Those who had hoped for some clarity – or perhaps a shift – in the standards involving where, and how, to draw the line between the obligations of corporate officials and ERISA plan fiduciaries – will have to wait a little longer.
It’s an issue that the U.S. Supreme Court had taken on when agreed to take up the case of In Ret. Plans Comm. of IBM v. Jander, which presented the issue “Whether Fifth Third Bancorp v. Dudenhoeffer’s ‘more harm than good’ pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.”
The Case
In this case, the plaintiffs alleged that the IBM defendants (IBM itself, along with the Retirement Plans Committee of IBM; Richard Carroll, IBM’s Chief Accounting Officer; Martin Schroeter, IBM’s CFO; and Richard Weber, IBM’s general counsel) failed to prudently and loyally manage the plan’s assets and adequately monitor the plan’s fiduciaries. Specifically, they argued that once the defendants learned that IBM’s stock price was artificially inflated, they should have either disclosed the truth about Microelectronics’ value or issued new investment guidelines temporarily freezing further investments in IBM stock by the plan.
However, those who had hoped for clarity – Fifth Third Bancorp v. Dudenhoeffer had been the law of the land since 2014 – instead found in a short, unsigned opinion (Ret. Plans Comm. of IBM v. Jander, U.S., No. 18-1165, unpublished 1/14/20), the justices declined to address arguments raised by the IBM defendants – and the federal government in its amicus brief – that involved federal securities laws.
Under the Fifth Third standard, plaintiffs were required to “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”
The Decision
However, the Supreme Court noted that while in their briefing on the merits the petitioners (fiduciaries of the ESOP at issue here) and the government (presenting the views of the Securities and Exchange Commission as well as the Department of Labor) focused their arguments primarily upon other matters. The justices stated that “the petitioners argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information.” And the government argued that an ERISA-based duty to disclose inside information that is not otherwise required to be disclosed by the securities laws would “conflict” at least with “objectives of” the “complex insider trading and corporate disclosure requirements imposed by the federal securities laws...”.
But “the Second Circuit did not address the[se] argument[s], and, for that reason, neither shall we,” they wrote.
That said, and recalling that in the Dudenhoeffer decision that the justices said that the views of the SEC might “well be relevant” to discerning the content of ERISA’s duty of prudence in this context, “…we believe that the Court of Appeals should have an opportunity to decide whether to entertain these arguments in the first instance.” And with that, they vacated the judgment of the appellate court, remanding the case to the Second Circuit “to determine their merits, taking such action as it deems appropriate.”
Now, that might be the end of things (for now, anyway), but a third of the court chose to share some interesting – but quite different – perspectives on the issue(s) the Supreme Court chose not to revisit.
Concurring, but Different Perspectives
Justices Kagan and Ginsburg concurred with the decision of the court, but chose to note in a concurring opinion some disagreements with the positions articulated by the parties in making their cases. “The petitioners argue that ERISA “imposes no duty on an ESOP fiduciary to act on insider information,” they wrote, “But Dudenhoeffer makes clear that an ESOP fiduciary at times has such a duty; the decision sets out exactly what a plaintiff must allege to state a claim that the fiduciary breached his duty of prudence by “failing to act on inside information.”
Turning their attention to the other aspect, they explain that “For its part, the Government argues that (absent extraordinary circumstances) an ESOP fiduciary has only the duty to disclose inside information that the federal securities laws already impose,” but go on to note that Dudenhoeffer characterizes the relationship between ERISA’s duty of prudence and the securities laws differently. It recognizes that a fiduciary can have no obligation to take actions “violat[ing] the securities laws” or “conflict[ing]” with their “requirements” or “objectives.”
They explain that “the decision explains that when an action does not so conflict, it might fall within an ESOP fiduciary’s duty – even if the securities laws do not require it. The question in that conflict-free zone is whether a prudent fiduciary would think the action more likely to help than to harm the fund.” Noting that “the Government candidly acknowledges that its approach would mostly wipe out that central aspect of the Dudenhoeffer standard,” the justices note that “That too does not accord with the decision.”
Gorsuch’s ‘Gist’
Justice Gorsuch also concurred in the judgment, but set out some unique thoughts. “The gist of respondents’ sole surviving claim is that certain ERISA fiduciaries should have used their positions as corporate insiders to cause the company to make an SEC-regulated disclosure,” he writes, explaining that “…merely stating the theory suggests a likely flaw: In ordering up a special disclosure, the defendants necessarily would be acting in their capacities as corporate officers, not ERISA fiduciaries. Run-of-the mill ERISA fiduciaries cannot, after all, order corporate disclosures on behalf of their portfolio companies. Nor do even all corporate insiders have that authority.”
He goes on to state that the effect of this is to create an even higher standard for “insider fiduciaries” than for regular ERISA fiduciaries. “Because ERISA fiduciaries are liable only for actions taken while “acting as a fiduciary,” it would be odd to hold the same fiduciaries liable for “alternative action[s they] could have taken only in some other capacity,” he writes.
He also writes that he doesn’t read the Dudenhofer standard as broadly as Kagan. While acknowledging that the Dudenhofer decision held that a plaintiff ’s ability “to identify a helpful action that the defendant could have taken consistent with the securities laws is a necessary condition to an ERISA suit,” he saw nowhere that that ruling held that that alone was sufficient to bring suit, “promising that a case may proceed anytime a plaintiff is able to conjure a hypothetical helpful action that would’ve been consistent with the securities laws.
“Dudenhoeffer made plain that suits requiring fiduciaries to violate the securities laws cannot proceed,” Gorsuch writes. “But only the most unabashed optimist could read that as guaranteeing all other suits may.
“The truth is, Dudenhoeffer was silent on the argument now before us for the simple reason that the parties in Dudenhoeffer were silent on it too. No one in that case asked the Court to decide whether ERISA plaintiffs may hold fiduciaries liable for alternative actions they could have taken only in a nonfiduciary capacity.” And it is beyond debate that "[q]uestions which merely lurk in the record, neither brought to the attention of the court nor ruled upon, are not to be considered as having been so decided as to constitute precedents.”
What’s Next
In 2014 the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs – and in fact, until that point the vast majority of these cases (including BP and Delta Air Lines, Lehman and GM) failed to get past the summary judgment phase. Indeed, the plaintiff in the IBM case had argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen. They had also noted that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”
However, when the “more harm than good” standard emerged with Fifth Third Bancorp v. Dudenhoeffer, it didn’t just establish a new standard, it also led to a refiling of claims of many of the so-called “stock drop” suits. Ironically, up until the IBM decision, those too had generally come up short of the new standard – though they did at least get past the summary judgment stage.
Indeed, since Fifth Third replaced the previous “presumption of prudence” standard, a number of these so-called “stock drop” cases have been relitigated, but most have resulted in judgments for the defendants, including BP and Delta Air Lines, Lehman and GM. In Dennis Smith v. Delta Airlines Inc., et al., the 11th Circuit noted that, “while Fifth Third may have changed the legal analysis of our prior decision, it does not alter the outcome.”
And so, for the moment, anyway, neither does this case.
- Log in to post comments