The U.S. Supreme Court's recent decision in Amgen, Inc. v. Harris1 makes clear that the Court's heightened pleading standard applies to claims that a fiduciary of a retirement plan that has investments in employer stock should have acted on inside information. This decision is good news for plan sponsors, as the new standard may make it easier to obtain dismissals of such claims.
Background
In Fifth Third Bancorp v. Dudenhoeffer,2 the Supreme Court held that ERISA fiduciaries who invest an employee stock ownership plan's assets in employer stock are not entitled to a presumption that they acted prudently in doing so (often referred to as the "Moench presumption"). The Supreme Court noted the potential for conflict between fiduciary duties and securities law when fiduciaries are alleged to have imprudently failed to act on inside information that the fiduciaries had about the value of the employer's stock. The Supreme Court held that in such a situation, a plaintiff must plausibly allege an alternative action that could have been taken that would have been consistent with the securities laws and that a prudent fiduciary would not have viewed as more likely to harm the plan than to help it, and lower courts should consider whether the complaint has plausibly alleged that a prudent fiduciary could not have concluded that stopping purchases (which the market might take as a sign that insider fiduciaries viewed the employer's stock as a bad investment) or publicly disclosing negative information would do more harm than good by causing a drop in the stock price and in the value of the stock already held by the plan. Please see our previous WSGR Alert on Dudenhoeffer for a more detailed analysis of that case.
Procedural History
Amgen Inc. and its subsidiary maintained employee stock ownership plans that offered Amgen common stock as one of the investment choices available to the plans' participants. Due to safety concerns about one of Amgen's products, Amgen's stock lost approximately 33 percent of its value over a one-and-a-half year period. Former employees who had participated in the plans filed a class action lawsuit in U.S. district court alleging the plans' fiduciaries had breached their fiduciary duty of prudence under ERISA by permitting the plans to continue to offer Amgen stock as an investment option under the plans because they had inside knowledge of the safety concerns and knew or should have known that the price of Amgen stock was artificially inflated. The district court held that the fiduciaries were entitled to a presumption of prudence and granted their motion to dismiss.
In Harris v. Amgen, Inc., 738 F.3d 1026 (9th Cir. 2013) (Amgen I), the Ninth Circuit reversed the district court and held that the presumption of prudence did not apply because the terms of the plans did not require or encourage the fiduciaries to invest primarily in Amgen stock. The plans' fiduciaries appealed to the Supreme Court.
While that appeal was pending, the Supreme Court issued its decision in Dudenhoeffer. In light of Dudenhoeffer, the Supreme Court vacated the Ninth Circuit's decision in Amgen I.3
Decision
In Harris v. Amgen, Inc., 788 F.3d 916 (9th Cir. 2015) (Amgen II), the Ninth Circuit again reversed the district court's dismissal. The Ninth Circuit explained that its opinion in Amgen I had already considered the standards for ERISA fiduciary liability laid out by the Supreme Court in Dudenhoeffer and that the complaint satisfied those standards because it was quite plausible that removing the Amgen common stock as an investment option would not cause undue harm to the plans' participants.
In a per curiam opinion, the Supreme Court disagreed and held that the Ninth Circuit's decision in Amgen II failed to properly evaluate the complaint in light of Dudenhoeffer. The Supreme Court stated that while the Ninth Circuit's proposition that removing the Amgen stock from the list of investment options was an alternative action that plausibly could have satisfied Dudenhoeffer's standards may be true, the facts and allegations supporting that proposition should appear in the complaint. The Supreme Court remanded the case for further proceedings and left it to the district court to determine whether to allow the complaint to be amended to meet the pleading standards provided in Dudenhoeffer.
Implications
The Supreme Court's reversal of Amgen II confirms that Dudenhoeffer set a heightened pleading standard requiring the complaint itself to plausibly allege an alternative action that the fiduciary could have taken (1) that would not have violated securities law and (2) that a prudent fiduciary could not have concluded would do more harm than good. As we noted in our prior Dudenhoeffer alert, the Supreme Court's decision in Dudenhoeffer is favorable to plan sponsors because the new standard likely will be difficult for plaintiffs to meet. The subsequent proceedings in Amgen, Inc. v. Harris and future decisions in other ERISA stock-drop cases will help determine how difficult it will be for plaintiffs to actually meet the Dudenhoeffer pleading requirements.
