Category Archives: ERISA Litigation Index

John Hancock Dodges ERISA Class Action – An Analysis of the Bigger Picture

On Friday, September 26, 2014, in Santomenno v. John Hancock, et al. the Third Circuit Court of Appeals found in favor of the John Hancock defendants in a putative ERISA class action filed against them over excessive fees, affirming the district court’s dismissal of the lawsuit. There have been a number of well drafted blog pieces on the specifics of the decision that I would recommend to our readers. See summaries by Sidley Austin and Alston + Bird. The essence of the decision is that the plaintiffs failed to show that Hancock was a fiduciary for the conduct alleged.

Instead what I want to focus on here is the bigger picture for our readers. The decision in favor of Hancock comes after recent decisions have found similar service providers to be fiduciaries and other than have found them not to be:

In most cases, there are no allegations that the service provider is a fiduciary by title such as the Named Fiduciary or the Plan Administrator. Instead, whether the plaintiffs can show the provider is a fiduciary turns to the functional fiduciary test under ERISA 3(21)(A), which by its very nature is fact driven. From there, ignoring 3(21)(A)(ii) which governs investment advice and has a specific set of regulations that are more easily understood, the plaintiffs have been trying to show fiduciary status through 3(21)(A)(i) and (iii). Those provisions read as follows:

 a person is a fiduciary with respect to a plan to the extent

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(iii) he has any discretionary authority or discretionary responsibility in the administration of such plan…

The cases are holding with few exceptions that the functional fiduciary test under 3(21)(A(i) must show that the fiduciary actually exercised their discretion. In decisions in favor of AUL and John Hancock, the plaintiffs were unable to show that. In decisions against Transamerica, MassMutual, and ING, the plaintiffs were able to either show the exercise of discretion or that it was a issue of fact for trial. (I would also submit that the quality of the complaint and the level of detail as to the allegations has also played a part, but an academic analysis of the complaint in these cases might be the subject of a later post)

The decisions are also focusing on the “to the extent” language in the opening line of 3(21)(A), which limits fiduciary liability only to those duties that are specifically that actors. This happened here in the Hancock case, as well as in Hecker v. Deere, where the courts have consistently rejected that fiduciary status comes from the design of a larger investment menu that an actual plan fiduciary then chooses from, even if the provider is a fiduciary in other respects. However, see the decision against Transamerica which seemed to challenge the to the extent language in finding that they should have been responsible over ensuring their own fees were reasonable after becoming a fiduciary.

The open question from these cases is whether 3(21)(A)(iii) requires the actor to actually exercise their discretion or not, i.e. it’s a fiduciary breach to be both malfeasant and nonfeasant. The reason this has not been as prominent is that in most instances, the allegations are centered around the investments which generate the fees and they have little to do with plan administration. The chances are high that allegations against the large service providers in the future will involve claims under 3(21)(A(iii), even if the investments are the core of the conduct, i.e. revenue sharing.

Fidelity Settles Lawsuit with Own Employees Over 401(k) ERISA Allegations

Fidelity has  settled two lawsuits filed last year by its own employees over allegations that they violated ERISA in the administration of their own 401(k) plan by charging excessive fees and committing prohibited transactions. We extensively covered the allegations in our previous posts – Fidelity is Targeted Again and This Time Regarding Its Own In House Plan; Fidelity Files a Motion to Dismiss the Lawsuit Regarding Its Own In-House Plan; Case Against Fidelity Regarding In-house Plan Heats Up; and Fidelity is Sued Again Over In-House 401(k) Plan.

The motion for settlement filed in Bilewicz v. FMR LLC and in Yeaw v. FMR LLC and the accompanying settlement agreement provides for $12 million to be paid to the class and for the following affirmative relief to be taken:

  • The Plan will make available a wide selection of both Fidelity and non-Fidelity mutual funds.
  • The Plan will also continue to offer: (i) the Fidelity Freedom Funds – Class K as the Plan’s qualified default investment alternative; and (ii) Fidelity’s portfolio advisory service, Portfolio Advisory Services at Work (PAS-W). PAS-W will continue to be offered at no cost to participants.
  • Fidelity is increasing auto-enrollment for eligible employees from 3% to 7% of eligible compensation, and will default current participants who are currently deferring below 7% to 7% of eligible compensation. Fidelity will apply its match to those increased contributions.
  • The Plan shall provide that revenue sharing attributable to non-Fidelity mutual funds shall be credited to participants in the same way as revenue attributable to Fidelity mutual funds and collective trusts pursuant to the 8th amendment to the 2005 restatement of the Plan is credited to participants.This revision to the Plan shall remain in effect for at least three years.

The lawyers representing the Plaintiffs have been appointed as class counsel for the purposes of settlement and will be filing a motion for attorney’s fees at a later time. The amount they will be requesting was not disclosed in the settlement agreement. Each named plaintiff has asked for a specific request of $5,000 for their work in bringing the case. In exchange for the monetary payment and affirmative relief, the plaintiffs have agreed to an extensive release of claims related to the allegations in the complaint. However, the claims against Fidelity regarding float interest in In re Fidelity ERISA Float Litigation have specifically been carved out and that case will continue to move forward.

Our Thoughts

Fidelity’s settlement of this case is somewhat surprising as they have typically vigorously defended itself in other excessive fee litigation. On the other hand, no substantive decisions had yet been made in the case and the cost of litigating this case through summary judgment had their motion to dismiss been denied, would likely have been multiples of the $12 million paid to settle the case. For plan sponsors that have Fidelity, the affirmative relief should be of particular interest, as it may serve as a road map of what kind of services are considered best in class when provided by Fidelity (such as K share classes or offering funds from multiple families). Since this settlement did not cover the float litigation, we will continue to monitor it and provide updates.

Court Grants Summary Judgment to Plaintiffs in Rollins v. Dignity Health

Today, July 22, 2014, a Northern District of California court in Rollins v. Dignity Health granted the plaintiffs’ motion for partial summary judgment and denied defendants’. The decision was consistent with the court’s earlier denial of defendants’ motion to dismiss. (See Court Finds Plan Sponsored by Catholic Hospital is NOT a Church Plan).

In finding for the plaintiffs that the pension plan should be governed by ERISA, the court rejected defendants’ argument that it was inequitable or unfair because of the long term reliance on the IRS rulings and that either the ERISA or a California state law statute of limitation applies. The court also found that these was no genuine issue of material fact as to Dignity Health’s predecessor Catholic Healthcare West establishing the pension plan, rather than that they were either controlled by a church or that a church co-established the plan.

So where does this leave the case? The plaintiffs will now need to move the court to grant it the relief it seeks, i.e. meeting ERISA. Needless to say, this will be a herculean task. I wouldn’t be surprised to see the court enter an order granting the relief plaintiffs seek and then immediately stay the order until defendants can appeal the case to the Ninth Circuit Court of Appeals. Again, I wouldn’t be surprised to see the defendants want to move the case along as fast as they can in order to get the case to the appeal stage. No true predictions here as to what will happen next, but I suspect speed will be a dominant factor.

Two New Cases Filed

In addition to the six cases we’ve written about on the blog, two new cases have been recently filed. The complaints in Owens v. St. Anthony Medical Center (N.D. Illinois) and Lann v. Trinity Health (D. Maryland) are similar to the others, with the exception that the St. Anthony pension plan was already terminated in an underfunded status.

Recommendation by Magistrate in Favor of Plaintiffs in Medina v. Catholic Health Initiatives

I’ve been reluctant to report on a development in the Medina v. Catholic Health Initiatives case. There, the district court judge used a procedure under the rules requesting the assigned magistrate judge to review the case and provide their recommendation on how to decide. Sometimes these recommendations are agreed to 100% by a district judge and adopted and other times, the ultimate outcome can be substantially different if the district judge disagrees. So read the recommendation by the magistrate (knowing that it is not binding) siding with the plaintiff and finding that the pension plan at issue is not eligible to be considered a church plan and thus should be subject to ERISA. We will report on the decision of the district court when it is granted.

Some Additional Thoughts on Fifth Third v. Dudenhoeffer

One of the questions I’ve been asked repeatedly by the media, my clients, and industry practitioners is: what does this decision actually mean for ESOP fiduciaries and participants?

We published our immediate reactions in our first blog post on the decision. (See Supreme Court Rejects the Moench Presumption – Vacates and Remands Fifth Third Case)  We discussed the idea that the Supreme Court felt uncomfortable finding a justification for a “presumption of prudence” in the statutory language of ERISA. The Court also rejected any plan document based arguments as unconvincing. As a result, the Supreme Court made clear that there are no “coach class trustees,” citing the phrase Justice Kennedy used at oral argument.

We also discussed the idea that the Court was sympathetic to the plight of ESOP fiduciaries who would otherwise be subject to an avalanche of stock drop litigation every other week as stock prices go up and go down. Out of their toolbox they pulled the Iqbal and Twombly doctrines which generally have made it more difficult for plaintiffs with less information about their claims than the defendant by adding a heightened plausibility standard. The doctrines are a relatively new development in federal jurisprudence with the Twombly case being decided in 2007. If the doctrines were available in 1995, I would bet a dollar that the Moench Presumption might never have existed.

All that being said, what must a plaintiff plead now to get past the motion to dismiss stage? Said another way, what I am supposed to advise my ESOP fiduciary clients to do when the price of the stock drops?

This Is All About the Allocation of Risk

In this post, I’m going to focus on claims based on public information, which arguably is equally available to both ESOP fiduciaries and ESOP participants. (At some point later I may post about the insider information portion) Let’s be clear: both before and after this decision ESOPs are risky. There are very few investments out there more risky than a single security. In the simplest terms, this case is all about allocating risk between the ESOP fiduciaries and the ESOP participants.

Under the Moench Presumption, the ESOP fiduciary with a falling stock price would have been protected unless it was clear the company was effectively headed for bankruptcy or total failure (think Enron, Worldcom, etc…). If you imagine a line graph where the price starts to go down, the risk related to any drop in price was shifted to the ESOP participants until, for argument’s sake, the price of the stock was maybe 10% or less of what it was at it’s height.

Graph 2

The Supreme Court rejected this allocation by rejecting Fifth Third’s statutory and plan document arguments. Nonetheless, what the Supreme Court clearly did not appreciate was the argument that the ESOP fiduciaries are supposed to be clairvoyant and know the stock price is overvalued when the entirety of the investing public did not or has yet to adjust. In the same vein, the Supreme Court did not appreciate the idea that the ESOP fiduciary was supposed to use insider information, again, presumably, when the stock price was at its highest.

Let’s be real about what that argument actually meant. The plaintiffs wanted the damages period to start at the highest price point of the stock. Not when the price starts slipping but instead when the maximum damages will be the greatest difference between the highest stock price and the lowest stock price. A chart showing that allocation of risk would look like this:

Graph 1

Are There Plausible Claims Not Covered by Part B of the Decision?

In finding that ESOP fiduciaries are not supposed to clairvoyant, the Supreme Court introduced the idea that if “special circumstances” were present, then you could possibly bring a plausible claim that the ESOP fiduciaries should have known of the overvaluation. What “special circumstances” means will be decided by the lower courts. But obviously, we will see complaints arguing special circumstances. That is an obvious point.

But after a few days of thinking about the decision, one thing that struck me is whether a more modest plaintiff who brings a complaint saying that an ESOP fiduciary violated the duty of prudence only after the stock dropped in price 10 or 20% and the market is starting to figure out what is happening and other institutional investors are selling the stock, would be subject to this portion of the Supreme Court’s decision at all. If the claim does not involve clairvoyance, then no special circumstances may be necessary. The allocation of risk under this scenario might look something like this:

Graph 3

How the risk is allocated (where the red and green meet in my chart) will be decided by the lower courts and may be slightly different (or dramatically different) in different factual circumstances. What I mean by this is that with 100 different ESOPs, there will be 100 different factual scenarios regarding available public information, circumstances of the stock price drop, and to what extent there is inside information.

Ultimately, I think it is important to understand that risk has not been created or destroyed by this decision.  The risk was always present. Under Moench, ESOP participants bore most of the risk. But  under this decision, ESOP fiduciaries will not bear most of the risk either. Instead, this case was all about shifting a portion of the risk back to ESOP fiduciaries rather than ESOP participants, but leaving it somewhere in the middle. The Goldilocks of ERISA decisions if you will.

So, Again, Now What?

Now that Moench is no more, it appears to me that plaintiffs will argue that the company stock investment is subject to the exact same investing standards as any other core option in a plan. If the price starts to tank and other investors are dumping it, then the ESOP fiduciary will be criticized (read: found liable) if they don’t do the same thing they would do with a mutual fund on their watch list (i.e. freeze or sell).

So while we all wait for the next year or two or nineteen (1995-2014) for the lower courts to figure this out, ESOP fiduciaries should consider treating their company stock investment with the same exacting fiduciary standards they are treating the plan’s other investments. The sun is rising and it’s going to be 130 degrees by Noon. The ESOP fiduciary needs shelter. Here are items they should consider:

  • If they have an IPS, consider including the company stock investment or drafting an entirely separate IPS.
  • If they have a watch-list procedure, consider having it cover the company stock investment.
  • If they receive the services of an investment professional for the plan’s other investments but not the company stock, consider adding it or seeking a capable investment professional.
  • Consider the use of an independent fiduciary who can take over all fiduciary risk but the narrow responsibility to monitor the independent fiduciary.
  • Consider a review of your ERISA fiduciary liability policy to ensure that it covers losses related to the ESOP.
  • And last, but not least, document every fiduciary decision related to the ESOP. Just because a presumption of prudence is gone, does not mean that the ESOP fiduciary should not engage in actual procedural prudence. Having a robust process has gotten more than one fiduciary a favorable result in a courtroom.


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Supreme Court Rejects the Moench Presumption – Vacates and Remands Fifth Third Case – BREAKING

The Supreme Court ruled this morning, June 25, 2014, that there is NO presumption of prudence for fiduciaries of ESOPs or Employee Stock Ownership Plans. In other words, the “Moench Presumption” which has been adopted nearly unanimously by every Circuit Court in the country has been unequivocally rejected. The decision was unanimous.

But it was not a total victory for these plaintiffs (or others). The Supreme Court disagreed with the two lower courts that any presumption of prudence applied, but also disagreed with the Sixth Circuit that the plaintiffs here stated a plausible claim for a violation of the duty of prudence. The Supreme Court vacated the Sixth Circuit decision and remanded to decide the claim’s plausibility in light of new factors provided by the Court.

[Scroll to the bottom for our analysis]

Here is the summary from the opinion:

1. ESOP fiduciaries are not entitled to any special presumption of prudence. Rather, they are subject to the same duty of prudence thatapplies to ERISA fiduciaries in general, §1104(a)(1)(B), except that they need not diversify the fund’s assets, §1104(a)(2). This conclusion follows from the relevant provisions of ERISA. Section 1104(a)(1)(B) “imposes a ‘prudent person’ standard by which to measure fiduciaries’ investment decisions and disposition of assets.” Massachusetts Mut. Life Ins. Co. v. Russell, 473 U. S. 134, 143, n. 10. Section 1104(a)(1)(C) requires ERISA fiduciaries to diversify plan assets. And §1104(a)(2) establishes the extent to which those duties are loosened in the ESOP context by providing that “the diversification requirement of [§1104(a)(1)(C)] and the prudence requirement (only to the extent that it requires diversification) of [§1104(a)(1)(B)] [are] notviolated by acquisition or holding of [employer stock].” Section 1104(a)(2) makes no reference to a special “presumption” in favor of ESOP fiduciaries and does not require plaintiffs to allege that theemployer was, e.g., on the “brink of collapse.” It simply modifies theduties imposed by §1104(a)(1) in a precisely delineated way. Thus, aside from the fact that ESOP fiduciaries are not liable for losses that result from a failure to diversify, they are subject to the duty of prudence like other ERISA fiduciaries. Pp. 4–15.

2. On remand, the Sixth Circuit should reconsider whether the complaint states a claim by applying the pleading standard as discussed in Ashcroft v. Iqbal, 556 U. S. 662, 677–680, and Bell Atlantic Corp. v. Twombly, 550 U. S. 544, 554–563, in light of the following considerations. Pp. 15–20.

(a) Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim under Twombly and Iqbal. Pp. 16–18.

(b) To state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. Where the complaint alleges that a fiduciary was imprudent in failing to act on the basis of inside information, the analysis is informed by the following points.

First, ERISA’s duty of prudence never requires a fiduciary to break the law, and so a fiduciary cannot be imprudent for failing to buy or sell stock in violation of the insider trading laws.

Second, where a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.

Third, courts confronted with such claims should consider whether the complaint has plausibly alleged that a prudentfiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stockprice and a concomitant drop in the value of the stock already held by the fund. Pp. 18–20.

 The Decision

So what really happened here? Remember that every circuit court that has looked at the issue has found some presumption of prudence, even the Sixth Circuit that had decided against Fifth Third Bank and was the subject of this appeal to the Supreme Court. However, where the Sixth Circuit differed from all other circuits was that they made the presumption an evidentiary presumption to be done at the summary judgment and/or trial stage, rather than at the motion to dismiss stage. The practical effect was that in most courts, plaintiffs had the the court doors shut in their face because the presumption was just too high to clear, where in courts in the Sixth Circuit, plaintiffs would be given the opportunity to engage in [expensive] discovery.

The Supreme Court rejected any presumption, effectively disagreeing with every circuit court to decide the issue:

In our view, the law does not create a special presumption favoring ESOP fiduciaries….§1104(a)(2) establishes the extent to which those duties are loosened in the ESOP context to ensure that employers are permitted and encouraged to offer ESOPs. Section 1104(a)(2) makes no reference to a special “presumption” in favor of ESOP fiduciaries. It does not require plaintiffs to allege that the employer was on the “brink of collapse,” under “extraordinary circumstances,”or the like.

Further, the Supreme Court rejected a very popular argument in ERISA litigation that if the plan document requires something, then that should govern fiduciary behavior even if a prudent fiduciary might otherwise disagree:

Consider the statute’s requirement that fiduciaries act “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter.” §1104(a)(1)(D) (emphasis added). This provision makes clear that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary.

The Supreme Court also addressed Fifth Third’s concerns about being between a rock and a hard place in that they can be sued if the price goes down and they keep the stock in the plan or can be sued if the stock price then goes up and they haven’t put it back in. The Supreme Court seemed to sympathize but still held that the presumption of prudence was not the solution:

Petitioners are basically seeking relief from what theybelieve are meritless, economically burdensome lawsuits. We agree that Congress sought to encourage the creationof ESOPs. And we have recognized that “ERISA represents a ‘“careful balancing” between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.’” Conkright v. Frommert, 559 U. S. 506, 517 (2010) (quoting Aetna Health Inc. v. Davila, 542 U. S. 200, 215 (2004)); see also Varity Corp. v. Howe, 516 U. S. 489, 497 (1996) (In “interpret[ing] ERISA’s fiduciary duties,” “courts may have to take account of competing congressional purposes, such as Congress’ desire to offer employees enhanced protection for their benefits, on the one hand, and, on the other, its desire not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place”).
At the same time, we do not believe that the presumption at issue here is an appropriate way to weed out meritless lawsuits or to provide the requisite “balancing.” The proposed presumption makes it impossible for a plaintiff to state a duty-of-prudence claim, no matter how meritorious, unless the employer is in very bad economic circumstances. Such a rule does not readily divide the plausible sheep from the meritless goats. That important task can be better accomplished through careful, context-sensitive scrutiny of a complaint’s allegations. We consequently stand by our conclusion that the law does not create a special presumption of prudence for ESOP fiduciaries.

The Supreme Court also rejected Fifth Third’s argument that plaintiffs’ claims required them to violate securities laws and thus they needed the presumption of prudence. Instead, the Supreme Court held explicitly that no fiduciary is ever expected to violate securities laws in order to meet their fiduciary duties, which was required even by all of the circuit court if dire circumstances required it but was advocated by plaintiffs to be required whenever they came in possession of the information.

Finally, the Supreme Court addressed Fifth Third’s concerns, which they found legitimate, as to how ESOP fiduciaries are to defend themselves against expensive litigation that may have no merit. First, the Supreme Court held that an allegation, like the one put forth by plaintiffs here that a stock is over or under valued based on public information, is not enough to state a claim:

In our view, where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances. Many investors take the view that “‘they have little hope of outperforming the market in the long run based solely on their analysis of publicly available information,’” and accordingly they “‘rely on the security’s market price as an unbiased assessment of the security’s value in light of all public information.’” Halliburton Co. v. Erica P. John Fund, Inc. ___ U. S. ___, ___ (2014) (slip op., at 11–12)(quoting Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U. S. ___, ___ (2013) (slip op., at 5)). ERISA fiduciaries, who likewise could reasonably see “little hope of outperforming the market . . . based solely on their analysis of publicly available information,” ibid., may, as a general matter, likewise prudently rely on the market price.

Second, however, the Supreme Court recognized that it may still be possible for a plaintiff to state a plausible claim based on public information but only under special circumstances (which they do not define):

We do not here consider whether a plaintiff could nonetheless plausibly allege imprudence on the basis of publicly available information by pointing to a special circumstance affecting the reliability of the market price as “ ‘an unbiased assessment of the security’s value in light of all public information,’” Halliburton Co., supra, at ___ (slip op., at 12) (quoting Amgen Inc., supra, at ___ (slip op., at5)), that would make reliance on the market’s valuation imprudent. In this case, the Court of Appeals held that the complaint stated a claim because respondents “allege that Fifth Third engaged in lending practices that were equivalent to participation in the subprime lending market, that Defendants were aware of the risks of such investments by the start of the class period, and that such risks made Fifth Third stock an imprudent investment.” 692 F. 3d, at 419–420. The Court of Appeals did not point to any special circumstance rendering reliance on the market price imprudent. The court’s decision to deny dismissal therefore appears to have been based on an erroneous understanding of the prudence of relying on market prices.

So the practical effect is that the Supreme Court is sending this case back to the Sixth Circuit for them to decide whether they can find a plausible claim based on special circumstances, under this claim by the plaintiffs. This may be tough for the plaintiffs as they will not get a chance to re-write their complaint before the Sixth Circuit.

Third, the Supreme Court re-addressed the issue of defending against a claim that an ESOP fiduciary should use insider information. The Supreme Court provided this standard for such a claim:

To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

They then provided the following three points to inform the analysis of such a claim:

First, in deciding whether the complaint states a claim upon which relief can be granted, courts must bear inmind that the duty of prudence, under ERISA as underthe common law of trusts, does not require a fiduciary tobreak the law. Cf. Restatement (Second) of Trusts §166,Comment a (“The trustee is not under a duty to the beneficiary to do an act which is criminal or tortious”). Federal securities laws “are violated when a corporate insidertrades in the securities of his corporation on the basis of material, nonpublic information.” United States v. O’Hagan, 521 U. S. 642, 651–652 (1997). As every Court of Appeals to address the question has held, ERISA’s duty of prudence cannot require an ESOP fiduciary to perform an action—such as divesting the fund’s holdings of theemployer’s stock on the basis of inside information—that would violate the securities laws. See, e.g., Rinehart v. Akers, 722 F. 3d 137, 146–147 (CA2 2013); Kirschbaum v. Reliant Energy, Inc., 526 F. 3d 243, 256 (CA5 2008); White, supra, at 992; Quan, supra, at 881–882, and n. 8; Lanfear v. Home Depot, Inc., 679 F. 3d 1267, 1282 (CA11 2012). To the extent that the Sixth Circuit denied dismissal based on the theory that the duty of prudence required petitioners to sell the ESOP’s holdings of Fifth Third stock, its denial of dismissal was erroneous.

Second, where a complaint faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for failing todisclose that information to the public so that the stock would no longer be overvalued, additional considerations arise. The 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 todisclose inside information to the public could conflict withthe complex insider trading and corporate disclosurerequirements imposed by the federal securities laws orwith the objectives of those laws. Cf. 29 U. S. C. §1144(d) (“Nothing in this subchapter [which includes §1104] shall be construed to alter, amend, modify, invalidate, impair,or supersede any law of the United States . . . or any ruleor regulation issued under any such law”); Black & Decker Disability Plan v. Nord, 538 U. S. 822, 831 (2003) (“Although Congress ‘expect[ed]’ courts would develop ‘a federal common law of rights and obligations under ERISA regulated plans,’ the scope of permissible judicial innovation is narrower in areas where other federal actors are engaged” (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U. S. 41, 56 (1987); citation omitted)); Varity Corp., 516 U. S., at 506 (reserving the question “whether ERISA fiduciarieshave any fiduciary duty to disclose truthful information ontheir own initiative, or in response to employee inquiries”).The U. S. Securities and Exchange Commission has not advised us of its views on these matters, and we believe those views may well be relevant.

Third, lower courts faced with such claims should also 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.

Our Thoughts

To be clear, this is not a total victory for the plaintiffs and is not a total defeat for ESOP fiduciaries. Instead, the opinion appears to be a carefully crafted balancing act by the Supreme Court that recognizes the concerns of ESOP fiduciaries but won’t allow those concerns to be protected by a presumption of prudence that is unsupported by the statutory language of ERISA and instead was an entirely judicially created doctrine. The Supreme Court instead went to great lengths to prop up the integrity of the duty of prudence, not allowing it to be undermined.

Despite the rejection of the presumption of prudence, the Supreme Court appears to have created a very high bar for plaintiffs to bring a case against ESOP fiduciaries for a drop in the price stock. Instead, the Supreme Court doubles down on the Iqbal and Twombly cases which have regularly been used as a hammer in narrowing what can be considered “plausible” claims.

When claim is alleged that the ESOP fiduciary was supposed to change course based on public information, the claim now needs to show “special circumstances” which the Supreme Court left undefined. How high the bar is will depend on how the lower courts interpret that phrase.

As for the issue of using insider trading and having conflicted fiduciaries, the Supreme Court clearly did not agree with the plaintiffs’ implicit, if not explicit argument at oral arguments, that insider corporate fiduciaries are always conflicted. Instead, the Supreme Court made clear that the securities laws trump ERISA law. Quite explicitly, the Court states that an ERISA fiduciary cannot sell the stock based on insider information. But the Court seems to have provided a narrow opportunity for claims by plaintiffs that an ESOP fiduciary can violate ERISA if they fail to stop purchasing the stock or if they tell the public what they know, but only if they don’t violate the securities laws. It remains to be seen how narrow or broad that opportunity is. However, it may make no difference at all, because the Court has now required the lower courts to consider whether a claim to stop purchasing or a claim to inform the public would hurt the participants more than doing nothing.

So what is the ultimate decision? It appears the Supreme Court has torn up the Moench Presumption’s invitation to the party but instead invited its not so distant cousins Iqbal and Twombly.

So what will be the ultimate outcome? Will employers line up to terminate their ESOPs? My initial reaction is no. The Supreme Court has provided enough cover for a large percentage of ESOP fiduciaries to defend themselves amply at the motion to dismiss stage and avoid the expensive discovery phase of a case. At the same time, the Supreme Court did leave open the possibility that insider fiduciaries may need to use their insider positions to stop purchasing stock or disclose the information they know. This would seem to me to strongly suggest that the use of independent fiduciaries who would not be subject to those circumstances may be increasingly utilized.