Burke v. The Boeing Co., No. 20-3389, __ F. 4th __, 2022 WL 3030835 (7th Cir. Aug. 1, 2022) (Before Circuit Judges Sykes, Ripple, and Hamilton).
In 2014, the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), addressed some of the unique issues that arise when participants bring claims for fiduciary breach based on pension plan investments in company stock. Most of these issues stem from ERISA’s unique structure, which imposes strict trust law-based duties on plan fiduciaries but also allows corporate insiders to serve as fiduciaries. This sets the stage for conflicts of interest that are not easily navigated, particularly given the securities law rules prohibiting insider trading. Perhaps predictably, courts continue to grapple with fiduciary duties in this context, as this case demonstrates.
The Boeing Company sponsors a 401(k) pension plan for its employees, which includes as one of the investment options the Boeing Stock Fund. Starting in 2007, the Investment Committee at Boeing responsible for overseeing plan investments began contracting with an outside company, Newport Trust Company, to oversee the investment in the Boeing Stock Fund. The relevant contracts gave Newport exclusive fiduciary authority over whether to continue investing in the Stock Fund.
Around 2017, Boeing began selling a new version of its popular 737 airliner called the 737 MAX. In 2018 and 2019, two of these planes crashed because of problems with the MAX’s automated flight control system, killing all of the hundreds of passengers on board. Not long after, the entire fleet of 737 MAX airplanes was grounded, and Boeing later announced that it was suspending production of the plane. The value of the Boeing stock and thus the Stock Fund also plummeted in response to these events.
Plaintiffs, participants in the 401(k) plan who were invested in the Boeing Stock Fund during this period, brought a putative class action for fiduciary breaches, alleging that fiduciaries at Boeing knew or should have known that the 737 MAX planes were unsafe to operate after the flight data recording box had been retrieved from the plane that crashed in 2018. Indeed, although not noted in the decision, the Department of Justice charged Boeing with criminal conspiracy and, as part of a settlement, Boeing admitted criminal misconduct in misleading the FAA about these problems. In any event, the participants alleged that the defendants knew that public disclosure of the safety issues was inevitable, and they should have taken steps to disclose them to the public immediately, thus preventing precipitous losses to the value of Boeing stock and the Stock Fund.
The Seventh Circuit, however, like the district court, disagreed that the Boeing fiduciaries had any obligation to make a public disclosure. In the court’s view, the delegation to Newport was designed precisely to remove the responsibility for stock fund oversight, as well as any dilemma stemming from that responsibility that corporate insiders might have to make disclosures about the stock. In the court’s view, the Boeing Investment Committee and its members successfully transferred all of their fiduciary responsibilities in this manner and were therefore simply not fiduciaries with respect to the Boeing Stock Fund.
Likewise, the Seventh Circuit rejected the plaintiffs’ argument that the Boeing fiduciaries had a non-delegable duty of loyalty to make public disclosures where necessary to protect the plan and its participants from avoidable losses. To the contrary, the court concluded that “[b]ecause the Investment Committee was not serving as an ERISA fiduciary with respect to the Boeing Stock Fund’s investment choices during the Class Period, it cannot be liable for breach of general fiduciary duties.”
Even if the Investment Committee and its members were acting as fiduciaries in some respect with regard to the Stock Fund, the court saw a “second obstacle.” In the court’s view, because “federal securities laws simply do not require immediate disclosure of all bad news,” requiring ERISA fiduciaries to make public disclosures would place them in a “double bind.” By appointing Newport as the responsible fiduciary for the Stock Fund, the fiduciaries got out of the bind, at least for the most part.
In this regard, the court recognized that appointing fiduciaries do have a non-delegable responsibility to monitor those whom they appoint. But that duty to monitor was not implicated in the court’s view because the plaintiffs did not allege that there was any problem with “Newport’s honesty or competence.”
The court went on to suggest that had it not delegated its duties to Newport, the Committee might have been sued for not appointing an independent fiduciary, and similarly suggested that any disclosure about the deadly problems with the 737 MAX planes might have done more harm than good for the company stock. In the court’s view, appointing an independent fiduciary like Newport provided a handy way to simply avoid those problems and protect plan fiduciaries from having to make hard decisions.
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