The U.S. Court of Appeals for the Second Circuit on Thursday, February 4, affirmed the dismissal of an ERISA class-action lawsuit filed against General Electric Company and its former CEO. The complaint had alleged the company violated ERISA by offering GE stock as an investment option for its 401(k) plan participants despite purportedly under-reserving for the liabilities of insurance subsidiaries by approximately $15 billion. The court rejected the plaintiff’s argument that her allegations satisfied the standard for pleading a breach of the duty of prudence in this context established by the Supreme Court in Dudenhoeffer v. Fifth Third Bancorp and interpreted by a different Second Circuit panel in Jander v. Retirement Plans Committee of IBM.
The Second Circuit affirmed the dismissal of an ERISA class action lawsuit filed against General Electric Company and its former CEO that alleged that retaining company stock as an investment option in GE’s 401(k) plan violated ERISA’s duty of prudence. This case is the most recent of a nearly unbroken chain of similar lawsuits that have been rejected by courts across the country since the Supreme Court set a high bar for pleading these types of claims in 2014.
These lawsuits have generally followed a similar pattern where a publicly held company makes available its own stock in its employee retirement plan. Following a drop in a company’s stock price, the company will often be targeted not only by a securities class-action complaint alleging that securities fraud caused the stock drop, but also by an ERISA class-action complaint alleging that the fiduciaries of the retirement plan knew that some type of corporate misfeasance was occurring and should have taken action to prevent plan participants from experiencing losses caused by the stock drop.
The Supreme Court has recognized that ERISA plan fiduciaries are “between a rock and a hard place” with respect to company stock offerings. Congress has encouraged employers to make company stock available in their retirement plans, and some plans of public companies mandate that company stock be available to employees. Plan fiduciaries must follow the plan documents unless doing so otherwise violates ERISA. Moreover, the stock-price impact of any new information about a company — good or bad — is often difficult to predict, particularly its long-term impact. If a plan fiduciary with non-public information about the company decides to continue offering company stock and the stock price goes down, he can be sued for acting imprudently; if he stops offering company stock and the price goes up, he can be sued for violating the plan document. Further confounding the dilemma faced by such fiduciaries, taking the latter action can itself trigger a stock drop and affirmatively cause losses to plan participants who are already invested in company stock.
Thus, the Supreme Court has set a high bar for pleading a viable claim for breach of ERISA fiduciary duty related to the decision to offer mandated company stock where a fiduciary allegedly has material non-public information of an undisclosed problem inflating the company stock price: a plaintiff must allege that the plan fiduciaries could have taken an “alternative action” that (a) would have been consistent with the securities laws and (b) a prudent fiduciary in the same position “could not have concluded . . . would do more harm than good” to the plan and its participants. Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 429-430 (2014); Amgen Inc. v. Harris, 136 S. Ct. 758, 759-760 (2016).
Following those two Supreme Court decisions, courts have, with almost-unfailing consistency, rejected ERISA stock-drop claims at the pleading stage. Plaintiffs asserting these types of claims have generally alleged that plan fiduciaries should have stopped making company stock available for new investments or publicly disclosed insider information to participants and the market as a whole — two outcomes that courts across the country have recognized could trigger a stock drop and harm plan participants, which is something that any reasonable fiduciary would aim to avoid. The only contrary decision is the Second Circuit’s decision in Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2d Cir. 2018), which permitted a prudence claim to go forward because the plaintiffs there alleged specific facts indicating that disclosure of the alleged inside information — the overvaluation of a corporate subsidiary — would inevitably become public once a planned sale of the subsidiary became public.
In Varga v. General Electric, the plaintiff alleged that plan fiduciaries had negative inside information more than a decade ago about reinsurance subsidiaries of General Electric Company and violated ERISA’s duty of prudence by failing to disclose that information to the public or stop permitting new plan investments in company stock. The plaintiff asserted that disclosure was “inevitable” because the information was bound to come out sooner or later and argued to the Second Circuit that those allegations were sufficient to fall within Jander. The Second Circuit disagreed, holding that conclusory assertions of inevitability are not sufficient to state a claim. The court agreed with the district court that a plaintiff must allege some “major triggering event” like the sale alleged in Jander to make it plausible that a prudent fiduciary could not have concluded that taking action would do more harm than good to participants.
The Second Circuit’s decision reaffirms that Jander was not the sea change in the law that ERISA plaintiffs in a variety of cases have suggested that it was. Instead, it was a narrow holding cabined to the unique facts of that case. And in doing so, the court reiterated the high pleading standard ERISA plaintiffs must satisfy to state a viable ERISA claim based on the decision to offer company stock.
GE was represented by Goodwin, and Jaime Santos (a partner in Goodwin’s Supreme Court and Appellate Litigation Practice) argued the Second Circuit appeal.