December 13, 2013
Today, the Supreme Court granted certiorari in one case of interest to the business community:
ERISA—Fiduciary Duties—Investments In Employer Stock
Fiduciaries who administer retirement plans governed by the Employee Retirement Income Security Act (“ERISA”) generally have a duty of prudence to plan participants. See 29 U.S.C. § 1104(a). Among other things, fiduciaries are typically required to “diversify the investments of the plan so as to minimize large losses, unless under the circumstances it is clearly prudent not to do so.” Id. § 1104(a)(1)(C). But because Congress wanted to encourage employees to invest in their own companies, it waived the duty of prudence “to the extent it requires diversification” for purchases of company stock. Id. § 1104(a)(2). Several federal courts of appeals have relied on this provision to establish a presumption in favor of fiduciaries in ERISA class actions alleging that the fiduciary unreasonably invested in company stock: Such fiduciaries may not be held liable unless the company was in such dire financial straits that its viability as a going concern was in doubt. In conflict with all other circuit-court decisions on the subject, however, the Sixth Circuit recently ruled that the presumption does not apply at the pleading stage. Today, the Supreme Court granted certiorari in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, to review that Sixth Circuit ruling and decide whether plaintiffs who bring these kinds of actions must “plausibly allege in their complaint that the fiduciaries of an employee ownership plan abused their discretion by remaining invested in employer stock, in order the overcome the presumption that their decision to invest in employer stock was reasonable.”
The plaintiffs in Dudenhoeffer were participants in their employer’s retirement plan. On behalf of a class of plan participants, they alleged that the plan fiduciaries continued to invest in the company’s stock despite the stock’s steep decline in value, and thus breached their duty of prudence. The district court dismissed the class-action complaint on the ground that the plaintiffs had not alleged facts sufficient to overcome the presumption that the fiduciaries’ continued investment in company stock was reasonable. The Sixth Circuit reversed, holding that the presumption was merely evidentiary and thus inapplicable at the pleading stage.
At the Supreme Court’s invitation, the Solicitor General filed an amicus brief in November recommending that the Court reformulate the question presented and grant review on whether a presumption of reasonableness should be applied at any stage of the proceedings. Answering that question in the negative (which is the view that the Solicitor General advanced) would vastly broaden the potential liability of fiduciaries who invest in company stock that subsequently drops in value. In a provisional victory for companies that offer employer stock funds to retirement-plan participants, however, the Supreme Court declined to reformulate the question presented, implying that review will be limited to whether the presumption must be overcome at the pleading stage.
Review of even that more limited question is tremendously important to the business community, especially public companies with retirement plans. Without the traditional presumption that a plan’s fiduciaries reasonably invest in the employer’s stock, it will be more difficult to obtain dismissal of ERISA suits challenging such investments and thereby to avoid the hydraulic pressure to settle created by class actions that survive dismissal motions.
Absent extensions, amicus briefs in support of the petitioner will be due on February 3, 2014, and amicus briefs in support of the respondents will be due on March 5, 2014. Any questions about the case should be directed to Joshua D. Yount (+1 312 701 8423) in our Chicago office or Brian D. Netter (+1 202 263 3339) in our Washington office.
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