S. 89, 100, 101 S. Ct. 2193, 2200 (1981). The district

court’s discretion must be exercised within the boundaries of

Rule 23. Id. Where a district court rests its legal analysis on

an erroneous understanding of governing law, it has abused its

discretion. Unger v. Amedisys Inc., 401 F.3d 316, 320 (5th Cir.

2004). Although federal courts cannot assess the merits of the

case at the certification stage, they must evaluate with rigor “the

claims, defenses, relevant facts and applicable substantive law in

order to make a meaningful determination of the certification

issues.” Id. at 321 (quoting Castano v. Am. Tobacco Co., 84 F.3d

734, 744 (5th Cir. 1996)).

The party seeking class certification bears the burden of

meeting all the Rule 23 requirements. Berger v. Compaq Computer

Corp., 257 F.3d 475, 479-80 (5th Cir. 2001). As was alluded to

above, the requirements fall into two general groups: the four

23(a) requirements (numerosity, commonality, typicality, and

representativeness), which must be met by all proposed class

actions; and the three groups of Rule 23(b) requirements, one of

which must be met by the proposed class.12
13 These duties under the statute include, “the care, skill, prudence,

and diligence under the circumstances then prevailing that a prudent man acting

in a like capacity and familiar with such matters would use in the conduct of an

enterprise of a like character and with like aims.” Id. § 1104(a)(1)(B). The

DOL’s regulation under § 404(a)(1)(B) says that a fiduciary must “give[]

appropriate consideration to those facts and circumstances that, given the scope

of such fiduciary’s investment duties, the fiduciary knows or should know are

relevant to the particular investment or investment course of action involved .

. .” and must act accordingly. 29 C.F.R. § 2550.404a-1(b)(1)(i)-(ii).

Appropriate consideration includes “[a] determination by the fiduciary that the

particular investment or investment course of action is reasonably designed, as

part of the portfolio, . . . to further the purposes of the plan, taking into

consideration the risk of loss and the opportunity for gain (or other return)

associated with the investment or investment course of action.” Id. § 2550.404a1(b)(2)(i). For a non-§ 404(c) plan, the fiduciary’s selecting an investment (as

provided in § 404(a)(1)(B)) is not only like a fiduciary’s selecting an

investment option, but also like a participant’s investing in an option under

§ 404(c).

11

Courts should not confuse rulings on the merits of claims

with the class certification decision. As noted above, however,

the district court’s threshold legal rulings are essential to its

conclusion that this case may be maintained as a class action. We

must accordingly consider briefly whether (1) ERISA § 502(a)(2)

entitled Plan Participants to seek derivative relief for “the plan

as a whole” to recover “plan losses” that allegedly resulted from

Appellants’ fiduciary duty breaches; and (2) whether either ERISA

§ 404(c) or the releases executed by about nine thousand

Participants bar class certification.

A. Section 502(a)(2).

An ERISA fiduciary must act with prudence, loyalty and

disinterestedness, requirements carefully delineated in the

statute. See generally 29 U.S.C. § 1104(a)13. ERISA § 502(a)(2)

authorizes any plan participant or beneficiary to sue on behalf of

the plan to remedy a breach of these duties, to require the
14 In this “comprehensive and reticulated statute,” Nachman Corp. v.

Pension Benefit Guar. Corp., 446 U.S. 359, 361, 100 S. Ct. 1723, 1726 (1980),

ERISA § 502 (29 U.S.C. § 1132) authorizes two other types of remedial actions.

Section 502 (a)(1) enables beneficiaries to sue for plan “benefits.” Section 502

(a)(2), as noted above, provides for suits against fiduciaries on behalf of the

plan. Section 502 (a)(3) is a “catchall” provision entitling a beneficiary to

“other appropriate equitable relief” for fiduciary duty breaches. See Great-West

Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 221 & n. 5, 122 S. Ct. 708, 718

(2002).

12

fiduciaries personally to “make good” any “losses to the plan” so

caused, or to replace the fiduciaries.14 29 U.S.C. § 1132(a)(2);

§ 1109(a). Appellants strenuously contend that this suit, which

alleges that Appellants breached fiduciary duties by failing to

limit the Plan’s offering of and investment in EDS stock, cannot

proceed under § 502(a)(2) because the Plan consists of individual

Participant-directed investments. More precisely, Appellants

contend that since any recovery of monetary damages would have to

be allocated among up to eighty-five thousand class members based

on each Participant’s widely divergent stock trading and holding

strategy, no Plan-wide relief can be fashioned.

To the extent Appellants’ contention is that no plan-wide

fiduciary duties exist with respect to 401(k) participant-directed

plans, it is clearly overbroad. ERISA does not distinguish

fiduciary duties according to the type of employee investment or

pension plans at issue. The Supreme Court described Congress’s

concern about “the possible misuse of plan assets, and with

remedies that would protect the entire plan,” also without

limitation concerning the type of plan. Russell, 473 U.S. at 142,

105 S. Ct. at 3090. Certain fiduciary duty breaches can injure
15 When employee funds are transferred from one plan to another, some

companies use a process called “mapping.” With “mapping,” each of the displaced

investment options is compared to the new options. During conversion, amounts

are automatically transferred or “mapped” from the displaced option to the most

comparable new option. See Wiseman v. First Citizens Bank & Trust Co.,

212 F.R.D. 482, 484 (W.D.N.C. 2003).

16 This opinion does not concern, and we do not opine on the subjects

covered in the recent opinion, Milofsky v. American Airlines, 418 F.3d 429 (5th

Cir. 2005), vacated en banc, 442 F.3d 311 (5th Cir. 2006).

17 To the extent allegations of nondisclosure were made against

Appellants in this case, the district court ruled that individual reliance issues

precluded certification of a § 502(a)(2) class.

18 Under ERISA, the prudence of investments or classes of investments

offered by a plan must be judged individually. See In re Unisys Sav. Plan

Litig., 74 F.3d 420, 438-41 (3d Cir. 1996).

13

401(k) participants generally and indiscriminately: theft from the

plan; mapping;15 noncompliance with ERISA-mandated duties to inform;

engaging in transactions that involve conflicts of interest; and

setting unreasonable blackouts are among the possibilities.16

Allegations that ERISA fiduciaries promoted company stock to prop

up its value or misled participants could also state plan-wide

breaches of fiduciary duties.17

In this case, however, the description and indeed

existence of a Plan-wide fiduciary breach are elusive at this

preliminary stage of the case. The key contention is that the

fiduciaries “knew” EDS stock was too risky to be offered or allowed

as an investment by any Participant (or the vast bulk of them) in

the 401(k) Plan during the period in question. This contention

challenges the fiduciaries’ judgment that EDS was or remained a

prudent investment for the Plan to offer.18 Hindsight is easy in

a case like that of Worldcom, a company so infected by over-
19 The Third Circuit wisely balanced the competing policies of ERISA

fiduciary duties with statutory exemptions to those duties crafted by Congress

to encourage employees’ investments in their companies’ stocks. See Moench v.

Robertson, 62 F.3d 553, 568-73 (3d Cir. 1995). The Moench standard was adopted

by the Sixth Circuit, see Kuper v. Iovenko, 66 F.3d 1447, 1458-59 (6th Cir.

1995), and favorably commented on by the Ninth Circuit, Wright v. Oregon

Metallurgical Corp., 360 F.3d 1090, 1097-98 (9th Cir. 2004).

20 We note that Participants would not be eligible to pursue relief

under § 502(a)(3) for “other equitable relief” under Great-West because the

damages they seek do not restore to them specific funds that were inequitably

kept in the Defendants’ possession. At best, their action would seem to be one

for legal restitution, which is not cognizable under § 502(a)(3). See GreatWest, 534 U.S. at 214, 122 S. Ct. at 714-15.

14

extension and fraud that it collapsed, and its stock became

worthless. EDS, despite its alleged failings, is not in that

category. From the facts adduced at the class determination stage,

it is far from clear that EDS stock became too risky to be a

permissible 401(k) offering or the basis for the employer-matching

contribution. Thousands of Plan Participants continued to purchase

EDS stock regularly after the company’s adverse disclosures and

after the price dropped. Thousands held on to their EDS stock

rather than sell. The stock price has slowly but steadily

rebounded. Given these facts, plus the long-term horizon of

retirement investing and the favored status Congress has granted to

employee stock investments in their own companies, ascribing a

Plan-wide fiduciary failure to Appellants seems fraught with

uncertainty.19 Nevertheless, at this preliminary stage, we cannot

rule out Appellees’ theories as a matter of law. Correlatively,

the possibility of a suit on behalf of the Plan as a whole is not

eliminated simply by the fact that any recovery would have to be

allocated among individual Participants’ 401(k) accounts.20
21 ERISA § 404(c), 29 U.S.C. § 1104(c), entitled “Control over assets

by participant or beneficiary,” reads in full:

(1) In the case of a pension plan which provides for individual

accounts and permits a participant or beneficiary to exercise

control over the assets in his account, if a participant or

beneficiary exercises control over the assets in his account (as

determined under regulations of the Secretary)

(A) such participant or beneficiary shall not be deemed to

be a fiduciary by reason of such exercise, and

(B) no person who is otherwise a fiduciary shall be liable

under this part for any loss, or by reason of any breach,

which results from such participant's or beneficiary's

exercise of control.

(2) In the case of a simple retirement account established

pursuant to a qualified salary reduction arrangement under section

408(p) of Title 26, a participant or beneficiary shall, for purposes

of paragraph (1), be treated as exercising control over the assets

in the account upon the earliest of--

(A) an affirmative election among investment options with

respect to the initial investment of any contribution,

(B) a rollover to any other simple retirement account or

individual retirement plan, or

(C) one year after the simple retirement account is

established.

No reports, other than those required under section 1021(g) of this

title, shall be required with respect to a simple retirement account

established pursuant to such a qualified salary reduction

15

B. Section 404(c) Defense.

While a brief look at the Participants’ theories confirms

the district court’s conclusion that § 502(a)(2) claims could be

brought on behalf of the Plan, the same cannot be said for the

court’s rejection of § 404(c) as a defense to the derivative

claims. Just as ERISA’s fiduciary duties may be breached on a

plan-wide basis, so, too, must the § 404(c) defense be considered

in its relation to the causes of action for recovery on behalf of

a plan as a whole. Section 404(c) relieves a fiduciary from

liability “for any loss” or “by reason of any breach” if the plan

is an individual account plan and the loss “results from” a

participant’s exercise of control over assets in his account.21
arrangement.

16

This provision places responsibility for the success or failure of

a participant’s investments on his own choices among the portfolio

offered in the plan. The defense does not apply to all plans,

however. The Department of Labor is charged with defining the

term “exercises control.” In its regulations, the Department

implemented the Congressional purpose to qualify plans for this

defense only if, inter alia, they offer a diversified array of

investments; provide adequate information concerning the

investments to the participants; and authorize flexible and

autonomous control by the participants. See 29 C.F.R. § 2550.404c1 (2005). EDS’s Plan claims to fulfill the § 404(c) criteria for

purposes of the allegations at issue in this appeal. Nevertheless,

the district court held that “[a]s a separate entity, the Plan

should not be subject to a defense that can only apply to

particular participants and particular transactions.” We disagree

with this conclusion.

Neither ERISA’s remedy provision, § 502(a)(2), nor

§ 404(c) articulates an exception to the availability of the

§ 404(c) defense when a plaintiff sues on behalf of a plan. It is

the courts’ duty to harmonize statutory provisions, not, as the

district court did, to eliminate one for the sake of crafting a

more expansive remedy. In any event, the provisions do not

conflict. The EDS 401(k) Plan is by definition the sum of the
17

investment choices of its participants. If plan fiduciaries

violate their duties, § 502(a)(2), as noted above, often affords a

classwide remedy. Determining whether the fiduciary is relieved of

liability because of § 404(c) is merely part of the statutory

calculus.

A simple example will suffice to demonstrate how the

provisions can work together. Suppose Plan fiduciaries neglected

to credit 401(k) plan accounts with stock dividends that had been

received. A Participant could sue under § 502(a)(2) to recover the

amount of the dividends and allocate them among accounts. The

§ 404(c) defense would play no role, because losses were

unconnected to the Participant’s exercise of control over his

individual account.

This case raises a more complex interpretive question

whether the losses “result from” the participants’ exercise of

control pursuant to § 404(c). The losses here could not have

occurred but for two separate acts: the fiduciary’s inclusion of

“bad” stocks into the pot, and the participants’ choices to invest

in those “bad” stocks with full § 404(c) disclosure. When there

are two actual causes of the loss, assuming the plan complies with

§ 404(c) regulations, how does a court determine whether the loss

“results from” the participants’ exercise of control, which in turn

determines whether the defense applies? Section 404(c) appears to

leave the question open. Accordingly, the Department of Labor

regulations come into play. 
18

The Department has decided that § 404(c) may be a defense

to liability when the loss is “the direct and necessary result of

that participant’s or beneficiary’s exercise of control.”

29 C.F.R. § 2550.404c-1(d)(2)(i) (emphasis added). The DOL’s

regulation gives the statutory term “result from” a narrow

construction, but it is consistent with the statutory language—no

liability when the losses “result from such participant’s or

beneficiary’s exercise of control.” See 29 U.S.C.

§ 1104(c)(1)(A)(ii) (emphasis added).

An explanatory footnote to the regulation, however,

narrows the statutory language even more in cases where the

allegation is that the fiduciary was imprudent in its designation

of investment options: 

[T]he Department points out that the act of limiting or

designating investment options which are intended to

constitute all or part of the investment universe of an

ERISA § 404(c) plan is a fiduciary function which,

whether achieved through fiduciary designation or express

plan language, is not a direct or necessary result of any

participant’s direction of such plan.

Final Regulations Regarding Particular Directed Individual Account

Plans (ERISA § 404(c) plans), 57 Fed. Reg. 46906, 46924-225, n.27

(General Preamble, n.27). The DOL as amicus, the dissent and the

Appellees take this footnote to mean that when a plan loses money

by reason of the fiduciary’s inclusion of an imprudent investment

option, none of the loss is the direct and necessary result of the
22 There is much disagreement over whether the DOL’s footnote is

entitled to Chevron deference. It can be asserted that the footnote itself was

subject to notice and comment rulemaking and therefore is subject to the Chevron

steps. The “Final Regulation Regarding Participant Directed Individual Account

Plans” includes the footnote, even though it is not in the actual “Code of

Federal Regulations.” 57 F.R. 46906-01. This is because the CFR never publishes

the preambles of the Final Regulations, even though the preambles were part of

the notice and comment process. The final rule in its entirety, including the

preamble, is published only in the Federal Register. For an explanation of what

portions of regulations are published in certain books, see

www.11sdc.org/sourcebook/fed-reg-cfr.htm. In this case, footnote 27 was included

in the original notice, see 52 F.R. 33508, and received comments before final

passage.

Nevertheless, the footnote constitutes at best a comment on the

regulations, and is not itself a regulation. Thus, an alternative argument can

be made that neither Chevron nor Auer deference is owed. See Auer v. Robbins,

519 U.S. 452, 461, 117 S.Ct. 905, 911 (1997); Chevron USA Inc. v. Natural

Resources Defense Counsel Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 2781-82

(1984). The dissent asserts that the footnote represents an “interpretation”

of the DOL regulation, to which Chevron deference is due. What the dissent

overlooks, however, is that this rule only applies if the regulation was

ambiguous. See Wells Fargo Bank of Texas and A.V. James, 321 F. 3d 488, 494

(5th Cir. 2003); Christensen v. Harris County, 529 U.S. 585, 120 S.Ct. 1655, 1663

(2000). Neither the dissent nor any of the authorities it cites points to an

ambiguity in the regulation. 

19

participant’s exercise of control. If the footnote is correct, it

bars § 404(c) as a defense to EDS’s alleged breach in such cases.

Because application of the standard of judicial deference

owed to the agency’s footnote is not determinative, we assume

arguendo that the more demanding Chevron standard applies.22 The

issue then becomes whether the DOL’s footnote reasonably interprets

§ 404(c) under Chevron Step II. We conclude it is not reasonable.

Most important, the footnote does not reasonably interpret § 404(c)

itself, because it contradicts the governing statutory language in

cases where an individual account plan fully complies with the

regulations’ disclosure, diversification and participant-control

provisions, and loss is caused, notwithstanding some other

fiduciary duty breach, by the participants’ investment decisions.
20

The DOL footnote would render the § 404(c) defense applicable only

where plan managers breached no fiduciary duty, and thus only where

it is unnecessary. Similarly, the footnote is in tension with the

actual DOL regulation, which does no more than narrowly construe

§ 404(c) to authorize the defense for a fiduciary when a loss is a

“direct and necessary result” of a participant’s exercise of

control. See 29 C.F.R. § 2550.404c-1(d)(2)(i). The regulation

also stresses that, “whether a participant . . . has exercised

independent control in fact with respect to a transaction depends

on the facts and circumstances of the particular case.” 29 C.F.R.

§ 2550.404c-1(c)(2). The footnote is at odds with these provisions

by appearing to eliminate a § 404(c) defense altogether, rather

than determining its scope on a transactional, case-by-case basis.

While various courts have deferred to the footnote with

little or no discussion, the only circuit court to address § 404(c)

found its meaning tolerably plain and explained that the provision

“allows a fiduciary, who is shown to have committed a breach of

duty in making an investment decision, to argue that despite the

breach, it may not be held liable because the alleged loss resulted

from a participant’s exercise of control.” In re Unisys Sav. Plan

Litig., 74 F. 3d 420, 445 (3rd Cir. 1996). Unisys predated the DOL
23 See also, Wiseman, supra, where the court noted that individual

assessments of § 404(c) defenses were required where, despite plan managers’

alleged fiduciary duty breach, some participants had made deliberate decisions

to hold onto declining stocks.

21

regulations but embodies a common sense interpretation of the

statute.23

Disregarding the footnote and relying solely on the

statute and the regulation does not, as the district court and

Appellees fear, leave plan participants without a remedy for the

type of fiduciary duty breaches alleged here. Instead, it

correlates the potential recovery with the sum of participants’

decisions regarding their individual accounts. The Plan “as a

whole” is not entitled to recover money damages for breach where an

individual participant, suing on his own behalf, could not recover.

The district court implicitly recognized this limitation in holding

that with respect to the misrepresentation claims, which it did not

certify for class treatment, § 404(c) affords an individual a

transactionally oriented defense. Put otherwise, the § 404(c)

defense is no different from a limitations defense in a class

action. A classwide claim may be stated, but the potential

recovery is limited to those class members whose claims have not

prescribed. Moreover, § 404(c) in no way limits the recovery of

equitable relief.

The dissent fears that if a § 404(c) defense applies,

Plan participants and beneficiaries will be left “at the mercy of

the wisdom of whoever made these limited [plan investment]
22

choices.” The dissent is also concerned that no duty of prudence

will attach to the selection and monitoring of plan investment

choices if § 404(c) is applied as written. These fears are both

overblown and misdirected. Principally, we are not holding that a

plan fiduciary’s duties do not include the selection and monitoring

of plan investment alternatives. The question, rather, is how to

harmonize the enforcement of the fiduciary’s duty with the § 404(c)

defense when a § 502(a)(2) action is pursued “on behalf of the

plan.” A plan fiduciary may have violated the duties of selection

and monitoring of a plan investment, but § 404(c) recognizes that

participants are not helpless victims of every error. Participants

have access to information about the Plan’s investments, pursuant

to DOL regulations, and they are furnished with risk-diversified

investment options. In some situations, as happened here, many of

the Participants will react to the company’s bad news by buying

more of its stock. Other Participants will, like Mizell, trade

their way to profit no matter the calamity that befell the stock.

Section 404(c) contemplates an individual, transactional defense in

these situations, which is another way of saying that in

participant-directed plans, the plan sponsor cannot be a guarantor

of outcomes for participants.

If the Appellees’ negation of § 404(c) prevails, then the

EDS fiduciaries would be liable not just for losses in individual

accounts, but also for failures to realize gains (measured against
24 Finally, contrary to the dissent, while we “agree that § 404(c)

provides no shield” for the two-year retention of matching contributions in EDS

stock, that match cannot be the subject of any ERISA fiduciary duty violation if

the requirement embodied a settlor decision, not a decision subject to the

fiduciaries’ discretion. The issue has not been briefed before us, the district

court did not decide it, and we do not speculate on its resolution.

23

some entirely speculative standard) and even for catch-up amounts

where participants bought into a declining EDS stock value.

The harmonization of § 502(a)(2) actions with the

§ 404(c) defense, however, limits the amount of “plan losses” for

which a fiduciary may be held liable. This harmonization also

bears on the susceptibility of this case to class action treatment,

because § 404(c) individualizes the consequences of fiduciary duty

violations. Finally, there is no inconsistency between this

harmonization and the courts’ decisions in the Enron and Worldcom

cases, because in those cases, where the company’s stock value

ultimately rested on a financial house of cards, no trading

strategy in the company’s stock could have salvaged a participants’

company stock ownership.24

Because the district court incorrectly eliminated the

§ 404(c) defense from its evaluation of the suitability of the

allegations on appeal for class treatment, we must vacate and

remand for further consideration of the extent to which § 404(c)

decisions by participants undermine the feasibility of class action

treatment.

C. Participant Releases.
25 The pertinent language in the releases states:

This Release does not include, however, a release of Employee’s

right, if any, to benefits he/she is entitled to under any EDS plan

qualified under Section 401(a) of the Internal Revenue Code,

including the EDS Retirement Plan and the EDS 401(k) Plan, and COBRA

benefits pursuant to Internal Revenue Code section 4980B.

24

While conceding that ordinarily the fact that up to nine

thousand potential class members have signed releases of claims

against EDS would defeat typicality and preclude class

certification, the district court found a distinction here for two

reasons. First, the court determined that the releases (which are

otherwise quite broad, discharging “all claims or demands” against

EDS) authorize the instant suit as one for “benefits.”25 Appellants

contend, with some force, that this exception only permits suits

under ERISA § 502(a)(1)(b) to recover specific benefits owed a

participant under the terms of an employee plan. As the Supreme

Court explained in Russell, ERISA § 502(a)(1)(b) allows a

beneficiary to recover plan “benefits,” whereas § 502(a)(2) allows

recovery that inures to the benefit of the plan as a remedy for

breach of fiduciary duties. Russell, 473 U.S. at 146-47,

105 S. Ct. at 3093; see also Rhorer v. Raytheon Eng’rs &

Constructors, Inc., 181 F.3d 634, 639 (5th Cir. 1999) (noting the

numerous differences between causes of action under §§ 502(a)(1)(b)

and 502(a)(2)). On the other hand, a release does not ordinarily

preclude claims based on subsequent conduct. The enforceability of

the releases presents difficult questions.
26 Even if, as the dissent suggests, the effect of the releases may be

considered on a classwide basis, the named Plaintiffs may not be adequate

representatives of those class members who did sign them. See JAYNE E. ZANGLEIN

& SUSAN J. STABILE, ERISA LITIGATION 479-80 (2d ed. 2005)(“[C]ourts have regularly

found standing, typicality, or adequacy lacking where the defense of a release

of claims was not shared by the named plaintiffs and the purported class. . . .

[I]f none of the named plaintiffs signed releases, they are inadequate

representatives because none of them would have any need to litigate or interest

in litigating the release issue.”)

25

Additionally, the district court refused to consider

individual releases pertinent to the maintenance of a derivative

suit on behalf of the Plan. For the reasons stated in regard to

the § 404(c) defense, however, this conclusion is untenable. The

impact of the releases should not have been excluded from the

district court’s certification analysis.

Without commenting further on the enforceability of the

releases or application of the “benefits” exception, we note that

holders of releases could become a subclass if a class action is

otherwise deemed appropriate. Contrary to the dissent, we are not

holding that the releases foreclose any § 502(a)(2) suit on behalf

of the Plan or foreclose any class certification. We do stress,

however, that the status of perhaps nine thousand claimants is not

a trifle — either to the Appellants or the claimants themselves.

The district court must consider the releases more thoroughly on

remand.26

D. Class Action Issues.

Applying the § 404(c) defense and factoring in the nine

thousand releases may well change the district court’s decision to

certify a class action. Nevertheless, we must also address the two
26

Rule 23(a) class certification issues challenged directly by

Appellants — typicality of the representative Plaintiffs’ claims

and adequacy of their representation — as well as the court’s

ultimate authorization of a Rule 23(b)(1) and (2) no-notice,

no-opt-out class action. We conclude that Smith and Mizell hold

sufficiently typical claims, but the court must reconsider whether

they are adequate representatives in light of inherent intraclass

conflicts. Finally, various difficulties demonstrate the impropriety of maintaining a Rule 23(b)(2) class action and the court’s

superficial analysis of the Rule 23(b)(1) alternative.

1. Typicality.

Rule 23(a) requires that the named representatives’

claims be typical of those of the class. Appellants question

whether Smith’s and Mizell’s claims are typical because Mizell

continued to invest in EDS stock even after it declined following

the September 18th disclosures, and Smith actually made money on

his EDS investments (although not as much as he thinks he should

have). The district court ruled these inquiries inappropriate

since the representatives’ derivative claims on behalf of the Plan

transcend individual claim variations. On the contrary, the

requirements of Rule 23(a) cannot be waved away by artful

characterization. Even if the typicality requirement did not

apply, Smith and Mizell would have the burden to prove, as
27

derivative representatives of the Plan, that their claims fairly

represent those of the absent Participants.

Stated broadly, the representatives’ claims are typical

of those of the class. Smith and Mizell both allege that they

suffered harm as Participants who lost money on EDS stock

investments through the Appellants’ imprudent Plan management. The

fact that Mizell continued to trade in EDS stock after the

company’s adverse disclosures may signify an intraclass conflict of

interest and may cut against his attempt to avert a § 404(c)

defense, but it does not disable him from being a typical class

representative. This court recently noted that “the key typicality

inquiry is whether a class representative would be required to

devote considerable time to rebut Defendants’ claims.” Feder,

429 F.3d at 138 (quoting Lehocky v. Tidel Techs., 220 F.R.D. 491,

501-02 (S.D. Tex. 2004). Feder went on to join numerous decisions

which have held that securities class action plaintiffs are not

categorically precluded from asserting typical claims despite their

own post-disclosure trading in the target defendant’s stock. Id.

Such trading becomes harmless where, after the company has made

adverse disclosures, the stock price reverts to valuation based on

an efficient market. The analogy between securities fraud and

ERISA fiduciary violation plaintiffs is inexact, as Appellants

point out, in the face of Mizell’s contentions that even after the

September 18th disclosures, EDS stock remained an imprudent Plan

investment. A trading strategy adopted for Mizell’s personal
28

benefit is, however, distinguishable from the Plan fiduciaries’

execution of their duties. Similar reasoning vindicates Smith’s

claim to typicality, reducing Appellants’ complaint over his profit

to questions of damages and the § 404(c) defense.

2. Adequacy.

In addition to measuring the competence of class counsel

and the class representatives’ willingness and ability to serve,

neither of which criteria are challenged here, the Rule 23 adequacy

inquiry also uncovers “‘conflicts of interest between the named

plaintiffs and the class they seek to represent.’” Berger v.

Compaq Computer Corp., 257 F.3d 475, 479-80 (5th Cir. 2001)

(quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625,

125 S. Ct. 2231, 2236 (1997)).

Substantial conflicts exist among the class members,

raising questions about the adequacy of the lead Plaintiffs’

ability to represent the class. Even after the EDS earnings

warning and the drop in its stock price, thousands of Plan

Participants (would-be class members), including Mizell, continued

to direct money into the EDS Stock Fund. Over forty-four thousand

Participants maintained investments in EDS stock as of February,

2004. This aggregate conduct seriously undermines the claim that

the EDS Stock Fund was an imprudent investment that Appellants

should not have offered in the first place. The intraclass

conflict is exacerbated because Appellants seek injunctive relief
27 More pointedly, even if Appellees prevail without receiving an

injunction, their assertion that the mere existence of the EDS Stock Fund

violated a fiduciary duty under ERISA will have won the day. It is hard to

imagine that the Fund would continue to exist after such a finding.

29

that would dissolve the EDS Stock Fund;27 the Fund cannot be

partially shut down for the litigating Plaintiffs and remain open

for absent class members who desire this investment option.

Additionally, Plan Participants were affected by the drop

in price in dramatically different ways. Class discovery revealed

that Smith and sixteen thousand absent class members made money on

their stock fund investments, while others, including Mizell, lost

money. Further conflicts exist among those who lost money.

According to David Ross’s report, for 17,890 class members, maximum

recovery would inure to the Plan (and eventually be allocated to

their accounts) if February 4, 2000, is established as the date on

which the stock fund became an imprudent investment. For 37,689

class members, maximum recovery would be attained if November 27,

2001, were the designated date. Appellees dismiss these concerns

by asserting that all Plan Participants share the goal of attaining

maximum payment to the Plan, regardless of the designated date.

This is true as a general matter and surely promotes the interest

of the class representatives and their counsel. Appellees gloss

over the inconvenient fact that these conflicts have implications

not only for dividing the pie at recovery but also for discovery

and preparation for trial. Unlike a securities fraud lawsuit, in

which class members have a uniform purpose in proving material
28 Indeed, intraclass problems can present problems of constitutional

magnitude. See Hansberry v. Lee, 311 U.S. 32, 43-44 61 S. Ct. 115, 119-120

(1940). The dissent’s suggestion that although “some members may not want EDS

stock removed as an investment alternative [this] does not present a conflict”

is not far from saying that the fact that the Hansberry family did not want to

enforce the covenant barring blacks from living in their neighborhood does not

present a class conflict with those who sought, through a class action judgment,

to enforce the covenant against them. A few class members cannot hijack

litigation “on behalf of the plan” to pursue their preference at the expense of

others who are not given notice of this purported representation. The interests

of all class members must be fundamentally consistent.

30

misrepresentations by company defendants at specific points in

time, here the goal is to second-guess judgments made by the

Appellants involving a multitude of considerations over a period of

years. The facts, once known, may bear out different legitimate

theories as to when EDS Stock Fund became an imprudent investment;

each theory will have different consequences for class members’

recovery.

Numerous courts have held that intraclass conflicts may

negate adequacy under Rule 23(a)(4). See Valley Drug Co. v. Geneva

Farms, Inc., 350 F.3d 1181, 1189-92 (11th Cir. 2003) (finding class

representatives inadequate where their economic interests and

objectives conflicted substantially with those of absent class

members); Pickett v. Iowa Beef Processors, 209 F.3d 1276, 1280

(11th Cir. 2000)(representation inadequate where class includes

those “who claim harm from the very acts from which other class

members benefitted”).

The trial court too readily succumbed to Appellees’

minimization of the intraclass problems in this case.28 That the

court recognized a fiduciary would need to be appointed to allocate
31

recovery among Plan Participants concedes at least the possibility

of intraclass apportionment problems. The problem goes to the

heart of proving the allegations of fiduciary imprudence. On

remand, the district court must more fully consider the

implications of the proven intraclass conflicts for the adequacy of

representation by Smith and Mizell. If a class is certified, the

court may have to consider certifying subclasses to represent the

participants with conflicting interests.

3. The Allison Rule 23(b)(2) Inquiry.

With little difficulty, the district court concluded that

because Plaintiffs’ derivative lawsuit was filed on behalf of the

Plan and sought “predominately” equitable remedies, it should be

certified as a class pursuant to Rule 23(b)(2). The court did not

afford absent class members the option of notice or self-exclusion

from the class. Certification of a class under Rule 23(b)(2) is

appropriate where “the party opposing the class has acted or

refused to act on grounds generally applicable to the class,

thereby making appropriate final injunctive relief or corresponding

declaratory relief with respect to the class as a whole.” FED. R.

CIV. P. 23(b)(2). The district court cited this court’s decision

in Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998),

which held that “monetary relief predominates in (b)(2) class

actions unless it is incidental to requested injunctive or

declaratory relief.” Id. at 415. This Allison (b)(2) predominance
29 “Allison reflects our concern that Plaintiffs may attempt to shoehorn

damage actions into the Rule 23(b)(2) framework, depriving class members of

notice and opt-out protections.” Bolin v. Sears, Roebuck & Co., 231 F.3d 970,

976 (5th Cir. 2000).

32

requirement, “by focusing on uniform relief flowing from

defendants’ liability, ‘serves essentially the same functions as

the procedural safeguards and efficiency and manageability

standards mandated in (b)(3) class actions.’” In re Monumental

Life Ins. Co., 365 F.3d 408, 417 (5th Cir. 2004) (quoting Allison,

151 F.3d at 414-15).29

Allison also imposed standards for determining whether

monetary relief sought in a Rule 23(b)(2) class action is truly

incidental, or whether such relief is the true pursuit of the class

action:

Ideally, incidental damages should be only those to which

class members automatically would be entitled once

liability to the class (or subclass) as a whole is

established. That is, the recovery of incidental damages

should typically be concomitant with, not merely

consequential to, class-wide injunctive or declaratory

relief. Moreover, such damages should at least be

capable of computation by means of objective standards

and not dependent in any significant way on the

intangible, subjective differences of each class member’s

circumstances. Liability for incidental damages should

not require additional hearings to resolve the disparate

merits of each individual’s case; it should neither

introduce new and substantial legal or factual issues,

nor entail complex individualized determinations.

Allison, 151 F.3d at 415 (internal citations omitted). Allison’s

test has been cited in connection with other ERISA class action

determinations. See Nelson v. Ipalco Enters. Inc., No. 1P02-

477CHK, 2003 WL 2310192 (S.D. Ind. Sept. 30, 2003) (unpublished).
33

Two considerations persuade us that the district court

got it backwards. This court has refused to permit certification

of a class where many members “have nothing to gain from an

injunction, and the declaratory relief they seek serves only to

facilitate the award of damages.” Bolin v. Sears, Roebuck & Co.,

231 F.3d 970, 978 (5th Cir. 2000). As just noted, many potential

class members have voted with their investments to remain in the

EDS Stock Fund and, inferably, do not want it closed; other

potential class members profited from stock swings caused by the

alleged fiduciary violations; and still other potential class

members would gain or lose damages based on the breach date

selected by the court. In light of these real, not simply alleged,

problems caused by such conflicts, the inability of absent class

members to receive notice of this suit or have an opportunity to

opt out is extremely troubling.

Second, to effectuate Appellees’ principal goal —

reimbursement into the individual accounts of each Plan Participant

— numerous individualized hearings would be required. Final

resolution of class members’ claims will involve “new and

substantial legal and factual issues,” Allison, 151 F.3d at 415,

including the § 404(c) defense, whether an individual class member

was actually harmed by the purported breaches of fiduciary duty,

and the releases. Resolution of these claims will require “complex

individualized determinations,” Allison, 151 F.3d at 415. Again,

the district court’s acknowledgment that a fiduciary would have to
34

sort out the claims of individual class members demonstrates how

little the “incidental damages” (which would total many millions of

dollars) will “be more in the nature of a group remedy,” as Allison

intended. See id.

The inappropriateness of Rule 23(b)(2) in this case is

strongly supported by the court’s decision in Nelson, which states:

Relief will depend on individualized calculations for

each account. As noted, individual claimants may present

issues of causation and reliance, so that a classwide

determination that defendants violated ERISA’s

requirements would not necessarily lead to an award in

favor of a particular claimant. Also, defendants may be

able to raise individual defenses regarding each class

member. Thus, monetary relief here would not “flow

directly from liability to the class as a whole.”

Certification under Rule 23(b)(2) is not available here.

Id. at * 11.

It may be objected that because Plaintiffs’ suit is

characterized as a derivative action on behalf of the Plan, resort

to the Rule 23 class action requirements is not mandated, and

Rule 23(b)(2) best represents a compromise between the derivative

nature of the claims and the ultimate relief that may be granted in

individual Participants’ accounts. Lower court cases are in fact

divided over which provision of Rule 23 applies. Compare Piazza v.

EBSCO Indus., Inc., 273 F.3d 1341, 1352-53 (11th Cir. 2001) (abuse

of discretion for the district court to certify a (b)(3) class)

with Coan v. Kaufman, 349 F. Supp. 2d (D. Conn. 2004)(“. . . Courts

. . . have nonetheless applied the procedural safeguards of either

Rule 23 or Rule 23.1 in order to protect the plan and absent

participants.”) (citing cases). Perhaps no general procedural rule
35

can be enunciated. In this case, we are confident that the

subtlety of the fiduciary claims alleged, the intraclass conflicts

and the individualized nature of potential defenses mandated that

the case proceed as a class action and equally mandated, on the

facts before us, against the propriety of a Rule 23(b)(2) class.

On remand, after further consideration, the court may adduce

sufficient grounds to approve a class pursuant to the standards

this court has developed.

4. Rule 23(b)(1).

The district court also purported to certify a class

under Rule 23(b)(1). Although certification must be reversed under

Rule 23(a), we point out the court’s cursory Rule 23(b)(1) analysis

in the interest of judicial efficiency and to provide guidance on

remand. See United States v. Murillo-Lopez, 444 F.3d 337, 339 &

n.5 (5th Cir. 2006).

Numerous courts, like the district court, have

conclusionally declared that a (b)(1) class is appropriate in an

ERISA lawsuit “on behalf of the plan.” Of course, a Rule

23(b)(1)(B) limited fund class action is plainly not appropriate.

See Ortiz v. Fibreboard Corp., 527 U.S. 815, 119 S. Ct. 2295

(1999). What the court evidently meant was a certification under

Rule 23(b)(1)(A), which authorizes a class action where the party

opposing the class would be subject to “incompatible standards” if

separate actions were brought. Such a remedy has some intuitive
30 The dissent contends that no intraclass conflict exists with respect

to the class members’ competing views on injunctive relief since the propriety

of injunctive relief will be determined at the end of litigation and an

injunction may be unnecessary.

36

appeal to the extent that Plaintiffs here seek equitable relief:

A judgment removing the fiduciaries in one lawsuit would be

inconsistent with a judgment in another permitting them to stay.

On the other hand, as even the dissent recognizes, achieving

injunctive relief is not the principal goal of this litigation.30

The focus on monetary damages would set this case apart from the

examples of classic Rule 23(b)(1) class actions, which are based on

situations “in which different results in separate actions would

impair the opposing party’s ability to pursue a uniform course of

conduct.” C.WRIGHT, A.MILLER, & M.KANE, 7A FEDERAL PRACTICE & PROCEDURE

§ 1773, at 16 (2005 ed.).

If the district court eventually reaches a Rule 23(b)

analysis, it should consider the extent to which the due process

concerns inherent in Allison apply to a (b)(1)(A) class and whether

a (b)(1)(A) class can be maintained if damages are the primary

remedy sought. See Zinser v. Accufix Research Inst., Inc.,

253 F.3d 1180, 1193-95 (9th Cir. 2001). The resolution of these

issues is still uncertain in the Fifth Circuit. What seems fairly

clear is that depriving tens of thousands of EDS shareholders of

notice and opt-out protections, where there are undeniable

intraclass conflicts pertinent to significant monetary outcomes,
31 The Eleventh Circuit decision in Piazza v. Ebsco Indus., Inc., 273

F.3d 1341 (11th Cir. 2001), certified a Rule 23(b)(1)(A) class action to redress

fiduciary duty breaches to an ERISA plan pursuant to § 502(a)(2), but no

intraclass conflicts were asserted against the maintenance of the class or as a

basis for questioning the denial of notice and opt-out.

37

would create an unacceptable risk of unfair treatment of class

members.31

III. CONCLUSION

For the foregoing reasons, the class certification by the

district court is VACATED and REMANDED. The court may reconsider

its class certification pursuant to the standards discussed herein.

VACATED AND REMANDED.
38

REAVLEY, J., Circuit Judge, dissenting: 

I would affirm the order certifying the class action. The

majority decides that plaintiffs must return to the district

court for further pondering of whether Title 29 U.S.C. §

1104(c)(1) relieves the fiduciary of liability, that

certification under Rule 23 (b)(2) would be inappropriate

because of conflict between members of the class, and that Rule

23(b)(1) is “conceptually unclear.” As I understand the

opinion, it misapplies § 1104(c)(1), reflects an incorrect view

of conflict, and ignores the unique applicability of Rule

23(b)(1) in this case. 

A. Control Over Assets

EDS employees could choose among a dozen or more options,

including an EDS stock fund, for investment of their plan

contributions. Matching plan contributions made by the company

on the employees’ behalf were mandatorily invested in the EDS

stock fund, where they were required to remain for two years.

In this suit, the employees who selected the EDS stock fund sue

for fiduciary imprudence in affording them that option, but the

majority holds that the statute and regulations count the
1 The majority and many writers use the ERISA §

404(c) designation and I will do so hereafter. 

39

employee selection of the EDS option to be control of assets

that absolves the fiduciary of liability. 

Title 29 § 1104(c)(1) (also ERISA § 404(c)1) provides in

relevant part that “[i]n the case of a pension plan which

provides for individual accounts and permits a participant or

beneficiary to exercise control over the assets in his account,

if a participant or beneficiary exercises control over the

assets in his account [then] no person who is otherwise a

fiduciary shall be liable [] for any loss, or by reason of any

breach, which results from such participant’s or beneficiary’s

exercise of control.” The statute further provides that the

circumstances in which a participant or beneficiary is

considered to have exercised independent control over assets

in his account as contemplated by § 404(c) are to be determined

under regulations of the Secretary of the Department of Labor

(“DOL”). Id. at (c)(1). The agency’s regulations describing

those circumstances, and the consequences of a participant’s

or beneficiary’s exercise of control are set forth at 29 C.F.R.

§ 2550.404c-1. Under these regulations, in order to qualify

for relief from fiduciary liability, plans must meet certain
40

general requirements, including provision of sufficient

investment information and disclosure of material facts. 29

C.F.R. §§ 2550.404c-1(b)(2)(B), (c)(2)(ii) (2004). The EDS

plan’s full compliance with these requirements is, at this

stage, undetermined.

For present purposes, we need not consider questions about

what information the law requires a fiduciary to give

participants about investments in a selected stock option, but

I would hold that imprudent designation of an option for

participants to choose constitutes grounds for fiduciary

liability, and falls outside the scope of participant control

envisaged by § 404(c). That is the position of the Department

of Labor, of the commentators, and of the case law. 

The DOL regulation provides that a plan fiduciary will not

be liable for any loss that “is the direct and necessary result

of [a] participant’s or beneficiary’s exercise of control.”

29 C.F.R. § 2550.404c-1(d)(2)(i)(2004). The DOL has made clear

that § 404(c) does not relieve fiduciaries of their prudence

duty in selecting and monitoring plan investment options. See

Final Regulation Regarding Participant Directed Individual

Account Plans (ERISA Section 404(c) Plans), 57 Fed. Reg. 46906-

01, 1992 WL 277875 (Oct. 13, 1992). (General preamble, n.27)
2 See, e.g., DOL Advisory Opinion No. 98-04A, 1998 WL

326300, at *1, *3 n.1 (May 28, 1998); DOL Advisory Letter,

1997 WL 1824017, at *2 (Nov. 26, 1997), amicus briefs in this

case and in In re Enron Corp. Securities, Derivative & ERISA

Litig., 284 F. Supp. 2d 511 (S.D. Tex 2003) and In re ScheringPlough Corp. ERISA Litig., 420 F.3d 231 (3d Cir. 2005). 

3 See Auer v. Robbins, 519 U.S. 452, 457, 117 S. Ct.

905, 909 (1997); Wells Fargo Bank of Texas N.A. v. James, 321

F.3d 488, 494-95 (5th Cir. 2003).

41

(“[T]he Department points out that the act of limiting or

designating investment options which are intended to constitute

all or part of the investment universe of an ERISA 404(c) plan

is a fiduciary function which, whether achieved through

fiduciary designation or express plan language, is not a direct

or necessary result of any participant direction of such

plan.”) (emphasis added). The DOL has consistently reiterated

this interpretation.2

An agency’s reasonable interpretation of its own

regulation is entitled to the highest deference under Chevron

U.S.A., Inc. v. National Resource Defense Council, Inc., 467

U.S. 837, 104 S. Ct. 2778 (1984).3 The majority says the DOL’s

preamble is entitled to deference only to the extent it has

power to persuade, citing Louisiana Environmental Action

Network v. EPA, 382 F.3d 575 (5th Cir. 2004), where we held

that an interpretation set forth in the preamble of a proposed
42

regulation, which had not yet been subjected to formal noticeand-comment rulemaking, was entitled to less than Chevron,

deference. Id. at 583. But here the statute expressly

delegated to the agency the task of promulgating a regulation

governing when a participant will be viewed as having exercised

independent control over the assets in his or her account for

the purposes of § 404(c) relief from fiduciary liability. See

29 U.S.C. § 1104(c)(1). 

The DOL’s interpretation, as quoted above, was contained

in the preamble to a revised version of the proposed § 404(c)

regulation, which was promulgated and noticed in March 1991.

See Participant Directed Individual Account Plans, 56 Fed. Reg.

10724-01, 1991 WL 301434 (Mar. 31, 1991). This version of the

regulation was the subject of further comment, and the final

regulation, containing the same interpretative passage in the

preamble, was adopted in October 1992. See Final Regulation

Regarding Participant Directed Individual Account Plans (ERISA

Section 40(c) Plans), 57 Fed. Reg. 46906-01, 1992 WL 277875

(Oct. 13, 1992). The DOL’s interpretation of the final noticeand-comment regulation as preserving the fiduciary’s duty to

prudently select and monitor the plan investment options, which

was published in the federal register and uniformly adhered to
43

in numerous public pronouncements, is entitled to controlling

weight to the extent that it is reasonable. 

The DOL’s interpretation of its own § 404(c) regulation is

reasonable. Section 404(c) need not be read to shield

fiduciaries from liability for including an imprudent

investment option on the investment menu in a self-directed

plan. By allowing plans to limit their universe of investment

choices and still be considered 404(c) plans, the DOL left

participants and their beneficiaries at the mercy of the wisdom

of whoever made these limiting choices. There should be some

assurance that these limited investment choices will be

prudently selected. If no duty of prudence attaches to

selection of investment options, plan fiduciaries could

imprudently select a full menu of unsound investments, among

which participants would be free to choose at their peril,

while the fiduciaries remain insulated from responsibility.

The DOL was within its delegated authority in deciding not to

offer relief for the decision to offer a plan investment

option. 

All commentators recognize that § 404(c) does not shift

liability for a plan fiduciary’s duty to ensure that each
4 See, e.g., 1 MICHAEL J. CANAN, QUALIFIED RETIREMENT PLANS

§ 16.28 (2006 ed.) (“[T]o some degree, fiduciary liability

remains for selection of the investment choices.”); Paul J.

Donahue, Plan Sponsor Fiduciary Duty for the Selection of

Options in Participant-Directed Defined Contribution Plans and

the Choice Between Stable Value and Money Market, 39 AKRON L.

REV. 9, 12 (2006) (“Selection of a [directed contribution]

Plan’s investment options remains a fiduciary function, and

Plan Sponsors must choose those investment options

knowledgeably and thoughtfully.”); 1 RONALD J. COOKE, ERISA

PRACTICE AND PROCEDURES §6:30 (2d ed. 1996 & Supp. 2004)(“ERISA

Section 404(c) does not relieve plan fiduciaries of the

responsibility for determining whether it is appropriate to

offer employer stock as an investment option under the Plan.”);

MICHAEL B. SNYDER, 3 COMPENSATION & BENEFITS (HR Series) § 33.138

(2006) (“Plan fiduciaries of ERISA § 404(c) plans remain

responsible for . . . prudently selecting and monitoring plan

investment alternatives.”); Debra A. Davis, Do-it-YourselfRetirement: Allowing Employees to Direct the Investment of

Their Retirement Savings, 8 U. PA. J. LAB. & EMP. L. 353, 377

(2006) (recognizing that plan “fiduciaries remain responsible

for prudently selecting and monitoring investments” even if the

plans comply with section 404(c)); David W. Powell, The Public

Company ESOP in 2004, 30 J. PENSION PLANNING & COMPLIANCE 70 (Sept.

30, 2004) (“[T]he fiduciary will remain responsible for whether

it is prudent for the investment in question to be offered.”);

Kathleen Sheil Scheidt & David L. Wolfe, Prudence and

Diversification Revisited — ERISA Section 404(c) Protection in

the Wake of Enron, EMP. BENEFITS J. (March 2003) (“Even if a

plan fully complies with ERISA Section 404(c), the plan

fiduciaries retain responsibility for selecting the investment

alternatives to be offered under the plan and monitoring the

performance and costs of those alternatives to ensure that they

remain prudent investment alternatives. This includes periodic

analysis of the prudence of retaining employer stock as an

investment alternative it is available under the plan.”); 1

JEFFREY D. MAMORSKY, EMPLOYEE BENEFITS LAW § 12.05 (2002) (“It is

important to note, however, that even if Section 404(c)

applies, the mere selection of an investment alternative in a

plan which limits options is a fiduciary decision and

accordingly the fiduciary will remain potentially liable for

44

investment option is and continues to be a prudent one.4
the selection of the investment alternatives.”); Morton A.

Harris, Working with Participant Directed Investments Under

ERISA § 404(c), SG008 ALI-ABA (July 2001) (“ERISA section

404(c) does not relieve a fiduciary from liability in choosing

the investment alternatives made available to participants and

beneficiaries under the plan nor in determining whether or not

to retain existing investment alternatives. In other words,

a plan fiduciary can never avoid potential liability for

negligence in picking the investments which constitute the

‘menu’ of investment alternatives made available to

participants . . .”); STEVEN J. SACHER, EMPLOYEE BENEFITS LAW 696

(2d ed. 2000) (selection of investment alternatives remains a

fiduciary function in a 404(c) plan); Frederick Reish and

Bruce L. Ashton, ERISA Section 404(c): Shifting Fiduciary

Liability in Participant-Directed Retirement Plans, PENSION &

BENEFITS WEEK NEWSLETTER, Vol. 4, No. 3, January 12, 1998 (“[T]he

responsibility for choosing and monitoring the investment

options — as opposed to participants choosing among a preselected menu of investment options — cannot be transferred to

the employees. . . . In selecting the investment options, the

responsible fiduciary must act prudently and is liable for

losses resulting from an imprudent decision. . . . In addition

to the initial selection of the investment options, the

responsible fiduciary must monitor the options to ensure that

they continue to be a prudent choice for the plan.”) (internal

quotation and citation omitted); RIA Pens. Analysis P 54,204

(2006) (“[F]iduciaries are not relieved of other obligations

in dealing with § 404(c) plans. For example, fiduciaries must

continue (subject to liability for failure) to [inter alia]

prudently select investment alternatives . . .”).

5 See, e.g., DiFelice v. U.S. Airways, Inc., 397 F.

Supp. 2d 758, 774-78 (E.D. Va. 2005); In re Dynergy, Inc.

45

Further, the majority of courts that have considered the issue

have held that, even if a plan otherwise qualifies as a §

404(c) plan, the fiduciary retains the duty to prudently select

and monitor investment options such that § 404(c) does not

provide an absolute defense to breach claims.5
ERISA Litig., 309 F. Supp. 2d 861, 893-94 (S.D. Tex. 2004);

In re Enron Corp. Securities, Derivative & ERISA Litig., 284

F. Supp. 2d 511, 574-79 (S.D. Tex. 2003); Rankin v. Rots, 278

F. Supp. 2d 853, 873 (E.D. Mich. 2003); In re Worldcom, Inc.

ERISA Litig., 263 F. Supp. 2d 745, 763-65 (S.D.N.Y. 2003);

Franklin v. First Union Corp., 84 F. Supp. 2d 720, 732 (E.D.

Va. 2000) (holding that plan fiduciaries are responsible for

selecting and removing their plans’ investment options when the

plans comply with section 404(c)).

46

The majority relies heavily on the Third Circuit’s

decision In re Unisys Sav. Plan Litigation, 74 F.3d 420 (3d

Cir. 1996), for its conclusion to the contrary. Unisys

concerned events occurring before the DOL’s § 404(c) regulation

became effective. Although some of the Unisys court’s

conclusions regarding the scope of the authorizing ERISA

statute, 29 U.S.C. § 1104(c), are similar to those contained

in the § 404(c) regulation, neither that regulation nor the

DOL’s interpretation were directly addressed. 74 F.3d at 444

n.21 (“As the regulation [29 C.F.R. § 2550.404c-1] was not in

effect when the transactions at issue occurred, it does not

apply or guide our analysis in this case.”). As courts have

recognized, Unisys and subsequent opinions that rely upon it

should not be considered controlling, particularly in light of

the DOL’s consistent contrary interpretation. See e.g.,

DiFelice v. US. Airways, Inc., 404 F. Supp. 2d 907, 909-10

(E.D. Va. 2005) (finding Unisys unpersuasive and noting that
6 I could not equate the mandatory retention as a

settlor decision free of fiduciary responsibility. In this

specific regard, the DOL has clearly stated that “the act of

limiting or designating investment options which are intended

to constitute all or part of the investment universe of an

ERISA 404(c) plan is a fiduciary function which, whether

achieved through fiduciary designation or express plan

language, is not a direct or necessary result of any

participant direction of such plan.” 57 Fed. Reg. 46,906 at

46,924 n.27. The DOL has consistently maintained its position

that plan fiduciaries have the duty to decline to follow the

terms of the plan documents where those terms require them to

invest participants’ funds in an imprudent investment vehicle

— even, and perhaps especially, where that required investment

is in company stock. See, e.g, DOL Amicus Brief in Kirschbaum

47

“every court to consider this issue with the benefit of the DOL

regulation” had agreed with the DOL interpretation). 

Holding plan fiduciaries responsible for imprudent choice

of a limited set of options does not, as EDS suggests, make it

a guarantor of participant investment returns. Plaintiffs

allege here that EDS stock had defects beyond mere riskiness

and that it was imprudent to offer it as an investment option

for anyone. Whether or not plaintiffs can prove that

allegation remains to be seen, but that is not before us at

this stage. Of course, it cannot be disputed that § 404(c)

provides no shield for the fiduciaries’ investment and

mandatory two-year retention of the matching contributions in

company stock, a decision guided by no participant direction

whatsoever.6
v. Reliant, Case No. 06-20157 (appeal pending 5th Cir. 2006);

DOL Op. Letter No. 90-05A, 1990 WL 172964, *3 (Mar. 29, 1990).

Indeed, we have recognized that, even in the context of

ESOPs, which are designed to be primarily invested in employer

securities, “ESOP fiduciaries remain subject to the general

requirements of [s]ection 404.” Donovan v. Cunningham, 716

F.2d 1455, 1467 (5th Cir. 1983). Those requirements include

the duty to reconsider a potentially imprudent investment

option, even if it is specified in the plan documents. See

ERISA § 404(a)(1)(B) (requiring that plan fiduciaries exercise

prudence “solely in the interest of the participants and

beneficiaries”), and ERISA § 404(1)(D) (stating that a

fiduciary may only follow plan terms to the extent that the

terms are consistent with ERISA). 

Most courts to address the issue have recognized that

fiduciaries for plans that hold employer stock (both ESOPs and

non-ESOP plans) are therefore obligated to consider whether it

continues to be prudent to invest in employer stock, and they

may continue to follow plan terms requiring such investment

only if prudent to do so. See, e.g., Laborers Nat’l Pension

Fund v. Northern Trust Quantitative Advisors, Inc., 173 F.3d

313, 322 (5th Cir. 1999); Kuper v. Iovenko, 66 F.3d 1447, 1457

(6th Cir. 1995); Fink v. Nat’l Sav. & Trust Co., 772 F.2d

951, 954-55 (D.C. Cir. 1985); Agway, Inc. Employees’ 401(k)

Thrift Investment Plan v. Magnuson, No. 5:03-CV-1060, 2006 WL

2934391 at *18 (N.D.N.Y. Oct. 12, 2006); Merck & Co., Inc.

Sec. Derivative & ERISA Litig., No. 05-2369, 2006 WL 2050577

at *7 (D.N.J. July 11, 2006); In re Ferro Corp. ERISA Litig.,

422 F. Supp. 2d 850, 859 (N.D. Ohio 2006) (“a fiduciary is not

required to blindly follow the terms of a plan if doing so

would be imprudent.”); In re CMS Energy ERISA Litig., 312 F.

Supp. 2d 898, 907-08 (E.D. Mich. 2004); In re Polaroid ERISA

Litig., 362 F. Supp. 2d 461 473 (S.D.N.Y. 2005); In re Sprint

Corp. ERISA Litig., 388 F. Supp. 2d 1207, 12,18-25 (D. Kan.

2004); In re Xcel Energy, Inc. Sec. Derivative & “ERISA”

Litig., 312 F. Supp. 2d 1165, 1181 (D. Minn. 2004); In re

Worldcom, 263 F.Supp.2d 745, 764-65 (S.D.N.Y. 2003); In re

Enron Corp. Sec. Derivative & “ERISA” Litig., 284 F. Supp. 2d

511, 548-49 (S.D. Tex. 2003); In re Ikon Office Solutions,

Inc. Sec. Litig., 86 F. Supp. 2d 481, 492-93 (E.D. Pa. 2000);

Canale v. Yegen, 789 F. Supp. 147, 154 (D.N.J. 1992); Ershick

48
v. Greb X-Ray Co., 705 F. Supp. 1482, 1486-87 (D. Kan. 1989).

49

B. Intra-class Conflict

Beyond the § 404(c) dispute, I do not believe the fact

that a portion of the plan participants signed general releases

upon departing the company’s employ precludes class

certification. I find no fault with the district court’s

conclusion that these releases do not extend to the plan

participants’ right to recoup plan benefits and agree that,

even if this conclusion is incorrect, no individual participant

can unilaterally release the rights of other participants to

derivatively seek recovery on behalf of the plan under §

502(a)(2). See, e.g, Bowles v. Reade, 198 F.3d 752, 759-61

(9th Cir. 1999) (rejecting the argument that settlement of a

participant’s breach of fiduciary claims against a defendant

released the plan’s claims against that defendant). The

dispute over the breadth of the release can be resolved on a

class-wide basis and, whether or not these releases preclude

the relatively small percentage of signing participants from

receiving allocation of any recovered plan assets, this does

not deny class certification. 

Further, the fact that some individual participants may

gain from allocation of any recouped plan assets and some may
7 See Milofsky v. American Airlines, Inc., 442 F.3d

311, 313 (5th Cir. 2006) (subset of participants not precluded

from bringing breach of fiduciary duty claims under ERISA

sections 502(a)(2) and 409(a) where remedy would not benefit

all participants); In re Schering-Plough Corp. ERISA Litig.,

420 F.3d 231, 239-41 (3d Cir. 2005) (derivative action under

§ 502(a)(2) was available to a subset of participants to

recover losses sustained to plan by breaches of fiduciary

duty); Kuper v. Iovenko, 66 F.3d 1447, 1452-53 (6th Cir.

1995); In re CMS ERISA Litig., 225 F.R.D. 539, 543 (E.D. Mich.

2004); Woods v. Southern Co., 396 F. Supp. 2d 1351, 1361-62

(N.D. Ga. 2005)(rejecting argument that a participant cannot

be said to seek redress for losses to the plan unless every

participant in the Plan was affected by the challenged breach

of fiduciary duty).

50

not does not present a conflict. All courts that have

considered the issue, including this one, have rejected

arguments that a § 502(a)(2) ERISA action must allege harm to

all of a plan’s individual participants.7 To hold that

variances among allocation present a class conflict is a backdoor avoidance of this universal conclusion. In short, the

possibility that individualized benefit determinations will be

required is insufficient to bar class certification. 

Further, because the plaintiffs are suing under section

502(a)(2) on behalf of the plan, it is not material whether or

not individuals lost money or had access to investment

information regarding EDS stock that might have prevented them

from doing so. The loss causation issue is whether the

defendants caused a loss to the plan (ERISA § 409(a), 29 U.S.C.
51

§ 1109(a)) by including EDS stock as a plan option, regardless

of whether or not individuals like plaintiff Mizell “traded

[his] way to profit,” as the majority states, by continuing to

invest in allegedly imprudent employer securities. See In re

Enron Corp. Sec. Derivative Sec. & “ERISA” Litig., No. MDL

1446, Civ. A. H-01-3913, 2006 WL 1662596, *3-4 (S.D. Tex. June

7, 2006); DiFelice v. U.S. Airways, Inc., 235 F.R.D. 70, 78-

79, 83 (E.D. Va. March 22, 2006). We have already implicitly

ruled against the defendants’ argument — and the majority’s

position — on this front in affirming the class in the parallel

EDS securities fraud suit. See Feder v. Electronic Data

Systems Corp., 429 F.3d 125, 138 (5th Cir. 2005) (“We reject

the argument that a proposed class representative in a

fraud-on-the-market securities suit is as a matter of law

categorically precluded from meeting the requirements of Rule

23(a) simply because of a post-disclosure purchase of the

defendant company's stock.”). 

Finally, our disposition of this appeal is not affected by

the fact that some participants may not agree with the request

for injunctive relief in the form of removing the EDS stock

fund as a plan option. While prudence will be evaluated as of

the time of the alleged fiduciary breach, the value of
52

injunctive relief will be measured as of the current status

quo. That some class members may not want EDS stock removed

as an investment alternative does not present a conflict.

Rather, the district court will decide what is best for the

plan and, accordingly, will weigh the fact that members

continue to invest in and hold the company stock in that

determination. 

For all of these reasons, I do not see either intra-class

conflicts or lack of typicality on the part of the named

plaintiffs that would preclude class certification under the

prerequisites of Rule 23(a). 

C. The District Court’s Certification and Rule 23(b).

The majority’s primary focus on class action Rule 23(b)(2)

is misplaced because certification was also ordered under Rule

23(b)(1), and that rule is particularly suited to this

litigation. Rule 23(b)(1) provides that: 

An action may be maintained as a class action if the

prerequisites of subdivision (a) are satisfied, and

in addition:
53

(1) the prosecution of separate actions by or

against individual members of the class

would create a risk of

(A) inconsistent or varying adjudications

with respect to individual members of

the class which would establish

incompatible standards of conduct for

the party opposing the class, or 

(B) adjudications with respect to

individual members of the class which

would as a practical matter be

dispositive of the interests of the

other members not parties to the

adjudications or substantially impair

or impede their ability to protect

their interests. 

FED. R. CIV. P. 23(b)(1). 

Although ERISA’s civil enforcement rules allow a single

plaintiff to sue for plan-wide relief, much of today’s ERISA

litigation is maintained on a class action basis. The
8 The risk of inconsistency encompasses but is not,

as the majority implies, limited to injunctive considerations.

Further, I do not acknowledge, as the majority states, that

injunctive relief is not at issue here, only that the

appropriateness of such relief will be determined (1) as to the

good of the plan (rather than the individuals), and (2) at a

different point than that fixed for determination of monetary

damages. 

54

fiduciary duty of prudence at issue is owed to the entire class

and separate actions would create the risk of establishing

inconsistent standards under ERISA. Were the individual class

members each left to bring separate § 502(a)(2) actions on

behalf of the plan, each case could conceivably result in

different courts reaching conflicting decisions regarding not

only the ultimate prudence of investment in EDS stock, but also

the applicability of the various defenses the defendants seek

to interpose. See In re CMS Energy ERISA Litig., 225 F.R.D.

at 543 (certifying class under Rule 23(b)(1) in face of

allegations similar to this case to avoid risk of inconsistent

rulings concerning fiduciary status and materiality of alleged

omissions where the “single overriding common issue is whether

CMS stock was an imprudent investment for the Plan”).

Contradictory rulings as to the appropriateness of injunctive

relief would also place imcompatible demands on the

defendants.8 In keeping with this rationale, a number of
9 See, e.g., In re Tyco Int’l, Ltd., No. MD-02-1335-

PB, 2006 WL 2349338, *7-8 (D. New Hampshire, Aug. 15, 2006)

(certifying class suing on behalf of plan under Rule

23(b)(1)(B)); In re Enron Corp. Sec. Derivative Sec. & “ERISA”

Litig., No. MDL 1446, Civ. A. H-01-3913, 2006 WL 1662596, *13-

15 (S.D. Tex. June 7, 2006) (certifying a class suing on behalf

of a plan under Rule 23(b)(1), finding both subsections (A) and

(B) applicable); Rogers v. Baxter Int’l, Inc., No. 04 C 6476,

2006 WL 794734, *11 (N.D. Ill. Mar. 22, 2006) (same); Summers

v. UAL Corp. ESOP Comm., 2005 WL 1323262 (N.D. Ill. Feb. 17,

2005); In re Williams Companies ERISA Litig., 231 F.R.D. 416,

424-25 (N.D. Okla. 2005) (same); In re ADC Telecommunications

ERISA Litig., No. Civ. 03-2989ADMFLN, 2005 WL 2250782, *4-5 (D.

Minn. Sept. 15, 2005) (same); Baker v. Comprehensive Employee

Solutions, 227 F.R.D. 354, 360 (D. Utah 2005); Rankin v. Rots,

220 F.R.D. 511 (E.D. Mich. 2004); In re Worldcom, Inc. ERISA

Litig., WL 2211664 *3 (S.D.N.Y. Oct. 4, 2004) (“[C]ertification

is appropriate under Rule 23(b)(1)(B). Any adjudication with

respect to individual members of the class will as a practical

matter be dispositive of the interests of the other members of

the class.”); In re Ikon Office Solutions, 191 F.R.D. 457, 464

(E.D. Pa. 2000); Bunnion v. Consol. Rail Corp., 1998 WL 372644

(E.D. Pa. 1998); Gruby v. Brady, 838 F. Supp. 820, 828 (S.D.

N.Y. 1993); Specialty Cabinets & Fixtures, Inc. v. Am.

Equitable Life Ins. Co., 140 F.R.D. 474, 479 (S.D. Ga.

1991)(“Because individuals may bring class actions to remedy

breaches of fiduciary duty only on behalf of the plan, rather

than themselves, the court cannot allow absent participants or

beneficiaries to opt out of this class. The right to recovery,

after all, belongs to the plan.”)(citation omitted).

55

courts have certified ERISA fiduciary breach suits under Rule

23(b)(1).9 I would follow this lead and affirm the district

court’s certification order under Rule 23(b)(1). 

The parties have devoted much of their extensive briefing

to discussion bearing on the merits of plaintiffs’ claims.

While plaintiffs may face factual obstacles on the way to
56

proving their claim, such matters are not before us at this

stage. For example, the fact that, as the majority opinion

observes, EDS stock has recovered in large measure is not

relevant. We have recognized that prudence is a test which

measures the fiduciary’s conduct at the time of the decision,

rather than the success or failure of his or her course of

action. Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997)

(“Prudence is to be evaluated at the time of the investment

without benefit of hindsight.”). Class certification is

appropriate regardless of the ultimate outcome on the merits

because the Rule 23 prerequisites have been met as the district

court correctly determined. 

It appears to me that the majority’s view of the effects

of section 404(c) and the general releases, and how they affect

all aspects of the class action certification, controls the

matter, and I have difficulty seeing how it leaves the district

court any room for certification on remand. In addition to

prolonging an already over-lengthy process, the majority’s

disposition presents the district court with a futile exercise.