By way of background, in 2014, the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014), which set a high bar for plaintiffs to overcome when pleading a breach of fiduciary duty under ERISA in ESOP “stock-drop” cases. Employees in stock-drop cases typically allege that their ESOP lost value as a result of the fiduciaries’ failure to consider negative non-public information of which the fiduciary was aware. Under Dudenhoeffer, for such a case to survive dismissal a plaintiff must plausibly allege that:
- Any potential disclosure would not violate corporate disclosure requirements under federal securities law; and
- That a prudent fiduciary could not have determined that disclosure would not “do more harm than good” by causing a drop in stock price, negatively affecting the value of the stock already held by the plan in the process.
Dudenhoeffer, 134 S.Ct. at 2472-73. This has been a difficult standard for plaintiffs to overcome. In over a dozen cases decided since Dudenhoeffer, federal courts have consistently held that plaintiffs could not overcome the “do more harm than good” test at the motion to dismiss stage.
One outlier was the Second Circuit’s Jander decision, which reversed such a district court decision. In Jander, the court held that where a plaintiff sufficiently pleads that disclosure of negative information (and the accompanying drop in stock price) was “inevitable,” and an earlier disclosure would have caused less loss than a later disclosure, the Dudenhoeffer requirement that the disclosure not “do more harm than good” is met. 910 F.3d at 630-31. Following the Second Circuit’s Jander decision, defendants filed a petition for certiorari in the Supreme Court, which the court granted.
The petitioners, in their August 6, 2019 brief, made two principal arguments. First, the petitioners argue that Congress explicitly authorized corporate officers to act in both corporate and fiduciary capacities. In their corporate capacity, corporate officers are required to act on behalf of all shareholders (not just the subset of employee-shareholders who participate in the ESOP) and are subject to securities laws governing the timing and scope of corporate disclosures. The petitioners contend that the court should not “[s]uperimpose[e] a judge-made ERISA disclosure regime” as to corporate officers who serve as plan fiduciaries.
Second, the petitioners argue that Dudenhoeffer recognizes that plan fiduciaries have discretion when taking action for their plan, and therefore should only be held liable for failing to disclose non-public information where fiduciaries could not have concluded that the disclosure would do no more harm than good. The petitioners claim that, given the nature of the disclosures at issue—the valuation of corporate assets that the company intended to sell—the fiduciaries could have concluded that earlier disclosure would have done more harm than good (i.e., the immediate and certain harm of an earlier disclosure, as compared with the uncertain harm associated with a future disclosure).
Last week, the United States submitted its amicus brief on the merits, authored by the Solicitor General and joined by both the DOL and SEC. The SEC’s joinder in the brief is notable because the SEC’s views on the interplay between ERISA fiduciary duties and federal securities laws may be particularly important to the Supreme Court. The Supreme Court stated as much in Dudenhoeffer, lamenting that the SEC did not file a brief in that case, and stating that the SEC “has not advised us of its views on these matters, and we believe that those views may well be relevant.” Dudenhoeffer, 134 S.Ct. at 2473. It is noteworthy that here the SEC signed on to the views expressed by the Solicitor General on behalf of the United States as to the holding of company stock in a retirement plan.
Although the brief does not explicitly support either the petitioners (the ESOP fiduciary defendants) or the respondents (the ESOP participants), the position articulated by the United States is more solicitous than the Second Circuit decision in Jander of ESOP fiduciaries, particularly in that it seeks reversal of a decision that allowed claims against the fiduciaries to proceed. The government reasons that:
- Because of the complexity of securities law disclosure requirements, ESOP fiduciaries should only be required to publicly disclose inside information where securities laws specifically mandate such disclosure; and
- “The better course is to recognize that Congress and the SEC have already made a judgment about when a public disclosure would do more harm than good, and prudent fiduciaries should generally not [have to] second-guess that judgment.”
Put another way, the government’s position is that ERISA does not require ESOP fiduciaries to divine what disclosure would “do more harm than good,” and instead directs fiduciaries to simply comply with the disclosure requirements mandated by federal securities laws. If the federal securities laws mandate disclosure, then the disclosure could not do more harm than good, and failure to disclose could give rise to a claim for fiduciary breach under Dudenhoeffer. Conversely, absent “extraordinary circumstances,” where federal securities laws do not mandate disclosure, then the disclosure presumptively would do more harm than good, and a failure to act on such adverse non-public information should not give rise to a claim of fiduciary breach under Dudenhoeffer.
If the government’s position is adopted by the Supreme Court, it would create more of a bright-line test and potentially clarify fiduciaries’ responsibilities under Dudenhoeffer’s “do more harm than good” standard.
James O. FlecknerPartnerChair, ERISA Litigation
John J. ClearyOf Counsel
Alison V. DouglassPartner