Randy Kopp, an employee of Idearc, Inc., and a participant in the Idearc Management Plan, brought an ERISA class action against various members of Idearc’s board of directors and Idearc’s officers, the Plan Benefits Committee and the Human Resources Committee (“Idearc Defendants”). Among other claims, Kopp alleged that the Idearc Defendants breached their fiduciary duties by allowing plan participants to buy and hold Idearc stock when it was no longer prudent to do so.
The District Court for the Northern District of Texas dismissed the action for failure to state a claim. Civil Action No. 3:09-CV-2354-N.
On appeal, the Fifth Circuit joined the Second, Third, Seventh, and Eleventh Circuits in holding that the presumption of prudence applies at the motion to dismiss stage. The Fifth Circuit rejected Kopp’s contention that doing so would violate the notice pleading requirements of Fed. R. Civ. P. 8, finding “[t]here is no reason to permit a case to proceed to discovery where the facts, even if proven true, would not establish that defendants abused their discretion in failing to divest employer stock.” Kopp v. Klein, No. 12-10416, 2013 WL 3449866, at *9 (5th Cir. July 9, 2013).
Applying the presumption of prudence, the Fifth Circuit focused on whether Kopp alleged sufficient facts to show that the Idearc Defendants knew or should have known that the viability of Idearc was threatened or Idearc’s stock was in danger of becoming worthless. It found that “regardless of whether the Idearc Defendants had discretion to cease permitting new Fund investments in Idearc stock or liquidate Fund investments in Idearc stock, the ‘presumption of prudence’ applies at the motion to dismiss stage, and Kopp failed to allege sufficient facts to over come the presumption.” Id. at *5.
Significantly, the Fifth Circuit rejected a duty to divest based on non-public information. It noted that such a duty might violate securities laws. However, the Fifth Circuit stated that “[w]hile individuals with access to inside information may not trade on that information, ceasing making new investments in stock because of access to inside information is not barred by insider trading laws.” Id. at *10. Thus, the Fifth Circuit proceeded to analyze Idearc’s duties separately: (1) First, considering both public and nonpublic information, did the Idearc Defendants have a duty to cease allowing plan investments in Idearc stock?; (2) Second, considering only public information, did Idearc Defendants have a duty to liquidate fund investments in Idearc stock?
Kopp alleged that the Idearc Defendants knew about Idearc’s declining customer base, mounting uncollectible receivables, lack of financial flexibility, false financial statements, loosened credit policies, reduced account collection workforce, and a stock drop of 36% over three months.
The Fifth Circuit found that “while the facts Kopp pleaded [including non-public information] suffice to show the Idearc Defendants were aware Idearc faced serious financial difficulties, the facts, if proven, would not show that the Idearc Defendants were aware Idearc’s stock was in danger of becoming essentially worthless or Idearc’s viability as a company was threatened, at least prior to the time that the Idearc Defendants ceased offering Idearc stock as an investment option under the Plan.” Id.
The Fifth Circuit also held that, “at least based on the public information available during the Class Period, Kopp did not allege sufficient facts to overcome the presumption that the Idearc Defendants acted prudently by choosing not to liquidate Fund investments in Idearc stock.” Id. at *11. Thus, the Fifth Circuit rejected Kopp’s prudence claim and affirmed the District Court’s dismissal of the action under Fed. R. Civ. P. 12(b)(6).
In adopting the presumption of prudence at the pleading stage, the Fifth Circuit has joined the majority position. Thus far, only the Sixth Circuit has set itself apart by affirmatively rejecting the presumption of prudence as a standard that may be applied at the pleading stage. See, e.g.,
Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012); Griffin v. Flagstar Bancorp, Inc., 492 F. App’x 598 (6th Cir. 2012).
The case is Kopp v. Klein, No. 12-10416, 2013 WL 3449866 (5th Cir. July 9, 2013).