Aug. 5, 2014, Class Action Law Reporter
Supreme Court helps ERISA plaintiffs but leaves issues unresolved
Courtney L. Davenport
Following a significant Supreme Court decision eliminating the defense-friendly “presumption of prudence” in Employee Retirement Income Security Act (ERISA) cases, the Fifth Circuit has revived a lawsuit against BP, P.L.C., by employees who suffered financial losses when their BP stock plummeted after the Deepwater Horizon oil spill. (Whitley v. BP, P.L.C., 2014 WL 3412205 (5th Cir. July 15, 2014).)
The employees had investments in various ERISA savings plans with BP North America board members acting as fiduciaries. About one-third of their money was invested in BP American Depository Shares (ADSs). The plaintiffs claim that for years, the fiduciaries invested their funds in ADSs even though they knew the company had a systemic problem with safety, resulting in numerous accidents that culminated in the Deepwater disaster.
“This case is not about making unreasonable predictions based on speculation but rather objective analysis considering the state of company affairs and a fiduciary’s responsibility to understand that a disaster like Deepwater Horizon would (and did) bring about great losses to the plans,” said the complaint. “Given the admitted crucial importance of safety to BP’s business and the myriad of problems BP experienced in the years leading up to the Deepwater Horizon disaster, reasonable fiduciaries would have considered themselves bound to divest BP ADSs from the plans.”
The plaintiffs faced an uphill battle that has derailed many ERISA suits involving employee stock ownership plans (ESOPs): Many circuit courts have long applied a “presumption of prudence,” holding that plan fiduciaries’ decision to remain invested in employer securities is presumed reasonable. Usually, plaintiffs can only overcome the presumption with allegations that it was patently obvious to the fiduciaries that the company was in dire circumstances, such as being on the brink of collapse—a significant burden. Relying on the presumption, the district court dismissed the case, and the Fifth Circuit heard oral arguments in the employees’ appeal.
While the appeal was pending, the Supreme Court changed the ERISA landscape, holding that the statute’s plain language does not give ESOP fiduciaries a presumption not granted to fiduciaries investing in non-ESOP plans. (Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014).) Courts created the presumption because they were trying to reconcile ERISA’s duty-of-prudence requirement with Congress’s recognition that ESOPs are designed to invest primarily in employer funds, so ESOP fiduciaries are not required to diversify the portfolio. But the Court said ERISA balances the conflict by exempting ESOP fiduciaries from the diversification requirement—it does not require an extra protection.
“We do not believe that the presumption at issue here is an appropriate way to weed out meritless lawsuits or to provide the requisite ‘balancing,’” wrote Justice Stephen Breyer in a unanimous decision. “The proposed presumption makes it impossible for a plaintiff to state a duty-of-prudence claim, no matter how meritorious, unless the employer is in very bad economic circumstances. Such a rule does not readily divide the plausible sheep from the meritless goats. That important task can be better accomplished through careful, context-sensitive scrutiny of a complaint’s allegations.”
The Fifth Circuit vacated the dismissal and remanded. Although the Court was clear on the presumption issue, trial lawyers say questions remain.
“The Supreme Court spoke with precision on some issues and left other issues open for the district courts and appellate courts to decide later. A lot of courts will be looking to the wording for guidance. It’s a brand-new world for ERISA,” said Houston attorney John Clay, one of the attorneys for the class. “We’re probably the first case to consider Dudenhoeffer, because the court was already on the lookout. There are a number of court decisions coming up the appellate pipeline that turn on the presumption and how to interpret it, and those were all affected by the decision.”
One unresolved issue arises when plaintiffs allege fiduciaries were imprudent because they didn’t act on publicly available information. Although those claims are generally implausible, the Court said, plaintiffs may be able to rely on “special circumstances” that affected the market price based on the public information. But the Court did not define “special circumstances,” which is sure to be a heavily litigated issue in future cases.
Also unresolved is what happens when plaintiffs’ claims that fiduciaries should have acted on private information overlap with federal law prohibiting corporate executives from trading on insider information. The duty of prudence cannot require fiduciaries to violate securities laws, the Court said. Thus, the BP plaintiffs’ claims that the fiduciaries should have sold the stock must be dismissed.
But claims that fiduciaries should have refrained from buying more stock or publicly disclosed the information require different considerations. The Court said the Securities and Exchange Commission hasn’t weighed in on what to do when those claims conflict with complex insider trading and corporate disclosure requirements, and “we believe those views may well be relevant.” Nonetheless, the Court ruled that plaintiffs “must plausibly allege an alternative action that the defendant could have taken that would have been consistent with 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.”
Some in the defense bar have claimed this as a victory, arguing this standard means ERISA claims will almost always be trumped by federal securities law. But Clay said the Court’s extensive discussion and refusal to specifically rule on the interplay means it’s not impossible to have claims under both ERISA and securities laws.
“The Court noted there can be tension between ERISA and securities law when a retirement plan fiduciary has inside information about the employer. The Court found that a fiduciary is not required to buy or sell the employer’s stock in violation of insider trading laws, but it also talked about some other duties that a fiduciary could have under ERISA because of having inside information,” Clay said. “The Court did not offer definitive guidelines for evaluating ERISA claims that are based on the breach of other duties triggered by inside information, but it listed some factors and questions that the lower courts should consider. This indicates there are situations where a fiduciary’s inside knowledge could establish an ERISA claim because the fiduciary has failed to pursue some other course of action that would not violate insider trading laws, but the Court was not ready to provide definite guidelines on when that occurs.”
Last month, the Court remanded several cases for reconsideration in light of Dudenhoeffer.