J.C. Penney Workers Lose Company Stock Dispute

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By Jacklyn Wille

Feb. 17 — J.C. Penney Corp. workers who held retirement savings in company stock are the latest group to hit a roadblock when trying to use federal benefits law to challenge a drop in company stock price.

On Feb. 17, a federal judge in the U.S. District Court for the District of Columbia dismissed the workers' proposed class action, which accused the company's retirement plan trustee, Evercore Trust Co., of continuing to hold J.C. Penney stock during a period when the retailer's business strategy of discontinuing coupons led to an 84 percent drop in stock price.

This decision continues the recent trend of federal courts siding with companies in lawsuits challenging price drops in employer stock plans under the Employee Retirement Income Security Act. In so ruling, these courts have interpreted the U.S. Supreme Court's 2014 decision on employer stock plans as setting a high hurdle for workers to clear (Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 58 EBC 1405 (U.S. 2014); 123 PBD, 6/26/14).

‘Special Circumstances.'

This ruling favoring J.C. Penney is significant for its analysis of “special circumstances,” which Dudenhoeffer requires workers to plead in order to bring a stock-drop claim based entirely on public information. According to Judge Reggie B. Walton, J.C. Penney's allegedly “ill-conceived” business strategy of eliminating coupons and rearranging store layouts likely wouldn't rise to the level of special circumstances required under Dudenhoeffer.

On that point, Walton took care to distinguish J.C. Penney's situation from the circumstances surrounding Eastman Kodak Co. in one of the few post-Dudenhoeffer lawsuits to survive a motion to dismiss (Gedek v. Perez, 66 F.Supp.3d 368, 58 EBC 1854 (W.D.N.Y. 2014); 243 PBD, 12/19/14).

According to Walton, the suit against Kodak alleged that the company was relying on a “dying technology,” “antiquated products” and short-term strategies like initiating patent lawsuits in order to maintain cash flow. These “ominous circumstances” were a far cry from J.C. Penney's execution of a failed business strategy, Walton said.

Despite this ruling against Kodak, Walton said in a footnote that only two post-Dudenhoeffer cases have “squarely analyzed” whether particular allegations qualify as special circumstances. Both cases resulted in wins for the defendant companies.

In July 2015, a federal court ruled for Lehman Brothers after finding that certain Securities and Exchange Commission orders including warnings about the company's health didn't qualify as special circumstances under Dudenhoeffer (In re Lehman Bros. Sec. & ERISA Litig., 2015 BL 221282 (S.D.N.Y. 2015); 133 PBD, 7/13/15).

And last month, a federal court in Texas found that RadioShack Corp.'s “slide into bankruptcy” wasn't a special circumstance, either (In re 2014 RadioShack ERISA Litig., 2016 BL 21149 (N.D. Tex. 2016); 17 PBD, 1/27/16).

Maneuvering Around Dudenhoeffer

Although Walton's ruling included considerable analysis of Dudenhoeffer‘s special circumstances requirement, the J.C. Penney workers didn't bring allegations of special circumstances at all. Instead, they attempted to maneuver around Dudenhoeffer by disclaiming any argument that the J.C. Penney stock was “artificially inflated.”

This attempt struck out with Walton, who said that Dudenhoeffer‘s reach wasn't limited to situations involving artificially inflated stock.

In fact, Walton said, the J.C. Penney workers' complaint “falls entirely within the ambit of the general rule adopted by the Supreme Court in Dudenhoeffer,” because they alleged that the company's retirement plan fiduciaries should have known, based solely on publicly available information, that the J.C. Penney stock was an imprudent investment.

The workers also advanced an argument under the continuing fiduciary duty to monitor plan investments, which was officially recognized by the Supreme Court last year in Tibble v. Edison Int'l, 135 S.Ct. 1823, 59 EBC 2461 (U.S. 2015) (96 PBD, 5/19/15).

Walton rejected this, saying that Tibble didn't involve claims based on declining employer stock value, and it therefore did nothing to alter Dudenhoeffer‘s holdings.

The workers were represented by Harwood Feffer LLP and Cuneo Gilbert & Laduca LLP. Evercore Trust Co. was represented by O'Melveny & Myers 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