Article III of the Constitution limits the jurisdiction of federal courts to “cases” and “controversies.” As the Supreme Court recently explained in Genesis HealthCare Corp. v. Symczyk, a lawsuit does not present an Article III case or controversy and “must be dismissed as moot” when “an intervening circumstance deprives the plaintiff of a ‘personal stake in the outcome of the lawsuit,’ at any point during the litigation.” Today, in Campbell-Ewald Co. v. Gomez (pdf), the Supreme Court held that a defendant’s unaccepted offer to satisfy the claims of a named plaintiff in a putative class-action lawsuit is not sufficient to render the suit moot. Continue Reading Supreme Court holds that an unaccepted offer of judgment doesn’t moot a class action
In ERISA stock-drop class actions, plaintiffs routinely allege that their employers breached a duty of prudence by permitting employees to invest their retirement assets in their company’s stock. Until today, defendants typically defended against such claims by invoking a judicially crafted presumption that offering company stock was prudent. Today, in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (pdf), the Supreme Court rejected that presumption.
But all hope is not lost for stock-drop defendants. Much of the work previously done by the presumption of prudence will now be done by the substantive requirements of the duty of prudence. The Court offered guidance as to what plaintiffs must demonstrate to survive a motion to dismiss—and the standards suggested by the Court will not be easy to satisfy.
As a starting point, fiduciaries who administer retirement plans governed by the Employee Retirement Income Security Act (ERISA) owe a duty of prudence to plan participants. See 29 U.S.C. § 1104(a). To comport with that duty, fiduciaries are generally required to “diversify the investments of the plan so as to minimize large losses, unless under the circumstances it is clearly prudent not to do so.” Id. § 1104(a)(1)(C). But because Congress wanted to encourage employees to invest in their own companies, it waived the duty of prudence “to the extent it requires diversification” for fiduciaries of an “employee stock ownership plan” (ESOP). Id. § 1104(a)(2).
Several federal courts of appeals had inferred from this exemption that an ESOP fiduciary’s decision to hold or buy employer stock should be presumed prudent, and that the fiduciary could not be held liable unless the company was in such dire financial straits that its viability as a going concern was in doubt. In today’s unanimous opinion by Justice Breyer, the Court held that ERISA’s text provides no presumption—in particular, although Section 1104(a)(2) expressly exempts ESOP fiduciaries from the duty of prudence, to the extent that duty requires diversification, it makes no reference to any special presumption.
Having resolved the question presented, the Court proceeded to “consider more fully one important mechanism for weeding out meritless claims, the motion to dismiss for failure to state a claim,” and explained how, in light of the substance of the duty of prudence, motions to dismiss should be assessed.
The Court effectively ruled out stock-drop claims based on publicly available information, invoking its two-day-old decision in Halliburton Co. v. Erica P. John Fund, Inc. (pdf) (previously discussed on the blog), in which the Court opined that investors may reasonably rely on the market to incorporate public information into a stock’s price. For circumstances in which fiduciaries are alleged to possess nonpublic information that suggests it was imprudent to hold company stock, the Court held that “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The Court emphasized that ERISA fiduciaries cannot be required to trade on insider information in violation of the securities laws. And the Court cast doubt on other theories sometimes offered by ERISA stock-drop plaintiffs—that fiduciaries should have ceased making new investments in company stock or disclosed the previously nonpublic information. The Court noted that ERISA’s requirements must be in harmony with “the complex insider trading and corporate disclosure requirements imposed by the federal securities laws” and the objectives of those laws, and indicated that ERISA’s fiduciary breach requirements do not require plan fiduciaries to take actions that “would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
The Court’s decision fundamentally reconfigures the landscape for ERISA stock-drop class actions. Although the rejection of the presumption of prudence is likely to result in more suits against retirement plan fiduciaries, the Court’s substantive guidance arms class-action defendants with potent defenses that can be invoked at the motion-to-dismiss stage. The main issue left open by the Court—when, if at all, fiduciaries must act on nonpublic information—will be litigated extensively in the lower courts, and may ultimately percolate back up to the Supreme Court again.
The Supreme Court makes its biggest headlines when it wades into the biggest issues of the day. But the Supreme Court also maintains a substantial docket of seemingly small—but ultimately important—technical questions.
In recent years, the Court has been particularly interested in defining precisely when an hourly employee is on and off the clock. For example, earlier this term, the Court held in Sandifer v. United States Steel Corp. that employers need not compensate certain workers for time spent donning and doffing safety gear. The Court will answer a related question next term. Yesterday, the Court granted certiorari to decide whether end-of-shift security screenings to prevent theft are compensable time under the Fair Labor Standards Act, as amended by the Portal-to-Portal Act.
Although such screenings may take only a matter of minutes, when aggregated over the course of a two-year limitations period for numerous employees, the damages exposure can be substantial. That explains why a series of nationwide back-pay class actions have been filed in the wake of the Ninth Circuit’s decision that time spent in security screenings must be compensated.
The Supreme Court will now review that decision in Integrity Staffing Solutions, Inc. v. Busk, No. 13-433. The legal issue is whether security screenings are “integral and indispensable” to employees’ “principal activities” or merely “preliminary” or “postliminary” to those activities. Under the Ninth Circuit’s view, security screenings are compensable because the task is necessary to the employees’ work and done for the benefit of the employer. But the Second Circuit has described security procedures as “modern paradigms of the preliminary and postliminary activities described in the Portal-to-Portal Act.”
Integrity Staffing is likely to be among the first cases heard when the Court reconvenes after its summer recess. Until then, expect the wave of related class actions to continue.
In what circumstances should you be permitted to invest your retirement savings in your own employer’s stock? We have blogged before about an ERISA class action pending at the Supreme Court regarding when plan fiduciaries must prevent participants from investing in employer stock. After the Solicitor General filed an amicus brief (pdf) asking the Court to broaden its inquiry, the case was poised to challenge a bedrock of ERISA stock-drop actions—a presumption that fiduciaries act prudently when investing in employer stock.
On Friday, the Supreme Court granted certiorari in the case, Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, but did not accept the Solicitor General’s request to have the parties brief the appropriateness of the presumption of prudence. Rather, the Court left intact the question presented by the petition, which concerns only the applicability of the presumption at the motion-to-dismiss stage.
A bit of background: As a general rule, the fiduciaries who administer ERISA-governed retirement plans owe a duty of prudence to plan participants. But although many investment advisors would warn investors not to invest substantial portions of their retirement savings in a single stock, Congress wanted to encourage employees to invest in their companies. So it waived the duty of prudence “to the extent that it requires diversification” for purchases of company stock. 29 U.S.C. § 1104(a)(2).
Of course, the risk of a non-diversified portfolio is that an individual stock will lose value. When that happens, securities-fraud class actions are commonplace, as are ERISA class actions that argue that retirement plan fiduciaries should have forced plan participants to sell their employer stock. Nearly 20 years ago, the Third Circuit recognized the tension between such claims and Congress’s goal of encouraging employee ownership. Under Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), which has been adopted in varying forms by seven federal courts of appeals, when a plan sponsor requires or encourages plan fiduciaries to invest in employer stock, plan fiduciaries are not generally liable for permitting such investments—unless the employer was in such dire financial straits that the company’s viability as a going concern was in doubt.
Despite the general agreement among the courts of appeals, the Labor Department has long disagreed with the Moench presumption. But as the presumption has gained acceptance in the lower courts, the Supreme Court has exhibited no particular interest in adopting a different course. The Court’s order in Fifth Third signals, if anything, that the Justices are not particularly eager to enter the fray now. That’s a sensible outcome. The Supreme Court rarely will address an issue that the parties did not contest below. And there are good reasons—grounded in Congress’s special dispensation for employer stock—why the courts of appeals have been reluctant to saddle employers with liability for stock-market volatility.
At a minimum, this case will determine what a plaintiff must allege to survive a motion-to-dismiss and to obtain discovery. And the Court is not precluded from resolving the broader issue when the case is decided this spring. That would be a substantial undertaking, however, because the Moench presumption implicates big questions for ERISA class actions:
- When plan fiduciaries are instructed by the plan sponsor to invest in employer stock, they face a potential conflict between the terms of the plan and the duty of prudence. When must a fiduciary disregard the terms of the plan? See 29 U.S.C. § 1104(a)(2)(D).
- If the purpose of diversifying investments is to “minimize the risk of large losses,” how (if ever) does a plan fiduciary violate the duty of prudence by permitting plan participants to sustain large losses through an investment in employer stock? See id. § 1104(a)(1)(C), (a)(2).
- Do fiduciaries face the same prudence obligations when they affirmatively invests plan participants’ retirement assets (as in a defined-benefit pension plan) as when they merely offer investment options among which plan participants will construct a portfolio (as in a 401(k) plan)?
To see whether the Court answers those questions, we will have to await the argument and decision.
This past March, the Supreme Court asked the Solicitor General to weigh in as to whether two rather technical questions about ERISA stock-drop actions are worthy of the Court’s attention. See Fifth Third Bancorp v. Dudenhoeffer, No. 12-751. The Solicitor General filed his brief (pdf) yesterday. Sidestepping the technical questions, he asked the Court to intervene on a different (and highly significant) question: whether ERISA plan fiduciaries are entitled to a presumption that they have acted prudently in permitting plan participants to invest in their own company’s common stock.
With the Solicitor General’s recommendation, the Supreme Court is highly likely to grant certiorari. And with the questions reformulated by the Solicitor General, this case stands either to sound the death knell for stock-drop class actions or to start a frenzied wave of such cases.
Stock-drop cases often arise as siblings to securities fraud class actions. When a company’s stock price falls precipitously, some plaintiffs’ lawyers scramble to identify corporate statements and omissions that might be responsible. Meanwhile, other plaintiffs’ lawyers focus on the company’s retirement plans. Many companies offer employees an ownership interest in their company, either through a freestanding Employee Stock Ownership Plan (an “ESOP”) or as an ESOP investment option in a participant-directed savings plan (a “401(k) plan”). When securities-fraud plaintiffs allege that corporate officers have violated the securities laws, ERISA plaintiffs will often allege that retirement plan fiduciaries acted imprudently by permitting plan participants to invest in a flawed product.
But Congress encouraged the creation of ESOPs by excluding them from certain ERISA requirements. See, e.g., 29 U.S.C. §§ 1104(a)(2), 1106(b)(1), 1107(d)(6)(a). Thus, allegations that plan fiduciaries should have shielded plan participants from investing in their own companies are in tension with Congress’s special treatment of ESOPs. To resolve that tension, the Third Circuit, in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), held that “an ESOP fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision.” Six other circuits have followed suit and recognized presumptions (with some differences on the details of how the presumptions operate).
The Solicitor General has urged the Court to hold that “courts should not apply a presumption that an ESOP fiduciary has acted prudently at any stage of the proceedings.” If the Court agrees with the Solicitor General, then plaintiffs’ lawyers will have new avenues for litigating perceived securities violations—avenues not limited by recent procedural reforms directed at securities actions. But if the Court recognizes a robust presumption, then such actions may appear far less desirable.
The Court is expected to consider the petition in Dudenhoeffer at its December 13 conference, with an order to issue sometime thereafter. If the Court grants certiorari, the case will likely be heard during the current term, with a decision on the merits expected by June 2014.