‘Dudenhoeffer' Ruling Poses Causation Questions

By Jacklyn Wille  

June 30 — The U.S. Supreme Court's invalidation of the Moench presumption may lead to battles over loss causation and increased litigation involving private companies' employee stock ownership plans, attorneys said in a June 27 webinar.

Further, while the high court's June 25 ruling in Fifth Third Bancorp v. Dudenhoeffer,2014 BL 175777, U.S., No. 12-751, 06/25/14 won't have retroactive effect on previously decided cases, it will affect pending cases and may allow for new lawsuits against fiduciaries that defeated stock-drop claims prior to class certification, attorneys said during the webinar.

Loss Causation

Gregory Y. Porter, a partner with Bailey & Glasser LLP in Washington, said that post-Moench presumption stock-drop litigation could center on how to demonstrate loss causation and which party has the burden of proof on that issue.

That is because it's often difficult to say exactly how a stock would have behaved under a different set of circumstances, Porter said.

Further, Porter said he expected that the same type of evidence used to show loss causation in securities cases likely would be used in stock-drop cases under the Employee Retirement Income Security Act.

Turning to the practical impact of the ruling, Porter said that companies would be wise post-Dudenhoeffer to ensure that their chief financial officers and chief executive officers don't sit on plan committees.

Brian T. Ortelere, a partner with Morgan, Lewis & Bockius LLP in Philadelphia and New York, agreed, saying that he's “been saying for years that C-level executives shouldn't sit on these committees.”

That is now “even clearer” after Dudenhoeffer, Ortelere said.

‘Halliburton' Creates Quandary

The Court's ruling in Dudenhoeffer can be better understood in the context of its ruling two days earlier in Halliburton Co. v. Erica P. John Fund, Inc.,2014 BL 172975, U.S., No. 13-317, 06/23/14, Porter said.

In Halliburton, the Court allowed securities class action plaintiffs to show reliance on alleged misrepresentations by using the fraud-on-the-market theory.

According to Porter, the timing of the Dudenhoeffer decision three days after Halliburton was “no accident,” as Dudenhoeffer wouldn't have been written the way it was “without the survival of the efficient market theory” in Halliburton.

Porter said that the interplay between the two decisions puts fiduciary defendants in “a bit of a quandary” when faced with a securities lawsuit and a companion ERISA fiduciary breach lawsuit.

That is because the Halliburton decision invites defendants to introduce evidence of why the market wasn't efficient in the early stages of litigation.

However, that is the same information that Dudenhoeffer asks plaintiffs to produce, Porter said.

Effect on Other Cases

Ortelere said that Dudenhoeffer won't have a retroactive effect on cases that already have been dismissed or settled.

Even so, the ruling may allow for new lawsuits to be filed against fiduciaries that defeated prior stock-drop claims before those claims progressed to the class certification stage, said Jeremy P. Blumenfeld, a partner with Morgan, Lewis & Bockius LLP in Philadelphia.

In those cases, Blumenfeld said that while the original named plaintiffs would be barred from reviving their claims, other plan participants theoretically could assert new claims under Dudenhoeffer, to the extent allowed by the statute of limitations.

However, ERISA's six-year statute of limitations for fiduciary breach actions may rule out many of these new lawsuits, Porter said, because “the clock has run or has come close to running on anything that happened with the 2008 financial crisis.”

Porter said that the Dudenhoeffer ruling might cause ESOP stock-drop litigation to “ramp up” in the area of privately held companies.

Further, stock-drop litigation may increase across the board post-Dudenhoeffer, Porter said, adding that he hopes that people have “learned their lessons about suing over small price swings.”

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

To contact the editor responsible for this story: Sue Doyle at sdoyle@bna.com

Text of the high court's ruling is available at http://www.bloomberglaw.com/public/document/Fifth_Third_ Bancorp_v_Dudenhoeffer_No_ 12751_2014_BL_175777_US_Jun.