In a recent per curiam order granting the plan fiduciaries’ petition for certiorari and reversing the Ninth Circuit, the United States Supreme Court made clear that it expects lower courts to faithfully apply the pleading requirements for ERISA “stock-drop” cases as articulated in the Court’s earlier opinion in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014). This is welcome news for stock-drop defendants, who should still have a meaningful opportunity to defeat specious cases at the motion-to-dismiss stage.
The Supreme Court’s January 25 per curiam ruling in Harris v. Amgen marks the second time the Court rejected a Ninth Circuit ruling reviving the Amgen plaintiffs’ putative class action complaint against plan fiduciaries responsible for overseeing the Amgen employee stock fund. The first time, in June 2014, the Supreme Court vacated the Ninth Circuit’s reversal of a district court order that dismissed the plan participants’ complaint based in part on the so-called “presumption of prudence” (or “Moench presumption”). (In specified circumstances, this presumption had effectively protected employee stock ownership plan (ESOP) fiduciaries from ERISA liability in price decline cases for nearly two decades prior to the Fifth Third decision.) The Court then remanded the case to the Ninth Circuit with instructions to revisit the plaintiffs’ complaint allegations in light of the new pleading guidance set out in Fifth Third, which had just been decided. On remand, the Ninth Circuit again upheld the viability of the complaint, which claimed that the fiduciary defendants improperly allowed the plan to continue to purchase and hold Amgen stock while knowing that the stock price was artificially inflated. In doing so, the Ninth Circuit explained that its original opinion “had already assumed” the standards for pleading ERISA fiduciary liability that the Supreme Court subsequently introduced in Fifth Third.
In its latest Amgen ruling, the Supreme Court unambiguously expressed its view that the Ninth Circuit did not diligently follow the Court’s June 2014 remand instructions. The Court first held that “the Ninth Circuit failed to properly evaluate the complaint,” which the Court found did not contain “sufficient facts and allegations” to state a claim against the plan fiduciaries. The Court then determined it would “leave to the District Court in the first instance whether the stockholders may amend [the complaint] in order to adequately plead a claim for breach of the duty of prudence guided by the standards provided in Fifth Third.” Amgen Inc. v. Harris, No. 15-0278 (Jan. 25, 2016 slip op., at 3-4). Thus, the Court’s Amgen message is clear: the Fifth Third pleading standard has substantive teeth and must be rigorously applied by the lower courts when evaluating a fiduciary defendant’s motion to dismiss in an ERISA stock-drop case.
To fully appreciate the significance of the Court’s Amgen order, we must return briefly to the Court’s opinion in Fifth Third. As a threshold matter, the Fifth Third Court ruled that the long-followed presumption of prudence in favor of ESOP fiduciaries’ stock purchase and hold activities has no support under ERISA. According to the Court, no such presumption should be applied at the pleading stage or otherwise in ERISA stock-drop cases. Fifth Third, 134 S. Ct. at 2467 (“In our view, the law does not create a special presumption favoring ESOP fiduciaries.”). “Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.” Id. at 2463 (citing 29 U.S.C. § 1104(a)(2)). Moreover, the Court stated, ERISA “makes clear that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary.” Id. at 2468 (citing 29 U.S.C. §§ 1104(a)(1)(D),1110(a)).
With the presumption jettisoned, the Fifth Third Court turned to a discussion of the stock-drop plaintiff’s affirmative pleading obligations. The Court laid out several important “considerations” for the lower courts to take into account when applying the Twombly/Iqbal “plausibility” standard to a duty-of-prudence claim in a stock-drop case. The guidance that would prove most important to the recent outcome in Amgen related to the plaintiffs’ claim that Fifth Third’s ESOP fiduciaries failed to act prudently based on nonpublic information that was allegedly available to them because they were Fifth Third insiders. The Court observed:
To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.
Fifth Third, 134 S. Ct. at 2472 (emphasis added). In this respect, the Court further advised that lower courts should evaluate whether the complaint has plausibly alleged that a prudent fiduciary could not have concluded that “stopping purchases – which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment – or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.” Id.
Like the plaintiffs in Fifth Third, the Amgen plaintiffs allege a “nonpublic information” or “insider” fiduciary claim. Thus, the Amgen plaintiffs must overcome the “[no] more harm than good” pleading hurdle to sustain their complaint. The Supreme Court has already ruled, contrary to the Ninth Circuit, that the plaintiffs failed to satisfy this hurdle in their current complaint. Based on the Supreme Court’s latest directive, it will be up to the district court to decide whether the Amgen plaintiffs will get another opportunity to do so through an amended complaint.