PHILADELPHIA (Legal Newsline) - A federal appeals court upheld the dismissal of a lawsuit on behalf of participants in a Johnson & Johnson retirement plan, saying fiduciaries had no duty as corporate insiders to disclose disputed claims that its iconic Johnson’s Baby Powder contained asbestos or to stop investing in J&J stock.
The ruling shuts the door on a potentially lucrative third avenue for plaintiff lawyers to capitalize on claims, which J&J denies, that cosmetic talc not only contains traces of asbestos fibers but that they are in sufficient concentration to cause deadly cancer. J&J shares fell after Reuters news service published what it called an “investigative report” in 2018, based largely upon plaintiff allegations in pending lawsuits, stating J&J knew its talc contained asbestos and hid that fact from the public. J&J denies the allegations.
Soon after the Reuters report, lawyers filed a securities class action against the company that is still pending. They also filed a lawsuit on behalf of participants in the J&J Employee Stock Ownership Plan, or ESOP, which allows them to buy J&J shares with retirement money. The ESOP action said plan fiduciaries, who are also J&J executives, should have used their influence to push the company to disclose the asbestos allegations and cease buying J&J stock until they were public.
A trial court dismissed the claims, citing the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer, which put strict limits on claims that can be made against ESOP managers. The Third Circuit Court of Appeals upheld the dismissal, saying it the disclosures plaintiff lawyers propose were based on claims that haven’t been fully proven in court.
Dudenhoeffer requires plaintiffs to explain an alternative action the defendants could have taken, consistent with securities laws, that wouldn’t do more harm than good. The decision didn’t eliminate all lawsuits over plans holding a single company’s stock and the Second Circuit, in a case involving an IBM ESOP, ruled insiders should have disclosed disastrous results at a subsidiary the company ultimately sold at a $4 billion loss since the stock drop would have been “inevitable.”
In the J&J case, plaintiff lawyers said corporate insiders should have disclosed the presence of asbestos in Johnson’s Baby Powder “near the very beginning of J&J’s misrepresentations and omissions” to protect participants against buying shares at inflated prices.
“That theory has a fatal shortcoming,” the appeals court said, however, since J&J still maintains its products are safe and the outcome of the tort litigation isn’t known. “Because J&J has not and likely will not make the disclosure proposed by the Plaintiffs, it can hardly be said that all prudent fiduciaries would have concluded in 2017 that such disclosure was `inevitable,’” the court concluded.
The court similarly rejected plaintiff claims the fiduciaries could have placed participants’ money in cash instead of J&J stock. Such a decision would leave them “between a rock and a hard place,” liable for being sued if the stock goes up and participants miss out on the gains, or if it goes down and lawyers argue they should have held even more cash.
“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,’” the court said.