Plaintiffs in Seventh Circuit Fail to Meet Dudenhoeffer Pleading Standards in Stock Drop Case | Practical Law

Plaintiffs in Seventh Circuit Fail to Meet Dudenhoeffer Pleading Standards in Stock Drop Case | Practical Law

In Burke v. Boeing Company, the US Court of Appeals for the Seventh Circuit held that employee stock ownership plan (ESOP) participants failed to state a claim that the plan's fiduciaries breached the duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA), among other claims, by failing to promptly and publicly disclose safety issues with a particular model of a Boeing airplane, which caused the participants to acquire and hold Boeing stock at an artificially inflated price.

Plaintiffs in Seventh Circuit Fail to Meet Dudenhoeffer Pleading Standards in Stock Drop Case

by Practical Law Employee Benefits & Executive Compensation
Published on 09 Aug 2022 • USA (National/Federal)
In Burke v. Boeing Company, the US Court of Appeals for the Seventh Circuit held that employee stock ownership plan (ESOP) participants failed to state a claim that the plan's fiduciaries breached the duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA), among other claims, by failing to promptly and publicly disclose safety issues with a particular model of a Boeing airplane, which caused the participants to acquire and hold Boeing stock at an artificially inflated price.
In Burke v. Boeing Company, the US Court of Appeals for the Seventh Circuit held that employee stock ownership plan (ESOP) participants failed to state a claim that the plan's fiduciaries breached the duties of prudence and loyalty, the duty to monitor plan investments, and the co-fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) by failing to promptly and publicly disclose safety issues with a particular version of a Boeing airplane, which caused the participants to acquire and hold Boeing stock at an artificially inflated price ( (7th Cir. Aug. 1, 2022)).
To learn more about ESOPs, see:

Boeing Assigns Fiduciary Authority to Investment Manager

Boeing allows its employees to participate in an ESOP. In 2007, the ESOP's fiduciaries delegated to an independent outside fiduciary the responsibility of selecting and managing investment options for the plan. Under the agreement between Boeing's Employee Benefit Investment Committee and the outside investment manager, the investment manager has the exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in Boeing stock is prudent under ERISA. Additionally, the investment manager has the authority to determine whether participant account balances and contributions should be invested in Boeing stock.
As a result of two plane crashes in 2018 and 2019, each involving the same version of a Boeing airplane known as the 737 MAX, the value of Boeing stock dropped significantly, which affected the participants in the ESOP.
Plaintiffs, Boeing employees who participated in the ESOP, filed a putative class action in March 2019 in federal district court, shortly after the second plane crash, against various individual defendants, Boeing's Employee Benefit Plans Committee, Boeing's Employee Benefit Investment Committee, and Boeing itself, alleging that from November 7, 2018 to December 16, 2019, Boeing's continuous concealment of material facts relating to the 737 MAX caused the price of Boeing stock to be artificially inflated. The plaintiffs claimed that the defendants breached four fiduciary duties. Specifically, the plaintiffs alleged that the defendants breached:
  • The fiduciary duties of prudence and loyalty under ERISA Section 404(a)(1) (29 U.S.C. § 1104(a)). Because the defendants failed to promptly disclose safety issues with the 737 Max, the plaintiffs and other class members continued to acquire and hold Boeing stock at an artificially inflated price. The plaintiffs alleged that Boeing knew about and encouraged individual defendants' continued concealment of material facts relating to the 737 MAX, and the concealment itself was a corporate strategy.
  • The fiduciary duty to monitor investments under ERISA Section 404(a)(1) (29 U.S.C. § 1104(a)).
  • The co-fiduciary duty to monitor other fiduciaries. The plaintiffs claimed the defendants are liable as co-fiduciaries for the breaches of other Boeing Stock Fund fiduciaries under ERISA Section 405(a) (29 U.S.C. § 1105(a)).
The investment manager was not named as a defendant in this case.
The defendants made a motion to dismiss the plaintiffs' claims under Rule 12(b)(6), and the district court granted that motion, holding that:
(Burke v. Boeing Company, 500 F. Supp. 3d 717, 725 (N.D. Ill. 2020).)
The plaintiffs appealed to the Seventh Circuit.

Seventh Circuit Holds That Plaintiffs Failed to State a Claim

Reviewing de novo the district court's dismissal for failure to state a claim, and construing the complaint in the light most favorable to the plaintiffs, the Seventh Circuit affirmed the district court's judgment.

The Question of Whether Any Defendant Acted in a Fiduciary Capacity

The Seventh Circuit affirmed the district court's holding that the Employee Benefit Plans Committee, despite being identified as the plan administrator in the ESOP's summary plan description and the plan's named fiduciary under ERISA Section 402(a) in the plan document, had no fiduciary responsibility over the investment choices of the ESOP. A plan administrator such as the Plans Committee is a fiduciary only to the extent it acts as one in regard to the plan, but the plaintiffs failed to allege facts showing that the Plans Committee acted in a fiduciary capacity related to managing the investments and investment options of the ESOP.
The Seventh Circuit also rejected the plaintiffs' contention that the Boeing Company itself was a fiduciary of the ESOP. Boeing delegated to the Investment Committee its authority to:
  • Invest, reinvest, and manage assets of all Boeing employee benefit plans.
  • Select and monitor investment options for the ESOP.
That delegation was subject to the duties of prudence and loyalty on the part of Boeing. Under the terms of the delegation, Boeing retained certain responsibilities under applicable securities laws and ERISA with respect to the offering of company stock under the ESOP. However, the Seventh Circuit held that the mere exercise of some authority over Boeing employee benefit plans did not mean that Boeing was exercising fiduciary authority over the investment choices and holdings of the ESOP.
The Seventh Circuit also affirmed the district court's holding that the Employee Benefit Investment Committee was not a fiduciary with respect to the ESOP's investments. The Seventh Circuit rejected the plaintiffs' argument that the delegation to the outside investment manager was much more limited than the district court understood it to be. The plaintiffs argued that the members of the Investment Committee had access to material non-public information concerning safety issues with the 737 MAX, and had a duty to disclose that information to the outside investment manager and all other shareholders and potential investors.
But the Seventh Circuit held that ERISA does not impose a duty that would be layered on top of federal securities laws governing public disclosures of information material to investors. The Investment Committee delegated to an outside investment manager the responsibility for choosing and managing the investments of the ESOP, including the exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in Boeing stock is prudent under ERISA. Therefore, the Seventh Circuit concluded that the Investment Committee did not exercise discretionary control or authority over the ESOP's management, administration, or assets – only the outside investment manager did.

Duties Owed by Plan Fiduciaries to Plan Participants

The Seventh Circuit rejected the plaintiffs' argument that the defendants' retained a non-delegable duty under ERISA to make immediate public disclosures of inside information to ESOP participants (which after Dudenhoeffer would require full public disclosure to all shareholders and potential investors), and by failing to do so, the defendants breached their fiduciary duty of loyalty under ERISA.
The Seventh Circuit found no support for the plaintiffs' position that these general fiduciary duties imposed by ERISA Section 404(a)(1) are non-delegable. Since the Investment Committee delegated those duties to the outside investment manager, the Committee was not serving as an ERISA fiduciary for the ESOP's investment choices and it could not be liable for breach of general fiduciary duties.
Even if the Investment Committee was an ERISA fiduciary, it would not be required to provide all information about the defendant corporation's business decisions in real time to ESOP participants. The Investment Committee and the other defendants were not required to provide all information about Boeing's business decisions in real time to plan participants because:
  • ERISA does not add additional layers of fiduciary duties to disclose inside information, at least to the extent plaintiffs contend any duty to disclose that might survive the Dudenhoeffer pleading standard also cannot be satisfied by delegating investment choices to an independent outsider.
  • Federal securities laws do not require immediate disclosure of all bad news.
The Seventh Circuit observed that, in light of the tension between the general duty of prudence required of ERISA fiduciaries and the authorization of non-diversified, high-risk ESOPs, the Investment Committee had a strong incentive to delegate the fiduciary power over investment decisions for the ESOP to an independent third-party fiduciary. The plaintiffs argued that the defendants, as company insiders, failed to disclose to the outside investment manager inside information about safety issues with the 737 MAX, rendering the investment manager incapable of performing its fiduciary obligations.
But the Seventh Circuit concluded that if an independent fiduciary relies on insider information to make investment decisions concerning the employer's stock, then the independent fiduciary would become mired in the very conflict of interest that it was appointed to avoid. The Seventh Circuit held that under the reasoning of Dudenhoeffer, plaintiffs did not plead circumstances under which a prudent fiduciary could not have concluded that public disclosures of the problems with the 737 MAX would have done more harm than good to plan participants.
Regarding the plaintiffs' duty of loyalty claim, the Seventh Circuit held that plaintiffs cannot use the broader and more general duty of loyalty under ERISA to circumvent the Dudenhoeffer standard for duty of prudence claims.
Finally, the Seventh Circuit wrote that the plaintiffs were unrealistic in arguing that if the Investment Committee or Plans Committee included lower-level employees not privy to the kind of information that senior executives were privy to, Committee members would have been absolved of the purported non-delegable duty to disclose inside information.

Practical Implications

Employers operating in the Seventh Circuit should familiarize themselves with the holding in Boeing. The decision noted that Boeing's delegation of fiduciary duties to an outside investment advisor anticipated exactly this sort of case, in which Boeing insiders would be accused of failing to properly disclose company information because of the tension of conflicting fiduciary loyalties. Appointing independent fiduciaries allows company insiders who manage ESOPs to give up control of the ESOP's investments to avoid potential conflicts between their duties under ERISA and their duties under corporation and federal securities laws.