In Quan v. Computer Sciences Corporation, Nos. 09-56190, 09-56248, 2010 WL 3784702 (9th Cir. Sept. 30, 2010), the United States Court of Appeals for the Ninth Circuit joined three other circuit courts in expressly adopting a rebuttable presumption that ERISA fiduciaries act prudently by continuing to follow plan terms and allowing plan participants to invest in employer stock. The Ninth Circuit had previously expressed skepticism about adopting such a presumption, known as the “Moench presumption” because it was first articulated in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Nevertheless, in Quan, the court held that the “Moench presumption is fully reconcilable with ERISA’s statutory text.” Applying the presumption, the court affirmed the district court’s grant of summary judgment for the defendants and remanded the case to determine whether to award the defendants their costs.
In this advisory, attorneys from our ERISA Litigation Practice summarize this case and identify important ramifications of the court’s decision.
Quan involved a participant-directed 401(k) plan (the “Plan”) that Computer Sciences Corporation (“CSC”) offered to employees, who contributed to individual investment accounts by selecting from a menu of investment options. The Plan mandated that the CSC Stock Fund be included as an investment offering to allow participants to invest in CSC stock.
The plaintiffs alleged that material weaknesses in CSC’s stock option granting and tax accounting practices caused errors in how CSC stock options were priced, resulting in two financial restatements within seven months. As a result, plaintiffs claimed, CSC’s stock price suffered, undergoing a 12% drop in a single day, which allegedly cost CSC employees and retirees who had invested in CSC stock a loss of over $700 million in retirement savings. The plaintiffs alleged the defendants violated their fiduciary duties to Plan participants by allowing continued investment in CSC stock when it was imprudent to do so, by making misrepresentations about the value of CSC’s stock, and by failing to properly monitor other fiduciaries who administered the Plan.
The district court granted the defendants’ summary judgment motion because, among other reasons, it concluded that the plaintiffs had failed to rebut the Moench presumption that the defendants acted prudently. It held that the plaintiffs presented no evidence that following the Plan’s mandate to offer participants the option to invest in employer securities was unreasonable. The district court noted, however, that the Ninth Circuit had not yet adopted the presumption. The plaintiffs appealed the summary judgment ruling.
In analyzing the imprudent investment claim, the Ninth Circuit began by noting that, to assess whether the defendants imprudently permitted investments in employer stock, the defendants urged it to adopt the Moench presumption. In Moench, the Third Circuit concluded that when a plan’s terms provide that the plan’s primary purpose is to invest in the employer’s securities, “the most logical result is that the fiduciary’s decision to continue investing in employer securities should be reviewed for an abuse of discretion . . . [A]n ESOP fiduciary who invests [plan] assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision.”
The Ninth Circuit recognized that the Third, Fifth, and Sixth Circuits have adopted the presumption and that “[n]o federal appellate court has rejected the Moench presumption on its merits.” The court held that, in light of the purposes of ERISA and Congress’s goal of promoting employee ownership, the Moench presumption strikes the appropriate balance and “provides a substantial shield to fiduciaries when plan terms require or encourage the fiduciary to invest primarily in employer stock.” The court also recognized that while the presumption was rebuttable, participants may “only rebut the Moench presumption by showing publicly known facts that would trigger the kind of ‘careful and impartial investigation’ by a reasonable fiduciary that the plan’s fiduciary failed to perform.”
The holding in Quan represents, if not a reversal, at least a change in course from the Ninth Circuit’s previous holdings. The court had twice previously declined to adopt the presumption, and had even criticized it. In Wright v. Oregon Metallurgical Corp., 360 F.3d 1090 (9th Cir. 2004), the court expressed concern that the presumption was “difficult to reconcile with ERISA’s statutory text” and “seem[ed] problematic to the extent that it inadvertently encourages corporate officers to utilize inside information for the exclusive benefit of the corporation and its employees.”
In Quan, however, the court disregarded these concerns, holding that it was “not persuaded by either of the objections to the Moench presumption raised in Wright, . . . [and] that the Moench presumption is fully reconcilable with ERISA’s statutory text and does not encourage insider trading, when properly formulated.” The court clarified that the earlier “objection to adopting the Moench presumption in Wright was that it was not sufficiently deferential to or protective of fiduciaries, not that it placed too great a burden on those asserting breach-of-fiduciary-duty claims.”
Applying Moench to the facts of Quan, the court affirmed the district court’s holding that the plaintiffs had failed to overcome the Moench presumption. The court identified several reasons why the plaintiffs’ evidence was insufficient. These included that there was no evidence that the defendants failed to use reasonable methods to investigate the merits of the investments; the one-day drop in CSC’s stock price was insufficient to suggest to a reasonable fiduciary that it was an imprudent investment; and the plaintiffs failed to identify any “red flags” that the fiduciaries failed to investigate properly.
The court also affirmed summary judgment on the plaintiffs’ misrepresentation claim because the plaintiffs failed to establish any misrepresentations that were “material,” and remanded the case only so the district court could determine whether the defendants could recover their costs under Federal Rule of Civil Procedure 54 as the prevailing party.
The Ninth Circuit’s decision to join other circuits in adopting the Moench presumption is an important development in ERISA litigation, especially in light of the court’s earlier criticisms of the presumption. By adopting the presumption, the Ninth Circuit has clarified the standards for presenting a viable breach of fiduciary duty claim in the employer stock context, a standard that is in line with the ERISA jurisprudence that has developed in other circuits, and it has enhanced the uniformity of employee benefits law, one of ERISA’s chief goals. The decision also may influence the remaining circuits that have not yet expressly adopted the presumption; the Second Circuit, for example, is currently considering that question in two pending appeals, Gray v. Citigroup Inc., No. 09-3804-cv (2d Cir.) and Gearren v. McGraw-Hill Cos., 10-934-cv (2d Cir.).
The court’s decision is a positive development for fiduciaries to ERISA plans that require offering employer stock as an investment option, because courts applying the Moench presumption often conclude that plaintiffs have failed to overcome it and their claims fail accordingly. However, the law in the Ninth Circuit will continue to develop in this area. Courts evaluating claims of imprudent investment in employer stock must still consider a variety of issues that are not clearly resolved by Quan, such as how the presumption should be applied, at what stage of the litigation it ought to be applied, and what allegations or evidence will be necessary to overcome it.