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U.S. Supreme Court to Hear ERISA Case of First Impression

April 1, 2014

On April 2, 2014, the Supreme Court of the United States will hear oral argument in a case with the potential to change the landscape of ERISA company stock cases. The case — Fifth Third Bancorp, et al. v. Dudenhoeffer, et al., No. 12-751 — raises issues of first impression for the Supreme Court and should serve to clarify what a plaintiff must plead in order to sufficiently state a claim for breach of the ERISA fiduciary duties of loyalty and prudence.

This case arises from plaintiffs’ claim that defendant Fifth Third Bancorp and certain individual defendants breached their fiduciary duties to act prudently and loyally under Section 404(a)(1) of the Employee Retirement Income Security Act of 1974. The complaint alleges that defendants, fiduciaries of a defined-contribution ERISA Plan that held employer stock, knew or should have known that continued investment in employer stock was imprudent because Fifth Third had abandoned its traditionally conservative lending practices to lend in the subprime market — a far more risky venture due to the high potential for defaults — and that defendants breached their fiduciary duties by failing to either restrict further investment in employer stock, divest the stock already owned or disclose this increased risk. 

The district court dismissed the complaint. In so doing, it applied what has been referred to as the “Moench presumption,” or in the Sixth Circuit, the “Kuper presumption,” under which “the plan fiduciaries start with a presumption that their ‘decision to remain invested in employer securities was reasonable.’” Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995); see Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Applying this so-called presumption of prudence, the district court found that the complaint did not allege that Fifth Third Bancorp was in a dire financial predicament sufficient to establish a breach of fiduciary duty. 

A unanimous panel of the Sixth Circuit court of appeals reversed, holding that no special presumption need be applied in analyzing the complaint because it would necessarily concern questions of fact at the pleadings stage when a court must accept the well pled factual allegations of the complaint as true. The Sixth Circuit concluded that plaintiffs had plausibly alleged that Fifth Third Bancorp had engaged in subprime lending practices, that defendants were aware of the risks of such subprime investments practices and that such risks made continued investment in Fifth Third stock imprudent in violation of ERISA Section 404(a)(1). 

On December 14, 2012, defendants filed a petition for writ of certiorari with the Supreme Court of the United States. In an effort to convince the Court that a clear circuit split required its attention, and therefore defendants’ petition should be granted, defendants sought to prove that the Sixth Circuit’s decision conflicted with circuit court jurisprudence that — according to defendants — has been clearly trending in favor of applying the presumption of prudence at the pleadings stage in ERISA company stock cases such as this one. 

Plaintiffs filed their brief in opposition on February 22, 2013. Plaintiffs argued that the Sixth Circuit decision did not conflict with any other court of appeals, emphasizing that varying results in cases of this sort turn on the underlying facts, and an important fact in this case — which differs from the other cases on which defendants relied — is that the Plan here does not limit the ability of the Plan fiduciaries to remove Fifth Third Bancorp stock as an investment option for the Plan, or divest Plan assets invested in Fifth Third stock as prudence dictates. 

After a reply brief by defendants, the Court entered an Order on March 25, 2013 inviting the United States Solicitor General to file a brief expressing the views of the United States. The Solicitor General filed its brief on November 12, 2013, and concluded that only one of the two questions presented warranted review by the Court. Namely, whether, to state a claim that a fiduciary of an employee stock ownership plan violated the duty of prudence by continuing to invest plan assets in employer stock, a plaintiff must rebut a presumption that the fiduciary acted prudently by alleging that the employer faced imminent financial peril. The Solicitor General advised the Court that in resolving the conflict of authority on this issue, it should hold that courts need not apply a presumption that an ESOP fiduciary has acted prudently at any stage of the proceedings. Thus while the Solicitor General advised the Court to grant defendants’ petition as to this issue, the United States supported plaintiffs’ position on the merits.

On December 13, 2013, the Court granted defendants’ petition as to its first question. Although the Solicitor General had urged the Court to rewrite the question, the Court chose not to do so, and accepted the question as initially presented by Fifth Third Bancorp: Whether the Sixth Circuit erred by holding that respondents were not required to plausibly alleged in their complaint that the fiduciaries of an employee stock ownership plan abused their discretion by remaining invested in employer stock, in order to overcome the presumption that their decision to invest in employer stock was reasonable, as required by the Employee Retirement Income Security Act of 1974 . . . and every other circuit to address the issue. 

The parties have since submitted their briefs on the merits and await oral argument. Defendants continue to argue that even if every fact in plaintiffs’ complaint were taken as true, plaintiffs could not establish that they were due any relief under the deferential standard of review owed to ESOP fiduciaries. Plaintiffs conversely urge the Supreme Court to look to the plain language of the statute, which clearly establishes a standard of care to which the Plan fiduciaries are required to adhere, and does not support application of a presumption of prudence to the fiduciaries’ decision to continue investment in Fifth Third Bancorp stock. Several amici briefs were filed in support of both parties’ positions, with the United States Solicitor General, AARP and AFL-CIO, among others, filing in support of plaintiffs’ position on the merits. 

This issue is one of first impression for the Supreme Court and if the Court were to find in favor of defendants, it could mean a loftier legal hurdle for employees seeking to recover retirement savings losses due to plan fiduciaries’ failure to take appropriate action in light of declining value of company stock due to corporate mismanagement. Plaintiffs, however, present strong textual and factual arguments in opposition and are hopeful that the Court will consider the impact of defendants’ position on retirement plan participants and beneficiaries. As one of the only firms in the country to try an ERISA company stock case to verdict, our expertise makes us uniquely qualified to handle these issues on appeal and we hope to see a decision that will encourage, as opposed to hinder, our ability to continue to litigate these cases on behalf of those plan participants and beneficiaries who have suffered losses due to clear fiduciary breaches.

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