Earlier this week, the Supreme Court emphatically reversed the Court of Appeals for the Ninth Circuit in an ERISA stock-drop lawsuit. The Supreme Court concluded that the Ninth Circuit failed to properly apply the rigorous pleading standards of Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___, 134 S.Ct. 2459 (2014), for determining whether a complaint in a stock-drop case alleged sufficient facts to state a claim for breach of fiduciary duty under ERISA. Amgen Inc. v. Harris, 577 U.S. ___, No. 15-278 (Jan. 25, 2016) (Amgen).
The promptness of the Supreme Court’s reversal was striking, and was predicted by the dissent in the Ninth Circuit opinion, Harris v. Amgen Inc., 788 F.3d 916, 922 (2014) (Harris II), denying petition for rehearing en banc and amending and replacing prior opinion [at 770 F.3d 865 (9th Cir. 2014)]. The Supreme Court granted certiorari and reversed Harris II in a single order and per curiam opinion, without the normal requirement of briefs by the parties on the question presented, thus sending a clear message that the Ninth Circuit’s interpretation of Dudenhoeffer was wrong.
The complaint in this litigation had alleged that fiduciaries of 401(k) plans breached their ERISA fiduciary duty of prudence by remaining invested in company stock despite allegedly having inside knowledge of safety concerns over one of the company’s best-selling drugs. When those safety concerns became publicly known and the company’s stock dropped in value, participants with plan accounts invested in a company stock fund experienced a drop in the value of their accounts.
The Supreme Court concluded that the plaintiffs’ complaint lacked sufficient facts and allegations to support their claim that the fiduciaries should have removed company stock from the list of plan investment options. It remanded the case for the district court to determine whether the plaintiffs should be permitted to amend their complaint.
Ninth Circuit Majority Finds Allegations of Fiduciary Breach “At Least Plausible”
The Ninth Circuit’s original opinion in this litigation was Harris v. Amgen Inc., 738 F.3d 1026 (9th Cir. 2013) (Harris I), where the court concluded that the plaintiffs had sufficiently alleged violation of the plan fiduciaries’ duties. Following Harris I, the Supreme Court in Dudenhoeffer vacated a Sixth Circuit decision for plan participant plaintiffs and directed the court to reconsider whether their complaint stated plausible claims for breach of ERISA fiduciary duty. The plaintiffs alleged that plan fiduciaries imprudently remained invested in company stock despite a substantial decline in the price of that stock, causing the stock fund to decline in value by tens of millions of dollars. Plaintiffs asserted in their complaint that the plan’s fiduciaries violated ERISA fiduciary duties by holding and purchasing shares of Fifth Third long after it ceased to be prudent to do so. Dudenhoeffer is discussed in an article that we published shortly after the decision was handed down. After deciding Dudenhoeffer, the Supreme Court granted certiorari as to Harris I and remanded for reconsideration in light of the new pleading standards established in the Dudenhoeffer decision.
Harris II is the first court of appeals ruling on a motion to dismiss in an ERISA stock-drop case following Dudenhoeffer. We discussed the original Harris II decision in an article after that decision was announced. In its amended Harris II decision, the Ninth Circuit panel emphasized that Amgen stock was “artificially inflated” because of alleged material misrepresentations made by Amgen officers. Those same allegations had been found in another lawsuit to state a cause of action for violation of the federal securities laws, which the Harris II court suggested was dispositive of the ERISA fiduciary breach issue. According to the Ninth Circuit panel:
If the alleged misrepresentations and omissions, scienter, and resulting decline in share price in [the securities class-action suit] were sufficient to state a claim that defendants violated their duties under Section 10(b) [of the Securities Exchange Act of 1934], the alleged misrepresentations and omissions, scienter, and resulting decline in share price in this case are sufficient to state a claim that defendants violated their more stringent duty of care under ERISA.
Harris II at 936. The securities class-action suit was Conn. Ret. Plans & Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011), aff’d, Amgen Inc. v. Conn. Ret. Plans & Trust Funds, ____ U.S. ____, 133 S.Ct. 1184 (2013).
The Ninth Circuit in Harris II found nothing new in the standards for ERISA liability articulated by the Supreme Court in Dudenhoeffer. The court stated that “we had already assumed those standards when we wrote our earlier opinion” (Harris I) finding that the plaintiffs had stated an ERISA cause of action. With little analysis, the Ninth Circuit concluded that the plaintiffs had alleged a plausible ERISA cause of action that was not inconsistent with federal securities laws, finding it “at least plausible that defendants could have removed the Amgen [Common] Stock Fund from the list of investment options available to the plans without causing undue harm to plan participants.” Harris II, 788 F.3d at 938. The panel also stated that:
there is no contradiction between defendants’ duty under the federal securities laws and ERISA. Indeed, properly understood, these laws are complementary and reinforcing.
Id . at 940.
Dissent Correctly Predicted “Supreme Court Will Promptly Correct Our Error”
Judge Kozinski − joined by Judges O’Scannlain, Callahan and Bea − dissented from the Ninth Circuit’s denial of rehearing en banc and correctly predicted that the Supreme Court would reverse. Judge Kozinski stressed that Dudenhoeffer “created stringent new requirements for plaintiffs who sue fiduciaries under ERISA for imprudent investment in an employer’s stock.” Harris II, 788 F.3d at 923.
The dissent stated that the panel’s decision conflicted with Dudenhoeffer’s emphasis on scrutinizing the complaint’s allegations and failed to appreciate the crucial language in Dudenhoeffer requiring a complaint to contain plausible factual allegations that a prudent fiduciary could not have continued offering company stock as an investment option in the plan. Judge Kozinski cautioned:
The panel’s decision creates almost unbounded liability for ERISA fiduciaries, plainly at odds with what the Court instructed. Worse still, the panel’s rule will have grave consequences for corporations across America, leaving them acutely vulnerable to meritless lawsuits and subjecting them to novel, judicially-fashioned disclosure requirements that conflict with those of the securities laws. * * * I expect the Supreme Court will promptly correct our error.
Harris II at 923.
The Supreme Court’s Reversal
In its decision this week in Amgen, the Supreme Court rejected the Ninth Circuit majority’s view in Harris II that the complaint met the Dudenhoeffer pleading standards. The Court observed:
The Ninth Circuit, however, failed to assess whether the complaint in its current form “has plausibly alleged” that a prudent fiduciary in the same position “could not have concluded” that the alternative action “would do more harm than good.” * * * The Ninth Circuit’s proposition that removing the Amgen Common Stock Fund from the list of investment options was an alternative action that could plausibly have satisfied [Dudenhoeffer’s] standards may be true. If so, the facts and allegations supporting that proposition should appear in the stockholders’ complaint. Having examined the complaint, the Court has not found sufficient facts and allegations to state a claim for breach of the duty of prudence.
Id . at ____ (slip op. at 3-4). By re-emphasizing the Dudenhoeffer requirement that a stock-drop complaint must contain specific facts and allegations that support the claim of breach of fiduciary ERISA duty, the Supreme Court sends a clear message that such complaints must be rigorously reviewed and that courts cannot accept conclusory allegations of ERISA fiduciary breach.
Dudenhoeffer Requires a “Could Not Have Concluded” Allegation
The Supreme Court reasoned that the complaint failed the Dudenhoeffer pleading standard because the complaint did not allege facts establishing that “a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases * * * or publicly disclosing negative information would do more harm than good to the fund.” Dudenhoeffer, 134 S.Ct. at 2473. Although the Ninth Circuit, in hindsight, concluded that it was “quite plausible” that removal of the company stock fund as an option could be done without undue harm to participants, the Supreme Court makes clear that this is not the standard. Rather, facts must be alleged that a fiduciary “could not have concluded” that the alternative action proposed by the plaintiff would not have done more harm than good. In other words, if a plaintiff alleges that the fiduciaries should have liquidated the company stock fund, the complaint must allege facts showing that the fiduciaries “could not have concluded” that actions short of eliminating the stock fund would be prudent.
The Supreme Court’s prompt and emphatic reversal of Harris II shows that the proper focus of such “stock drop” claims is on the fiduciary’s discretionary judgment. As Judge Kozinski had observed in his dissent in Harris II:
there is no liability if any “prudent fiduciary could have concluded that [the proposed alternative action] would do more harm than good [quoting Dudenhoeffer; emphasis in original].
Harris II, 788 F.3d at 924.
A Huge Win for ERISA Fiduciaries
The Supreme Court’s decision reiterates that lawsuits against ERISA fiduciaries must be based on detailed factual allegations showing breach of fiduciary duty and emphasizes again that a motion to dismiss requires a court to “scrutiny[ize] a complaint’s allegations” in order to “divide the plausible sheep from the meritless goats.” Dudenhoeffer, ____ U.S. at ______, 134 S.Ct. at 2473.