Edgar v. Avaya Inc

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

9-26-2007

Edgar v. Avaya Inc

Precedential or Non-Precedential: Precedential

Docket No. 06-2770

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

__________

No. 06-2770

__________

JANE EDGAR,

Appellant,

v.

AVAYA, INC.; GARRY MCGUIRE, SR.; DONALD K.

PETERSON; JOSEPH P. LANDY; RICHARD F. WALLMAN;

BRUCE LASKO; and JOHN DOES 1-30

__________

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 05-cv-03598)

District Judge: Honorable Stanley R. Chesler

__________

Argued April 24, 2007

Before: SCIRICA, Chief Judge, FUENTES and ALARCÓN,*

Circuit Judges.

(Filed September 26, 2007)

*

The Honorable Arthur L. Alarcón, Senior Judge of the

United States Court of Appeals for the Ninth Circuit, sitting by

designation.

Mark C. Rifkin (Argued)

Wolf, Haldenstein, Adler, Freeman & Herz LLP

270 Madison Avenue

New York, NY 10016

Counsel for Appellant

H. Douglas Hinson (Argued)

Alston & Bird LLP

1201 Peachtree Street

One Atlantic Center

Atlanta, GA 30309

Joseph A. Martin

Archer & Greiner, P.C.

One Centennial Square

P.O. Box 3000

Haddonfield, NJ 08033

Counsel for Appellees

__________

OPINION OF THE COURT

_________

FUENTES, Circuit Judge.

In this lawsuit, Jane Edgar, a former employee of Avaya

Inc., alleges that Avaya and several of its officers (“defendants”)

breached their fiduciary duties under § 404 of the Employee

Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1104, by

offering participants in three employee pension benefit plans the

option of investing in Avaya common stock. Edgar commenced

the lawsuit after the price of the stock declined from $10.69 to

$8.01 per share, following Avaya’s announcement that it would not

meet its previously forecasted earnings goals for the 2005 fiscal

2

year. We agree with the District Court that Edgar failed to plead

facts sufficient to establish that defendants breached their fiduciary

duties under ERISA by (1) imprudently offering Avaya common

stock as an investment option, and (2) failing to disclose material

information to plan participants. Accordingly, we will affirm the

District Court’s dismissal of the amended complaint under Rule

12(b)(6) of the Federal Rules of Civil Procedure.1

I. BACKGROUND

Avaya, which came into existence in September 2000, as a

spin-off from Lucent Technologies, Inc., designs, builds, and

manages communications networks for businesses. Avaya

sponsors three employee pension benefit plans administered in

accordance with ERISA, 29 U.S.C. §§ 1001-1461.2 At the time she

1

The District Court’s decision is set forth in Edgar v.

Avaya, No. 05-3598, 2006 WL 1084087 (D.N.J. Apr. 25, 2006).

2

An “employee pension benefit plan” is defined, in relevant

part, as any employer-established or maintained plan that “(i)

provides retirement income to employees, or (ii) results in a

deferral of income by employees for periods extending to

termination of covered employment or beyond.” 29 U.S.C. §

1002(2)(A). The three plans are also “individual account plans”

and “defined contribution plans” which allow participants to

contribute to individual accounts and provide “benefits based solely

upon the amount contributed to the participant’s account, and any

income, expenses, gains, and losses.” 29 U.S.C. § 1002(34)

(emphasis added). In her brief, Edgar misleadingly refers to the

plans as “traditional retirement plans.” We have explained,

however, that a “traditional pension plan is a defined benefit plan

that pays an annuity based on the retiree’s earnings history, usually

the most recent or highest paid years, and the number of completed

years of service to the company.” Depenbrock v. CIGNA Corp.,

389 F.3d 78, 80 n.1 (3d Cir. 2004) (emphasis added) (internal

quotation marks omitted). Thus, defined benefit plans, unlike

defined contribution plans, guarantee participants a fixed-income

at retirement. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432,

439 (1999).

3

filed this lawsuit, Edgar participated in the Avaya Inc. Savings Plan

(“the Union Plan”), one of the three plans offered to eligible

employees. The other two plans are the Avaya Inc. Savings Plan

for the Variable Workforce (“the Variable Plan”) and the Avaya

Inc. Savings Plan for Salaried Employees (“the Management

Plan”).3 The Plans state that they are “intended to provide for a

portion of the livelihood of Participants in their retirement,” by

“allow[ing] each Participant to elect to set aside a portion of his or

her salary on a pretax and after tax basis.” (J.A. at 383, 479, 539.)

Participants are permitted to change or terminate the amount they

elect to contribute, subject to certain requirements, at any time.

The Plans provide that the investment options “shall include

a broad range of investment alternatives as the Company

determines are necessary or appropriate to allow Participants to

materially affect the potential return and achieve a portfolio with

aggregate risk and return characteristics” typical of similar pension

plans. (J.A. at 415, 504, 570.) The Plans offer three asset classes:

short-term investments, bond and stock funds, and asset allocation

funds. Although Avaya selects the investment options, Plan

participants have discretion as to how their contributions are

invested, including whether to invest all of their contributions in

one fund or in a mix of funds. After initially electing which funds

to invest in, a Plan participant may change how future contributions

are invested and transfer existing investments into other funds.

During the relevant time period, Avaya offered Plan

participants twenty-three investment options, which the Summary

Plan Descriptions explain, “differ in their investment objectives

and opportunities for risk and return.” (J.A. at 255, 301, 340.) The

Plan Descriptions state that participants should “consider the risks

and potential rewards” of each option. (Id.) Of particular

significance to this litigation, the Plans provide that the investment

options “shall include the Avaya Stock Fund, which shall be

3

We refer to the Union Plan, the Variable Plan, and the

Management Plan collectively as “the Plans.” Any reference to

“Plan participants” refers to individuals who participated in any of

the three Plans, unless otherwise specified.

4

invested primarily in shares of Avaya common stock, with a small

portion in cash and other liquid investments.” (J.A. at 415, 504,

570.) With respect to the Avaya Stock Fund, the Plan Descriptions

state:

The value of your investment will vary depending on

Avaya’s performance, the overall stock market, the

performance and amount of short-term investments

held by the fund, and the amount of fund expenses.

Investing in a non-diversified single stock fund

carries more risk than investing in a diversified fund.

(J.A. at 261, 307, 346.) According to Avaya’s Form 11-K filed

with the Securities and Exchange Commission (“SEC”) on June 22,

2005, the Master Trust, which holds the total assets for all three

Plans, was valued at $1.4 billion at the end of December 2004. Of

this amount, approximately 16 percent, or $229 million, was

invested in the Avaya Stock Fund.

On April 19, 2005, Avaya publicly released its quarterly

earnings statement in which it announced that it was unlikely to

meet its previously forecasted earnings goals for fiscal year 2005.

The announcement explained that this was primarily due to

disruption in sales caused by the company’s implementation of new

delivery methods; costs associated with integrating recent

acquisitions; and “potential softness in the U.S. technology

market.” (J.A. at 69.) On the first trading day following the

5

announcement, the price of Avaya common stock fell from $10.69

to $8.01 per share.

In July 2005, Edgar filed this class action lawsuit pursuant

to section 502 of ERISA, 29 U.S.C. § 1132(a)(2).4 She seeks

damages and injunctive relief under 29 U.S.C. § 1109(a), on behalf

of all similarly situated individuals who participated in the Plans

and invested in the Avaya Stock Fund between October 2004 and

July 2005 (“the Class Period”).5 Defendants moved to dismiss the

amended complaint pursuant to Rule 12(b)(1) for lack of standing,

and Rule 12(b)(6) for failure to state a claim for breach of fiduciary

duty. On April 25, 2006, the District Court granted defendants’

Rule 12(b)(6) motion without reaching the standing issue.6 This

timely appeal followed.

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had jurisdiction pursuant to 28 U.S.C. §

1331 and 29 U.S.C. § 1132(e)(1). We have appellate jurisdiction

pursuant to 28 U.S.C. § 1291. We exercise plenary review over a

4

29 U.S.C. § 1132(a) allows a participant in an ERISA plan

to bring a civil action for breach of fiduciary duty. Graden v.

Conexant Sys. Inc., __F.3d __, No. 06-2337, 2007 WL 2177170,

at *2 (3d Cir. July 31, 2007).

5

29 U.S.C. § 1109(a) states that a fiduciary who breaches

his or her duty in administering an ERISA plan must “make good

to such plan any losses” resulting from the breach, and authorizes

other equitable relief as a court may find appropriate. 29 U.S.C. §

1109(a).

6

Defendants argued that Edgar lacked standing to sue on

behalf of participants in the Variable Plan and the Management

Plan. The District Court recognized that standing is typically a

threshold jurisdictional issue. But, because defendants conceded

that Edgar had standing to sue on behalf of participants in the

Union Plan, a ruling on the Rule 12(b)(1) motion would not have

completely disposed of the case. See Edgar, 2006 WL 1084087, at

*3 n.3.

6

district court’s dismissal of claims pursuant to Rule 12(b)(6).

Miller v. Fortis, 475 F.3d 516, 519 (3d Cir. 2007). We accept all

well-pleaded allegations in the complaint as true and draw all

reasonable inferences in favor of the plaintiff. Id.

III. DISCUSSION

We first address Edgar’s argument that defendants breached

their fiduciary duties by imprudently offering Avaya common stock

as an investment option during the Class Period. We then turn to

her contention that defendants had a duty to disclose to Plan

participants Avaya’s allegedly deteriorating financial condition.

A. Duty of Prudence

Section 404 of ERISA imposes the following duty on

ERISA fiduciaries:

(a) Prudent man standard of care

(1) . . . a fiduciary shall discharge his duties with

respect to a plan solely in the interest of the

participants and beneficiaries . . .

...

(B) with the care, skill, prudence, and diligence

under the circumstances then prevailing that a

prudent man acting in a like capacity and familiar

with such matters would use in the conduct of an

7

enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as

to minimize the risk of large losses, unless under the

circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and

instruments governing the plan . . . .

29 U.S.C. § 1104(a)(1).7 In rejecting Edgar’s prudence claim, the

District Court first determined that defendants’ conduct should be

reviewed under an abuse of discretion standard, and then concluded

that Edgar failed to allege facts sufficient to establish an abuse of

discretion. We agree with both rulings.

1) An abuse of discretion standard governs defendants’ decision

to offer Avaya stock

In concluding that defendants’ decision to offer Avaya

common stock as an investment option is reviewed for an abuse of

discretion, the District Court relied on Moench v. Robertson, 62

F.3d 553 (3d Cir. 1995). In Moench, we held that fiduciaries of an

Employee Stock Ownership Plan (“ESOP”) are entitled to judicial

deference when they decide to invest plan assets in the sponsoring

company’s stock. Id. at 571. Under ERISA, an ESOP is defined,

in relevant part, as an individual account plan “which is designed

to invest primarily in qualifying employer securities.” 29 U.S.C.

§ 1107(d)(6). Although the Plans are not ESOPs, we agree with

the District Court that the same deferential standard applies here.

Moench involved an employer-sponsored ESOP which

required the Trustee to “invest all contributions received under the

terms of the plan . . . in ESOP stock.” Moench, 62 F.3d at 558.

After the price of the stock declined dramatically, a former

employee and participant in the ESOP sued the fiduciaries of the

7

We have observed that 29 U.S.C. § 1104(a) “in essence,

codifies and makes applicable to . . . fiduciaries certain principles

developed in the evolution of the law of trusts.” In re Unisys Sav.

Plan Litig., 74 F.3d 420, 434 (3d Cir. 1996) (internal quotation

marks omitted).

8

plan for breach of their duty under ERISA, claiming that they

should have diversified plan assets in light of the company’s

financial deterioration. Id. at 559-60. On appeal, we reversed the

district court’s summary judgment ruling in favor of defendants

and held that “in limited circumstances, ESOP fiduciaries can be

liable under ERISA for continuing to invest in employer stock

according to the plan’s direction.” Id. at 556. We explained that

although the “primary purpose” of the ESOP was to invest in

employer stock, defendants were not “absolutely require[d]” to do

so; rather, they retained limited discretion over investment

decisions.8 Id. at 568.

Turning to the standard governing defendants’ discretionary

decision to offer employer securities as an investment option, we

first considered the unique status of ESOPs under ERISA.

Specifically, we noted that ESOP fiduciaries are exempt from the

duty to diversify imposed by § 1104(a)(1)(C), and from §

1106(b)(1)’s strict prohibition against dealing with a party in

interest. 9 Id. at 568. We explained that these exceptions “arise[]

8

For example, we observed that the ESOP stated that funds

were to be invested “primarily,” not “exclusively,” in employer

stock, and that defendants had conceded that, on prior occasions,

they interpreted plan documents as permitting them to “refrain

from” making such investments if necessary. Id. at 567. In

addition, we explained that to interpret the ESOP as stripping

defendants of all investment discretion would conflict with the

common law rule that a “trustee in certain narrow instances must

take actions at odds with how it is directed generally to act.” Id.

9

Under § 1104(a)(1), plan fiduciaries are required to

“diversify[] the investments of the plan so as to minimize the risk

of large losses, unless under the circumstances it is clearly prudent

not to do so.” 29 U.S.C. § 1104(a)(1)(C). The Seventh Circuit has

observed that because “the very purpose of an ESOP is to give

employees stock in the employer, it would be anomalous if the

ESOP’s trustees were required to sell most of the stock donated by

the employer in order to create a diversified portfolio of stocks.”

Steinman v. Hicks, 352 F.3d 1101, 1103 (7th Cir. 2003). Section

1106(b)(1) prohibits an ERISA fiduciary from “deal[ing] with the

9

out of the nature and purpose of ESOPs themselves,” id., which as

set forth in § 1107, is to “invest primarily in qualifying employer

securities.” 29 U.S.C. § 1107(d)(6)(A). In other words, “the

concept of employee ownership constituted a goal in and of itself.”

Moench, 62 F.3d at 568.

Despite the special status of ESOPs, we emphasized that

ESOP fiduciaries are still required to act in accordance with the

duties of loyalty and care that apply to fiduciaries of typical ERISA

plans. Id. at 569; see also Kuper v. Iovenko, 66 F.3d 1447, 1457

(6th Cir. 1995) (“[T]he purpose of ESOPs cannot override

ERISA’s goal of ensuring the proper management and soundness

of employee benefit plans.”); Fink v. Nat’l Sav. & Trust Co., 772

F.2d 951, 955-56 (D.C. Cir. 1985) (“The investment decisions of

a profit sharing plan’s fiduciary are subject to the closest scrutiny

under the prudent person rule, in spite of the strong policy and

preference in favor of investment in employer stock.”) (internal

quotation marks omitted). “In other words, Congress expressly

intended that the ESOP would be both an employee retirement

benefit plan and a technique of corporate finance that would

encourage employee ownership.” Moench, 62 F.3d at 568 (internal

quotation marks omitted). Accordingly, we declined to adopt a per

se rule that the decision of an ESOP fiduciary to invest in employer

securities is not subject to judicial review.10 See id. at 571.

In order to fashion an appropriate standard that would

balance the two roles that ESOPs are required to serve—as a

mechanism of corporate finance and a vehicle for retirement

savings—we noted that “trust law distinguishes between two types

of directions.” Id. at 571. On the one hand, if the trust “requires”

assets of the plan in his own interest or for his own account.” 29

U.S.C. § 1106(b)(1).

10

We noted that we were “not concerned with a situation in

which an ESOP plan in absolute unmistakable terms requires that

the fiduciary invest the assets in the employer’s securities

regardless of the surrounding circumstances.” Id. at 567 n.4. We

explicitly left open the issue of whether there could still be a breach

of fiduciary duty in such a case. Id.

10

the trustee to invest in a particular stock, then the trustee is

“immune from judicial inquiry.” Id. On the other hand, if the trust

merely “permits” the trustee to invest in a particular stock, then the

trustee’s investment decision is subject to de novo judicial review.

Id.

The situation presented in Moench did not fit either

category. Defendants were “not absolutely required to invest in

employer securities,” but they were “more than simply permitted to

make such investments.” Id. We therefore determined that an

intermediate abuse of discretion standard would strike the

appropriate balance between immunity from judicial review, at one

extreme, and de novo review, at the other. Accordingly, we set

forth the following rebuttable presumption: “[A]n ESOP fiduciary

who invests [plan] assets in employer stock is entitled to a

presumption that it acted consistently with ERISA by virtue of that

decision. However, the plaintiff may overcome that presumption

by establishing that the fiduciary abused its discretion by investing

in employer securities.” Id. Edgar refers to this deferential abuse

of discretion standard as Moench’s “presumption of prudence.”

(See, e.g., Appellant’s Br. at 23.)

Edgar argues that Moench’s presumption of prudence does

not apply here, because the Plans at issue in this case are not

ESOPs. We are not persuaded. An ESOP is one of several types

of pension plans categorized under ERISA as “Eligible Individual

Account Plans” or “EIAPs.” 29 U.S.C. § 1107(d)(3)(A). An EIAP

is defined as “an individual account plan which is (i) a

profit-sharing, stock bonus, thrift, or savings plan; (ii) an employee

stock ownership plan; or (iii) a money purchase plan which . . . [is]

invested primarily in qualifying employer securities.” Id. It is

undisputed that the Plans at issue in this case are EIAPs.11

Because one of the purposes of EIAPs is to promote

investment in employer securities, they are subject to many of the

11

There is also no dispute that, as in Moench, defendants

retained limited discretion not to offer Avaya common stock as an

investment option.

11

same exceptions that apply to ESOPs. See Wright v. Oregon

Metallurgical Corp., 360 F.3d 1090, 1094 (9th Cir. 2004). For

example, § 1104(a)(2) provides that all EIAPs, not just ESOPs, are

exempt from ERISA’s duty to diversify: “In the case of an eligible

individual account plan . . . the diversification requirement . . . and

the prudence requirement (only to the extent that it requires

diversification) . . . is not violated by acquisition or holding of . .

. qualifying employer securities.” 29 U.S.C. § 1104(a)(2)

(emphasis added). And § 1108(e)(3)(A) states that ERISA’s

prohibitions against dealing with a party in interest or self-dealing

“shall not apply to the acquisition or sale by a plan of qualifying

employer securities . . . if the plan is an eligible individual account

plan.” 29 U.S.C. § 1108(e)(3)(A) (emphasis added).

Consequently, EIAPs, like ESOPs, “place employee retirement

assets at much greater risk” than traditional ERISA plans. Wright,

360 F.3d at 1097 n.2. Given these similarities, we conclude that

the underlying rationale of Moench applies equally here.12

In sum, we conclude that the District Court correctly

determined that Moench’s abuse of discretion standard governs

judicial review of defendants’ decision to offer the Avaya Stock

Fund as an investment option.

12

In reaching our conclusion, we reject Edgar’s argument

that our decision In re Schering-Plough Corp. ERISA Litigation,

420 F.3d 231 (3d Cir. 2005), requires a contrary result. In

Schering-Plough, we addressed the narrow question of whether

participants in an ERISA retirement savings plan could prosecute

a derivative action on behalf of the plan even though the alleged

losses affected only a subset of participants who invested in

employer stock. Id. at 232. In resolving the standing issue, we

referenced Moench only to state that it was inapposite because the

plan at issue in Schering-Plough was not an ESOP, and did not

even direct plan fiduciaries to offer employer stock as an

investment option. See id. at 238 & n.5. In addition, we explicitly

stated that we were expressing “no opinion on the significance” of

§1104(a)(2)—which as previously stated, exempts EIAPs from the

duty to diversify—to the facts presented in the case. Id. at 238 n.5.

12

2) The facts alleged in the amended complaint do not establish

an abuse of discretion

Having set forth the appropriate standard of judicial review,

the District Court then correctly concluded that Edgar failed to

plead facts sufficient to establish that defendants abused their

discretion.

In order to rebut the presumption that a fiduciary acted

prudently in investing in employer securities, a “plaintiff must

show that the ERISA fiduciary could not have believed reasonably

that continued adherence to the ESOP’s direction was in keeping

with the settlor’s expectations of how a prudent trustee would

operate.” Moench, 62 F.3d at 571. Thus, “the plaintiff may

introduce evidence that ‘owing to circumstances not known to the

settlor and not anticipated by him,’” investing in employer

securities “‘would defeat or substantially impair the

accomplishment of the purposes of the trust.’” Id. (quoting

Restatement (Second) § 227 comment g)).

In Moench, we observed that the plaintiff alleged “that the

precipitous decline in the price of [the employer’s stock], as well

as [defendants’] knowledge of its impending collapse and [their]

own conflicted status, changed circumstances to such an extent that

[defendants] could effectuate the purposes of the trust only by

deviating from the trust’s direction or by contracting out

investment decisions to an impartial outsider.” Id. at 572.

Specifically, plaintiff proffered evidence that during the relevant

two-year period, the price of the company’s stock declined from

$18.25 to less than $0.25 per share; federal regulators informed the

company’s Board of Directors that they had concerns about the

company’s financial condition and had uncovered various

regulatory violations; the Federal Deposit Insurance Corporation

eventually took over control of one of the company’s subsidiaries;

and, ultimately, the company filed for Chapter 11 bankruptcy. Id.

at 557. Based on these facts, we remanded the matter to the district

court for further development of the record. Id. at 572.

Here, Edgar alleges in the amended complaint that

defendants abused their discretion by knowingly or recklessly

13

disregarding the fact that: (1) the cost of integrating a recent

corporate acquisition was greater than defendants publicly

represented; (2) rather than having a positive financial impact, the

acquisition reduced Avaya’s earnings by at least $.06 per share

during the 2005 fiscal year; (3) changes to Avaya’s method of

delivering products to market were causing severe disruptions in

sales; and (4) the company was experiencing a dramatic reduction

in demand for its products. Therefore, Edgar contends, “Avaya had

no reasonable basis to project an increase in profits or an increase

in revenues of 25-27% for fiscal 2005.” (J.A. at 54-55, 59-60, 62,

64-65, 68.)

Edgar’s allegations, if true, indicate that during the Class

Period, Avaya was undergoing corporate developments that were

likely to have a negative effect on the company’s earnings and,

therefore, on the value of the company’s stock. In fact, this is

precisely what happened when the price of Avaya stock declined

by $2.68 per share following Avaya’s April 19, 2005, earnings

announcement. We cannot agree, however, that these

developments, or the corresponding drop in stock price, created the

type of dire situation which would require defendants to disobey

the terms of the Plans by not offering the Avaya Stock Fund as an

investment option, or by divesting the Plans of Avaya securities.

Indeed, had defendants divested the Plans of Avaya common stock

during the Class Period, they would have risked liability for having

failed to follow the terms of the Plans.13 See Moench, 62 F.3d at

13

We do not interpret Moench as requiring a company to be

on the brink of bankruptcy before a fiduciary is required to divest

a plan of employer securities. However, we believe that the bare

allegations of fraud and other wrongdoing set forth in Edgar’s

amended complaint are insufficient to establish an abuse of

discretion, particularly when a review of Avaya’s historic stock

price shows that, by July 26, 2005, the price of the stock rebounded

to $10.74 per share—$.05 per share more than its trading price on

the day of the April 19, 2005 earnings announcement. See Oran v.

Stafford, 226 F.3d 275, 288 (3d Cir. 2000) (noting that a court may

“take judicial notice of facts that are ‘capable of accurate and ready

determination by resort to sources whose accuracy cannot

14

571-72 (“[C]ourts must recognize that if the fiduciary, in what it

regards as an exercise of caution, does not maintain the investment

in the employer’s securities, it may face liability for that caution,

particularly if the employer’s securities thrive.”).

Finally, Edgar argues that the District Court’s application of

Moench’s presumption of prudence at the motion to dismiss stage

is somehow inconsistent with the liberal pleading standards set

forth in Rule 8 of the Federal Rules of Civil Procedure. We are

unconvinced. Quite simply, if a plaintiff does not plead all of the

essential elements of his or her legal claim, a district court is

required to dismiss the complaint pursuant to Rule 12(b)(6). For

example, in Wright v. Oregon Metallurgical Corp., the Ninth

Circuit concluded that “Plaintiffs’ alleged facts effectively

preclude[d] a claim under Moench, eliminating the need for further

discovery.” 360 F.3d at 1098. As the Court noted, “published

accounts of [the employer’s] earnings and financial fundamentals

during the relevant period, attached to the complaint, demonstrate

that [the employer] was far from the sort of deteriorating financial

circumstances involved in Moench and was, in fact, profitable and

paying substantial dividends throughout that period.” Id. Given

these circumstances, “[m]ere stock fluctuations, even those that

trend downward significantly, are insufficient to establish the

requisite imprudence to rebut the Moench presumption.” Id. at

1099. We find the Ninth Circuit’s reasoning to be logical, and see

no reason to allow this case to proceed to discovery when, even if

the allegations are proven true, Edgar cannot establish that

defendants abused their discretion.14 Accordingly, we will affirm

reasonably be questioned’”) (quoting Fed. R. Evid. 201(b)(2)).

14

Edgar cites a number of district court cases suggesting

that it is improper to consider Moench’s presumption of prudence

in ruling on a motion to dismiss. See, e.g., Rankin v. Rots, 278 F.

Supp. 2d 853, 879 (E.D. Mich. 2003); In re Elec. Data Sys. Corp.,

305 F. Supp. 2d 658, 669-70 (E.D. Tex. 2004). It is our view,

however, that a duty of prudence claim that is on its face

inadequate as a matter of law obviates the need for discovery.

15

the District Court’s dismissal of Edgar’s prudence claim.15

B. Duty of Disclosure

Edgar argues that even if the adverse corporate

developments revealed in Avaya’s April 19, 2005, earnings

announcement did not require defendants to divest the Plans of

Avaya common stock, “[a]t a minimum, they were required to

disclose the materially adverse facts to the Plans and their

participants” prior to the earnings announcement. (J.A. at 38.) We

do not agree.

It is well-established that an ERISA fiduciary “may not

materially mislead those to whom section 1104(a)’s duties of

loyalty and prudence are owed.” In re Unisys Sav. Plan Litig., 74

F.3d 420, 440 (3d Cir. 1996). Indeed, the “‘duty to inform is a

constant thread in the relationship between beneficiary and trustee;

it is not only a negative duty not to misinform, but also an

affirmative duty to inform when the trustee knows that silence

might be harmful.’” Id. at 441 (quoting Bixler v. Cent. Pa.

Teamsters Health & Welfare Fund, 12 F.3d 1292 (3d Cir. 1994)).

In Unisys, we held that the same duty applies to “alleged material

misrepresentations made by fiduciaries to participants regarding the

risks attendant to a fund investment.” Id. at 442. In the investment

context, “a misrepresentation is ‘material’ if there was a substantial

likelihood that it would have misled a reasonable participant in

making an adequately informed decision about whether to place or

maintain monies” in a particular fund. Id.

The Summary Plan Descriptions inform Plan participants

that their investments are tied to the market performance of the

15

Edgar summarily argues in her brief on appeal that

because the District Court improperly dismissed her duty of

prudence claim, it should not have dismissed her claims for breach

of the duty of loyalty, breach of the duty to monitor fiduciaries, and

co-fiduciary liability. Because we affirm the District Court’s

dismissal of Edgar’s duty of prudence claim, there is no basis for

us to disturb the District Court’s dismissal of these other claims.

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funds; that each fund carries different risks and potential returns;

that participants are responsible for investigating the investment

options; and that, in doing so, they might consider seeking the

advice of a personal financial advisor. In addition, the Plan

Descriptions explicitly warn participants that there are particular

risks associated with investing in a non-diversified fund. Nowhere

in the Plan Descriptions or the Plans themselves are participants

guaranteed a particular return on their investments. These

disclosures were sufficient to satisfy defendants’ obligation not to

misinform participants about the risks associated with investment

in the Avaya Stock Fund. Under Third Circuit law, they did not

have a duty to “give investment advice” or “to opine on” the

stock’s condition. See id. at 443. Rather, the information provided

Plan participants the opportunity to make their own informed

investment choice.

To the extent Edgar argues that the adverse development

disclosed in the April 19, 2005 earnings announcement should have

been disclosed earlier, we agree with the District Court that had the

Avaya defendants “publicly released any adverse information they

had prior to the April 2005 announcement, under the ‘efficient

capital markets hypothesis,’ such a disclosure would have resulted

in a swift market adjustment.” Edgar, 2006 WL 1084087, at *9.

Therefore, as the District Court reasoned, “the Plans would not

have been able to sell their Avaya stock holdings at the higher, pre-

announcement price, and the Plans would have sustained the same

losses they incurred when the Company publicly announced the

quarterly results in April 2005.” Id. In addition, the District Court

observed, had defendants decided to divest the Plans of Avaya

stock prior to April 19, 2005, based on information that was not

publicly available, they would have faced potential liability under

the securities laws for insider trading. Id. at *10. That observation

does not, as Edgar argues, mean that the federal securities laws

relieve fiduciaries of their obligations under ERISA.

In sum, we conclude that defendants fulfilled their duty of

disclosure under ERISA by informing Plan participants about the

potential risks associated with investment in the Avaya Stock Fund.

That defendants did not inform Plan participants about several

adverse corporate developments prior to Avaya’s earnings

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announcement, does not constitute a breach of their disclosure

obligations under ERISA.

IV.

For the reasons stated above, we conclude that Edgar failed

to plead facts that, if proven, would establish that defendants

abused their discretion by offering participants in the company’s

three pension benefit plans the option of investing in Avaya

common stock. In addition, we conclude that defendants fulfilled

their disclosure obligations under ERISA by apprising plan

participants of the risks associated with investing in the Avaya

Stock Fund. Accordingly, we will affirm the District Court’s

dismissal of the amended complaint pursuant to Rule 12(b)(6).

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