ERISA requires plan fiduciaries to act prudently. In the Dudenhoeffer decision last year, the Court clarified that there is no presumption of prudence under ERISA, even for employee stock ownership plan (ESOP) fiduciaries facing a challenge to a decision to buy or hold employer stock. Specifically, Dudenhoeffer held that while ERISA exempts ESOP fiduciaries from the duty to diversify the investments of the plan to minimize the risk of large losses, ESOP fiduciaries are subject to the duty of prudence under ERISA Section 404(a), just like all other ERISA fiduciaries. While Dudenhoeffer was initially viewed as a victory for plaintiffs, the fact is that the Court also set forth heightened pleading standards, which plaintiffs must satisfy to sufficiently state a fiduciary breach claim involving employer stock. As a threshold issue, where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information that the market was over- or undervaluing the stock are implausible as a general rule unless special circumstances exist. With respect to non-public information, the Court articulated three principles. First, “ERISA’s duty of prudence cannot require an ESOP fiduciary to perform an action—such as divesting the fund’s holdings of the employer’s stock on the basis of inside information—that would violate the securities laws.” Second, “courts should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws.” Third, the complaint must have “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.”
In Amgen, an employee class initially alleged that plan fiduciaries breached their fiduciary duties, particularly the duty of prudence, when Amgen’s common stock experienced a sharp decline. The U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court for the Central District of California’s dismissal of the case for failure to assert a fiduciary breach. After Dudenhoeffer was decided, the Supreme Court remanded Amgen to the Ninth Circuit to determine whether the complaint had been sufficiently pled under the Court’s heightened pleading standards.
On remand, the Ninth Circuit held that the stockholders’ complaint stated a claim against the plan fiduciaries for breach of the duty of prudence. Specifically, the Ninth Circuit found that the complaint satisfied Dudenhoeffer’s requirements because when “the federal securities laws require disclosure of material information,” it is “quite plausible” that removing the Amgen Common Stock Fund “from the list of investment options” would not “caus[e] undue harm to the plan participants.”
The Supreme Court, however, disagreed with the Ninth Circuit’s application of Dudenhoeffer. In the per curiam opinion, addressing only the “more harm than good” pleading requirement, the Court held that the Ninth Circuit failed to properly evaluate the employees’ remanded 2007 complaint, stating that the court failed to assess whether the complaint plausibly alleged that a prudent fiduciary in the same position “could not have concluded” that the alternative action “would do more harm than good.” The Court determined that there were not sufficient plausible facts alleged in the stockholders’ complaint showing that a prudent fiduciary could not have concluded that removing the Amgen Common Stock Fund from the list of investment options was an alternative action that would not cause more harm than good—and such facts must be alleged to state a proper claim.
Because the complaint did not meet all of the pleading requirements set forth in Dudenhoeffer, the Supreme Court again reversed the Ninth Circuit. The Court concluded that the employees are the masters of their complaint, and left it to the district court to decide whether the Amgen employees may amend the complaint to try again to plead a proper claim.
The Court’s decision in Amgen—an unusual, four-page unsigned decision issued without oral argument—provides further evidence that the Supreme Court intended to institute a much stricter standard for plaintiffs to satisfy when pleading a “stock drop” complaint based upon insider information. In fact, a plaintiff must satisfy all of Dudenhoeffer’s pleading requirements to get passed a motion to dismiss. The Court’s analysis in Amgen shows that Dudenhoeffer’s heightened pleading standard may be difficult—if not impossible—for plaintiffs to meet going forward.