By: Mark Casciari
Synopsis: ERISA stock-drop litigation has diminished in recent years due to the Supreme Court’s Dudenhoeffer decision (and a rising stock market). Now, the Court will have another chance to weigh in on whether federal ERISA litigation in this space should breathe new signs of life.
There is a trend-line in recent Supreme Court decisions limiting federal court jurisdiction before a plaintiff ever enters the world of expansive and expensive discovery. This trend-line is a great assist to all federal court defendants, including ERISA defendants. Key decisions to note are Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Spokeo, Inc. v. Robbins, 136 S. Ct. 1540 (2016). As to Twombly’s “plausibility” precondition to discovery, see generally here. As to Spokeo’s “concrete injury” precondition to discovery, see generally here.
The Supreme Court has just accepted certiorari in Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2d Cr. 2018). In Jander, ESOP plan participants claimed that the ERISA plan fiduciaries knew but failed to disclose that IBM’s microelectronics division (and thus IBM’s stock) was overvalued. The district court found that the plaintiffs did not plausibly plead a violation of the ERISA fiduciary duty of prudence. The Court of Appeals for the Second Circuit reversed.
The Second Circuit ruled that the following allegations equated to plausibility: (i) the fiduciaries knew that IBM stock was artificially inflated by virtue of the impairment of a business unit and its associated accounting violations, (ii) the fiduciaries had the power to disclose the truth to SEC filing recipients and to plan participants, (iii) the failure to disclose long-term investment prospects was harmful because uncorrected fraud causes greater damages the longer the fraud continues, (iv) correcting the fraud would reduce the stock price only by the amount of the artificial inflation, and (v) the fiduciaries knew that disclosure of the truth was inevitable. The Second Circuit was not dissuaded by the fact that the district court dismissed a related securities fraud claim that the plaintiffs did not appeal.
The petition for certiorari accepted by the Supreme Court presents this issue: Can the Dudenhoeffer standard that a plaintiff must “plausibly allege that a prudent fiduciary in the defendant’s position could not have concluded that [an alternative action] would do more harm than good to the fund,” be satisfied by “generalized allegations that the harm of inevitable disclosure of an alleged fraud generally increases over time.”
Cutting through the legal niceties, the issue boils down to the level of detail required in a federal complaint to open the discovery door. Entering that door is of utmost significance to plaintiffs because discovery is so expensive to defendants, even after taking proportionality preconditions into account. Many large cases that find themselves stuck in discovery settle without any adjudication on the merits.
The forthcoming Jander decision will advise ERISA litigants whether the trend towards closing the discovery door will continue. A Court majority seems disinclined to loosen pleading standards in the hyper-partisan political culture now enveloping the country. Should the Court reverse the Second Circuit, moreover, ERISA plaintiffs may find it tougher to assert fiduciary breach claims in contexts other than the stock-drop context, in the absence of inculpatory information uncovered outside discovery.