The “Moench presumption of prudence,” a key defense that has been used by employers defending breach of fiduciary duty claims in ERISA cases, and applied in the well-known cases of Moench v. Robertson, and Quan v. Computer Sciences Corp., has been limited by the Ninth Circuit. In Harris v. Amgen, Inc., the Ninth Circuit ruled that defendants were not entitled to the presumption of prudence in a “stock drop” case because the retirement plans in question did not require or encourage participants to invest in company stock.

The Moensch presumption was first adopted by the Ninth Circuit in Quan to protect plan investments of employees and to permit employers to provide loyalty incentives to their employees. In Harris, the Ninth Circuit limited the application of the presumption only where plan terms required or encouraged participants to invest primarily in employer stock. Because the plans did not place such a limitation on the fiduciaries’ discretion in Harris, the presumption was not applicable. In the absence of the Moench presumption, the court held that the normal prudent man standard applied to defendants’ investment decisions and that plaintiffs had sufficiently alleged that defendants violated the duty of care they owed as fiduciaries under ERISA because they alleged that defendants knew or should have known that the stock was being sold at an artificially inflated price.

This decision and the Second Circuit decision in Taveras v. UBS, AG, indicate that courts will not routinely apply the Moench presumption but rather will closely review the terms of the plan to determine if there was a requirement or encouragement to invest in employer stock.