In its June 2014 decision in Dudenhoeffer v. Fifth Third Bank,1 the U.S. Supreme Court unanimously declined to recognize a “presumption of prudence” that had favored retirement-plan fiduciaries faced with allegations of breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”). The so-called Moench presumption, named for the 1995 case that introduced it,Moench v. Robertson,2 had, prior to Dudenhoeffer, helped fiduciaries obtain dismissal of numerous allegations of breaches of fiduciary duty with respect to the acquisition and holding of employer stock by a retirement plan.
Generally, under Dudenhoeffer, (i) a plan fiduciary will ordinarily not be considered imprudent for relying upon the market price of a publicly traded stock as indicating a fair value for the stock, and (ii) it was confirmed that ERISA does not require a fiduciary to act upon inside information in violation of U.S. securities laws. Regarding this latter point, the Court announced a rule under which the lower courts should “consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that [alternative action proposed by the plaintiff to be taken by the fiduciary] would do more harm than good” to the plan.3
We have previously discussed Dudenhoeffer here and here, and you may wish to refer to those discussions for additional background. In particular, we have suggested that the precise impact ofDudenhoeffer on plan sponsors, plan fiduciaries and overall litigation relating to drops in the value of company stock held under ERISA-governed retirement plans would develop over time. We suggested that, although the Supreme Court declined to adopt the pro-fiduciary Moench presumption, “defendants may well be heartened by certain pronouncements in the Dudenhoeffer decision that potentially could make it more difficult for plaintiffs to prevail.”
Amgen Inc. v. Harris,4 decided by the Supreme Court earlier this week on January 25, 2016, is the most recent chapter in this saga. Under the latest Amgen decision, the “more harm than good” rule emerges as a critical aspect of the Dudenhoeffer analysis.
In Amgen, the plaintiffs were former Amgen, Inc. (“Amgen”) employees who participated in one or more retirement plans that included Amgen stock as an investment option. The value of Amgen stock fell, and plan participants filed a class action alleging that the plan’s fiduciaries breached their duties under ERISA by allowing the plan to purchase and hold Amgen stock despite knowing that the stock price was artificially inflated due to undisclosed improper off-label drug marketing and sales. The district court granted Amgen’s motion to dismiss but, in 2013, the U.S. Court of Appeals for the Ninth Circuit reversed.5Following Dudenhoeffer, the Supreme Court vacated the Ninth Circuit’s 2013 reversal and remanded the case for reconsideration in light of Dudenhoeffer.6
On the initial remand from the Supreme Court, the Ninth Circuit in 2014 again reversed the District Court’s dismissal of the complaint, dispensing with concerns under Dudenhoeffer’s “more harm than good” standard by stating that it was “quite plausible” that the fiduciary defendants could have removed the company’s stock from the list of investment options “without causing undue harm to plan participants.”7That decision by the Ninth Circuit was appealed to the Supreme Court.
In a strong rebuke to the Ninth Circuit, issued less than two years after Dudenhoeffer was decided, the Supreme Court vacated the Ninth Circuit’s 2014 decision, stating that “the Ninth Circuit failed to properly evaluate the [Amgen] complaint” in light of Dudenhoeffer. The Supreme Court criticized the Ninth Circuit for not properly applying the requirement that plaintiffs “plausibly allege” that the fiduciaries “could not have concluded” that the alternative action proposed by the plaintiffs “would do more harm than good” for the plan.8
Although it may not have immediately been apparent from the Dudenhoeffer decision how much of an impediment the “more harm than good” standard would be for plaintiffs in so-called “stock drop” cases, theAmgen decision seems to make clear that the standard has both substantive and procedural significance. The Supreme Court emphasized that the complaint must not only allege that the fiduciary could have pursued an alternative path consistent with the securities laws, but must do so “plausibly,” by laying out “sufficient facts and allegations.”9 While it still remains to be seen just how Dudenhoeffer, now bolstered by Amgen, will affect the trajectory of ERISA “stock drop” litigation, the Court at the very least seems to have solidified the threshold that the plaintiffs in any given case may need to reach at the pleadings stage in order for the case to continue.10