Supreme Court Waiting Game Begins After DOL Submits Stock Drop Amicus Brief

The continued viability of the “Moench Presumption” may or may not be decided by the United States Supreme Court. As explained below, we are now in a waiting game to learn whether the court will vote to hear an appeal of a case where the Moench Presumption was not adopted.

Since 1995, ERISA plan sponsors have had the so-called “Moench Presumption” to help defend against breach of fiduciary duty claims regarding company stock funds included in their retirement plans. The Moench Presumption originated from Moench v. Robertson in the 3rd Circuit. Explained simply, the case stated that proper breach allegations must “implicate the company’s viability as an ongoing concern or show a precipitous decline in the employer’s stock.” Otherwise, the plan sponsor is entitled to a presumption of prudence regarding the company stock fund and in most circumstances, a lawsuit claiming the fund is imprudent will be dismissed.

Since then, the defense has been adopted by most circuit courts across the country. Except the 6th Circuit. After a case against Fifth Third Bancorp was dismissed by the district court, the 6th Circuit reversed and held that the plan sponsor was not entitled to any presumption of prudence at the beginning of a case, and instead, those issues should be decided during the discovery phase of a case because of their factual nature.

Fifth Third Bancorp filed a cert. petition with the Supreme Court last year raising two questions:

(1) Whether the Sixth Circuit erred by holding that respondents were not required to plausibly allege in their complaint that the fiduciaries of an employee stock ownership plan abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1101 et seq. (“ERISA”), and every other circuit to address the issue; and

(2) whether the Sixth Circuit erred by refusing to follow precedent of this Court (and the holdings of every other circuit to address the issue) by holding that filings with the Securities and Exchange Commission become actionable ERISA fiduciary communications merely by virtue of their incorporation by reference into plan documents.

In response, the Supreme Court asked the Department of Labor for their opinion. On November 12, 2013, the Department of Labor, in conjunction with the Solicitor General of the United States, submitted an amicus curiae, or “friend of the court,” brief. In that brief, the DOL recommends that the Supreme Court hear only the first question but in a modified form:

1. Whether, in a suit claiming that an ESOP fiduciary violated the statutory duty of prudence, 29 U.S.C. 1104(a)(1)(B), the fiduciary should be accorded a presumption that he acted prudently.

2. If so, whether the presumption applies at the pleading stage and what a plaintiff must allege to rebut it.

In summary, it is the DOL’s position, and has been for quite some time, that ESOP fiduciaries are no different than any other ERISA fiduciary in their duties and responsibilities, except that ESOP fiduciaries are given a limited exemption from the diversification rules of ERISA 404 because of the obvious concentration in employer stock.

I was asked to comment on this brief for Pension & Investments, and did so in an article published this morning. The outstanding issue at this point is whether the Supreme Court will now vote to hear the case. There are multiple practitioners in the industry that are flat out stating this will happen. I respectfully decline to make any predictions, as regular readers of this blog will know is my standard position. Does the DOL’s recommendation that the Supreme Court take the case raise the chances? Yes. But is it guaranteed? No.

If the Supreme Court does take the case, we [hopefully] will finally have resolution to this issue for plan sponsors and plan participants, alike. My recommendation is that for anyone wanting to stay informed,  you should regularly visit the case page on the Scotusblog (a wonderful resource for anything Supreme Court related). It is not yet clear to me at which conference the Supreme Court justices will vote whether to hear the case, although there is one today, with the results published tomorrow.

Leave a Reply

Your email address will not be published. Required fields are marked *