The U.S. Supreme Court announced Dec. 3 that it will not review the U.S.
Court of Appeals for the Sixth Circuit's decision on the extent to which Section
404(c) of the Employee Retirement Income Security Actshields plan fiduciaries
from claims of imprudent investment in employer stock (State Street Bank and
Trust Co. v. Pfeil, U.S., No. 12-256, cert. denied 12/3/12).
In February, the Sixth Circuit found that, while the Section 401(k) plan
participants pleaded sufficient facts to overcome the “presumption of prudence”
that attaches to plans that invest in employer stock, the lower court erred in
applying the presumption at the motion-to-dismiss stage (35 PBD, 2/23/12; 39 BPR
411, 2/28/12). According to the Sixth Circuit, plan fiduciaries cannot escape
their duty of prudent investing by asserting at the pleadings stage that any
losses plan participants suffered were caused by the participants' decisions to
continue investing in employer stock. “Such a rule would improperly shift the
duty of prudence to monitor the menu of plan investments to plan participants”
and would place an “unreasonable burden” on “unsophisticated” participants who
do not have the resources to pre-screen investments, the court said.
The Department of Labor indicated its support for the decision in an amicus
brief filed in the Sixth Circuit in support of the employees. “If the district
court were correct that [Employee Retirement Income Security Act] fiduciaries
are nevertheless absolved of liability for any resulting losses simply because a
401(k) plan provides, as most do, that the plan participants and beneficiaries
may allocate the assets in their individual accounts among different plan
investments, then most fiduciaries to such plans would never be liable for
losses stemming from lapses of their duties,” DOL said in its brief.
In 2009, two General Motors Corp. employees filed a proposed class action
alleging that State Street Bank and Trust Co. breached its fiduciaries duties by
waiting too long to divest GM's Section 401(k) plans of their holdings in GM
stock (111 PBD, 6/12/09; 36 BPR 1440, 6/16/09). The U.S. District Court for the
Eastern District of Michigan dismissed the employees' complaint and found that,
although they were likely to overcome the “presumption of prudence” that
attaches to plans that invest in employer stock, they would be unable to show
that State Street caused their investment losses, because the employees retained
ultimate control over their investment selections (191 PBD, 10/5/10; 37 BPR
On appeal, the Sixth Circuit reversed, finding that the district court erred
in applying the presumption of prudence at the motion to dismiss stage. The
presumption, the appellate court said, was an evidentiary presumption, rather
than an additional pleading requirement. The Sixth Circuit also found that the
employees plausibly pleaded a causal connection between State Street's alleged
breach and the plan losses. In so finding, the appeals court said the district
court erroneously relied on the fact that the plaintiffs could divest their plan
accounts of the GM stock to find that State Street's alleged breach did not
cause plan losses.
In its petition
for review, State Street asked the Supreme Court whether ERISA Section 404(c)
provides fiduciaries of otherwise-qualified plans a defense to liability against
an imprudent investment claim when the participant's control over the investment
is the proximate cause for the loss. It also asked the court to consider a
second question--whether liability under ERISA Section 409(a) for a breach of
fiduciary duty claim requires that the breach constitute the proximate cause of
State Street's petition argued that the Sixth Circuit's decision “widens an
existing circuit split” over the parameters of ERISA Section 404(c), the
provision that insulates plan fiduciaries from liability for investments in
participant-directed account plans; it also alleged that the decision “further
splinters the courts of appeals over the standard for causation” in cases of
fiduciary breach. The Supreme Court should resolve the issue of whether ERISA
Section 404(c) provides a defense to claims of fiduciary breach for imprudent
investments, State Street argued in its petition. “In ruling that Section 404(c)
does not protect fiduciaries when employees make informed decisions to invest in
company stock, the court of appeals has undermined one of the most significant
policy considerations shaping ERISA's balanced provisions,” State Street wrote
in its petition.
In response to State Street's petition, the employees challenged whether a
circuit split existed with respect to ERISA Section 404(c), saying that “[a]ny
such circuit split, however, has no bearing on the Sixth Circuit's holding in
the case because the Sixth Circuit held that 404(c) is a fact-intensive
affirmative defense that the district court improperly applied on a motion to
dismiss, an issue on which the courts of appeals unanimously agree.” The
employees argued that State Street, as an ERISA fiduciary, “cannot breach its
duty and then escape liability as a matter of law on 404(c) or causation grounds
when the exact risk State Street was supposed to protect against materializes to
harm the plans.”
The employees also asserted that State Street's petition did not seek review
of the case's “key holding,” which they contended was the holding that “GM plan
participants had alleged sufficient facts to overcome the presumption of
prudence,” and instead sought review of only two “narrow issues.”
The petition was filed by Wilber H. Boies, Nancy G. Ross, Chris C.
Scheithauer, Kirk Watkins, and M. Miller Baker of McDermott Will & Emery,
Chicago and Washington.
The Sixth Circuit's decision is at http://op.bna.com/pen.nsf/id/mmaa-8rqn5v/$File/Pfeil%203.pdf.
State Street's petition for review is at http://op.bna.com/pen.nsf/r?Open=jwie-92mnvz.
The employees' response to State Street's petition is at http://op.bna.com/pen.nsf/r?Open=jwie-92mp7r.