A long-running 401(k) plan stock-drop case that could set a new standard on where the line between the obligations of corporate officials and ERISA plan fiduciaries has been remanded—again—to a lower court.
The U.S. Supreme Court in January 2020 declined to address arguments raised by IBM defendants that involved federal securities law and instead remanded the case back to the 2nd U.S. Circuit Court of Appeals. That court has now done so (Jander v. Ret. Plans Comm. of IBM, 2d Cir., No. 17-3518, 6/22/20)—and concluded that it doesn’t see anything that requires a reconsideration of its original decision. “To the extent that the arguments were previously considered, we will not revisit them. To the extent that they were not properly raised, they have been forfeited, and we decline to entertain them,” wrote the three-judge panel of Chief Judge Robert A. Katzmann and Circuit Judges Robert D Sack and Reena Raggi, citing Norton v. Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998), as they did their own remand for reconsideration back to the district court for further proceedings consistent with its original opinion.
A year ago, the Supreme Court granted the IBM defendants’ petition for certiorari (Ret. Plans Comm. of IBM v. Jander, 139 S. Ct. 2667 (2019)), which presented the question whether a plaintiff can state a duty-of-prudence claim based on “generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” However, in January, the Supreme Court in its opinion explained that defendants’ and the government’s post-certiorari arguments primarily addressed matters that fell beyond the question presented and that had not been raised previously. As such, the high court sent the case back to the 2nd Circuit so that it could “have an opportunity to decide whether to entertain these arguments in the first instance,” and take action as it deems appropriate.
‘Second’ Cite
On remand, the 2nd Circuit invited the parties, as well as the federal government and other amici, to submit supplemental briefs regarding the appropriate disposition of the appeal, including whether the court should consider any arguments not previously raised before the court. In fact, the SEC and Labor Department resubmitted their briefs to the Supreme Court, arguing, in sum, that, “absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such a disclosure.”
But after reviewing the submissions, the 2nd Circuit reinstated it original judgment, reversing the district court’s granting of defendants’ motion to dismiss, noting that the arguments raised in the supplemental briefs either were previously considered by the court or were not properly raised.
The Original Claims
In the original case (Jander v. Ret. Plans Comm. of IBM), participants in IBM’s employee stock option plan alleged that the plan’s fiduciaries breached their duty of prudence under ERISA by failing to prudently and loyally manage the plan’s assets and failing to adequately monitor the plan’s fiduciaries. Specifically, they argued that once the defendants learned that IBM’s stock price was artificially inflated, they should have either disclosed the truth about the value or issued new investment guidelines temporarily freezing further investments in IBM stock by the plan.
The district court granted the defendants’ motion to dismiss, finding that the plaintiffs failed to prove that disclosure would have cleared the “more harm than good” standard. The U.S. District Court for the Southern District of New York held that the plaintiffs failed to establish that the defendants were de facto fiduciaries, and went on to apply the standards in the U.S. Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer. Under the Fifth Third standard, plaintiffs were required to “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.”
The 2nd Circuit, however, in December 2018 reversed and remanded the case, concluding that the plaintiffs had plausibly alleged facts showing that a prudent ERISA fiduciary “could not have concluded” that a corrective disclosure of an allegedly overvalued IBM business would have done “more harm than good to the fund.” And, just to bring this whole thing full circle, that remand was appealed to the Supreme Court.
Next Steps
The parties now get a second chance before the Southern District. Whether that reconsideration through the filter provided by the appellate court decision will warrant a reconsideration remains to be seen.
