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Employee class action suit against Home Depot revived

August 5, 2008

By Rachel Tobin Ramos

A class action lawsuit filed by Home Depot employees against former company CEO Robert Nardelli and several directors has a new lease on life.

The case has been revived by a federal appellate court decision that gives a life line to the retirees while being pro-business, said two lawyers who studied the case.

The lawsuit, possibly worth tens of millions of dollars to current and future retirees, alleges that Nardelli, and other directors like co-founder Ken Langone, mismanaged the employees' defined contribution plan by purchasing Home Depot stock even though the executives backdated stock options. As a result, the suit claims, Home Depot's share price deflated when the backdating schemed was revealed, making the value of the employees' stock portfolio plummet.

The suit initially was dismissed by the U.S. District Court for the Northern District of Georgia in Atlanta. Then on July 31, the 11th Circuit Court of Appeals in Atlanta partially ruled in favor of the employees' class action, meaning the case can move forward.

"We're pretty happy with the result," said Jeffrey Norton, an attorney with Harwood Feffer in New York who represents the Home Depot employees. The class includes any employee since 2001 that invested in the 401(k) portfolio with Home Depot stock, he said. That includes current employees. There are about 330,000 U.S. Home Depot employees.

The suit was filed under the Employee Retirement Income Security Act. Norton said the basis of the claim is that Home Depot employees' retirement portfolios would have done much better if the company had bought different stock.

Norton said it's called the "alternative investment" theory. "In ERISA cases," he said, "the damage is measured not by stock price, but on how well this individual or plan would have done had the money been prudently invested in a better-performing stock."

Norton said that tens of millions of dollars are at stake if his side wins. The claims, he added, most likely would be paid from insurance money, not from Nardelli's, Langone's or Home Depot's wallets.

Two lawyers at Atlanta's Ford & Harrison see the appellate court ruling as pro-business because it forces employees to complain first to the company before filing a lawsuit.

"I like the opinion," said Joelle Sharman, a partner who works with ERISA cases. She said she generally represents employers and insurance companies and she thinks the ruling could have repercussions far beyond this case.

"It puts all these extra procedural hurdles in front of the retiree and it gives the employer a chance to fix the error if it did have an error," added Tiffany Downs, also with Ford & Harrison. Neither is involved in the case.

Already two years old, the case is far from over. Now, Norton must file an administrative appeal with the Home Depot committee that oversees the retirees' investment portfolio.

"I have very little faith that the Home Depot plan administrators are going to say, 'Yes, we think you're right. We breached our duties to the tune of tens of millions of dollars and we'll reimburse your plan for that,' " Norton said. "That's why we argued it'll be futile to go down that road, but that's what the Eleventh Circuit requires. I presume eventually we'll have our case back in District Court."

Home Depot is eager to hear the claims outside the courtroom.

"We're pleased that the Court of Appeals said that the plaintiffs must now pursue any of their claims outside of the courtroom," Home Depot spokesman Ron DeFeo said. "We will address their claims in the appropriate administrative forum."

Several lawsuits were spawned by employee and investor anger at Nardelli, who left Home Depot in January 2007 with a $210 million severance package after a tumultuous six years as CEO. A group of shareholders recently settled a suit for $14.5 million against Home Depot, all for attorneys' fees.

Nardelli is now CEO of the privately held Chrysler auto giant. His compensation is not made public.