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Rogers v. Baxter International Inc.

October 4, 2007


The opinion of the court was delivered by: Magistrate Judge Nan R. Nolan


This ERISA class action challenges defendants' decision to continue to offer company stock as a plan investment option. Defendants seek to propound four interrogatories on 14,511 individual plaintiff class members. Plaintiff opposes discovery on absent class members. For the reasons set forth below, Defendants' motion for leave to serve interrogatories on class members [Doc. 244] is denied.

I. Background

Plaintiff David E. Rogers ("Rogers") represents a class of all current and former participants in the Subsidiaries Incentive Investment Plan and the Baxter Healthcare Corporation of Puerto Rico Savings and Investment Plan (the "Plans") for whose individual accounts of the Plans held shares of Baxter Common Stock at any time from January 1, 2001 to the present. The Plans were "defined contribution" or "individual account" plans within the meaning of ERISA, in that the Plans provided for individual account(s) for each participant and for benefits based solely upon the amount contributed to the participant's account(s), and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which could be allocated to such participant's accounts. Defendants are Baxter International, Inc. and the committees and managers responsible for the Plans. Rogers argues that defendants violated their fiduciary duties by allowing and encouraging participants to invest their retirement funds in Baxter common stock when they knew, or should have known, that the stock's value was inflated.

Rogers contends that defendants breached their fiduciary duties to participants of the Plans in five principal ways: (1) misrepresenting and failing to disclose material facts to the participants in connection with the administration of the Plans; (2) failing to exercise their fiduciary duties to the Plans and participants solely in the interests of the participants for the exclusive purpose of providing benefits to participants; (3) failing to manage the Plans' assets with the care, skill, prudence and diligence of a prudent person under the circumstances and imprudently failing to diversify the investments in the Plans so as to minimize the risk of large losses; (4) permitting the participants to continue to elect to invest their retirement monies in the Baxter Common Stock Fund when it was imprudent to do so and when the participants were not provided with timely, accurate and complete information concerning the company as required by applicable law; and (5) failing to appoint, inform, monitor and supervise the members of the committees which helped to administer the Plans. Rogers recently amended the complaint to allege that defendants violated ERISA's Section 407(a)(1) by holding more than 10% of Baxter Plan assets in Baxter stock.

II. Discussion

Discovery from nonnamed class members is not warranted "as a matter of course." Brennan v. Midwestern United Life Ins. Co., 450 F.2d 999, 1005 (7th Cir. 1971); see also Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 810 & n.2 (1985) (generally, "an absent class-action plaintiff is not required to do anything."). Discovery from absent class members may be allowed only in appropriate circumstances. Clark v. Universal Builders, 501 F.2d 324, 340-41 (7th Cir. 1974); Brennan, 450 F.2d at 1004. "Postcertification discovery directed at individual class members (other than named plaintiffs) should be conditioned on a showing that it serves a legitimate purpose . . . One of the principal advantages of class actions over massive joinder or consolidation would be lost if all class members were routinely subject to discovery." Manual for Complex Litigation, Fourth, § 21.41. A party may serve interrogatories on absent class members if the party shows that "the information requested is necessary to trial preparation and that the interrogatory is not designed 'as a tactic to take undue advantage of the class members or as a stratagem to reduce the number of claimants.'" Clark, 501 F.2d at 340 (citing Brennan, 450 F.2d at 1005). Defendants bear the burden of demonstrating the merits of their proposed discovery. Id.

A. Interrogatory No. 1 - Class Members Assets Outside of the Baxter Plan

Proposed interrogatory No. 1 seeks information concerning the size and composition of class members' overall investment portfolios during the class period, January 1, 2001 to the present. Defendants rely on two cases to support their view that discovery of information on absent class members' non-Baxter investments outside the Baxter Plan is relevant to assessing whether the Baxter stock was a prudent investment option for class members, Steinman v. Hicks, 352 F.3d 1101 (7th Cir. 2003) and Summers v. State Street Bank & Trust, 453 F.3d 404 (7th Cir. 2006). Defendants say that these cases "make clear that whether the Baxter Common Stock Fund was and is a prudent investment option cannot be evaluated in isolation. Instead, such a determination requires consideration of the size and composition of individual class members' overall investment portfolios during the class period." Defs' Motion at 3.

An ERISA trustee has a fundamental duty to behave prudently in managing the trust's assets. Armstrong v. LaSalle Bank Nat'l Ass., 446 F.3d 728, 732 (7th Cir. 2006). ERISA requires plan fiduciaries to select and monitor investment options "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S. C. § 1104(a)(1)(B). Section 404 also includes a general requirement of diversification of plan assets. Id. § 1104(a)(1)(C). "The duty to diversify is an essential element of the ordinary trustee's duty of prudence, given the risk aversion of trust beneficiaries." Armstrong, 446 F.3d at 732. In determining whether a fiduciary exercised prudence in selecting and retaining available investment options, a court should consider the totality of the circumstances, including, but not limited to "the plan structure and aims, the disclosures made to participants regarding the general and specific risks associated with investment in company stock, and the nature and extent of challenges facing the company that would have an effect on stock price and viability." DiFelice v. U.S. Airways, 2007 WL 2192896, at *5 (4th Cir. Aug. 1, 2007).

Neither Steinman nor Summers persuades the Court that information on class members' investment holdings outside the Baxter Plan bears on the question of whether defendants breached their fiduciary duties in this case by continuing to offer the Baxter Common Stock Fund despite their knowledge that Baxter stock was overvalued. Steinman and Summers involved ESOPs (employee stock ownership plans). An ESOP is nondiversified by definition because "the very purpose of an ESOP is to invest in a single stock, that of the employer of the ESOP's participants." Summers, 453 F.3d at 406, 410. "A directed trustee appointed under an ERISA plan does not have [the duty to diversify the trust assets] because the very purpose of an ESOP is to invest in a single stock, that of the employer of the ESOP's participants." Id. at 406. An ESOP trustee's duty of prudence demands an even more watchful eye, diversification not being in the picture to buffer the risk to the beneficiaries should the company encounter adversity. There is a sense in which, because of risk aversion, an ESOP is imprudent per se, though legally authorized. This built-in 'imprudence' (for which the trustee is of course not culpable) requires him to be especially careful to do nothing to increase the risk faced by the participants still further. Armstrong, 446 F.3d at 732. Even though the trustee of an ESOP does not have a general duty to diversity, such a duty can arise in "special circumstances." Id.

The Steinman and Summers courts elaborated on the "special circumstances" which could require diversification of an ESOP's holdings. In Steinman, the Seventh Circuit noted that if the "ESOP was [the employees'] principal retirement asset . . . and was entirely invested in the stock of their employer . . ., and their employer was bought in a stock-for-stock deal-so that all the assets of the ESOP became stock in the acquirer by a company that had a much higher debt-equity ratio than their (former) employer and as a result its stock price was much more volatile and its bankruptcy risk greater," then the duty of prudence could require diversification of an ESOP's holdings. Steinman, 352 F.3d at 1106. In Summers, "[t]he question was whether the participants in the ESOP had a remedy against the ESOP trustee for the trustee's failure to dispose of the employer's stock as the market price of the stock fell (ending at zero)." Harzewski v. Guidant Corp., 489 F.3d 799, 807 (7th Cir. 2007). The Seventh Circuit held that "the trustee could not be faulted for failing to second-guess the stock market, and while it could be faulted for failing to recognize (and, by diversifying, reduce) the risk that the drop in price was imposing on the ESOP's participants because of the increase in the employer's debt-equity ratio brought about by the fall in its market value, the plaintiffs had never sought to 'determine the point at which the ESOP trustee should [have sold] in order to protect the employee-shareholder against excessive risk.'" Id. The Summers court explained that the source of the duty to diversify an ESOP is: the excessive risk imposed on employee-shareholders by the rise in the debt-equity ratio of the employer's stock as a result, in the example given in Steinman, of a merger and in our case of plummeting stock price. How excessive would depend in the first instance on the amount and character of the employees' other assets, for, as we have already indicated, it is the riskiness of one's portfolio, not of a particular asset in the portfolio, that is important to the risk-averse investor.

Summers, 453 F.3d at 411.

Steinman and Summers thus instruct that a plaintiff may introduce evidence that there may have been a point where an ESOP trustee should have sold an employer's stock in order to protect the employee-shareholders from "excessive" risk.*fn1 By definition, an allegation that a fiduciary failed to protect employee-shareholders from "excessive" risk necessarily depends on the participants' other investments. "Excessive" risk cannot be judged in isolation, but must be compared to the amount and character of the participants' other assets. It makes no sense to argue that the risk was "excessive" without knowing the amount and character of the participants' other assets. "[W]hat is important is ...

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