On January 14, 2020, the Supreme Court issued an opinion in Jander v. IBM, a stock drop case, sending the case back to the Second Circuit for consideration of two questions raised by defendant IBM and the Government in their briefs that had not been considered by the Second Circuit.
The decision is unusual. It is an unsigned per curiam opinion, but it includes two separate and conflicting concurring opinions by Justices Kagan and Ginsburg, on the one hand, and Justice Gorsuch, on the other. The concurring opinions highlight an issue present in most post-Fifth Third Bancorp v. Dudenhoeffer stock drop litigation – whether these disputes should be resolved under the securities laws or there is a separate ERISA cause of action with respect to them.
In this article we review the Supreme Court’s decision.
Background – facts in Jander
Jander is a stock drop case – an ERISA fiduciary claim brought in connection with losses participants sustained when company stock held in the plan lost significant value because of some exogenous event.
Very briefly, in Jander, plaintiffs alleged: (1) that in 2013 “IBM began trying to find buyers for its microelectronics business;” (2) that it “failed to publicly disclose [annual losses in that business of $700 million] and continued to value the business at approximately $2 billion;” (3) that in 2014 it announced the sale of the business in connection with which it took a $4.7 billion pre‐tax charge; and (4) that thereafter “IBM’s stock price declined by more than $12.00 per share.”
In a related securities lawsuit (International Ass’n of Heat & Frost Insulators & Asbestos Workers Local #6 Pension Fund v. International Business Machines Corp.), the lower court found that, while “the investor plaintiffs had ‘plausibly plead[ed] that Microelectronics’ decreased value, combined with its operating losses, may have constituted an impairment indicator under’ Generally Accepted Accounting Principles (‘GAAP’) … the plaintiffs ‘fail[ed] to raise a strong inference that the need to write-down Microelectronics was so apparent to Defendants before the announcement, that a failure to take an earlier write-down amount[ed] to fraud.’”
The Second Circuit held that where a sale of a division and ultimate disclosure of negative information was imminent, plaintiffs could bring an ERISA action against plan fiduciaries for not making earlier disclosure, even though an action based on (more or less) the same facts might not lie under the securities laws.
The law of stock drop cases
In Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court stated that a court’s review of this sort of claim should be informed by the following principles:
(1) A plaintiff cannot sue a fiduciary on the premise that the fiduciary should know, based on public information, that a publicly traded stock is overvalued, absent special circumstances.
(2) A plaintiff cannot state a claim that a fiduciary should have sold stock in a fund, based on private (aka “inside”) information that the stock was overvalued, because to do so would violate insider trading laws.
(3) With respect to a decision to continue to buy stock or not publicly disclose insider information in such circumstances, it’s probably better to consider the conduct of company officials under the securities laws.
(4) In any case, in considering a motion to dismiss (“whether the complaint has plausibly alleged” a breach of ERISA’s prudence rule), a court should consider whether the proposed action (stopping buying stock and/or disclosing non-public information) would do more harm than good.
Since Dudenhoeffer, courts have generally focused on clarifying principles (3) and (4) – reconciling ERISA fiduciary obligations with respect to company stock with securities law disclosure and fraud rules and explicating the “more harm than good” test.
The Supreme Court’s decision
The Supreme Court’s decision sends the case back to the Second Circuit for consideration of two issues that were not considered by the Second Circuit but argued in briefs submitted by IBM and the Government (presenting views of the Securities and Exchange Commission and the Department of Labor). Those arguments were that:
ERISA imposes no duty on a fiduciary to act on inside information.
An ERISA-based duty to disclose inside information not required to be disclosed by the securities laws would conflict with the objectives of securities laws insider trading and corporate disclosure requirements.
As we noted above, the decision was rendered per curiam, which generally means that it was a collective and unsigned decision. But there were two signed concurring opinions – one from Justices Kagan and Ginsburg and one from Justice Gorsuch – that disagreed with each other on critical issues.
Justices Kagan and Ginsburg pointed out that, on reconsideration, the Second Circuit could choose not to consider the two “new” arguments put forth by IBM and the Government in their Supreme Court briefs if it found that these arguments had not been “properly preserved” (e.g., raised in a timely fashion) in earlier proceedings.
Justice Gorsuch, in a separate opinion disagreeing with Justices Kagan and Ginsburg on this point, went to the merits. He characterized plaintiffs’ argument in this case (and, in effect, in nearly all the inside information-based cases brought post-Dudenhoeffer) as proposing “that certain ERISA fiduciaries should have used their positions as corporate insiders to cause the company to make an SEC-regulated disclosure.” He argued that this theory is flawed: “In ordering up a special disclosure, the defendants necessarily would be acting in their capacities as corporate officers, not ERISA fiduciaries. … [A]t bottom [plaintiffs] seek to impose an even higher duty on fiduciaries who have the authority to make or order SEC-regulated disclosures on behalf of the corporation.” Thus, this case raises an issue that will have to be decided by some court (even if the Second Circuit refuses to hear it on procedural grounds): “whether ERISA plaintiffs may hold fiduciaries liable for alternative actions they could have taken only in a nonfiduciary capacity.”
Justices Kagan and Ginsburg disagreed with Justice Gorsuch on this point, arguing that the only question is whether there is a conflict with the securities laws.
All of which is a long way of saying that – unless it is settled – Jander may be a vehicle for resolving one of the basic questions raised by post-Dudenhoeffer stock drop litigation: Do ERISA fiduciary rules impose some sort of inside information disclosure obligation on plan fiduciaries that is different from, and conceivably higher than, the inside information disclosure obligations under the securities laws?
We will continue to follow this issue.