Dudenhoeffer is yet another case in which the Court rejects years of lower-court precedent with nary a shrug.  We saw this happen in CIGNA v. Amara, where the Court both rejected the notion that an SPD could effectively be a binding plan document, and then held, unlike every circuit court to have previously considered the point, that monetary damages could be available under ERISA in the appropriate case.  Both holdings were contrary to years of lower-court action, and yet the Court's majority turned its back on that history with the greatest of ease. 

Here, the so-called "Moench presumption" has been applied over and over at various stages of the litigation by circuit court after circuit court.  It almost seemed as though the question was not whether there was a presumption, but, rather, only what the contours of the presumption might be.  Notwithstanding that background, the Court in Dudenhoeffer, faced with a statute that does not set forth an explicit presumption in favor of ESOP fiduciaries, unanimously declined to recognize one.

Thus, ESOP fiduciaries will have to be "prudent" without reference to a presumption in their favor.  On its face, Dudenhoeffer is a significantly negative development for employers with (or considering) ESOPs and for ESOP fiduciaries.  Certainly, having a rule under which the fiduciary is prudent unless otherwise shown is a material positive in the context of a potential litigation.  Closer examination may show, however, that the final chapter in this ESOP's fable has yet to be written. 

At the outset, it is worth noting that, by statute, fiduciaries of ESOPs and other eligible individual account plans are and will continue to be free of specific obligations to diversify to minimize the risk of large losses.  That is a significant contextual point, as one of the key potential infirmities with investment in company stock lies with the inherent concomitant lack of diversification.  With diversification claim out of the way by statute, one might then wonder - in what ways would the holding of company stock arguably be imprudent?  In this regard, there are some interesting and significant pro-fiduciary aspects in the Dudenhoeffer decision. 

First, in the case of publicly traded stock, the Court generally frees fiduciaries from an obligation to determine, based on publicly available information, whether stock is properly valued, stating that "allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule . . . ."  In effect, the Court endorsed public market prices as the best estimate of value, and confirmed that a fiduciary has no obligation to try to "outsmart a presumptively efficient market."  While the Court did hold open the possibility that there could be "special circumstances affecting the reliability of the market price," Dudenhoeffer can be read to indicate that information available to the public would in no event be expected to rise to the level of a "special" circumstance.

Harkening back to issues that became the centerpiece of the oral argument in the case, the Court in Dudenhoeffer also held that plan fiduciaries cannot be required to sell company stock based on inside information.  The Court stated that the "duty of prudence cannot require an ESOP fiduciary to . . . perform an action that would violate the securities laws." 

The foregoing two results - that a fiduciary can generally rely on market pricing and cannot sell stock based on inside information - potentially undercut key allegations that one would expect to see in a stock-drop case.  If diversification, reliance on market price and possession of inside information cannot stand as bases for successfully arguing that a fiduciary should have caused the sale of ESOP stock, there may well be a reasonable question as to what's left. 

In this regard, as I have argued previously, see hereandhere, I continue to believe that, separate and apart from the now-defunct Moench presumption, a presumption-like effect might arise in the case of a plan that expressly requires investment in stock.  Section 404(a)(1)(D) of ERISA requires that fiduciaries comply with plan documents "insofar  as . . . consistent with" ERISA.  As a result, in the case of a plan that requires investment in company stock, the fiduciary would arguably need to be invest in such stock unless the investment were to be outside of the range of prudence.  With Dudenhoeffer confirming the elimination of two potential bases for a claim to that effect, and the statutory exception from a diversification requirement eliminating yet a third, the path to succeeding on a stock-drop claim involving publicly traded stock may be muddy at best in the post-Dudenhoeffer world.  I take the point that Dudenhoeffer confirms that, under Section 401(a)(1)(D), "the duty of prudence  trumps . . . the plan document."  And I take the point that the Court specifically stated that "trust documents cannot excuse trustees from their duties under ERISA" (citation omitted).  But I do not think any of that squarely addresses how Section 404(a)(1)(D) interacts as a practical matter with the duty of prudence in the face of a plan provision specifically requiring investment in publicly traded company stock.  In particular, given the pro-fiduciary aspects of Dudenhoeffer together with ERISA's diversification exception, what, in the ordinary case, will be the basis for asserting that the acquisition or holding of publicly traded stock that is required by an ESOP or other eligible individual account plan is outside the range of prudence such that a fiduciary violation arises as a result of such acquisition or holding?  I guess we shall see.

As to whether or not fiduciaries should refrain from buying additional stock based on inside information, the Court indicated that the views of the Securities and Exchange Commission, which the Court did not have, "may well be relevant."  A thicket "may well" develop over that issue, in that the Court seems expressly to have opened the door to further inquiry.

The Court also expressly stated that lower courts addressing whether a fiduciary should stop buying stock should consider whether stopping purchases or publicly disclosing negative information would do more harm than good by causing a drop in the stock price and, therefore, the value of the ESOP's stock.  The "more harm than good" standard may ultimately turn out to become a big part of the discourse for years to come.   

Having said all that, I think that there's little doubt that the Court's declining to adopt a presumption of prudence is a major and significant break with lower-court precedent.  One of the issues that would be expected to unfold is the extent to which the Court's decision not to recognize a presumption may cause plaintiffs' cases to withstand dismissal at early stages of litigation, thereby adding to litigation costs and possibly increasing the likelihood of settlement.  And so it remains to be seen how much Dudenhoeffer may add to litigation costs and encourage settlement, and the extent to which companies will continue to adopt ESOPs and maintain stock funds under 401(k) and similar plans.  However, before concluding that Dudenhoeffer is clearly a drag on the establishment and maintenance of tax-qualified retirement plans invested in stock, one may wish to review all the nuances to see just how bad or good the news might really be at the end of the day.

Andrew L. Oringer

Andrew L. Oringer is a partner and co-chair of the ERISA and Executive Compensation Group at Dechert LLP, and leads the firm’s national fiduciary practice in New York. He counsels clients on their employee benefit plans and programs, benefits-related tax matters and fiduciary issues arising in connection with the investment of employee benefit plan assets. Oringer’s practice includes advising clients regarding ERISA and employee benefits generally, including 401(k) and other retirement plans as well as medical and other welfare plans. His advice to clients encompasses all aspects of corporate transactions and initial public offerings in which benefits and compensation issues play a central part. He regularly counsels financial institutions and plan fiduciaries regarding investments, and has been instrumental in designing complex investment structures to address difficult ERISA issues.

Oringer advises clients with respect to the design and implementation of arrangements relating to executive compensation, including stock option and other equity-based arrangements. His practice extends to the representation of employers and executives in the negotiation of executive employment and termination agreements.

Nationally known for his experience with ERISA and matters relating to executive compensation, Oringer is a frequent speaker and writer on a wide variety of topics. Publications including The Wall Street Journal, The New York Times, Crain’s Pensions & Investments, Newsday, USA Today and The Chicago Sun Times have quoted him in articles on employee benefits issues. He has authored, co-authored or contributed to numerous bar comment letters and reports to regulators on both fiduciary and compensation issues, and has testified at the request of Congress regarding certain proposed Department of Labor regulations.

He holds leadership roles for the American Bar Association and the New York State Bar Association and is a fellow of the American College of Employee Benefits Counsel and an adjunct professor teaching ERISA at Hofstra University School of Law. He is a member of the Bloomberg BNA Benefits Practice Resource Advisory Board and the Advisory Board of the BNA Bloomberg Tax Management Compensation Planning Journal. He holds an A.B. (with distinction in economics), cum laude, from Duke University; an M.B.A. from Adelphi University; and a J.D. (with distinction) from Hofstra University School of Law, where he was associate editor of the law review. Oringer has contributed two reports to the Bloomberg BNA Benefits Practice Resource Center as part of the Benefits Practitioner's Strategy Guide: "Release Us From Confusion Over ERISA Fiduciary Claims" and "Investment Funds and ERISA Controlled Groups-Egregious Aggregation?"

Several major legal directories have recognized Mr. Oringer as a leading lawyer, including The Best Lawyers in America (2010-2012), Chambers USA (2005-2012, at Band One since 2008), the Practical Law Company’s Labour and Employee Benefits Cross-Border Handbook (2007, 2010-2012) and New York Super Lawyers (2006-2012, including in several years, listing among New York City’s Top 100 lawyers across all practice areas).

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