On November 12, the Solicitor General filed a brief in Fifth Third Bancorp v. Dudenhofer, No. 12-751, urging the Supreme Court to grant a petition for certiorari to consider whether ESOP fiduciaries are entitled to a presumption of prudence when deciding whether to continue to offer company stock as an investment option in a 401(k) plan. The SG’s brief makes it very likely that the Supreme Court will hear the case. If it does, it will make Dudenhofer the most important and closely watched ERISA case of the entire term (if not in recent memory). The Supreme Court’s decision could have substantial repercussions for large companies that offer company stock as an investment option in their 401(k) plans.
Dudenhofer is an ERISA “stock drop” class action. Plaintiffs alleged that fiduciaries of the Fifth Third 401(k) plan breached their fiduciary duties under ERISA by continuing to allow participants to invest in Fifth Third stock and by failing to divest the stock from the plan. Plaintiffs contended that the stock declined by 74% during the financial crisis of 2008 and that the plan fiduciaries should have foreseen the decline. Like many ERISA stock drop plaintiffs, the Dudenhofer plaintiffs alleged that Fifth Third stock had become excessively risky because of the bank’s subprime mortgage lending practices and had become artificially inflated because of inaccurate financial statements. The district court dismissed the action on the basis of the Moench presumption of prudence, but the Sixth Circuit reversed, holding that the Moench presumption did not apply at the pleading stage.
Fifth Third filed a petition for certiorari on two issues: (1) whether the Moench presumption applies at the pleading stage, and (2) whether financial statements incorporated into a summary plan description by reference are fiduciary communications. The Supreme Court called for the views of the SG on whether it should take the case.
The SG’s brief recommends granting cert on the first issue but not the second. However, while the SG’s brief supports Fifth Third’s position on the issue of whether cert should be granted, it is hostile to Fifth Third’s position on the merits. The SG’s brief argues that there should not be any presumption of prudence, and that Moench and its progeny should be overruled. According to the SG, “ERISA’s text and purposes do not call for application of a presumption at any stage of the proceedings.” Instead, the SG argues that ESOP fiduciaries should just be governed by the prudence standards that apply to non-ESOP fiduciaries (except as to the duty of diversification, which it acknowledges does not apply). While recognizing that every court of appeals to have considered the issue has adopted a form of the Moench presumption, the SG argues that all of these decisions rest on “policy considerations that extend beyond ERISA’s text and are unconvincing in their own right.”
The SG has recommended re-formulating the question presented and having the Court consider two issues: (1) whether an ESOP fiduciary should be accorded a presumption that it acted prudently, and (2) if so, whether the presumption applies at the pleadings stage and what a plaintiff must allege to rebut it.
Assuming, as we do, that the Supreme Court will grant cert in Dudenhofer and consider both of the questions posed in the SG’s brief, this case will be one of the most significant ERISA cases before the Court in years, and certainly the most important ERISA case of the term. The Moench presumption was announced in a Third Circuit decision issued in 1995, and over the past 18 years, courts of appeals have unanimously held – over repeated objections in amicus briefs from the Department of Labor – that the presumption applies. If the Court were to overrule the Moench presumption and the substantial body of case law developed over the last two decades, it would have substantial ramifications for 401(k) plans and ESOP fiduciaries.
Nowadays, virtually every 401(k) plan that offers company stock requires that the stock be made available as an investment option. Absent the Moench presumption, any time there is a decline in the price of company stock, ESOP fiduciaries would be faced with the impossible task of deciding whether they are required to follow the plan terms requiring that company stock be offered. If they deviate from the plan documents, and the stock rebounds, they will likely be sued for failing to follow the plan documents. If they follow the plan documents and the stock declines further, they will be sued for failing to deviate. Given the no-win proposition created by such a regime, companies may decide not to offer company stock as an investment option, even though Congress encouraged the creation of ESOPs when it enacted ERISA. As the Seventh Circuit noted in Cooper v. IBM, 457 F.3d 636, 642 (7th Cir. 2006), “it is possible … for litigation about pension plans to make everyone worse off” by creating rules that make it unattractive to offer such plans.
On the other hand, if the Supreme Court upholds the presumption, its guidance on the second question posed by the SG would be largely welcome. While there is no circuit split on the issue of whether the presumption applies, there is substantial disarray among the circuits about what is needed to overcome the presumption and whether the presumption applies at the pleading stage. While case law among most circuits could be readily harmonized, the Sixth Circuit is an outlier, with difficult-to-apply standards on what is needed to overcome the presumption. A clarification on these issues would provide ESOP fiduciaries with helpful guidance for the future.
Regardless of the outcome, this case promises to be one of the most heavily-watched ERISA decisions in recent memory. Stay tuned.