On June 25, 2014, the Supreme Court set forth a long-anticipated ERISA decision--Fifth Third Bancorp. v. Dudenhoeffer1--putting the final nail in the coffin of the misguided Moench presumption engineered by several Courts of Appeals. However, while with one hand the Court giveth to plan participants, with the other it taketh away, as it expressed skepticism for certain theories of liability based on investment decisions involving publicly-traded funds.
The End of Moench
Beginning with Moench v. Robertson,2 several Courts of Appeal adopted the presumption that an ESOP or EIAP fiduciary acts prudently whenever it invests assets in employer stock. In some circuits, the presumption applied at the pleading stage, while in others it applied at summary judgment.Furthermore, several circuits set a high bar for rebuttal, requiring that a plaintiff provide "evidence that the company is on the brink of collapse or is undergoing serious mismanagement."3
In the appellate decision on review in Fifth Third, the Sixth Circuit had held that, while the presumption of prudence for an ESOP fiduciary was appropriate, it did not apply at the pleading stage, but rather at summary judgment.4 Furthermore, it found that to rebut the presumption, a plaintiff need only show that "a prudent fiduciary acting under similar circumstances would have made a different investment decision."5
On review, the Supreme Court fully rejected the Moench presumption, finding that a plain-text reading of the relevant provisions provided no basis for it. The Court recognized that ERISA exempts ESOP fiduciaries from "the diversification requirement" normally required of ERISA fiduciaries and the prudence requirement "to the extent that it requires diversification."6 However, it found no reason for extending this express exemption to a presumption of prudence. Rather, it found that ERISA's "duty of prudence applies to all ERISA fiduciaries," including ESOP fiduciaries.7 In reaching its holding, the Court rejected several arguments for preferential treatment of ESOPs. First, it rejected the argument that the nonpecuniary goals of a plan, such as the promotion of employee ownership, modify ERISA's duty of prudence.8Second, it rejected the argument that plan documents could waive the fiduciary duty of prudence.9 Third, though the Court recognized the possibility that a regular duty of prudence for ESOP fiduciaries might conflict with insider trading rules, it found that an ESOP-specific fiduciary duty was an "ill-fitting means" to address this issue.10 Finally, it rejected the argument that the Moench presumption was necessary to prevent burdensome lawsuits that would frustrate Congress's intent to promote ESOPs.11
Pleading Breach of the Duty of Prudence Claims Based on Investment Decisions Involving Publicly-Traded Funds
After soundly rejecting the Moench presumption, the Court considered how a breach of the duty of prudence claim based on an investment decision involving publicly-traded funds might proceed past the pleading stage, looking to how allegations regarding both public and non-public information might form the basis for such a claim.
In Fifth Third, the plaintiffs had alleged that the defendants should have known in light of publicly available information that purchase of Fifth Third stock was imprudent. The Court limited this line of argument, echoing the "efficient market" analysis adopted by some appellate courts in holding that "allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances."12 The Court further defined such "special circumstances" as those "affecting the reliability of the market price as an unbiased assessment of the security's value in light of all public information that would make reliance on the market's valuation imprudent."13
Next, the Court looked to breach of the duty of prudence claims based on non-public information about publicly-traded stock, concluding that, "[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must 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."14 The Court set forth three considerations for such claims: (1) that fiduciaries cannot be required to break the law to meet their duty of prudence; (2) "the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws"; and (3) whether "stopping purchases--which the market might take as a sign that insider fiduciaries viewed the stock as a bad investment--or publicly disclosing negative information would do 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 held by the fund."15
Unfortunately, the Court in Fifth Third does not give much guidance as to how to plead a viable breach of the duty of prudence claim based on publicly available information about publicly-traded funds, nor does it provide much guidance on the intricate interaction between insider trading laws and ERISA's duty of prudence as applied to non-public information about publicly-traded funds. As for the latter point, the Court points out that the views of the Securities and Exchange Commission may be relevant, suggestive of an amicus role for the SEC in future "non-public information" litigation, as well as room for regulatory guidance. As for the former point, the only specific guidance provided by the Court is its rejection of the Court of Appeals' conclusion that, because "Fifth Third engaged in lending practices that were equivalent to participation in the subprime lending market . . . [and] Defendants were aware of the risks of such investments by the start of the class period," Fifth Third stock was an imprudent investment.16
Appellate decisions suggest some ways plan participants might state viable claims based on investments in publicly-traded funds after Fifth Third. For example, in White v. Marshall & Ilsey Corp.,17 the Seventh Circuit expressed skepticism about ESOP prudence claims involving publicly-traded employer stocks. Yet, it recognized that, apart from a claim based on the over- or under-valuing of particular investments, plaintiffs may assert a claim based on an "excessive risk theory." In Bunch v. W.R. Grace & Co.,18 the court rejected a claim in which the plaintiffs used the efficient market theory to argue that, in placing a different value than the market value for a publicly-traded stock, a plan fiduciary breached its duty of prudence by "second guessing" the market. Post-Fifth Third, it remains to be seen whether such a "second guessing" theory might be viable, given the Court's nod to efficient market theory.
More importantly, as made clear by Bunch,19 market price is but one factor courts consider in evaluating whether fiduciaries breached their fiduciary duty of prudence. Rather, the prudence of an ERISA fiduciary is evaluated according to the statutory test--whether a fiduciary has acted with the "'care, skill, prudence and diligence . . . that a prudent man acting in a like capacity and familiar with such matters would use'"--evaluated in the totality of the circumstances.20
In short, Fifth Third sends a clear message to ESOP fiduciaries that they are bound by the same standard of prudence as any other fiduciary. Thus, we can anticipate further litigation against fiduciaries that breach their duty of prudence when making investment decisions involving both publicly-traded and non-publicly traded stock funds.
1134 S. Ct. 2459 (2014).
262 F.3d 553 (3d Cir. 1995).
3Quan v. Computer Sciences Corp., 623 F.3d 870, 882 (9th Cir. 2010) (citation omitted).
4Dudenhoeffer v. Fifth Third Bancorp,692 F.3d 410, 419 (6th Cir. 2012).
5Id. at 418 (citation omitted).
6134 S. Ct. at 2466 (quoting 29 U.S.C. § 1104(a)(2)).
7Id. at 2467.
8134 S. Ct. at 2468.
9134 S. Ct. at 2469 (citing Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559 (1985) (trust documents cannot excuse ERISA fiduciaries from their duties)).
11Id. at 2470.
12134 S. Ct. at 2471. Notably, the Court has not embraced efficient market theories whole hog; in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2410 (2014), the Court recognized that "market efficiency is a matter of degree . . . ".
13Id. at 2472 (quotation marks and citation omitted).
15Id. at 2472-73.
16Id. at 2472.
17714 F.3d 980, 992-98 (7th Cir. 2013).
18555 F.3d 1 (1st Cir. 2009).
19555 F.3d at 7,
20Id. (quoting ERISA § 404, 29 U.S.C. § 1104(a)(1)(B)).