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High court asked to revisit company stock fiduciary case

The Supreme Court has been asked to review an appeals court’s ruling on stock-drop litigation guidelines set by the high court in 2014.

Among the recent ERISA case petitions now before the Supreme Court, one asks the court to revisit its unanimous 2014 ruling that set a high bar for plaintiffs in making fiduciary breach claims about company stock in defined contribution plans.

The court ruled in the 2014 case in Fifth Third Bancorp vs. Dudenhoeffer et al. — and which it reiterated in its 2016 decision in Harris vs. Amgen — on specific guidelines that lower courts should follow to determine if a complaint should be dismissed or be allowed to go to trial.

In its March 8 petition, the Retirement Plans Committee of IBM asked the court to reaffirm its guidelines and declare that a New York federal appeals court was "plainly mistaken" in interpreting the stock-drop standards. The appeals court decision "reopens the door to lawyer-driven class actions that spring up after every stock drop," the petition said.

The plaintiff, a participant in an IBM 401(k) plan, asked the Supreme Court to reject IBM's request, saying the appeals court correctly followed the litigation guidelines. "Lacking any basis to criticize" the decision, "petitioners make a variety of bombastic claims about the parade of horribles about to descend on the federal courts" due to the ruling, according to court documents.

The IBM case — Retirement Plans Committee of IBM et al. vs. Larry W. Jander, et al. — represents a rare victory for plaintiffs.

Since the Supreme Court's 2014 ruling, U.S. District Courts have repeatedly dismissed — backed by appeals courts — plaintiffs' allegations that sponsors violated ERISA in managing investment menus containing a company stock fund.

Participants sued IBM in 2015, saying its 401(k) plan managers should have acted to protect holders of company stock due to IBM's writing down $2.4 billion of a troubled microelectronics unit and paying $1.5 billion to another company to take the unit.

A District Court judge ruled in September 2016 and September 2017 that participants failed to show a prudent fiduciary could have taken actions without causing more harm than good, referencing the Supreme Court's guidelines.

In December 2018, the 2nd Circuit Court of Appeals reversed and remanded the ruling. A three-judge panel said participants "plausibly allege" that plan managers "had the requisite knowledge" that IBM's stock was overvalued due to the microelectronics unit's problems. "The allegations regarding the sale of the microelectronics business … tip the scales toward plausibility," the court wrote.

The appeals court ruling "is unsettling given Dudenhoeffer and Amgen," said Aliya Robinson, senior vice president, retirement compensation policy, for the ERISA Industry Committee, Washington.

Her organization, the American Benefits Council and the U.S. Chamber of Commerce jointly filed an amicus brief arguing that if the appeals court decision prevails, employers will be discouraged from offering employee stock ownership plans "for fear of being forced into high-dollar settlements or incurring significant legal fees to defend imprudence claims."