Looking ahead, we preview cases currently pending before the Supreme Court—which have already been accepted for review by the Court—that may be of particular interest to readers of the Need-to-Know Litigation Weekly. These cases pertain to various topics in Securities, Enforcement, and, as to one, arbitration.

Retirement Plans Committee of IBM et al. v. Larry W. Jander et al., No. 18-1165

Relevant Issue(s) to be Addressed: Whether, in suits claiming that employers breached their Employee Retirement Income Security Act (“ERISA”) fiduciary duty by keeping company stock in the employee retirement plan, the pleading standard for ERISA breach of fiduciary duty claims, as set forth by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), can be met by providing generalized allegations that a disclosure of an alleged fraud, that would impact the company stock, was inevitable and the harm of such an “inevitable” disclosure increased over time while the stock remained in the retirement plan.

Status: Petition granted on June 3, 2019; Argument heard on November 6, 2019.

Background: The case is on appeal from the Second Circuit, which held that plaintiffs—employees of IBM at the time of the initial suit—sufficiently alleged under the pleading standard set forth by the Supreme Court in Dudenhoeffer, that defendants—fiduciaries in charge of IBM’s employee stock option plan (“ESOP”)—breached their fiduciary duties under ERISA, based on generalized allegations that the disclosure of an alleged fraud by IBM was “inevitable” and the harm caused by defendants’ decision to continue to invest in IBM stock despite the allegedly inevitable disclosure magnified the harm suffered by plaintiffs once the disclosure was made. Under the Supreme Court’s Dudenhoeffer pleading standard, in order to sufficiently plead a breach of the fiduciary duty of prudence based on inside information pursuant to ERISA, plaintiffs must “plausibly allege” that a prudent fiduciary in the defendant’s position could not have concluded that a different action would “do more harm than good” to the ESOP. The Second Circuit held that “when a ‘drop in the value of the stock already held by the fund’ is inevitable, it is far more plausible that a prudent fiduciary would prefer to limit the effects of the stock’s artificial inflation on the ESOP’s beneficiaries through prompt disclosure.”

Potential Implications: The Dudenhoeffer standard has rarely been found to have been met. If the Supreme Court were to affirm the Second Circuit, ESOP participants could be more likely to initiate ERISA suits so long as they can plausibly allege that the fiduciaries had any prior information—including inside information—related to an alleged fraud or other matter which allegedly affected the company’s stock that was not promptly disclosed to the plan participants.

Intel Corp. Investment Policy Committee, et al. v. Christopher M. Sulyma, No. 18-1116

Relevant Issues Addressed: Whether the three-year statute of limitations period for ERISA, which runs “from the earliest date on which the plaintiff had actual knowledge of the breach or violation,” bars a suit where the defendants disclosed all relevant information more than three years before the plaintiff initiated the action, but the plaintiff allegedly chose not to read or could not recall having read the information.

Status: Petition granted on June 10, 2019; Argument heard on December 4, 2020.

Background: ERISA generally imposes a six-year limitations period for breach of fiduciary duty claims, which begins to run from “the date of the last action which constituted a part of the breach or violation.” However, if the plaintiff had “actual knowledge” of the breach or violation more than three years before filing suit, the claim is time-barred. This case is on appeal from the Ninth Circuit, which held that in order for the “actual knowledge” trigger to be met, “the plaintiff must have been aware that the defendant had acted and that those acts were imprudent.” The Ninth Circuit found that receiving ERISA-mandated disclosures from the plan administrator was insufficient, because “the plaintiff must have actual knowledge, rather than constructive knowledge.” In so holding, the Ninth Circuit disagreed with a prior decision from the Sixth Circuit.

Potential Implications: A Supreme Court affirmance would likely limit the availability of the three-year statute of limitations as a defensive argument in ERISA suits, as plaintiffs would need to be shown to have had actual, subjective knowledge of the acts at issue.

James J. Thole, et al., Petitioners v. U.S. Bank, N.A., et al., No. 17-1712

Relevant Issue(s) to be Addressed: Whether ERISA plan participants may seek restoration under 29 U.S.C. § 1132(a)(2) or injunctive relief under 29 U.S.C. § 1132(a)(3), for alleged breaches of fiduciary duty, without demonstrating individual financial loss or its imminent risk.

Status: Petition granted on June 28, 2019; Argument scheduled for January 13, 2020.

Background: The case is on appeal from the Eighth Circuit, which held that plaintiffs—plan participants of a defined-benefit employee pension plan who alleged that defendants breached their fiduciary duties of loyalty and prudence by investing all the plan assets in high-risk equities, ultimately causing $748 million in losses to the plan—may not bring claims seeking injunctive relief or restoration for alleged breach of fiduciary duties by the plan’s sponsors and fiduciaries, where plaintiffs could not demonstrate they suffered individual financial losses, where the plan became fully funded during the litigation. Regarding plaintiffs’ claim for restorative relief under 29 U.S.C. § 1132(a)(2), the Eighth Circuit held that it was bound by its prior decisions in which it “concluded that § 1132(a)(2) does not permit a participant in a defined-benefit plan to bring suit claiming liability . . . for alleged breaches of fiduciary duties when the plan is overfunded.” Regarding plaintiffs’ claim for injunctive relief under 29 U.S.C. § 1132(a)(3), the Eighth Circuit held that “plaintiffs must show actual injury” in order to “fall within the class of plaintiffs whom Congress has authorized to sue under the statute” and, “[g]iven that the Plan is overfunded, there is no ‘actual or imminent injury to the Plan itself’ that caused injury to the plaintiffs’ interests in the Plan.” In so holding, the Eighth Circuit acknowledged a circuit split, noting that cases from other circuits have concluded that a plan participant may seek injunctive relief against fiduciaries of an overfunded plan, without showing harm to their monetary interests in the plan.

Potential Implications: If the Supreme Court were to reverse, this could have a significant impact on ERISA litigation generally, as it would likely implicate standing issues across other ERISA claims.

Charles C. Liu, et al. v. U.S. Securities and Exchange Commission, case number 18-1501

Relevant Issue to be Addressed: Whether the SEC is empowered to seek and obtain disgorgement in federal court cases as “equitable relief” for a securities law violation.

Status: Petition granted on November 1, 2019; Argument scheduled for March 3, 2020.

Background: This case is on appeal from the Ninth Circuit, which upheld an order that defendants disgorge nearly $27 million in ill-gotten gains from an illegal immigrant visa scheme that was found to have defrauded Chinese investors. Although statutorily authorized in the context of administrative proceedings, disgorgement is not an enumerated power of the SEC’s in federal court. Instead, the SEC has long sought and obtained disgorgement from defendants in federal court cases on the theory that disgorgement of ill-gotten gains is equitable relief within the inherent authority of district courts to issue. Accordingly, the Court’s decision will likely depend on whether it concludes that court-ordered disgorgement is a “penalty,” and therefore an inappropriate form of equitable relief.

Petitioner’s arguments rely heavily on the Supreme Court’s recent decision in Kokesh v. SEC, 137 S.Ct. 1635 (2017), which, in holding that disgorgement was subject to the five-year catchall statute of limitations under 28 U.S.C. §2462, observed that an SEC disgorgement remedy “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.” Although the Supreme Court in Kokesh was careful not to opine on the whether the SEC could obtain disgorgement in the absence of specific statutory observation, Petitioners now ask the Court to extend its disgorgement-as-penalty reasoning advanced in Kokesh to hold that the SEC cannot do so. Petitioners also advance a statutory authorization argument, claiming that since Congress has vested in the SEC specific remedies in the context of civil cases, including civil monetary penalties, the exclusion of disgorgement should be understood as intentional.

Potential Implications: Disgorgement has long been a primary tool in the SEC’s enforcement toolkit. Extending Kokesh’s disgorgement-as-penalty holding beyond the statute of limitations context would thus, at least temporarily, be a dramatic change to the contours of SEC courtroom litigation.. However, Congress has explicitly granted the SEC the power to seek and obtain disgorgement in administrative proceedings, and thus the percentage of cases brought as administrative proceedings would likely spike up if the petitioner’s arguments are accepted, unless and until there is a legislative solution.

Seila Law LLC v. Consumer Financial Protection Bureau, case number 19-7

Relevant Issue(s) to be Addressed: Whether the structure of the CFPB, an independent executive branch agency headed by a single director who is shielded from being fired by the President without cause, violates the Constitution’s separation of powers, and, if so, whether the section of Dodd-Frank establishing the removal restriction can be severed from the remainder of the statute.

Status: Petition granted on October 18, 2019; Argument scheduled for March 3, 2020

Background: This case is on appeal from the Ninth Circuit, which held that the CFPB’s structure is constitutionally permissible. The CFPB was established as an independent federal agency headed by a single director who can be removed by the President only for “inefficiency, neglect of duty, or malfeasance in office.” Petitioner Seila Law challenged a Civil Investigative Demand from the CFPB as invalid and thus unenforceable on the grounds that the CFPB is improperly constituted because the removal restriction violates the separation of powers. The Ninth Circuit affirmed a district court’s decision rejecting the argument, noting that the constitutional issue had been “thoroughly canvassed” and upheld by the D.C. Circuit. The Ninth Circuit relied in particular on the Supreme Court precedent in Humphrey’s Executor v. United States, 295 U.S. 692 (1935), which upheld similar restrictions in the context of multimember commissions, and Morrison v. Olson, 487 U.S. 674 (1988), which upheld a for-cause removal restriction for a prosecutorial entity headed by a single independent counsel, as precluding a contrary ruling. Though the Ninth Circuit found merit to Seila Law’s argument, it ultimately ruled that the removal restriction did not impede the President’s ability to perform his duty to ensure that the laws are faithfully executed.

As briefed, both Seila Law and government lawyers agree that the CFPB’s single-director structure and removal restriction violates the separation of powers and impedes the President’s ability to faithfully execute the laws of the United States. They differ, however, as to the implications of that fact. Seila Law contends that the court should reverse the lower court’s order enforcing the CID and claims that, should the Court reach the issue of severability, the Court invalidate Title X of Dodd-Frank altogether, effectively shutting down the agency. In opposition, the government advocates for severability, noting that Dodd-Frank includes a severability clause, and that there is no strong evidence that Congress intended that the remaining provisions of Dodd-Frank, including those establishing the CFPB, should be invalidated.

Potential Implications: Given Supreme Court precedent, prior lower court decisions, as well as the CFPB’s ten-year history and integration into the federal financial regulatory regime, it is unclear how willing the Court will be to invalidate Title X in its entirety, even if it agrees with the Petitioner and the government that the removal provision is invalid. However, a decision allowing the removal provision to be severed could embolden the presidents to exert influence over CFPB directors, lessening its independence meaningfully. So, it is possible that Congress would step in regardless of the outcome to ensure the CFPB is able to function consistent with congressional intent.