As a case that has lasted fifteen years reaches its likely conclusion, the Fourth Circuit Court of Appeals has clarified the “loss causation” standard applicable to claims of ERISA fiduciary breach involving non-employer stock. In Tatum v. RJR Pension Investment Committee, No. 16-1293, 2017 WL 1531578 (Apr. 28, 2017), the court made clear that a defendant fiduciary that breaches its duty of prudence can successfully defend against a fiduciary breach claim by demonstrating that a prudent fiduciary would have ultimately reached the same decision. While the fiduciaries in this case managed to escape liability, this “would have” test is a high bar for fiduciaries to meet—certainly higher than the “could have” standard for which the defendants advocated, as explained further below.
The facts that led to the case are as follows: In 1999, the company then known as RJR Nabisco, Inc. spun off its tobacco business (RJR) from its food business (Nabisco). After the spin-off, RJR’s pension plan still held Nabisco stock as an investment, and the plan’s fiduciaries decided to divest the plan of Nabisco stock within six months. Nabisco stock fell steadily in price through the time when it was divested by the RJR plan, but in the several months following divestment, Nabisco stock prices increased substantially. In this so-called “reverse stock drop” case instituted in 2002, a class of plan participants sued RJR and the plan fiduciaries, alleging that the decision to sell off plan investments in Nabisco stock violated the fiduciary duty of prudence and caused losses to the participants who then could not realize the increased value of the Nabisco stock price.
The case was appealed three different times to the Fourth Circuit Court of Appeals. Ultimately on April 28, 2017, a divided panel of the Fourth Circuit affirmed the latest opinion of the United States District Court for the Middle District of North Carolina, holding in favor of RJR and the plan fiduciaries.
The district court concluded, following a lengthy trial, that the plan fiduciaries did breach their duty of procedural prudence when deciding to remove Nabisco stock from the plan, because they did not perform a proper investigation. However, there was no liability because the named plaintiff could not prove loss causation; the fiduciaries’ breach did not cause plan losses because a hypothetical prudent fiduciary would have made the same decision. The majority of the Fourth Circuit panel affirmed.
There was significant debate between the parties about whether the defendant fiduciaries should have to show that a prudent fiduciary “would have” made the same decision, or only that a prudent fiduciary “could have” done so. Not surprisingly, the plaintiff argued for the “would have” standard—a higher bar for fiduciaries to meet. The United States Department of Labor filed an amicus brief advocating for this higher standard as well, which the Fourth Circuit found persuasive. The defendants advocated for the lower “could have” standard. The Fourth Circuit made clear that “the proper standard [is] what a prudent fiduciary ‘would have’ done.” 2017 WL 1531578, at *5 n.5.
In reaching its conclusion about the applicable legal standard, the Fourth Circuit was careful to note that this case addressed loss causation for non-employer single-stock funds—once Nabisco was a separate company, its stock was no longer RJR employer stock. The recent Supreme Court cases of Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), and Amgen, Inc. v. Harris, 136 S. Ct. 758 (2016), on the other hand, focused on applicable standards for fiduciary breach claims relating to an employer’s own stock and fiduciaries with insider information.
This decision makes clear that even an imprudent fiduciary—one who makes a decision about plan assets without careful investigation or consideration—can avoid liability, but only if he or she shows that a prudent fiduciary, after taking those steps, would have done the same thing. While this provides an “out” for some fiduciaries who have neglected their duty of procedural prudence, it requires both facts supporting their decision and the satisfaction of a heavy legal burden. Of course, the best practice for fiduciaries considering whether to buy or sell stock in retirement plans is to undertake a careful, thorough, and well-documented investigation, such that there can be no breach of their duty of prudence in the first place. In the absence of facts to support any breach of fiduciary duties, fiduciaries need not hang their hats on loss causation arguments.
In its opinion, the Fourth Circuit reached a few ancillary legal holdings that may assist fiduciaries in future cases:
- First, the court emphasized that fiduciaries must be allowed to rely on current stock prices under the efficient market theory (at least absent “special circumstances”). No one predicted the event that ultimately led to the large increase in Nabisco’s stock price following divestment (an unexpected purchase offer leading to corporate restructuring). Fiduciaries cannot be expected to predict the future.
- Second, the court rejected the plaintiff’s argument that fiduciaries should need more compelling reasons for divestment decisions, rather than investment decisions. The same standards apply when considering whether fiduciaries complied with their duties.
- Finally, in a holding of note, the Fourth Circuit stated that plan documents do not trump fiduciaries’ overall duty of prudence. The court explained that divestment of the Nabisco stock was technically not allowed under the then applicable plan documents. Due to a procedurally invalid plan amendment, the plan documents required that the Nabisco stock fund remain frozen (i.e., no purchases or sales could occur) at the time the fiduciaries divested. The Fourth Circuit held that the district court properly considered this, and held that a prudent fiduciary, having considered those plan documents along with all facts and circumstances, still would have decided to divest. The opinion stated that ERISA plan documents are important and inform a court’s decision regarding prudence, but those documents cannot trump the duty of prudence. Countless ERISA cases, including from the Supreme Court, emphasize the importance of ERISA plan documents and that their terms must be followed, but this decision reminds fiduciaries that they cannot blindly follow plan documents if it would be imprudent to do so.
The plaintiff has requested rehearing en banc before the Fourth Circuit.