On September 26, 2016, in Whitley v. BP, Plc (BP), the US Court of Appeals for the Fifth Circuit held that the plaintiffs, BP employees who invested in BP stock through their participation in BP's employee stock ownership plan (ESOP), failed to state a plausible employer stock drop claim under the pleading standards set out in the US Supreme Court's Fifth Third Bancorp v. Dudenhoeffer decision (No. 15-20282, (5th Cir. Sep. 26, 2016)). The plaintiffs' claim failed because their complaint did not:

BP is a multinational oil and gas company based in England that sponsors several retirement plans subject to ERISA. These plans offer participants as an investment option an ESOP (the BP Stock Fund) that invests primarily in BP stock.

Following the explosion of BP's Deepwater Horizon oil drilling rig in 2010, BP's stock price dropped and the BP Stock Fund lost significant value. In June 2010, BP retirement plan participants filed an employer stock drop suit against the plan fiduciaries, alleging that they breached their duty:

The US District Court for the Southern District of Texas dismissed the plaintiffs' claims because they failed to overcome the Moench presumption of prudence, and the plaintiffs appealed to the Fifth Circuit. While the appeal was pending, the Supreme Court decided Dudenhoeffer, holding that there is no presumption of prudence in favor of ESOP fiduciaries under ERISA, and they are bound by the same duty of prudence that applies to all ERISA fiduciaries (with the exception of the duty to diversify) (for more information on Dudenhoeffer, see Legal Update, Supreme Court Rejects Moench Presumption of Prudence and Article, Fifth Third v. Dudenhoeffer: Advisory Board Roundtable Discussion).

Following the Dudenhoeffer decision, the Fifth Circuit vacated the district court's original decision and remanded the case to the district court (575 Fed. Appx. 341).

On remand, the plaintiffs moved to file an amended complaint that reflected the new pleading standard under Dudenhoeffer. The amended complaint alleged that the defendants possessed unfavorable inside information about BP and that they could have taken various alternative actions that would not have done more harm than good to the BP Stock Fund.

The district court granted the plaintiffs' motion to amend, holding that the amended complaint met the pleading standards of Dudenhoeffer. Specifically, the court held that the stockholders had plausibly alleged:

The district court then certified the defendants' motion for interlocutory appeal.

Reviewing the district court's order de novo, the Fifth Circuit found that the plaintiffs' amended complaint failed to meet the pleading requirements of Dudenhoeffer. The Fifth Circuit reversed the judgment of the district court and remanded the case for further proceedings.

Under Dudenhoeffer, a plaintiff states a claim for a breach of the duty of prudence on the basis of inside information only if the plaintiff plausibly alleges an alternative action that the fiduciary could have taken:

Regarding the second prong of the Dudenhoeffer test, the Supreme Court's 2016 decision in Amgen Inc. v. Harris clarified that the complaint itself must plausibly allege that a prudent fiduciary in the same circumstances could not conclude that the alternative action would do more harm than good. Furthermore, the facts and allegations supporting that proposition should appear in the stockholders' complaint. (For more information on Amgen, see Legal Update, Supreme Court Reinforces Plaintiffs' High Bar in Employer Stock Drop Cases After Fifth Third v. Dudenhoeffer.)

Applying Dudenhoeffer and Amgen, the Fifth Circuit held that the district court erred by applying a different standard than the one set out in Dudenhoeffer. The district court granted the plaintiffs' motion to amend because it could not determine, on the basis of the pleadings alone, that no prudent fiduciary would have concluded that the alternative actions proposed by the plaintiffs would do more good than harm. The Fifth Circuit held that this is a different standard from the one established by Dudenhoeffer, which requires the plaintiff to propose an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.

The plaintiffs' amended complaint stated that their two proposed alternatives:

The Fifth Circuit stated that these conclusory statements did not meet the actual Dudenhoeffer standard because they did not specifically allege, for each proposed alternative, that a prudent fiduciary could not have concluded that the alternative would do more harm than good. The plaintiffs' amended complaint stated that BP's stock was overvalued due to safety breaches known only to insiders, but this fact alone is not enough to satisfy the Dudenhoeffer standard.

According to the Fifth Circuit, a prudent fiduciary could have very easily concluded that the plaintiffs' proposed alternatives would do more harm than good.

Whitley shows that plaintiffs in employer stock drop lawsuits must provide more than conclusory statements in their pleadings to meet the requirements of Dudenhoeffer and Amgen. Plaintiffs must provide alternative courses of action that the plan fiduciaries could have taken, and for each of these alternatives, specifically provide that a prudent fiduciary in the same circumstances could not conclude that the alternative would do more harm than good, supplying facts to support each alternative.