Earlier this year, the U.S. Supreme Court decided the case of Amgen v. Harris,1 in which the Court revisited and clarified its 2014 holding in Dudenhoeffer v. Fifth Third Bancorp.2 Both cases concern the application of a fiduciary’s duty of prudence with respect to employer stock held in a benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). The 2015-16 Term has been a busy one for the Supreme Court when it comes to ERISA issues, as Amgen – which had not even been accepted for review by the Court before the Term began – is one of four cases decided in 2016 that involve ERISA3 or that had potential significant ERISA implications.4
For further discussion of the Dudenhoeffer and Amgen cases, please refer to the following Dechert OnPoints:
In Dudenhoeffer, the Court unanimously declined to recognize the so-called Moench presumption – a presumption of prudence – that for years had favored decisions by ERISA fiduciaries to acquire and hold employer stock. However, in striking down the Moench presumption, the Court also delineated several principles that potentially make it more difficult to survive defendants’ motions to dismiss in lawsuits against plan fiduciaries. Dudenhoeffer generally confirmed that ERISA plan fiduciaries may rely on market pricing of publicly traded stock, and that they are not compelled to violate federal securities laws by acting on inside information. Regarding this latter point, the Court introduced the concept that courts should “consider whether the complaint has plausibly alleged that a prudent fiduciary ... could not have concluded” that an alternative permissible course of action would “do more harm than good” to the plan. InAmgen, in a strongly worded rebuke to the U.S. Court of Appeals for the Ninth Circuit, the Supreme Court confirmed that the “more harm than good” standard is one that must be sufficiently addressed by plaintiffsat the pleadings stage. Although plan fiduciaries can no longer invoke the Moench presumption, theAmgen decision seems to have solidified the threshold that plaintiffs may need to reach at the pleadings stage in order for the case to continue.
ERISA imposes an obligation on ERISA plan fiduciaries to act prudently with respect to investment decisions for the plan.5 Certain retirement plans, such as employee stock ownership plans (ESOPs) and certain 401(k) plans, are specifically designed to invest all or a portion of their assets in stock of the sponsoring employer. In 1995, in the case Moench v. Robertson,6 the U.S. Court of Appeals for the Third Circuit reasoned that, in light of various statutory provisions favoring investment in employer stock, Congress intended to provide special protection to decisions with respect to such investment. The court inMoench held, therefore, that decisions with respect to the investment in employer stock were generally presumed to be prudent absent special circumstances (such as showing that the company was on the verge of collapse).
Over the years, there has been a spate of so-called “stock drop” litigation, in which plaintiffs alleged that fiduciaries were in breach of their duties under ERISA when the value of employer stock held by the plan declined, often precipitously. In these cases, the Moench presumption of prudence was repeatedly invoked by ERISA fiduciaries to achieve dismissal of plaintiffs’ fiduciary breach allegations. As a practical matter, this presumption became a significant factor in giving employers and fiduciaries a sufficient comfort level that decisions with respect to investment in company stock under an ERISA plan would not result in fiduciary liability. With the Moench presumption having then been adopted in one form or another by the courts of appeals of six federal circuits, it seemed evident that the Supreme Court’s 2014 grant of certiorari in Dudenhoeffer could have broad implications for stock drop litigation.
Rejection of the Moench Presumption
In Duenhoeffer, the Court rejected the framework that plans designed to invest in employer stock are subject to a fiduciary standard different from that which applies to ordinary ERISA plans. The Court held that ERISA’s statutory duty of prudence applies equally to all ERISA fiduciaries regardless of any provision in a plan document, including any provision regarding the purchase or holding of employer stock. The Court acknowledged Congress’ intention of encouraging employee ownership of employer stock by retirement plans – specifically, as evidenced by the exemption from the requirement to diversify plan assets – but ultimately found a lack of authority indicating that Congress “sought to promote ESOPs by further relaxing the duty of prudence” with the Moench presumption.
Although this significant break with established lower court precedent may have, at first glance, appeared to favor plaintiffs, there were important pro-fiduciary aspects of the opinion that plan sponsors and fiduciaries could use when faced with allegations of imprudence in the context of stock drop litigation. First, the Court in Dudenhoeffer stated that generally a fiduciary will not be imprudent for relying upon the market price of publicly-traded stock as indicating a fair value for such stock, because “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule.” In effect, the Court endorsed public market prices as the best estimate of value, confirming that a fiduciary has no obligation to “outsmart a presumptively efficient market” or “predict the future of the company stock’s performance.”
Second, the Court appeared to have made it more difficult for plaintiffs to assert stock drop cases against fiduciaries who failed to act on the basis of non-public information. Harkening back to issues that became the centerpiece of the oral argument in Dudenhoeffer, the Court held that plan fiduciaries cannot be required to sell company stock based on inside information. Specifically, the Court stated that the “duty of prudence cannot require an ESOP fiduciary to perform an action ... that would violate the securities laws.” In addition to requiring plaintiffs to allege a specific alternative action that the fiduciary could have taken,Dudenhoeffer instructed the lower courts to “consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that [such action] would do more harm than good” to the plan. Ultimately, Dudenhoeffer requires a plaintiff to “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the [plan] than to help it.”
Amgen: Applying Dudenhoeffer and the “More Harm Than Good” Standard
With the Court’s rejection of the Moench presumption, it was not clear just how Dudenhoeffer would affect stock drop litigation – both in general and at the pleadings stage. Perceiving that its holding inDudenhoeffer had been misapplied, the Court in Amgen took steps to clarify that holding.
In Amgen, the plaintiffs were former employees who participated in one or more retirement plans sponsored by Amgen Inc. (Amgen), which included Amgen stock as an investment option. The value of Amgen stock fell, and plan participants filed a class action alleging that the plans' fiduciaries breached their duties under ERISA by allowing the plans to purchase and hold Amgen stock despite knowing that the stock price was artificially inflated due to undisclosed improper off-label drug marketing and sales. In 2010, the district court granted Amgen’s motion to dismiss but, in 2013, the U.S. Court of Appeals for the Ninth Circuit reversed.7 Within days after deciding Dudenhoeffer, the Supreme Court in 2014 vacated the Ninth Circuit’s 2013 reversal and remanded the case for reconsideration in light of Dudenhoeffer.8
On the initial remand from the Court, the Ninth Circuit in 2014 again reversed the District Court’s dismissal of the complaint,9 dispensing with concerns under Dudenhoeffer’s “more harm than good” standard by stating that it was “quite plausible” that the fiduciary defendants could have removed the company’s stock from the list of investment options “without causing undue harm to plan participants.” That decision by the Ninth Circuit was appealed to the Supreme Court.
In a strong rebuke to the Ninth Circuit, issued less than two years after its opinion in Dudenhoeffer, the Court vacated the Ninth Circuit’s 2014 Amgen decision, stating that “the Ninth Circuit failed to properly evaluate the [Amgen] complaint” in light of Dudenhoeffer. The Supreme Court criticized the Ninth Circuit for not properly applying the requirement that plaintiffs “plausibly allege” that the fiduciaries “could not have concluded” that the alternative action proposed by the plaintiffs “would do more harm than good” for the plan.
Although it may not immediately have been apparent from the Dudenhoeffer decision how much of an impediment the “more harm than good” standard would be for plaintiffs in stock drop cases, the Amgendecision seems to make clear that the standard has both substantive and procedural significance. The Supreme Court in Amgen emphasized that the complaint must not only allege that the fiduciary could have pursued an alternative path consistent with the securities laws, but must do so “plausibly,” by laying out “sufficient facts and allegations.”
The significance of an impediment to the ability of plaintiffs to proceed with a class-action complaint past the pleadings stage should not be understated from a practical perspective. An increased likelihood of having complaints dismissed at the pleadings stage has the potential significantly to reduce litigation costs. Indeed, even before the Amgen decision, a district court dismissed a stock drop complaint for, among other reasons, the complaint’s failure to contain allegations sufficient to withstand dismissal under the “more harm than good” standard.10
It still remains to be seen precisely just how Dudenhoeffer, now bolstered by Amgen, will affect the trajectory of ERISA stock drop litigation.11 At the very least, however, the Supreme Court in Amgen seems to have solidified the threshold that the plaintiffs in any given case may need to reach at the pleadings stage in order for their cases to continue. For fiduciaries of plans holding employer stock, Amgen may be viewed as an encouraging development.