SCOTUS Rejects Presumption of Prudence Standard in ESOP Cases

In a win for employees, on June 25, 2014 the United States Supreme Court issued its ruling in the highly anticipated case, Fifth Third Bancorp v. Dudenhoeffer, and rejected the presumption of prudence standard in ESOP stock-drop cases. 

For years, federal courts have followed a standard of presumption of prudence in ESOP stock-drop cases and have routinely dismissed such claims without allegations in a complaint that a company’s situation was dire, or that the company was on the brink of collapse.  

In Fifth Third Bancorp v. Dudenhoeffer the Court concluded by unanimous decision that the presumption of prudence could not be supported by the text of ERISA.   In its opinion, the Supreme Court held that there was nothing in ERISA that supported the imposition of a presumption of prudence for ESOPs, and that, with the exception of ERISA’s diversification requirement, the same standard of prudence applies to ESOPs as to all other ERISA plans.

It may be a narrow victory for employees, as the opinion also instructed lower courts to carefully scrutinize such cases.  The Court held that dismissal of meritless claims can be better accomplished through careful scrutiny of a complaint’s allegations, and instructed the Sixth Circuit on remand to apply the pleading standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (“Twombly”), and Ashcroft v. Iqbal, 556 U.S. 662 (2009)(“Iqbal”).  The Court stated that allegations that a fiduciary should have recognized from publicly available information that the market improperly valued the stock are “implausible as a general rule, at least in the absence of special circumstances” that would make reliance on the market’s valuation imprudent.

A copy of the opinion can be found here:

http://www.supremecourt.gov/opinions/13pdf/12-751_d18e.pdf

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