Supreme Court Provides Additional Clarity on Pleading Requirements for ERISA Stock Drop Cases

The Supreme Court has provided additional clarity on the Fifth Third Bancorp v. Dudenhoeffer decision.  In Dudenhoeffer, the Supreme Court held that a fiduciary decision to invest in employer stock is not deemed to be prudent; however, in bringing a claim for a fiduciary breach, plaintiffs must allege an alternative action that a plan fiduciary could have taken that would be consistent with the securities laws and that a prudent fiduciary would not have viewed as more likely to harm the stock fund than help it.  For additional information on the Dudenhoeffer decision, please see our July 15, 2014 blog.

In Amgen v. Harris, participants sued following a significant decline in the value of the company stock fund in the employer’s employee stock ownership plan, claiming that the company stock fund was an imprudent investment.

The Ninth Circuit determined that the plaintiffs’ complaint plausibly alleged that there was a genuine issue of whether the fiduciaries breached the prudent person standard by continuing to hold and purchase Amgen stock following its decline in price.

In a four page decision, the Supreme Court reversed the Ninth Circuit and held that for plaintiffs to challenge the prudence of a company stock fund in a retirement plan, the plaintiffs must allege that a prudent fiduciary could not have concluded that stopping purchases of the company stock fund or disclosing negative information to the public would do more harm than good to the company stock fund by causing a drop in the stock price and a drop in the value of the stock already held in the company stock fund.

The Supreme Court held that the Ninth Circuit failed to properly evaluate the complaint because the Ninth Circuit failed to evaluate whether the complaint in its current form “plausibly alleged” that the alternative action would do more harm than good.

The Supreme Court remanded the case back to the Ninth Circuit, but also noted that it is within the District Court’s discretion to allow the plaintiffs to amend their complaint to plead a claim for a breach of fiduciary duty based on the standards required by the Dudenhoeffer decision.

This decision provides some additional guidance on how courts will apply the Dudenhoeffer decision, which most plan fiduciaries likely consider to be a victory.  Nonetheless, it remains clear that plan fiduciaries must actively monitor a company stock fund in accordance with ERISA’s prudence requirement.