Thursday, April 7, 2011

Federal Court Grants Class Certification in YRC Worldwide "Stock-Drop" Litigation

The United States District Court for the District of Kansas has certified a class of approximately 17,000 YRC Worldwide Inc. (“YRCW”) employees who invested their retirement plan accounts in YRCW stock, and allegedly saw a decline in their accounts balances as the value of the shares plunged. See In re YRC Worldwide Inc. ERISA Litigation, D. Kan., No. 2:09-cv-02593-JWL-JPO (4/6/11). The class certification ruling comes approximately five months after the District court denied YRCW’s motion to dismiss the stock-drop lawsuit filed by employees who claimed the stock should have been taken out of YRCW’s 401(k) plan.

The decision is significant because it provides support for the minority view that the "Moench “presumption of prudence" discussed in our prior blog entries can be overcome at the pleading stage. As we have noted, the Moench presumption more frequently than not prevents plaintiffs from getting to the discovery phase of litigation – as plaintiffs typically cannot, or do not, allege enough facts in their complaint to show that they can rebut the presumption.

The YRCW case involved some interesting class-action stock-drop defense arguments. By way of background, the plaintiffs alleged that the fiduciaries YRCW’s 401(k) plan breached fiduciary duties under ERISA when they continued to invest in YRCW's stock even as the stock price plummeted. The plaintiffs alleged that YRCW’s stock dropped from a high of $25.96 per share in October 2007 to a low of 45 cents per share in March 2010. The fiduciary defendants offered several arguments as to why the court should not certify the lawsuit as a class action. One argument was that the typicality requirement for class certification could not be met in this stock-drop case, where there was no allegation that the fiduciaries failed to make “full disclosure” about YRCW’s financial struggles. [In most of the stock-drop cases, there are two allegations of wrongdoing on the part of ERISA fiduciaries. First, plaintiffs typically allege that plan fiduciaries breached their duty of prudence under Section 404(a) of ERISA by continuing to invest in company stock, even after the stock price spiraled downward. Second, plaintiffs frequently assert that the fiduciaries made misrepresentations or failed to disclose material information about the company's finances, and that had they known this information, the plaintiffs/participants which would have taken other action.] In the YRCW case, there was no allegation that YRCW had not made full disclosure to the participants about the performance YRWC, and the defendants argued that in the absence of a disclosure claim, class certification was inappropriate because the District would need to examine the prudence claim by looking at participants' individual investment choices. The District Court rejected this argument, stating that it could find no legal authority to support the YRCW fiduciaries' position. According to the District Court, “courts presented with both prudence claims and communications claims consistently treat those claims as entirely distinct such that the alleged misrepresentations or nondisclosures appear to have no bearing whatsoever on the prudence claim.”

The District Court also rejected the defendants’ argument that Section 404(c) of ERISA (which provides a defense to a breach of fiduciary duty claim if the loss caused by the breach resulted from a participant's exercise of control over his or her investments). The District Court also rejected the defendants’ argument that the Supreme Court’s 2008 LaRue decision brought an end to class certifications under Federal Rule of Civil Procedure 23(b)(1)(B) for ERISA fiduciary breach claims brought by defined contribution pension plan participants. [Many defendants in stock drop cases have argued that LaRue casts doubt on whether fiduciary breach claims brought under Section 502(a)(2) of ERISA are suitable for class action treatment given that the Supreme Court found in LaRue that individuals can bring their own claims.] According to the District Court, nothing in LaRue prevents class certification under Rule 23(b)(1)(B) of ERISA breach actions brought under ERISA Section 502(a)(2).