In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-3752
ERICA HARZEWSKI, et al., on their own behalf and on behalf
of all other persons similarly situated,
Plaintiffs-Appellants,
v.
GUIDANT CORPORATION, et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 05–CV–1009—Larry J. McKinney, Chief Judge.
____________
ARGUED APRIL 10, 2007—DECIDED JUNE 5, 2007
____________
Before BAUER, POSNER, and RIPPLE, Circuit Judges.
POSNER, Circuit Judge. This is a class action on behalf of
participants and beneficiaries in a pension plan for employ-
ees of Guidant Corporation. A manufacturer of cardiovas-
cular devices, Guidant was bought last year by Boston
Scientific, which paid for each share of Guidant stock
$42.28 in cash plus 1.6799 shares (worth $37.78 at the time,
as each share was worth $22.49) of stock in Boston Scien-
tific, for a total value of $80.06. The plan’s portfolio in-
cluded stock in Guidant held by an ESOP (employee stock
2 No. 06-3752
ownership plan), and the suit claims that the pension
plan’s fiduciaries acted imprudently in failing to dispose of
that stock between October 1, 2004, and November 3, 2005.
The fiduciaries are various employees and board members
of Guidant, all of whom were under the company’s control
(as ERISA permits, see 29 U.S.C. §§ 1102(c)(1), 1103(a)(1);
Geddes v. United Staffing Alliance Employee Medical Plan, 469
F.3d 919, 923–24 (10th Cir. 2006); U.S. Department of
Labor, “Meeting Your Fiduciary Responsibilities,”
www.dol.gov/ebsa/publications/fiduciaryresponsibility
.html (visited May 17, 2007)), as was the ESOP. So for the
sake of simplicity we shall pretend that Guidant is the only
defendant and the only fiduciary.
October 2004 to November 2005 was a period, prior to
Boston Scientific’s acquisition of Guidant (which took place
in April 2006), when according to the complaint the price
of Guidant stock was inflated by a fraud committed by the
company’s management. The alleged fraud consisted of the
concealment of information concerning defects in the
company’s implantable defibrillators, which accounted for
nearly half its revenues. Very shortly after Boston Scien-
tific’s acquisition of Guidant, the full gravity of Guidant’s
problems came to light and the revelation contributed to
the drop in the price of Boston Scientific stock from $22.49
when Boston Scientific bought Guidant to $16.33 on May 3
of this year.
The district court dismissed the complaint on the ground
that the named plaintiffs have no “standing” to bring this
suit because they retired from Guidant and cashed out
their pension benefits before the filing of the amended
complaint, and so ceased to be participants in the pension
plan. The lawyers for the class could, to keep the class
action alive, have substituted as named plaintiffs members
of the class who remained participants in the plan—current
No. 06-3752 3
employees. But being unwilling to abandon the claims of
class members in the situation of the named plaintiffs, they
decided instead to appeal the district court’s ruling.
To make the issue of “standing,” as the parties call it,
intelligible, we must say a bit more about the plan and the
allegations. The plan is a defined-contribution plan,
meaning that it does not specify the pension benefits to
which participants are entitled. Rather, it establishes
retirement accounts for each participant and a scheme for
determining the character, amount, timing, etc., of contri-
butions to those accounts by employer and employee.
When a participant retires, his pension benefit is simply the
balance in his account. Contributions to the Guidant
pension plan and hence to the retirement accounts were to
come from both a 401(k) plan and the ESOP, the former
funded by employee contributions and matching employer
contributions and the latter funded by Guidant’s issuing
common stock to the ESOP usually amounting to five
percent of the employee’s monthly salary. Apparently the
ESOP component of the pension plan accounted for most
of the value in most of the retirement accounts.
In December 2004, Guidant agreed to be sold to Johnson
& Johnson for $76 a share. But before the deal could be
consummated, problems with Guidant’s products came to
light. It was forced to recall hundreds of thousands of
defibrillators and pacemakers; Johnson & Johnson began to
get cold feet; and the Attorney General of New York filed
a fraud complaint (still pending) against Guidant. (On
Guidant’s woes, see Barry Meier & Andrew Ross Sorkin,
“Price Tag of Guidant Is Lowered,” N.Y. Times, Nov. 16,
2005, at C1.) But although Guidant was thus in trouble
toward the end of the period (which, remember, ran from
October 2004 to November 2005) in which the plaintiffs
4 No. 06-3752
contend that the pension plan’s fiduciaries should have
disposed of the plan’s Guidant stock, it bounced back
shortly afterwards, rising steadily until the company’s sale
to Boston Scientific in April 2006 (after Johnson & Johnson,
having earlier lost interest, made a new offer, of $71 per
share) for, as we said, a total consideration of $80.06 a
share. (See accompanying charts graphing Guidant’s
share price from the beginning of 2004 to the acquisition
by Boston Scientific, and Boston Scientific’s share price
thereafter.).
No. 06-3752 5
Had the pension plan been divested of its Guidant stock
no later than November 2005, as the plaintiffs claim it
should have been, the members of the class would have
missed out on the sale of Guidant to Boston Scientific. It is
unlikely that they would have done better from whatever
substitute investment Guidant would have put them in.
Even after Boston Scientific’s stock tanked following the
acquisition of Guidant, anyone who owned Guidant stock
at the time of the acquisition received $42.28 per share in
cash plus 1.6799 shares of Boston Scientific worth $27.43 as
of May 3 of this year. The total of $69.71 exceeds the price
of Boston Scientific on the last day of the class period
($57.57) and also the revised offer of $63 per share that
Johnson & Johnson submitted twelve days after the class
period ended. And it falls only slightly short of the $71 that
Johnson & Johnson ultimately offered—an offer that the
plaintiffs claim was inflated by that company’s ignorance
of the fraudulent overvaluation of Guidant. So, had there
6 No. 06-3752
been no fraud, the price that Johnson & Johnson and
Boston Scientific would have offered for a share of Guidant
stock would have been less than either the $80.06 that
Boston Scientific eventually paid or the $69.71 in cash and
stock that shareholders in Guidant when it was acquired by
Boston Scientific still have. But whether the class was
injured by Guidant’s alleged imprudence in its capacity as
the plan fiduciary (or whether, for that matter, Guidant was
imprudent) has not been considered by the district court or
raised as an issue in this appeal, and so we shall not try to
resolve it.
The issue that has been raised and pressed is whether the
plaintiffs are within the group of persons who are autho-
rized to seek relief under ERISA. Section 502(a)(2) of the
statute authorizes a participant in an ERISA-governed plan
to sue “for appropriate relief under section 1109 [of Title
29].” 29 U.S.C. § 1132(a)(2). Section 1109 makes ERISA
fiduciaries personally liable for breaches of their fiduciary
duties. The named plaintiffs, however, cashed out of the
plan during the course of the suit. That they cashed out
after the complaint was filed, and before the amended
complaint was filed, is immaterial. The parties’ preoccupa-
tion with those filing dates is a product of the confusing
use of the word “standing” to denote both a right to invoke
the aid of the courts and a right to obtain a particular form
of judicial relief.
Obviously the named plaintiffs have standing to sue in
the sense of being entitled to ask for an exercise of the
judicial power of the United States as that term in Article
III of the Constitution has been interpreted, because if they
win they will obtain a tangible benefit. But there is also a
nonconstitutional doctrine of standing to sue, one aspect of
which is the requirement that the plaintiff be within the
No. 06-3752 7
“zone of interests” of the statute or other source of rights
under which he is suing. See, e.g., Air Courier Conference of
America v. American Postal Workers Union, 498 U.S. 517, 523-
26 (1991); Clarke v. Securities Industry Ass’n, 479 U.S. 388,
395-400 (1987). The requirement has been used to bar some
ERISA suits. E.g., Miller v. Rite Aid Corp., 334 F.3d 335, 340-
41 (3d Cir. 2003). If someone brought a suit for ERISA
benefits who had no possible legally protected interest in
the pension plan (suppose he was merely a creditor of a
plan participant), he would be outside the statute’s do-
main, and the court would dismiss the case for want of
jurisdiction even if the defendant had made no issue of the
remoteness of the plaintiff’s interest from the interests that
ERISA protects, namely the interests of plan participants
and beneficiaries. See, e.g., Western Shoshone Business
Council v. Babbitt, 1 F.3d 1052, 1055-56 (10th Cir. 1993);
Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1109 (9th Cir. 1992);
National Union of Hospital & Health Care Employees v. Carey,
557 F.2d 278, 280-81 (2d Cir. 1977).
But if “zone of interests” were interpreted too broadly,
standing and merits would merge, since any time a plain-
tiff failed to prove that the statute under which he was
suing entitled him to relief, thus revealing that he was not
someone whose interests the statute had been intended to
protect, his suit would be dismissed for want of standing.
Both Coan v. Kaufman, 457 F.3d 250, 256 and n. 3 (2d Cir.
2006); and Miller v. Rite Aid Corp., supra, express misgivings
about the merger of standing and merits that “zone of
interest” analysis, unguardedly applied to the question
whether an ERISA plaintiff is a “participant,” might
produce. Except in extreme cases illustrated by our exam-
ple of the attempt of the plan participant’s creditor to
enforce a claim to ERISA benefits, the question whether an
8 No. 06-3752
ERISA plaintiff is a “participant” entitled to recover
benefits under the Act should be treated as a question of
statutory interpretation fundamental to the merits of the
suit rather than as a question of the plaintiff’s right to bring
the suit. Vartanian v. Monsanto Co., 14 F.3d 697, 701-02 (1st
Cir. 1994); cf. National Credit Union Administration v. First
National Bank & Trust Co., 522 U.S. 479, 492-94 (1998);
American Federation of Government Employees, Local 2119 v.
Cohen, 171 F.3d 460, 469 (7th Cir. 1999).
So, having cleared a lot of brushwood, let us turn at last
to the merits. ERISA defines “participant” to include
former employees who have cashed out their plan benefits,
as the named plaintiffs in this case did, if they “may
become eligible to receive a benefit of any type [from the
plan].” 29 U.S.C. § 1002(7). So the question comes down to
whether, if the plaintiffs win their case by obtaining a
money judgment against Guidant, the receipt of that
money will constitute the receipt of a plan benefit. It will.
In the case of a defined-contribution plan, “an employee’s
retirement benefit is the eventual value of his or her
account to which contributions have been made by the
employer and/or the employee.” West v. AK Steel Corp., No.
06-3442, 2007 WL 1159951, at *1 (6th Cir. Apr. 20, 2007); see
also United States v. Novak, 476 F.3d 1041, 1061 (9th Cir.
2007) (en banc). Suppose the amount is miscalculated to the
participant’s disadvantage and he discovers this later and
sues. Because he is a former employee eligible to receive a
benefit, he can maintain the suit under section 502(a) of
ERISA. West v. AK Steel Corp., supra, at *8-9, *13; Coan v.
Kaufman, supra, 457 F.3d at 255-56; Dobson v. Hartford
Financial Services Group, Inc., 389 F.3d 386, 398 (2d Cir.
2004).
No. 06-3752 9
Some courts have had trouble seeing this because they
strain to distinguish between “benefits” and “damages.”
ERISA does not say that a plan participant has the right to
sue a plan fiduciary for damages, and the Supreme Court,
noting the high level of detail in the Act’s provisions for
civil enforcement, 29 U.S.C. § 1132(a), has refused to allow
courts to read such a right into the statute. Mertens v. Hewitt
Associates, 508 U.S. 248, 255-56 (1993); Massachusetts Mutual
Life Ins. Co. v. Russell, 473 U.S. 134, 146-47 (1985). Not that
monetary relief is excluded, but it must be relief to which
the plan documents themselves entitle the participant. The
statute authorizes suits for benefits, just not for damages
separate from those benefits; so only “extracontractual
damages are prohibited.” Glencoe v. Teachers Ins. & Annuity
Ass’n, No. 99-2417, 2000 WL 1578478, at *1 (4th Cir. Oct. 19,
2000) (per curiam); see also Powell v. Chesapeake & Potomac
Tel. Co., 780 F.2d 419, 424 (4th Cir. 1985). The plaintiffs
must therefore show that they are claiming an amount of
money to which they are entitled by the plan documents
over what they received when they retired and received the
money in their retirement accounts.
Suppose Guidant had stolen half the money in a plan
participant’s retirement account and a suit by the partici-
pant resulted in a judgment for that amount; the suit would
have established the retiree’s eligibility for the larger
benefit. There is no difference if instead of stealing the
money from the account, Guidant by imprudent manage-
ment caused the account to be half as valuable as it would
have been under prudent management. The benefit in a
defined-contribution pension plan is, to repeat, just what-
ever is in the retirement account when the employee retires
or whatever would have been there had the plan honored the
10 No. 06-3752
employee’s entitlement, which includes an entitlement to
prudent management.
The idea that pension “benefits” refer to an amount
specified in the plan confuses defined-contribution plans
with defined-benefit plans. The latter specify a formula for
computing benefits. The former specify a formula for
making contributions to the retirement account, but the
benefits themselves are not specified; they are just what-
ever is in the account when it is cashed out, provided the
formula is properly applied. If the formula is misapplied to
the participant’s detriment, he can sue for an adjustment in
the benefits designed to give him what he would have
received had the formula been honored. What he cannot
do is sue for damages, in the hope of obtaining punitive as
well as compensatory damages. Punitive damages are not
a plan benefit, because the plan documents do not create an
entitlement to them. Massachusetts Mutual Life Ins. Co. v.
Russell, supra, 473 U.S. at 144; Harsch v. Eisenberg, 956 F.2d
651, 656, 660-61 (7th Cir. 1992); Dobson v. Hartford Financial
Services Group, Inc., supra, 389 F.3d at 397-98; Fraser v.
Lintas: Campbell-Ewald, 56 F.3d 722, 724-26 (6th Cir. 1995).
Nor can he sue to obtain the statutory penalty for failing to
provide plan documents to a participant, since that penalty
is not a benefit either. Winchester v. Pension Committee of
Michael Reese Health Plan, Inc., 942 F.2d 1190, 1193 (7th Cir.
1991). Nor seek damages for a plan’s failure to advise a
participant of an option that would enable him to avoid
taxes, unless such advice was promised in the plan docu-
ments. Fraser v. Lintas: Campbell-Ewald, supra, 56 F.3d at 725-
26. Nor sue for emotional distress resulting from a plan’s
failure to honor its obligations to a participant, Reinking v.
Philadelphia American Life Ins. Co., 910 F.2d 1210, 1219-20
(4th Cir. 1990), overruled in part on other grounds in
No. 06-3752 11
Quesinberry v. Life Ins. Co. of North America, 987 F.2d 1017
(4th Cir. 1993); that too could not be thought a suit for
benefits.
The defendants argue that the plaintiffs don’t need a
remedy under ERISA because they can sue the defendants
for securities fraud. But can they? The burden of proving
fraud is heavier than that of proving a breach of fiduciary
duty (provided, of course, that a fiduciary relation is
established). Such a breach might consist in imprudent
management (for example, failure to diversify), mistake,
self-dealing and other conflicts of interest, or failure to
remedy breaches of fiduciary duty by a co-fiduciary—all
examples of misfeasance rather than malfeasance, involv-
ing no misrepresentations, and in short falling short of
fraud. Compare 15 U.S.C. § 78u-4(b); Dura Pharmaceuticals,
Inc. v. Broudo, 544 U.S. 336, 342-42 (2005), with 29 U.S.C.
§ 1104(a); Massachusetts Mutual Life Ins. Co. v. Russell, supra,
473 U.S. at 140 n. 8; LaScala v. Scrufari, 479 F.3d 213, 220-22
(2d Cir. 2007); Smith v. Sydnor, 184 F.3d 356, 357, 359-60,
362-63 (4th Cir. 1999); Felber v. Estate of Regan, 117 F.3d
1084, 1086-87 (8th Cir. 1997); Concha v. London, 62 F.3d 1493,
1502 (9th Cir. 1995); Morgan v. Independent Drivers Associa-
tion Pension Plan, 975 F.2d 1467, 1470-71 (10th Cir. 1992).
The duty of care, diligence, and loyalty imposed by the
fiduciary principle is far more exacting than the duty
imposed by tort law not to mislead a stranger. See, e.g.,
Burdett v. Miller, 957 F.2d 1375, 1381 (7th Cir. 1992) (“a
fiduciary duty is the duty of an agent to treat his principal
with the utmost candor, rectitude, care, loyalty, and good
faith—in fact to treat the principal as well as the agent
would treat himself”); Meinhard v. Salmon, 164 N.E. 545, 546
(N.Y. 1928) (Cardozo, C.J.); cf. Market Street Associates Ltd.
v. Frey, 941 F.2d 588, 594-95 (7th Cir. 1991); Langbecker v.
12 No. 06-3752
Electronic Data Systems Corp., 476 F.3d 299, 314 (5th Cir.
2007).
We have approached the issue of a former employee’s
right to obtain monetary relief under ERISA for a breach of
fiduciary duty by the fiduciary of a defined-contribution
plan as one of first impression, as it largely is despite both
parties’ insistence that the case law compels the result for
which each contends. (This is like the depressingly com-
mon case in which each party to a contract dispute insists
that the “plain language” of the contract compels a judg-
ment for him.) Forty-five of the cases that the parties cite
are district court cases, which, as we tirelessly but futilely
remind the bar, are not precedents. Most of the appellate
cases the parties cite deal with unrelated issues, though
some contain language that, taken out of context, as both
sides do relentlessly, might appear to support one side of
this case or the other. The sheer number of cases cited in
the briefs—123 different cases—illustrates the regrettable
tendency of some lawyers to substitute citations for
analysis.
The defendants’ best case, though falling far short, is
Kuntz v. Reese, 785 F.2d 1410 (9th Cir. 1986) (per curiam).
The court disallowed a suit in which the plaintiffs claimed
that they had been induced to work for the defendant, and
thus become participants in its pension plan, by the
defendant’s misrepresentations concerning the rights and
benefits that the plan would confer. They were not suing to
enforce any entitlement created by the plan. They might
have argued that the defendant should be estopped to deny
that its representations were the plan. See Coker v. Trans
World Airlines, Inc., 165 F.3d 579, 585-86 (7th Cir. 1999);
Mello v. Sara Lee Corp., 431 F.3d 440, 444-45 (5th Cir. 2005).
But they did not argue that.
No. 06-3752 13
The plaintiffs’ best case is Panaras v. Liquid Carbonics
Industries Corp., 74 F.3d 786, 791 (7th Cir. 1996). It holds that
the benefits that a former employee may seek are not
limited to defined benefits; in that case they involved
severance benefits under a welfare plan. One might have
thought the point obvious, but the Supreme Court in
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 117 (1989),
had glossed “benefit” in section 1002(7) as “vested bene-
fit,” which has caused the lower courts a good deal of
angst. But in context it is apparent that all the Court meant
was that the former employee had to have an entitle-
ment—had to show that had it not been for the trustees’
breach of their fiduciary duty he would have been entitled
to greater benefits than he received.
Panaras differs from this case, however, because it was
plain what the plaintiff was entitled to. Here the entitle-
ment is less definite, because it is an entitlement only to
whatever the retirement account would have been worth
had Guidant sold the Guidant stock held by the pension
plan and invested the proceeds elsewhere. This also
distinguishes the other case on which the plaintiffs particu-
larly rely, Sommers Drug Stores Company Employee Profit
Sharing Trust v. Corrigan, 883 F.2d 345 (5th Cir. 1989).
Former employees were permitted to sue the trustees of a
defined-contribution plan for the fair market value of stock
held by the plan that (the employees charged) the trustees
had improperly disposed of for less than its fair market
value. But the court thought the claim “quite close to a
simple claim that benefits were miscalculated,” id. at 350,
and the claim in this case is farther away from that.
Not that we approve of the distinction made in Sommers.
Benefits are benefits; in a defined-contribution plan they
are the value of the retirement account when the employee
14 No. 06-3752
retires, and a breach of fiduciary duty that diminishes that
value gives rise to a claim for benefits measured by the
difference between what the retirement account was worth
when the employee retired and cashed it out and what it
would have been worth then had it not been for the breach
of fiduciary duty. What seems to have troubled the court in
Sommers is that a contractual or plan entitlement sounds
like something quite definite, whereas in Sommers as in this
case the amount of the entitlement is uncertain because it
is whatever the plaintiff’s retirement account would have
contained when he retired had the account been managed
without the manager’s breaching the duties of a fiduciary.
But there is nothing in ERISA to suggest that a benefit must
be a liquidated amount in order to be recoverable.
The defendants argue in the alternative that our decision
in Summers v. State Street Bank & Trust Co., 453 F.3d 404 (7th
Cir. 2006), compels affirmance by exempting the trustee of
an ESOP from liability for failing to dispose of stock of the
employer. But that is not what Summers holds. The 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). We said 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. at 411. The claim in
this case is that Guidant knew that the price of its stock was
No. 06-3752 15
overvalued but took no measures to protect the partici-
pants in the pension plan, as it could have done by selling
the Guidant stock held by the plan before the overvaluation
was discovered by the market and its price plummeted.
The plaintiffs have not yet had an opportunity to try to
prove that there was such a window of opportunity.
Remember that the suit was dismissed for failure to state a
claim; there has been no discovery.
So the case must go back to the district court. But as its
first order of business, that court will have to take a very
careful look at the plaintiffs’ theory of how they were
injured. As explained earlier in this opinion, had the
Guidant stock held by the pension plan been sold by
November 2005, as the plaintiffs claim should have been
done, they and the rest of the class would not have bene-
fited from the sale of Guidant to Boston Scientific for a total
consideration of $80.06 a share in April 2006. It seems
exceedingly speculative to suppose that Guidant in its
capacity as plan fiduciary should and would have found a
substitute investment that would have turned out as well
as the sale of Guidant to Boston Scientific turned out. Later,
it is true, Boston Scientific’s stock, which replaced the
Guidant stock in the ESOP, lost value. But aside from the
difficulty of parceling out that loss between continued
problems with Guidant’s products and Boston Scientific’s
own problems unrelated to the acquisition, we noted
earlier that even after the drop in Boston Scientific’s stock
price the ESOP’s stock holdings combined with the cash
received in the deal were worth more than the Guidant
stock had been worth at the end of the class period.
It probably would have been unlawful, moreover, for
Guidant to sell the Guidant stock held by the pension plan
on the basis of inside knowledge of the company’s prob-
16 No. 06-3752
lems. If so, there are no damages, and indeed no breach of
fiduciary duty; for the fiduciary’s duty of loyalty does not
extend to violating the law. Wright v. Oregon Metallurgical
Corp., 360 F.3d 1090, 1098 n. 4 (9th Cir. 2004), intimates that
an ESOP trustee cannot trade on inside information, and
this is also the SEC’s view. Securities and Exchange
Commission, “Employee Benefit Plans,” 1980 WL 29482, at
*28 and n. 168 (S.E.C. Securities Act of 1933 Release No. 33-
6188, Feb. 1, 1980); cf. Schlansky v. United Merchants & Mfrs.,
Inc., 443 F. Supp. 1054, 1062 (S.D.N.Y. 1977); Craig C.
Martin et al., “What’s Up on Stock-Drops? Moench Revis-
ited,” 39 John Marshall L. Rev. 605, 629 (2006). But this is
another issue to be considered in the first instance on
remand, should its resolution become critical to the out-
come.
VACATED AND REMANDED, WITH DIRECTIONS.
RIPPLE, Circuit Judge. I am pleased to join that part of the
panel’s fine opinion that holds that the district court erred
in dismissing this case for lack of standing. In my view, it
would be far better, as a prudential matter, to refrain from
commentary on the merits at this time. Therefore, I respect-
fully decline to join that part of the panel’s opinion that
addresses the merits of the case.
No. 06-3752 17
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-5-07