An Employee Retirement Income Security Act (ERISA) stock drop lawsuit against Johnson & Johnson has been dismissed, though the judge has granted the plaintiffs permission to amend and resubmit their complaint.
In a complex ruling, Chief Judge Freda L. Wolfson of the U.S. District Court for the District of New Jersey granted the company’s motion to dismiss, primarily on the basis that plaintiffs have not sufficiently alleged an alternative course of action that their plan fiduciaries could have taken. In basic terms, Wolfson determined that the participants’ alleged course of alternative action would have involved actions taken by plan officials in their “corporate capacities,” rather than in their capacity as alleged fiduciaries of the plan.
The 40-page decision by Wolfson goes into significant detail surrounding the history behind Johnson & Johnson’s talc business. The plaintiffs had alleged that Johnson & Johnson knew, for decades, that its talc products contained asbestos, and that the company had knowingly concealed this information from government regulators and consumers and had gone to “great lengths” to hide it. Additionally, plaintiffs alleged that Johnson & Johnson had made efforts to control Food and Drug Administration (FDA) research and regulation of talc-based products.
In the initial complaint, plaintiffs claimed that committee members had “knowingly permitted plan participants to purchase and hold an imprudent investment that was disqualified under ERISA [the Employee Retirement Income Security Act] as well as damaging to the plan.”
Under the Supreme Court’s decision in Fifth-Third v. Dudenhoeffer, plaintiffs who make such claims “must outline plausible alternative actions that plan fiduciaries could have taken, which would not have violated securities laws and which would not have potentially resulted in more harm than good to the plan and participants.”
Within the ultimately pro-defense ruling, Wolfson denies the company’s motion to dismiss Johnson & Johnson as a defendant simply because it is not a named or functional fiduciary. Instead, the court says, it is possible that the company could be subject to vicarious liability under general agency law. At the same time, however, the ruling says the plaintiffs have not sufficiently alleged that Johnson & Johnson had sufficient control of the plan to be determined to carry direct fiduciary liability with respect to the issues at hand.
Johnson & Johnson successfully argued that the plaintiff’s alleged alternative action the fiduciary defendants may have taken did not satisfy the standard set under Dudenhoeffer. Additionally, the company argued that making a corrective disclosure to the U.S. Securities and Exchange Commission (SEC) might have required defendants to issue a false statement. Johnson & Johnson stated the company possessed a good faith belief that its talc products neither contained asbestos nor caused cancer. Therefore, the company said, it could not have issued such a disclosure.
Important to the pro-defense ruling is the argument that issuing such SEC filings requires individuals to function in a corporate capacity and not a fiduciary one. Therefore, the ruling states, alleged alternative actions that require such disclosures do not automatically meet Dudenhoeffer’s standard. In response, the plaintiffs contended that the company’s failure to issue a corrective disclosure is indeed a fiduciary decision, as making this decision would have protected plan beneficiaries.
On this notion, Wolfson sides with the defendants’ argument, stating that “if ERISA fiduciaries cannot be held liable for breach of fiduciary duty based on statements in SEC filings, such fiduciaries also may not be held responsible for failing to issue a corrective disclosure, an action which could only be taken in a corporate capacity.”
Wolfson further states that plaintiffs did not adequately allege, as required under Dudenhoeffer, that their prescribed course of conduct would not have done “more harm than good,” as their proposed corrective disclosure would likely also have caused a drop in the value of Johnson & Johnson’s stock. Even as the plaintiffs argued that an earlier disclosure of Johnson & Johnson’s contaminated product would be better than a later one, Wolfson stated the timing of the disclosure is unavailing, as there is no evidence this would have caused less damage.
Lastly, on the basis of the right to a jury trial, Wolfson concludes that because the plaintiffs’ complaints are dismissed, the court “need not reach defendants’ arguments regarding plaintiffs’ jury demand.” She adds that plaintiffs may allege a “different, viable alternative” in an amended complaint within 45 days from the date of her order.
The full text of the ruling is here.