Cases involving employer stock (often referred to as “stock drop” cases) have slowed a bit in recent years. In 2014, the Supreme Court rejected the judicially drafted “presumption of prudence” generally afforded to fiduciaries who chose to offer employer stock in a company retirement plan and replaced it with a new pleading standard for evaluating such claims.

Specifically, in situations where a plan fiduciary has nonpublic (i.e., inside) information that could affect the value of the company stock available in the plan, plaintiffs may be able to state a claim for breach of fiduciary duty under ERISA if they can allege that there was an action that the fiduciary could have taken that: (1) would have been consistent with the securities laws and (2) a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

For the past few years, courts have grappled with interpreting the Supreme Court's language, most often finding that this new pleading standard has not been met.  But in December 2018, the Second Circuit overturned the dismissal of one of these “stock drop” lawsuits filed against IBM, finding that the participants sufficiently pled a claim even under the most restrictive reading of the new standard.

In that case, the plaintiffs claimed that the plan's fiduciaries knew that a division of the company was overvalued but failed to disclose that fact, and this failure artificially inflated IBM's stock price, harming the participants.

The Second Circuit held that the participants plausibly established that a prudent fiduciary in the defendants' position could not have concluded that a corrective disclosure would do more harm than good.

Most significant to the court's decision was the fact that disclosure of the truth was “inevitable,” because IBM was likely to sell the business and would be unable to hide its overvaluation from the public at that point. The IBM case could certainly serve to revive these types of stock drop lawsuits, particularly those trying to mimic factually similar “inevitable disclosure” circumstances.

At the end of 2018, plaintiffs' counsel began to test the waters with new theories. A handful of cases have been filed in recent months against plan sponsors challenging their use of old and allegedly “outdated” mortality tables as unreasonable when performing actuarial assumptions for conversion of life annuities to other annuity forms.

The theory is that mortality has improved (that is, gone down) and life expectancy increased since the 1960s. Because more recent tables have lower mortality (that is, longer life expectancy), they would generally produce larger factors for certain annuity conversions.

There is scant case law on whether assumptions need to be periodically updated, which makes these cases interesting to watch. These cases are still in the beginning stages and it remains to be seen whether they will have any success with the many legal and actuarial considerations at issue.

Notably, there have not been many ERISA decisions from the Supreme Court recently, but there are at least two important ERISA cases that may be considered in the upcoming term. In Brotherston v. Putnam Investments LLC, the First Circuit joined the Fourth, Fifth and Eighth Circuits in holding that, once an ERISA plaintiff has shown a breach of fiduciary duty and loss to the plan, the burden shifts to the fiduciary to prove that the loss was not caused by its breach—that is, to prove that the resulting investment decision was objectively prudent.

The Tenth, Sixth, Ninth and Eleventh Circuits have held the opposite—the burden falls on the plaintiff to prove losses to the plan arising from the breach.

Putnam has petitioned the Supreme Court to review this decision. Given this circuit split, it is arguably ripe for Supreme Court review, and could be a key factor in framing the ultimate viability of fiduciary breach claims in the future.

Also, potentially at issue before the Supreme Court is the arbitrability of ERISA breach of fiduciary duty claims. In Munro v. University of Southern California, the Ninth Circuit rejected USC's attempt to compel plan participants to arbitrate their ERISA breach of fiduciary duty claims based on arbitration provisions in their employment agreements.

The Ninth Circuit held that because the employee-participants only consented to arbitrate claims brought on their own behalf, and because the claims are brought “on behalf of” the plans, the claims were outside the scope of the arbitration agreements.

USC has petitioned the Supreme Court to review this decision.

This case is significant as arbitration provisions continue to be a hot topic for ERISA plans—with more and more plan sponsors and fiduciaries weighing the pros and cons of arbitrating ERISA claims.

Emily Costin is a partner in Alston & Bird's Washington, D.C. office, where she focuses her practice primarily on the defense of employee benefits disputes and counseling employers, plan sponsors, and fiduciaries on litigation avoidance strategies. She represents plan sponsors, insurers, and fiduciaries in individual, mass action, and class action litigation over claims for benefits and breach of fiduciary duty under ERISA.

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