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R.J. Reynolds Tobacco Co. once again escaped liability for losses suffered by its 401(k) plan when the company sold off the stock of its Nabisco subsidiaries ( Tatum v. RJR Pension Inv. Comm. , 4th Cir., No. 16-1293, 4/28/17 ).
The April 28 split ruling marks the third time the U.S. Court of Appeals for the Fourth Circuit has considered the tobacco company’s 1999 spinoff of two Nabisco subsidiaries and related losses suffered by the company’s 401(k) plan. The court found that a district judge applied the correct standard in clearing the R.J. Reynolds defendants of liability for the decision to dump Nabisco stock from the 401(k) plan—which was made after minimal discussion and ultimately caused workers to lose out on large gains when the Nabisco stock price rebounded.
The long-running case involves the proper standard for holding retirement plan fiduciaries liable for imprudent decisions that cause plan losses. A district judge initially said the R.J. Reynolds fiduciaries weren’t liable for the stock dump—despite the bad decision-making process that preceded it—because a hypothetical prudent fiduciary “could have” made the same decision. The Fourth Circuit said in 2014 that this standard was too lenient. Rather, fiduciaries can escape liability for imprudent decisions only if a hypothetical prudent fiduciary “would have” made the same decision, the court ruled.
This question of how to evaluate fiduciary conduct has 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. The Labor Department has twice filed briefs supporting the R.J. Reynolds workers, and the U.S. Supreme Court signaled its interest in this case in 2015, when it asked the solicitor general whether the case was a good candidate for high court review.
“We are disappointed by the majority’s opinion, which would deprive RJR’s employees and retirees of any remedy for what the court previously found to be an unparalleled breach of fiduciary duty by RJR,” Jeffrey Lewis, counsel for the employees and a partner with Keller Rohrback LLP in Oakland, Calif., told Bloomberg BNA in an email. He added that the team is evaluating its options going forward.
Counsel for R.J. Reynolds didn’t immediately respond to requests for comment.
In her majority opinion, Judge Diana Gribbon Motz considered whether the parties’ dispute was affected by the Supreme Court’s recent decision in Fifth Third Bancorp v. Dudenhoeffer. In Dudenhoeffer, the Supreme Court embraced the efficient market hypothesis—which posits that stocks traded on an efficient market are correctly priced absent special circumstances—in the context of ERISA-based challenges to fluctuations in employer stock price.
Dudenhoeffer teaches that “a prudent fiduciary would have relied on the low market price of the Nabisco stock as the current value of the stock,” according to Motz. This factor provided no basis for second-guessing the decision to divest the R.J. Reynolds plan of Nabisco stock, Motz said.
In ruling for R.J. Reynolds, Motz said one could “easily hypothesize” a situation in which the rebound in Nabisco stock price—which followed an unexpected takeover bid by investor Carl Icahn in 2000—never happened. In that case, the company likely would have been sued if it had kept the Nabisco stock in the plan, Motz said.
“Having a standard in which the fiduciary is held liable regardless of whether an outcome is foreseeable is akin to having no standard at all, eliminating the purpose of the loss causation analysis,” Motz wrote. “Neither ERISA nor the efficient market theory requires that fiduciaries shoulder such burden or absorb such risk.”
Judge J. Harvie Wilkinson III joined Motz’s opinion.
Judge Albert Diaz dissented, arguing that the district judge failed to properly apply the more stringent “would have” standard for evaluating fiduciary conduct. In Diaz’s view, the noteworthy timing of the divestment and the plan fiduciaries’ disregard for the plan document qualified as “extraordinary circumstances” that could warrant a different outcome. Diaz faulted the district judge for deferring too much to R.J. Reynolds, adding that the judge’s language “smacks of ‘could have’ rather than ‘would have.’”
Keller Rohrback LLP, Lieff Cabraser Heimann & Bernstein and Elliot Morgan Parsonage represented the employees. Kilpatrick Townsend & Stockton LLP represented R.J. Reynolds.
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Text of the decision is at http://www.bloomberglaw.com/public/document/Richard_Tatum_v_RJR_Pension_Investment_Docket_No_1601293_4th_Cir_.
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