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(Article from Securities Law Alert, October 2016) 

For more information, please visit the Securities Law Alert Resource Center

On September 26, 2016, the Fifth Circuit held the Southern District of Texas applied the wrong pleading standard in determining whether an amended ERISA complaint brought by the beneficiaries of BP’s employee stock ownership plan passed muster under the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014).[1] Whitley v. BP, 2016 WL 5387678 (5th Cir. 2016) (Clement, J.). In Whitley, the Fifth Circuit stated that “[u]nder the Supreme Court’s formulation,” a plaintiff asserting an ERISA breach of the duty of prudence claim based on inside information “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.” The Fifth Circuit determined the district court had instead erroneously considered whether “no prudent fiduciary would have concluded that” the alternative actions “would do more good than harm.”

The District Court Erred in Considering Whether No Prudent Fiduciary Would Have Concluded the Alternative Actions Would Have Done “More Good Than Harm” 

The Fifth Circuit explained that in Fifth Third, the Supreme Court held that in order “[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.” Id. (quoting Fifth Third, 134 S. Ct. 2459).

The Fifth Circuit also noted that in Amgen v. Harris, 136 S. Ct. 758 (2016),[2] the Supreme Court “confirmed” that plaintiffs asserting an ERISA breach of the duty of prudence claim based on inside information must “plausibly allege that no prudent fiduciary could have concluded that the proposed alternative action would do more harm than good.”

In the case on appeal before the Fifth Circuit, however, the Southern District of Texas had evaluated plaintiffs’ proposed amended complaint by considering whether “on the basis of the pleadings alone, . . . no prudent fiduciary would have concluded that [the alternatives] would do more good than harm.” The Fifth Circuit determined that this formulation was “not equivalent” to the Fifth Third standard, and found the district court had “erred” by “alter[ing] the language of Fifth Third  to reach its holding.”

Plaintiffs’ Amended Allegations Did Not Meet the Fifth Third Standard 

Turning to the allegations of plaintiffs’ amended complaint, the Fifth Circuit explained that plaintiffs “theorize[d] that BP stock was overpriced because BP had a greater risk exposure to potential accidents than was known to the market.” The Fifth Circuit found that it did “not seem reasonable to say that a prudent fiduciary at that time could not have concluded that (1) disclosure of such information to the public or (2) freezing trades of BP stock—both of which would likely lower the stock price—would do more harm than good.” To the contrary, the Fifth Circuit determined that “a prudent fiduciary could very easily  conclude that such actions would do more harm than good.”

The Fifth Circuit deemed plaintiffs’ amended complaint insufficient to meet the Fifth Third standard, and held “the district court [had] erred in granting [plaintiffs’] motion to amend.”