Supreme Court: ERISA 'Stock Drop' Suits Must Allege Plausible Facts To Survive Motion To Dismiss, But No Presumption Of Prudence For ESOP Fiduciaries

Yesterday, the Supreme Court vacated the Sixth Circuit's decision in Dudenhoeffer v. Fifth Third Bancorp and directed the court of appeals to reconsider whether the suit stated plausible claims for breach of ERISA fiduciary duty based on allegations that 401(k) plan fiduciaries imprudently remained invested in company stock as the stock dropped in value.

The court did not accept the presumption of prudence for employee stock ownership plan (ESOP) fiduciaries (generally referred to as the "Moench presumption"), which several courts of appeal - other than the Sixth Circuit - had used to justify dismissing ERISA "stock drop" claims on motions to dismiss. The Supreme Court held that ESOP fiduciaries have the same duty of prudence applicable to all ERISA fiduciaries, except that ESOP fiduciaries have no duty to diversify plan investments.

Nonetheless, a unanimous Supreme Court directed the Sixth Circuit to reconsider whether the participants' complaint states a claim under the pleading standards in Ashcroft v. Iqbal, 556 U. S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U. S. 544 (2007), recognizing that such claims are subject to dismissal at the pleading stage in the absence of plausible factual allegations of breach of fiduciary duty.

The Supreme Court said that allegations that a fiduciary should have recognized, on the basis of publicly available information, that the market was overvaluing or undervaluing the stock generally do not meet the plausibility requirement. As a result, in the absence of "special circumstances," such allegations are insufficient to state a claim under Twombly and Iqbal and are thus subject to dismissal.

To state a claim for breach of the duty of prudence on the basis that fiduciaries failed to act on nonpublic (i.e., inside) information, the court said, a complaint must plausibly allege some legal action the fiduciary could have taken, that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. The Supreme Court indicated that the following principles should be applied by a court to make this determination:

ERISA's duty of prudence never requires a fiduciary to break the law; therefore, a fiduciary cannot be imprudent for failing to buy or sell stock in violation of federal securities laws regarding insider trading. Where a complaint alleges that the fiduciary breached ERISA duties by making additional stock purchases or failing to publicly disclose negative inside information, courts should consider whether...