Opinion analysis: Justices punt on liability of insiders for mismanagement of pension plans that invest in employer stock
on Jan 14, 2020 at 3:47 pm
My analysis of the November argument in Retirement Plans Committee of IBM v. Jander suggested that the justices were not yet settled on a consensus resolution to this case. What we learned this morning is that they would rather let the court of appeals take another look at the matter than resolve it directly.
Jander raises some crucial questions about employee-benefit plans governed by the Employee Retirement Income Security Act of 1974, so this case (or one like it) well might be back on the Supreme Court’s docket in the years to come. The basic problem involves the fiduciaries of pension plans that invest in employer stock. Those fiduciaries traditionally have been insiders (usually major executives) of the employers. In their executive capacity, they are likely to learn inside information about adverse (or positive) events that could affect the value of the employer’s stock. When that information is adverse, it places those officers in a conflict. On the one hand, as fiduciaries for the beneficiaries of the pension plan, they are supposed to be managing the assets of the pension plan exclusively for the benefit of the employees. On the other hand, as insiders of the company, they well might have personal interests in slowing disclosure of adverse information. Laid on top of those considerations is the obligation eventually to disclose that information to the public markets under the securities laws.
The Supreme Court’s most important case on the topic is the 2014 decision in Fifth Third Bancorp v. Dudenhoeffer. That decision both underscored the vigor of the fiduciary duty of the executives managing the pension plan and at the same time emphasized that this duty could not obligate the plan fiduciaries to take any action violating the securities laws. Dudenhoeffer included a substantial discussion of whether fiduciaries could be held liable under ERISA if they continued purchasing employer stock despite the adverse information. Among other things, the court noted that a decision to stop purchasing shares might harm fiduciaries by causing an immediate drop in the value of the stock already held by the plan. Emphasizing that it had not received any input from the Securities and Exchange Commission (which might “well be relevant” to the matter), the Dudenhoeffer court stated that the plan fiduciaries could be held liable under ERISA only if they “could not have concluded that stopping purchases … would do more harm than good.”
In Jander, the Supreme Court agreed to review a decision of the U.S. Court of Appeals for the 2nd Circuit holding that employees had satisfied the Dudenhoeffer standard by making allegations based on empirical research tending to establish that employees generally will suffer smaller losses if adverse information is disclosed promptly than if disclosure is delayed. At the oral argument, several of the justices seemed to think that those allegations readily satisfied the Dudenhoeffer standard.
For the most part, though, the fiduciaries (supported by the government) did not challenge that question, but rather argued that the decision of the lower court was wrong for separate reasons. The executives argued that the Supreme Court should adopt a bright-line rule under which ERISA never could obligate fiduciaries to use insider information. The government argued that ERISA should not be interpreted to impose any separate duty of disclosure on plan fiduciaries, reasoning that the securities laws provide a comprehensive framework for requiring the disclosure of material information about public companies. Either of those arguments would justify dismissal of the employees’ claims without regard to the question on which the justices granted review. The employees, predictably, argued that the justices should ignore those arguments because they had not been presented to the court of appeals.
This morning’s decision resolved Jander in a brief per curiam opinion, sending the new questions back to the court of appeals. The court explained that it was unwilling to address those new questions, but suggested that the court of appeals should have an “opportunity to decide … in the first instance” whether it is too late to assess them. The court did repeat the passage quoted above from Dudenhoeffer about the likely relevance of the SEC’s views (now available to the courts for the first time), but it went no further than that in advising the court of appeals whether it should entertain the new arguments, much less whether those arguments are meritorious.
As I suggested above, the non-decision in Jander is not likely to be the last word of the justices on the topic. But it probably will be the last word for this term.