Supreme Court Clarifies Heightened Pleading Standard for Stock Drop Cases
On January 25, 2016, the Supreme Court of the United States issued a per curiam opinion in Amgen Inc. v. Harris, holding that the Amgen, Inc. employees who filed suit after the value of the employer stock in which they had invested dramatically decreased, failed to sufficiently plead a breach of fiduciary duty claim under ERISA in light of the Court’s decision last term in Fifth Third Bancorp v. Dudenhoeffer.
ERISA requires plan fiduciaries to uphold the duty of prudence. In the Dudenhoeffer decision last year, the Court clarified that there is no presumption of prudence under ERISA, even for employee stock ownership plan (ESOP) fiduciaries facing a challenge to a decision to buy or hold employer stock. Specifically, Dudenhoeffer held that while ERISA exempts ESOP fiduciaries from the duty to diversify the investments of the plan to minimize the risk of large losses, ESOP fiduciaries are subject to the duty of prudence under ERISA Section 404(a), just like all other ERISA fiduciaries. However, in Dudenhoeffer, the Court set out high pleading standards for plaintiffs to state a claim for fiduciary breach based on the duty of prudence against ESOP fiduciaries.
Following Dudenhoeffer, to state a claim for a fiduciary breach for prudence on the basis of inside information, the complaint must include:
An explanation of an alternative action that:
a. the fiduciary could have taken that would have been consistent with securities laws, and
b. a prudent fiduciary would have viewed the alternate action as more likely to help than harm the fund; or
A plausible allegation that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases of company stock or publicly disclosing negative information would do more harm than good.
In Amgen, an employee class initially alleged that plan fiduciaries breached their fiduciary duties, particularly the duty of prudence, when Amgen’s common stock experienced a sharp decline. The U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court for the Central District of California’s dismissal of the case for failure to assert a fiduciary breach. After Dudenhoeffer was decided, the Supreme Court remanded Amgen to the Ninth Circuit to determine whether the complaint had been sufficiently pled under the Court’s new heightened pleading standards.
On remand, the Ninth Circuit held that the stockholders’ complaint stated a claim against the plan fiduciaries for breach of the duty of prudence. Specifically, the Ninth Circuit found that the complaint satisfied Dudenhoeffer’s requirements because when “the federal securities laws require disclosure of material information,” it is “quite plausible” that removing the Amgen Common Stock Fund “from the list of investment options” would not “caus[e] undue harm to the plan participants.”
The Supreme Court, however, disagreed with the Ninth Circuit’s application of Dudenhoeffer. In the per curiam opinion, the Court held that the Ninth Circuit failed to properly evaluate the employees’ remanded 2007 complaint, stating that the Ninth Circuit failed to assess whether the complaint has plausibly alleged that a prudent fiduciary in the same position “could not have concluded” that the alternative action “would do more harm than good.” The Court determined that although removing the Amgen Common Stock Fund from the list of investment options was an alternative action that could plausibly have satisfied Dudenhoeffer’s standard, the allegations supporting that proposition must appear in the stockholders’ complaint.
In reversing the Ninth Circuit again, the Supreme Court concluded that the employees are the masters of their complaint, and left it to the district court to decide whether the Amgen employees may amend the complaint to adequately plead a claim for the breach of the duty of prudence.
The Court’s decision in Amgen—an unusual, four-page unsigned decision issued without oral argument—provides further evidence that the Supreme Court intended to institute a much stricter standard for plaintiffs to satisfy when pleading a “stock drop” complaint based upon insider information. The Court’s “more harm than good” pleading standard for these types of class actions may well end up being a very difficult hurdle for plaintiffs to overcome when challenging losses in employer stock investment options in both ESOPs and 401(k) plans.