On May 25, 2012, the United States Court of Appeals for the Sixth Circuit affirmed the dismissal of a class representative’s putative ERISA class action against KeyCorp and related defendants because the proffered “class representative” could not demonstrate that she suffered any actual injury from the alleged breach of fiduciary duty and, therefore, lacked standing. See Taylor v. KeyCorp, No. 10-4163, 2012 WL 1889283 (6th Cir. May 25, 2012).

In KeyCorp, the putative class representative, Ann Taylor (“Taylor”), asserted that during the class period, the defendants breached their fiduciary duties by failing to disclose and/or misrepresenting KeyCorp’s allegedly inappropriate lending and tax practices. Taylor alleged that these breaches of fiduciary duty caused KeyCorp stock to become unduly risky and artificially inflated. The United States District Court for the Northern District of Ohio dismissed the complaint for lack of subject matter jurisdiction.

On appeal, a three judge panel of the Sixth Circuit noted that, in order to have standing to pursue the lawsuit, Taylor must establish that she was actually injured by the defendants’ alleged conduct. The Sixth Circuit noted that Taylor’s trading history revealed that she sold over 80% of her KeyCorp holdings at a time when she claimed that the stock was artificially inflated. Therefore, Taylor was able to sell her KeyCorp holdings for more money than they were actually worth (if her allegations in the complaint were true). As a result, Taylor actually benefitted from the defendants’ alleged breach of fiduciary duty.

Taylor disputed the district court’s holding that an “out-of-pocket” loss is an appropriate measure for her alleged injuries and contended that the Court should apply an alternative-investment theory. Specifically, Taylor alleged that she would have made more money on her investments if her holdings had been transferred away from KeyCorp stock and placed in the S&P 500 index. The Sixth Circuit rejected the alternative-investment theory, finding it to be inappropriate for this case. The Court noted that “damages based upon an entirely different investment vehicle, such as the S & P 500, are not fairly ‘traceable’ to the defendants' breach. Indeed, to allow plaintiffs the benefit of an alternative, more lucrative investment, would not advance the policies underlying ERISA.” KeyCorp, 2012 WL 1889283 at *3.

Taylor and the Department of Labor (which submitted an amicus curiae brief in this case) also argued that, even if the Court were to apply an “out-of-pocket” loss assessment to Taylor’s alleged injury, Taylor could still establish “actual injury” sufficient to confer Article III standing because she suffered a loss on the KeyCorp stock that she obtained through the company’s matching program. The thrust of this argument was that, even if Taylor benefitted from the alleged artificial inflation regarding her sale of KeyCorp stock, the shares that she obtained thereafter were purchased at an inflated price and sold at a loss. The Sixth Circuit held that Taylor’s gains and losses during the class period must be netted, to determine whether Taylor suffered actual injury. Based on Taylor’s net gains and losses during the class period, the Court determined that she did not suffer an actual injury and, therefore, did not have standing to pursue the lawsuit.

The key takeaway from the Sixth Circuit’s decision in Taylor v. KeyCorp is that allegations that stock prices were “artificially inflated” can prove to be tricky for putative class representatives who have sold their company stock at any point during the class period or benefitted in any way from holding company stock during the class period. The Sixth Circuit’s decision underscores the necessity of an actual injury or out-of-pocket loss that is clearly traceable to the alleged breach of fiduciary duty in order for a plaintiff to have standing and survive a motion to dismiss.