Although each case is different, the strategy for sponsor-defendants is the same — convince a judge to dismiss a stock-drop complaint to avoid extra expenses of pre-trial discovery, a trial, a settlement or a pro-plaintiff ruling.
Some settlements reached in recent years represent lawsuits that had been filed five or more years ago. The Dudenhoeffer case, for example, was settled last year for $6 million with no admission of wrongdoing by Fifth Third Bancorp. Participants sued in August 2008.
"Don't assume that if a company settles that it had a bad case," said Mr. Oringer, noting that he, like other ERISA attorneys, wasn't commenting on a specific case. "Companies have different levels of risk aversion. Each sponsor has a different risk appetite."
ERISA attorneys say the Supreme Court left it up to lower courts to interpret guidelines that have proven to be as strict as, if not stricter than, the Moench presumption.
"Simply pleading that the stock went down and the plan should have sold it is not enough" to convince judges, said David Levine, a partner in the Groom Law firm. "There's a high barrier."
One hurdle is the requirement that plaintiffs prove "special circumstances" to convince lower courts to let a lawsuit proceed. As noted in the Arch Coal case, even impending bankruptcy isn't automatically considered a special circumstance.
"Plaintiffs' allegations of Arch Coal's 'serious deteriorating condition' and 'overwhelming debt' are evidence of the company's slide into bankruptcy but do not establish a special circumstance under Dudenhoeffer," St. Louis-based U.S. District Judge Carol E. Jackson said in an Aug. 4 opinion dismissing the complaint against Arch Coal and the plan's trustee, Mercer Fiduciary Trust Co.
The biggest hurdle for plaintiffs is convincing lower courts that an alternative action by a prudent fiduciary to keeping company stock in a DC plan wouldn't do more harm than good.
For example, the "more harm than good" standard was cited by U.S. District Judge William H. Pauley III in New York on Sept. 29 in dismissing a suit against IBM. "The complaint is bereft of context-specific details to show how a prudent fiduciary would not have viewed the proposed alternatives as more likely to do more harm than good," he wrote.
The standard also was cited by U.S. District Judge Joan Ericksen of Minneapolis on July 31 in dismissing a complaint against Target, in which 401(k) plaintiffs said managers could have taken other steps to keeping company stock.
"Nobody knows what 'special circumstances' mean and what 'more harm than good' means," said Nancy Ross, a Chicago-based partner at the Mayer Brown law firm, adding the Dudenhoeffer standards make it "exceptionally difficult to get things past the motion to dismiss."
The "more harm than good" is especially vexing, she added, because "that's asking fiduciaries to be prescient" in assessing alternatives to keeping company stock in a 401(k) plan.
None of her clients has dropped company stock from their 401(k) plans due to fears of litigation. "I tell clients to listen to their employees" because they "are still providing company stock if their employees want it," she said.