Solicitor General Urges Supreme Court to Address Plan Investment in Company Stock

by Goodwin
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The Supreme Court will soon announce whether it will clarify the circumstances under which a plaintiff may state a claim against plan fiduciaries for the continued holding of employer securities.  The federal government is urging the Court to take up the issue – and to move the law in a significantly more plaintiff-friendly direction.  Every federal court of appeals has held that, under at least some circumstances, courts must presume that an ERISA plan fiduciary acted prudently when it continued holding employer securities pursuant to the terms of a written plan.  The federal government has now asked the Supreme Court to take up the issue for the first time and to reject that presumption completely.  The Court will decide on December 13 whether to take up the case.  If it does so – which appears highly likely – the case would be argued in March or April 2014 and decided by June 2014.  (Update: the Supreme Court has granted review and will hear arguments in the case.)

The government staked out its position in a filing in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751.  In that case, the U.S. Court of Appeals for the Sixth Circuit declined to apply a presumption of prudence at the pleadings stage, although the Sixth Circuit agreed that under its precedent a presumption would apply once evidence was submitted.  The defendants asked the Supreme Court to decide when a presumption of prudence should apply.  Before ruling on the defendants’ petition, the Court asked the Solicitor General of the United States to submit the federal government’s views.  On November 12, 2013, the Solicitor General filed a brief urging the Supreme Court to grant review and to reject the presumption of prudence completely.

Background

The Dudenhoeffer case arises against a familiar background.  A publicly traded financial services company offered its employees a defined contribution plan that allowed employees to choose among various options for their retirement savings.  One such option was a fund designed to invest primarily in the employer’s securities.  The governing plan instrument gave a plan committee discretionary authority to select the investment options that would be made available under the plan.  However, the plan document specified that, “in all events,” a fund designed to invest primarily in the employer’s stock “shall be an investment option.”

During the class period, July 19, 2007 through September 18, 2009, the plan allowed participants to invest in the stock fund and 19 other, diversified funds.  During that same period, the price of the company’s stock fell 74%.  The plaintiffs, two former participants in the plan, sued the company, its president and chief executive officer, and members of the plan committee under ERISA, alleging breaches of fiduciary duty for the continued holding in the plan of the sponsor’s stock during the class period.

District and Appeals Court Decisions in Dudenhoeffer

The trial court dismissed the case on the pleadings, ruling that the plaintiffs failed to defeat the presumption of prudence attendant to the plan’s holding such stock.  The Sixth Circuit reversed, largely following its earlier holding in Pfiel v. State Street Bank and Trust Company, reported in  Goodwin Procter’s March 29, 2012 ERISA Litigation Update.  While the Sixth Circuit again agreed that a presumption of prudence should be applied when a plan holds publicly traded shares of the sponsor’s stock consistent with the plan document, it held that the presumption is evidentiary in nature and should not apply at the pleadings stage.

It reached this conclusion, in part, based on its standard for rebutting that presumption, which it held was not as narrow as other circuits that hold that the presumption can only be rebutted by a showing of dire circumstances faced by the company, such as an impending collapse.  In this case, the court held that the plaintiffs had sufficiently stated a claim by alleging that the defendants were aware of sufficient information that rendered the stock an imprudent investment, in large part because of the company’s exposure with respect to sub-prime mortgages.

U.S. Supreme Court Petition for Certiorari

The defendants sought review by the Supreme Court in a petition for certiorari filed on December 14, 2012 (a similar petition had been filed by the defendants in the earlier Sixth Circuit case, Pfiel, though that petition had been rejected by the Supreme Court).  On March 25, 2013, the Court invited the federal government to file a brief.  On November 12, 2013, the Solicitor General, joined by the Solicitor of Labor, filed a brief urging the Court to accept the petition.

While the defendants’ petition had pointed out that the Sixth Circuit has diverged from other circuit courts of appeal in not applying the presumption of prudence at the pleading stage, the government brief urges the Supreme Court to take up the case not just to resolve the circuit conflict, but to moot it entirely by rejecting the presumption of prudence completely.  The government asserts (as the Department of Labor has repeatedly argued in amici briefs in the courts of appeals since Moench v. Robertson was appealed in 1994) that no presumption of prudence for holding employer stock should be afforded at any stage in the proceedings, regardless of the terms of the written plan.  The government argues that the presumption is not directly stated in the statutory text and is inconsistent with its reading of the statutory prudence standard. 

The government acknowledges that the result it seeks is contrary to the rule in every one of the seven courts of appeals to have reached the question.  All of those circuits – the Second, Third, Fifth, Sixth, Seventh, Ninth, and Eleventh – have adopted the presumption given other ERISA provisions favoring the holding of employer stock.  Nonetheless, the government’s brief explains that the Sixth Circuit’s decision meets the Supreme Court’s criteria for review, because the Sixth Circuit diverged from those other circuits in (i) determining what a plaintiff must prove to rebut the presumption, and (ii) holding that the presumption should not apply at the pleadings stage.  And if the Court is to review the question of when and how to apply the presumption, the government asks the Supreme Court to resolve the antecedent question of whether a presumption applies at all.  The Supreme Court had done just that in another recent ERISA case, CIGNA Corp. v. Amara, where it decided a question antecedent to the one on which certiorari actually was granted.

The Supreme Court has distributed the certiorari briefing for its December 13, 2013 conference.  A decision to take up the case would ordinarily be released that day.  The Court almost invariably accepts recommendations by the Solicitor General to grant certiorari, making this case a highly likely addition to the Court’s March 2014 argument calendar. A decision on the merits would come by June 2014.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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