As a class action lawyer (and one who defends class actions, no less), I often face the problem of explaining to friends and family exactly what I do all day. The cases themselves are often interesting, but the way we lawyers go about defending them–by mastering the arcana of one of the Federal Rules of Civil Procedure–can seem hopelessly dry. And that is why, at times, I have comforted myself with the (hollow, I admit) consolation that at least I’m not an ERISA lawyer.

Except, of course, that ERISA can spawn class-action lawsuits as well. Some simply challenge a plan administrator’s decisions in administering employees’ retirement benefits. But, more and more frequently, plaintiffs’ lawyers are filing ERISA "stock-drop" cases, which go after the same alleged frauds challenged in securities class actions, but use ERISA plan beneficiaries as plaintiffs instead of individual or institutional investors.

The combination of Rule 23 and ERISA is enough to send many experienced lawyers into fits of anxiety or ennui, but Vanderbilt law student Lauren Fromme has bravely stepped in to explain the workings of the ERISA stock-drop suit in her comment "Unreliable Securities for Retirement Income Security: Certifying the ERISA Stock-Drop Class."

Let me say first, Fromme has written an outstanding student note, not so much for its final prescription (which I’ll admit is intriguing), but for its careful exploration of a burgeoning trend in securities class actions. Fromme begins by identifying the key differences between a securities case and an ERISA stock-drop suit, namely:

First, most 10b-5 lawsuits are governed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which provides for an automatic discovery stay and heightened pleading requirements. Mirroring Federal Rule of Civil Procedure 9(b), the PSLRA requires that 10b-5 claimants plead "loss causation" and "state with particularity" facts creating a "cogent and compelling inference" that the defendants acted with intent to deceive. ERISA claims, however, are not covered by PSLRA, and Federal Rule of Civil Procedure 26 is the sole guidance for discovery. Without the additional requirements of PLSRA and Rule 9(b), ERISA plaintiffs need only plead facts creating a "plausible" inference of causal connection under Federal Rule of Civil Procedure Rule 8(a), making it easier to survive a motion to dismiss. Second, Rule 10b-5 plaintiffs must show that the defendants acted with scienter, which is a wrongful state of mind requiring at least a showing of recklessness, while ERISA requires only a showing of negligence. Third, Rule 10b-5 only allows for the recovery of damages as defined by the loss resulting from the defendant’s misstatements. Remedies under ERISA, however, may exceed the plaintiffs’ damages, including lost profits and other equitable relief restoring the benefit plan for losses. Finally, Rule 10b-5 defendants are defined broadly by their relationship to any fraudulent misstatements, while ERISA defendants must be plan fiduciaries.

(Emphases added, internal footnotes omitted)

As Fromme points out, the largest obstacle to certifying an ERISA stock-drop class is the treatment of the investors’ reliance on the alleged misrepresentations. Reliance matters in ERISA suits (which seek restitution to a firm’s retirement plan) because most plans are defined-contribution plans, rather than defined benefit plans. As a result, participants choose their own investments, and bear the risk of those investments working out or not. (Courts certify ERISA suits under all three subsections of Rule 23(b), but Fromme argues causation matters even in Rule 23(b)(1) or (b)(2) suits to the extent defendants can demonstrate that a representative plaintiff is atypical of the class because she relied on a misrepresentation no one else did.) ERISA suits are not suits under 10b-5, so it is unclear that the Basic rule that allows plaintiffs to presume reliance is in effect.

Fromme’s proposal to fix this apparent contradiction is to require "some reliance":

the plan participants collectively in an ERISA section 502(a)(2) claim can be likened to a single plaintiff asserting a claim under Rule 10b-5. All of the plan participants might not rely on the fiduciary’s misstatements, but as long as some participants rely there will be actual causation. This is similar to a single 10b-5 plaintiff, for example, who detrimentally relies in part on the corporate officer’s misstatements, in part on her own intuition, and in part on the recommendations of a friend. As long as the plaintiff in this 10b-5 case can demonstrate the detrimental reliance on the material misstatements, her reliance on the other aspects of the security should not matter. Therefore, to establish liability in an ERISA section 502(a)(2) claim, all that the plaintiffs must show is that some of the plan participants relied on the material misstatements. Only some reliance will be enough to cause harm to the plan as a whole.

Fromme’s proposal is interesting, although it raises some questions about how it would play out in practice. Does a plan participant who did not rely on a misstatement have standing to offer evidence of others’ reliance? Will this create a greater focus on cherry-picking class representatives, which may raise adequacy problems? Nonetheless, this is an outstanding piece of student scholarship, and well worth a read by anyone who defends securities class actions.