Seventh Circuit Court of Appeals Pillories ESOPs

In Summers v. State Street Bank & Trust Co., No. 05-4005 (7th. Cir., June 28, 2006), the U.S. Court of Appeals for the Seventh Circuit upheld a lower court's ruling that State Street Bank did not violate its fiduciary duties by failing to sell UAL (the corporate parent of United Airlines) stock in the ESOP sooner than it ultimately did. The court concluded the plaintiffs did not make a compelling case about when the sale would have occurred; indeed, the court concluded that to make that guess would be to try to outsmart the market.

More significant, however, was Judge Richard Posner's written opinion for the court. Posner is a highly respected and influential jurist, famous for his "law and economics" approach to decisions. His comments on ESOPs were scathing: "The time may have come to rethink the concept of an ESOP, a seemingly inefficient method of wealth accumulation by employees because of the underdiversification to which it conduces." Posner said that there is no reason for taxpayers to encourage employee ownership; if it is a good idea, the market should make it happen. Moreover, he wrote, the idea that the evidence that ownership would improve corporate performance was "weak and makes no theoretical sense."

Of course, these policy comments did not prompt the court to read the law differently, and they are directed more at Congress than other courts. They do, however, provide fodder for critics of employee ownership. The full decision is at the Seventh Circuit's site (search for "Summers").