ERISA-Eighth Circuit Rules That Plaintiff Did Not State A Claim Of Imprudent Investment Based On Actions Concerning Employer’s Product; Court Declines To Adopt Moench Presumption

In Brown v. Medtronic, Inc., No. 09-2524 (8th Cir. 2010), the plaintiff was a participant in an ESOP maintained by one of the defendants, Medtronic, Inc. (“Medtronic”). The plaintiff’s account in the ESOP was invested in a fund which held Medtronic common stock (the “Stock”).

Medtronic manufactures and markets a broad assortment of medical devices, including Infuse-brand bone graft material (“Infuse”) and Sprint Fidelis-brand lead wires for implantable defribillators and pacemakers (“Fidelis”). Regarding Fidelis, the plaintiff alleged that the defendants failed to respond properly to a February 2007 report from a physician, Dr. Hauser, who observed an approximate 1% failure rate in Fidelis use among approximately 600 patients. In October 2007, Medtronic stopped marketing Fidelis, issued a recall of unused Fidelis devices, and instructed physicians to cease using Fidelis. This recall led to a drop in the price of the Stock, and a corresponding drop in the value of plaintiff’s ESOP account. Regarding Infuse, the plaintiff alleged Medtronic promoted Infuse for uses not approved by the FDA and improperly paid reviewing physicians for favorable reviews. When this information came to light in a September 4, 2008 Wall Street Journal article, again, a drop in the price of Stock and the value of plaintiff’s ESOP account resulted. As a result of these events, the plaintiff alleged that the defendants had violated ERISA by imprudently permitting the ESOP to the continue holding the Stock.

In reviewing the case, the Court said that, to state a claim for relief, the plaintiff must plead facts sufficient to show that the claim is plausible. In this case, the Court found that the facts plead by the plaintiff were insufficient to make this showing. The Court did not find enough of a connection between any of the alleged conduct by Medtronic concerning Fidelis or Infuse and any possible imprudence in the ESOP holding Stock. Interestingly, the Court failed to adopt the Moench presumption-that that the investment by an ESOP in company stock is entitled to a rebuttable presumption of prudence (already adopted in the 5th, 6th and 9th Circuits)-since, even without this presumption, the Court felt that the plaintiff did not state a plausible claim.

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