J&J Beats ERISA Appeal Over Talc Asbestos Scandal Stock Drop (1)

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Johnson & Johnson defeated a Third Circuit appeal Wednesday by workers who say they lost retirement savings by investing in employer stock that was embroiled in scandal.

The proposed class action accuses J&J of concealing from the public the presence of cancer-causing asbestos in their products, leading to a 10% drop in stock price when reports surfaced in 2018. By allowing workers to invest their retirement savings in artificially inflated company stock, J&J and top executives violated the Employee Retirement Income Security Act, workers claim.

The plaintiffs argued that the executives should’ve either made public disclosures to correct J&J’s artificially high stock price earlier or else stopped investing in J&J stock and held onto all ESOP contributions as cash.

But a reasonable fiduciary in the circumstances could have seen either option “as being likely to do more harm than good to the ESOP, particularly given the uncertainty about J&J’s future liabilities and the future movement of its stock price,” the US Court of Appeals for the Third Circuit said.

The fiduciary liability case is one of dozens of lawsuits brought against J&J in the wake of revelations that the company knew but concealed that the talc in its baby powder likely contained asbestos. J&J denies its iconic baby powder causes ovarian cancer or mesothelioma, but has since stopped selling it in the US and Canada.

A New Jersey federal judge dismissed the case in 2021, applying the US Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer. The high court held in that case that retirement plan fiduciaries typically won’t be liable for failing to protect against a stock drop unless plan participants identify some alternative action that could have been taken that wouldn’t be more likely to harm the plan.

Since Dudenhoeffer, many courts have rejected ERISA-based challenges to drops in company stock price, including the Second, Fifth, Sixth, Eighth, and Ninth circuits.

‘Economic Theory’

In its decision Wednesday, the Third Circuit panel characterized the plaintiffs’ argument in favor of public disclosures as an “economic theory” that didn’t meet the standard under Dudenhoeffer.

The plaintiff’s “complaint relies too much on general economic theory and too little on specific allegations that would establish that no prudent fiduciary in the Defendants’ circumstances would believe that making corrective disclosures would do more harm than good,” Judge Kent A. Jordan wrote for the court.

Similarly, the option of redirecting funds to the ESOP’s cash buffer “leaves a fiduciary ‘between a rock and a hard place,’” Jordan said.

If the company had decided to pull the funds but their corresponding stock prices rose, plan officials could face another fiduciary imprudence case for allowing the plaintiffs’ investments to drag, the court said.

“It was a guess that J&J’s stock price would drop significantly, and there was even less certainty about the timing and degree of such a drop,” Jordan added. “It is simply too much of a stretch to say that a prudent fiduciary in the Defendants’ position ‘could not have concluded’ that redirecting contributions to the ESOP’s cash buffer ‘would do more harm than good.’”

Judges L. Felipe Restrepo and D. Brooks Smith joined the Third Circuit decision.

The workers are represented by Lite DePalma Greenberg & Afanador LLC; Berger Montague; Schneider Wallace Cottrell Konecky LLP; and Zamansky LLC. J&J is represented by Robinson Miller LLC and Sidley Austin LLP.

Attorneys for the plaintiffs and J&J didn’t immediately respond to requests for comment, nor did company officials.

The case is Perrone v. Johnson & Johnson, 3d Cir., No. 21-1885, 9/7/22.