Alert June 25, 2015

Ninth Circuit Again Wrestles with Fifth Third v. Dudenhoeffer, and Again Reverses Dismissal of Stock Drop Case


The Ninth Circuit, which was the first appellate court to substantively address the Supreme Court’s decision in Fifth Third v. Dudenhoeffer, has divided over the implication of Dudenhoeffer when plan fiduciaries are alleged to have breached duties by allowing a plan to hold employer stock during a time of alleged artificial inflation of the share price.

Factual Background

As described in greater detail in the December 18, 2014 edition of the ELU, this case involves claims for breach of fiduciary duty when two 401(k) plans remained invested in the employer stock at a time when the value of the stock was alleged to have been artificially inflated as a result of material misstatements made by the company or its officers and directors regarding the efficacy of its products. Before the Supreme Court eliminated the so-called Moench presumption of prudence, as described in the June 26, 2014 edition of the ELU, the district court dismissed the claims, holding that the defendants were either protected by the presumption of prudence, or that, alternatively, the plaintiffs did not state a claim for imprudence where discontinuing the plans’ holdings of employer stock would either cause losses to the plans or require defendants to violate the securities laws.

The Amended Appellate Decision Allows Claims to Proceed

Following Dudenhoeffer, on October 30, 2014, a panel of the Ninth Circuit reversed the district court’s order dismissing the complaint. The defendants sought en banc review of the panel’s decision, arguing that, if it stands, it “will have far reaching deleterious effects.” On May 26, 2015, the panel issued an amended opinion, which again reversed the district court’s order dismissing the complaint. The full Ninth Circuit also denied the petition for rehearing en banc, although four judges dissented from that decision.

In its amended decision, the Ninth Circuit panel again allowed the complaint to proceed where it claimed that plan fiduciaries should have removed publicly traded stock from the plans when they knew or should have known that material information was being withheld in violation of federal securities laws. The panel again held that Dudenhoeffer stood as no bar to such claims. It reasoned that (i) the harm to participants of the eventual disclosure of negative information would be greater than the harm to participants of any fiduciary decision to remove a stock; and (ii) any tension fiduciaries may have between acting consistent with the securities laws and ERISA, where there is an alleged failure to disclose material information, is a “problem of the defendants’ own making.” 

The Dissent Reads Dudenhoeffer as Providing Greater Protection for Fiduciaries

Judge Kozinski, writing for a four-judge dissent, argued that Dudenhoeffer “created stringent new requirements” that were ignored by the panel.  He argued that the decision “creates almost unbounded liability for ERISA fiduciaries” and that it “will have grave consequences for corporations across America, leaving them acutely vulnerable to meritless lawsuits and subjecting them to novel, judicially-fashioned disclosure requirements that conflict with those of the securities laws.” The dissent chided the panel for not paying heed to the Supreme Court’s admonition that courts still need to “weed out meritless lawsuits” under Dudenhoeffer. It expressed concern that under the panel’s holding, any complaint alleging that the plan fiduciary could have withdrawn a fund or provided greater disclosure can survive a motion to dismiss, a holding that not only conflicts with Dudenhoeffer, but “fundamentally undermines” the Supreme Court’s earlier decisions establishing the pleading standard to be applied under FRCP 12(b)(6), Twombly and Iqbal.

On June 9, 2015, the panel agreed to stay its mandate pending the defendants’ filing a petition for writ of certiorari to the Supreme Court.