Battle Over Presumption of Prudence Heats Up Ahead of High Court Arguments


The question of whether a judge-made presumption of prudence should protect fiduciaries of employer stock plans from liability for declining stock prices will be front and center at the U.S. Supreme Court next week, with the court receiving nine amicus briefs in the months leading up to oral arguments.         

The briefs, filed by various industry groups, employers and governmental entities, are fairly evenly split on the question of whether the pro-fiduciary presumption should continue to apply in stock-drop cases brought under the Employee Retirement Income Security Act.         

 Groups arguing in favor of the presumption emphasized the importance of encouraging employee ownership of companies through employer stock plans and the need to avoid costly, meritless litigation by plan participants equipped with the benefit of hindsight. They also argue that, without the benefit of a robust presumption, fiduciaries weighing declining stock price will be faced with a lawsuit regardless of whether they choose to sell or hold company stock.         

On the other side of the debate, groups have pointed out the “nearly insurmountable” nature of the presumption and the need to protect Americans' retirement plan savings—which increasingly are held in defined contribution plans such as those at issue—from fiduciary misconduct and abuse. These groups advocate replacing the presumption with the prudent person standard of care, which they say better reflects the text and history of ERISA.         

The high court will consider these arguments and more on April 2, when it hears oral arguments in Fifth Third Bancorp v. Dudenhoeffer, U.S., No. 12-751, arguments scheduled 4/2/14. In Dudenhoeffer, the U.S. Court of Appeals for the Sixth Circuit broke from a number of other circuits to hold that the pro-fiduciary presumption doesn't apply at the motion-to-dismiss stage of litigation.         

The Sixth Circuit also used Dudenhoeffer to articulate a weaker presumption than had been used in other circuits. While some courts require a showing of impending collapse or other dire circumstances in order to overcome the presumption, the Sixth Circuit found that plan participants could overcome the presumption by showing that “a prudent fiduciary acting under similar circumstances would have made a different investment decision.”         

Attorney: Focus on Congressional Intent          

Dean J. Schaner, an employment lawyer and founder of Haynes and Boone LLP's labor and employment group in Houston, said that while the amicus briefs have been largely divided, one unifying theme has been the attempt to use congressional intent to make arguments about the validity of the presumption.         

Specifically, Schaner said that one of Congress's goals has been encouraging employee ownership of companies through employee stock plans.         

“The issue that I see running through all of the amicus briefs on the side of the petitioners is that, without that presumption, it would dissuade employers from offering that type of benefits to employees,” Schaner told Bloomberg BNA March 25.         

However, Schaner said that those groups arguing against the presumption have also invoked Congress's emphasis on protection of retirement security in support of their position.         

Schaner said there was “enough fodder” in the area of congressional intent for both sides to make arguments.         

“That's probably a washout,” Schaner said.         

Government Urges Prudent Person Standard          

The government, through the Department of Labor, Department of Justice and Solicitor General, filed an amicus brief in support of the participants. It urged the high court to strike down the presumption—which it called “nearly insurmountable”—because the “text and purposes” of ERISA didn't support such a presumption.         

In the government's view, ERISA fiduciaries are subject to the “prudent person” standard of care in making their investment decisions. This standard differs from the standard established by trust law, the government argued, because ERISA fiduciaries can't relieve themselves of statutorily imposed duties by drafting advantageous plan terms.         

Moreover, the government asserted that the same prudent-person standard applicable to all ERISA plans applied with equal force to fiduciaries of employee stock ownership plans. Although ERISA relieves ESOP fiduciaries of the duty to diversify plan assets, it “does not permit them to concentrate plan assets in an imprudent investment, such as employer securities the fiduciary knows or should know are materially overvalued,” the government contended.         

Finally, the government disagreed with the idea that striking down the presumption would make fiduciaries liable for any decline in share price. Rather, the government said, fiduciaries should be subject to viable breach claims when plaintiffs allege that they knew or should have known that the employer stock was artificially inflated and failed to take corrective action.           

On March 24, the high court granted the Solicitor General's motion to participate in the oral arguments.         

AARP: Defined Contribution Plans Predominate          

The AARP also filed a brief arguing in favor of striking down the presumption.         

In the brief, the AARP emphasized the importance of the “paradigm shift” away from defined benefit plans and toward defined contribution plans in the retirement plan industry. On that point, the AARP urged the court to discount the legislative history cited by Fifth Third and its amici, saying that “legislative history which predates both the enactment of 401(k) plan statutory provisions and the sea change towards the predominance of such plans sheds no light on how ESOPs in the current era should be regarded.”         

The AARP also argued that, should the court decide not to strike down the presumption of prudence, it should interpret the presumption “only as establishing an evidentiary presumption in favor of ESOP fiduciaries,” as opposed to “imposing a heightened pleading requirement on injured plan participants.” That is because participants will “almost always be unable to produce satisfactory evidence of breach absent formal discovery,” the AARP said.         

AFL-CIO Stresses Discovery          

In addition to echoing some of the points raised by the AARP, the AFL-CIO used its brief to argue that the prudence of a fiduciary's decision to continue investing in employer stock can't be determined without knowing the actual basis for the fiduciary's decision.         

Turning to the Dudenhoeffer case in particular, the AFL-CIO said that, because the district court granted Fifth Third's motion to dismiss, the record was devoid of evidence indicating why the plan's fiduciaries continued to hold employer stock in the face of “increasingly risky” financial conditions.         

That is because the question of whether a given fiduciary acted prudently in holding employer stock is a “factual question” best resolved through discovery “and perhaps at trial,” the AFL-CIO contended.         

Law Professors Consider Congressional Intent          

A group of legal professors who write and teach about ERISA law also filed an amicus brief arguing against the presumption.         

Like the government, the professors argued that plan fiduciaries should be subject to the prudent person standard of care, rather than the presumption of prudence, which the professors called a “judicial construction completely at odds with the language of the statute, and which creates a barrier to ERISA litigants that not a shred of evidence exists to suggest Congress ever contemplated.”         

On the other hand, the professors said that the prudent person standard was rooted in both the text and the legislative history of ERISA, both of which suggested that Congress “intended that plans that invest in the sponsoring employer's securities—like every other plan subject to ERISA—be subject to the prudence requirement.”         

Finally, the professors took issue with the argument advanced by some groups—including the U.S. Chamber of Commerce—that fostering employee ownership was an essential goal of ERISA. According to the professors, “protection of employee retirement savings,” and not encouragement of employee ownership, is the paramount goal of ERISA.

Excerpted from a story that ran in Pension & Benefits Daily (3/26/2014).