Fifth Third Bancorp v. Dudenhoeffer: Supreme Court Rejects Special 'Presumption of Prudence' for Employer Stock

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Adrienne L. Robertson, Esq.

Drinker Biddle & Reath LLP, Philadelphia, PA

Decision Provides a Useful Roadmap for Plan

Fiduciaries of Employee Stock Ownership Plans (ESOPs), defined
contribution plans that include an ESOP, and plans that include
employer stock have generally been able to rely on a special
"presumption of prudence" when challenged in court over their
decisions to continue to buy employer stock or offer that
investment option if the stock has substantially declined in value.
In Fifth Third Bancorp v. Dudenhoeffer , 573 U.S. __, 2014
BL 175777 (2014), the U.S. Supreme Court held that there is no
special presumption of prudence applicable to fiduciaries with
respect to employer stock. The Court has, however, provided a
roadmap to the lower courts to use in evaluating whether a claim
can proceed, the threshold for which may not be particularly easy
for plaintiffs to meet. This roadmap also serves as guidance to
plan fiduciaries in connection with employer stock investments.


In the Fifth Third case, former employees brought
suit against Fifth Third Bancorp. The plaintiffs alleged, in a
"stock drop" case, that the fiduciaries of the ESOP sponsored by
Fifth Third breached their ERISA duty of prudence by continuing to
invest in employer stock that the fiduciaries either knew or should
have known was inflated in value, and which subsequently lost
almost three-quarters of its value. The district court dismissed
the case on the grounds that the plaintiffs' allegations were
insufficient to overcome the special presumption of prudence. The
Sixth Circuit reversed that decision, reasoning that the
presumption of prudence did not apply at the pleading stage.

The Supreme Court took the Fifth Third case in order to
consider whether a presumption of prudence applies to ESOP
fiduciaries (sometimes called the "Moench presumption" for an
oft-cited Third Circuit ruling). It evaluated several arguments set
forth by Fifth Third. Specifically, the Court considered whether
the presumption of prudence should apply because (1) it is
consistent with the intent of Congress in fostering employee
ownership of employer stock; (2) the terms of the Fifth Third ESOP
plan document commanded the ESOP fiduciaries to invest in employer
stock, effectively waiving the duty of prudence with respect to
investment in employer stock; (3) enforcement of a duty of prudence
without the protection provided by a presumption of prudence would
create an inherent conflict with prohibitions on insider trading;
and (4) without a presumption of prudence, frivolous lawsuits would
abound, which would deter companies from offering ESOPs.

No Special Presumption of Prudence

The Court unanimously agreed that there is no special
presumption of prudence uniquely applicable to fiduciaries with
respect to ESOPs or the decision to offer an employer stock
investment alternative. It ruled that ERISA narrowly alleviates
only the duty to diversify within an ESOP and alleviates the duty
of prudence only with respect to diversification. These narrow
provisions do not give rise to a greater presumption of prudence.
With respect to the argument that the plan document mandated an
investment in employer stock and that the fiduciaries could not act
contrary to the document, the Court found that the documents cannot
excuse fiduciaries from their duties under ERISA.

 Fiduciaries should be aware that provisions within plan
documents that expressly require investment in employer stock do
not eliminate the duty of fiduciary prudence with respect to
continued investment in employer stock. Sponsors of plans that
state that fiduciaries must invest in employer stock may wish to
revisit the wording of this provision.

The Court also considered the argument that, without a
presumption of prudence, fiduciaries, who are often company
insiders, will be faced with conflicts regarding their
responsibilities under securities laws. For example, an officer
with inside information who believes that continued investment in
employer stock may not be prudent could not act on that information
without violating the insider trading prohibitions. The Court found
that this was a legitimate consideration, but not one that created
the necessity of a presumption of prudence. Finally, with respect
to the argument that absent a presumption of prudence participants
might be more inclined to bring meritless lawsuits, the Court
acknowledged that this is also a legitimate concern and that
district courts could address this through careful scrutiny of the
complaint's allegations, rather than a presumption of prudence.

A Roadmap for the Lower Courts and for Plan

In vacating the Sixth Circuit's decision and remanding the case
for reconsideration, the Court provides a roadmap of the elements
of judicial consideration in determining whether plaintiffs have
stated a plausible claim.  The Court instructed the lower
court to use the pleading standard established in prior cases (that
only a complaint that states a plausible claim for relief can
survive a motion to dismiss, and that determining whether a
complaint states a plausible claim for relief is

The Court laid out key considerations to be taken into account
in determining whether a claim alleging a breach of the duty of
prudence in the context of a stock drop scenario will meet the
"plausible claim" pleading standard:

Publicly available information: Where a stock is publicly
traded, allegations that a fiduciary should have recognized, from
public information alone, that the marketplace was either over- or
under-valuing employer stock are "implausible as a general rule,"
absent special circumstances.  As a result, generally a
fiduciary will be not considered imprudent when assuming that the
market value of employer stock on a major exchange provides the
best estimate of the stock's value. The Court did not elaborate on
what circumstances might give rise to a situation where reliance on
the stock price as set on a public exchange is not considered

Inside information: A claim for the breach of the duty of
prudence on the basis of inside information will not withstand a
motion to dismiss unless the plaintiff plausibly alleges another
course of action that the fiduciary could have taken. To be
plausible, the course of action must be must be one that does not
violate or conflict with securities laws. Also, the course of
action must be one that a prudent fiduciary in the same situation
would not have viewed as more likely to harm the employer stock
fund than to help it (e.g., could a prudent fiduciary have
concluded that ceasing investment in employer stock, or selling
stock, would have caused or worsened a decline in the value of the
stock). The Court suggested that SEC input on this aspect may be
relevant to the analysis.

The Court observed that the Sixth Circuit had not referenced any
special circumstances in the Fifth Third case that would
have rendered the fiduciaries' reliance on the market price of the
Fifth Third stock imprudent. It also noted that, to the extent the
Sixth Circuit was basing its decision on the theory that the
fiduciaries should have sold Fifth Third stock based on insider
information, the denial of dismissal was erroneous because ERISA's
duty of prudence cannot require an ESOP fiduciary to perform an
action, such as selling employer stock on the basis of insider
information, that would violate federal securities laws. This
suggests the possibility that, upon remand, the Fifth
case may not survive the motion to dismiss.

Since plan fiduciaries can no longer rely on a presumption of
prudence with respect to the investment in employer stock, they
should have procedures in place to regularly review the prudence of
acquiring or retaining employer stock. Fiduciaries should ensure
those procedures are being followed and the process
documented.  Fiduciaries will also need to determine how best
to evaluate the value of employer stock.

The elimination of the presumption of prudence should not
discourage employers from including or retaining employer stock in
their retirement plans. The Court's decision should prove to be of
benefit in creating a functional roadmap for both courts and plan
fiduciaries. Plan document language mandating investment in
employer stock will not be enough. Future court challenges will
likely provide some guidance as to what special circumstances are
relevant with respect to reliance on publicly available
information.  In the meantime, fiduciaries that have not
already done so will need to develop and follow processes for
monitoring employer stock, and the process should be

For more information, in the Tax Management Portfolios, see
Kaplan, Brown, and Granados, 354 T.M.
, ESOPs, Wagner, 374
, ERISA - Litigation, Procedure, Preemption and Other
Title I Issues, and in Tax Practice Series, see ¶5560,
Specialized Retirement Plans.