Employee Stock Ownership Plans at Issue
CHICAGO – (August 14, 2019)— DRI – The Voice of the Defense Bar has filed an amicus brief with the Supreme Court in support of Retirement Plans Committee of IBM in the case of Retirement Plans Committee of IBM, et al. v. Jander, et al. The brief was filed by DRI’s Center for Law and Public Policy.
Employee stock ownership plans, or “ESOPs,” are a subset of congressionally preferred plans that enable employees to invest primarily in their employers’ stock. Such plans are exempt from ERISA’s diversification requirements and can be vulnerable to litigation if the employer’s stock drops. This is especially true where the plan fiduciaries are also corporate insiders who were privy to material non-public information affecting the stock’s value.
In Retirement Plans Committee of IBM, et al. v. Jander, et al., the Supreme Court will decide whether the pleading standard for ESOP stock-drop claims established by Fifth Third Bancorp v. Dudenhoeffer, requiring plaintiffs to “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,” can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.
In a decision that creates a split with other circuits that have considered this issue, the Second Circuit held that such allegations were sufficient to survive a motion to dismiss. The defendants petitioned for a writ of certiorari, which the Supreme Court granted.
The outcome of the case will have significant ramifications for ESOPs, especially for ESOP fiduciaries who are also corporate insiders. DRI’s brief argues that the case presents the opportunity for the Court to set forth the elements of an ESOP stock-drop case against insider fiduciaries in light of the pleading standard established by Dudenhoeffer. While Dudenhoeffer established the pleading standard for such claims, it did not clarify the underlying elements of an ESOP stock-drop case. Without a clear identification of these elements, the Dudenhoeffer pleading standard only goes so far.
DRI’s brief proposes five essential elements for ESOP stock-drop suits against insider fiduciaries: (1) the defendant was acting in a fiduciary capacity; (2) the defendant was governed by a specific fiduciary duty; (3) the defendant breached that specific fiduciary duty; (4) the breach caused loss; and (5) the plaintiff(s) suffered economic loss or damage. These proposed elements follow from the statutory text, prior Court decisions, and the common law of trusts. The brief further argues that applying these elements, plaintiffs fell far short of pleading a plausible claim for breach of fiduciary duty, requiring reversal of the Second Circuit’s decision.
Brief co-authors Michael R. Pennington of Bradley Arant Boult Cummings LLP of Birmingham, AL and Scott Burnett Smith and Caroline D. Spore of Bradley Arant Boult Cummings LLP of Huntsville, AL are available for interview or expert comment through the contact information listed above. For the full text of the amicus brief, click here.
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