Today, the Supreme Court, in a 9-0 decision authored by Justice Breyer, issued its decision in Fifth Third Bancorp v. Dudenhoeffer, stating, “We hold that no such presumption [of prudence] applies. Instead, ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.” The Court did not address the ERISA duty of loyalty.
Even though the Court has firmly placed the presumption of prudence, created in Moench v. Robertson, 62 F. 3d 553, 571 (3d Cir. 1995) and adopted in some form by all of the Courts of Appeal, see our prior articles, into the dustbin of American jurisprudence, there is much in Dudenhoeffer to warm the hearts of ERISA fiduciaries.
The Court reversed the decision of the Court of Appeals for the Sixth Circuit. The Sixth Circuit had held that a complaint alleging that the fiduciaries should have sold publicly traded stock (or take other action not specifically authorized by ESOP documents) just before a substantial decline in stock prices stated a valid ERISA claim.
Practitioners, employee benefits professionals, and of course fiduciaries, should note these statements of the Court in Dudenhoeffer:
• The Court expressly recognized that a goal of Congress is to encourage the establishment of ESOPs, and that Congress “is deeply concerned that the objectives sought by this series of laws will be made unattainable by regulations and rulings which treat [ESOPs] as conventional retirement plans, which reduce the freedom of the employee trusts and employers to take the necessary steps to implement the plans, and which otherwise block the establishment and success of these plans.” This passage could be cited to the Department of Labor, which, for years, has exhibited antagonism towards ESOPs.
• The Court stated that plaintiffs should be unable to survive a motion to dismiss and thereby engage in discovery merely by alleging that the fiduciaries should have taken action to protect publicly-traded company stock in light of publicly available information. Discovery, of course, dramatically increases settlement values. Prior Supreme Court decisions allow discovery only if the complaint makes “plausible” allegations. The Court in Dudenhoeffer said: “[W]here a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” (Emphasis added.)
• The Court stated that plaintiffs will not enter the discovery door without strong allegations that the fiduciaries breached their duties on the basis of inside information: “To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must 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.” (Emphasis added.) For a further analysis of the relation between securities laws and ERISA, see M. Casciari and I. Morrison, “Should the Securities Exchange Act be the Sole Federal Remedy for an ERISA Fiduciary Misrepresentation of the Value of Public Employer Stock,” John Marshall Law Review, Vol. 39 No. 3 (Spring, 2006).
• The Court stated that plaintiffs cannot survive a motion to dismiss without plausible allegations of conduct the fiduciaries should have undertaken: “[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.” (Emphasis added.)
These statements of the Court may help fiduciaries win motions to dismiss not only in the company stock context, but also in other contexts. The Court’s statements may be seen as having the effect of raising the plausibility bar applicable to all ERISA fiduciary breach claims.