(Article from Securities Law Alert, February 2016)
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On January 25, 2016, the Supreme Court reversed for the second time the decision of the Ninth Circuit not to dismiss an ERISA complaint. Amgen v. Harris, 136 S. Ct. 758 (2016) (per curiam) (Amgen III) (reversing Harris v. Amgen, 788 F.3d 916 (9th Cir. 2014) (Amgen II)). Reiterating that Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014),[1] “set[s] forth the standards for stating a claim for breach of the duty of prudence against fiduciaries who manage employee stock ownership plans (ESOPs),” the Supreme Court held the Ninth Circuit had failed to properly apply those standards in evaluating the Amgen complaint. After conducting its own review, the Supreme Court concluded the complaint lacked “sufficient facts and allegations to state a claim.”
Background
In 2007, participants in Amgen-sponsored pension plans (the “Amgen Plans” or the “plans”) brought suit in the Central District of California alleging that the plans’ fiduciaries had breached their duties under ERISA by continuing to offer the Amgen Common Stock Fund as an investment option, even though the fiduciaries allegedly knew or should have known that the price of Amgen stock was artificially inflated.
On March 2, 2010, the district court dismissed plaintiffs’ claims for failure to rebut the presumption of prudence established in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Harris v. Amgen, 2010 WL 744123 (C.D. Cal. 2010). Several years later, in October 2013, the Ninth Circuit reinstated plaintiffs’ ERISA claims. Harris v. Amgen, 738 F.3d 1026 (9th Cir. 2013) (Fletcher, J.) (Amgen I). The Ninth Circuit held that the fiduciaries of the Amgen Plans were “not entitled to a presumption of prudence” because they “were neither required nor encouraged by the terms of the Plans to invest in Amgen stock.” Applying ERISA’s “normal prudent man” standard of care, the Ninth Circuit determined that plaintiffs’ allegations were sufficient to state a claim.
On June 25, 2014, the Supreme Court vacated the Ninth Circuit’s decision in Amgen I and remanded for reconsideration in light of its opinion issued the same day in Fifth Third. In Fifth Third, the Supreme Court held that ESOP fiduciaries are not entitled to any “special presumption” of prudence but are instead “subject to the same duty of prudence that applies to ERISA fiduciaries in general, except that they need not diversify the fund’s assets.” Simultaneously, however, the Court provided pleading guidance to help courts “divide the plausible sheep from the meritless goats.” As relevant here, the Court held that “[t]o state a claim for breach of the duty of prudence on the basis of inside information, 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.”
On remand, the Ninth Circuit once again deemed plaintiffs’ allegations sufficient to state breach of fiduciary duty claims under ERISA. Amgen II, 788 F.3d 916. The Ninth Circuit acknowledged that the Supreme Court in Fifth Third had “articulated certain standards for ERISA liability,” but stated that it had “already assumed those standards” in Amgen I. Applying those standards, the Ninth Circuit determined it was “quite plausible” that defendants could have removed the Amgen Common Stock Fund “from the list of investment options” available through the Amgen Plans “without causing undue harm to plan participants.” Accordingly, the Ninth Circuit held, the Amgen complaint plausibly alleged that the fiduciary defendants had violated their ERISA duty of care “by continuing to provide Amgen common stock as an investment alternative when they knew or should have known,” based on inside information, “that the stock was being sold at an artificially inflated price.”
Defendants petitioned the Supreme Court for certiorari of the Ninth Circuit’s decision in Amgen II. The Court granted certiorari and reversed.
Supreme Court Reverses the Ninth Circuit for Failure to Properly Apply the Pleading Standard in Fifth Third
In its per curiam decision, the Supreme Court explained that Fifth Third recognized that “ESOP fiduciaries confront unique challenges given ‘the potential for conflict’ that arises when fiduciaries are alleged to have imprudently ‘fail[ed] to act on inside information they had about the value of the employer’s stock.’” Amgen III, 136 S. Ct. 758 (quoting Fifth Third, 134 S. Ct. 2459). In light of these challenges, the Supreme Court explained, courts must “consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed that employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund” (quoting Fifth Third, 134 S. Ct. 2459).
Applying this standard, the Supreme Court held the Ninth Circuit had “failed to properly evaluate the complaint.” The Ninth Circuit had found it “quite plausible” that removing the Amgen Common Stock Fund as an investment option under the Amgen Plans would not have resulted in “undue harm to plan participants” (quoting Amgen II, 788 F.3d 916). However, the Ninth Circuit did not “assess whether the complaint . . . ‘plausibly alleged’ that a prudent fiduciary in the same position ‘could not have concluded’” that removing the Amgen Common Stock Fund as an investment option under the plans would have done “more harm than good” (quoting Fifth Third, 134 S. Ct. 2459).
The Supreme Court conducted its own review of the Amgen complaint and determined the complaint lacked “sufficient facts and allegations” to support “[t]he Ninth Circuit’s proposition that removing the Amgen Common Stock Fund from the list of investment options was an alternative action that could plausibly have satisfied Fifth Third’s standards.” The Court therefore reversed the Ninth Circuit’s decision and remanded the action for further proceedings consistent with its opinion. The Court left it to the discretion of the district court to decide whether to permit plaintiffs to amend their complaint “in order to adequately plead a claim for breach of the duty of prudence guided by the standards provided in Fifth Third.”
[1] Please click here to read our prior discussion of the Supreme Court’s decision in Fifth Third.