The U.S. Supreme Court’s decision in the latest ERISA stock drop case to reach the high court should be a welcome development for companies with employer stock funds in defined contribution plans. In Amgen v. Harris, 577 U.S. ___ (2016), the Supreme Court made crystal clear that it has reached its limit in giving the Ninth Circuit a chance to correct its mistakes in light of the high court’s landmark ruling in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___ (2014), the seminal ERISA stock drop case. The message was strong and unanimous, as the justices issued a per curiam order summarily reversing the Ninth Circuit’s decision to allow current and former employees of Amgen, Inc. to proceed with their claims that fiduciaries of the company’s eligible individual account plan (EIAP) breached their fiduciary duties when they failed to remove the Amgen Common Stock Fund as a plan investment option after the value of Amgen common stock fell. This is the second time the Supreme Court rejected the Ninth Circuit’s determination that the plaintiffs stated a claim against the plan fiduciaries, which likely contributed to the Court’s frustration, as evidenced by the no nonsense tone of its opinion.
That frustration emanated from the Ninth Circuit’s failure to truly consider the complaint in light of the Supreme Court’s decision in Dudenhoeffer. That decision set forth the new standard for assessing whether a complaint states a claim against fiduciaries who manage plans offering investment in employer stock 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.” Dudenhoeffer, 573 U.S. at __ (slip op. at 18). The Supreme Court directed lower courts to consider “whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded” that the alternative action “would do more harm than good.” Id. (slip op. at 20). And that is precisely what the Ninth Circuit failed to do after the Supreme Court vacated the original Amgen decision and remanded the case for further proceedings consistent with Dudenhoeffer.
The Ninth Circuit explained that it “had already assumed” the standards set forth in the Supreme Court’s decision in Dudenhoeffer when it decided the Amgen case the first time, despite the fact that Dudenhoeffer had not been decided at that time. And yet, it went far beyond what Dudenhoeffer requires of fiduciaries, holding that the complaint satisfied theDudenhoeffer standards because when “the federal securities laws require disclosure of material information,” it is “quite plausible” that removing the Amgen Common Stock Fund as an investment option would not cause more harm than good. See Harris v. Amgen, 788 F.3d 916, 937-38 (2014). That holding flipped Dudenhoeffer on its head, as the Ninth Circuit transposed the negatives embedded in the Supreme Court’s standard. Rather than requiring a plaintiff to allege that a prudent fiduciary “could not have concluded” that the alternative action “would do more harm than good” − in other words, no prudent fiduciary could have thought removing the stock fund as an investment option would do more harm than good − the Ninth Circuit allowed the plaintiffs to proceed by alleging that at least one hypothetical fiduciary could have thought such an action would not do more harm than good.
The Supreme Court not only rejected that misapplication of Dudenhoeffer, but dug its heels in deeper by taking the extraordinary step of holding that the complaint does not contain sufficient facts and allegations to state a claim for breach of the duty of prudence. And with that, the Court refused to give the Ninth Circuit a third bite at the apple. The Court instead left the question of potential amendment of the complaint “to the District Court in the first instance whether the stockholders may amend it in order to adequately plead a claim for breach of the duty of prudence guided by the standards provided in Fifth Third.”
That is a daunting task for several reasons. This decision reiterates the Supreme Court’s skeptical view of breach of fiduciary duty claims premised on the failure to act on the basis of inside information. The Court rejected the argument that federal securities laws require plan fiduciaries to disclose all material information about the company to plan participants invested in company stock. The Court made clear that the facts included in the complaint failed to state a claim for breach of the duty of prudence, and those facts included allegations that the fiduciaries had knowledge of outright fraud, which the plaintiffs contend the fiduciaries should have disclosed and acted upon to remove the Amgen Common Stock Fund as a plan investment option. The Court ultimately held that the Amgen plaintiffs did not satisfy the Dudenhoefferstandard, as they failed to plausibly allege that a fiduciary armed with that knowledge could not have concluded that an alternative action (i.e., removing the Amgen Common Stock Fund as an investment option) would do more harm than good.
That is not to say that allegations of fraud are irrelevant or that removing the fund is not an alternative action that could satisfy the standard. The Court indeed left those questions open. But it appears that mere allegations of fraud are not enough under Amgen. The Court’s adherence to the Dudenhoeffer standard suggests that Plaintiffs must plausibly allege what the fiduciary could have done with the alleged knowledge of fraud and that any action that a prudent fiduciary could have taken on that basis would be both consistent with securities laws and not viewed as more likely to harm the fund than to help it. If that alternative action would violate securities laws or could be viewed by a prudent fiduciary as one that “would do more harm than good,” the standard will not be met.
As we warned when Dudenhoeffer was issued, the Supreme Court’s standard for assessing whether a complaint contains sufficient allegations to plausibly state a claim for breach of the duty of prudence on the basis of inside information is filled with negatives (and sometimes double negatives) to help “divide the plausible sheep from the meritless goats.” The Ninth Circuit and other district courts transposed those negatives and thus transformed the standard in order to allow implausible claims to go forward. The Supreme Court has now made clear that it will have none of that. While the Dudenhoeffer standard is not impossible to satisfy, it is certainly more difficult than moving the “not” around. And while the Amgen decision does not raise the bar, it does reinforce just how high the Supreme Court set the bar in the first place. This is good news for employers with company stock funds in their plans, as the decision underscores the difficult task that opportunistic plaintiffs face in bringing stock drop lawsuits, but the plaintiffs’ bar will nevertheless look for new ways to make these claims stick.