Supreme Court Vacates Three Circuit Court Decisions, Showing Double-Edged Sword of Fifth Third Decision

The Supreme Court's June 25 ruling in Fifth Third v. Dudenhoeffer ended the presumption of prudence for fiduciaries of ESOPs, but its decisions to remand three related cases shows that its decision will have both pros and cons for ESOPs.

In Rinehart v. Akers, No. 13-830 (July 1, 2014) and Kopp v. Klein, 2014 No. 13-578 (July 1, 2014), the Supreme Court vacated and remanded two cases previously decided in favor of defendants (Lehman Brothers in the Second Circuit and Idearc in the Fifth Circuit). In both cases, the defendants had successfully asserted a presumption of prudence for holding and offering company stock in their retirement plans. Now that that presumption has been voided, lower courts will have to reconsider the cases.

In Amgen Inc. v. Harris, No. 13-888 (June 30, 2014), however, the Court vacated and remanded a case the fiduciaries had lost. The Ninth Circuit had ruled that the fiduciaries were not entitled to the presumption of prudence because the plan did not require employer stock as an option. It also held that statements made in SEC filings and expressly incorporated in summary plan descriptions (SPDs) are fiduciary acts that can give rise to ERISA liability. The plaintiffs had alleged that the fiduciaries provided misleading information to participants and the SEC and should have disclosed what they actually knew about threats to Amgen's stock price. The Fifth Third case made it more difficult for plaintiffs to successfully make such pleadings, and now they case will have to be redecided.

The standards created in Dudenhoeffer are difficult to apply to privately held companies, and its implications are unclear. While some writers expect an increase in litigation among private companies with ESOPs, the majority of lawyers with ESOP expertise suggest that Dudenhoeffer will make it more difficult for plaintiffs to prove lack of prudence. The NCEO will continue to release comments on the implications of the Dudenhoeffer decision, including the implications for inside ESOP trustees.