Ward v. Avaya Inc , 299 F. App'x 196 ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
11-13-2008
Ward v. Avaya Inc
Precedential or Non-Precedential: Non-Precedential
Docket No. 07-3246
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NOT PRECEDENTIAL
IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 07-3246
_____________
BYRON WARD
Appellant
v.
AVAYA INC; PENSION AND EMPLOYEE BENEFITS INVESTMENT
COMMITTEE, THE; JOHN DOES 1-10
Appellees.
_____________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 06-cv-01721)
District Judge: Honorable Joel A. Pisano
_____________
Submitted Under Third Circuit LAR 34.1(a)
July 22, 2008
Before: McKEE, FUENTES, and JORDAN, Circuit Judges
_____________
(Filed November 13, 2008)
_____________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
Byron Ward appeals an order of the District Court dismissing his claims against
Avaya, Inc. (“Avaya”) and Avaya’s Pension and Employee Benefits Investment
Committee (the “Committee”) (collectively, the “defendants”) for breach of fiduciary
duties under the Employee Retirement and Income Securities Act (“ERISA”). We
conclude that Ward’s complaint fails to allege sufficient facts to overcome the
presumption imposed by Monech v. Robertson, 62 F.3d 553 (3d Cir. 1995), that the
defendants acted within their discretion in performing their fiduciary duties. Further, one
of Ward’s claims is barred by a previous class action settlement agreement. Accordingly,
we will affirm the District Court.1
I. Background
Because we write only for the parties, we focus on those facts pertinent to the
resolution of Ward’s appeal. Ward is a former employee of Lucent Technologies, Inc.
(“Lucent”). On September 30, 2000, he became an Avaya employee when Avaya was
spun off from Lucent. In the course of the spin-off, Avaya established three ERISA plans
(collectively, the “Plans”): the Avaya Inc. Savings Plan for Salaried Employees (the
“Salaried Plan”), the Avaya Inc. Savings Plan (the “Union Plan”), and the Avaya Inc.
1
The District Court had jurisdiction pursuant to 28 U.S.C. § 1331 and 29 U.S.C.
§1132(e)(1). We have jurisdiction pursuant to 28 U.S.C. § 1291. “We exercise plenary
review over a district court’s dismissal of claims pursuant to Rule 12(b)(6). We accept all
well-pleaded allegations in the complaint as true and draw all reasonable inferences in
favor of the plaintiff.” Edgar v. Avaya, Inc., 503 F.3d 340, 344 (3d Cir. 2007) (citations
omitted).
2
Savings Plan for the Variable Workforce (the “Variable Plan”). The Salaried and Union
Plans are successors to similar ERISA plans maintained by Lucent (the “Predecessor
Plans”).
All of the Plans are explicitly required to offer participants the option of investing
in the Avaya Stock Fund, which, as its name implies, consists of shares of Avaya
common stock. Additionally, the Predecessor Plans were required to offer Lucent
employees the opportunity to invest in Lucent common stock. Contributions by Avaya
employees who had invested in the Predecessor Plans prior to the spin-off were
automatically transferred to the Salaried Plan or the Union Plan. Pursuant to that transfer,
Lucent stock invested in the Predecessor Plans was transferred to the Plans’ Lucent Stock
Fund which, similar to the Avaya Stock Fund, consists of shares of Lucent common
stock.
The crux of Ward’s complaint is that the defendants breached their fiduciary duties
under ERISA by investing the Plans’ assets in the Avaya and Lucent Stock Funds. He
alleges that, because of declining demand for Lucent’s products and difficulties
developing new products, the value of Lucent’s stock dropped sixty percent during the
nine-month period preceding the Avaya spin-off. He also alleges that Lucent’s
difficulties continued following the spin-off and that by October 30, 2003, its stock had
lost approximately 90% of the value that it had held at the time of the spin-off.
Ward further alleges that Avaya also experienced serious financial difficulties after
the spin-off. He stated that the price of Avaya’s stock, which began trading at $22.88 a
3
share immediately after the September 2000 spin-off, declined drastically, falling to a low
of $1.15 a share on August 2, 2002. Ward also alleges that despite Lucent’s and Avaya’s
financial difficulties, the Committee allowed the Plans to invest heavily in the Avaya and
Lucent Stock Funds, both immediately following the spin-off and during the period of
deteriorating stock prices for both companies.
Based on the above allegations, Ward asserts four class action claims against the
defendants for breach of fiduciary duty under ERISA. Only Claims II-IV remain at issue
in this appeal. Ward purports to bring Count II of his complaint on behalf of a class
consisting of “[a]ll persons ... who were participants or beneficiaries in the Plans at any
time between September 29, 2000 and April 24, 2003, whose accounts in the Plans
included investments in Avaya securities (the ‘Avaya Class’).” (JA at 36 ¶ 29.) He
alleges that the defendants had “failed to conduct an adequate investigation of Avaya
securities or the Avaya Stock Fund ... nor did [they] take any actions to prevent the Plans
from investing in Avaya securities.” (JA at 61, Compl. at ¶ 141.) Ward further alleges
that if the defendants had conducted an investigation, they would have concluded that
“Avaya securities and the Avaya Stock Fund ... were not prudent investment options for
the Plans’ assets, participant contributions, or Avaya’s matching contributions.” (JA at
61 ¶ 140.)
Ward purports to bring Count III of his complaint on behalf of a class consisting of
“[a]ll persons ... who were participants or beneficiaries in the Plans at any time between
September 29, 2000 and October 30, 2003, whose accounts in the Plans included
4
investments in Lucent securities (the ‘Lucent Class’).” (JA at 36 ¶ 30.) Unsurprisingly,
Ward makes the same claim in Count III regarding the Lucent Class and the Lucent Stock
Fund that he makes in Count II regarding the Avaya Class and the Avaya Stock Fund.
Finally, Ward purports to bring Count IV of his complaint on behalf of both the Avaya
and the Lucent Classes, and claims that the defendants had breached their fiduciary duty
to “adequately monitor the activities of other fiduciaries and ... to replace them with
fiduciaries willing and able to make prudent investment decisions that were solely in the
interests of the Plan’s participants and beneficiaries.” (JA at 70 ¶ 180.)
On September 12, 2006, the District Court partially granted the defendants’ motion
to dismiss and dismissed Counts II-IV of Ward’s complaint. Ward v. Avaya, Inc., 487 F.
Supp. 2d 467 (D. N.J. 2007). The Court concluded that Count II could not survive
because he had failed to plead sufficient facts to overcome the presumption from Monech
v. Robertson, 62 F.3d 553 (3d Cir. 1995), that the defendants had acted within their
discretion by investing in the Avaya Stock Fund. Ward, 487 F. Supp 2d at 479-80. The
District Court also dismissed Count III, concluding that it was barred by a class action
settlement agreement reached in Reinhart v. Lucent Technologies, Inc., No. 01-CV-3491
(D. N.J.). Id. at 480-81. Finally, the District Court dismissed Count IV because Ward
had failed to state valid claims for breach of fiduciary duty. Id. at 481-82.
Ward chose for a time to proceed with his claim in Count I, wherein he asserted
that Avaya and the Committee had violated their fiduciary duties by acquiring Avaya
stock for more than adequate consideration. However, he eventually moved to dismiss
5
Count I with prejudice, and the District Court granted the motion, thereby disposing of all
of Ward’s claims. Shortly thereafter, Ward filed a timely notice of appeal from the
dismissal of Counts II-IV of his complaint.
III. Discussion
A. Ward’s Count II Claim for Breach of Fiduciary Duty
In Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir. 2007), we considered an appeal
from a motion to dismiss a class action lawsuit involving the same Avaya Plans at issue in
Count II of Ward’s complaint.2 Id. at 343. As Ward does in Count II, the Edgar plaintiff
alleged that Avaya and the Committee had breached their fiduciary duties by investing
the Plans’ assets in the Avaya Stock Fund despite Avaya’s financial difficulties.3 Id. at
2
In that case, we used the same short-hand terminology to refer to the Union Plan and
the Variable Plan, but we chose to refer to the Avaya Inc. Savings Plan for Salaried
Employees as the “Management Plan” instead of the “Salaried Plan.” Edgar, 503 F.3d at
343.
3
The class at issue in Edgar covered “individuals who participated in the [Avaya] Plans
and invested in the Avaya Stock Fund between October 2004 and July 2005.” 503 F.3d at
344. As noted, Ward’s proposed class covers “[a]ll persons ... who were participants or
beneficiaries in the Plans at any time between September 29, 2000 and
6
344. Relying on our decision in Monech v. Robertson, 62 F.3d 533 (3d Cir. 2005), we
concluded that the Edgar plaintiff could succeed on her claims only if she had pleaded
sufficient facts to overcome the presumption that Avaya and the Committee had “acted
consistently with ERISA by virtue of [the] decision [to invest in the Avaya Stock Fund].”
503 F.3d at 347 (quoting Monech, 62 F.3d at 571). To do so, she had to plead sufficient
facts showing that “that the fiduciary abused its discretion by investing in employer
securities.” Id. (citation omitted).
Apart from a difference in the time periods used to define the classes in each case,
Ward’s claim in Count II is identical to the claims made in Edgar.4 Thus, the sole issue
before us as to that claim is whether it meets the standard we articulated in Edgar and
Monech. Ward argues that his complaint passes muster because it alleges that if the
defendants had investigated whether the Avaya Stock Fund was a prudent investment
during the Avaya Class period, they would have realized from the outset that it was not,
and, as a result, divested the Plans of Avaya stock and refused to accept new investments
in that stock.
April 24, 2003, whose accounts in the Plans included investments in Avaya securities.”
(JA at 36 ¶ 30.)
4
In his opening brief, Ward challenged whether the Monech presumption applied to the
Plans and whether the District Court could apply the presumption when deciding his
motion to dismiss. (Appellant Br. at 16-36.) In his reply brief, however (Reply Br. at 1
n.1), he recognizes that we answered both of those questions affirmatively in Edgar. 503
F.3d at 347-49.
7
In Edgar, we explained that, in the context of an ERISA plan that offers employees
the option of investing in a fund consisting solely of the employer’s own securities, there
is a “presumption that a fiduciary acted prudently in investing in employer securities” and
that, to rebut the presumption, “a ‘plaintiff must show that the ERISA fiduciary could not
have believed reasonably that continued adherence to the [Plan’s] direction was in
keeping with the settlor’s expectations of how a prudent trustee would operate.’” 503
F.3d at 348 (quoting Moench, 62 F.3d at 571). In determining whether a plaintiff has
made that showing, we must “be cognizant that as the financial state of the company
deteriorates ... fiduciaries who double as directors of the corporation often begin to serve
two masters. And the more uncertain the loyalties of the fiduciary, the less discretion it
has to act.” Monech, 62 F.3d at 572. However, we must also be aware that “if the
fiduciary, in what it regards as an exercise of caution, does not maintain the investment in
the employer’s securities, it may face liability for that caution.” Id. In Monech, we
remanded the defendant’s breach of fiduciary duty claims for further consideration by the
district court because, during the class period,
the price of the [defendant’s] stock declined from $18.25 to less than $0.25
per share; federal regulators informed the [defendant’s] Board of Directors
that they had concerns about the company’s financial condition and had
uncovered various regulatory violations; the Federal Deposit Insurance
Corporation eventually took over control of one of the [defendant’s]
subsidiaries; and, ultimately, the [defendant] filed for Chapter 11
bankruptcy.
Edgar, 503 F.3d at 348 (citing 62 F.3d at 557).
8
In Edgar, however, we held that the plaintiff was unable to overcome the Monech
presumption because she alleged only that Avaya’s stock price declined by $2.68 per
share during the class period. Id. We explained that such a reduction in share price did
not
create[] the type of dire situation which would require defendants to
disobey the terms of the Plans by not offering the Avaya Stock Fund as an
investment option, or by divesting the Plans of Avaya securities. Indeed,
had defendants divested the Plans of Avaya common stock during the Class
Period, they would have risked liability for having failed to follow the terms
of the Plans.
Id. at 348-49 (citation omitted).
We further explained that, while Monech did not require “a company to be on the
brink of bankruptcy before a fiduciary is required to divest a plan of employer securities,”
the Edgar plaintiff’s “bare allegations of fraud and other wrongdoing set forth in [her] ...
complaint are insufficient to establish an abuse of discretion, particularly [because
Avaya’s stock price had risen significantly by the end of the class period.]” Id. at 349 n.
13. Taken together, Monech and Edgar stand for the proposition that short-term financial
difficulties do not give rise to a duty to halt or modify investments in an otherwise lawful
ERISA fund that consists primarily of employer securities.
In light of the allegations in the complaint, we are persuaded, as was the District
Court, that Ward’s complaint is insufficient to overcome the presumption articulated in
Monech and Edgar. At the outset of the class period immediately following the spin-off
on September 30, 2000, Avaya’s stock traded at $22.18 a share. As Ward takes pains to
9
point out, it initially lost much of that value, and by August 2, 2002, after fluctuating
significantly for some time, it reached a low of $1.15 a share. By April 25, 2003, the day
after Ward’s Count II class period ended, Avaya stock was trading at $3.24 per share.
Following the end of the class period, however, Avaya’s stock continued to rise and, by
August 2003, was trading at around $10.00 a share. Between October and December
2003, the stock was trading between $12.00 and $14.00 a share. During 2004, Avaya
stock usually closed at between $12.00 and $16.00 a share. Commensurate with its rising
stock price, Avaya reported significant positive net income in 2003 and 2004.5 Further,
like the plaintiff in Edgar and unlike the plaintiff in Monech, Ward’s complaint fails to
point to anything other than Avaya’s financial struggles to support his breach of fiduciary
duty claim. Thus, at most, “[Ward’s] allegations, if true, indicate that during the Class
Period, Avaya was undergoing corporate developments that were likely to have a
negative effect on the company’s earnings and, therefore, on the value of the company’s
5
Ward contends that it is inappropriate for us to consider any improvements in Avaya’s
stock price or in its financial situation following the end of the class period he has defined
in Count II. We disagree. Because plaintiffs define the relevant class period, adopting
such a rule would allow plaintiffs to bring breach of fiduciary duty claims based entirely
on a narrow window of financial difficulty, potentially eviscerating the abuse of
discretion standard we articulated in Monech and Edgar. Further, although we would
ordinarily refuse to consider matters not contained in the complaint when deciding a
motion to dismiss, we may take judicial notice of the well-publicized rise in Avaya’s
stock price following the end of the class period Ward defines in Count II. Cf. Edgar,
503 F.3d at 349 n.13 (conducting a “review of [the rise in] Avaya’s historic stock price
[during the Edgar class period],” and noting that “a court may take judicial notice of facts
that are capable of accurate and ready determination by resort to sources whose accuracy
cannot reasonably be questioned”) (quoting Oran v. Stafford, 226 F.3d 275, 288 (3d Cir.
2000)).
10
stock.” Id. at 348. That alone does not suffice to rebut the presumption that the
defendants acted within their discretion in refusing to halt or alter the Plan’s investments
in Avaya stock. Therefore, we will affirm the District Court’s dismissal of his Count II
claim.
B. Ward’s Count III Claim For Breach of Fiduciary Duty
Ward’s Count III claim requires us to address the effect of a class action settlement
reached in Reinhart v. Lucent Technologies, Inc., No. 01-CV-3491 (D. N.J.). That
agreement settled claims that Lucent had breached its fiduciary duties under the
Predecessor Plans by continuing to offer Lucent stock as an investment option despite
financial setbacks similar to Avaya’s. The Reinhart settlement agreement specifically
listed Avaya as a “Released Party” and defined the “Settled Claims” as “any and all
claims, rights or causes of action ... that have been or could have been asserted ... by the
Plans, Claimants, or any of them against any of the Released Parties which arise out of or
relate in any way to the allegations ... set forth or referred to in [the complaint].” (JA at
409-09 ¶1(ff)). The settlement agreement defined “Plans” to mean the “two Lucent
401(k) plans.” (JA at 400). The agreement further defined “Claimants” as those who
were participants and beneficiaries of the two Lucent Plans between December 31, 1999
and March 27, 2003.
Ward argues that his claim is not covered by the Reinhart settlement agreement for
several reasons. First, he argues that, because the settlement agreement covered only
claims “held by ... the Lucent Plans ... and by ... [participants and beneficiaries of the two
11
Lucent plans],” it “did not purport to settle claims held by the Avaya Plans or by
participants and beneficiaries of the Avaya Plans.” (Appellant Br. at 45.) Ward further
argues that his Count III claim against Avaya is not a “Settled Claim” because that claim
is not related to the same allegations made against Lucent in Reinhart. Finally, he argues
that without discovery, it is impossible to determine whether there is enough factual
similarity between the Reinhart litigation and his Count III claim to apply the Reinhart
release.
Ward’s arguments require us to examine the terms of the Reinhart settlement
agreement closely. “Interpreting a settlement agreement presents a question of contract
law, in which the primary object is to give effect to the intention of the parties.” In re
Columbia Gas Sys. Inc., 50 F.3d 233, 241 (3d Cir. 1995) (citations and punctuation
omitted). After examining the agreement, we agree with the District Court that Ward’s
Count III claim is barred. First, although Ward is correct that the Avaya Plans are not
specifically mentioned in the agreement, we fail to see why the parties in Reinhart would
have included Avaya as a “Released Party” if they did not intend the agreement to cover
claims against Avaya for breaches of fiduciary duty over the Avaya Plans. This is
particularly so because Avaya was only a fiduciary of the Avaya Plans, not the Lucent
Plans and, therefore, it could not have been liable as a fiduciary for any alleged
mismanagement of the Lucent Plans. Second, the underlying claim in both Reinhart and
Count III of Ward’s complaint – that it was imprudent to continue to offer Lucent stock as
an investment option because of Lucent’s financial struggles – is the same. Additionally,
12
the Avaya Plans at issue in Count III are successor plans, and Avaya is a successor
fiduciary, to the Lucent Plans and the Lucent fiduciary at issue in Reinhart. Finally, the
class period in Reinhart is virtually identical to the class period that Ward defines in
Count III, and Ward does not dispute that he is a member of the Reinhart class.6 Ward v.
Avaya, Inc., 487 F. Supp. 2d 467, 480-81 (D. N.J. 2007).
Ward also argues that Count III should go forward because any assent by members
of the classes defined in his complaint to the Reinhart settlement agreement was not
knowing and voluntary. The District Court rejected that argument, concluding that it was
an impermissible collateral attack on the final judgment in Reinhart. Id. We agree.
Ward contends that he has not mounted a collateral attack on Reinhart because his Count
III claim is not included in that settlement. However, for the reasons previously
explained, Ward is incorrect. Consequently, Ward may not now claim that his assent to
the settlement was defective.7 See Interdynamics, Inc. v. Firma Wolf, 653 F.2d 93, 96-97
6
Because Count III fails due to the language of the settlement agreement, we reject
Ward’s contention that discovery is necessary to decide that claim.
7
Ward also raises a number of other arguments in his brief, including that the notice
provided to Reinhart class members did not satisfy due process, and that, because claims
to recover plan losses are derivative in nature, the Reinhart settlement cannot bar his
claims unless that settlement explicitly mentioned claims by Avaya Plan participants and
beneficiaries against the Avaya Plans. None of those arguments, however, were raised
before the District Court, and we have “consistently held that [we] will not consider
13
(3d Cir. 1991) (holding that “a consent decree, although negotiated by the parties, is a
judicial act. ... Such a decree possesses the same force with regard to res judicata and
collateral estoppel as a judgment entered after a trial on the merits.”) (citation omitted).
Finally, because Ward fails to state any claims for breach of fiduciary duty in
Counts II and III of his complaint, we will also affirm the dismissal of his claim in Count
IV. See Edgar, 503 F.3d at 349 n.15 (dismissing the plaintiff’s failure to monitor claim
because she had failed to adequately allege any breaches of fiduciary duty).8
IV. Conclusion
Accordingly, as Ward has failed to state valid claims in Counts II-IV of his
complaint we will affirm the District Court’s dismissal of those counts.
issues that are raised for the first time on appeal.” Harris v. City of Philadelphia, 35 F.3d
840, 845 (3d Cir. 1994).
8
After the parties filed their briefs, we granted Ward’s motion to supplement the record.
The defendants then filed a motion to reconsider. In light of our disposition of Ward’s
claims, we will deny the motion to reconsider as moot.
14