Two years ago, when called upon to address an ESOP fiduciary’s duty of prudence in the context of a motion to dismiss, the 11th Circuit Court of Appeals followed a long line of cases: “We join our five sister circuits in …review[ing] only for an abuse of discretion the defendant’s decision to continue investing in and holding [company] stock in compliance with the direction of the Plan.” Lanfear v. Home Depot, Inc., 679 F. 3d 1267 (11th Cir. 2012). (See our blog, Eleventh Circuit Determines Standard of Prudence for ESOP Fiduciaries in Stock-Drop Case.) In defining that point at which a fiduciary abuses its discretion, the LanfearCourt explored and rejected the two ends of the spectrum: A fiduciary’s actions should not be subject to scrutiny with every rise and fall of the stock market, nor should the standard be so deferential as to presume prudence unless the company was on the brink of financial collapse. Rather, in following Moench v. Robertson, 62 F. 3d 553 (3d Cir. 1995), the Lanfear Court held that a fiduciary would be seen to have abused its discretion only when it continued to invest in company stock at a time when it could not have reasonably believed that “continued adherence to the ESOP’s directions was in keeping with the settlor’s expectations of how a prudent trustee would operate it.” Id. at 1280, quoting Moench.
Although the Moench Court called it a “presumption of prudence,” the Lanfear Court clarified that “the Third Circuit did not intend to use, and we disavow any intension of using, the word ‘presumption’ in a sense that had any evidentiary weight.” Instead, in the context of a motion to dismiss, the Lanfeardescribed the standard in dauntingly deferential terms: “prescib[ing] who is to win in almost all of the circumstances that can be envisioned.” Id. at 1281.
Whether called a “standard of review” or a “presumption,” it is now gone. In Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (June 25, 2014), the United States Supreme Court held that no special presumption of prudence should apply to ESOP fiduciaries. Although the rule is stated simply, the issue is complex, when measured against a backdrop of putative class actions where the stakes are high at the pleadings stage. Defendants have been understandably concerned about meritless claims getting past a Rule 12(b)(6) motion, due to the high cost of going forward in litigation. The Supreme Court responded to these voiced concerns, but found that this judicially-created presumption did “not readily divide the plausible sheep from the meritless goats.” Id. at 2470. It suggested instead a “careful, context-sensitive scrutiny of a complaint’s allegations.” Id. Keeping intact a requirement for a robust review under Twomblyand Iqbal, it provided guidelines on “plausibility.” This included the strong suggestion that a fiduciary’s prudence usually could not be questioned when it used major stock markets as an estimate of the company’s stock value. Nor could ERISA’s duty of prudence “require an ESOP fiduciary to perform an action…that would violate securities law,” such as insider trading. Id. at 2473. For this latter suggestion, it cited Lanfear, keeping at least part of the 11th Circuit’s ruling intact.