[co-author: Elliot Morrison]
The Supreme Court recently agreed to resolve a circuit split on the pleading requirements for claims that ERISA fiduciaries imprudently invested employee stock ownership plan (ESOP) assets in the stock of the employer—so-called “stock-drop” cases. Under the “Moench presumption,” named after Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), courts presume that investments of ESOP assets in employer stock are reasonable, raising the bar for claims of imprudent investment decisions. Id. at 571. Until recently, all of the circuits to face the issue have found that the Moench presumption applies at the pleading stage, requiring plaintiffs to plausibly allege that fiduciaries abused their discretion by deciding to include employer stock as an investment option or to remain invested in employer stock. See, e.g., Lanfear v. Home Depot, Inc., 679 F.3d 1267, 1279 (11th Cir. 2012); In re Citigroup ERISA Litig., 662 F.3d 128, 139 (2d Cir. 2011); Edgar v. Avaya, Inc., 503 F.3d 340, 349 (3d Cir. 2007).
But the Sixth Circuit rejected that notion, holding that the Moench presumption was an evidentiary principle and that it was not properly raised at the pleading stage. Dudenhoefer v. Fifth Third Bancorp, 692 F.3d 410, 419 (6th Cir. 2012). As a result, the defendants in Dudenhoefer were required to go through discovery.
Defendant Fifth Third Bancorp, with aid from amicus curiae KeyCorp (represented by BakerHostetler LLP), petitioned for a writ of certiorari. After the Solicitor General weighed in on behalf of the government, the Court agreed to hear the case. In doing so, the Court declined the government’s invitation to reformulate the question presented to consider whether the presumption should apply at all—a step not even the Sixth Circuit had contemplated. (The Court also declined to address a different issue, concerning the scope of liability for SEC filings incorporated into ERISA plan documents.)
This will be one of the most-watched Supreme Court cases of the year. As KeyCorp argued, in a fluctuating market, nearly all companies will experience significant stock-price drops at various times—and vanishingly few avoided that fate in the recent financial crisis. Armed only with hindsight and generalized challenges to the company’s business practices leading up to a price drop, plaintiffs regularly claim that merely offering the option of investing in an employer’s stock was imprudent. For large employers, with correspondingly large putative classes, the potential liability for even minor stock drops can be substantial. Further, because the claims concern the wisdom of the employer’s wide-ranging business practices over long periods of time, discovery is an enormously costly endeavor. As a result, the Court’s decision on the timing and definition of the presumption of reasonableness will have major consequences for all employers who want to provide an mechanism for employees to acquire company stock.