The U.S. Supreme Court on Tuesday declined to act on an ERISA stock-drop lawsuit, vacating and remanding an appeals court ruling that had represented a rare victory by participants over 401(k) plan sponsors.
In an unsigned opinion, the Supreme Court sent the lawsuit back to a New York federal appeals court with instructions to review issues that lower courts had not addressed.
The case involves a participant's complaint plan that fiduciaries should have taken corrective action to protect investors who held IBM stock in an IBM 401(k) plan. The plaintiff said participants' investments were harmed when the stock fell following IBM's disclosure, asset write-down and subsequent sale of a money-losing microelectronics unit.
"The question presented in this case concerned what it takes to plausibly allege an alternative action 'that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it,' " said the justices' unsigned opinion known as a per curiam opinion. In remanding the case to the 2nd U.S. Circuit Court of Appeals, New York, the justices wrote that it "should have the opportunity to decide whether to entertain these arguments in the first instance."
The case, Retirement Plans Committee of IBM et al. vs. Larry Jander et al., was the rare example of a lower court supporting a plaintiff's argument that a sponsor had violated guidelines set by the Supreme Court's unanimous 2014 decision in Fifth Third Bancorp vs. Dudenhoeffer et al.
The court established guidelines for lower courts to follow when considering whether to dismiss a stock-drop complaint or allow it to proceed to trial. The Dudenhoeffer decision and the Supreme Court's 2016 decision in Harris vs. Amgen set a high bar for plaintiffs and resulted in frequent dismissals by lower courts.
A U.S. District Court judge in New York dismissed the lawsuit by IBM plan participant Larry Jander in September 2016 and again in September 2017. The judge said Mr. Jander, who sued in 2015, had failed to show that a prudent fiduciary could have taken actions without causing more harm than good — a reference to the Dudenhoeffer ruling.
However, a three-judge panel of the 2nd U.S. Circuit Court of Appeals ruled in December 2018 that Mr. Jander's argument met a Dudenhoeffer standard, and it reversed the lower court decision. IBM petitioned the Supreme Court in May; the justices held oral arguments in November.
The Dudenhoeffer decision sought to reconcile the ERISA duties of plan fiduciaries with the Securities and Exchange Commission duties of corporate officers with three broad principles:
- ERISA's duty of prudence doesn't require a fiduciary to violate securities laws by selling company stock in a retirement plan based on insider information.
- Courts must assess a sponsor's taking no action, based on insider information, by balancing ERISA rules with the SEC's "complex insider trading and corporate disclosure requirements."
- Lower courts must analyze whether a complaint "plausibly alleged" that a prudent fiduciary in a similar situation would made sure any action didn't do more harm than good.
In the Jander-IBM case, the Supreme Court was asked to determine if the more-harm-than-good standard "can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time," the per curiam opinion said.
However, attorneys for IBM and the federal government, which filed a friend-of-the-court brief representing the SEC and the Labor Department, "focused their arguments primarily upon other matters," the Supreme Court wrote. These other matters weren't discussed at the lower court level, and that's one reason why the Supreme Court vacated and remanded the case. The per curiam opinion also noted that in its Dudenhoeffer decision, the justices said the views of the SEC might be relevant in determining how ERISA's duty of prudence can be reconciled with securities laws. The appeals court can "determine their merits, taking such action as it deems appropriate," the justices wrote.