2005 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-19-2005

In Re: Schering

Precedential or Non-Precedential: Precedential

Docket No. 04-3073

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Recommended Citation

"In Re: Schering " (2005). 2005 Decisions. Paper 595.

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 04-3073

 

IN RE: SCHERING-PLOUGH CORPORATION ERISA

LITIGATION,

JINGDONG ZHU, on behalf of

himself and all other similarly

situated; ADRIAN FIELDS, on

behalf of himself/herself and all

others similarly situated,

Appellants

 

On Appeal from the United States District Court

for the District of New Jersey, Newark

(D.C. Civil Action No. 03-cv-01204)

District Judge: Honorable Katharine S. Hayden

 

Argued June 7, 2005
 The Honorable Arthur L. Alarcón, Senior Judge, United *

States Court of Appeals for the Ninth Circuit, sitting by

designation.

2

Before: AMBRO, STAPLETON, and 

ALARCÓN , Circuit Judges *

(Filed: August 19, 2005)

Richard S. Schiffrin, Esq.

Joseph H. Meltzer, Esq.

Schiffrin & Barroway LLP

280 King of Prussia Road

Radnor, PA 19087

Joseph DePalma, Esq.

Lite DePalma Greenberg & Rivas, LLC

Two Gateway Center, 12th Floor

Newark, NJ 07102

Peter H. LeVan, Jr. Esq. (Argued)

Hangley, Aronchick, Segal & Pudlin

One Logan Square, 27th Floor

Philadelphia, PA 19103

Counsel for Appellants
3

Douglas S. Eakeley, Esq.

Gavin J. Rooney, Esq.

Lowenstein Sandler, PC

65 Livingston Avenue

Roseland, N.J. 07068

Ethan M. Posner, Esq. (Argued)

Peter J. Nickles, Esq.

Amy N. Moore, Esq.

Caroline M. Brown, Esq.

Frederick G. Sandstrom, Esq.

Covington & Burling

1201 Pennsylvania Avenue, N.W.

Washington, D.C. 2004

Jonathan A. Wasserman, Esq.

Schering-Plough Corporation

2000 Galloping Hill Road

Kenilworth, N.J. 07033

Counsel for Appellees

Howard M. Radzely

Timothy D. Hauser

Elizabeth Hopkins, Esq.

Theresa S. Gee, Esq. (Argued)

United States Department of Labor

Plan Benefits Security Division

200 Constitution Avenue, N.W.
4

Room –4611

Washington, D.C. 20210

Counsel for Amicus Curiae U.S. Department of Labor

Mary Ellen Signorille, Esq.

Melvin Radowitz, Esq.

601 E. Street, N.W.

Washington, D.C. 20049

Counsel for Amicus Curiae AARP

Kent A. Mason, Esq.

Jason K. Bortz, Esq.

Davis & Harman, LLP

1455 Pennsylvania Ave., NW

Washington, D.C. 20004

Robert G. Chambers, Esq.

Jack W. Campbell IV, Esq.

Helms, Mulliss & Wicker

201 North Tryon Street

Charlotte, N.C. 28202

Counsel for Amicus Curiae American Benefits Council

 

OPINION OF THE COURT

 
5

ALARCÓN, Circuit Judge

We must decide in this matter whether, under the

Employee Retirement Income Security Act of 1974 (“ERISA”),

the District Court erred in ruling that former employees, who

were participants in a defined contribution plan, may not

prosecute a derivative action on behalf of an employees’ savings

plan to recover losses sustained by the savings plan because of

alleged breaches of fiduciary duty. We conclude that the

Plaintiffs may seek money damages on behalf of the fund,

notwithstanding the fact the alleged fiduciary violations affected

only a subset of the saving plan’s participants.

Accordingly, we will reverse and remand for further

proceedings.

I

A

The complaint alleges the following facts. Jingdong Zhu

and Adrian Fields (the Plaintiffs) are former employees of

Schering-Plough Corporation (“Schering”). During their

employment with Schering, the Plaintiffs elected to participate

in the Schering-Plough Employees’ Savings Plan (“the Savings

Plan” or “the Plan”). Under the Savings Plan, a Schering
An employee who participates in a deferred 1

compensation plan to save for retirement qualifies for tax

benefits pursuant to 26 U.S.C. § 401(k). The type of deferred

compensation plan offered to Schering employees is referred to

in ERISA as an “individual account plan” or a “defined

contribution plan.” 29 U.S.C. § 1002(34). These terms refer to

“a pension plan which provides for an individual account for

each participant and for benefits based solely upon the amount

contributed to the participant’s account, and any income,

expenses, gains and losses, and any forfeitures of accounts of

other participants which may be allocated to such participant’s

account.” Id.

6

employee agreed to reduce his or her take-home compensation

in order to invest that amount in one or more investment funds

on a pre-tax basis . The Savings Plan authorized a participant to 1

select from different investment funds. One of the investment

funds was the Schering Plan Company Stock Fund (“the

Company Stock Fund”), which consisted of company stock.

Under the Savings Plan, a participant was not permitted to invest

more than 50% of his or her future contributions in Schering

stock. Some of the Plaintiffs’ deferred compensation included

an investment in the Company Stock Fund.

As of December 31, 2001, Schering stock made up

approximately 31% of the value of the Saving Plan’s assets.

More than 60% of the employees who participated in the Saving
7

Plan had at least some of their assets allocated to the Company

Stock Fund. In fiscal year 2001 the loss in the value of Schering

stock constituted 87% of the drop in value of the Saving Plan’s

assets, and in 2002 the loss in Schering’s stock’s value

constituted 50% of the Saving Plan’s net loss. The loss to the

Savings Plan was approximately $138,000,000. By June of 2003

the price of Schering stock had fallen below $20 per share from

a class-period high of better than $60 a share.

B

On October 6, 2003, the Plaintiffs filed this class action

pursuant to 29 U.S.C. § 1132(a)(2) on behalf of the Savings Plan

and “[a]ll persons who were participants in or beneficiaries of

the Saving Plan at any time between July 29, 1998 and the

present (the ‘Class Period’), and whose accounts included

investments in Schering stock.” The complaint named as

defendants and as fiduciaries of the Savings Plan Schering,

Richard Kogan, its former CEO, members of the Schering

Board’s Pension Committee, the Schering-Plough Employees

Benefits Committee and one of its members, the ScheringPlough Benefits Investment Committee and three of its

members, the counsel of the Investment Committee, and

Vanguard Group, Inc., the Trustee of the Savings Plan

(collectively “the Defendants”).
 29 U.S.C. § 1109 reads as follows:

2

Liability for breach of fiduciary duty

(a) Any person who is a fiduciary with respect to a plan

who breaches any of the responsibilities, obligations, or

duties imposed upon fiduciaries by this title shall be

personally liable to make good to such plan any losses to

the plan resulting from each such breach, and to restore

8

The complaint alleges that the Defendants breached their

fiduciary duties of prudence, care, and loyalty by continuing to

offer the Company Stock Fund as one of the Savings Plan

alternatives when they knew that Schering’s stock price was

unlawfully and artificially inflated. Additionally, the Plaintiffs

alleged that the Defendants failed to disclose negative material

information about Schering, which induced participants in the

Savings Plan to elect to invest in the Company Stock Fund. The

complaint also alleges that some of the Defendants did not

loyally serve the Saving Plan participants by taking steps to

avoid a conflict of interest such as making appropriate public

disclosures, divesting the Savings Plan of Schering stock,

discontinuing further investments in Schering stock, consulting

independent fiduciaries, or resigning as Savings Plan fiduciaries.

In lieu of answering the complaint, the Defendants filed

a motion to dismiss the action for failure to state a claim under

§ 1109(a). The Defendants argued that “[b]ecause [Section 2
to such plan any profits of such fiduciary which have

been made through use of assets of the plan by the

fiduciary, and shall be subject to such other equitable or

remedial relief as the court may deem appropriate,

including removal of such fiduciary. A fiduciary may

also be removed for a violation of 29 USCS § 1111.

(b) No fiduciary shall be liable with respect to a breach

of fiduciary duty under this title if such breach was

committed before he became a fiduciary or after he

ceased to be a fiduciary.

9

1109(a)] authorizes relief only for ‘the plan’, a participant can

state a claim only if he proceeds in a representative capacity on

behalf of ‘the plan as a whole’ and seeks to recover for all plan

participants allegedly injured by the fiduciary breach.”

(Emphasis in the original.). In addition, they asserted that the

Plaintiffs do not seek relief on behalf of the Plan as a whole

because the complaint allegedly excludes current employees

who were part of the sub-group that invested in the Company

Stock Fund.

They further maintained that the consolidated complaint

improperly seeks “individual relief for each Plan participant”

because it prays for “an allocation ‘among the Participants’

individualized accounts in proportion to the accounts’ losses.’”

(Emphasis added in the Defendants’ motion.). Finally, the

Defendants contended that the Plaintiffs failed to allege facts
29 U.S.C. § 1132(a)(2) reads as follows: “A civil action

3

may be brought . . . by the Secretary, or by a participant,

beneficiary or fiduciary for appropriate relief under section 1109

of this title.”

10

showing detrimental reliance by the Saving Plan’s participants

on the Defendants’ alleged misrepresentations and nondisclosures.

The District Court granted the Defendant’s motion and

dismissed the consolidated complaint with prejudice. It held that

the Plaintiffs lacked standing to prosecute this action under 29

U.S.C. §§ 1109(a) and 1132(a)(2) because the consolidated 3

complaint alleges only “harm suffered by the individual Plan

Participants and not the Savings Plan, and seeks relief measured

by the harm to individuals and tailored for the benefit of

individuals, and not the Savings Plan.” The District Court

summarized its conclusion in these words:

Even assuming that each defendant

is an ERISA fiduciary, that each of

plaintiffs’ allegations concerning

defendants’ conduct were true, and

that this conduct rose to a level to

breach ERISA’s fiduciary duties

(without the Court opining as to
11

merits of these assumptions),

plaintiffs cannot demonstrate how

any defendant would be “personally

liable for damages (‘to make good

to [the] plan any losses to the plan

resulting from each such breach’)”

to the Saving Plans because it is

only Plan Participants who might

be able to show that they suffered

individualized losses.

The District Court commented further that because

“plaintiffs can point to no set of facts that would demonstrate

losses to the plan. . . . the Court need not reach defendants’

further arguments in favor of dismissal.”

The Plaintiffs have timely appealed. The District Court

had subject matter jurisdiction pursuant to 29 U.S.C. §

1132(e)(1) of ERISA. This Court has appellate jurisdiction

under 28 U.S.C. §§ 1291, 1294(1).

II

A

The Plaintiffs contend that “[t]he district court erred in
12

failing to distinguish between the plan-wide nature of the losses

caused by defendants’ fiduciary breaches, and the fact that the

losses caused by those breaches are reflected in the Plan’s

individual participant accounts.” They argue that the District

Court erred in concluding that their contributions were kept in

separate, segregated accounts and never became a part of the

Saving Plan’s assets. Instead, the Plaintiffs maintain that the

Savings Plan was a unitary trust that purchased and maintained

stock in the Company Stock Fund, which was one of the

fourteen investment alternatives in a defined contribution

employee benefit plan. The Plaintiffs also assert that the District

Court erred in determining that the Company Stock Fund was an

individual account plan and an Employee Stock Ownership Plan

(“ESOP”).

We exercise de novo review over

the dismissal of claims under

Federal Rule of Civil Procedure

12(b)(6). A.D. Bedell Wholesale

Co. v. Philip Morris Inc., 263 F.3d

239, 249 n.25 (3d Cir. 2001).

Furthermore, we must take all

factual allegations and reasonable

inferences as true and view them in

the light most favorable to

Plaintiffs. Id. The District Court
13

properly dismissed Plaintiffs’

complaint only if Plaintiffs could

have proved no set of facts entitling

them to relief. Id.

Mariana v. Fisher, 338 F.3d 189, 195 (3d Cir. 2003) (full

citation provided).

Under § 1002(21)A of ERISA, 29 U.S.C. § 1002(21)A,

those having discretionary authority or discretionary

responsibility in the administration of a plan are fiduciaries.

Section 1104 imposes upon them fiduciary duties including the

duties of “care, skill, prudence, and diligence under the

circumstances.” 29 U.S.C. § 1104. Section 1109(a) makes plan

fiduciaries “personally liable to make good to [the] plan any

losses to the plan resulting from each . . . breach” of fiduciary

duty. 29 U.S.C. § 1109(a). And, finally, § 1132(a)(2) provides

that a “civil action may be brought . . . by a participant or

beneficiary . . . for appropriate relief under section 1109.” 29

U.S.C. § 1109.

The issue presented here is whether the complaint states

a claim under § 1109 – i.e., whether the complaint seeks relief

for the Schering-Plough Employees’ Savings Plan based on

allegations that there were “losses to the plan resulting from [a]

breach” of fiduciary duty. We believe it clearly does. 
 The Supreme Court did not hold otherwise in 4

Massachusetts Mutual Life Insurance Company v. Russell, 473

U.S. 134 (1985). While the Court did observe in that case that

§ 1132(a)(2) actions seek remedies which provide a benefit “to

the plan as a whole,” the issue presented here was not before the

Court. Moreover, the recovery in this case would go to the Plan

as a whole to be held in accordance with the terms of the plan,

including the payment of operating expenses and the like, which

would redound to the benefit of all participants. 

14

The complaint alleges that “[a]s a consequence of the

defendants’ breaches [of fiduciary duty], the Plan suffered

significant losses” and seeks “a monetary payment to the Plan to

make good to the Plan the losses to the Plan resulting from

[those] breaches of fiduciary duty.” Section 1109 allows the

Plan to recover “any losses” from a breach of fiduciary duty. 29

U.S.C. § 1109 (emphasis added). The fiduciary’s liability is not

limited to plan “losses that will ultimately redound to the benefit

of all participants.” The Plan held Schering-Plough stock as an

asset and that asset was greatly reduced in value allegedly

because of breaches of fiduciary duty. This clearly was a “loss”

to the Plan within the meaning of § 1109.4

Just as the fact that the assets at issue were held for the

ultimate benefit of Plaintiffs does not alter the fact that they

were held by the Plan, so, too, the fact that Plaintiffs may have

to show individual reliance on the defendants’ alleged
15

misrepresentations to prevail on some claims does not mean they

do not seek recovery for Plan losses. As the Court aptly put it in

In re Honeywell Int’l ERISA Litigation, Civil No. 03-1214

(D.N.J., June 14, 2004) at 30:

[L]osses to the Plan may have resulted from

decisions by individual participants, but that does

not mean that those losses were not losses of the

Plan; it simply means that some of the decision

making for Plan investments was conducted by

the participants who contributed to it.

It is a non sequitur to say, as the District Court did, that

Plaintiffs cannot demonstrate any losses to the Plan because it

is an “individual account plan which includes an ESOP

investment alternative.” First, while the Plan is, indeed, an

“individual account plan,” this does not preclude the Plan from

having losses. Second, the Plan is not an “employee stock

ownership plan” or an “ESOP.” Under § 1107(d)(6)(A), an

“employee stock ownership plan” is “designed to invest

primarily in qualifying employer securities.” 29 U.S.C. §

1107(d)(6)(A). As this Court explained in Moench v. Robertson,

62 F.3d 553, 568 (3d Cir. 1995):

[ESOPs are] “device[s] for expanding the national

capital base among employees – an effective
16

merger of the roles of capitalist and worker.”

Donovan v. Cunningham, 716 F.2d at 1458. Thus,

the concept of employee ownership constituted a

goal in and of itself. To accomplish this end,

“Congress . . . enacted a number of laws designed

to encourage employers to set up such plans.” Id.

The Plan before us was designed to provide opportunities

for saving and investment. It was not designed to invest

primarily in securities of the employer. Indeed, the Plan was not

required to offer Schering-Plough stock as one of its investment

opportunities.

The District Court’s conclusions (1) that Plaintiffs’

contributions were never assets of the Savings Plan and never

aggregated, and (2) that Plaintiffs only seek damages for their

individualized losses, directly conflict with the express terms of

the Savings Plan as well as other allegations of the complaint.

The Savings Plan provides in Article 4.01(a) that

contributions to the Savings Plan

shall be invested in one or more

Investment Funds authorized by the

Investment Committee, which,

from time to time, may include
17

such equity funds, international

equity funds, fixed income funds,

money market funds, a Company

Stock Fund, and other funds or

investment vehicles as the

Investment Committee elects to

offer.

Article 4.02 provides as follows:

A participant shall make one

investment election covering his or

her Accounts in accordance with

the following options:

(a) 100 percent in

one of the available

Investment Funds;

(b) in more than one

Investment Fund

allocated in multiples

of 1 percent;
18

provided, however, that in no event

may a Participant allocate more

than 50 percent of future

contributions to the Company Stock

Fund. If a Participant fails to make

an investment election with respect

to 100 percent of his or her

Accounts, the portion of such

Accounts not subject to the

Participant’s investment election

shall be invested in a money market

fund or equivalent investment

vehicle.

Section 4.03 reads as follows:

Each Participant is solely

responsible for the selection of his

or her investment options. The

Trustee, the Committee, the

Investment Committee, any

Employer, and the officers,

supervisors and other employees of

any Employer are not empowered

to advise a Participant as to the

manner in which his or her
19

accounts shall be invested. The fact

that an Investment Fund is

available to Participants for

investment under the Plan shall not

be construed as a recommendation

for investment in that Investment

Fund.

Pursuant to Article 4.05,

[a] participant may elect to

reallocate his or her Accounts

among the Investment Funds, in

multiples of 1 percent, by giving

such Notice as the Committee or its

delegate shall prescribe; provided,

however, that in no event may a

Participant allocate more than 50

percent of the value of his or her

Accounts at the time of the

reallocation to the Company Stock

Fund. The reallocation shall be

eff ect i v e a s s oon as

administratively practicable after

the Trustee receives such Notice.
20

Article 5.01 requires the trustee of the Savings Fund to

value each of the Investment Funds each business day. “On each

Valuation Date there shall be allocated to the Accounts of each

Participant his or her proportionate share of the increase or

decrease in the fair market value of his or her Accounts in each

of the Investment Funds.” Article 5.03 requires the trustee to

furnish each participant with a statement setting forth the value

of his or her Accounts each calendar quarter.

Article 9.06 provides that until the accounts of a

participant who is entitled to distribution because of the

termination of employment or after the 65th anniversary of the

Participant’s date of birth, are completely distributed, “the

Accounts of a Participant who is entitled to a distribution shall

continue to be invested as part of the funds of the Plan . . . .” 

In Section 10.09, the Savings Plan provides that “[t]he

Committee or its delegate shall maintain, or cause to be

maintained, records showing the individual balances in each

Participant’s Accounts. However, maintenance of those records

and Accounts shall not require any segregation of the funds of

the Plan.”

In Section 11.01, the Savings Plan provides that “[a]ll the

funds of the Plan shall be held by the Trustee appointed from

time to time by the Investment Committee or its delegate under
21

a trust agreement adopted, or as amended, by the Board of

Directors.”

Pursuant to Article 11.03, “Company Stock held by the

Trustee shall be voted by the Trustee at each annual meeting and

at each special meeting of stockholders of the Company as

directed by the Participant to whose Accounts such Company

Stock is credited.” (emphasis added).

Thus, contrary to the District Court’sinterpretation of the

provisions of the Savings Plan, each participant’s deferred

payroll compensation was held in trust as the assets of the

Savings Plan. Each participant in the Savings Plan was provided

with an individualized account and periodically informed of the

individual balance in his or her account. The Savings Plan also

makes clear the fact that each participant has an individual

account does not “require any segregation of the funds of the

Plan.” Article 10.09. 

The District Court cited this Court’s decision in Moench

in support of its determination that a plan that permits

employees to become part owners of their employer is an ESOP

and not a traditional pension plan governed by ERISA. As noted

above, the Defendants have conceded that the Savings Plan we

are considering is not an ESOP. In Moench, this Court held that

“in limited circumstances, ESOP fiduciaries can be liable under
22

ERISA for continuing to invest in employer stock according to

the plan’s direction . . . .” Id. at 556. It went on to say that

“[w]hile fiduciaries of pension benefit plans generally must

diversify investments of the plan assets . . ., fiduciaries of

ESOPS are exempted from this duty.” Id. at 568. In reversing

the District Court’s holding that an ESOP cannot be held liable

for investing solely in employer common stock, this Court

explained that “an ESOP fiduciary who invests the assets in

employer stock is entitled to a presumption that it acted

consistently with ERISA by virtue of that decision. However,

the plaintiff may overcome that presumption by establishing that

the fiduciary abused its decision by investing in employer

securities.” Id. at 571. The principle announced in Moench has

no application to the duty of a fiduciary of pension benefit plans

to diversify investments “so as to minimize the risk of large

losses.” Id. at 568. “ESOPs, unlike pension plans, are not

intended to guarantee retirement benefits, and indeed, by its very

nature, ‘an ESOP places employee retirements assets at much

greater risk than does the typical diversified ERISA plan.’” Id.

at 568. Because the Savings Plan in this case was not an ESOP,

the Moench decision does not resolve the issue presented in this

matter.

In a letter to this Court filed pursuant to Rule 28(j) of the

Federal Rules of Appellate Procedure, the Defendants cited a

recent decision of the Fifth Circuit, Milofsky v. American
Fifth Circuit Rule 41.3 states that “[u]nless otherwise

5

expressly provided, the granting of a rehearing en banc vacates

the panel opinion and judgment of the court and stays the

mandate.”

23

Airlines, Inc., 404 F.3d 338 (5th Cir. 2005) reh’g en banc

granted, No. 03-11087, 2005 U.S. App. LEXIS 15122, (5th Cir.

July 19, 2005) in support of their argument that a participant 5

lacks standing to bring an action on behalf of an individual

account pension plan if he or she does not seek plan-wide relief.

In Milofsky, the plaintiffs were employed as pilots by

Business Express, Inc. (“BEX”) when it was acquired by AMR

Eagle Holding Corporation, the holding company of American

Eagle, Inc. (“American Eagle”). While employed by BEX, the

plaintiffs participated in its individual account pension plan. Id.

at 340. At the time of the acquisition of BEX, the plaintiffs were

given notice that the balance of their accounts in the BEX plan

would be transferred to a comparable American Eagle 401k

plan. The notices advised the plaintiffs when the transfers would

occur. The transfers did not occur, however, until months after

the time written in the notice. Id. at 340-41.

The plaintiffs filed a class action against American

Airlines and Towers Perrin, a benefits consulting firm hired by

American Airlines to render administrative services in
24

connection with the plan. Id. at 340. The action, which was filed

under 29 U.S.C. § 1132(a)(2), alleged that American Airlines

and Towers Perrin had violated fiduciary duties in

misrepresenting how and when their accounts would be

transferred to the American Eagle 401(k) plan. Id. “They alleged

that because of the failure to effect the transfer of the class

members’ account balances in a timely and prudent manner, the

values of their accounts decreased because the assets remained

invested in the floundering BEX Plan longer than expected.” Id.

at 341. The plaintiffs requested “actual damages to be paid to

the [American Eagle] $ uper $ aver Plan, to be allocated among

their individual accounts proportionately to their losses resulting

from the alleged breach.” Id. 

The majority of the three-judge panel in Milofsky held

that “plaintiffs lack standing because this case in essence is

about an alleged particularized harm targeting a specific subset

of plan beneficiaries, with claims for damages to benefits [sic]

members of the subclass only, and not the plan generally.” Id. at

347. 

The facts in Milofsky are clearly distinguishable from

those in the matter sub judice. In Milofsky, the plaintiffs alleged

that the value of their investments in the BEX plan decreased

because of the failure of the defendants to transfer the funds to

the American Eagle 401(k) plan. Id. at 351. Thus, this alleged
25

loss occurred prior to the transfer of the BEX plan participants’

investments to the American Eagle 401(k) plan. In Milofsky, the

plaintiffs sought damages on behalf of the BEX plan members,

and did not seek to restore assets of the American Eagle 401(k)

fund. Here, the Plaintiffs seek damages from the fiduciaries for

their violation of their duty to a subclass which had transferred

its funds to the trustee of the Savings Fund.

In Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995), the

Sixth Circuit held that a subset of employee benefit participants

has standing to bring an action for breach of fiduciary duty

under 29 U.S.C. §1109. The Court rejected the same argument

presented by the Defendants in this matter that “an action under

29 U.S.C. § 1109 must be brought on behalf of a plan as a whole

and that a claim brought by a subclass of plan participants fails

to satisfy this requirement.” Id. at 1452. The Sixth Circuit in

Kuper concluded that the plaintiffs had standing to bring this

action pursuant to §1132(a)(2). Citing Moench, however, it

affirmed the dismissal of the action on the merits, adopting this

Court’s rule that a fiduciary who invests in an employer’s stock

is entitled to a rebuttable presumption that it acted consistently

with ERISA in continuing to invest in an employer’s securities.

Kuper, 66 F.3d at 1458-59. The Sixth Circuit affirmed because

it concluded that the plaintiffs had failed “to rebut the

presumption that defendants acted reasonably in continuing to

hold Quantum stock.” Id. at 1459. In sum, the court concluded
At least one other circuit court, and several district 6

courts, have reached a similar conclusion. In Roth v. SawyerCleator Lumber Co., 61 F.3d 599 (8th Cir. 1995), the Eighth

Circuit addressed the issue of whether plaintiffs were bringing

their action under Section 1132(a)(2) individually or on behalf

of the plan. Id. at 605. The court explained that the defendants’

breach of fiduciary duty resulted in two types of loss: individual

loss to the beneficiaries, which is not actionable under Russell,

and a loss to the plan, which is actionable under Section

1132(a)(2), because the plan itself was also harmed due to the

breach. Id; see also In re Honeywell International ERISA Litg.,

No. 03-1214, 2004 U.S. Dist. LEXIS 21585, at *51-52. (D.N.J.

Sept. 14, 2004) (holding that even though plaintiffs could

choose the investment vehicles in which their funds were

invested, those funds were still held by the plan, and therefore

plaintiffs were permitted to bring their claim under Section

1132(a)(2)); In re CMS Energy ERISA Litg., 312 F. Supp. 2d

898, 913 (E.D. Mich. 2004) (citing Kuper in support of the

Court’s decision to reject defendant’s argument that a claim

must be dismissed under Section 1132(a)(2) unless it alleges

harm to all of a plan’s participants); Kayes v. Pac. Lumber Co.,

Nos. C-89-3500 SBA, C-91-1812 SBA, 1993 U.S. Dist. LEXIS

21090, *6-7 (N.D. Cal. Mar. 8, 1993), aff’d in part and rev’d in

part on other grounds, 51 F.3d 1449, 1462 (9th Cir. 1995)

26

in Kuper that § 1132(a)(2) does not authorize a plaintiff to

recover damages on his or her own behalf. Instead, a plaintiff

must seek to have the fiduciary reimburse the plan. Id. at 1453.6
(holding that a plaintiff who sues under Section 1132(a)(2)

“does so on behalf of the plan and not in his individual capacity.

While the individual has standing to bring the suit, and stands to

gain if the suit is successful, his benefit is secondary or

derivative of the plans [sic] gain”).

27

The majority in Milofsky stated that the Court’s reasoning

in Kuper is directly contrary to the principle announced in

Supreme Court’s decision in Massachusetts Mutual Life

Insurance Company v. Russell, 473 U.S. 134 (1985), that a

participant’s action filed pursuant to § 1132(a)(2) must seek

remedies that provide a “benefit to the plan as a whole . . . .”

Milofsky, 404 F.3d at 346. In her dissent, Chief Judge Carolyn

Dineen King wrote that

Russell never reached the

conclusion that the majority

reaches, i.e., that standing can exist

under [§ 1132(a)(2)] only if all plan

participants would benefit from the

litigation. Instead, it only held that

a single plan participant, seeking

individual recovery for extracontractual damages payable

directly to her, could not proceed

with her lawsuit under [§
28

1132(a)(2)]. Russell, 473 U.S. at

134, 105 S.Ct. 3085. Accordingly,

the majority’s holding goes far

beyond the holding of Russell.

Id. at 349 (emphasis added) (footnote omitted).

In footnote 4 of her opinion, Chief Judge King also

stated:

The majority correctly notes that

Russell distinguishes between relief

for individuals and relief for the

plan as a whole. Majority Opinion,

[344-45]. Russell does not,

however, stand for the proposition

that the ‘plan as a whole’ is

synonymous with ‘all participants

of the plan,’ and several courts

have rejected this definition of the

‘plan as a whole.’

Id. We agree with Chief Judge King’s interpretation of Russell,

and decline to follow the majority’s opinion in Milofsky.

In Russell, the plaintiff was a beneficiary under two
29

employee health benefit plans funded by her employer and

governed by ERISA. 473 U.S. at 136. She became disabled and

received plan benefits until October 17, 1979. She requested

internal review of the termination decision. The plan

administrator reinstated her benefits on March 11, 1980, and she

was paid retroactive benefits in full. Id.

The plaintiff in Russell filed an action in state court

seeking damages for mental and emotional distress under state

law and ERISA claims resulting from the interruption of her

benefit payments, as well as punitive damages. Id. at 137. The

defendant removed the action to the District Court and moved

for summary judgment. The District Court granted the motion.

It held that the state-law claims were preempted by ERISA, and

that ERISA barred claims for extra-contractual and punitive

damages. Id. The Ninth Circuit affirmed the District Court’s

determination that the state law claims were pre-empted by

ERISA, but also concluded that the complaint alleged a cause of

action under §1132(a)(2) and that punitive damages could be

awarded. Id. at 138.

The Supreme Court reversed the judgment of the Ninth

Circuit. It held that § 1109 does not authorize extracontractual

or punitive damages. The Court also rejected the plaintiff’s

argument that a private right of action for extracontractual

damages was implied in § 1109. Id. at 148. In rejecting the
Thus, Russell involved an action brought by one

7

individual who erroneously sought to recover extra contractual

damages under ERISA.

30

employee’s claims, the Court stated that “[a] fair contextual

reading of the statute makes it abundantly clear that its

draftsmen were primarily concerned with the possible misuse of

plan assets, and with remedies that would protect the entire plan,

rather than with the rights of an individual beneficiary.” Id. at

142.

Unlike the circumstances presented in this matter, in

Russell the plaintiff did not file a class action on behalf of an

ERISA employee benefits plan to require the defendants to pay

damages to the health benefit plan because of their alleged

breach of their fiduciary duty. Instead, she filed a private cause

of action for extracontractual and punitive damages. The Court 7

did not hold in Russell that a subgroup of plan participants

cannot file derivative action on behalf of an ERISA employee

benefits plan if the fiduciaries’ alleged breach did not affect the

investments of participants in other subgroups. That issue

simply was not before the Court. 

The District Court relied in part on Russell and its

progeny in holding that 
31

[a]lthough individual employees’

c o n tri b u ti o n s w e r e neve r

aggregated and all employees

remained capable of investing on

an individualized basis, plaintiffs

now seek to theoretically aggregate

these individualized losses into

losses by “the plan.” Such an

after-the-fact aggregation by

individuals in order to sue on

behalf of the plan is not permitted

under the language of Sections

1104, 1109 or, most importantly

1132(a)(2). 

The District Court based this holding on its misreading of the

Savings Plan. While employees were able to choose which fund

to invest their assets in, the Savings Plan makes clear that its

assets are aggregated and are held in trust by the Savings Plan

trustees at all times. The District Court’s reliance on Russell and

its progeny in support of its holding in this particular case was,

therefore, misplaced. 

The Defendants cite the Ninth Circuit’s decision in

Horan v. Kaiser Steel Retirement Plan, 947 F.2d 1412 (9th Cir.

1991), in support of their argument that the Plaintiffs’ cause of
32

action in this case should be dismissed because the remedies

they seek are for their own benefit, and not on behalf of the

Savings Plan. In Horan, former employees of Kaiser Steel

sought to force it to use plan assets in order to purchase

annuities for the benefit of each former employee. Id. at 1415.

The Ninth Circuit held that the plaintiffs could not state a claim

because “[t]he remedies sought by the plaintiffs are for their

own benefit, and not for the benefit of the Plan. The objective of

the plaintiffs’ suit is to recover an annuity for each individual

plaintiff.” Id. at 1418. 

Horan is easily distinguishable from this case. Unlike the

plaintiffs in Horan, the Plaintiffs in this case do not seek to

force the Savings Plan to purchase annuities for their individual

benefit. Instead, they seek to force the Defendants to make

payments to the Savings Plan for the Defendants’ alleged failure

to fulfill their fiduciary obligations, in order to remedy the

damage their actions caused to the Savings Plan. The fact that

damages paid to the Savings Plan for breaches of fiduciary

duties will also indirectly benefit its participants does not bar a

derivative action under §§ 1109 and 1132(a)(2). Smith v.

Sydnor, 184 F.3d 356, 363 (4th Cir. 1999).

We are persuaded that the District Court erred in

concluding that the complaint fails to state a claim on behalf of

the Savings Plan pursuant to §1109.
 The District Court has yet to address the propriety of 8

this suit being maintained as a class action and we, of course

express no view thereon.

33

B

The Defendants contend that the “individualized nature”

of Plaintiffs’ claims is reflected in the fact that the consolidated

complaint “expressly excludes all Plan participants currently

employed by Schering” in the class definition. While this

statement is literally true, it seems to us more likely than not that

the referenced allegation was inadvertent, given the other

allegations of the complaint making it clear that this action was

brought for the ultimate benefit of “[a]ll persons who were

participants in . . . the Plan at any time [during the class period],

and whose accounts included investments in Schering stock.”

App. at 67. Compare Complaint paragraph 62, App. at 67, with

paragraph 3, App. at 48 (“Defendants, as fiduciaries of the Plan,

breached their duties to [the Plaintiffs] and to other participants

and beneficiaries of the Plan . . . particularly with regard to

holdings of Schering stock.”) At this point, however, any

ambiguity thus created is not significant and can be clarified by 8

amendment on remand.
34

III

In their motion to dismiss, the Defendants requested that

the District Court dismiss the action on the merits because the

Plaintiffs failed to allege facts showing a breach of duty by any

of the fiduciaries named in the consolidated complaint. The

District Court expressly declined to determine the merits of

Plaintiffs’ allegations that the Defendants breached their

fiduciary duties, or whether the counts against Mr. Kogan

should be dismissed “because the complaint failed to allege that

Mr. Kogan performed any specific fiduciary acts.” 

The issues raised by the Defendants regarding the merits

of the claims of breaches of fiduciary duties involve complex

legal and factual questions. This matter was dismissed for lack

of standing prior to the filing of an answer, or any other pre-trial

proceedings. We decline to review the merits of the Defendants’

alternative bases for dismissing this action because “the record

as presented to us is not sufficiently adequate for us to give the

careful and thoughtful consideration these issues merit. Since

the case must go back to the District Court, we think these issues

would benefit from further elaboration there in the first

instance.” Callahan v. A.E.V., Inc., 182 F.3d 237, 249 (3d Cir.

1999). Additional discovery proceedings and possible

amendments to the pleadings may clarify the issues should

further appellate review become necessary to finally dispose of
35

this matter.

Conclusion

We conclude that the District Court erred in dismissing

this action on the sole ground that the Plaintiffs failed to state a

claim under § 1109 on behalf of the Savings Plan. Accordingly,

we reverse the judgment dismissing this action with prejudice

and remand with instructions to the District Court to conduct

further proceedings regarding the merits of the claims asserted

in the consolidated complaint.