Opposition Brief — Harley v. 3M Co.

No. 02-566 |

ao

IN THE | 7 |

Supreme Court of the Gnited States

CAROL HARLEY, et al...

Petitioners,

V.

3M COMPANY, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

BRIEF IN OPPOSITION

JOHN D. FRENCH JOHN G. KESTER *

STEVEN L. SEVERSON J. ALAN GALBRAITH

; . ELLINGBOE

DEBORAH A. ELLINGBOE WILLIAMS & CONNOLLY LLP

FAEGRE & BENSON LLP 725 12th Street, N.W.

2200 Wells Fargo Center Washington, D.C. 20005

9%) South Seventh Street (202) 434-5000

Minneapolis, Minnesota 55402

(612) 766-7000

Attorneys for Respondents

* Counsel of Record

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Were participants in a “robust, richly-funded” defined-

benefit pension plan that had a substantial surplus never-

theless authorized under ERISA 29 U.S.C. § 1132 to sue to

obtain additional surplus, following an investment loss that

had no effect on the adequacy of the plan’s funding to pay

benefits, and that the defendant employer already had volun-

tarily restored by excess contributions?

2. Did the Court of Appeals properly affirm unanimously

the District Court’s factual finding that a particular fee paid to

an investment adviser of an ERISA plan, when there was no

claim of intentional misconduct, was not unreasonable, and

therefore was not actionable under ERISA?

(i)

ii

LIST OF PARTIES

Respondent 3M Company is a publicly-held corporation.

It has no parent companies, and no publicly-held corporation

owns 10% or more of its common stock. Other parties are

stated in the petition.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED..........:ccccssssssseseressesereeseees i

LIST OF PARTIES. .....0:scscoscoscssesssssonscocescesensvsvesnsovesssoses ii

TABLE OF AUTHORITIEG ...............cssccsssessrsesseessesens iv

ST ATE T vessveveccesscssvsssscassesercessssscecosoveccnencesocoonenscese I

REASONS FOR DENYING THE WRIT ............:ee0e0+ 5

I. THIS CASE INVOLVES UNUSUAL FACTS

AND LACKS GENERAL SIGNIFICANCE .... 5

Il. THE DECISION OF THE COURT OF

APPEALS CONFORMS TO THIS COURT'S

DICTION G oeesivcssseseseiccccssesecavoveebsvevcsovevsesesessones 9

A. The Decision Correctly Interprets ERISA

in Light of This Court’s Holdings................ 10

B. The Decision Is Clearly in Accordance

With the Trust Principles Upon Which

ERISA Is Based ............ccccccssscsessssreresseecners 12

C. Petitioners’ Interpretation Would Under-

~ mine the Purposes of ERISA ...........:csseessees 14

Ill. THERE IS NO CIRCUIT CONFLICT.............. 15

IV. THE RULING CONCERNING REASON-

ABLENESS OF AN INVESTMENT AD-

VISER’S COMPENSATION WAS NOT

ERRONEOUS AND DOES NOT MERIT

THIS COURT'S REVIEW. .......ssssssssssnseressesesees 17

CONCLUSION .......0cesccscsssssssvccrccscccceseressvessssssrssecsescssees 20

ADDENDUM

Opinion of district Court, Dec. 7, 2000 ..........s:sese00 la

(ili)

iV

TABLE OF AUTHORITIES

Cases: Page

ABF Capital Met. v. Askin Capital Met., L.P.,

957 F. Supp. 1308 (S.D.N.Y. 1997).......cccccseesees 2

Alessi v. Raybestos-Manhattan, Inc., 451 U.S.

FIG CIO EP vsnsecsescnitesnaiasveiatinitinseviaintmicaentvisesnaniannse 15

Amalgamated Clothing & Textile Workers Union

v. Murdock, 861 F.2d 1406 (9th Cir. 1988)....... 16

Astoria Fed. Sav. & Loan Ass'n v. Solimino, 501

PS, BG CEE Piciinteninsnevicisecininnicnncineniartnenebiintes 13

Bennett v. Conrail Matched Sav. Plan Admin

Committee, 168 F.3d 671 (3d Cir.), cert.

denied, 528 U.S. 871 (1999) .....cccccccseeeseeseees 9

Brink v. DaLesio, 667 F.2d 420 (4th Cir. 1981)... 16

Call v. Sumitomo Bank, 881 F.2d 626 (9th Cir.

Central States, SE & SW Areas Pension Fund v.

Central Transport, Inc., 472 U.S. 559 (1985) ... 12

DeFunis v. Odegaard, 416 U.S, 312 (1974).......... 11,12

Diamond v. Charles, 476 U.S. 54 (1986) .............. 7

FEC v. National Conservative Political Action

Committee, 470 U.S. 480 (1985) 00... eeeeeeeees 14

Financial Institutions Retirement Fund v. OTS,

SEG Fe BE ae aly ee intertetdaneceennnieentiniin 17

Firestone Tire & Rubber Co. v. Bruch, 489 U.S.

FE vetcinicinnnnietccaclindinniedknddiatbincnddibinisn 12

Friends of the Earth, Inc. v. Laidlaw Environ-

mental Services (TOC), Inc., 528 U.S. 167

CHIE cinssiindakinmstentiioniincneatitoniavceltintia sciiatinalsbiaeiine 7

Granny Goose Foods, Inc. v. Brotherhood of

Teamsters, 415 U.S. 423 (1974) .....ccccccccesesseeees 11

Hall v. Beals, 396 U.S. 45 (1969)........ccccsccssesseesees 12

Hughes Aircraft Co. v. Jacobson, 525 U.S. 432

CFI cnnccsseniiiitiicahincniiinicapiilicadamibitinitanininnalatinte GS

ENS ¥.. St. Cy, S53 UB. Be RF ricternentcrenns 12

Vv

TABLE OF AUTHORITIES—Continued

Page

Isbrandtsen Co. v. Johnson, 343 U.S. 779

(9D Z) .nnersscrsrrescrssenstessinsentvcenmesrsninansessanionnanseniern 13

Katsaros v. Cody, 744 F.2d 270 (2d Cir.), cert.

denied sub nom. Cody v. Donovan, 469 U.S.

BOT2 CADE) secerincrrvsnpizerenseivscesensesepneneorenenenseresense 11

Lewis v. Continental Bank Corp., 494 U.S. 472

CDI) .cececscconvereineventeseesesntminentnonerenenarsosenvevesounene 7

Lujan v. Defenders of Wildlife, 504 U.S. 555

€BDOE) snrncariciciinesininiasiiisiinhannisennmaniguinntiteaninccnes 1]

Massachusetts Mut. Life Ins. Co. v. Russell, 473

U.S. 134 (1965S). <ceccvosevereccosescrssocesconnsvsccsvnssoceses 1]

Mertens v. Hewitt Assocs., 508 U.S. 248 (1993)... 13

Nachman Corp. v. Pension Ben. Guaranty Corp.,

4A U.S. 359 (19B0).....recrccccrcccrccerccescererserersrsees 14

North Carolina v. Rice, 404 U.S. 244 (1971)........ 11

Patelco Credit Union v. Sahni, 262 F.3d 897 (9th

Cig, DUDA) va cacinvssesceccesscsvevises simasatcstesensevonboveccescoes 19

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41

(BIBT) necesearaciessvorenicrecnsnntvonntavsnreesbeontntecsstgesngisiens 15

Simon v. Eastern Ky. Welfare Rights Organi-

Zation, 426 U.S. 26 (1976)......sccsseeereesrneeseeeeeees 12

Steel Co. v. Citizens for a Better Environment,

$23 U.S. 83 (199B)....cccccosororosoovecscccereveseceroeeess y AD te

United Food & Comm'l Workers Union Local

751 v. Brown Group, Inc., 517 U.S. 544

(1996) ....cocoreccesscceesscovescoesensosccossosescensoosnsoscasooosose 12

Varity Corp. v. Howe, 516 U.S. 489 ti, ) 12,15

Vermont Agency v. United States ex rel. Stevens,

529 U.S. 765 (2000).........cccccscccsssccessersesessesssoees ~

Constitutional Provisions:

U.S. Constitution, Art. TET ....ccccccoccsccccsceccsoscosscseeeees 7,11

vi

TABLE OF AUTHORITIES—Continued

Statutes: Page

2D Uthhn | CU itiinnuiidbininniiiaidiaanaees 2

yy BRE ol % | SRR Una ee 4,17, 18

oF UE. F Ue inctintnittioiiandiamal 3, 4, 18, 19

29 Uados © 1 COO cannnisttnainaae 6, 10

29 USES UD eb ciiininiucnttivivicaiamaaaa 5, 8, 13

2D Ut dhs B POS incatnasceenceessnadiadnans 8

Rules:

FOG, Be. CAV. We Gp cccctsidisiicidiaincdieiatthlacbaiabeaan 11

Miscellaneous:

G. BOGERT & G. BOGERT, LAW OF TRUSTS AND

TRUSTEES CGR OG) FE istrinnnbiien 13

Joint Committee on Taxation, Background Infor-

mation Relating to the Investment of Retire-

ment Plan Assets in Employer Stock (2002) ......

RESTATEMENT (SECOND) OF TRUSTS (1959).......... 13

A. Scott & W. FRATCHER, LAW OF TRUSTS

(GU OG. TIE ccceccctusenceevcietiedenveinianiesietatsiiaiinanilidadiads 13

Sirkin, The 20 Year History of ERISA, 68 ST.

JOHNS L, REV. 521 (19D) wrccoccsscscsvesesceecossssscetes 9

IN THE

Supreme Court of the Anited States

No. 02-566

CAROL HARLEY, et ai.,

Petitioners,

Vv.

3M COMPANY, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

BRIEF IN OPPOSITION

STATEMENT

The petition covers two lawsuits, which -were decided

separately in the District Court, but in a single opinion by the

Court of Appeals.

1. The first case was a class action brought in 1996 against

3M Company’ in the United States District Court for the

District of Minnesota. The three plaintiffs, petitioners here,

were participants in the 3M Employee Retirement Income

Plan, a defined-benefit pension plan for 3M employees, of

which 3M was the sponsor and sole contributor. Petitioners

alleged that because of an imprudent investment, 3M had

'3M Company at that time was called Minnesota Mining and

Manufacturing Company.

2

violated the federal ERISA statute by failing to discharge its

fiduciary duty “with the care, skill, prudence, and diligence . . .

that a prudent man acting in a like capacity and familiar with

such matters would use... .” 29 U.S.C. § 1104(a)(1)(B).

That alleged violation was based on an investment in 1990

of $20 million—out of the Plan’s then assets of $2.3 billion—

in a hedge fund called Granite Corporation, which held a

portfolio of mortgage-related derivative securities. The value

of the Plan’s investment in Granite climbed to $34 million in

February 1994; but in April 1994, because of an unfore-

seen interest-rate rise, Granite became insolvent and bank-

rupt, and the Plan’s investment consequently worthless.

Granite’s manager admitted to having improperly valued

and structured the portfolio. A. 3a. Petitioners alleged that

3M had failed adequately to investigate and monitor the

Granite investment.’

In September 1994, five months after the failure of Granite,

3M contributed to the Plan $101 million in excess of the

amount required by the federal ERISA law. Voluntary over-

payments to the Plan, which had been made in previous years,

continued thereafter. From 1993 to 1998, 3M contrib-

uted to the Plan a total of $683 million in excess of legal

requirements.’ At all relevant times, the 3M Plan was in an

“overfunded” condition, with the surplus funding rising from

? The petition in its “Statement of the Facts” states, Pet. 3, that as of

1998 “the cumulative investment loss to the Plan was approximately $80

million,” citing the District Court opinion at P.C.A. 48a. That opinion

made no such finding; it simply recited what petitioners were arguing. /d.

Respondents wholly disagree with that number, which far overstates the

real loss.

* In addition, besides making the $101 million voluntary overpayment,

the Plan fiduciaries also brought suit on the Plan’s behalf against invest-

ment advisors and broker-dealers associated with the Granite investment.

See P.C.A. 3a n.4; ABF Capital Mgt. v. Askin Capital Mgt., L.P., 957 F.

Supp. 1308 (S.D.N.Y. 1997).

3

$430 million in 1994 to $1.4 billion in 1999. The total

assets of the Plan rose to $3.4 billion in 1995 and $6.3 billion

in 1999, T oaks

On March 29, 2000, having earlier referred to “the unique

circumstances of this case,” P.C.A. 69a, the District Court

granted summary judgment for 3M on the claim for allegedly

imprudent investment. Citing this Court’s decision in Hughes

Aircraft Co. v. Jacobson, 525 U.S. 432 (1999), the court

explained that because this was a defined-benefit plan, the

rights of plan participants were to specified benefits, and did

not include any interest in the size of the surplus. There was

no evidence whatsoever that the ability of the Plan to pay had

been affected or jeopardized by the loss in the Granite -

investment, because the Plan at all times had a very

substantial surplus resulting in part from very large voluntary

extra payments by 3M. P.C.A. 37a.

With respect to the claim of unauthorized compensation

of the investment adviser, the District Court noted that

petitioners had never brought it as a formal claim, and had

then abandoned reliance on one statutory provision and

substituted another. P.C.A. 63a. Even if the issue had been

properly before it, the court held, the compensation

arrangement of the Granite adviser on the facts presented

clearly came within the provision of 29 U.S.C. § 1108(c)(2)

that specifically authorizes “any reasonable compensation for

services renderec.” P.C.A. 64a-65a. )

2. After 3M filed its motion for summary judgment,

petitioners on September 29, 1999 brought a second class-

action complaint in the same court. This one named as

defendants the seven individual members of 3M’s Pension

Assets Committee, to whom 3M delegated management of

Plan investments. The substance of the allegations was

4

identical to petitioners’ suit against 3M.‘ On December 7,

2000, the District Court granted summary judgment for the

defendants in this second suit, based on collateral estoppel

from the first ruling. The court did not have occasion to con-

sider numerous other defenses the defendants in the second

case had raised, including the statute of limitations, and a

stipulation by petitioners not to sue. Addendum at 4a, infra.’

3. The Court of Appeals held that in the unusual cir-

cumstances of this case, because of the large overfunding

payments voluntarily contributed by 3M, which far exceeded

the investment loss complained of, the “ongoing plan had a

substantial surplus before and after the alleged breach and a

financially sound settlor responsible for making up any future

underfunding,” so that all participants’ pension rights were

“fully protected.” P.C.A. 10a. Dismissal was proper when

“the Plan’s surplus was sufficiently large that the Granite

investment loss did not cause actual injury to plaintiffs’

interests in the Plan.” P.C.A. lla. The court observed that

“the purposes underlying ERISA’s imposition of strict fidu-

ciary duties are not furthered” by such a lawsuit, P.C.A. 10a,

and that “[iJn these circumstances, the failure to investi-

gate and monitor claims were properly dismissed because

plaintiffs suffered no injury-in-fact.” P.C.A. 12a. The Court

of Appeals also affirmed the District Court’s holding that

there was no prohibited transaction with the investment

adviser, because there was no evidence that the fee paid was

unreasonable, and therefore it was authorized under 29 U.S.C.

§ 1108(c)(2).

*See Addendum at 4a, infra. This complaint added a claim of

violation of ERISA 29 U.S.C. § 1106(b)(1), by allegedly permitting an

unreasonable fee to the investment manager.

* The District Court’s December 7, 2000, opinion, which is not repro-

duced in the Petition for Certiorari, is appended hereto.

5

Judge Bye, writing separately, agreed as to the latter point,

but believed contrary to the majority that petitioners were

authorized by 29 U.S.C. § 1132(a)(2) of ERISA to bring

claims on behalf of the Plan for breach of fiduciary duty. He

reasoned that petitioners were “statutorily designated” agents

of the Plan and permitted to sue based on what he believed

this Court had “suggested” in Vermont Agency v. United

States ex rel. Stevens, 529 U.S. 765, 773 (2000), in which a

gui tam relator was held to have standing to sue because of

assignment to him of part of the claim. P.C.A. 16a. In his

brief opinion, Judge Bye did not discuss requirements of

injury, redressability, nor the effect of the large overpayments

made by 3M, which far exceeded any loss. P.C.A. 16a-17a.

REASONS FOR DENYING THE WRIT

I. THIS CASE INVOLVES UNUSUAL FACTS AND

LACKS GENERAL SIGNIFICANCE.

The holding in this case is especially narrow. It applies

only to the small minority of pension plans that are defined-

benefit; ° and of those, only to those that are overfunded; and

of those, only to claims for imprudent investment. Claims for

breach of duty of loyalty or for intentional misconduct are not

addressed at all. Finally, it concerns only this tiny category

of claims in the context of an action brought by plan

participants and beneficiaries. The statutory authority of

fiduciaries or the Secretary of Labor to bring suit is entirely

unaffected. See P.C.A. 12a n.5.

Petitioners are quite mistaken to suggest that the present

decision broadly “precludes participant enforcement of

fiduciary standards,” and thereby conflicts “with decisions by

® Once the norm, defined-benefit pension plans now comprise only 8%

of retirement plans subject to ERISA in the United States. Joint Commit-

tee on Taxation, Background Information Relating to the Investment of

Retirement Plan Assets in Employer Stock 14 (2002). And only a fraction

of that 8% of plans is overfunded.

6

every other court that has considered the standing of par-

ticipants to enforce fiduciary standards in connection with

defined benefit pension plans.” Pet. 13. The Court of

Appeals confined its holding to participants in these circum-

stances who “seek relief under § 1109 for this particular

breach of duty, given the unique features of a defined benefit

plan,” P.C.A. 7a (emphasis supplied)—i.e., a duty to exercise

care to avoid imprudent investments. The holding has noth-

ing to do with, for instance, a claim that a fiduciary had a

conflict of interest. It has nothing to do with complaints for

breach of the fiduciary duty of loyalty. No case is cited by

petitioners, and none has been found, which addresses a suit

by participants to challenge allegedly imprudent investments

in this very narrow situation, where the plan at issue has a

substantial surplus, and where no fiduciary was ever accused

of self-enrichment.

No damage to any Plan participant was at issue.

Petitioners failed to come forward with a shred of evidence

that the investment complained of had the remotest effect on

the stability of the Plan, or its ability to pay all benefits in the

future. The Plan, as was previously noted, was overfunded

by hundreds of millions of dollars in excess of legal

requirements. The Plan was found by the District Court,

and the Court of Appeals expressly agreed, “[b]y nearly

any measure” to be “a robust, richly-funded, ongoing

plan,” P.C.A. 12a, 37a, with assets exceeding $6.3 billion,

P.C.A. 4a.

“The actuarial value of the Plan’s assets exceeded its

actuarial accrued liabilities in 1993, before Granite’s

bankruptcy, and in every year thereafter. 3M _ has

contributed $683 million more than its minimum

funding requirements since the loss of the $20 mil-

lion Granite investment. Plaintiffs failed to prove the

absence of a substantial surplus under any relevant

valuation method. In these circumstances, the failure to

7

investigate and monitor claims were properly dismissed

because plaintiffs suffered no injury-in-fact.”

P.C.A. 12a (footnote omitted). Indeed, in the 71 years since

its establishment in 1931, the Plan has never failed to make

any payment owed to any participant. Cf. P.C.A. 33a.

The complaint accused 3M of having made a bad invest-

ment of $20 million. Yet it is undisputed that 3M more than

restored the loss on that investment by then voluntarily

contributing to the Plan an additional $683 million not

required by law. So all that is really at stake in this litigation

is a hope of recovering class-action attorneys’ fees, which

would be associated with a court order that 3M had incurred

an obligation to reimburse to the Plan for loss on the Granite

investment—even though 3M long ago voluntarily made

excess contributions to the Plan several times that amount.

As the Court of Appeals pointed out, “[i]ndeed those rights

[of individual participants] would if anything be adversely

affected by subjecting the Plan and its fiduciaries to costly

litigation brought by parties who have suffered no injury

from a relatively modest but allegedly imprudent invest-

ment.” A. 10a (emphasis supplied).

Attorneys’ hopes for class-action fees-are not a sufficient

basis for maintaining litigation or distorting the ERISA

statute, much less a reason for this Court to grant certiorari.

This Court has explained more than once that “courts should

use caution to avoid carrying forward a moot case solely to

vindicate a plaintiff's interest in recovering attorneys’ fees.”

Friends of the Earth, Inc. v. Laidlaw Environmental Services

(TOC), Inc., 528 U.S. 167, 192 n.5 (2000). An “interest in

attorney’s fees is, of course, insufficient to create an Article

III case or controversy where none exists on the merits of the

underlying claim... .” Lewis v. Continental Bank Corp.,

494 U.S. 472, 480 (1990), quoted in Steel Co. v. Citizens for

a Better Environment, 523 U.S. 83, 107 (1998). See also

Diamond v. Charles, 476 U.S. 54, 70-71 (1986).

8

Nor is any substantial enforcement concern at issue. The

Secretary of Labor plainly is authorized by statute to bring

suit for ERISA violations in 29 U.S.C. § 1132(a)(2), as an

enforcement function without the restrictions applied to

private parties. Hence, if rare situations like the present one

were to arise, and the Department of Labor believed the

conduct of a fiduciary sufficiently serious or troubling, the

Secretary could elect to bring suit. Petitioners observe that

“the Secretary’s enforcement resources are limited.” Pet. 19.

But all government resources are limited, not least of all this

Court’s. How they are allocated for various enforcement

ends is a matter decided by Congress and the Executive

Branch officials assigned to make those policy decisions.

There is no evidence that Congress in ERISA prescribed a

proliferation of suits by undamaged participants, to recover

monies already reimbursed, addressed to alleged violations of

prudence that federal administrators deemed unworthy of

their own action. If the Secretary of Labor truly believed that

the anomalous facts of this case were important enough to

warrant an enforcement action, she could have chosen to

bring suit. She did not do so. A relatively small case of an

unfortunate investment, insufficiently significant to engage

the enforcement staff of the Department of Labor, scarcely

seems an appropriate candidate for the limited time of

this Court.

Nor need this Court assume the responsibility to address

minor or anomalous disagreements of construction occurring

in unusual situations like this one concerning the ERISA

statute. Congress is the primary body to address statutory

issues if they seem important or recurrent enough, and it

exercises its legislative oversight over ERISA. ERISA is one

of the most frequently and constantly amended statutes ever

enacted. It was significantly amended in 1980, 1984, 1986,

1991, 1994 and 1997. See references collected at 29 US.

Code Ann. at § 1001. In 1994 it was observed that as of then

“Since 1974, ERISA has grown from 200 pages of legislation

ee

9

and legislative history to 700 pages of legislation, 3600 pages

of regulations, and countless pages of cases and

commentary.” Sirkin, The 20 Year History of ERISA, 68 ST.

JOHN’S L. REV. 321, 321-22 (1994).

II. THE DECISION OF THE COURT OF APPEALS

CONFORMS TO THIS COURT’S DECISIONS.

As this Court explained in Hughes Aircraft Co. v.

Jacobson, 525 U.S. 432, 439 (1999), a defined-benefit plan—

unlike the far more common defined-contribution plans (such

as § 401(k) plans), in which an employee’s interest is to a

share of the fluctuating value of a fund’s investments—

promises a predetermined retirement obligation, which does

not vary according to the success of the Plan’s investments.

If a defined-benefit plan is overfunded, “the employer may

reduce or suspend his contributions.” 525 U.S. at 440. See

also Bennett v. Conrail Matched Sav. Plan Admin. Comm.,

168 F.3d 671, 677 (3d Cir.)(participants in employee stock

ownership plan may not bring breach-of-fiduciary-duty

claims because they are not entitled to surplus assets), cert.

denied, 528 U.S. 871 (1999).

This Court in Hughes Aircraft emphasized that “it is essen-

tial to recognize the difference between defined contribution

plans and defined benefit plans,” for in the latter, because the

benefit is predetermined, “the employer typically bears the

entire investment risk and—short of the consequences of plan

termination—must cover any underfunding as the result of

a shortfall that may occur from the plan’s investments.”

525 U.S. at 439.

If the assets of a defined-benefit plan are greater than the

amount of the accrued benefit obligation, calculated on an

actuarial basis, the plan possesses a surplus. Participants in a

defined-benefit plan “have no entitlement to share in a plan’s

surplus.” Hughes, 525 U.S. at 440. The employer may,

among other things, cease making contributions to the plan

until the surplus has been exhausted, id. at 440, or add

10

benefits for a new class of participants. /d. at 442. Existing

participants, in short, have no expectation that a surplus will

persist or be used for their benefit. In the present case, no

shortfall in funding ever occurred; the Plan was at all relevant

times comfortably in surplus. And even the relatively small

loss from the Granite investment was more than made up by

voluntary additional contributions by 3M that exceeded the |

required amount.’ - - |

A. The Decision Correctly Interprets ERISA in

Light of This Court’s Holdings. |

As the Court of Appeals’ opinion pointed out, the decision

here is based on interpretation of the ERISA statute, not on

Article III of the Constitution. See P.C.A. 8a. The decision

reflects that petitioners ultimately could show no injury for

which ERISA provided a claim. The remedy prescribed by

ERISA for violation of the “prudent man” standard is “to

make good to such plan any losses to the plan resulting from

each such breach.” 29 U.S.C. § 1109(a). That is exactly

what already occurred here. The overpayments by 3M to the

Plan are the equivalent—and indeed far exceed—the very

payments petitioners’ complaint, if successful, would have

required. The statute does not “authorize any relief except for

’The petition now adds a new assertion—with no support in the

record—that currently “the Plan is underfunded.” Pet. 24. But the

relevant period, on which the record was made and the case was addressed

by the District Court and Court of Appeals, was 1994-1999. See P.C.A.

38a n.6. Moreover, petitioners’ new assertion, made for the first time in

this Court, is quite incorrect. The Plan has continued to be overfunded by

the measures applied by the courts below, as reflected in its most recent

required annual ERISA reports on Form 5500. Cf. P.C.A. 25a. Unlike the

valuation method used in the SEC filing petitioners rely upon (FAS 87),

these annual reports reflect the surplus funding of the Plan using valuation

methods required by ERISA (AAL and RPA ’94). See P.C.A. 12a, 27a,

29a, 30a. Indeed, petitioners themselves did not propose the FAS 87

method in either the District Court or the Court of Appeals, and neither

court addressed it.

See aaa

11

the plan itself.” Massachusetts Mut. Life Ins. Co. v. Russell,

473 U.S. 134, 144 (1985). To the extent the complaint sought

to make the Plan whole, the Plan already had been made

whole. After being made whole, the Plan had no damage. Cf.

Call v. Sumitomo Bank, 881 F.2d 626, 628 n.4, 632-33

(9th Cir. 1989); Katsaros v. Cody, 744 F.2d 270, 280-81

(2d Cir.), cert. denied sub nom. Cody v. Donovan, 469 U.S.

1072 (1984).*

Even if the test were simply that of Article III, which the

Court of Appeals found unnecessary to decide, it would not

be met by petitioners on the particular circumstances of this

case. Because of the overpayments, petitioners simply have

suffered no injury, a basic requirement of standing under

Article III. See Steel Co. v. Citizens for a Better Environ-

ment, 523 U.S. 83, 103 (1998). Further, another essential for

Article III standing is “redressability”—‘“a likelihood that the

requested relief will redress the alleged injury.” /d.; see also

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).

Here redressability is absent, because the overpayments by

3M left nothing to redress. In another sense, because of the

overpayment, the issue is simply moot. Cf. North Carolina v.

Rice, 404 U.S. 244, 246 (1971); DeFunis v. — 416

U.S. 312, 318 (1974).’

® Although the complaints included a routine request for injunctive and

other appropriate relief, petitioners did not specify particular relief or

challenge its denial in the District Court, and neither that court’s opinion

nor the opinion of the Court of Appeals addressed it. Even if it had been

adequately pleaded and preserved, the only conceivable injunction plain-

tiffs could have sought would be an order directing 3M and the other

respondents to obey ERISA. But ERISA itself already contains such a

command, and a generalized injunction would be not only redundant

but contrary to Fed. R. Civ. P. 65(d) and the principles of equity. See

Granny Goose Foods, Inc, v. Brotherhood of Teamsters, 415 U.S. 423,

444 (1974).

® Vermont Agency v. United States ex rel. Stevens, 529 U.S. 765

(2000), involved a markedly different statute that actually assigned part of

the claim to the plaintiffs. Petitioners had no statutory basis to assert such

12

Because the money the complaint sought (from 3M) would

go to the Plan—and thereby pro tanto reduce the obligation

of 3M to fund the Plan—the suit in substance seeks to impose

on 3M a judgment to pay money for the benefit of 3M, less

the portion that would be captured by attorneys’ fees.

Petitioners argue that ERISA should allow them to sue on

behalf of the Plan. But the Plan obtains no benefit whether

the suit is won or lost. Certainly neither the ERISA statute

nor the limits of standing should be distorted or stretched to

encompass recoveries by attorneys for phantom services. It is

“purely speculative” whether obtaining such relief would

achieve any benefit at all. Simon v. Eastern Ky. Welfare

Rights Org., 426 U.S. 26, 39 (1976); cf. also, e.g., DeFunis,

supra; Hall v. Beals, 396 U.S. 45, 49 (1969). And “a plaintiff

cannot achieve standing to litigate a substantive issue by

bringing suit for the cost of bringing suit.” Steel Co., 523

U.S. at 107. “[W]e are obligated to construe the statute

to avoid such problems.” JNS v. St. Cyr, 533 U.S. 289,

299-300 (2001).

B. The Decision Is Clearly in Accordance With the

Trust Principles Upon Which ERISA Is Based.

ERISA’s provisions “are guided by principles of trust law.”

Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111

(1989); see also Varity Corp. v. Howe, 516 U.S. 489 (1996).

“Congress invoked the common law of trusts to define the

general scope of [fiduciary] authority and _respons-

ibility.” Central States, SE & SW Areas Pension Fund v.

Central Transport, Inc., 472 U.S. 559, 570 (1985). This

a claim here. United Food & Comm'l Workers Union Local 751 v. Brown

Group, Inc., 517 U.S. 544 (1996), addressed only the situation in which

an association seeks to represent its members, exactly the opposite of the

situation here.

13

Court looks to trust law in interpreting the scope of ERISA’s

remedial provisions for breach of fiduciary duty. Mertens v.

Hewitt Assocs., 508 U.S. 248, 255-59 (1993).

Under the common law of trusts, beneficiaries whose

interest in a trust are not injured after an allegedly imprudent

investment of trust assets do not have standing to bring an

action for fiduciary breach. RESTATEMENT (SECOND) OF

TRUSTS, § 214, Comment b (1959)(“A particular beneficiary

cannot maintain a suit for breach of trust which does not

involve any violation of duty to him.”); A. ScoTT & W.

FRATCHER, LAW OF TRUSTS § 214 (4th ed. 1988) (“In order to

maintain a suit . . . the beneficiary must show that his interest

is involved”). Thus, for example, “[a] remainderman cannot

sue for breach of an investment duty resulting merely in a

loss of income.” G. BOGERT & G. BOGERT, LAW OF TRUSTS

AND TRUSTEES § 871 (2d ed. rev. 1982). “[W]here a

common-law principle is well established . . . the courts may

take it as given that Congress has legislated with an expec-

tation that the principle will apply except ‘when a statutory

purpose to the contrary is evident.’” Astoria Fed. Sav. &

Loan Ass’n v. Solimino, 501 U.S. 104, 108 (1991), quoting in

part Isbrandtsen Co. v. Johnson, 343 U.S. 779 (1952).

Petitioners’ claim of imprudent investment clearly would

fail under trust law. As this Court held in Hughes, petitioners

as participants in a defined-benefit plan “have no entitlement

to share in [the] plan’s surplus.” 525 U.S. at 440. The breach

petitioners allege did not affect their interest in receiving their

defined benefits, and it did not reduce assets to which they

were entitled. Consequently, petitioners are not, under trust

law, the appropriate parties to bring suit in these cases.

Moreover, the text and structure of ERISA 29 U.S.C.

§ 1132(a)(2) confirm the expectation that the classes of

actions authorized there would be shaped by existing

principles of law. That section authorizes only suits for

“appropriate relief,” id., thus leaving for the courts, applying

14

existing principles and doctrines of trust law, to identify the

persons situated to seek relief in the circumstances of a

particular case. Cf. FEC v. National Conservative Poiitical

Action Comm., 470 U.S. 480, 486-87 (1985)(statutory author-

ization of actions “appropriate to implement” act precludes

standing for private parties when FEC was the more appro-

priate party to bring suit). And the principles and doctrines of

trust law arise entirely from the doctrines of equity, under

which such a complaint clearly fails.

C. Petitioners’ Interpretation Would Undermine

the Purposes of ERISA.

ERISA’s requirements of adequate funding are designed to

ensure that when workers retire, money will be on hand to

pay the benefits they are owed. Nachman Corp. v. Pension

Ben. Guar. Corp., 446 U.S. 359, 375-76 (1980). To hold

employers liable for unsuccessful investment decisions, as

petitioners seek, even when employers have generously

overfunded the plan, and made extra payments more than

sufficient to offset a loss, would create a perverse incentive.

Instead of encouraging overfunding, it would motivate

employers to hold back, and limit funding to the minimum

required by law, reserving other amounts for potential judg-

ments for fiduciary breach. Further, an employer like 3M,

which already has funded the plan far beyond legal require-

ments, might be encouraged instead simply to cease payments

for a year or two, until a judgment amount (plus interest and

attorneys’ fees) had been paid. In the end, contrary to the

goals of ERISA, retirement plans would receive less, rather

than more, funding. The overall effect would be to impose on

employers—and, ultimately, the plans—the transaction costs

of wholly unnecessary fiduciary litigation, and ultimately to

divert money away from ERISA plans to attorneys.

ERISA was intended to assure adequate funding of pension

benefits, not to be a litigation-generator. It reflects Congress’

“desire not to create a system that is so complex that

15

administrative costs, or litigation expenses, unduly discourage

employers from offering . . . benefit plans in the first place.”

Varity Corp. v. Howe, 516 U.S. 489, 497 (1996). See also

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987) (to

allow punitive damages under ERISA would be “contrary to

the public interest in encouraging the formation of employee

benefit plans”); Alessi v. Raybestos-Manhattan, Inc., 451

U.S. 504, 515 (1981).

Ill. THERE IS NO CIRCUIT CONFLICT.

The conflict supposed by petitioners completely ignores

the unusual facts of this case, on which the decision of the

Court of Appeals entirely depended. There is no reported

case that respondents have been able to discover with cir-

cumstances even close to the present one. None of the three

decisions cited by petitioners—nor any others, to respond-

ents’ knowledge—had any occasion to consider the unusual

situation of a defined-benefit pension plan that was

overfunded, partly as a result of a stream of voluntary

Overpayments by the employer. And all of them concerned

intentional breaches of the fiduciary duty of loyalty—not, as

.. here, a single small, allegedly imprudent, investment that

involved no conscious wrongdoing.

The contrast between the present case and the three cases

cited by petitioners, which involved vastly different facts and

claims, is striking. None_of those cases involved a claim, like

the present one, of negligent breach of the prudent-man

duty. All involved breaches—intentional breaches—of the

fiduciary’s duty of loyalty. All those cases, moreover, were

decided substantially prior to, and hence without the benefit

of, this Court’s decision in Hughes Aircraft Co. v. Jacobson,

525 U.S. 432 (1999). In Hughes this Court focused sharply

on the unique nature of defined-benefit plans. This Court

pointed out that “the employer typically bears the entire

investment risk and—short of the consequences of plan

termination—must cover any underfunding as a result of a

16

shortfall that may occur from the plan’s investments.” 525

U.S. at 439. And this Court emphasized that in the

uncommon realm of defined-benefit plans, participants

simply have no entitlement to or interest in a plan’s surplus

assets. Id. at 440-41.

Brink v. DaLesio, 667 F.2d 420 (4th Cir. 1981), involved a

gross breach of duty of loyalty, in which a plan fiduciary had

diverted part of the employer’s plan contributions to the plan

as a “consultant’s fee,” and in addition had “secretly received

a commission from the insurers who sold coverage to the

funds, and agreed to represent their interests in an adversarial

capacity.” 667 F.2d at 426. The court held that suit was

appropriate on behalf of the plan to recover amounts improp-

erly taken from it. Insofar as the court addressed standing, it

was simply the issue whether participants could intervene

after the suit already had been brought, an issue of no

relevance here.

In Amalgamated Clothing & Textile Workers Union v.

Murdock, 861 F.2d 1406 (9th Cir. 1988), the breach-of-

loyalty claim was that a fiduciary had used plan assets to

drive up the price of stock he owned, then amended the plan

to distribute assets to himself, and then terminated the plan.

The relief the court of appeals ordered was not money

damages, but rather imposition of a constructive trust of the

dishonest fiduciary’s gains. In declaring the fiduciary’s

profits to be held in constructive trust for the benefit of the

plan, the court found it “the only means available to give

effect to the goals of ERISA,” 861 F.2d at 1411, and rejected

the intentional wrongdoer’s “claim that ERISA provides no

remedy to deny the fiduciary these alleged ill-gotten profits,”

id. at 1415. The reason for imposing a constructive trust, the

court emphasized, had nothing to do with whether there was

any loss to the Plan. Rather, it was an equitable remedy to

prevent an intentional wrongdoer from profiting from his

wrongdoing, a remedy designed to deter intentional wrong-

17

doing by fiduciaries. /d. at 1411-12. In the present case, by

contrast, there is no claim of intentional wrongdoing, nor that ~

any fiduciary pocketed any assets belonging to the Plan.

Financial Institutions Retirement Fund v. OTS, 964 F.2d

142 (2d Cir. 1992), alleged a “conflict of interest,” id. at 149,

on the part of plan fiduciaries, pursuant to which they had

made an improper distribution of surplus assets, as a result of

improper influence. Fiduciaries are not likely to sue them-

selves for their own improper self-dealing; hence the partic-

pants were allowed to do so on behalf of the plan. The

present case, of course, involves no claims of self-dealing at

all. In any event, the central holding of the decision was that

there had been no breach and dismissal was proper on that

ground, quite apart from any ERISA standing issue. More-

over, the opinion scarcely mentioned the question whether

there was statutory standing under ERISA, focusing instead

on whether suit was permitted under Article III. See id.

at 1309.

Thus none of the three cases cited by petitioners contains a

conflict, much less a present one. All are markedly different

on their facts from the peculiar situation of the present case,

and all were decided well before this Court’s decision

analyzing defined-benefit plans in Hughes Aircraft Co. v.

Jacobson, 525 U.S. 432 (1999). In the present case, there

were no claims of conflict of interest or improper self-

dealing, and no defendant was enriched by the unsuccessful

investment.

IV. THE RULING CONCERNING - REASON-

ABLENESS OF AN INVESTMENT ADVISER’S

COMPENSATION WAS NOT ERRONEOUS

AND DOES NOT MERIT THIS COURT’S

REVIEW.

Petitioners’ complaint against 3M did not even mention

any claim that the fee paid to an investment advisor was

unreasonable and therefore a “prohibited transaction.” Nor

ls _ ————

18

did their amended complaint. Nevertheless, over objec-

tion they tried to add such a theory at the summary judg-

ment stage, on the theory that 3M had violated ERISA

29 U.S.C. § 1106(b)(1), by allowing an investment manager a

fee based on value of the assets. After full discovery, the

District Court granted summary judgment for 3M, holding

that even if there had been such a claim in the complaint, on

the undisputed material facts petitioners had failed to present

any admissible evidence that the fee was not reasonable; on

the contrary “there is no evidence in the record to support the

claim,” P.C.A. 63a, and “this amount [of compensation] was

reasonable.” P.C.A. 65a. Therefore no actionable violation

had occurred. P.C.A. 66a."°

On appeal, petitioners argued that the fee provision with

the investment adviser violated the prohibition against a

fiduciary dealing with plan assets, whether or not the fees

paid were reasonable. The Court of Appeals had no difficulty

rejecting that argument, based on the plain language of the

ERISA statute:

“Section 1106(b)(1) prohibits a fiduciary from ‘deal-

ing with the assets of the plan in his own interest and for

his own account.’ However, § 1108(c)(2) provides that

‘nothing in section 1106 of this title shall be construed to

prevent any fiduciary from . . . receiving any reasonable

compensation for services rendered . . . in the perform-

ance of his duties with the plan.” 3M introduced uncon-

tradicted expert testimony that the compensation paid to

ACM [the investment adviser] was reasonable.”

P.C.A. 13a (emphasis supplied). “[T]he plain language of

§ 1108(c)(2) sensibly insulates the fiduciary from liability

" Petitioners later added such a claim to their subsequent complaint

against the Pension Assets Committee members, which the District Court

dismissed on other grounds. See Addendum at 6a-7a, infra.

19

if the compensation paid was reasonable.” P.C.A. 14a.

“Moreover, the legislative history of § 1108 does not support

[petitioners’] contention... .” Jd.

All members of the Court of Appeals panel agreed with

this conclusion and that the factual ruling of the District Court

should be affirmed. P.C.A. 14a, 16a. Petitioners now argue

that that ruling is in conflict with Patelco Credit Union v.

Sahni, 262 F.3d 897 (9th Cir. 2001), a case involving

improper self-dealing on the part of a fiduciary in violation of

ERISA 29 U.S.C. § 1108(e)(2). But the record here, as

determined by the District Court and unanimously affirmed

by the Court of Appeals, showed only a fee that was

reasonable and therefore was allowed by the statute, and no

self-dealing. The statute clearly provides that “[nJothing in

section 1106 of this title shall be construed to prohibit any

fiduciary from . . . receiving any reasonable compensation for

services rendered . . . in the performance of his duties with

the plan.” 29 U.S.C. § 1108(c)(2). The Court of Appeals

rejected petitioners’ argument that that provision did not

really mean what it said. P.C.A. 13a-14a.

Moreover, even if there were a difference in reasoning

between the two cases, the issue whether this particular

adviser’s compensation was reasonable or not—an issue not

even pleaded in the principal complaint—is so narrow and

fact-specific as to fall far outside the kinds of cases this Court

considers for certiorari.

20

CONCLUSION

For the reasons stated, certiorari should be denied.

Respectfully submitted,

JOHN D. FRENCH JOHN G. KESTER *

STEVEN L. SEVERSON J. ALAN GALBRAITH

eaeesirsrmueieenin WILLIAMS & CONNOLLY LLP

FAEGRE & BENSON LLP 725 12th Street, N.W.

2200 Wells Fargo Center Washington, D.C. 20005

90 South Seventh Street (202) 434-5000

Minneapolis, Minnesota 55402

(612) 766-7000 Attorneys for Respondents

* Counse! of Record

November 14, 2002

A eR Pe ag el te hee on Me tay! — . —— an ee ee

la

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

Civil No. 99-1481 (JRT/RLE)

CAROL HARLEY, LENORA BANASZEWSKI, MICHAEL PAYTON,

and RICHARD ZOESCH,

Plaintiffs,

Vv.

GUILIO AGOSTINI, MICHAEL J. BARRETT, LARRY E. EATON,

HARRY A. HAMMERLY, RICHARD A. LIDSTAD,

DWIGHT A. PETERSON, and JOHN J. URSU,

Defendant.

ORDER GRANTING DEFENDANTS’ MOTION

FOR SUMMARY JUDGMENT

This putative class action is the second case arising out of

defendant Minnesota Mining and Manufacturing Co.’s

(“3M”) alleged failure to invest prudently the assets of the

3M Employee Retirement Plan (“the Plan”). In the first

action, plaintiffs sued 3M, bringing claims of breach of

fiduciary duty and a prohibited transaction under ERISA, 29

U.S.C. §§ 1001 et seg. The Court certified a class, and on

March 31, 1999, the Court granted 3M’s motion to dismiss or

for summary judgment in part and dismissed the prohibited

transaction claim. On March 29, 2000, the Court granted

3M’s motion for summary judgment on the breach of

fiduciary duty claim and entered final judgment. Meanwhile,

on September 29, 1999, plaintiffs filed this action, which is

substantially similar to the first with the notable exception

that defendants in this action are the individual members of

3M’s Pension Assets Committee (“PAC’’), the body to which

3M delegated its fiduciary responsibilities for overseeing the

2a

investment of the Plan assets. This matter is now before the

Court on defendants’ motion to dismiss or, in the alternative,

for summary judgment. For the reasons set forth below,

defendants’ motion is granted.

BACKGROUND

The facts underlying this action are fully set forth in the

Court’s March 31, 1999 Order entered in the previous case,

see Harley v. Minnesota Mining and Mfg. Co., 42 F.Supp.2d

898, 900-04 (D. Minn. 1999), and the Court will only briefly

summarize them here. The Plan is a non-contributory defined

benefit plan subject to ERISA. 3M is a fiduciary of the Plan

and delegated this responsibility to the PAC. In 1990, the

PAC decided to invest $20 million of Plan assets in Granite

Corporation (“Granite”), a recently created vehicle for

investment in primarily mortgage-related derivatives. The

PAC agreed to have the Granite managers appointed as the

investment managers for the Plan. To compensate the invest-

ment managers, the Plan would pay performance-based

incentive fees equal to 15% of any increase in the value of the

Granite portfolio in excess of the London Interbank Offered

Rate (“LIBOR”’). In 1994, after a sudden rise in interest rates,

Granite’s derivative holdings plummeted in value and Granite

was drained of all its assets, including the Plan investment

and income.

In the previous action, as here, plaintiffs alleged that 3M

breached its fiduciary duties under ERISA by failing to

investigate, monitor, and understand all aspect of the Granite

investment. In its first motion for summary judgment, 3M

contended that because it made voluntary contributions to the

Plan in excess of plan funding requirements, the class could

not establish an essential element of this claim, namely, a loss

to the Plan. After oral argument on that motion but prior to

the Court’s decision, the Supreme Court decided Hughes

Aircraft v. Jacobson, 525 U.S. 432 (1999). In Hughes

3a

Aircraft, the employer used surplus plan assets to fund

newly created early retirement and non-contributory benefit

structures. See id. at 436. Among other claims, the plaintiffs

contended that this use of the surplus violated ERISA’s

vested benefits and anti-inurement provisions. See id. at 439.

The Court concluded that because participants in a defined

benefit plan have no claim to surplus funds, those claims

must fail. See id. at 441-43.

This Court found the Hughes Aircraft analysis instructive

and held that Hughes Aircraft controlled the class’s breach of

fiduciary duty claim. See Harley, 42 F.Supp.2d at 913. Thus,

the Court found that if 3M could show that the Plan had a

surplus, the Granite investment caused no loss to the Plan and

the class could not prevail. See id. at 914. Although the

Court denied 3M’s motion for summary judgment on that

claim at that time due to the incomplete state of the record,

the Court ultimately found, on the basis of the parties’ later

submissions, that the Plan was fully funded. Accordingly, the

Court granted 3M’s motion for summary judgment and

dismissed the action.

ANALYSIS

A. Standard of Review

Summary judgment is appropriate where there are no

genuine issues of material fact and the moving party is

entitled to judgment as a matter of law. See Fed.R.Civ.P.

56(c). Only disputes over facts that might affect the outcome

of the suit under the governing substantive law will properly

preclude the entry of summary judgment. See Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In considering

a motion for summary judgment, a court is required to view

the facts in a light most favorable to the nonmoving party.

See Lomar Wholesale Grocery, Inc. v. Dieter’s Gourmet

Foods, Inc., 824 F.2d 582, 585 (8th Cir. 1987). Summary

judgment is to be granted only where the evidence is such

that no reasonable jury could return a verdict for the non-

4a

moving party. See Anderson, 477 U.S. at 248. The moving

party bears the burden of bringing forward sufficient evidence

to establish that there are no genuine issues of material fact

and that the movant is entitled to judgment as a matter of law.

See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

B. The General Standard of Care Claim

Plaintiffs claim that defendants’ alleged failure to inves-

tigate and monitor the Granite investment and failure to

acquire suffcient knowledge regarding Granite and its invest-

ments constitute a breach of their fiduciary duties under 29

U.S.C. § 1104(a)(1)(A) and (B). Other than the identity of the

defendants, the allegations in plaintiffs’ complaint respecting

this claim are taken nearly verbatim from the amended

complaint in the previous action. Defendants move to dismiss

or alternatively for summary judgment on a number of

grounds, including res judicata, collateral estoppel, plaintiffs’

alleged stipulation not to sue the PAC members, claim

splitting, and ERISA’s statute of limitations, 29 U.S.C.

§ 1113. The Court need not address all these arguments,

because it finds that plaintiffs’ claim is barred by the doctrine

of collateral estoppel.

Under the doctrine of collateral estoppel, relitigation of an

issue is precluded if the following elements are present:

(1) the issue was identical to one in a prior adjudication; (2)

there was a final judgment on the merits; (3) the estopped

party was a party or in privity with a party to the prior

adjudication; and (4) the estopped party was given a full and

fair opportunity to be heard on the adjudicated issue. See

United States v. Gurley, 43 F.3d 1188, 1198 (8th Cir. 1994).

Plaintiffs maintain that the first and fourth elements are not

met in this case. The source of plaintiffs’ argument is

footnote 23 in the Court’s March 31, 1999 Order, in which

the Court stated:

The Court notes that while the Hughes Aircraft analysis

controls in this case, its applicability to other contexts is

Sa

limited. For example, nothing in Hughes Aircraft pre-

cludes recovery of defined benefit plan assests or profits

that have been wrongfully retained by others. Also,

because the analysis in Hughes Aircraft depends on the

relationship between participants in a defined benefit

plan and the employer-sponsor that makes contributions

to the plan, it appears to apply only to fiduciaries that

are employers.

Harley, 42 F.Supp.2d at 914 n.23. Plaintiffs argue that

because defendants in this case are the members of the PAC,

and not the employer, footnote 23 indicates that their lia-

bility is different and the issues in the two cases are thus not

identical.

It is true that the Court, in the previous case, did not need

to decide the precise boundaries between employer and non-

employer liability under Hughes Aircraft. In that sense,

plaintiffs have a colorable argument that the issues in this

case are not identical to the issues in the previous case. But,

just as the Court did not decide this issue previously, it need

not do so now. The Court’s observation in footnote 23 was

not intended to hold out the possibility of liability on the part

of the PAC in a case such as this, where the PAC consists of

the corporate employer-sponsor’s employees, it is undisputed

that the PAC’s role was to fulfill the employer’s fiduciary

responsibilities, there is no allegation or suggestion that the

PAC members were acting outside the scope of their

authority, and it is clear that the corporation itself would

ultimately bear any liability imposed on the members of the

PAC. See 3M Company Bylaws, at 5 (requiring 3M to

indemnify its employees in any action “by reason of the fact

that such person . . . is or was a Director, officer, or employee

of [3M] or serves or served at the request of [3M] any other

enterprise as a Director, officer, or employee’’) (attached as

ex. 8 to aff. of Ahna M. Thoresen). The Court was merely

noting in dicta that there may be cases in which the

6a

relationship between the fiduciary and the participants in the

plan is such that the Hughes Aircraft analysis would be

inapplicable. For example, cases where a plan is managed by

outside, independent advisers, or where the employees to

whom the employer delegated its fiduciary responsibilities

acted outside the scope of their authority, may present

exceptions to Hughes Aircraft. Under the undisputed facts

presented in this case, however, the PAC’s liability is

identical to that of the employer for the purpose of

establishing the required element of a loss to the Plan. As

such, there is an issue in this case identical to the one

previously litigated, namely, whether the Plan has a surplus

as defined in ERISA and Hughes Aircraft. Plaintiffs cannot

prevail in this case without a favorable finding on this issue,

but the Court previously decided this issue against plaintiffs

after they had a full and fair opportunity to litigate it. The

Court therefore concludes that collateral estoppel bars their

new claim of breach.

C. The Prohibited Transaction Claim

Plaintiffs claim that by agreeing to the performance-based

incentive fee, defendants enabled a prohibited transaction in

violation of ERISA, 29 U.S.C. § 1106(a), and thereby

breached their fiduciary duties. In the previous case, 3M

moved to dismiss this claim for failure to plead it, and

alternatively moved for summary judgment on the basis that

the class had failed to present any evidence that the

compensation was unreasonable. Although plaintiffs have

included additional detail respecting this claim in this action,

they conceded at oral argument that their current prohibited

transaction claim is barred by collateral estoppel if the Court

dismissed the previous claim on the merits. To avoid the

application of this doctrine, plaintiffs argue that the Court in

fact dismissed the previous claim for failure to plead.

Plaintiffs’ argument does not comport with the Court’s

decision, which clearly states that “3M is entitled to summary

7a

judgment on the [on the prohibited transaction claim] because

there is no evidence in the record to support the claim.”

Harley, 42 F. Supp. 2d at 910. In addition, the Court

explicitly dismissed the claim with prejudice. See id. at 916.

Accordingly, as plaintiffs agree that a previous dismissal on

the merits mandates the dismissal of their current prohibited

transaction claim, the Court will grant defendants’ motion for

summary judgment with respect to this claim.

ORDER

Based on the submissions of the parties the argumeni of

counsel, and the entire file and proceedings herein, IT IS

HEREBY ORDERED that:

1. Defendants’ motion to dismiss or, in the alter-

native, for summary judgment [Docket No. 8] is

GRANTED; and

2. Plaintiffs’ complaint [Docket No. 1] is DIS-

MISSED WITH PREJUDICE.

LET JUDGMENT BE ENTERED ACCORDINGLY.

Dated: December 7, 2000 /s/ John R. Tunheim

at Minnepapolis, Minnesota. JOHN R, TUNHEIM

Untied States District Judge