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

by Goodwin

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.


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.

© Goodwin | Attorney Advertising

Written by:


Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.