Your ERISA Watch – Supreme Court Sends Closely Watched Fiduciary Duty Case Back to the Second Circuit Court of Appeals

Yesterday, in Retirement Plans Committee of IBM v. Jander, No. 18-1165, 2020 WL 201024 (U.S. Jan. 14, 2020), the U.S. Supreme Court vacated and remanded a closely watched ESOP breach of fiduciary duty case to the Second Circuit Court of Appeals. The High Court’s per curiam decision is a short one so allow me to give you some background to understand the full picture.

In December 2018, the Second Circuit issued a decision in Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620 (2d Cir. 2018), cert. granted, 139 S. Ct. 2667, 204 L. Ed. 2d 1068 (2019), and vacated and remanded sub nom. Retirement Plans Committee of IBM v. Jander, No. 18-1165, 2020 WL 201024 (U.S. Jan. 14, 2020), where it addressed the question of what standard one must meet to plausibly allege that fiduciaries of an employee stock option plan (“ESOP”) have violated ERISA’s duty of prudence.

Plaintiffs, who are participants in the company’s ESOP, claim that the plan’s fiduciaries failed to disclose its knowledge that a company division was overvalued, which lead to an artificially inflated company stock price that harmed the ESOP members. In order to plausibly allege a duty-of-prudence claim, Plaintiffs must allege that a proposed alternative action would not have done more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already head by the fund.  Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2473, 189 L. Ed. 2d 457 (2014) (“Fifth Third”).

The Second Circuit identified that the test set forth in Fifth Third to determine whether a plaintiff has plausibly alleged that the actions a fiduciary took were imprudent in light of available alternatives is unclear. It explained,

"The Court first set out a test that asked whether ‘a prudent fiduciary in the same circumstances would not have viewed [an alternative action] as more likely to harm the fund than to help it.’ This formulation suggests that courts ask what an average prudent fiduciary might have thought. But then, only a short while later in the same decision, the Court required judges to assess whether a prudent fiduciary ‘could not have concluded’ that the action would do more harm than good by dropping the stock price. This latter formulation appears to ask, not whether the average prudent fiduciary would have thought the alternative action would do more harm than good, but rather whether any prudent fiduciary could have considered the action to be more harmful than helpful. It is not clear which of these tests determine whether a plaintiff has plausibly alleged that the actions a defendant took were imprudent in light of available alternatives."

Jander, 910 F.3d at 626-27 (internal citations omitted). Rather than settle this dispute, the Court declined to decide which of the two standards is correct. This is because it found that Plaintiff plausibly pleads a duty-of-prudence claim even under the more restrictive test.

The Court disagreed with the district court’s determination that a prudent fiduciary could have concluded that the three proposed alternative actions—disclosure, halting trades of IBM stock, or purchasing a hedging product—would do more harm than good to the fund. On appeal, Plaintiff proposed just one alternative action: early corrective disclosure of the microelectronics division’s impairment, conducted alongside the regular SEC reporting process.  The Court found that a prudent fiduciary could not have concluded that the corrective disclosure would do more harm than good. The Plan Defendants allegedly knew that IBM stock was artificially inflated, they had the power to disclose the trust to the public and correct the artificial inflation, and the failure to promptly disclose the value of the IBM division hurt management’s credibility and the long-term prospects of IBM as an investment. Plaintiff “plausibly alleges that a prudent fiduciary need not fear an irrational overreaction to the disclosure of fraud.” Id. at 630. Lastly, Defendants knew that the disclosure of the truth was inevitable because IBM was likely to sell the business and would not be able to hide its overvaluation from the public at that point. 

For these reasons, the Second Circuit found that Plaintiff stated a claim for violation of ERISA’s duty of prudence. With respect to the dismissal of the parallel securities suit, the Second Circuit found that this was not preclusive. Plaintiff may allege directly or indirectly that the Plan Defendants committed securities fraud. The court reversed the judgment below and remanded the matter to the district court.

On June 3, 2019, the U.S. Supreme Court granted the ESOP fiduciaries’ petition for a writ of certiorari. 

In the per curiam opinion issued yesterday, the High Court held that the parties’ briefing on certiorari review focused on matters that the Second Circuit had not considered, finding it appropriate to vacate and remand back to the Second Circuit. Specifically, the Court noted that the ESOP fiduciaries argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information. The Government, presenting the views of the SEC and DOL, “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 ....’” Jander, 2020 WL 201024, at *1. In light of the Court’s statement in Fifth Third that the views of the SEC might well be relevant to ERISA’s duty of prudence in this context, the Court believes it is appropriate to allow the Second Circuit to entertain these arguments in the first instance.

Justice Kagan issued a concurring opinion, in which Justice Ginsburg joined. They stated that the Second Circuit may decide under its usual rules of waiver or forfeiture to not consider those arguments. But, if the Second Circuit does address the merits of the argument, it has to ask whether it is consistent with the Court’s decision in Fifth Third. Justice Kagan “cannot see how” it is consistent when Fifth Third makes it clear that an ESOP fiduciary at times has a duty to act on inside information.

Justice Gorsuch issued a separate concurring opinion. He questioned the basis of Respondents’ claim that certain ERISA fiduciaries should have used their positions as corporate insiders to cause the company to make an SEC-regulated disclosure. He observed a flaw: “In ordering up a special disclosure, the defendants necessarily would be acting in their capacities as corporate officers, not ERISA fiduciaries. Run-of-the mill ERISA fiduciaries cannot, after all, order corporate disclosures on behalf of their portfolio companies.” Respondents, according to Justice Gorsuch, seek to impose an even higher duty on fiduciaries with the authority to make or order SEC-regulated disclosures on behalf of the corporation. But, this was not addressed by the Second Circuit.

Further, Justice Gorsuch explained that the Court in Fifth Third held that a plaintiff must identify a helpful action that the defendant could have taken consistent with securities laws, but the Court did not consider whether other necessary conditions to suit might exist because the question wasn’t before it. In other words, the proposed alternative action alone may not be a sufficient condition to an ERISA suit. “No one in [Fifth Third] asked the Court to decide whether ERISA plaintiffs may hold fiduciaries liable for alternative actions they could have taken only in a nonfiduciary capacity.”

Stay tuned in to Your ERISA Watch for further developments in this case. There were lots of other notable decisions this past week so keep reading. 

For those of you attending the 46th Annual TIPS Mid-Winter Symposium on Insurance and Employee Benefits – Life, Health and Disability, and ERISA: Emerging Issues and Litigation, starting tomorrow in Austin, TX, I hope to see you there!

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