Court issues summary decision limiting claims against ERISA-governed ESOPs
on Jan 25, 2016 at 5:20 pm
This morning’s order list included something of a surprise: a summary reversal in a civil case that involved neither arbitration nor qualified immunity. Amgen v. Harris is a case under the Employee Retirement Income Security Act of 1974 (ERISA), involving claims by beneficiaries against an ERISA-covered employee stock ownership plan (an ESOP) – a retirement plan for employees that invests in the employer’s stock. The claims relate to a sharp fall in the price of Amgen stock during 2007. Steve Harris and the other plaintiffs claim that the failure of the plan’s fiduciaries to take any action to mitigate the harm suffered by the employees (the plan’s beneficiaries) violated the duties of prudence and loyalty that ERISA imposes on the fiduciaries.
The case follows directly from the 2014 decision in Fifth Third Bancorp v Dudenhoeffer, which involved similar claims against Fifth Third’s ESOP. [Full disclosure: I represented the plaintiffs in Fifth Third.] Before Fifth Third, a consensus had developed in the courts of appeals that, at least in the absence of financial collapse, ERISA fiduciary duties did not apply to ESOP plans: because the plans were obliged to invest in employer stock, the courts thought it inappropriate to second-guess the decisions of such plans to maintain those investments. The Court in Fifth Third rejected that idea, explaining that the language of ERISA’s fiduciary duties applies equally to all plans, whether they do or do not own employer stock.
But what the Court gave with one hand it took back (at least in part) with the other. Agreeing that the fiduciary duties applied, the Court nevertheless cautioned that trial courts should be skeptical of claims involving publicly traded stock, doubting that ERISA fiduciary duties should be construed to require fiduciaries to violate the securities laws. Specifically, for claims that involve the failure to respond to inside (that is, non-public) information, the Court explained that “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” (my emphasis). [A separate discussion provided a parallel caution for claims involving material public information, but this case involves only non-public information.]
This case involves a second passage from Fifth Third, a few pages after the passage I quoted above, in which the Court went on to note that “lower 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 [the alternative action] would do more harm than good” (my emphasis).
The Ninth Circuit had ruled for the plaintiffs before the decision in Fifth Third. Reassessing the case in response to Fifth Third, the court of appeals explained that the fiduciaries in this case violated the securities laws by not disclosing the information, and thus thought it “quite plausible” that stopping further investments in the stock would not harm the participants. Unfortunately, the Ninth Circuit did not go on to consider whether a prudent fiduciary “could not have concluded” that the alternative action would do more harm than good. It is not entirely clear why the court of appeals did not address what the prudent fiduciary “could not have concluded.” Perhaps the court of appeals thought that the two passages in the Court’s opinion were intended to be parallel phrasings of the same idea. It would not have been an entirely unreasonable reading of the somewhat disjointed Fifth Third opinion.
In any event, today’s reversal establishes that the two passages state separate hurdles for ERISA ESOP cases involving non-public information. The Court acknowledged that the underlying facts of the case might satisfy Fifth Third’s “could not have concluded” standard. But, the opinion explained, the complaint in this case did not meet that standard: “Having examined the complaint, the Court has not found sufficient facts and allegations to state a claim for breach of the duty of prudence.” Accordingly, the Court remanded the case to allow the district court to assess whether the plaintiffs can provide an appropriate amendment of their complaint.
Today’s opinion is an interesting response to the turmoil in the courts of appeals responding to Fifth Third. On the one hand, it is fair to say that the lower courts have had difficulty applying the heightened pleading standard from Fifth Third. Still, it seems a little premature for the Court to return to the area so quickly. For one thing, it is not yet two years since the Court decided Fifth Third; most of the courts of appeals have not yet addressed the subject at all. Moreover, none of the courts of appeals have addressed how Fifth Third applies to the parallel claims for breach of the duty of loyalty. Because most ESOP fiduciaries are insiders, complaints in the area commonly include claims for breach of the duties of prudence and loyalty. Both Fifth Third and this case include such claims, but the Court in both cases addressed only the prudence claims. The defendant in Fifth Third did not challenge the loyalty claims; the Ninth Circuit in Amgen had not yet addressed them.
This case is just as likely to resolve the turmoil over ERISA ESOP litigation as the Court’s repeated summary reversals in the habeas cases are to settle the law in that area. It certainly will signal the difficulty of stating claims that fiduciaries acted imprudently by failing to respond to material non-public information. But given the issues still awaiting attention, the only thing to be sure of is that this subject will return to the Court again soon.
