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March 9 — Just months after issuing a much-anticipated ruling on employer stock plans, the U.S. Supreme Court indicated that it may revisit the topic.
The high court signaled its continued interest in employer stock plans March 9, when it invited the U.S. solicitor general to file a brief in a case involving the proper standard for holding plan fiduciaries liable for selling off employer stock (RJR Pension Investment Comm. v. Tatum, U.S., No. 14-656, invitation to file brief 3/9/15).
A ruling by the Supreme Court in this case could have wide implications for Employee Retirement Income Security Act litigation, because it could determine which party—the plan fiduciary or the participants bringing suit—has the legal burden of proving whether a fiduciary breach caused compensable loss to the plan. This determination of loss causation ultimately can affect whether plan participants are able to collect money damages from breaching fiduciaries.
An invitation to the solicitor general typically signals the justices' interest in a particular topic and is thought to increase the likelihood that the court will ultimately hear the case.
The instant lawsuit stemmed from tobacco company R.J. Reynolds's decision to divest its Section 401(k) plan of the stock of two of its Nabisco subsidiaries in the course of a 1999 corporate spin-off. The plan participants alleged that they were forced to sell their stock at an all-time low, with share prices later jumping 247 and 82 percent over the price at divestment.
The U.S. Court of Appeals for the Fourth Circuit found that the R.J. Reynolds fiduciaries could be liable for selling off the stock unless a prudent fiduciary “would have” made the same decision.
Previously, R.J. Reynolds had escaped liability at the district court level, with the U.S. District Court for the Middle District of North Carolina approving the company's actions after concluding that a prudent fiduciary “could have” made the same decision. The district court ruled in favor of the R.J. Reynolds fiduciaries despite finding that their decision-making process was procedurally imprudent, noting that they spent less than an hour considering what to do with the Nabisco funds and failed to consult with any experts or consider alternative courses of action.
The Fourth Circuit's 2-1 split ruling holding R.J. Reynolds Tobacco Co. to a heightened standard of care caused waves in the employer stock community, leading R.J. Reynolds and multiple industry groups to urge the court for rehearing in front of a full panel of judges.
In particular, the U.S. Chamber of Commerce and the American Benefits Council argued that the panel decision represented a “radical reinterpretation” of the Employee Retirement Income Security Act's standard of care for fiduciaries, because it required fiduciaries to act “as a majority of prudent men” would act, rather than as “‘a' prudent man” would act.
The Fourth Circuit declined these requests last fall, and R.J. Reynolds petitioned the Supreme Court for intervention.
In its petition for Supreme Court review, R.J. Reynolds skirted the would-have, could-have debate and focused on another aspect of the Fourth Circuit's ruling—namely, the burden of proof in fiduciary breach cases.
Resolving an issue of first impression in the circuit, the Fourth Circuit found that once plan participants establish that fiduciaries breached their duties by employing an imprudent decision-making process, plan fiduciaries then bear the burden of demonstrating that their decision was objectively prudent. Put another way, the Fourth Circuit shifted the burden to R.J. Reynolds to show that the losses suffered by the plan would have occurred even if the fiduciary decision-making process had been prudent, which—if proven—would hamper the participants' ability to collect money damages stemming from the breach.
“In sum, the long-recognized trust law principle—that once a fiduciary is shown to have breached his fiduciary duty and a loss is established, he bears the burden of proof on loss causation—applies here,” the Fourth Circuit said in its opinion.
In so ruling, the Fourth Circuit adopted the standard urged by the Department of Labor in its amicus brief.
In its petition for Supreme Court review, R.J. Reynolds criticized the Fourth Circuit for deepening a circuit split on loss causation, in which the Second, Sixth, Seventh, Ninth and Eleventh Circuits have applied the “straightforward default rule” that the burden of proof rests with the plaintiffs filing suit.
The R.J. Reynolds plan participants disputed this characterization in their brief filed in opposition. They argued that the Supreme Court should decline to hear the case because there was no “genuine disagreement” in the lower courts and because the question at the heart of the dispute “rarely arises.”
In addition to asking the Supreme Court's view on the burden of proof question, R.J. Reynolds also asked the high court whether an ERISA fiduciary with a duty of prudence can be held liable for money damages even though its ultimate investment decision was objectively prudent.
The petition for certiorari was filed by Daniel R. Taylor Jr., Adam H. Charnes, Chad D. Hansen and Thurston H. Webb of Kilpatrick Townsend & Stockton LLP, Winston-Salem, N.C., and Paul D. Clement, Jeffrey M. Harris and C. Harker Rhodes IV of Bancroft PLLC, Washington.
The brief in opposition was filed by Kelly M. Dermody and Daniel M. Hutchinson of Lieff Cabraser Heimann & Bernstein LLP, San Francisco; Peter K. Stris and Dana Berkowitz of Stris & Maher LLP, Los Angeles; Jeffrey Lewis and Catha Worthman of Lewis, Feinberg, Lee, Renaker & Jackson PC, Oakland, Calif.; and Robert M. Elliot and Helen Parsonage of Elliot Morgan Parsonage PA, Winston-Salem, N.C.
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Text of the Fourth Circuit's opinion is at http://www.bloomberglaw.com/public/document/Richard_Tatum_v_RJR_Pension_Investment_Committ_2014_BL_214923_4th/1.
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