By Pension and Benefits Editorial Staff
In a per curiam opinion, the U.S. Supreme Court vacated and remanded a petition asking for clarification of Fifth Third Bancorp v. Dudenhoeffer’s “more harm than good” pleading standard. According to the Court, the merits briefing in Retirement Plans Committee of IBM v. Jander was occupied by two arguments that were not addressed by the lower courts. Accordingly, the case was remanded, leaving it to the Second Circuit to determine the merits of the arguments raised in the briefs. Justice Kagan, joined by Justice Ginsburg, issued a concurring opinion, as did Justice Gorsuch.
New arguments raised. The petition (No. 18-1165), brought by employee stock ownership plan (ESOP) fiduciaries, asked the Supreme Court to resolve a circuit split over the pleading requirements to state a claim for breach of the duty of prudence as set forth in Fifth Third Bancorp v. Dudenhoeffer. Specifically, the petition asked whether Dudenhoeffer’s “more harm than good” pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time. In their Supreme Court briefing on the merits, however, both the petitioners (the fiduciaries of the ESOP) and the government (the Department of Labor and Securities and Exchange Commission (SEC)) focused on other matters.
The fiduciaries argued that ESOP fiduciaries have no duty under ERISA to act on inside information. The government, for its part, maintained that an ERISA-based duty to disclose inside information not otherwise required to be disclosed by the securities laws would conflict with the objectives of the insider trading and corporate disclosure requirements imposed by the federal securities laws.
Because these arguments had not been raised before the Second Circuit (Jander v. Retirement Plans Committee of IBM), the court declined to address them, believing that the lower court should be given the chance to entertain the arguments in the first instance. To that end, the judgment below was vacated and the case remanded to the Second Circuit to determine the merits of the arguments and take “such action as it deems appropriate.”
Concurrences. Justice Kagan, joined by Justice Ginsburg, concurred, adding two notes. She first pointed out that the appellate court could, under its rules of waiver or forfeiture, not consider the new arguments at all. Second, if the court addresses the merits of the arguments, Justice Kagan is unable to see how either is consistent with Dudenhoeffer. According to Justice Kagan, contrary to the fiduciaries’ argument, Dudenhoeffer clearly states that an ESOP at times has a duty to act on inside information and sets out exactly what a plaintiff must allege to state a claim for breach of this duty. She also takes issue with the government’s position, explaining that a fiduciary may be obligated to take an action not required by the securities laws if that action is “more likely to help than to harm the fund.” The government acknowledged that its approach would wipe out this central aspect of the Dudenhoeffer standard, she noted.
In his concurrence, Justice Gorsuch agreed that remand is the best way to allow the appellate court to address promising arguments that would “prove unavoidable later.” As Justice Gorsuch characterized it, the respondents’ claim is that certain ERISA fiduciaries should have made SEC-regulated disclosures in their capacities as corporate officers. But, he said, to find such a duty would impose an even higher duty on fiduciaries who are also corporate officers.
Gorsuch also does not read Dudenhoeffer as broadly as does Justice Kagan and does not believe that remand is a “wasted gesture.” According to him, Dudenhoeffer does not address the argument presented here: whether ERISA plaintiffs may hold fiduciaries liable for alternative actions they could have taken only in a non-fiduciary capacity. Simply put, the Dudenhoeffer court was not asked to rule on this question, so there is no precedent. Justice Kagan, in a footnote, disagreed, stating that absent a conflict with the securities laws, there is no categorical exclusion from the duty to disclose.
Source: Retirement Plans Committee of IBM v. Jander (US Sup Ct).
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