Supreme Court Oral Arguments on the Presumption of Prudence

In the last email bulletin we reported on the oral arguments in the Dudenhoeffer v. Fifth Third Bank case, during which the Supreme Court heard oral arguments on the ESOP presumption of prudence. The case revolves around the decision of the Sixth Circuit Court not to dismiss a lawsuit over trustees' actions over company stock based the presumption. The decision was at odds with most other circuit courts. More details of those arguments follow.

Justice Scalia opened by saying that he was skeptical that holding stock may be a way to protect retirement interests. Justice Kagan worried that prudent fiduciaries would hold on to stock they knew from inside information to be overvalued even if this causes problems in the short run because the information will come out anyway. Justice Kennedy suggested the presumption of prudence could create a "coach class" trustee. Justice Ginsburg said the statue itself did not hard-wire a presumption of prudence.

But when it came to how to remedy this situation, the Justices were much more skeptical. Justice Breyer pointed out that there is "no rule of trust or ERISA law that you can breach a duty to a beneficiary by failing to use inside information. . . . So what is wrong with just saying that an ESOP fiduciary 'cannot have an obligation to use inside information'?" The Chief Justice said that the duties of an ESOP trustee were seemingly simple: "get up in the morning and... buy some of [his] company's stock." He asked the DOL counsel how can you "say that he has breached a duty of prudence when the people investing in this ought to know that what they're going to get is the company's stock?"

Most of the debated focused on what fiduciaries with inside information should do. Selling the stock could cause problems for participants if it pushed the stock lower; buying it would cause problems because it was overvalued. Justices Sotomayor and Kagan seemed clearly to side with the argument that the presumption should not apply and fiduciaries should use the inside information to make decisions for employee interests, but Justices Roberts, Breyer, and Kennedy seemed perplexed about just how fiduciaries could get out between the rock and hard place of the consequences of actions.

The arguments suggested that there may not be enough support just to retain the presumption of prudence rule at the pleadings stage, but also suggested that the Court might try to find some middle ground. A decision is expected in June.