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(Article from Securities Law Alert, November 2014)

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On October 30, 2014, the Ninth Circuit reversed the dismissal of an ERISA action against Amgen, Inc. for a second time. Harris v. Amgen, Inc. (Amgen III), 2014 WL 5471651 (9th Cir. 2014) (Fletcher, J.). The Ninth Circuit reconsidered its earlier decision in light of the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014), which held that employee stock ownership plan (“ESOP”) fiduciaries are not entitled to any “special presumption” of prudence under the Employee Retirement Income Security Act (“ERISA”) when they invest plan assets in employer stock.[1] The Ninth Circuit explained that in its first decision, it had “assumed” “certain standards for ERISA liability” later “articulated … in Fifth Third” and had found that no presumption of prudence applied. 

On reconsideration, the Ninth Circuit again deemed plaintiffs’ allegations sufficient to state breach of fiduciary duty claims under ERISA. The Ninth Circuit found that defendants, certain of whom had allegedly made material misrepresentations and omissions in violation of the federal securities laws, could have removed the Amgen Common Stock Fund as an investment option under two Amgen-sponsored pension plans (the “plans”) without violating the insider trading prohibitions of the federal securities laws. The court further ruled that ERISA fiduciaries are obligated to disclose “material information” concerning employer stock to plan participants “who must decide whether to invest in such stock.” 

Background

In 2007, participants in the plans brought suit in the Central District of California against Amgen, Amgen Manufacturing Limited, Amgen’s board of directors, and the Fiduciary Committees of the plans (collectively, “the Amgen defendants”). Plaintiffs contended that the Amgen defendants had breached their fiduciary duties under ERISA by continuing to offer Amgen stock as an investment option under the plans through the Amgen Common Stock Fund, even though the Amgen defendants allegedly knew or should have known that the price of Amgen stock was artificially inflated because of material misrepresentations and omissions by company officers (including certain defendants), as well as improper off-label marketing of Amgen pharmaceuticals. 

On March 2, 2010, the district court found that plaintiffs had failed to allege sufficient facts to rebut the presumption of prudence established in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).  Harris v. Amgen, Inc., 2010 WL 744123 (C.D. Cal. 2010). The Moench court held that an ESOP “fiduciary who invests the assets in employer stock is entitled to a presumption that it acted consistently with ERISA by virtue of that decision.”

Several months after the district court’s decision, the Ninth Circuit in Quan v. Computer Scis. Corp., 623 F.3d 870 (9th Cir. 2010), expressly adopted the Moench presumption. The Quan court found that the Moench presumption “provides a substantial shield to fiduciaries when plan terms require or encourage the fiduciary to invest primarily in employer stock.”

On October 23, 2013, the Ninth Circuit reinstated plaintiffs’ ERISA claims against the Amgen defendants. Harris v. Amgen (Amgen II), 738 F.3d 1026 (9th Cir. 2013) (Fletcher, J.). The court found that the Amgen defendants “were neither required nor encouraged by the terms of the [p]lans to invest in Amgen stock,” and therefore held that, under Quan, they were “not entitled to a presumption of prudence.” The court found that plaintiffs’ allegations were sufficient to state a claim under ERISA’s “normal prudent man standard” of care.

On June 25, 2014, the Supreme Court unanimously held in Fifth Third that ESOP fiduciaries are not entitled to any “special presumption” of prudence under ERISA with respect to their decisions to invest plan assets in employer stock. The Supreme Court subsequently vacated the Ninth Circuit’s decision in Amgen II for reconsideration in light of its decision in Fifth Third.

Ninth Circuit Finds the Amgen Defendants Could Have Removed the Amgen Common Stock Fund as an Investment Option Under the Plans Without Violating Federal Securities Laws

On reconsideration, the Ninth Circuit once again found that plaintiffs had adequately alleged that the Amgen defendants had violated their duty of care under ERISA “by continuing to provide Amgen common stock as an investment alternative when they knew or should have known that the stock was being sold at an artificially inflated price.” Amgen III, 2014 WL 5471651.

Significantly, the Ninth Circuit found it “at least plausible that defendants could have removed the Amgen [Common] Stock Fund from the list of investment options available to the plans without causing undue harm to plan participants.” The court explained that “[r]emoving the Fund as an investment option would not have meant liquidation of the Fund.” Rather, “[i]t would have meant only that while the share price was artificially inflated, plan participants would not have been allowed to invest additional money in the Fund, and that the Fund would therefore not have purchased additional shares at the inflated price.” The court found it “extremely unlikely that this decrease in the number of shares that would otherwise have been purchased, considered alone, would have had an appreciable negative impact on the share price.”

The Ninth Circuit acknowledged that “removing the Amgen Common Stock Fund as an investment option would have sent a negative signal to investors if the fact of the removal had been made public, and that such a signal may have caused a drop in the share price.” However, the court found that under the efficient market hypothesis, “the ultimate decline in price would have been no more than the amount by which the price was artificially inflated.” Moreover, the court reasoned that if the Amgen defendants had removed the Amgen Fund as an investment option under the Plans “as soon as they knew or should have known that Amgen’s share price was artificially inflated, … that action may well have caused [Amgen and company management] to comply with [their] obligations” under the securities laws.

The Ninth Circuit also rejected defendants’ contention that “they could not have removed the Amgen [Common] Stock Fund based on undisclosed alleged adverse material information” without potentially violating the federal securities laws.  The court found that “[t]he central problem in this case is that Amgen officials, many of whom are defendants here, made material misrepresentations and omissions in violation of the federal securities laws.” Given that these individuals were subject to obligations under both the federal securities laws and ERISA, the Ninth Circuit determined that “[c]ompliance with ERISA would not have required defendants to violate [federal securities] laws.” Instead, “compliance with ERISA would likely have resulted in compliance with the securities laws.” The court explained that “[i]f defendants had revealed material information in a timely fashion to the general public (including plan participants), thereby allowing informed plan participants to decide whether to invest in the Amgen Common Stock Fund, they would have simultaneously satisfied their duties under both the securities laws and ERISA.”

“Alternatively,” the Ninth Circuit found that the Amgen defendants would not “have violated the prohibition against insider trading” if they “had made no disclosures but had simply not allowed additional investments in the Fund while the price of Amgen stock was artificially inflated.” The court reasoned that “there is no violation” of the insider trading laws “absent purchase or sale of stock.”

Ninth Circuit Holds That (1) the Amgen Defendants Were Required to Provide Plan Participants with Material Information Concerning Amgen Stock, and (2) Amgen’s SEC Filings Incorporated by Reference into the Summary Plan Descriptions May Be Considered When Evaluating Plaintiffs’ ERISA Claims

The Ninth Circuit further ruled that plaintiffs had adequately alleged that the Amgen defendants had violated ERISA’s duties of loyalty and care “by failing to provide material information to plan participants about investment in the Amgen Common Stock Fund.” 

Notably, the court rejected the Amgen defendants’ contention that they “owe no duty under ERISA to provide material information about Amgen stock to plan participants who must decide whether to invest in such stock.” The Ninth Circuit explained that it has previously clarified that an ERISA “fiduciary has an obligation to convey complete and accurate information material to the beneficiary’s circumstance,” including “alleged material misrepresentations made by fiduciaries to participants regarding the risks attendant to fund investment.” Id. (quoting Quan, 623 F.3d 870).

The Ninth Circuit also deemed meritless defendants’ argument that plaintiffs were required “to show that they [had] relied on defendants’ material omissions and misrepresentations.”  The court found “no reason why ERISA plan participants who invested in a company stock fund whose assets consisted solely of publicly traded common stock should not be able to rely on the fraud-on-the-market theory in the same manner as any other investor in a publicly traded stock.”

Finally, the court determined that the Amgen “defendants’ preparation and distribution of the [Summary Plan Descriptions (the “SPDs”)], including their incorporation of Amgen’s SEC filings by reference, were acts performed in their fiduciary capacities” for ERISA purposes. The court ruled that “statements made in Amgen’s SEC filings and incorporated in the [p]lans’ SPDs may therefore be used under ERISA to show that defendants knew or should have known that the price of Amgen shares was artificially inflated, and to show that plaintiffs presumptively detrimentally relied on defendants’ statements under the fraud on the market theory.” 

The Ninth Circuit underscored that “incorporation by reference is an act performed in a fiduciary capacity.” The court explained that “hold[ing] otherwise would authorize fiduciaries to convey misleading or patently untrue information through documents incorporated by reference, all while safely insulated from ERISA’s governing reach,” and that “[s]uch a result . . . would create a loophole in ERISA large enough to devour all its protections.” Id. (quoting Dudenhoefer v. Fifth Third Bancorp, 692 F.3d 410 (6th Cir. 2012)).

Because the Ninth Circuit found that plaintiffs had sufficiently alleged violations of ERISA’s duties of loyalty and care, the court again reversed the district court’s dismissal and reinstated plaintiffs’ ERISA claims.