Supreme Court Remands IBM Stock Drop Litigation to the Second Circuit

Practical Law Legal Update w-023-6009 (Approx. 6 pages)

Supreme Court Remands IBM Stock Drop Litigation to the Second Circuit

by Practical Law Employee Benefits & Executive Compensation

Background

The plaintiffs in Jander are participants in an employee stock ownership plan (ESOP) sponsored by IBM. They alleged that IBM and its corporate officers breached their fiduciary duty to the plan under ERISA by failing to prudently and loyally manage the plan's assets and failing to adequately monitor the plan's fiduciaries. Specifically, the plaintiffs claimed that the plan's fiduciaries knew that IBM's stock price was artificially inflated, to the detriment of the ESOP's participants.

Under Fifth Third Bancorp v. Dudenhoeffer, a plaintiff adequately states a claim that plan fiduciaries breached their duty of prudence under ERISA based on inside information if the plaintiff plausibly alleges an alternative action:

Consistent with the applicable securities laws.
That a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the employer stock fund than to help it.

(573 U.S. 409 (2014).)

To learn more about Dudenhoeffer, see:

The Court's decision in Dudenhoeffer provided three considerations for courts to apply in employer stock drop cases:

ERISA's fiduciary duty of prudence does not require plan fiduciaries to violate the securities laws.
Courts should consider the extent of the conflict between ERISA and the securities laws regarding whether, based on inside information, to refrain from a stock trade or disclose inside information.
Courts should also consider whether the plaintiff plausibly alleges that a prudent fiduciary could not have concluded that either action would do more harm than good to the employer stock fund by causing a drop in the value of the employer's stock held by the fund.

The US District Court for the Southern District of New York granted the defendants' motion to dismiss (272 F.Supp.3d 444 (S.D.N.Y. Sep. 29, 2017)). On appeal, the US Court of Appeals for the Second Circuit reversed and remanded the decision to the district court (910 F.3d 620 (2d Cir. Dec. 10, 2018)). The Second Circuit held that the plaintiffs plausibly alleged an ERISA violation under the Supreme Court's decision in Dudenhoeffer. The defendants then petitioned the Supreme Court for a writ of certiorari, which the Court granted.

Decision

In its per curiam decision, the Supreme Court wrote that the plan fiduciaries and the federal government (which filed an amicus curiae brief on behalf of the Department of Justice, the Department of Labor, and the Securities and Exchange Commission (SEC) supporting neither party in this litigation) did not focus on the three considerations provided in Dudenhoeffer. Instead:

The plan fiduciaries argued that ESOP fiduciaries have no duty to act on inside information under ERISA.
The federal agencies argued that a duty under ERISA to disclose inside information would conflict with the securities laws, and there is only a duty to disclose inside information that federal securities laws already impose.

The Supreme Court declined to address these arguments because the Second Circuit did not do so. The Court held that the Second Circuit should have the opportunity to decide whether to entertain these arguments in the first instance (in Dudenhoeffer, the Court wrote that the views of the SEC would be relevant to the analysis of these issues), and vacated the Second Circuit's judgment and remanded the case.

Concurring Opinions

Two concurring opinions offered different interpretations of Dudenhoeffer.

Justice Kagan's concurrence stated that even if the Second Circuit decides to consider the two arguments included in the briefs from the plan fiduciaries and the federal government (and it may decide not to consider them), neither of the two arguments is consistent with Dudenhoeffer. Regarding the plan fiduciaries' argument that ESOP fiduciaries have no duty to act on inside information under ERISA, Dudenhoeffer held that an ESOP fiduciary does have a duty at certain times to act on inside information. Regarding the government's argument that a duty under ERISA to disclose inside information would conflict with the securities laws, Dudenhoeffer held that when a fiduciary action does not violate the securities laws, then it might be required as an ESOP's fiduciary duty under ERISA if a prudent fiduciary would find it more likely to help than harm the employer's stock fund.

Justice Gorsuch's concurrence stated that the plaintiffs in Jander would impose an even higher duty on ESOP fiduciaries who can make SEC-regulated disclosures by holding those fiduciaries liable for alternate actions they could have taken only in a non-fiduciary capacity. Justice Gorsuch interprets Dudenhoeffer as requiring that a plaintiff identify a helpful action that a plan could have taken consistent with the securities laws. However, Dudenhoeffer did not decide whether ERISA plaintiffs may hold fiduciaries liable for alternative actions they could have taken only in a nonfiduciary capacity.

Practical Implications

ESOP fiduciaries should continue to follow the developments in Jander, especially if and how the Second Circuit answers the two issues that were raised before the Supreme Court. If the Second Circuit and the Supreme Court address these issues in this case, they will provide additional interpretation of Dudenhoeffer that will be helpful to ESOP fiduciaries who have access to inside information.

Supreme Court Remands IBM Stock Drop Litigation to the Second Circuit | Practical Law