In Dudenhoefer v. Fifth Third Bancorp, No. 11-3012, 2012 WL 3826969 (6th Cir. Sept. 5, 2012), the Sixth Circuit reversed the dismissal of an ERISA class action against the company, its CEO, and other officers that alleged defendants breached their fiduciary duties by allowing employees to invest in the company’s stock, even though defendants allegedly knew the stock was at risk because of the company’s subprime lending activity. Of particular note, the court became the first appeals court to hold that plaintiffs stated a claim that defendants violated their fiduciary duties by expressly incorporating by reference certain SEC filings into the plan’s Summary Plan Description.
This is the latest in a string of Sixth Circuit decisions that have been favorable to plaintiffs in ERISA class actions alleging breaches of fiduciary duty. In this advisory, attorneys from our ERISA Litigation Practice summarize this case and identify important ramifications of the court’s decision, which could increase the litigation risks for many publicly-traded companies that allow employees to invest in company stock through a benefit plan.
Plaintiffs alleged that Fifth Third Bancorp sponsors a defined contribution retirement plan (the “Plan”) for employees in which participants make voluntary contributions from their salaries and direct the Plan to purchase investments for their individual accounts from several investment options. Among the options was a fund that allowed participants to invest in Fifth Third stock. Fifth Third matched 100% of the first 4% of each Plan participant’s contribution, and those matching contributions were initially invested in company stock.
During the class period, from July 19, 2007 to September 18, 2009, a significant amount of the Plan’s assets became invested in Fifth Third stock. At the same time, plaintiffs alleged Fifth Third’s loan portfolio became increasingly at risk because the company expanded its subprime lending. In connection with the subprime lending and financial crisis, the price of Fifth Third stock declined 74% during the class period. The Plan allegedly lost tens of millions of dollars due to the investments in Fifth Third stock.
Plaintiffs claimed that defendants breached their fiduciary duties by allowing significant investment in Fifth Third stock in the Plan and continuing to offer Fifth Third stock as an investment option when they knew it was an imprudent investment. Plaintiffs further alleged that defendants breached their duties by failing to provide complete and accurate information to Plan participants about the risks associated with investing in Fifth Third stock. In particular, plaintiffs claimed defendants misled Plan participants by incorporating by reference Fifth Third’s allegedly inaccurate SEC filings into the Summary Plan Description (“SPD”) for the Plan.
The district court granted defendants’ motion to dismiss under Fed. R. Civ. P. 12(b)(6) in 2010. As to the imprudent investment claim, the district court determined that defendants benefitted from a presumption that their decision to allow investments in employer securities was reasonable and that plaintiffs’ allegations failed to overcome that presumption of reasonableness. As to the alleged misrepresentation claim, the district court held that defendants did not breach their fiduciary duties by incorporating SEC filings into the SPD because the SEC filings were not prepared as part of defendants’ fiduciary capacity. Any alleged misstatements and omissions contained in the filings could not be actionable under ERISA.
The Sixth Circuit reversed the district court on both the imprudence and the misrepresentation claims. First, it addressed whether the district court properly applied the presumption at the motion to dismiss stage. Under the presumption, a fiduciary’s decision to allow investments in employer securities is presumed to be reasonable, and a plaintiff may rebut the presumption of reasonableness in the Sixth Circuit by showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision. The district court’s dismissal of plaintiffs’ complaint based on the presumption predated the Sixth Circuit’s decision in Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012), which held that the presumption cannot apply at the motion to dismiss stage. Following Pfeil, the Sixth Circuit reiterated that at the motion to dismiss stage plaintiffs merely must allege facts sufficient to state a plausible claim that a fiduciary breached its duty and that a causal connection exists between the breach and the harm suffered by the plan.
Because the presumption did not apply, the court concluded that plaintiffs stated a claim for relief sufficient to survive a motion to dismiss. The court reversed the dismissal of this claim because plaintiffs alleged that defendants knew of the industry warnings and publications regarding the risks associated with subprime lending and they should have investigated whether Fifth Third’s stock was still a prudent investment because they also knew that Fifth Third was engaged in subprime lending.
Next, the court rejected the district court’s holding that plaintiffs could not state a misrepresentation claim under ERISA. The Sixth Circuit’s opinion focused on the district court’s conclusion that defendants were not acting in a fiduciary capacity when they incorporated by reference Fifth Third’s SEC filings into the SPD. The court stated that no circuit court had yet decided this question. The SPD is a fiduciary communication ERISA mandates, but the Sixth Circuit observed that courts have varied on whether incorporating non-fiduciary communications into Plan documents constitutes a fiduciary act.
Here, the court held that defendants were acting in an ERISA fiduciary capacity by expressly incorporating the SEC filings into the SPD because defendants were using the SPD to provide information about benefits to the Plan participants. First, the court noted that the question here related not to merely preparing and filing statements with the SEC, but deciding to incorporate them into Plan communications. The court then rejected the district court’s reliance on Varity Corp. v. Howe, 516 U.S. 489 (1996). It stated that that case addressed employer statements made outside of plan administration, whereas here the statements were included in communications made to Plan participants. The court also distinguished the Fifth Circuit’s opinion in Kirschbaum v. Reliant Energy, Inc., 526 F.2d 243 (5th Cir. 2008). The Sixth Circuit stated that that decision was inapplicable because the issue there was incorporating SEC filings into a plan’s prospectus – which the court said is not disseminated to plan participants like an SPD and not a fiduciary communication.
A final factor the court relied upon was that while ERISA mandates providing an SPD, it does not require materials be incorporated into the SPD. Because defendants used discretion in deciding which materials to incorporate into the SPD, the court determined defendants were acting in a fiduciary capacity. The court reasoned that to hold that the incorporation of the SEC filings was not a fiduciary act might create a loophole that authorized fiduciaries to convey misleading information through outside documents incorporated by reference into Plan documents without penalty under ERISA.
In Dudenhoefer, the Sixth Circuit appears to be the first circuit court to hold that expressly incorporating SEC filings by reference into an SPD is a fiduciary act that can give rise to ERISA liability. In doing so, the Sixth Circuit may have significantly increased the risk of exposure of fiduciaries to ERISA liability, as companies may often incorporate outside materials into their SPDs. At a minimum, the ruling will likely give plaintiffs an additional argument to use to attempt to defeat motions to dismiss in ERISA class actions.
The opinion is also noteworthy because, along with Pfeil, it suggests an increasingly plaintiff-friendly direction in the Sixth Circuit in recent ERISA stock drop class action litigation. Together, these cases may provide plaintiffs with new ways to survive motions to dismiss breach of fiduciary duty claims against ERISA fiduciaries. This will inevitably increase both the risk of exposure and the litigation costs for publicly-traded companies that allow employees to invest in company stock through a benefit plan. Finally, these opinions are contributing to emerging circuit splits in ERISA litigation related to employer stock. This developing caselaw could eventually require the U.S. Supreme Court to decide that it must take on these questions to clarify the appropriate standards for fiduciary liability under ERISA.
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