Retirees Win Key Door-Opener For ERISA Suits

August 3, 2007

By Kris W. Scibiorski

In a ruling that ultimately could be a boon to thousands of aggrieved workers and retirees - as well as their lawyers - the 3rd U.S. Circuit Court of Appeals has determined that individuals can sue company managers over dubious investment decisions - even after they've cashed out their company 401(k) or other ERISA-covered retirement plan.

Rejecting heavy opposition from the National Association of Manufacturers, the court said the fact that workers have withdrawn their money from the fund does not negate their legal standing under the 1974 Employment Retirement Income Security Act (ERISA) to pursue companies for mismanaging investment funds.

In effect, the appeals court, whose jurisdiction includes New Jersey, agreed with AARP that workers should be able to recover money they lost when their employer's shares tanked as a result of questionable company oversight and fund management .

"This is a huge victory for an untold number of American workers and retirees whose rights to pursue claims for breaches of fiduciary duty under ERISA were in limbo," said Jeffrey M. Norton, the New York lawyer who argued for the plaintiff. "The 3rd Circuit ... dispatched the myopic view expressed by some courts relating to ERISA standing."

In Graden v. Conexant Systems Inc., Howard Graden, the former employee, claimed Conexant managers acting as fiduciaries inappropriately invested the 401(k) funds in the company even though they knew and misrepresented the risks of a proposed merger.

Between March and October 2004, when Graden cashed out of the 401(k) plan, Conexant's common stock value plummeted from $7.42 to $1.70 a share.

The ruling follows the 7th Circuit's similar determination earlier this year in Harzewski v. Guidant Corp.

The latest decision reversed New Jersey's U.S. District Judge Stanley R. Chesler's finding that Graden, as a "cashed-out" former employee, was not eligible to sue for lost profits under ERISA, since he was no longer one of the plan's "participants."

However, in his opinion in Graden, Circuit Judge Thomas L. Ambro said the plaintiff continued to be a participant even after cashing out and thus could file an ERISA complaint for financial losses his savings sustained because of management's alleged improper conduct.

At issue is the interpretation of 29 U.S.C. 1002(7), which defines an ERISA participant as "any employee or former employee ... who is or may become eligible to receive a benefit of any type" from the plan.

Ambro agreed with Graden's argument that since he claims he's due the money his investment in Conexant stock would have earned but for management's misconduct, he continues to be "eligible to receive" a plan benefit.

"In other words, ERISA entitles ... participants not only what is in their accounts, but also what should be there," Ambro wrote. Graden "was entitled to the net value of his account as it should have been in the absence of any fiduciary mismanagement."

To obtain the full text of the opinion in Graden, go to www.njlnews.com and click on Decisions.

Ambro said Conexant and Chesler wrongly relied on the claims' similarities to "shareholder derivative litigation," which the court called "the analogy that comes quickest to mind," instead of on the trust-law roots of the action, which "run far deeper."

In a footnote, Ambro noted Graden's approach "was exactly the process that Sec. 1132(a)(2) - borrowing from trust law - contemplates," because by individually suing the fiduciaries "he sued the person liable to make good on the loss."

If Graden can prove breach of fiduciary duty, he, along with other harmed employees, would receive a direct payment for their lost profits, the judge added.

Wrote Ambro, "In sum, we hold that, when determining participant standing under ERISA, the relevant inquiry is whether the plaintiff alleges that his benefit payment was deficient on the day it was paid under the terms of the plan and the statute. If so, he states a claim for benefits, which, if colorable, makes him a participant with standing to sue."

Graden was represented by Robert Harwood and Jeffrey M. Norton of Harwood Feffer in New York City, and Lisa J. Rodriguez of Trujillo Rodriguez & Richards in Haddonfield.

Conexant's lawyers were Richard A. Rosen, Robyn F. Tarnofsky and Kerry L. Quinn of Paul, Weiss, Rifkind, Wharton & Garrison in New York, and Gregory B. Reilly and Deborah A. Silodor of Lowenstein Sandler in Roseland.