BP Beats ERISA Challenge to Stock Drop in 5th Circuit

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By Jacklyn Wille

Sept. 27 — BP Plc. prevailed in a lawsuit accusing it of losing employees’ retirement savings when the company’s stock price fell after the 2010 Deepwater Horizon oil spill ( Whitley v. BP, PLC , 2016 BL 316686, 5th Cir., No. 15-20282, 9/26/16 ).

This much-anticipated decision by the U.S. Court of Appeals for the Fifth Circuit is the latest court ruling to emphasize the high bar facing workers who challenge drops in publicly traded stock price under the Employee Retirement Income Security Act. Since the U.S. Supreme Court changed the pleading standard for ERISA-based stock drop lawsuits in 2014’s Fifth Third Bancorp v. Dudenhoeffer, courts have rejected lawsuits against companies like Lehman Bros., JPMorgan Chase, Edison International, and International Business Machines Corp.

This loss for BP employees is also a loss for the Department of Labor and the Securities and Exchange Commission, which filed coordinated briefs urging the Fifth Circuit to adopt a more forgiving pleading standard. Without mentioning the DOL and SEC briefs, the Fifth Circuit said that workers challenging employer stock losses now bear “the significant burden of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.”

Decision ‘Makes Sense.’

H. Douglas Hinson, an ERISA attorney with Alston & Bird LLP who has defended companies from similar claims, praised the decision as a faithful interpretation of Supreme Court precedent.

“I think it’s a solid victory,” Hinson told Bloomberg BNA Sept. 27. “I think it’s also somewhat of an obvious decision, given what the district court had done, which was to flip the standard and place the burden on the defendants.”

Hinson, who filed an amicus brief in support of BP on behalf of the American Benefits Council, added that the Supreme Court has made it “very hard on plaintiffs to plead these types of cases.”

“The Fifth Circuit’s decision, following the standard laid out by the Supreme Court in Dudenhoeffer, makes sense,” Hinson said. “The burden on plaintiffs is high because courts do not want ERISA’s fiduciary standards to be used to force ERISA fiduciaries to be making disclosures about inside information concerning public companies outside the normal context of the securities laws, except in the most egregious and obvious of circumstances where there is no potential downside to doing so.”

No Guidance on Additional Facts

Samuel Bonderoff, a partner with Zamansky LLC in New York who represents employees bringing ERISA suits against their companies, criticized the Fifth Circuit for failing to identify the types of factual allegations that would pass muster under Supreme Court precedent.

“The Fifth Circuit in BP, like the Second Circuit in JPMorgan, has concluded that, even where ERISA fiduciaries are aware that employees are being defrauded by the company, more specific facts must be pleaded to pass muster under Dudenhoeffer,” Bonderoff told Bloomberg BNA in a Sept. 27 e-mail.

“Unfortunately, the Fifth Circuit declined to suggest what those additional facts might look like,” said Bonderoff, who wasn’t involved in the BP litigation. “Focus will now turn to the remaining circuits and their district courts, and perhaps ultimately the Supreme Court again, to make sense of Dudenhoeffer’s implications.”

A spokesman for BP praised the decision in a Sept. 27 e-mail to Bloomberg BNA.

“BP has long maintained that the plaintiffs’ claims lack merit, and we are pleased that the Fifth Circuit agreed that plaintiffs failed to meet the pleading requirements for such claims,” Geoff Morrell, BP’s senior vice president for U.S. communications and external affairs, said.

Counsel for the BP workers didn’t immediately respond to Bloomberg BNA’s request for comments.

High Bar for Workers

The lawsuit against BP is an attempt to hold corporate executives liable for a drop in company stock price allegedly attributable to inside information known to the executives but kept secret from the workers who invested their retirement savings in BP stock.

Under the Supreme Court’s new framework, the BP workers were required to identify some alternative action the executives could have taken in lieu of continuing to hold the BP stock in question. According to the Supreme Court, that alternative action must be consistent with securities laws and not, in the view of a prudent fiduciary, likely to do more harm than good to the company stock.

The BP worker’s proposed alternative actions—disclosing the inside information and freezing trades of BP stock—were insufficient to state a claim under this standard, the Fifth Circuit said. According to the court, both suggested actions “would likely lower the stock price,” meaning that a prudent fiduciary “could very easily conclude that such actions would do more harm than good.”

This ruling is a direct rebuke of the position advanced in the DOL’s brief. In the department’s view, fiduciaries of employer stock plans will never do more harm than good to the plan by disclosing a corporate fraud that will ultimately come to light and potentially do even more damage.

Judge Edith Brown Clement wrote the court’s Sept. 26 decision, which was joined by Judges Jacques L. Wiener Jr. and Gregg J. Costa.

The BP workers were represented by Shepherd Finkelman Miller & Shah LLP, Ajamie LLP, Milberg LLP and Gainey McKenna & Egleston. BP was represented by Steptoe & Johnson LLP.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

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