[18-1165] Retirement Plans Committee of IBM v. Jander

Retirement Plans Committee of IBM v. Jander

Justia (with opinion) · Docket · oyez.org

Argued on Nov 6, 2019.
Decided on Jan 14, 2020.

Petitioner: Retirement Plans Committee of IBM, et al..
Respondent: Larry W. Jander, et al..

Advocates:

• Paul D. Clement (for the petitioners)
• Jonathan Y. Ellis (Assistant to the Solicitor General, Department of Justice, for the United States, as amicus curiae, supporting neither party)
• Samuel Bonderoff (for the respondents)

Facts of the case (from oyez.org)

In Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. __ (2014), the Supreme Court unanimously held that under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries to an employee stock ownership plan (ESOP) are not entitled to a presumption of prudence regarding their decisions to buy or hold employer stock. Rather, for a plaintiff to state a claim for breach of the fiduciary duty of prudence based on inside information, the plaintiff need only “plausibly allege that a prudent fiduciary in the defendant’s position could not have concluded that [an alternative action] would do more harm than good to the fund.” Thus the Court established a “context-specific” pleading standard rather than a generalized presumption standard.

IBM offers as a benefit to its employees an ERISA-qualified ESOP, invested predominantly in IBM common stock, with Retirement Plans Committee of IBM as the fiduciary. In 2015, two substantially similar lawsuits were filed against IBM and its officers, one under securities laws and the other under ERISA. Both lawsuits alleged that IBM fraudulently concealed problems with the company’s microelectronics unit, thereby artificially inflating IBM’s reported value. By continuing to invest in IBM stock despite allegedly knowing that the market price was artificially inflated due to the fraudulent scheme, the plaintiffs in the ERISA lawsuit argued that the ESOP’s fiduciaries breached their duty of prudence under Section 404 of ERISA.

The district court dismissed the ERISA lawsuit for failure to state a claim, finding that the plaintiffs failed to meet the pleading standard established in Fifth Third, as they had not alleged facts showing that the fiduciaries “could not have concluded” that publicly disclosing the alleged “fraud” or halting further investments in IBM stock would be more likely to harm the fund than to help it.

The plaintiffs amended their complaint to add generic allegations that disclosure of the alleged fraud was “inevitable” and that the magnitude of the stock price correction resulting from a delayed disclosure would increase over time. The plaintiffs also added a claim that the fiduciaries could have avoided doing more harm than good by instead purchasing a “low-cost” hedging product.

The district court again dismissed the lawsuit for failing to meet the Fifth Third pleading standard and because a prudent fiduciary could reasonably find their proposed alternative likely to cause more harm than good. The U.S. Court of Appeals for the Second Circuit reversed, finding that “when a ‘drop in the value of the stock already held by the fund’ is inevitable, it is far more plausible that a prudent fiduciary would prefer to limit the effects of the stock’s artificial inflation on the ESOP’s beneficiaries through prompt disclosure.”

Question

Do generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time satisfy the “more harm than good” pleading standard for ERISA claims the Court established in Fifth Third Bancorp v. Dudenhoeffer?

Conclusion

In a per curiam (unsigned) opinion, the Court vacated the judgment below and remanded the case to the Second Circuit to determine whether to entertain the parties’ arguments on ERISA’s duty of prudence.