If all you wanted for Christmas this year was to see the Supreme Court take up the question of whether the presumption of prudence is the applicable standard in reviewing breach of fiduciary duty claims related to investments in employer stock, prepare to be disappointed (and to consider expanding your wish list for next year).

In 2012, the best chances for the Supreme Court to consider this issue that has shaped the landscape of ERISA stock drop litigation were (1) In re Citigroup ERISA Litigation and Gearren v. McGraw-Hill Cos., Inc., which were argued in tandem before the Second Circuit; and (2) the Sixth Circuit’s decision in Pfeil v. State Street Bank & Trust Company.

On October 15, 2012, the Supreme Court denied the petitions for writs of certiorari regarding Citigroup and Gearren. The petitions were submitted by the plan participants who were seeking the high Court’s review of the dismissal of their putative stock drop class actions against respective employers. The Second Circuit upheld the dismissal of the complaints due to the plaintiffs’ failure to overcome what is commonly referred to as the Moench presumption—the presumption that investing in company stock is presumed to be prudent , absent dire circumstances. For more information on the Second Circuit’s decisions in Citigroup and Gearren, please read our advisory.

In Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012), the Sixth Circuit became the first and only Circuit Court to hold that the presumption of prudence does not apply at the pleadings stage. For more information on Pfeil, read our blog entry on “ERISA Stock Drop Actions: The Class of 2012,” by clicking here.

In light of this controversial holding, and the resulting split in the Circuits with regard to the application of the presumption, there was some thought that the Supreme Court might pick up Pfeil for review.

However, in submitting its petition for writ of certiorari, State Street avoided the key holding of Pfeil—i.e., the holding that the plan participants had alleged sufficient facts to overcome the presumption of prudence. Rather, State Street chose to focus on more narrow issues, including: (1) whether ERISA Section 404(c) (which immunizes fiduciaries from liability for selecting and maintaining investment options) can be applied at the motion to dismiss phase; and (2) the applicable standard for causation and whether the plan participants alleged a plausible causal connection between the alleged fiduciary breach by State Street and the losses suffered by the plan. See State Street's Petition for Writ of Certiorari, 2012 WL 3724740, at *12-17.

In Pfeil, the Sixth Circuit held that the safe harbor of ERISA Section 404(c) is not applicable at the pleadings stage and is “not appropriate for consideration on a motion to dismiss when, as here, the plaintiffs did not raise it in the complaint.” Pfeil, 671 F.3d at 598. The Sixth Circuit went on to “join other circuits in recognizing that section 404(c) is an affirmative defense to a claim for breach of fiduciary duty under ERISA, on which the party asserting the defense bears the burden of proof.” Id. at 599 (citing Hecker v. Deere & Co., 556 F.3d 575, 588 (7th Cir. 2009); Langbecker v. Elec. Data. Sys. Corp., 476 F.3d 299, 309 (5th Cir. 2007); Allison v. Bank One–Denver, 289 F.3d 1223, 1238 (10th Cir. 2002); In re Unisys Sav. Plan Litig., 74 F.3d 420, 446 (3d Cir.1996)).

The Sixth Circuit also held that the safe harbor defense does not apply under the circumstances because it does not relieve fiduciaries of the responsibility to screen investments. The Court determined that, although the plaintiffs “must eventually prove causation to prevail on their claims, . . . the plaintiffs have plausibly pleaded causation to survive State Street's motion to dismiss.” Pfeil, 671 F.3d at 596.

On December 3, 2012, the Supreme Court denied State Street’s petition for a writ of certiorari, without comment. State Street Bank & Trust Co. v. Pfeil, No. 12-256, 2012 WL 4009309, at *1 (U.S. Dec. 3, 2012) (“The petition for a writ of certiorari is denied.”)

Thus, the Sixth Circuit continues to effectively stand alone in its wholesale rejection of the Moench presumption at the pleadings stage. Perhaps 2013 will ring in more opportunities for the Supreme Court to consider the Moench presumption and when it should be applied, if at all, in the course of ERISA stock drop litigation.