Case No. 18-1165 | 2d Cir.
Preview by Sean Lowry, Online Editor*
The Employee Retirement Income Security Act (“ERISA”) requires fiduciaries of private employer retirement plans to manage the assets according to a prudent person standard of care. See 29 U.S.C. § 1104(a)(1)(B). The alleged harms in this case occurred from 2013 to 2014, when IBM employees purchased the company’s stock through an employee stock option plan (“ESOP”). Larry Jander and other IBM employees brought a suit claiming that the Retirement Plans Committee violated its fiduciary duty under ERISA when it knew, but failed to disclose, that a division of IBM was losing money, thereby making the company’s stock overvalued. The day that IBM publicly announced that the division lost money and was being sold to another company, share prices declined by seven percent (approximately thirteen dollars per share). The Court’s decision in Jander will decide whether or not the employees’ ERISA claim can proceed or will be dismissed.
The conflict between the parties is the result of recent Supreme Court decisions and subsequent decisions in federal courts. In 2014, the Court held in Fifth Third Bancorp v. Dudenhoeffer that ESOPs, like all covered plans, are not presumed to be managed prudently under ERISA. See 573 U.S. 409, 418–19 (2014). However, the Court’s holding also included a pleading standard intended to help screen meritless cases against an ESOP fiduciary at the motion to dismiss stage of litigation. The Court stated that:
[L]ower courts . . . should . . . consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment— or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.
Id. at 429–30. Here in Jander, the Second Circuit reversed the district court’s decision and allowed the employees’ suit to survive a motion to dismiss. According to the Second Circuit, the plaintiffs satisfied Fifth Third Bancorp’s “more harm than good” standard by alleging that no prudent fiduciary could have concluded that disclosing the division’s losses would do more harm than good. The court’s reasoning was that disclosure of the losses was inevitable, and that delayed disclosure would lead to a more significant “correction” in the overvalued stock. See Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620, 629–31 (2d Cir. 2018).
Petitioner, Retirement Plans Committee of IBM, argues that the Second Circuit’s decision has created a split with the Fifth and Sixth Circuits. These circuits have held that the Fifth Third Bancorp pleading standard is not satisfied by a generalizable allegation that the costs of undisclosed fraud grow over time. Respondents, Jander and other employee class members, argue that the Second Circuit correctly applied the facts of the case when it concluded that disclosure was inevitable.
More broadly, the Court’s decision in this case could widen the aperture for plaintiff ERISA suits in ESOP stock price drop suits. Jander noted in the lower court filings that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the Court last examined this pleading standard in 2016. See generally Amgen Inc. v. Harris, 136 S. Ct. 758 (2016).
*Sean Lowry is a 3LE (Class of 2021) and Analyst in Public Finance at the Congressional Research Service (CRS). The views expressed are those of the author and are not necessarily those of the Library of Congress or CRS.