The Supreme Court heard arguments yesterday in Retirement Plans Committee of IBM v. Jander, an ERISA case challenging the prudence of fiduciary decisions with respect to an employee stock ownership plan (ESOP). The Court granted certiorari to review whether the Second Circuit correctly applied the Court’s “more harm than good” standard set forth in Fifth Third Bancorp. v. Dudenhoeffer to a claim that fiduciaries, who were corporate insiders with information that the company stock was overvalued, should have made a corrective disclosure before allowing the plan to make continuing investments in that stock.
Of the three ERISA cases that Court is looking at this term, Jander is the most confounding and the argument yesterday did little to clear things up. This is mostly because the case concerns the meaning and application of Dudenhoeffer, a decision that attempted to describe pleading standards in the hazy terrain where corporate securities obligations end and ERISA fiduciary duties begin. But the fact that the Petitioners (IBM plan fiduciaries), the government and the plan participant all proposed different standards, only one of which was based on Dudenhoeffer, added to the confusion.
Several Justices expressed some concern that the petitioner’s broadest argument – that corporate insiders who are fiduciaries have no ERISA duties when they learn of problems with the company stock – and the government’s argument that almost any disclosure not required under securities law would be inconsistent with that regime, would require them to scrap Dudenhoeffer. Perhaps most interestingly, Justice Gorsuch noted that corporate insiders don’t have to serve as fiduciaries and thus the problem presented in the case was, to some extent, self-created. But he also questioned whether the securities laws might not be the most logical place to look when considering what actions a fiduciary with insider information should take to protect ESOPs.
Because the broadest arguments were not presented in the petition for certiorari and were not really argued below, and because Dudenhoeffer’s adoption of a normal prudence standard for ESOP fiduciaries has the virtue of being consistent with the statutory language, I predict that the Court will not abandon Dudenhoeffer. Whether this means the Court will affirm the Second Circuit’s decision allowing the suit to go forward is harder to say and oddly enough was not the focus of the argument. And whether the Supreme Court’s decision is likely to do more harm than good is also too close to call.
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