Supreme Court Sends Its Latest “Stock Drop” Case Back to the Second Circuit

Blog Post Authors: Jonathan Dilger (jdilger@sfmslaw.com); Nicolas A. Lussier (nlussier@sfmslaw.com)

On January 14, 2020, the Supreme Court remanded Retirement Plans Committee of IBM v. Jander back to the Second Circuit to the surprise of many employee benefit and retirement experts who anticipated that the Court would use Jander as an opportunity to further clarify the strict application of the pleading standard created by the Supreme Court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409.

In Dudenhoeffer, the Court tangled with the question of how to apply fiduciary duties imposed by ERISA on corporate insiders with access to material, non-public information regarding their company stock held  in retirement plans regulated by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001.  Rather than simply holding that such insiders could not hold positions as fiduciaries without exposing themselves to liability under ERISA (which likely would have ushered in an era of outside, unbiased fiduciaries akin to outside directors on company boards), the Supreme Court in Dudenhoeffer created a cumbersome and arguably impracticable standard when it held that “a complaint must plausibly allege (1) an alternative action that the defendant could have taken, (2) that would have been legal, and (3) that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it” to state an ERISA fiduciary breach of prudence on the basis of information. Dudenhoeffer, 573 U.S. 409, 428.

According to the Supreme Court in Jander, the arguments presented by the Jander fiduciaries and the Solicitor General (on behalf of the SEC and the DOL) did not concentrate on the Dudenhoeffer standard.  Instead, the fiduciaries contended that Employee Stock Ownership Plan (“ESOP”) fiduciaries have no duty under ERISA to act on inside information, and the Solicitor General argued that it would be inconsistent to have a duty to disclose inside information under ERISA that is not otherwise required by federal securities laws.                                                                                                                                                                                                                                                                                                                                                            The Supreme Court concluded that the Second Circuit should entertain these arguments in the first instance, relying on the view expressed in its Dudenhoeffer decision that the position of the SEC might “well be relevant” to applying ERISA’s duty of prudence to stock drop cases.  The Jander case represented an opportunity to clarify the standard created by Dudenhoeffer.  The Supreme Court, however, criticized the parties during oral arguments, saying the arguments offered by the Jander fiduciaries and the Solicitor General (on behalf of the SEC and the DOL) did not concentrate on the Dudenhoeffer standard in a sufficient manner.  Instead, the fiduciaries took a different route, contending that ESOP fiduciaries have no duty under ERISA to act on inside information, and the Solicitor General argued that it would be inconsistent to have a duty to disclose inside information under ERISA that is not otherwise required by federal securities laws.  In sending the case back down to the Second Circuit, the Supreme Court concluded that the Second Circuit should entertain the arguments in the first instance, relying on the view expressed in its Dudenhoeffer decision that the position of the SEC might “well be relevant” to applying ERISA’s duty of prudence to stock drop cases.

In his concurrence, Justice Gorsuch signaled that a change to the Dudenhoeffer standard might be in order.  Justice Gorsuch observed that “run-of-the-mill” ERISA fiduciaries are not able to order corporate disclosures on behalf of their companies, and that it would be strange to hold ERISA fiduciaries liable for actions they could have taken only in another, non-fiduciary role. Justice Gorsuch further remarked that, under Dudenhoeffer, a plaintiff alleging a helpful action that defendants could have taken is a necessary but not necessarily sufficient condition to an ERISA suit; otherwise any case in which a plaintiff raised a hypothetical helpful action consistent with the securities laws would be able to proceed. The latter statement seems to foreshadow a change, should his colleagues on the Supreme Court find him persuasive.

Stay posted for the Second Circuit’s decision on remand which, hopefully, will create some clarity in this confusing and challenging area of ERISA and employee benefits law.

The legal team at SFMS has significant experience litigating ERISA class action matters and has obtained some of the most significant recoveries for retirement plans in the history of the United States.  If you have any questions regarding this subject or this posting, please contact James E. Miller (jmiller@sfmslaw.com) or Alec Berin (aberin@sfmslaw.com).  We can also be reached toll-free at 877-891-9880.

Shepherd, Finkelman, Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, and Pennsylvania. SFMS is an active member of International Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe.  For more information about our firm, please visit us at www.sfmslaw.com.