In Fifth Third Bancorp v. Dudenhoeffer, a decision written by Justice Breyer, the US Supreme Court unanimously held that plan fiduciaries are not entitled to any special “presumption of prudence” under the Employee Retirement Income Security Act of 1974 (ERISA) when they decide to buy or hold employer stock in an employee stock ownership plan (ESOP). The Supreme Court concluded that nothing in the text of ERISA creates a “special presumption favoring ESOP fiduciaries.” ESOP fiduciaries, therefore, are subject to the same general duty of prudence that applies to all ERISA fiduciaries, 29 U.S.C. § 1104(a)(1)(B), except for the statutory exemption that having an ESOP that holds principally one stock is not prohibited by ERISA fiduciaries’ ordinary duty to diversify the fund’s assets. See 29 U.S.C. § 1104(a)(2).
The “presumption of prudence,” or the “Moench doctrine,” arose from the Third Circuit’s decision in Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995). Although courts of appeals had since split on whether such a “defense-friendly presumption” would apply at the motion to dismiss stage or only once the merits of a case were reached—a split that led to the case before the Court—the Supreme Court bypassed the split in the Circuits entirely, holding that no presumption of prudence should apply at all.
The decision vacated the Sixth Circuit’s decision refusing to dismiss a suit alleging that fiduciaries of Fifth Third’s ESOP, which permitted employees to invest their retirement savings in Fifth Third common stock, breached the fiduciary duty of prudence imposed by ERISA. Although the Supreme Court concluded that there was no special presumption favoring ESOP fiduciaries, it also remanded the case to the Sixth Circuit with guidance on how to evaluate Fifth Third’s motion to dismiss the ESOP participants’ claims for breach of the duty of prudence. This decision changes how motions to dismiss ERISA “stock drop” cases will be evaluated by courts in those Circuits that had adopted the Moench doctrine, and provides some helpful guidance to judges in all Circuits about how to evaluate whether plaintiffs have pleaded enough facts plausibly to support a claim of breach of duty by ERISA fiduciaries.
The Court provided the following guidance to lower courts on how to evaluate future motions to dismiss complaints challenging the prudence of ESOP fiduciaries. First, the Court noted that where a company’s stock is publicly traded, allegations that an ESOP fiduciary should have recognized from publicly available information that the market was improperly valuing the employer stock—and thus, the fiduciary should have jettisoned the stock—are “implausible as a general rule, at least in the absence of special circumstances.” The Court did not explain what “special circumstances” may transform such a claim into a plausible one.
Second, the Court explained that for a plan participant to state a claim for breach of the duty of prudence on the basis of non-public information, a plaintiff must plausibly allege an “alternative action” that the ESOP fiduciary should have taken that would have been “consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” In making this determination, the Court noted that several considerations must be taken into account. First, ERISA’s duty of prudence does not require a plan fiduciary to break the law, and thus a fiduciary cannot be imprudent for failing to buy or sell company stock in violation of laws prohibiting insider trading. Second, where a plaintiff faults fiduciaries for failing to stop making additional company stock purchases or for failing to disclose non-public information to prevent the market price for the company’s stock price from continuing to be inflated, courts should weigh the extent to which imposing such an ERISA-based obligation could conflict with the insider trading laws and corporate disclosure requirements under the federal securities laws. Third, courts should consider whether the complaint has plausibly alleged that no prudent fiduciary in the defendant’s position could have concluded that stopping participants from purchasing ESOP shares or publicly disclosing negative information “would do more harm than good to the fund by causing a drop in the stock price.”
Although the framework for analysis provided by the Court may in time prove helpful with respect to the issues company insiders face when acting as plan fiduciaries by focusing lower courts on the plausibility of the claims when analyzed in context, the elimination of the presumption of prudence suggests that these claims will be more fact specific and employers will continue to face litigation risk in connection with the offering of the employer’s stock through an ESOP or other qualified retirement plan.