:: Seventh Circuit Opinion Permits Suit By Former ESOP Participants – A Balanced View Of Standing To Sue

Obviously the named plaintiffs have standing to sue in the sense of being entitled to ask for an exercise of the judicial power of the United States as that term in Article III of the Constitution has been interpreted, because if they win they will obtain a tangible benefit. But there is also a nonconstitutional doctrine of standing to sue, one aspect of which is the requirement that the plaintiff be within the “zone of interests” of the statute or other source of rights under which he is suing. Harzewski v. Guidant Corp., — F.3d —-, 2007 WL 1598097 C.A.7 (Ind.) (June 05, 2007)

In this opinion, Judge Posner analyzed the current confusion over standing in ERISA cases in the context of a suit by retired employees who had cashed out their retirement benefits provided through an ESOP. The ESOP owned shares in Guidant Corporation which the plaintiffs claimed should have been sold to the plan’s financial advantage before a substantial decline in value after defects in the company’s products came to light:

October 2004 to November 2005 was a period, prior to Boston Scientific’s acquisition of Guidant (which took place in April 2006), when according to the complaint the price of Guidant stock was inflated by a fraud committed by the company’s management. The alleged fraud consisted of the concealment of information concerning defects in the company’s implantable defibrillators, which accounted for nearly half its revenues. Very shortly after Boston Scientific’s acquisition of Guidant, the full gravity of Guidant’s problems came to light and the revelation contributed to the drop in the price of Boston Scientific stock from $22.49 when Boston Scientific bought Guidant to $16.33 on May 3 of this year.

The Court’s reasoning will be influential. Judge Posner takes pains to illustrate how standing issues can essentially become a proxy for decisions on the merits of the case, a result he finds at odds with a proper understanding of the standing concept.

Persons Entitled To Sue

The Court viewed the central issue as “whether the plaintiffs are within the group of persons who are authorized to seek relief under ERISA.” Noting that Section 502(a)(2) authorizes a participant to sue “for appropriate relief under section 1109 [of Title 29] [breaches of their fiduciary duties], the court turned to the question of the plaintiffs’ status.

The named plaintiffs, however, cashed out of the plan during the course of the suit. That they cashed out after the complaint was filed, and before the amended complaint was filed, is immaterial. The parties’ preoccupation with those filing dates is a product of the confusing use of the word “standing” to denote both a right to invoke the aid of the courts and a right to obtain a particular form of judicial relief.

Article III Standing

The Court had little difficulty finding Article III standing.

Obviously the named plaintiffs have standing to sue in the sense of being entitled to ask for an exercise of the judicial power of the United States as that term in Article III of the Constitution has been interpreted, because if they win they will obtain a tangible benefit.

Recall that the elements of Article III standing are (1) an injury in fact, (2) that is causally connected to the defendant, and (3) that is redressable by the court. Id. at 560-61, 112 S.Ct. 2130. The elements are conjunctive, so that a failure of any of the three elements deprives a plaintiff of standing to maintain an action in federal court. “If plaintiffs lack Article III standing, a court has no subject matter jurisdiction to hear their claim.” See, Cent. States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care, 433 F.3d 181, 198 (2d Cir.2005).

“Zone of Interests” Requirement – Prudential Limitations On Standing

The Court then refined the concept of standing, stating:

But there is also a nonconstitutional doctrine of standing to sue, one aspect of which is the requirement that the plaintiff be within the “zone of interests” of the statute or other source of rights under which he is suing. (citing, Air Courier Conference of America v. American Postal Workers Union, 498 U.S. 517, 523-26 (1991); Clarke v. Securities Industry Ass’n, 479 U.S. 388, 395-400 (1987)

The Court gave an example of this limitation:

If someone brought a suit for ERISA benefits who had no possible legally protected interest in the pension plan (suppose he was merely a creditor of a plan participant), he would be outside the statute’s domain, and the court would dismiss the case for want of jurisdiction even if the defendant had made no issue of the remoteness of the plaintiff’s interest from the interests that ERISA protects, namely the interests of plan participants and beneficiaries.

To get at what the Court is saying here, it is helpful to take a look at the Third Circuit opinion cited by Judge Posner, Miller v. Rite Aid Corp., 334 F.3d 335, 340-41 (3d Cir.2003). In that case, the Third Circuit distinguished constitutional as opposed to prudential limitations on standing.

Prudential considerations of standing amount to asking whether a plaintiff’s grievance arguably falls within the zone of interests protected or regulated by the statutory provision or constitutional guarantee invoked in the suit. The Third Circuit evaluated the doctrine in the ERISA context as follows:

[T]he “zone of interest” inquiry in the prudential standing analysis for § 502(a)(1) claims is inextricably tied to the question of whether a plaintiff can meet the definitions of either a “participant” or “beneficiary.” (citing Vartanian v. Monsanto Co., 14 F.3d 697, 701 (1st Cir.1994) ( “In determining who is a ‘participant,’ for purposes of standing, the definition found in 29 U.S.C. § 1002(7) must be read in the context of traditional concepts of standing…. The ultimate question is whether the plaintiff is within the zone of interests ERISA was intended to protect.” ))

Defining the Zone’s Perimeter

Logically, one could surmise that anytime a plaintiff failed to prove his or her case, that fact established that the plaintiff was, by definition, not within the zone of interests ERISA was intended to protect. The Court observed that the concept had more substance:

But if “zone of interests” were interpreted too broadly, standing and merits would merge, since any time a plaintiff failed to prove that the statute under which he was suing entitled him to relief, thus revealing that he was not someone whose interests the statute had been intended to protect, his suit would be dismissed for want of standing. Both Coan v. Kaufman and Miller v. Rite Aid Corp., express misgivings about the merger of standing and merits that “zone of interest” analysis, unguardedly applied to the question whether an ERISA plaintiff is a “participant,” might produce.

The Seventh Circuit then expressed its view of the issue, stating that:

[e]xcept in extreme cases illustrated by our example of the attempt of the plan participant’s creditor to enforce a claim to ERISA benefits, the question whether an ERISA plaintiff is a “participant” entitled to recover benefits under the Act should be treated as a question of statutory interpretation fundamental to the merits of the suit rather than as a question of the plaintiff’s right to bring the suit.”

In support of this view, the Court cited Vartanian v. Monsanto Co., 14 F.3d 697, 701-02 (1st Cir.1994), National Credit Union Administration v. First National Bank & Trust Co., 522 U.S. 479, 492-94 (1998) and American Federation of Government Employees, Local 2119 v. Cohen, 171 F.3d 460, 469 (7th Cir.1999).

Former Participants Are “Participants”

Returning to the issue at hand, the Seventh Circuit held that the former ESOP participants did indeed have standing to sue, and were properly considered “participants” for purposes of ERISA:

So, having cleared a lot of brushwood, let us turn at last to the merits. ERISA defines “participant” to include former employees who have cashed out their plan benefits, as the named plaintiffs in this case did, if they “may become eligible to receive a benefit of any type [from the plan].” . . . So the question comes down to whether, if the plaintiffs win their case by obtaining a money judgment against Guidant, the receipt of that money will constitute the receipt of a plan benefit. It will.

Case of First Impression

Pressing further into its analysis, the Court observed that “[w]e have approached the issue of a former employee’s right to obtain monetary relief under ERISA for a breach of fiduciary duty by the fiduciary of a defined-contribution plan as one of first impression, as it largely is despite both parties’ insistence that the case law compels the result for which each contends.

The Court resolved the question in favor of the plaintiffs. Framing the issue, the Court stated that the key distinction lies in distinguishing “benefits” from “damages”:

In the case of a defined-contribution plan, “an employee’s retirement benefit is the eventual value of his or her account to which contributions have been made by the employer and/or the employee.” . . . Some courts have had trouble seeing this because they strain to distinguish between “benefits” and “damages.” ERISA does not say that a plan participant has the right to sue a plan fiduciary for damages, and the Supreme Court, noting the high level of detail in the Act’s provisions for civil enforcement, 29 U.S.C. § 1132(a), has refused to allow courts to read such a right into the statute. . . . Not that monetary relief is excluded, but it must be relief to which the plan documents themselves entitle the participant. The statute authorizes suits for benefits, just not for damages separate from those benefits; so only “extracontractual damages are prohibited.” . . . The plaintiffs must therefore show that they are claiming an amount of money to which they are entitled by the plan documents over what they received when they retired and received the money in their retirement accounts.

Note: The Guidant case represents a balanced view of standing that tempers the use of standing as a defense. The Court’s position:

[e]xcept in extreme cases illustrated by our example of the attempt of the plan participant’s creditor to enforce a claim to ERISA benefits, the question whether an ERISA plaintiff is a “participant” entitled to recover benefits under the Act should be treated as a question of statutory interpretation fundamental to the merits of the suit rather than as a question of the plaintiff’s right to bring the suit.

The Court gave this example of how ERISA’s definition of “participant” does not foreclose a claim for benefits on the basis that the plaintiff is a former participant:

Suppose the amount is miscalculated to the participant’s disadvantage and he discovers this later and sues. Because he is a former employee eligible to receive a benefit, he can maintain the suit under section 502(a) of ERISA. (citing West v. AK Steel Corp.; Coan v. Kaufman, 457 F.3d at 255-56; Dobson v. Hartford Financial Services Group, Inc., 389 F.3d 386, 398 (2d Cir.2004).

In the Court’s view, the suit by the former plan participants was essentially one for benefits that they were entitled to under the terms of the plan – thus their claims were squarely within the ambit of ERISA’s remedial scheme:

Suppose Guidant had stolen half the money in a plan participant’s retirement account and a suit by the participant resulted in a judgment for that amount; the suit would have established the retiree’s eligibility for the larger benefit. There is no difference if instead of stealing the money from the account, Guidant by imprudent management caused the account to be half as valuable as it would have been under prudent management.

Reduced To Simplest Terms - The opinion ranged far from the initial questions presented – so far, in fact, that Judge Ripple stated:

I am pleased to join that part of the panel’s fine opinion that holds that the district court erred in dismissing this case for lack of standing. In my view, it would be far better, as a prudential matter, to refrain from commentary on the merits at this time. Therefore, I respectfully decline to join that part of the panel’s opinion that addresses the merits of the case.

The bottom line appears to be this: A suit by a former plan participant will be evaluated from the standpoint of whether the former plan participant is advancing a claim for benefits to which he or she was entitled under the plan. Except in extreme cases, the Court will not evaluate the case in terms of the plaintiff’s right to bring the suit, but rather in terms of the merits of the claim for “benefits” under the terms of the plan. That the benefits sought may be monetary relief is of no consequence so long as the monetary relief represents “the relief to which the plan documents themselves entitle the participant.”

See Also -:: The Continuing Controversy Over Standing To Sue Under ERISA

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