Cliffs Natural Resources Beats ERISA Challenge to Stock Drop

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By Jacklyn Wille

Iron mining company Cliffs Natural Resources beat back claims that it harmed workers’ retirement savings by allowing them to invest in the company’s declining stock ( Saumer v. Cliffs Natural Resources Inc. , 2017 BL 114947, 6th Cir., No. 16-3449, 4/7/17 ).

The U.S. Court of Appeals for the Sixth Circuit held April 7 that the Cliffs workers failed to satisfy the high pleading standards that govern challenges to declining employer stock brought under the Employee Retirement Income Security Act.

Since the U.S. Supreme Court established those standards in 2014, courts have routinely dismissed ERISA-based challenges to drops in employer stock price in cases involving the employee stock ownership plans of RadioShack Corp., Whole Foods Corp., Lehman Brothers, JPMorgan Chase & Co., International Business Machines Corp. and BP Plc.

Policy Concerns

Although it ruled against the Cliffs workers, the Sixth Circuit appeared reluctant about this outcome. The court questioned the wisdom of encouraging any workers to invest retirement savings in the stock of their employer.

“Because competition and changing circumstances will inevitably devastate some companies’ prospects, hapless employees will continue to lose their jobs, their benefits, and their retirement savings, often in one fell swoop,” the Sixth Circuit said. However, it added that any policy change “must come from Congress” and not the courts.

Corey Rosen, founder of the National Center for Employee Ownership in Oakland, Calif., agreed that individual investments like employer stock could be risky, but he took issue with the idea that losses were inevitable.

“If you look at a long enough period of time, almost every company will go out of business, but many will go out of business because they were sold at a profit and not because they’ve failed,” Rosen told Bloomberg BNA.

In many situations, employee stock ownership plans can provide greater returns and less volatility than traditional 401(k) plans, Rosen said.

Death Knell for Stock-Drop Cases?

Samuel Bonderoff, a partner with Zamansky in New York who represents workers in cases similar to this one, had a different take on the Sixth Circuit’s policy concerns.

“The Sixth Circuit’s recognition of the dangers of ESOPs is somewhat encouraging, but their conclusion that they lack the power to do anything to protect employees from these dangers seems misplaced,” Bonderoff told Bloomberg BNA.

Bonderoff said that the Sixth Circuit, like many courts, has taken the “limited language” from recent Supreme Court decisions on employer stock plans and “extrapolated from it a pleading standard so biased against plaintiffs that it makes” the standard previously used by courts “look like a day at the beach.”

That new Supreme Court standard has made it virtually impossible for plaintiffs to sustain ERISA challenges to declining employer stock price, Patrick C. DiCarlo, a defense-side ERISA lawyer and counsel with Alston & Bird LLP in Atlanta, told Bloomberg BNA.

Short of an “Enron-type situation” involving massive corporate fraud, it’s hard to see how employees bringing stock-drop claims could prevail, given the thrust of recent court decisions, DiCarlo said.

“Even if the company becomes insolvent, the plaintiffs may not be able to win,” DiCarlo said.

Parsing Dudenhoeffer

The lawsuit against Cliffs involved two scenarios that can arise in ERISA challenges to drops in employer stock price. The first is when stock price plummets and investors claim that public information about the company’s struggles demonstrated that the stock was a bad investment. The second is when investors learn that the company’s stock was artificially inflated and corporate executives had inside knowledge of corporate fraud that caused the inflation.

The Supreme Court addressed both scenarios in 2014’s Fifth Third Bancorp v. Dudenhoeffer, creating separate pleading standards for each one. Claims based on public information must allege some kind of “special circumstances” that would call into question the stock’s market price. Cases involving inside information must point to a viable alternative action that plan fiduciaries could have taken in lieu of continuing to hold the stock.

The Cliffs employees raised claims based on both public and inside information. The Sixth Circuit rejected both under Dudenhoeffer.

Public Information

The public information claim was foreclosed by Dudenhoeffer, which the Sixth Circuit said “plainly holds that a fiduciary may rely on market price as an unbiased assessment of a security’s value.” Allegations that Cliffs stock was “excessively risky” did nothing to change that result, the Sixth Circuit said.

In so ruling, the Sixth Circuit answered a question left open by its 2015 decision rejecting an ERISA challenge involving GM’s employer stock plan.

Specifically, the court said that a fiduciary’s failure to investigate the merits of investing in a publicly traded company doesn’t qualify as a “special circumstance” that would state a viable claim under Dudenhoeffer.

Inside Information

The workers also claimed that Cliffs executives had inside knowledge that one of the company’s mining projects was performing poorly. Their failure to disclose this information caused Cliffs stock to be artificially inflated and made the decision to continue offering the stock imprudent under ERISA, the workers alleged.

The Sixth Circuit rejected this claim, finding that the workers failed to allege a valid “alternative action” that the Cliffs executives could have taken.

The workers’ suggested alternative actions—disclosing inside information and halting new investments in Cliffs stock—were the same actions rejected by the Second, Fifth and Ninth circuits, the court said.

Judge Deborah L. Cook wrote the decision, which was joined by Senior Judge Gilbert S. Merritt and Judge David W. McKeague.

Kessler Topaz Meltzer & Check represented the workers. Jones Day represented Cliffs.

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

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