U.S. District Judge Paul Barbadoro said in his opinion that several factors led him to his conclusion, including that section 404(c) is unclear as to whether it can be used to bar a claim based on a fiduciary’s designation of investment options. Barbadoro noted that section 404(c) requires the DoL to adopt regulations, explaining when a participant or beneficiary has sufficient control over his assets to be subject to a section 404(c) defense—but it is unclear whether this can be applied to designated investment options by the fiduciary.

According to the court, the DoL reasonably determined in the preamble to its regulations that losses that result from a fiduciary’s designation decision are neither a “direct” nor a “necessary” result of a participant’s exercise of control over plan assets, and the court pointed out that both the Supreme Court and the 1st Circuit have recognized in similar circumstances that an agency’s reasonable interpretation of its own regulations in a regulatory preamble is entitled to deference.

In the case, participants claim Tyco and other defendants were negligent in designating the Tyco Stock Fund as an investment option in its retirement plan and allowing participants to invest in the fund. The company denied their claims and asserted an affirmative defense based on section 404(c).

The participants claim that the price of Tyco International’s stock was grossly inflated during the class period as a result of undisclosed looting and pervasive accounting fraud by its senior management, which caused them to experience substantial losses when the company’s true financial condition was exposed.

The court order is available here.