June 05, 2019

IBM workers who alleged the overseers of their employee stock ownership plan let them invest in overvalued company stock may need to brace for a reversal of the Second Circuit’s revival of their suit now that the nation’s highest court has agreed to review the case.

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While a decision backing the Second Circuit's finding could breathe new life into those cases, which haven't fared well since the Supreme Court’s 2014 decision in Fifth Third Bancorp. v. Dudenhoeffer, Cohen Milstein Sellers & Toll PLLC's employee benefits group Chair Karen Handorf is doubtful the high court granted the committee's petition on Monday with that intention.

“Optimistically, I would like to believe that the Supreme Court was going to take it and clarify that you actually can plead such a case, I just don’t think that’s what they’re going to do,” Handorf told Law360.

At the center of the suit is the "more harm than good" pleading standard that was established in the Supreme Court’s Fifth Third Bancorp ruling. In that decision, the high court held that ESOP participants could only allege their plan’s fiduciaries breached their duty of prudence based on inside information by demonstrating there was a legal alternative action available that the fiduciaries could not have concluded would do more harm than good to the plan.

The creation of the “more harm than good” standard has made it exceedingly difficult for suits against ESOPs claiming a company's stock price was artificially inflated to make it past the motion-to-dismiss stage. But that changed in December 2018 when the Second Circuit revived the IBM workers’ suit alleging the company flouted ERISA by letting them invest their retirement savings in its stock while knowing that its microchip division was losing $700 million per year.

The appeals court found that the workers had satisfied the pleading burden established in Fifth Third Bancorp by pointing to alternatives their fiduciary could have taken, such as notifying them about the microelectronic business’s losses or freezing company stock from further investment.

For Handorf, the ruling came as a bit of a surprise, she said.

“I think most people had kind of given up on employer stock cases and then all of a sudden they seemed to have new life,” Handorf said.

If the Supreme Court reverses that decision, Handorf said, it would be hard to imagine what complaint could meet the “more harm than good” standard. And if a plaintiff can’t plead a fiduciary breach claim that could ever survive a motion to dismiss, then no one would bring cases and fiduciaries would be free to do whatever they wished, Handorf contended.

The full article can be accessed here.