U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois ruled that Baxter did not violate its Employee Retirement Income Security Act (ERISA) fiduciary duties by keeping company stock in the plan as its share price dropped over word the company was unable to meet its expected earnings goals.
Gottschall found that Baxter qualified for 404(c) safe harbor protection because the plan met the requirements set out in that ERISA section, including:
- provide for individual accounts
- allow participants the opportunity to exercise control over their accounts
- provide participants with the opportunity to choose from a broad range of investment alternatives
- give participants sufficient information to make informed investment decisions
- provide additional safeguards if the plan offers qualifying employer securities.
In her ruling, Gottschall rejected the plaintiff’s contention that the plan was not a 404(c) plan because the plan’s fiduciaries had never explicitly determined that the plan would qualify as such. Also, the court contended, Baxter satisfied 404(c) by providing plan participants with enough information to allow them to make informed decisions about their investment in Baxter stock.
In addition, the court disposed of the plaintiff’s contention that 404(c) would not save the defendants from liability with respect to his claim that the plan violated ERISA by acquiring and holding more than 10% of the plan assets in Baxter stock. The court found it was the participants, and not the Baxter defendants, who caused the plan to hold more than 10% of its assets in company stock because the investments were made by the participants.
The class action brought by Baxter employee David E. Rogers stems from Baxter’s announcement in July 2002 that it had inflated its expected earnings. The announcement caused Baxter’s stock price to drop (see “Appellate Court Allows Stock Drop Suit to Move Forward”).
The case is Rogers v. Baxter International Inc., N.D. Ill., No. 04 C 6476.