BY NEVIN E. ADAMS, JD NOVEMBER 10, 2020
FIDUCIARY RULES AND PRACTICES
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—well, the Supreme Court has decided (again) not to provide it.
It’s an issue that the U.S. Supreme Court had initially 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.”
How We Got Here
The plaintiffs had 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.
Under the Fifth Third Bancorp v. Dudenhoeffer standard (which had been the law of the land since 2014), the 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.”
But in January, in a short, unsigned opinion, the justices declined to address arguments raised by the IBM defendants—and the federal government in its amicus brief—that involved federal securities laws. The Supreme Court 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…”. And while that was clearly an issue—the nation’s highest court pointed out that “the Second Circuit did not address the[se] argument[s], and, for that reason, neither shall we,” they wrote, kicking the case back to the Second Circuit “to determine their merits, taking such action as it deems appropriate.
However, the Second Circuit (also) declined to address these arguments on remand—and reinstated its initial opinion. And, the issue basically unresolved, IBM (again) asked the Supreme Court to consider the issues, specifically:
whether Dudenhoeffer’s “more harm than good” standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time and thus plan fiduciaries should have made earlier disclosures through regular securities law filings; and
whether ERISA imposes a duty on a plan fiduciary who is also a corporate officer to use inside information for the benefit of plan participants.
As part of their petition for consideration, IBM explained that “The Fifth, Sixth, and now Eighth Circuits have rejected the same ERISA claims, premised on the same allegations, brought by the same counsel. The Eighth Circuit, moreover, had the benefit of the Second Circuit’s reinstated opinion and expressly rejected its reasoning.”
That argument—and the questions posed notwithstanding—amidst what the IBM defendants have alleged is a “clear circuit split”—remain unresolved by the Supreme Court.
What This Means
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, 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.
The split in the circuits might suggest that suits based on the same issue might be adjudicated differently based on the venue. Or it might just suggest that the facts in this case are distinguishable from that that has led to litigation in other circuits. Regardless, for now anyway, the Fifth Third/more harm standard established by the Supreme Court would seem to “hold.”