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Abbott v. Lockheed Martin Corporation

United States Court of Appeals, Seventh Circuit

August 7, 2013

Anthony Abbott, et al., Plaintiffs-Appellants,
v.
Lockheed Martin Corporation and Lockheed Martin Investment Management Company, Defendants-Appellees.

Argued May 29, 2013

Appeal from the United States District Court for the Southern District of Illinois. No. 06-cv-0701-MJR — Michael J. Reagan, Judge.

Before Bauer, Wood, and Tinder, Circuit Judges.

Wood, Circuit Judge.

In Spano v. Boeing Co., 633 F.3d 574 (7th Cir. 2011), we confronted for the first time the question whether an action for breach of fiduciary duty under Section 502(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(a)(2), may be maintained as a class action when a defined-contribution retirement savings plan is at issue. We concluded in Spano that the answer was "maybe." The proposed classes before us in that case, however, were too broad to meet the certification requirements of Federal Rule of Civil Procedure 23. Spano thus left for another day the resolution of many questions concerning the use of the class-action device for a Section 502(a)(2) claim about a defined-contribution plan.

This case requires us to take the next step. It involves a proposed class of plaintiffs who are participants in two defined-contribution plans run by Lockheed Martin. The class is more focused than those we rejected in Spano, and it reflects Spano's guidance about how to define a certifiable Section 502(a)(2) class. Notwithstanding these improvements, the district court thought that it still came up short, and so the court declined to certify the class. We granted Plaintiffs' petition under Federal Rule of Civil Procedure 23(f) to appeal that ruling. We now reverse, and we hope that our explanation for doing so will further refine the discussion we began in Spano.

I

A

Plaintiffs have brought a number of claims against Lockheed Martin Corporation and Lockheed Martin Investment Management Company (collectively, Lockheed) regarding the management of Lockheed's two retirement savings plans, the Salaried Savings Plan and the Hourly Savings Plan. (The two plans are indistinguishable for purposes of this appeal, and we refer to them collec- tively as the "Plan" from here on unless the distinction is relevant.) In general they allege that Lockheed breached its fiduciary duty to the Plan in a number of ways, in violation of Sections 409 and 502 of ERISA, 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3). The Plan is a defined-contribution plan, often referred to as a 401(k), which allows employees to direct a portion of their earnings to a tax-deferred retirement savings account; the employee's contribution is often augmented by the employer. These plans offer a range of investment options to participants, who are permitted to allocate the funds in their accounts as they choose. Defined-contribution plans are common in this country, and they "play a vital role in the retirement planning of millions of Americans." Spano, 633 F.3d at 576.

Among the investment options Lockheed offered Plan participants was something called the "stable-value fund" (SVF). SVFs are recognized investment vehicles that are available only through employer-sponsored retirement plans and some college-savings plans. See, e.g., Adam Zoll, For Safety-First Savers, Stable-Value Funds Are Tough to Beat, ht tp://ne ws.morningstar.com/a r ticlene t/ article.aspx?id=592164 (last visited Aug. 5, 2013). They typically invest in a mix of short- and intermediate-term securities, such as Treasury securities, corporate bonds, and mortgage-backed securities. Because they hold longer-duration instruments, SVFs generally outperform money market funds, which invest exclusively in short-term securities. Id. To provide the stability advertised in the name, SVFs are provided through "wrap" contracts with banks or insurance companies that guarantee the fund's principal and shield it from interest-rate volatility. Id.; see also Paul J. Donahue, Plan Sponsor Fiduciary Duty for the Selection of Options in Participant-Directed Defined Contribution Plans and the Choice Between Stable Value and Money Market, 39 Akron L. Rev. 9, 20-22 (2006).

Plaintiffs allege that the SVF that Lockheed offered through its Plan failed to conform to this general description. Rather than containing a mix of short- and intermediate-term investments, Lockheed's SVF was heavily invested in short-term money market investments. This resulted in a low rate of return, such that in Lockheed's own words, the SVF did "not beat inflation by a sufficient margin to provide a meaningful retirement asset." Plaintiffs contend that structuring the SVF in this manner amounted to imprudent management and violated Lockheed's duty to manage the Plan "with [] care, skill, prudence, and diligence under the circumstances." 29 U.S.C. § 1104(a)(1)(B).

B

Plaintiffs filed this suit in 2006. Lockheed eventually moved for summary judgment, and in March 2009 the district court granted the motion with respect to some claims and denied it for others. The SVF claim is one that survived. Several days later, the district court certified two classes under Federal Rule of Civil Procedure 23(b)(1)(A) and (B), one for the Salaried Savings Plan and one for the Hourly Savings Plan. Each class was certified for all claims. The Salaried Savings Plan class was defined as:

All persons, excluding from the class defendants and/or other individuals who are or may be liable for the conduct described in the First Amended Complaint, who were or are participants or beneficiaries of the Salaried Plan and who were or may have been affected by the conduct set forth in the First Amended Complaint, as modified by subsequent court ...

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