On January 25, 2016, in Amgen, Inc. v. Harris, 2016 WL 280886, the Supreme Court sent a strong message to the lower courts, plaintiffs and ERISA fiduciaries that pleading standards for breach of fiduciary duty prudence claims in the face of publically-traded employer stock losses are very tough to satisfy. That is important, because absent compliance with those standards, the ERISA plan is not confronted with expensive court discovery and a correspondingly high litigation settlement demand.
To refresh, in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014), the Supreme Court overturned a near uniform lower court presumption of fiduciary prudence. As we noted at the time, however, there was much in Dudenhoeffer that made it easier for fiduciaries to dismiss stock drop claims without the need for any discovery. The Dudenhoeffer Court created these heightened pleading rules:
- The Court said that Congress wants to encourage the establishment of employer stock funds (commonly, ESOPs), and that Congress “is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat [ESOPs] as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establishment and success of these plans.” This passage could be cited to the Department of Labor, which, for years, has exhibited a bias against ESOPs.
- The Court said that plaintiffs should lose motions to dismiss if they merely allege that the fiduciaries should have taken action to sell publically-traded company stock in light of publicly available information. The Court said: “[W]here a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” (Emphasis added.)
- The Court said that plaintiffs will not survive a motion to dismiss a claim based on inside information without detailed allegations: “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.” (Emphasis added.)
- The Court said that plaintiffs cannot survive a motion to dismiss without specific allegations of conduct the fiduciaries should have undertaken: “[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position 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.” (Emphasis added.)
The Court of Appeals for the Ninth Circuit did not understand how high the Supreme Court had set the pleading standard involving employer stock. In Amgen, Inc. v. Harris, the Ninth Circuit overturned a lower court’s motion to dismiss a publically-traded employer stock drop claim despite no facts in the pleadings that either plausibly suggested the “special circumstances” necessary to second guess the market or that any prudent fiduciary would have removed the employer stock fund.
Now, in a 9-0 decision, the Supreme Court is having none of what the Ninth Circuit handed out, finding that the Ninth Circuit “failed to properly evaluate the complaint.” The Ninth Circuit had determined that it was “quite plausible” that removing the employer stock fund would not cause undue harm to participants. The Supreme Court found that the complaint must allege, with specificity, much more -- that a prudent fiduciary in the same position could not have concluded that the alternative action (e.g., removing the employer stock fund) would do more harm than good.
It is easy to imagine why a prudent fiduciary would retain a publically-traded employer stock fund even in a significantly declining market. There probably will be no special circumstances suggesting that the market price of the stock is wrong and that selling the stock will not make matters worse. When it comes to publically-traded stock funds in ERISA plans and the ERISA duty of fiduciary prudence, therefore, plaintiffs will have a hard time opening the door to expensive discovery.