High-court ruling thwarts ERISA stock-drop lawsuits

More than six years after the U.S. Supreme Court issued a unanimous ruling on how courts should handle stock-drop cases, defined contribution participants claiming ERISA violations are struggling to vault the high hurdle set by the court.

Since the 2014 decision in Fifth Third Bancorp et al. vs. Dudenhoeffer et al., the annual number of stock-drop suits being filed has declined, especially when compared to the annual filings during and following the Great Recession.

Many U.S. District Court judges have dismissed ERISA complaints as they abide by the Dudenhoeffer guidelines. A handful of appeals courts have reversed lower court dismissals. For those few lawsuits that climbed the litigation ladder to the Supreme Court, the justices have shown little desire to review or revise the standards for determining if a stock-drop complaint should be dismissed or allowed to go to trial.

The Dudenhoeffer decision "provided some relief" to sponsors, said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, which has filed friend-of-the-court brief in a variety of ERISA cases.

"There is still some concern among employers who have company stock in their plans," she said. "Even when a case is dismissed, there's a cost."

The court offered several guidelines:

• "Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim" under previous Supreme Court rulings.
• "To state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it."
• "ERISA's duty of prudence never requires a fiduciary to break the law, and so a fiduciary cannot be imprudent for failing to buy or sell stock in violation of insider trading laws."

Initially, sponsors worried that the Supreme Court's guidance would make sponsors more vulnerable to stock-drop lawsuits because it replaced the "presumption of prudence standard" establish by a 1995 Philadelphia federal appeals court decision. The standard offered a strong barrier against stock-drop lawsuits.

District Courts have, however, interpreted the Dudenhoeffer guidelines to the point that participant-plaintiffs have had little success.

"There was an immediate reaction (by sponsors) to the loss of the presumption of prudence," said Andrew L. Oringer, a New York-based partner at Dechert LLP and co-chairman of the firm's ERISA and executive compensation group.

"It became evident quickly" that the Dudenhoeffer ruling "was neutral or a net good" for sponsors, said Mr. Oringer, who represents employers in ERISA cases. "It has played out as a net good for fiduciaries."

The high court since Dudenhoeffer has declined to hear a few stock-drop petitions, sent another back to a federal appeals court on procedural grounds and issued a full-fledged opinion, which emphatically reaffirmed its guidelines issued in 2014. In that 2016 opinion, the justices supported the sponsor, Amgen Inc.

The 9th U.S. Circuit Court of Appeals in San Francisco had overturned a District Court's dismissal of ERISA complaints relating to Amgen's stock falling due to controversies over drug-marketing practices and drug safety.

The Supreme Court said the appeals court "did not correctly apply" the Dudenhoeffer guidelines, adding that it "has not found sufficient facts and allegations" to support an ERISA violations claim.

"Amgen was totally a we're-not-kidding decision," Mr. Oringer said.

Still, "Amgen doesn't necessarily stop (lower) courts from doing what they think is right," said Mr. Oringer noting that some appeals courts have issued decisions saying plaintiffs' allegations met the Dudenhoeffer standards.

The latest stock-drop petition to reach the Supreme Court is Francesca Allen et al. vs. Wells Fargo & Co. et al. The justices haven't decided whether to review or deny review of the petition that was filed in December 2020. Unlike some earlier petitions to the Supreme Court by sponsors challenging an adverse appeals court ruling, this is a lawsuit by current and former employees whose complaint was dismissed by a U.S. District Court in 2017. A federal appeals court upheld the dismissal in July 2020.

Plaintiffs criticized fiduciaries for failing to protect stock-owning plan participants following the revelations of a Wells Fargo sales-practices scandal that depressed the stock and led to penalties against the company.

The Dudenhoeffer decision appears to have affected the filing of stock-drop cases, according to the Washington consulting firm Cornerstone Research.

"Historically, the number of cases was much higher," said Kivanc Kirgiz, a vice president at Cornerstone Research, in an email. "Between 2009 and 2011, for example, these cases almost averaged 20 per year."

The highest yearly filings were 34 in 2002 and 37 in 2008, according to Cornerstone data, which count stock drop-cases for publicly held companies but excludes employee stock ownership plan lawsuits among private companies. The data also exclude suits in which a corporate spin-off produces a publicly traded company with its own company stock as well as the publicly traded stock of its former parent.

According to Cornerstone, the number of stock-drop lawsuits began to shrink even before the Dudenhoeffer ruling. There were six in 2012, two in 2013, three in 2014 and seven in 2015. Also, there were eight in 2016, four in 2017, none in 2018 and three in 2019.

"We have not finished our review of 2020 but so far we have not identified any stock-drop cases," wrote Mr. Kirgiz, suggesting that a strong stock market also has played a role in the filing of fewer cases.

Despite courts' pro-employer track record, sponsors' attorneys and trade groups representing employers aren't ready to declare victory.

"There is still some concern" because different cases present different facts, said Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington.

As for the Dudenhoeffer guidelines, "We think it's clear, but it's always open to interpretation," said Ms. Robinson, whose organization has filed friend-of-the-court briefs supporting employers.

Attorney David Levine, who represents employers in ERISA cases, said sponsors "are not taking anything for granted" even though they are "relieved" by the trend of pro-sponsor rulings by lower courts.

"The courts often are dismissing cases, but there are cases like IBM," said Mr. Levine, Washington-based principal with the Groom Law Group. Without more specific guidelines, "we will always have courts go in different directions."

The case of Retirement Plans Committee of IBM et al. vs. Larry W. Jander et al. has gone to the Supreme Court twice.

Although a U.S. District Court in New York dismissed a complaint by plan participants in 2016 and 2017, the 2nd U.S. Circuit Court of Appeals in New York ruled in 2018 that participants had met the Supreme Court's guidelines in some of their allegations.

In January 2020, the Supreme Court responded to IBM's petition by vacating and remanding the case to the appeals court, instructing it to examine issues that the lower courts hadn't addressed. The 2nd Circuit's judges reaffirmed their original decision; IBM petitioned the Supreme Court again.

In November 2020, the Supreme Court declined to review the case; it is back at the trial court, which must follow the appeals court's interpretation. Participants sued the IBM fiduciaries in 2015, saying they should have protected stock-holding participants in the 401(k) plan. IBM's stock fell following disclosure of an asset write-down and subsequent sale of a money-losing microelectronics unit.

"I think we were hoping that the Supreme Court would take up IBM and confirm Dudenhoeffer," Ms. Robinson said. "It does leave uncertainty."

The IBM case highlights the challenge in interpreting the Dudenhoeffer "more harm than good" standard. Lower courts must assess if participants suing a company can "plausibly allege" that any response by a plan's fiduciary — such as freezing a stock fund or halting stock purchases — would have been better than doing nothing. That applies to allegations that fiduciaries failed to act on non-public information.

The IBM case indicates that "the judiciary is waiting for more clarity" regarding the more-harm-than-good standard, said Dechert's Mr. Oringer. "There's more work to be done on just what that means. The final word hasn't been written."