Divided Fourth Circuit Panel Rules On Burden Of Proving Loss Causation In ERISA Fiduciary Breach Case

"As for those who might contemplate future service as plan fiduciaries, all I can say is: Good luck."

That was the sentiment expressed in a blistering dissent by Fourth Circuit Judge J. Harvie Wilkinson in the latest ruling in a lawsuit challenging the decision by the fiduicaries of the RJR 401(k) plan to liquidate two stock funds that previously had been available to plan participants wishing to invest in Nabisco stock. Tatum v. RJR Pension Inv. Committee et al., No. 13-1360, 2014 WL 3805677 (4th Cir. Aug. 4, 2014). In a split decision, the panel ruled that, because plaintiff-participant Richard Tatum had proved that the plan fiduciaries acted imprudently by liquidating the stock fund without the benefit of a proper investigation, the burden of proof shifted to defendants to show that a prudent fiduciary would have made the same decision. In so ruling, the Court reversed the lower court decision, which had found in favor of defendants after a bench trial upon finding that they had demonstrated that a prudent fiduciary could have made the same decision.

The Fourth Circuit's decision makes a number of significant statements and rulings on the burdens of proof related to loss causation, the meaning of "objective prudence," and the standards for reviewing decisions pertaining to stock funds in the wake of the Supreme Court's ruling in Fifth Third v. Dudenhoeffer. Some of the Court's pronouncements are difficult to reconcile with existing case law. If not set aside on en banc or Supreme Court review and if adopted elsewhere, the decision could substantially impact the future conduct of fiduciary breach litigation, as well as plan practices in administering stock funds.

Background

For many years, RJR Nabisco—the product of the merger of Nabisco and R.J. Reynolds Tobacco—sponsored a 401(k) plan, which consisted of six diversified funds and two undiversified funds:

The Nabisco Common Stock Fund, consisting of stock in the food business, and The RJR Nabisco Common Stock Fund, consisting of stock in the food and tobacco businesses. In March 1999, the merged company decided to spin off its tobacco business, R.J. Reynolds, from its food business, Nabisco. The decision was prompted by R.J. Reynolds' exposure to tobacco litigation and the negative effect it was having on the company's stock price—a phenomenon referred to as the "tobacco taint."

The 401(k) plan at issue (the "Plan") was created on the date of the spin-off by RJR for the benefit of RJR employees. The Plan designated a benefits committee as being responsible for making Plan amendments, and an investment committee as being responsible for Plan investments. For simplicity's sake, these committees and RJR are collectively referred to as "RJR."

After the spin-off, the RJR Nabisco Common Stock Fund was divided into two separate funds:

Nabisco Group Holdings Common Stock Fund, consisting of stock in the food business, and RJR Common Stock Fund, consisting of stock in the tobacco business As a result of the spin-off, the Plan had two funds holding Nabisco stock: the Nabisco Common Stock Fund and the Nabisco Group Holdings Fund (the "Nabisco Funds"). The Plan provided for the retention of the Nabisco Funds as "frozen" funds in the Plan. The Plan also retained the six diversified funds offered in the pre-spin-off plan, as well as the RJR Common Stock Fund. Thus, as a result of the spin-off, the Plan maintained an investment option that consisted of investments in a single, non-employer (Nabisco) stock.

Notwithstanding the Plan language providing that the Nabisco Funds remain as frozen funds in the Plan, RJR decided to eliminate them from the Plan because it was concerned that having funds that were invested in a single, non-employer stock could expose it to a breach of fiduciary duty suit based on a failure to diversify the fund. According to the majority's opinion, the decisions to freeze and then liquidate the Nabisco Funds were made at a meeting by a working group consisting of RJR employees who had no authority under the Plan that lasted no longer than one hour. The group discussed: (a) reasons for removing the Nabisco Funds...