On June 25, 2014, the U.S. Supreme Court released another much anticipated decision in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, 2014 U.S. LEXIS 4495. The decision, which was analyzed in a previous alert, unanimously overturned an important "presumption of prudence" that lower courts had for many years afforded ERISA fiduciaries in connection with a decision to buy, hold or offer employer stock as a part of a stand-alone employee stock ownership plan ("ESOP"), an ESOP component of a defined contribution plan or an employer stock fund offered under a 401(k) or profit sharing plan. As the name implies, such investment decisions previously had been viewed as presumptively prudent in all but the most exceptional circumstances, and the application of the presumption had been a powerful tool for defendants in seeking an early dismissal in ERISA stock-drop lawsuits.
The Supreme Court held that Section 404(a)(2) of ERISA does not create any special presumption favoring ESOP fiduciaries whether at the pleading stage or later in the proceedings as an evidentiary rule. Importantly, the Court explained that the instructions of a plan document - such as a provision requiring employer stock as an investment option - do not excuse fiduciaries from the duty of prudence with respect to the decision to include employer stock as a plan investment option. ESOP fiduciaries are now subject to the same standard of prudence that applies to all fiduciaries under ERISA with respect to decisions regarding plan investments, with the caveat that they are not bound by the same diversification requirements that ERISA imposes on fiduciaries who oversee investments of non-ESOP benefit plans. The loss of this defendant-friendly presumption could have significant ramifications for ESOP fiduciaries and could increase the number of ERISA-related actions that are filed. To address the concern that an ESOP fiduciary might find "himself between a rock and a hard place" when faced with competing obligations under ERISA and the federal securities laws, the Supreme Court decision does give lower courts some guidance as to how to use motions to dismiss to weed out meritless lawsuits.