In Fifth Third Bancorp v. Dudenhoeffer, a decision
written by Justice Breyer, the US Supreme Court unanimously held
that plan fiduciaries are not entitled to any special
"presumption of prudence" under the Employee Retirement
Income Security Act of 1974 (ERISA) when they decide to buy or hold
employer stock in an employee stock ownership plan (ESOP). The
Supreme Court concluded that nothing in the text of ERISA creates a
"special presumption favoring ESOP fiduciaries." ESOP
fiduciaries, therefore, are subject to the same general duty of
prudence that applies to all ERISA fiduciaries, 29 U.S.C. §
1104(a)(1)(B), except for the statutory exemption that having an
ESOP that holds principally one stock is not prohibited by ERISA
fiduciaries' ordinary duty to diversify the fund's assets.
See 29 U.S.C. § 1104(a)(2).
The "presumption of prudence," or the
"Moench doctrine," arose from the Third
Circuit's decision in Moench v. Robertson, 62 F.3d
553, 571 (3d Cir. 1995). Although courts of appeals had since split
on whether such a "defense-friendly presumption" would
apply at the motion to dismiss stage or only once the merits of a
case were reached—a split that led to the case before the
Court—the Supreme Court bypassed the split in the Circuits
entirely, holding that no presumption of prudence should apply
at all.
The decision vacated the Sixth Circuit's decision refusing to
dismiss a suit alleging that fiduciaries of Fifth Third's ESOP,
which permitted employees to invest their retirement savings in
Fifth Third common stock, breached the fiduciary duty of prudence
imposed by ERISA. Although the Supreme Court concluded that there
was no special presumption favoring ESOP fiduciaries, it also
remanded the case to the Sixth Circuit with guidance on how to
evaluate Fifth Third's motion to dismiss the ESOP
participants' claims for breach of the duty of prudence. This
decision changes how motions to dismiss ERISA "stock
drop" cases will be evaluated by courts in those Circuits that
had adopted the Moench doctrine, and provides some helpful
guidance to judges in all Circuits about how to evaluate whether
plaintiffs have pleaded enough facts plausibly to support a claim
of breach of duty by ERISA fiduciaries.
The Court provided the following guidance to lower courts on how to
evaluate future motions to dismiss complaints challenging the
prudence of ESOP fiduciaries. First, the Court noted that where a
company's stock is publicly traded, allegations that an ESOP
fiduciary should have recognized from publicly available
information that the market was improperly valuing the employer
stock—and thus, the fiduciary should have jettisoned the
stock—are "implausible as a general rule, at least in
the absence of special circumstances." The Court did not
explain what "special circumstances" may transform such a
claim into a plausible one.
Second, the Court explained that for a plan participant to state a
claim for breach of the duty of prudence on the basis of non-public
information, a plaintiff must plausibly allege an "alternative
action" that the ESOP fiduciary should 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." In making
this determination, the Court noted that several considerations
must be taken into account. First, ERISA's duty of prudence
does not require a plan fiduciary to break the law, and thus a
fiduciary cannot be imprudent for failing to buy or sell company
stock in violation of laws prohibiting insider trading. Second,
where a plaintiff faults fiduciaries for failing to stop making
additional company stock purchases or for failing to disclose
non-public information to prevent the market price for the
company's stock price from continuing to be inflated, courts
should weigh the extent to which imposing such an ERISA-based
obligation could conflict with the insider trading laws and
corporate disclosure requirements under the federal securities
laws. Third, courts should consider whether the complaint has
plausibly alleged that no prudent fiduciary in the defendant's
position could have concluded that stopping participants from
purchasing ESOP shares or publicly disclosing negative information
"would do more harm than good to the fund by causing a drop in
the stock price."
Although the framework for analysis provided by the Court may in
time prove helpful with respect to the issues company insiders face
when acting as plan fiduciaries by focusing lower courts on the
plausibility of the claims when analyzed in context, the
elimination of the presumption of prudence suggests that these
claims will be more fact specific and employers will continue to
face litigation risk in connection with the offering of the
employer's stock through an ESOP or other qualified retirement
plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
