General Release Executed by Employees at Termination was Valid Under ERISA but Class Action Claims Fell Within Carve-Out Provision in Release, and Former Plan Participants have Standing to Prosecute Class Action Alleging Breach of Fiduciary Duty Against Plan Administrators Illinois Federal Court Holds
Plaintiffs filed a putative ERISA class action lawsuit against Tellabs alleging breach of fiduciary duty “by permitting investments in Tellabs securities when it was imprudent to do so and by disseminating misleading information to Plan participants about the prudence of investing in Tellabs securities.” Brieger v. Tellabs, 473 F.Supp.2d 878, 880 (N.D. Ill. 2007). Defense attorneys moved for summary judgment on two grounds: (1) the putative members of the class action had executed general releases which barred them from prosecuting the class action complaint, and (2) plaintiffs lacked standing to prosecute the class action because they had cashed out of the Plan. Id., at 883. The district court denied the motion.
Briefly, in December 2000, Tellabs announced a $100 million sales agreement with Sprint, and in January 2001 announced increased sales and expressed optimism about the future. For purposes of the period covered by the class action complaint, in February 2001 Tellabs common stock hit a high of $67 per share. However, the following month Tellabs lowered its revenue and earnings expectations for 2001, and in April 2001 it announced that it would not meet its lowered expectations. “By April 16, 2001, Tellabs stock had declined to $35.50 per share.” Brieger, at 881. The stock recovered to $42 per share in May 2001, but fell to $16 by June 2001 and plunged to under $1 by April 2003. Id., at 881-82. Tellabs implemented workforce reductions, and in exchange for severance benefits each employee executed a general release which provided that the employee released Tellabs – including its “officers, directors, agents, employees, employee benefit plans (and their plan fiduciaries and administrators)” – “from any and all claims of any kind relating to or arising out of Employee’s employment or the termination of that employment with Tellabs, Inc. or any of its subsidiaries or affiliates.” Id., at 882.
Tellabs retirement plan purchased a significant amount of Tellabs common stock. Brieger, at 881. The class action complaint alleged that defendants’ investment in Tellabs stock caused them to suffer substantial losses, and asserted that the Plan should have divested itself of its holdings in Tellabs stock “when it was no longer a prudent investment.” Id., at 882. The class action further alleged that defendants failed to provide accurate information to Plan participants regarding the investment in Tellabs stock, and that Plan administrators held a conflict of interest with Plan participants, id., at 882-83.
As noted above, the defense first argued that the general releases expressly covered the claims asserted in the class action. Brieger, at 883. Plaintiffs did not dispute this, but argued that the release was unenforceable under ERISA or, alternatively, that the class action claims fell within a “carve-out” provision in the release. Id. The district court first held that the general release was not invalid under ERISA. Id., at 883-84. However, the court agreed with plaintiffs that the release contains an exception for claims involving vested benefits under the Plan, id., at 885. Specifically, the general release provided that it did not extend to “any vested benefits under the Tellabs Advantage Program, the Tellabs Profit Sharing and Savings Plan, and the Tellabs Retirement Plan” and plaintiffs argued that this exempted the claims in the class action complaint; defense attorneys countered that ERISA claims were expressly released. Id. The district court’s analysis led it to the conclusion that employees who executed the general release would not have understood it “to bar a claim that the signatory received a lower level of vested benefits as a result of defendants’ fiduciary breaches,” id., at 886. Accordingly, the federal court held that the class action was not barred by the general release because its claims fell within the scope of the carve-out provision. Id.
With respect to the remaining issue, defense attorneys also argued that plaintiffs lacked standing to prosecute the class action because they had cashed out of the Plan. The district court disagreed, holding that former ERISA plan participants have standing to file suit for breach of fiduciary duty under ERISA. Brieger, at 886-87. Accordingly, the district court denied the defense motion for summary judgment. Id., at 887.