Our final 2016 Update focuses on an issue addressed in our first 2016 Update — “stock drop” litigation arising from employer stock held in a tax-qualified 401(k) and/or savings plan that is subject to the Employee Retirement Income Security Act (“ERISA”). See “Employee Benefits Update: Supreme Court Issues Decisions Addressing Plan’s Subrogation Rights (Again) and Employer Stock in 401(k) Plans Post-Dudenhoeffer.”In this update, we highlight the Fifth Circuit’s September decision in Whitley v. BP, P.L.C., 838 F.3d 523 (5th Cir. 2016), addressing the “more harm than good” pleading standard discussed by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___, 134 S. Ct. 2459 (2014), along with subsequent district court rulings that have followed Whitley. These post-Dudenhoeffer decisions offer good news for plan fiduciaries in that the “more harm than good” pleading standard has been applied as written and establishes a high burden that plaintiffs must overcome at the pleading stage than a standard that may be insurmountable in many cases.
By way of background, BP’s tax-qualified savings plan included the BP Stock Fund among the investment funds available to participants, a fund invested primarily in BP stock. Litigation concerning the fund arose following the explosion of the Deepwater Horizon offshore drilling rig and the resulting decline in BP’s stock price. The plaintiff alleged that plan fiduciaries breached their ERISA fiduciary duties when they allowed the plan to continue to acquire and hold “overvalued” BP stock. The plaintiff contended that the plan fiduciaries had insider information about BP’s business deficiencies, which in part caused the explosion and thus the decline in the BP stock price.
The question on appeal before the Fifth Circuit was whether the district court erred in holding that the plaintiff’s amended complaint stated a plausible claim under the Dudenhoeffer pleading standard. The Fifth Circuit concluded the court had in fact erred and reversed and remanded the case to the lower court.
In Dudenhoeffer, the Supreme Court noted that with respect to publicly-traded stock, an allegation that a fiduciary should have recognized from publicly available information alone that the market was overvaluing or undervaluing the stock is implausible as a general rule in the absence of special circumstances. Turning to claims for breach of ERISA fiduciary duty based on inside information, the Court held that the plaintiff must plausibly allege (1) an alternative action that the defendant fiduciary could have taken that would have been consistent with the securities laws and (2) that a prudent fiduciary in the same circumstances “could not have concluded” that such alternative action would do “more harm than good” to plan participants. Subsequently, in Amgen Inc. v. Harris, 577 U.S. ___, 136 S. Ct. 758 (2016), the Supreme Court confirmed that allegations that a proposed alternative action plausibly, in the mind of the court, would not cause “undue harm” to plan participants were not sufficient, that the language “could not have concluded” must be applied as written, and that the plaintiff’s complaint itself must contain facts and allegations sufficient to support this proposition. Thus, a lower court cannot merely presume that the plaintiff’s proposed alternatives would or could satisfy this standard.
The district court in BP held that the plaintiff plausibly alleged that the defendants had inside information and that there were two alternative actions that the defendants could have taken: (1) freeze, limit, or restrict company stock purchases; or (2) disclose the unfavorable information to the public. Based on the Supreme Court’s instructions in Dudenhoeffer and Amgen, the Fifth Circuit concluded that “the plaintiff bears the significant burden of proposing an alternative course of action so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.” 838 F.3d at 529. The Fifth Circuit stated that, aside from conclusory statements, the plaintiff failed to specifically allege that a prudent fiduciary could not have concluded that the alternatives would do more harm than good, and failed to offer facts that would support such an allegation. To the contrary, the Fifth Circuit concluded that a prudent fiduciary could very easily have concluded that the proposed alternative actions would do more harm than good, and thus the district court failed to follow the Dudenhoeffer standard.
The Fifth Circuit’s BP holding is consistent with the holding in Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56, 68 (2d Cir. 2016), where the Second Circuit held a complaint failed to plausibly allege that a prudent fiduciary “would not have viewed [disclosure of material nonpublic information regarding Lehman or ceasing to buy Lehman stock] as more likely to harm the fund than to help it.”
The Fifth Circuit’s decision has subsequently been followed in two Texas district court cases — Martone v. Whole Foods Market, Inc., 2016 WL 5416543 (W.D. Tex. September 28, 2016) and In re: Idearc Erisa Litigation, 2016 WL 7189981 (N.D. Tex. October 4, 2016). In both cases the district courts held that the plaintiff failed to overcome the “more harm than good” pleading standard and dismissed the complaints. The In re: Idearc Erisa Litigation court held that the plaintiffs failed to plausibly allege an alternative course of action that was consistent with securities laws. In Martone, while the court agreed that the complaint plausibly alleged an alternative course of action that was consistent with securities laws, it held that the plaintiff had “not plausibly alleged an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”
Based on the court holdings issued to date, the “more harm and good” pleading standard sets a high burden for a plaintiff that may be insurmountable in many cases. It is not clear what specific facts a plaintiff could allege that would support the claim that a prudent fiduciary in the same circumstances could not have concluded that the proposed alternative actions would do more harm than good with respect to the plan’s participants. One question is whether there can ever be disclosure of negative news with respect to a company’s stock, or negative actions taken with respect to employer stock fund, that will not contribute to the lowering of the stock price and thereby, in the eyes of a prudent fiduciary, do more harm than good to current participants in the fund. It is a question that we expect will be further addressed in future court decisions.