Johnson & Johnson Talc Tribulations Spark ERISA Lawsuit

Newark, NJOn January 25, participants in the Johnson and Johnson Savings Plan (the “401k Plan”), filed a class action ERISA lawsuit claiming that the 401k Plan fiduciaries encouraged them to invest imprudently in company stock. The lawsuit, Tarantino v. Johnson and Johnson Pension and Benefits Committee , claims that the value of the stock was inflated because J&J hid the possibility that Baby Powder, its signature product, was contaminated with asbestos. The company allegedly held on to the secret for decades.

The fiduciaries either knew or had reason to know about the deception and failed to act in the interest of participants and beneficiaries. When the truth began to emerge in the course of lawsuits linking Baby Powder to various forms of cancer, the stock price dropped precipitously. Along with all the other harms that followed, the 401k Plan participants lost their retirement savings.

The lie at the root of it all

The Complaint alleges that J&J first became aware of asbestos in the talc used to make Baby Powder as long ago as 1957, more than 60 years ago. Internal documents from the 1960s and 1970s appear to demonstrate both the company’s knowledge of asbestos contamination and the growing fear about the damage this news might do to the reputation of the company and the value of its stock.

J&J reportedly spent years trying to hide what it knew, influence government agencies responsible for setting acceptable limits of asbestos in consumer products and reassure consumers of the safety of its talc products.

The end came suddenly on December 14, 2018 when both Reuters and The New York Times published the results of their investigations.

The consequences are still playing out in lawsuits brought by plaintiffs who link their cancers to Baby Powder and other J&J talc-based products. The ERISA connection is a newer twist and it comes as fresh potential seems to be emerging for so-called “stock drop” lawsuits.

Was it an employee benefit? Or was it for the company?

The primary responsibility of ERISA plan fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and diversify the plan's investments in order to minimize the risk of large losses.

With 401k plans, like the J&J 401k Plan, that generally means that plan administrators must provide a menu of reasonably good investment options among which participants may choose. ERISA does not protect plan participants from investments that simply don’t work out for reasons that no one could have foreseen. It is designed to protect them from being from being offered a poisonous choice.

That distinction can be particularly fraught when a plan offers employer stock or proprietary investment products as investment options. In those situations, an employee’s choice to invest his or her retirement savings in stock or other alternatives linked to the employer’s bottom line may obviously benefit the employer, too.

The question quickly devolves into whether the participant made the choice knowingly, with adequate information and the opportunity to make other reasonable choices. When the value of the stock then plunges, it becomes even more complicated.

New life for stock-drop lawsuits

Stock-drop lawsuits have been difficult to bring precisely because a decline in stock value, by itself, is not sufficient to show a breach of fiduciary duty. In addition, because correcting false representations about the strength of a company may harm plan participants as much if not more than the misrepresentation, itself, the plan sponsor may have no good option for correcting the problem.

Under the Supreme Court’s recent decision in Fifth Third v. Dudenhoeffer, however, plan participants may succeed when they can also demonstrate that there are plausible alternative actions that plan fiduciaries could have taken which would not have violated securities laws and which would not have potentially resulted in more harm than good to the plan and participants. This was the argument made recently in Varga v. General Electric Company, a similar lawsuit concerning serious company misstatements and a company stock option within a retirement plan.

In Tarantino, plan participants claim that the company could have mitigated the harm to them by taking steps to cure the fraud consistent with the requirements of the federal securities laws, thereby making J&J stock an accurately priced, prudent investment again.

It is a difficult argument to make, but may be helped by the company’s long history and the modest rebound in stock value that has occurred since the initial disclosures. Undoing the damage caused by a long-buried lie will be difficult and complicated on many fronts.