On June 4, 2019, the US Supreme Court granted the petition for writ of certiorari of the defendant fiduciaries in Retirement Plans Committee of IBM, et al. v. Larry W. Jander, No. 18-1165. The justices will review the Second Circuit’s unexpected holding that a complaint, which alleged that plan fiduciaries violated ERISA by failing to disclose information about overvalued employer stock held in a 401(k) plan, satisfied the high “more harm than good” pleading standard enunciated in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014). If upheld, this ruling—which runs contrary to the recent trend in employer stock drop cases—likely would lead to an increase in filings of such cases and in the number of such cases that survive early motions to dismiss.
The petition arose from the Second Circuit’s opinion in December 2018 in which it reversed a district court order granting petitioners’ motion to dismiss the plaintiffs’ complaint. Jander v. Retirement Plans Committee of IBM, et al. 910 F.3d 620 (2d Cir. 2018). The Second Circuit held that the plaintiffs had satisfied the “more harm than good” pleading standard of Fifth Third Bancorp v. Dudenhoeffer by alleging that a prudent fiduciary of IBM’s retirement plan could not have concluded that disclosing information about financial problems with IBM’s microelectronics business through IBM’s regular securities filings would do more harm than good. The court reasoned that disclosure of the harmful information was inevitable, and this harm would only increase with delayed disclosure due to additional reputational harm that allegedly would result from market perception that the harmful information had been intentionally concealed. Id. at 630-31.
By way of background, the Supreme Court in Fifth Third dramatically altered the generally established rules of pleading in the circuits for claims that retirement plan fiduciaries breached their fiduciary duties by permitting a plan to continue to hold employer securities when the fiduciaries possessed inside information that the employer’s securities were overvalued. Rejecting the “presumption of prudence” that applied in many circuits at that time, the Court held that no such presumption was supported by the text of ERISA. Fifth Third Bancorp, 134 S.Ct. at 2467. The Court held that the adequacy of a plaintiff’s allegations should instead be evaluated under the Court’s established guidance for evaluating the sufficiency of a plaintiff’s complaint. Id. at 2471. Critically, however, the Court held that for a plaintiff to state a claim for breach of fiduciary duty based on the failure to disclose non-public information, a plaintiff must plausibly allege an alternative action the defendant could have taken that a prudent fiduciary “would not have viewed as more likely to harm the fund than to help it.” Id. at 2472.
The Court’s commitment to apply this rule exactly as written was tested by Harris v. Amgen, in which the Ninth Circuit, in an employer stock drop case remanded for reconsideration in light of the Court’s holding in Fifth Third, held that a plaintiff had adequately pleaded a claim for relief because it was “quite plausible” that the defendants could have taken the alternative action proposed by the plaintiffs “without causing undue harm to plan participants.” 788 F.3d 916, 938 (9th Cir. 2015). On review, the Supreme Court squarely rejected this rewriting of its articulation of the pleading requirements stated in Fifth Third, holding that the circuit court had failed to assess whether the complaint had “plausibly alleged” that a prudent fiduciary “could not have concluded” that the alternative action “would do more harm than good.” See Amgen v. Harris, 136 S.Ct. 758, 759-760 (2016). Since that time, no circuit court has held that a plaintiff successfully satisfied this pleading requirement.
In Jander, the Second Circuit refrained from acknowledging any exception to the “more harm than good” standard of Fifth Third, but nevertheless permitted the plaintiffs’ complaint to survive dismissal based only on general allegations that eventual disclosure of the alleged financial misstatements was inevitable and that delayed disclosure resulted in “reputational damage” that no reasonable fiduciary could conclude would not be more harmful than the disclosure through IBM’s quarterly financial statements—the alternative action the plaintiffs alleged the fiduciaries should have taken. 910 F.3d at 630-631.
In their cert petition, petitioners argued that the Second Circuit’s holding resulted in a clear circuit split and, if allowed to stand, would completely undermine Fifth Third, allowing virtually any plaintiff to plead around Fifth Third merely by making generalized assertions that delayed disclosure would be more harmful than early disclosure.
The resolution of this case is important for plan fiduciaries of retirement plans, such as 401(k) plans, that hold employer securities. Although petitioners’ cert petition possibly overstates the number of cases in which the Second Circuit’s reasoning would permit a plaintiff to artfully plead around the high bar set by Fifth Third, it is undoubtedly true that allowing the ruling to stand will give new life to plaintiffs in employer stock drop cases and likely lead to new filings. Prior to Jander, plaintiffs’ attempts to survive motions to dismiss in employer stock drop cases in the aftermath of Fifth Third have been largely unsuccessful and the Court’s “more harm than good” standard is at the center of numerous rulings dismissing plaintiff complaints.
We will continue to watch this case as it progresses in the Supreme Court.
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