United States: Does Jander Signal The Liberalization Of Pleading Standards In Stock-Drop Cases? Signs Point To No

The Second Circuit sent shock waves through the community of ERISA stock-drop practitioners late last year in Jander v. Retirement Plans Committee of IBM¹ by finding plan participants had plausibly alleged a breach of duty of prudence claim against plan fiduciaries.² Jander is the only appellate court decision to have found such a claim plausibly pled since the Supreme Court's decisions in Fifth Third Bancorp v. Dudenhoeffer³ and Amgen Inc. v. Harris⁴ significantly raised the pleading bar for plaintiffs. It thus raised the prospect that the Second Circuit was signaling the liberalization of pleading standards in stock-drop cases (at least in the Second Circuit), despite the long line of cases finding stock-drop plaintiffs had failed to meet their pleading burden under Dudenhoeffer.

However, the Supreme Court recently granted certiorari on Jander, so litigants may soon have more clarity on whether the Second Circuit itself properly applied the Dudenhoeffer standard.

Recapping Dudenhoeffer, Amgen & Jander

"Stock-drop" lawsuits involve 401(k) plans, employee stock ownership plans ("ESOPs"), or similar plans that include employer stock as an investment option. In the event of a stock price drop, plan participants may allege the plan fiduciaries breached their duty of prudence under ERISA by failing to remove the stock from the plan or to take other corrective action, such as disclosing corrective information about problems with the company. These often are companion cases to securities litigation.

In Dudenhoeffer, the Supreme Court held that when a breach of duty of prudence claim is based on inside information—i.e., information known to the fiduciaries but not to the public—"a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it."⁵ This holding derives from the notion that an ERISA fiduciary's responsibility is to the plan participants—not the public—and it is thus reasonable for a fiduciary to decide not to act, unless no reasonable fiduciary could conclude that acting would do more harm to the participants than good. For example, unless plan participants make plausible, non-conclusory allegations in a complaint that a proposed alternative action—such as proactively disclosing problems with the company not previously known to the public—would not have harmed a stock's value more than helped it, a complaint fails to state a claim for breach of the duty of prudence.⁶

Amgen amplified this principle, holding that a complaint must include sufficient facts and allegations supporting the proposition of a breach of fiduciary duty to survive a motion to dismiss.⁷ It was not enough to plead the conclusion that an alternative action could plausibly have satisfied Dudenhoeffer's standards.⁸ Rather, the "facts and allegations supporting that proposition should appear in the stockholders' complaint."⁹

The pleading standard set by Dudenhoeffer and Amgen has been variously described as "strenuous,"¹⁰ "very tough," "highly exacting," and "incredibly difficult to satisfy."¹¹ Unsurprisingly, the vast majority of ERISA duty of prudence claims brought since Dudenhoeffer have foundered on the pleading requirement.¹²

But not all of them.

In Jander, the Second Circuit revived a stock-drop case, finding that the plaintiffs had plausibly alleged a claim for breach of the duty of prudence. The Jander plaintiffs alleged that the plan fiduciaries knew the company's market price was artificially inflated due to undisclosed problems with a subsidiary, which was eventually sold. Plaintiffs alleged that when the plan fiduciaries learned the stock price was artificially inflated, they should have either made corrective disclosures to plan participants about the subsidiary's "true value," or frozen investments in the company's stock. The complaint also alleged that disclosure of the issues with the poorly performing subsidiary was inevitable, because the company intended to sell the subsidiary, at which time the poor performance would have to be publicly disclosed.

In finding that the Jander plaintiffs had plausibly alleged a breach of the duty of prudence, the Second Circuit found allegations of "inevitable disclosure" to be "particularly important," reasoning that "when a drop in the value of the stock already held by the fund is inevitable, it is far more plausible" that failure to disclose would do more harm than good, and that no prudent fiduciary would fail to promptly disclose.¹³

Thus, if it is upheld, Jander would establish an "inevitable disclosure" road map by which plaintiffs could allege a duty of prudence claim.

The Second Circuit Affirms Dismissal of a Stock-Drop Case in O'Day v. Chatila

While the Second Circuit found the allegations in Jander to be plausibly pled, it recently had the opportunity to evaluate the sufficiency of stock-drop allegations in a case that did not involve inevitable disclosure, in O'Day v. Chatila, No. 18-2621-CV, 2019 WL 2404660 (2d Cir. June 7, 2019), and again found them to be deficient.

The plaintiffs in O'Day alleged that the plan defendants had breached their duty of prudence by continuing to offer company shares as an investment option despite their access to public and non-public information regarding the company's dire financial straits. In a short summary order, the Second Circuit affirmed the dismissal of the O'Day plaintiffs' claims, holding that they had not plausibly alleged their claims.¹⁴

In so doing, the court expressly distinguished Jander on two grounds: (1) in Jander, "it was inevitable that the overvaluation would be disclosed"; and (2) the Jander plaintiffs had identified studies showing that "early disclosure of fraud would soften the reputational damage" of a later disclosure.¹⁵ In contrast, O'Day presented no similar or analogous allegations. The Second Circuit then tied O'Day back to an earlier Second Circuit decision affirming dismissal of stock-drop claims that did not involve allegations of inevitable disclosure, Rinehart v. Lehman Bros. Holdings,¹⁶ finding O'Day to be much more analogous to Rinehart than the alleged facts of Jander.¹⁷

Thus, in its first opportunity to evaluate the sufficiency of duty of prudence claims after Jander, the court found a complaint for which there was no "inevitable disclosure" to be deficient.

The Supreme Court Takes Up Jander

On June 3, 2019, the U.S. Supreme Court granted certiorari in Jander, representing the Supreme Court's first opportunity to opine on the pleading sufficiency of a duty of prudence claim under ERISA since Amgen. Thus, the Supreme Court will decide the important question of whether "inevitable disclosure" is a sufficient allegation to overcome the high pleading bar set by Duddenhoffer and Amgen.

In addition to taking comfort in the fact that the Second Circuit indicated in O'Day that Jander is to be narrowly construed, stock-drop practitioners should soon also know¹⁸ whether plaintiffs in stock-drop cases may survive motions to dismiss where they plausibly plead inevitable disclosure.

Footnotes

1 Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620 (2d Cir. 2018), cert. granted, No. 18-1165, 2019 WL 1100213 (U.S. June 3, 2019).

2 910 F. 3d 620 (2d Cir. 2018).

3 134 S. Ct. 2459 (2014).

4 136 S. Ct. 758 (2016).

5 Dudenhoeffer, 134 S. Ct. at 2472.

6 See also Whitley v. BP, P.L.C., 838 F.3d 523, 529 (5th Cir. 2016) ("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." ) (emphasis in original).

7 Amgen Inc., 136 S. Ct. at 760.

8 Id.

9 Id. at 760.

10 In re SunEdison, Inc. ERISA Litig., No. 16-md-2742 (PKC), 16-mc-2744 (PKC), 2018 WL 3733946, at *6-*8 (S.D.N.Y. Aug. 6, 2018).

11 Dormani v. Target Corp., No. 17-CV-4049 (JNE/SER), 2018 WL 3014126, at *4 (D. Minn. June 15, 2018) (collecting authorities).

12 Price v. Strianese, No. 17 Civ. 652 (VEC), 2017 WL 4466614, at *5 (S.D.N.Y. Oct. 4. 2017).

13 Jander, 910 F.3d at 630.

14 See O'Day v. Chatila, No. 18-2621-CV, 2019 WL 2404660 (2d Cir. June 7, 2019).

15 Id. at *1.

16 817 F.3d 56, 68 (2d Cir. 2016).

17 Id. ("This case is therefore quite different from Jander and much closer to Rinehart, in which we addressed allegations that a prudent fiduciary should have divested or stopped purchasing stock and held that a prudent fiduciary could have concluded that such an action would have done more harm than good.")

18 Jander is expected to be heard by the Court in its 2019-2020 term.

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