The guidelines in a landmark Supreme Court ruling on stock-drop cases are turning out to be almost as tough on plaintiffs as the standard the court nullified.
Two years after the U.S. Supreme Court's ruling in Fifth Third Bancorp et al. vs. Dudenhoeffer et al., ERISA attorneys say plan executives' fears of a flood of lower court decisions against plan sponsors and new lawsuits hasn't been realized.
Relatively few stock-drop lawsuits have been filed since the court issued its 9-0 opinion in June 2014, striking down what one attorney called an “almost bulletproof defense” by companies to defeat fiduciary-breach allegations when company stock funds fell in value.
In its place, the court issued guidance to lower courts to determine whether they should accept or dismiss a stock-drop case based on fiduciaries' administering company stock funds in defined contribution plans. So far, ERISA attorneys say, the ruling appears to have been stricter than originally believed.
“Any notion it would cause an avalanche of cases has not been proven,” said Richard McHugh, the Washington-based vice president for the Plan Sponsor Council of America, referring to the aftermath of the Supreme Court's ruling. “I don't think the doom and gloom is as bad as people thought. I'm not sure this case has changed the landscape all that much.”
In a string of high-profile cases decided since the Supreme Court's decision, many federal district courts and federal appeals courts have dismissed participants' claims of fiduciary breaches under the new guidelines. Among rulings in favor of plan sponsors were complaints against Delta Air Lines Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Citigroup Inc.
Lower courts also have applied the new guidelines in dismissing complaints against third-party fiduciaries of company-stock funds within DC plans, such as Evercore Trust Co., for a J.C. Penney Co. stock fund, and State Street Bank & Trust Co., for a General Motors Co. stock fund.
“From a plan sponsor perspective, I think this is a happy anniversary despite the initial concern,” said Meaghan VerGow, a Washington-based counsel for O'Melveny & Myers LLP, referring to the two-year anniversary of the Dudenhoeffer ruling.
In that ruling, the Supreme Court nullified a defense known as the “presumption of prudence,” which was based on a 1995 Philadelphia federal appeals court ruling. This defense enabled sponsors to convince most judges that lawsuits should be dismissed at the initial pleading stage rather than at the trial stage. In doing so, companies avoided the heavy expenses of pretrial discovery and/or the trial itself.
In some instances, companies have settled stock-drop suits since the Dudenhoeffer decision, including Eastman Kodak Co. and Avon Products Inc.
Still, the impact of the court's decision “is not as troubling as people thought,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, a trade group of large corporations. “Many employers were concerned when Dudenhoeffer was decided.”