Supreme Court Clarifies: Stock-Drop Standard Is High

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By Jacklyn Wille

Jan. 25 — The U.S. Supreme Court clarified that workers challenging losses in their employer stock plans face a higher hurdle than some lower courts have used.

In a short opinion, the justices said Jan. 25 that the U.S. Court of Appeals for the Ninth Circuit has been too friendly to workers bringing these types of stock-drop challenges against the fiduciaries of their companies' retirement plans. The justices ordered the Ninth Circuit to reconsider a case concerning Amgen Inc.'s company stock under the Supreme Court's recent precedent in this area, which the justices said the Ninth Circuit failed to properly apply.

This move by the high court answers a question that has plagued lower courts since 2014, when Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 58 EBC 1405 (U.S. 2014) struck down the defendant-friendly presumption of prudence that many courts had used to dismiss lawsuits challenging declines in company stock value (123 PBD, 6/26/14). Over the past two years, lower courts have grappled with whether Dudenhoeffer raised or lowered the pleading standards applicable to workers bringing these types of claims.

Courts reading Dudenhoeffer as pro-defendant have given wins to State Street Bank & Trust Co., BP Plc, Lehman Brothers, Hewlett-Packard Co. and JPMorgan Chase & Co.

Other courts have interpreted the case as being more protective of workers, allowing stock-drop drop lawsuits to proceed against Eastman Kodak Co., Bank of New York Mellon Corp. and Invacare Corp.

Reacting to the court's ruling in Amgen, Andrew L. Oringer, co-chair of Dechert LLP’s ERISA and executive compensation group and head of the firm’s national fiduciary practice in New York, said that the standard announced in Dudenhoeffer was shaping up to be “quite a troublesome hurdle for plaintiffs.”

Justices Raise the Bar

The Supreme Court's ruling in Amgen—an unusual, four-page, unsigned decision issued without the benefit of oral argument—suggests that the justices intended for Dudenhoeffer to raise the bar for workers and make it easier for companies to dismiss these types of suits.

In particular, the Amgen opinion recited and emphasized two of Dudenhoeffer‘s holdings, both of which apply to workers who allege that plan fiduciaries continued offering company stock despite having inside information that would negatively affect stock price.

First, Dudenhoeffer held that workers must “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

Second, Dudenhoeffer held that courts considering these types of inside-information cases must consider “whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

According to the justices, the Ninth Circuit's decision in favor of the Amgen workers failed to follow Dudenhoeffer‘s directive to assess whether the workers’ complaint “plausibly alleged” that a prudent fiduciary in the same position as Amgen “could not have concluded” that an alternative action—that is, an alternative to dumping company stock or disclosing negative information—“would do more harm than good.”

On this point, the justices said that the Ninth Circuit let the Amgen workers off the hook by articulating an alternative action—removing company stock from the plan's list of investment options—that could have done more harm than good. Because no such suggestion appeared in the operative complaint, the justices said that the Amgen workers failed to satisfy the stringent pleading standard set forth in Dudenhoeffer. They therefore instructed the district court that first heard the dispute to determine whether the workers could file an amended complaint.

Reaction

According to Oringer, the court's decision in Amgen provides some clarity on how Dudenhoeffer changed the legal landscape for stock-drop claims—and particularly, how it stacked up with the pre-DudenhoefferMoench” presumption in favor of plan fiduciaries.

“A number of practitioners had wondered, notwithstanding the Court's unwillingness to accept the Moench presumption, whether at the end of the day Dudenhoeffer would be good—or, at a minimum, not bad—for defendants,” Oringer told Bloomberg BNA in an e-mail. “Much of the focus on potential pro-defendant thinking in Dudenhoeffer was on the Court's favorable comments on the use of market pricing, and on the confirmation that ERISA fiduciaries are never required to break the securities laws.”

Oringer said that Dudenhoeffer‘s “more harm than good” standard could end up being a “troublesome hurdle” for plaintiffs bringing stock-drop claims.

“In fact, on a close read, Dudenhoeffer effectively requires that the complaint itself ‘plausibly' allege that proposed alternative courses of action to be taken by the plan fiduciary would not have done more harm than good to plan participants,” Oringer said.

“In this Amgen decision, the Supreme Court seems almost to be scolding the Ninth Circuit for failing to parse Dudenhoeffer sufficiently,” he added. “It's starting to seem like Dudenhoeffer, at least in certain cases, may ultimately ‘do more harm than good' to claims by plaintiffs.”

Litigation History

The Ninth Circuit considered the dispute over Amgen stock on multiple occasions, both before and afterDudenhoeffer. Each time, the Ninth Circuit ruled largely in favor of the Amgen workers and allowed them to continue pursuing their claims under the Employee Retirement Income Security Act.

Most recently, the Ninth Circuit denied Amgen's request to have the case reviewed by a full panel of circuit court judges. This decision came over the strong dissent of four judges, led by Chief Judge Alex Kozinski, who read Dudenhoeffer as imposing a greater obstacle for employer stock plan participants.

In particular, Kozinski warned that the Ninth Circuit's opinion ignored Dudenhoeffer's heightened pleading standard and created “almost unbounded liability for ERISA fiduciaries.”

Amgen's petition for Supreme Court review was filed by Seth P. Waxman, Daniel S. Volchok, Louis R. Cohen, Albinas J. Prizgintas and Brook Hopkins of Wilmer Cutler Pickering Hale & Dorr. 

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