The case involves Michael Perrone, Tom Tarantino, and Rochelle Rosen, acting on behalf of participants in the Johnson & Johnson (J&J) Savings Plan, who are appealing against J&J and its executives. The appeal arises from a District Court ruling concerning claims that J&J violated fiduciary duties under the Employee Retirement Income Security Act (ERISA) due to a significant drop in the stock price of J&J's Employee Stock Ownership Plan (ESOP) following allegations of asbestos contamination in its baby powder. The plaintiffs argue that the ESOP administrators, as corporate insiders, should have anticipated the stock decline and taken preventive measures.
Specifically, the plaintiffs proposed two alternative actions that the fiduciaries could have undertaken: 1) making timely public disclosures to correct the stock price, and 2) ceasing investments in J&J stock and holding contributions as cash. However, the District Court found these proposed actions insufficient under the Supreme Court's precedent in Fifth Third Bancorp v. Dudenhoeffer, which requires plaintiffs to plausibly suggest alternatives that a prudent fiduciary would consider less harmful. The court determined that a reasonable fiduciary could perceive these alternatives as potentially detrimental given the unclear implications of J&J's future liabilities and stock performance. As a result, the dismissal of the plaintiffs' complaint was upheld.
Additionally, the background highlights the longstanding sale of Johnson's Baby Powder, primarily made from talc, and the risks associated with talc mining due to its proximity to asbestos deposits.
Asbestos, recognized as a carcinogen associated with ovarian cancer and mesothelioma, raises concerns regarding potential contamination in talc products, particularly Johnson & Johnson's (J&J) Johnson’s Baby Powder. Plaintiffs allege that J&J has long been aware of the possibility that its talc may contain asbestos and has actively suppressed adverse research, ignored internal warnings, and obstructed regulatory efforts. Thousands of product liability lawsuits have been filed against J&J, with varying outcomes, while the company consistently denies liability, asserting its products are safe and free of asbestos. In its 10-K filings from 2012 to 2016, J&J maintained a commitment to product safety and claimed robust defenses against talc-related liability. Public affirmations of safety continued through late 2018, despite an investigative report by Reuters alleging that J&J concealed information about asbestos in its baby powder, leading to a notable decline in stock price.
Two major lawsuits are currently pending in the U.S. District Court for the District of New Jersey related to these allegations: the "Products Liability Action," comprising multiple consolidated cases claiming personal injury from asbestos in J&J’s talc, and the "Securities Fraud Action," a class action concerning violations of federal securities laws connected to the same issues. Additionally, in 2019, Plaintiffs initiated a class action under ERISA, alleging breaches of fiduciary duties by the Defendants, distinct from the prior product liability and securities fraud claims.
J&J offers several defined contribution retirement plans for its employees, including the Johnson & Johnson Savings Plan and the Johnson & Johnson Retirement Savings Plan, all governed by ERISA. The Pension and Benefits Committee, comprising individual Defendants, oversees these Plans. Participants can invest in an Employee Stock Ownership Plan (ESOP) that primarily invests in J&J stock, supplemented by a cash buffer for liquidity. Plaintiffs, who invested in the Savings Plan during a specific Class Period, allege that the Committee breached fiduciary duties by failing to act prudently amid knowledge of potential dangers associated with J&J's talc products, which they claim led to inflated stock prices. They argue that the fiduciaries should have issued corrective disclosures to protect ESOP participants from stock price drops.
The District Court dismissed the Plaintiffs’ claims, applying the Dudenhoeffer standard, which requires fiduciaries to demonstrate viable alternative actions. The Court found that the Defendants could only issue disclosures in their corporate roles, not as ERISA fiduciaries, and that Plaintiffs failed to show that earlier disclosures would have mitigated harm to the ESOP. The dismissal was without prejudice, allowing for a revised complaint. The Plaintiffs later filed an amended complaint reiterating their claims and proposing that the fiduciaries should have redirected contributions to the cash buffer instead of purchasing overvalued stock. The District Court again dismissed the claims, asserting that neither proposed action would necessarily prevent greater harm to the ESOP. The Plaintiffs have appealed the decision. ERISA mandates fiduciaries to act with prudence and diligence akin to a prudent person in similar circumstances.
Congress promotes Employee Stock Ownership Plans (ESOPs) to facilitate employee investment in employer securities, as noted in 29 U.S.C. § 1107(d)(6). Under the Employee Retirement Income Security Act (ERISA), ESOPs are exempt from certain prudential obligations, including the requirement for fiduciaries to diversify assets (29 U.S.C. § 1104(a)(2)). Historically, circuit courts presumed ESOP fiduciaries to be prudent, as established in Moench v. Robertson. However, the Supreme Court in Dudenhoeffer firmly rejected this presumption, emphasizing the need for a balanced approach to enforce plan rights while promoting ESOPs. The Court criticized the presumption for hindering plaintiffs' ability to assert duty-of-prudence claims, even in meritorious cases, and advocated for a context-sensitive evaluation of complaints.
In Dudenhoeffer, the Court specified that to claim a breach of fiduciary duty based on inside information, plaintiffs must plausibly suggest an alternative action that adheres to securities laws and is not viewed as likely to harm the fund. It highlighted the importance of Rule 12(b)(6) as a tool for dismissing baseless claims, with a focus on the contextual nature of the inquiry.
The Court also instructed that if a complaint alleges fiduciaries should have acted on inside information, courts must consider the implications on insider trading laws and corporate disclosure requirements. Specifically, it noted that a prudent fiduciary must assess whether disclosure of negative information could negatively impact the fund's stock value.
The Supreme Court reaffirmed Dudenhoeffer’s principles in subsequent rulings, including Amgen Inc. v. Harris and Ret. Plans Comm. of IBM v. Jander. In the current case, plaintiffs propose two alternative actions that satisfy the Dudenhoeffer standard, including the assertion that defendants could have made corrective disclosures about the health risks associated with their talc products earlier to address price inflation.
Plaintiffs sought to compel the Defendants to acknowledge that Johnson & Johnson's talc products were not entirely safe and proposed alternatives for Defendants to manage ESOP investments. However, these alternatives did not meet the Dudenhoeffer standard, as a prudent fiduciary could reasonably conclude that such actions might harm the ESOP. Plaintiffs expressed confusion over why certain claims in the Securities Fraud Action could survive dismissal while an ERISA claim based on similar facts could not. It was clarified that differing pleading standards under various laws can lead to this situation, as securities law violations do not automatically validate an ERISA claim.
The Plaintiffs suggested that Defendants should have made corrective disclosures to address stock inflation. While the Court assumed these disclosures might meet the first prong of Dudenhoeffer regarding consistency with securities laws, they failed to satisfy the second prong. Plaintiffs must plausibly demonstrate that a prudent fiduciary could not conclude that the proposed actions would be more harmful than beneficial. This requirement is stringent, particularly when assessing the timing of disclosures, which involves uncertain variables. General economic theories are insufficient; the allegations must include specific context illustrating why earlier disclosure would have been distinctly beneficial. The duty of prudence is context-dependent, necessitating detailed justification against the backdrop of the fiduciary’s circumstances at the time of action.
Allegations were deemed insufficient because they failed to demonstrate that a prudent fiduciary could not reasonably conclude that delaying disclosure of fraud until after investigations would cause less harm than good. Even with the knowledge that eventual disclosure was necessary, a prudent fiduciary might decide that immediate disclosure of Wells Fargo’s sales practices could harm the company more than waiting for the investigation's conclusion. An untimely disclosure could negatively affect stock prices, leading fiduciaries to consider early disclosure as potentially riskier.
The excerpt references Jander v. Retirement Plans Committee of IBM, where the Second Circuit found that plaintiffs plausibly alleged that IBM's fiduciaries acted imprudently by failing to disclose significant financial issues of a business unit before its sale. IBM publicly valued the unit at $2 billion despite knowing it would incur heavy losses. The court emphasized that the fiduciaries’ knowledge of the impending sale made non-disclosure untenable, and the potential stock drop from early disclosure would be no worse than the inevitable decline from later disclosure.
The plaintiffs in the current case seek to apply Jander's principles but rely too heavily on economic theory rather than concrete allegations that would demonstrate that no prudent fiduciary would believe that early corrective disclosures would be harmful. They claim that timely corrective disclosures at the outset of Johnson & Johnson's misrepresentations could have prevented substantial stock price inflation and reduced harm to plan participants.
Concealment by the Defendants led to Plan participants making purchases at inflated prices, increasing harm to these participants. The failure to disclose corrective information exacerbated the situation and negatively impacted Johnson & Johnson's (J&J) reputation. Although Plaintiffs reference the Dudenhoeffer standard, their claims reflect general economic theory rather than a specific duty-of-prudence violation. They argue that the inevitable disclosure of risks associated with J&J's talc products was akin to the situation in Jander, suggesting that as lawsuits increased, internal documents revealing knowledge of asbestos would eventually emerge. However, this argument is flawed; liability for talc product dangers remains unresolved, and J&J has not admitted any issues with asbestos in its talc.
In contrast to IBM's actions in Jander, J&J has not taken clear steps to disclose alleged overvaluation, and the absence of consensus on any cover-up undermines the Plaintiffs' claims. They also caution that premature disclosures could mislead the market regarding J&J's legal exposure, potentially harming the ESOP. Additionally, the Plaintiffs propose redirecting ESOP contributions into a cash buffer, which would allow for more flexible participant transactions and minimize transaction costs, but this alternative approach has not been adopted by the Defendants.
Plaintiffs argue that a prudent fiduciary should use the cash buffer as a hedging tool; however, this assertion is deemed unreasonable. Redirecting funds to an ESOP's cash buffer creates a dilemma for fiduciaries, who risk being sued for imprudence regardless of their decision regarding stock investment. If fiduciaries increase the cash buffer and the stock price subsequently rises, they could face claims for allowing investment drag. Conversely, if they maintain or reduce the cash buffer and the stock price drops, they might be accused of failing to mitigate losses. The Plaintiffs have not sufficiently demonstrated specific circumstances where increasing the cash buffer would be advantageous. The prediction of a significant drop in J&J’s stock price was speculative, with uncertainty regarding timing and severity. A prudent fiduciary could reasonably believe that the stock price would not necessarily decline or that any potential drop would be offset by prior gains or a quick recovery. Thus, it is implausible to assert that a prudent fiduciary could not conclude that redirecting contributions to the cash buffer might be detrimental. Consequently, Plaintiffs have not met the rigorous pleading standard for an ERISA claim regarding a breach of the duty of prudence based on inside information, leading to an affirmation of the decision. The opinion does not address the merits of the related Products Liability Action or Securities Fraud Action.
