The ERISA Litigation Newsletter - September 2015

EDITOR'S OVERVIEW

It has been a little more than one year since the U.S. Supreme Court altered the legal landscape for litigating ERISA breach of fiduciary duty claims relating to the investment in employer stock funds. This month we took a look at the court decisions since Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), which allege, at least in part, that investment in the employer stock fund was imprudent based on publicly available information. As Joe Clark reviews below, the standard set forth by the Supreme Court appears to be fulfilling its intended role as an appropriate gatekeeper and, with one exception, these claims have been rejected by the courts.

As always, please be sure to review the Rulings, Filings, and Settlements of Interest, which address IRS guidance on 40% excise tax on high-cost health care, final regulations and FAQs n preventive services coverage, subrogation clauses, administrative appeal denial letters and the need to state plan-imposed time limits.

EMPLOYER STOCK-DROP ERISA CLAIMS BASED ON PUBLIC INFORMATION MAY NOT SURVIVE IN A POST-DUDENHOEFFER WORLD1

By Joe Clark

The U.S. Supreme Court's June 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), created a new legal landscape for evaluating ERISA stock-drop claims - i.e., breach of fiduciary duty claims based on the continued investment in employer stock - at the pleadings stage. The Court provided separate guidance for claims based on publicly available information and those based on material, non-public information. For claims based on public information, the Court's comments caused many attorneys to question the continued viability of these claims. This article provides a brief summary of the Dudenhoeffer decision's discussion of claims based on public information and of subsequent case law addressing these claims, and then offers a perspective on their future.

The Supreme Court's Dudenhoeffer Decision

In Dudenhoeffer, participants in Fifth Third Bancorp's profit sharing plan claimed that the defendant plan fiduciaries knew or should have known that Fifth Third stock was overvalued and excessively risky and thus they should have divested or prevented further investment in Fifth Third stock. Although the complaint alleged that the defendants had access to inside information concerning the company's financial well-being, the claim was based in large part on publicly available information showing that Fifth Third had moved from a conservative to a subprime lender and that its portfolio therefore became increasingly exposed to defaults. With respect to the portion of the claim based on public information, the Supreme Court held that when a company's 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." In so holding, the Court explained that "a fiduciary usually is not imprudent to assume that a major stock market . . . provides the best estimate of the value of the stocks traded on it that is available to him." The Court vacated the Sixth Circuit's prior opinion, and remanded for further proceedings.

Post-Dudenhoeffer Decisions

Since Dudenhoeffer, there have been a handful of reported decisions addressing employer stock-drop claims based on publicly available information. As discussed below, in all but one case, plaintiffs' claims have been dismissed.

1. Gedek v. Perez, 66 F. Supp. 3d 368 (W.D.N.Y. 2014)

   The first post-Dudenhoeffer decision on public information claims was decided by a district court in the Western District of New York and involved allegations that the plan fiduciaries imprudently continued to offer, purchase and hold Kodak stock as an option in the plans despite publicly available information that Kodak's performance had no reasonable chance of improving. Gedek v. Perez, 66 F. Supp. 3d 368 (W.D.N.Y. 2014). Plaintiffs were participants in the Kodak Savings and Investment Plan and the Kodak Employee Stock Ownership Plan. They alleged that Kodak's downward path was so obvious that it was imprudent to invest in Kodak stock, regardless of its price, and that Kodak had no reasonable chance of improving because Kodak relied on a "dying technology" and was unable to develop new products.

   The court denied defendants' motion to dismiss the complaint for failure to state a claim for relief. In so ruling, the court observed that "the complaint recites a history not just of Kodak's inexorable slide toward bankruptcy, but of publicly available information contemporaneously documenting that slide, step by painful step, and accurately forecasting Kodak's bleak future." In response to the argument that there can be no claim if the market is fully aware of the company's financial condition, the court stated that, "the fact that the market, on any given date, may have provided the best available estimate of the 'value' of Kodak stock, does not necessarily reveal much about whether defendants acted prudently in continuing to invest in that stock." The court concluded that the relevant inquiry was "not whether defendants paid an artificially inflated price for Kodak stock, but whether they should have realized that Kodak stock represented such a poor long-term investment that they should have ceased to purchase, hold, or offer Kodak stock to plan participants." With respect to this issue, the court determined that it could not rule, at the pleadings stage, that plaintiffs failed to state a claim that the plan fiduciaries acted imprudently by continuing to offer, purchase and hold company stock.

2. In re BP p.l.c. ERISA Litig., No. 4:10-cv-4214 (S.D. Tex. Jan. 15, 2015).

   The next decision came from a district court in Texas involving claims against BP. In re BP p.l.c. ERISA Litig., No. 4:10-cv-4214 (S.D. Tex. Jan. 15, 2015). Plaintiffs were participants in 401(k) plans sponsored by BP North America and claimed that defendants breached their fiduciary duties between January 16, 2007 and June 24, 2010 (the period leading up to, including and subsequent to the Deepwater Horizon explosion) in connection with the plans' investment in the BP stock fund.

   After Dudenhoeffer, the Fifth Circuit vacated the district court's previous decision in this case. Plaintiffs then sought leave to file an amended complaint to add a breach of fiduciary duty claim based on allegations that "Defendants knew or should have known of the imprudence of [company stock] because of 'publicly available information' as to the riskiness of the [company stock]," such as information about BP's safety track record, and public uncertainty about how BP would respond to the Deepwater Horizon explosion. The court did not allow plaintiffs to amend their complaint to add the claim. First, the court determined that plaintiffs failed to offer any coherent theory as to why the market's valuation of BP based on public information was unreliable. Second, the court found that plaintiffs' claim that BP stock was "excessively risky," and thus imprudent, could not stand where, as here, the stock was widely traded in a public market, and there was no indication that the market was inefficient. The court reasoned that fiduciaries generally are entitled to rely on the market price as an "unbiased assessment of the security's value in light of public information." Finally, the court noted that "[e]ven if Gedek [supra] can be reconciled with Dudenhoeffer, the Court [found] it to be of limited usefulness. The alleged riskiness of BP's stock simply does not conjure the inevitability of 'default, bankruptcy or worse' present in Gedek."

3. In re Citigroup ERISA Litig., 2015 U.S. Dist. LEXIS 63460 (S.D.N.Y. May 13, 2015), reconsideration denied, 2015 U.S. Dist. LEXIS 88045 (S.D.N.Y. July...