An appeals panel has ruled employee stockholders have no grounds to sue Boeing for tumbling stock values caused by two plane crashes, ruling an outside investment firm handled stocks on behalf of employees, not the aircraft company.
The Aug. 1 decision was authored by Circuit Judge David Hamilton, with agreement from circuit judges Diane Sykes and Kenneth Ripple, of the U.S. Court of Appeals for the Seventh Circuit. Boeing is headquartered in Chicago, but reported in May it planned to move to Arlington, Va.
The class action suit was brought in March 2019 in U.S. District Court for the Northern District of Illinois, by Boeing employees Diane Burke, Blake Parra, Mohammad Farooq Mustafa, Alex Proestakis and Miguel A. Ibarra. The case centers on the Boeing Voluntary Investment Plan and the U.S. Employee Retirement Income Security Act (ERISA).
In 2018 and 2019, Boeing-made 737 MAX airplanes crashed in the Java Sea and in Ethiopia respectively, killing everyone aboard. The 737 MAX aircraft was then grounded worldwide and Boeing soon suspended production of the jetliner. Boeing stock plummeted.
Plaintiffs sued, alleging Boeing had a fiduciary duty to properly handle investments and to announce after the first crash that the 737 MAX was unsafe, but failed to do so. Plaintiffs also alleged Boeing concealed information the 737 MAX was dangerous.
Boeing countered it had no such fiduciary duty, because it contracted with the investment firm Newport Trust Company, to manage investments. As related in court documents, companies with employee stockholders will hand over such management to an independent fiduciary to avoid conflict of interest. Boeing stock amounted to $11 billion.
District Judge Virginia Kendall agreed with Boeing, dismissing the suit in November 2020.
On appeal, Circuit Judge Hamilton also agreed, finding Boeing did not have "any responsibility, authority, or discretion to make investment decisions" and "cannot be liable for breaching fiduciary duties that [it] simply did not have."
Hamilton added, "The delegation of investment decisions to an independent fiduciary means" Boeing did not act in a "fiduciary capacity in connection with the continued investments in Boeing stock."
Hamilton questioned plaintiffs' allegation that Boeing should have quickly told Newport, if not the public, the 737 MAX was in trouble. The judge pointed out federal securities laws do not require "immediate disclosure of all bad news," contrary to what plaintiffs suggested.
Hamilton further asked whether it would have caused "more harm than good" for stock values, if Boeing had come clean to plaintiffs' liking immediately after the first plane crash. As plaintiffs acknowledged, such a "disclosure would have caused 'massive disruptions in the demand for the 737 MAX,' leading to a sharp drop in the value of Boeing stock," Hamilton noted.
As a consequence, "Newport was not a Boeing insider. It was making decisions like any outside investor," according to Hamilton.
"The point of having an independent fiduciary is of course to give the fiduciary independence from the appointing fiduciaries. If the independent fiduciary relies on insider information to make investment decisions concerning the employer’s stock, then the independent fiduciary would become mired in the very conflict of interest that she was appointed to avoid.
"If [Boeing's] Investment Committee — composed of Boeing insiders — had not appointed an independent fiduciary to select and manage the Plan’s investments under these circumstances, we could easily imagine a different case in which plaintiffs alleged that defendants breached the duty of prudence by failing to appoint an independent fiduciary," Hamilton observed.
Plaintiffs have been represented by: Michael Mulder, of The Law Offices of Michael Mulder, of suburban Evanston; James A. Bloom and John Nestico, of Schneider, Wallace, Cottrell & Konecky, of Emeryville, Calif.; and Ellen Noteware and Todd S. Collins, of Berger Montague, of Philadelphia.
Boeing has been defended by Deborah S. Davidson, Christopher Boran, Michael Kenneally and Matthew A. Russell, of the Chicago and Washington, D.C. offices of Morgan, Lewis & Bockius.