Hochstadt v. Boston Scientific Corp. (708 F. Supp. 2d 95, 2010)

MEMORANDUM AND ORDER

DOUGLAS P. WOODLOCK, District Judge.

Before me is a motion seeking preliminary review of a settlement agreement resolving two putative class actions against Boston Scientific Corporation (“Boston Scientific” or the “Company”) and alleged fiduciaries of Boston Scientific Corporation’s 401(k) Retirement Savings Plan (the “Plan”) (collectively, the “Defendants”). Both class actions are based on the allegation that Defendants breached their fiduciary duty to the Plan and to the Plan’s participants, in violation of the Employee Retirement Income Security Act (“ERISA”), by imprudently selecting Boston Scientific stock as an investment, despite their knowledge that the stock price was artificially inflated. The proposed settlement class consists of participants in the Plan whose individual Plan accounts held an interest in Boston Scientific common stock at any time between May 7, 2004 and January 26, 2006 (the “Class Period”). For the reasons set forth more fully below, I will certify the settlement class and authorize the publication of the proposed class notice.

I. BACKGROUND

A. Facts

Boston Scientific develops, manufactures, and distributes medical devices whose products are used in the cardiovascular and endosurgery health care arena. During the Class Period, Boston Scientific administered the Plan in the interest of its participants.

The Plan qualifies as an “employee pension benefit plan” within the meaning of ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A). Participants in the Plan make voluntary contributions and the Company makes matching contributions. Throughout the Class Period, participants could contribute to the Plan between 1% and 25% of their pre-tax annual compensation and between 1% and 10% of their compensation on an after-tax basis each year. Effective January 1, 2005, the Company provided a matching contribution equal to 200% of the employee’s contribution for up to 2% of the employee’s earnings, plus 50% of the next 4% of the employee’s earnings. During the Class Period, the Plan offered approximately ten separate investment options, including Boston Scientific stock.

Plaintiffs allege that Defendants issued several misleading public disclosures, which caused the Company stock to be inflated artificially during the Class Period (the “Inflation Claim”). Plaintiffs further contend that, despite their knowledge that Boston Scientific stock was not a prudent investment for the Plan, Defendants continued to accept the Company matching contributions in Boston Scientific stock throughout the Class Period, thereby causing losses to the Plan’s participants (the “Prudence Claim”).

The alleged misleading disclosures are based on four events. First, Plaintiffs contend that Defendants failed to disclose adequately the 1998 investigation conducted by the Department of Justice (“DOJ”) concerning defective NIR stents. This investigation led the DOJ to file a civil complaint in 2005 charging Boston Scientific with distributing in interstate commerce medical devices that were altered and misbranded between 1998 and 2005 and re-suited in the payment by Boston Scientific of $74 million.

Second, Plaintiffs allege that Defendants misrepresented the seriousness of the litigation with Medinol Ltd., one of Boston Scientific’s suppliers, as to which Defendants agreed to pay a $750 million settlement in 2005.

Third, Plaintiffs contend that Defendants failed to disclose adequately concerns associated with the 2004 recall of TAXUS stent systems when Defendants knew or should have known before the recalls took place that the TAXUS product contained dangerous manufacturing defects, which would lead to massive liabilities adversely affecting the Company stock.

The last subject as to which Defendants allegedly made misrepresentations concerns a series of “warning letters” sent between 2005 and 2006 by the U.S. Food and Drug Administration (“FDA”) to Boston Scientific in connection with FDA violations by several of its manufacturing facilities.

B. Procedural History

In January 2006, Plaintiffs Douglas Fletcher, Michael Lowe, Jeffrey Klunke, and Robert Hochstadt each filed separate class action complaints against Defendants. The four complaints were consolidated before Judge Tauro on April 3, 2006; a consolidated complaint was subsequently filed by Plaintiffs. In re Boston Scientific Corp. ERISA Litig., Civil Action No. 06-cv-10105-JLT (D.Mass.) (“ERISA I”).

On October 10, 2006, Defendants filed a motion to dismiss the Consolidated Complaint. Judge Tauro denied Defendants’ motion in significant part on August 27, 2007. In re Boston Scientific Corp. ERISA Litig., 506 F.Supp.2d 73 (D.Mass.2007). Thereafter, the parties commenced fact discovery.

On March 12, 2008, Plaintiffs Fletcher, Lowe, Klunke and Hochstadt moved to certify the class under Federal Rule of Civil Procedure 23(a) and (b)(1). Klunke and Hochstadt later withdrew from the litigation. However, on June 30, 2008, Hochstadt filed a motion to intervene and asked to be reappointed as a class representative. On November 3, 2008, Judge Tauro denied the motion for class certification and Hochstadt’s motion to intervene; he then dismissed the case because Plaintiffs Fletcher and Lowe lacked Article III standing. In re Boston Scientific Corp. ERISA Litig., 254 F.R.D. 24 (D.Mass.2008). On December 2, 2008, Plaintiffs Fletcher, Lowe, and Hochstadt filed a notice of appeal. In re Boston Scientific Corp. ERISA Litig. (1st Cir. No. 08-2568). The matter is currently stayed in the First Circuit, pending settlement developments.

On December 24, 2008, Plaintiffs Hochstadt and Hazelrig filed the instant action, Hochstadt et al. v. Boston Scientific Corp. et al., Civil Action 08-cv-12139-DPW (D.Mass.) (“ERISA II”), seeking to sidestep the standing issue and the problem of Hochstadt’s failure to reenter the case through intervention, which together ended ERISA I before Judge Tauro. Thereafter, the parties resumed fact discovery where they left off in ERISA I. In doing so, the parties agreed that all documents produced in ERISA I would be deemed produced in ERISA II.

Under the auspices of Settlement Counsel for the First Circuit, counsel for Plaintiffs Fletcher, Lowe, and Hazelrig and the Defendants in September 2009 agreed to settle ERISA I and ERISA II (collectively, the “ERISA Actions”) for an amount of $8.2 million (the “Settlement Amount”) to be paid in cash by Boston Scientific and its insurer, St. Paul Mercury Insurance Company.

On December 1, 2009, Plaintiffs Fletcher, Lowe, and Hazelrig filed a motion for preliminary review, see Note 1 supra, of the Proposed Settlement Agreement, contending that the agreement was an excellent result for the Settlement Class on whose behalf the ERISA Actions were brought. In their motion, they also sought certification of a mandatory class under Rule 23(b)(1) on the basis that the ERISA Actions involved Defendants’ Plan-wide conduct and relief was sought on behalf of the Plan as a whole.

Plaintiff Hochstadt filed an opposition to this motion by Plaintiffs Fletcher, Lowe, and Hazelrig, alleging that Fletcher and Lowe had been found to lack standing to settle the ERISA Actions, that the settlement amount was insufficient and that the non-opt-out provision, the proposed plan of allocation and the class notice were inappropriate.

I held a hearing on January 13, 2010 in connection with my preliminary review of the Proposed Settlement Agreement. During that hearing, I requested the parties to file supplemental briefing on three points: (1) the participation of Plaintiffs Fletcher and Lowe in the class settlement in light of Judge Tauro’s decision that they lacked Article III standing, (2) the proposed plan of allocation, which at the time did not separately take into consideration discrete disclosure events that occurred during the Class Period, and (3) the publication of the report of the independent fiduciary Plaintiff Hazelrig and Defendants agreed to retain to review the settlement agreement.

On February 17, 2010, Plaintiff Hazelrig and Defendants submitted the Amended Stipulation and Agreement of Settlement (the “Amended Settlement Agreement”) now before me. Pursuant to this amended agreement, Plaintiffs Fletcher and Lowe are now excluded from the Settlement Class, leaving Hazelrig the only settlement class representative. The Amended Settlement Agreement incorporates a revised plan of allocation (the “Revised Plan of Allocation”), a copy of which is attached hereto as Exhibit A, which now provides for the payment of settlement proceeds to class members separately based upon discrete disclosure events that occurred during the Class Period. A revised class notice has been prepared reflecting the Revised Plan of Allocation (the “Revised Class Notice”). In addition, Plaintiff Hazelrig and the Defendants have committed to ensure that the report of the independent fiduciary they will retain will be made publicly available at least thirty days before the deadline for objecting to the Amended Settlement Agreement.

II. PRELIMINARY CLASS CERTIFICATION

Before preliminarily determining whether the settlement is fair, I must determine whether to certify the class for settlement purposes. The Amended Settlement Agreement defines the Settlement Class as a non-opt-out class consisting of:

[ A]ll Participants in the Plan for whose individual accounts the Plan held an interest in Boston Scientific common stock at any time during the Class Period. Excluded from the Proposed Class are Douglas Fletcher, Michael Lowe, Defendants, members of the Defendants’ Immediate Families, any officer, director or principal stockholder of Boston Scientific under Section 16 of the Securities Exchange Act of 1934, any entity in which a Defendant has a controlling interest, and their heirs, Successors-In-Interest, or assigns (in their capacities as heirs, Suceessors-In-Interest, or assigns).

Am. Settlement Agreement, ¶ 1.1.29. I first address the standing issue before turning to the requirements of Federal Rule of Civil Procedure 23.

A. Standing

In a class action lawsuit, as in every law suit, “Article III standing is a ‘threshold requirement,’ and the representative plaintiff must demonstrate personal injury in fact to certify a class.” In re Boston Scientific ERISA Litig., 254 F.R.D. at 28. As discussed above, Judge Tauro previously dismissed class certification in ERISA I because the proposed class representatives, Fletcher and Lowe, failed to demonstrate individual injury in fact and therefore lacked Article III standing. Id. at 28-32.

Plaintiff Hochstadt initially relied on Judge Tauro’s ruling to show that Plaintiffs Fletcher and Lowe lacked standing to settle the ERISA Actions. Given that Plaintiffs Fletcher and Lowe are now excluded from the Settlement Class, see Notes 2 and 7 supra, the only issue at this point is therefore whether Plaintiff Hazel-rig has adequate standing to settle the ERISA Actions as class representative.

Hochstadt did not specifically address Hazelrig’s standing in his initial briefing. Rather he merely contended, without adducing any evidence, that “the presently ‘proposed’ representatives are not representative because they did not lose money[,] were not injured.” For his part, Hazelrig asserted without evidentiary support, that he has constitutional and statutory standing to maintain and settle the ERISA Actions because he has suffered a compensable loss. At a further hearing in this matter on April 21, 2010, I directed counsel for Hazelrig to make a submission demonstrating that Hazelrig in fact has a compensable loss, which would support his standing to act as class representative. Counsel has submitted a Declaration from Candace L. Preston, CFA, who assisted crafting the Revised Plan of Allocation. Ms. Preston opined that Hazelrig would have a likely recovery of approximately $1,970.00. This is sufficient to establish standing at this stage. For purposes of this preliminary review, I find that Plaintiff Hazelrig has the requisite standing to settle the ERISA Actions and will therefore focus my analysis on whether the Rule 23 requirements are met in this case.

B. Rule 23

1. Legal Standard

In order to certify a class, “[a] district court must conduct a rigorous analysis of the prerequisites established by Rule 23.” Smilow v. Sw. Bell Mobile Sys., Inc., 323 F.3d 32, 38 (1st Cir.2003) (citing Gen. Tel. Co. v. Falcon, 457 U.S. 147, 161, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982)). In doing so, “the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.” Waste Mgt. Holdings, Inc. v. Mowbray, 208 F.3d 288, 298 (1st Cir.2000) (quoting Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974)). “[W]hen confronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there be no trial.” Id. (quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997)). Nevertheless, “[w]hen a settlement class is proposed, it is incumbent on the district court to give heightened scrutiny to the requirements of Rule 23 in order to protect absent class members.” In re Lupron Mktg. and Sales Practices Litig., 228 F.R.D. 75, 88 (D.Mass.2005) (citing Amchem, 521 U.S. at 620, 117 S.Ct. 2231). “This cautionary approach notwithstanding, the law favors class action settlements.” Id. (citing City P’ship Co. v. Atl. Acquisition Ltd. P’ship, 100 F.3d 1041, 1043 (1st Cir.1996)).

To obtain class certification, the plaintiff must establish the Rule 23(a) requirements of numerosity, commonality, typicality, and adequacy of representation and demonstrate that the action may be maintained under Rule 23(b)(1), (2), or (3). See Smilow, 323 F.3d at 38 (citing Amchem, 521 U.S. at 614, 117 S.Ct. 2231). Here, Hazel-rig seeks to obtain class certification pursuant to Rule 23(b)(1).

2. iRule 23(a)

In light of the First Circuit’s instruction in Smilow that the court to which a settlement is tendered conduct a “rigorous analysis of the prerequisites established by Rule 23,” I address each of Rule 23 requirements, although only the typicality and the adequacy requirements appear to be in dispute.

a. Numerosity

In order to satisfy Rule 23(a)(l)’s numerosity requirement, Plaintiff must demonstrate that “the class [would be] so numerous that joinder of all members is impracticable.” Fed.R.CivP. 23(a)(1). This requirement is easily met here because the Settlement Class consists of approximately 12,000 Boston Scientific employees who held Boston Scientific stock in their Plan accounts during the Class Period.

b. Commonality

Rule (23)(a)(2)’s commonality requirement is satisfied when “there are questions of law or fact common to the class.” FED. R. CIV. P. 23(a)(2). “While at least one common issue of fact or law at the core of the action must shape the class, Rule 23(a) does not require that every class member share every factual and legal predicate of the action.” In re Lupron, 228 F.R.D. at 88. “The threshold of commonality is not a difficult one to meet.” In re Relafen Antitrust Litig., 231 F.R.D. 52, 69 (D.Mass.2005).

In this case, there are a number of common issues of fact and law that the Settlement Class members bear upon in establishing the Defendants’ liability, as well as Plaintiffs’ entitlement to damages. Such questions concern Defendants’ alleged breaches of fiduciary duties under ERISA and their impact on the price of Boston Scientific stock. Accordingly, I conclude that the commonality requirement of Rule 23(a)(2) is satisfied.

c. Typicality

The typicality requirement set forth in Rule 23(a)(3) requires that “the claims or defenses of the representative parties are typical of the claims or defenses of the class.” Fed.R.Civ.P. 23(a)(3). “The representative plaintiff satisfies the typicality requirement when its injuries arise from the same events or course of conduct as do the injuries of the class and when plaintiffs claims and those of the class are based on the same legal theory.” In re Credit Suisse-AOL Sec. Litig., 253 F.R.D. 17, 23 (D.Mass.2008). The typicality inquiry “is designed to align the interests of the class and the class representatives so that the latter will work to benefit the entire class through the pursuit of their own goals.” In re Prudential Ins. Co. of Am. Sales Practice Litig., 148 F.3d 283, 311 (3d Cir.1998). “Rule 23(a)(3), however, does not require that the representative plaintiffs claims be identical to those of absent class members.” In re Credit Suisse, 253 F.R.D. at 23.

Here, Plaintiff Hazelrig was a Boston Scientific employee and his claim arises from the fact he held Boston Scientific stock in its Plan account during the Class Period. Contrary to Hochstadt’s allegations, Hazelrig’s claim is therefore based on the same basic legal theory as the claims of all other class members. This fact is sufficient to support a finding of typicality because I need not determine that Plaintiff Hazelrig’s claims and the claims of the Settlement Class are precisely aligned as to all issues in order to find that Hazelrig has satisfied his burden with respect to the typicality requirement. See In re Tyco Int’l, Ltd. Multidistrict Litig., No. MD-02-1335-PB, 2006 WL 2349338, at *6 (D.N.H. Aug. 15, 2006). Under these circumstances, for purposes of settlement only, I conclude that the claims asserted by Plaintiff Hazelrig are sufficiently typical of the claims of the Settlement Class as a whole to satisfy Rule 23(a)(3).

d. Adequacy

The final requirement articulated in Rule 23(a)(4) requires that the proposed class representatives “fairly and adequately protect the interests of the class.” Fed. R.CivP. 23(a)(4). This entails a two-prong showing: “The moving party must show first that the interests of the representative party will not conflict with the interests of any of the class members, and second, that counsel chosen by the representative party is qualified, experienced and able to vigorously conduct the proposed litigation.” Andrews v. Bechtel Power Corp., 780 F.2d 124, 130 (1st Cir.1985).

The first prong of the test seeks to ensure that the interests of the class representatives are aligned with the interests of absent class members. For essentially the same reasons that Plaintiff Hazelrig’s claims are “typical” of the claims of the Settlement Class, I find that, for purposes of the settlement, Plaintiff Hazelrig’s interests do not conflict with the interests of other class members. Cf. In re Credit Suisse, 253 F.R.D. at 22 (noting that “[t]he requirements of typicality and adequacy tend to merge”). I also find that, unlike Hochstadt’s new counsel, Plaintiff Hazel-rig’s counsel have demonstrated that they are qualified, experienced, and are fully prepared to represent the Settlement Class to the best of their abilities. Accordingly, I conclude that the adequacy requirement is satisfied in this case.

In sum, all of the Rule 23(a) requirements are met.

S. Rule 2S(b)

Plaintiff Hazelrig seeks class certification under Rule 23(b)(1)(B). In addition to satisfying the four elements set forth in Rule 23(a), Rule 23(b)(1) requires that a class action may be maintained if:

(1) prosecuting separate actions by or against individual class members would create a risk of: ...

(B) adjudications with respect to individual class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.

Fed.R.CivP. 23(b)(1)(B). Because Rule 23(b)(1) does not provide opt-out protections, class actions brought under this rule “are often referred to as ‘mandatory1 class actions.” Ortiz v. Fibreboard Corp., 527 U.S. 815, 833 n. 13, 842, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999). Plaintiff Hazelrig argues that certification of a non-opt-out class under Rule 23(b)(1) is appropriate in this case because the ERISA Actions involve Defendants’ Plan-wide conduct and relief is sought on behalf of the Plan as a whole under ERISA § 502(a)(2), 29 U.S.C. 1132(a)(2). In making this argument, Hazelrig relies on the assumption that “[sjuits brought pursuant to this provision are derivative in nature; those who bring suit do so on behalf of the plan and the plan takes legal title to any recovery.” Evans v. Akers, 534 F.3d 65, 70 n. 4 (1st Cir.2008) (citing Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 141, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985)).

Generally, an action “charging ‘a breach of trust by an indenture trustee or other fiduciary similarly affecting the members of a large class’ of beneficiaries, requiring an accounting or similar procedure ‘to restore the subject of the trust’ ” is a classic example of the type of case appropriate for certification under Rule 23(b)(1)(B). Ortiz, 527 U.S. at 833-34, 119 S.Ct. 2295 (quoting Fed.R.Civ.P. 23 advisory committee’s notes). Not surprisingly, therefore, “[i]n light of the derivative nature of ERISA § 502(a)(2) claims, breach of fiduciary duty claims brought under § 502(a)(2) are paradigmatic examples of claims appropriate for certification as a Rule 23(b)(1) class, as numerous courts have held.” In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 604 (3rd Cir.2009); Evans v. Akers, No. 04-11380-WGY, slip op. at 4 (D.Mass. Oct. 7, 2009) (finding class certification appropriate under Rule 23(b)(1)(B) because “[gjiven the Pi