A case using federal benefits law to challenge a 7% drop in IBM stock price will go before the U.S. Supreme Court Nov. 6, giving the justices their third opportunity in five years to consider 401(k) plans that allow workers to invest in their company’s stock.
The dispute over
The Supreme Court first considered these questions in 2014’s Fifth Third Bancorp v. Dudenhoeffer, which fleshed out what plaintiffs must include in their complaints to maintain one of these lawsuits. After Dudenhoeffer and the 2016 follow-up decision in Harris v. Amgen Inc., courts have almost universally dismissed these lawsuits, ruling for defendants in cases involving RadioShack, Lehman Brothers, Citigroup, Whole Foods, JPMorgan, BP Plc, and others.
The Second Circuit made a surprising break with this line of cases in 2018, when it partly revived the IBM lawsuit. The case may now give the Supreme Court a chance to reaffirm the high pleading standard facing employees who hold declining company stock in their 401(k) accounts, attorneys told Bloomberg Law. It’s also likely to drive the outcome of pending cases involving Target Corp., Wells Fargo & Co., Allergan PLC, Boeing Co., and others.
Time For a Correction?
The Supreme Court may have taken the IBM case to correct a problem with the Second Circuit’s interpretation of Dudenhoeffer, Amanda S. Amert, a Chicago-based litigator and chair of Jenner & Block’s ERISA litigation practice, told Bloomberg Law.
The last time a federal appeals court ruled in favor of a 401(k) plan participant challenging a drop in employer stock price, the Supreme Court reversed the decision without hearing arguments. In Amgen—decided just a year and a half after the 2014 Dudenhoeffer decision—the Supreme Court said the Ninth Circuit “did not correctly apply” Dudenhoeffer.
The IBM case may meet a similar fate.
“I think it’s pretty clear that the court took Amgen because it took issue with the interpretation of Dudenhoeffer that the Ninth Circuit was offering,” Amert said. “You could reasonably infer that the court is doing something similar here.”
Amert said it was “notable” that the Second Circuit’s IBM ruling was one of the few post-Amgen decisions allowing a plaintiff to proceed past the motion to dismiss stage.
Todd M. Schneider, a plaintiff-side litigator and founding partner of Schneider Wallace Cottrell Konecky Wotkyns LLP, said the Supreme Court may ultimately use a different legal standard than the one used by the Second Circuit. But that doesn’t necessarily mean the plaintiffs will lose, he said.
“I could see this case going either way, because I don’t think the plaintiffs are overreaching here,” Schneider said.
Schneider called the plan participants’ main argument—that the IBM insiders should have more promptly disclosed the company’s struggles—a “very measured request.”
The Supreme Court also may be interested in resolving the circuit split created when the Second Circuit broke from rulings by the Fifth and Sixth circuits, Chris K. Meyer, a class action and ERISA-focused litigation partner in Sidley Austin’s Chicago office, told Bloomberg Law.
The IBM plan participants dispute the existence of a split.
Watch the Feds
The IBM arguments will give the justices a chance to hear from three groups: the plan participants, the IBM defendants, and the federal government, which was granted 10 minutes to present its views on the case.
The government is expected to argue that ERISA doesn’t require corporate insiders to make public disclosures beyond what’s required under federal securities laws, as it argued in a recent brief. This argument stems from Dudenhoeffer‘s requirement that plan participants challenging a stock drop must identify an alternative action that plan fiduciaries could have taken instead of continuing to hold the disputed stock. The IBM participants have argued that publicly disclosing the company’s struggles would have been an appropriate alternative to continuing to hold IBM stock.
“The fact that they gave the government some time to argue suggests some justices may be interested in that position,” Meyer said.
Amert expressed some doubt that the high court would be persuaded by the government’s position.
“That rule was available to the court in Dudenhoeffer too and it didn’t adopt it,” Amert said. “They chose not to do it for some other reason. ERISA and the securities laws are not identical and they serve different purposes.”
Two New Justices
Both Dudenhoeffer and Amgen were unanimous rulings. But both were decided before the court’s newest justices, Neil M. Gorsuch and Brett M. Kavanaugh, took the bench.
Neither Kavanaugh nor Gorsuch authored a significant decision in an ERISA stock-drop case during their time as appeals court judges.
“I haven’t seen anything that would suggest that either of the new justices would be skeptical of the court’s previous opinion in Dudenhoeffer,” Meyer said. “I haven’t seen anything either way.”
Justice Stephen G. Breyer may be one to watch during oral arguments, Meyer said, because he both authored the Dudenhoeffer decision and actively questioned the lawyers arguing that case.
Big Names Waiting on SCOTUS
The Supreme Court’s eventual ruling in the case will likely drive the outcome of ongoing cases involving several large companies.
The Target and Wells Fargo employees appealed to the Eighth Circuit, which decided to delay consideration until the Supreme Court resolves the IBM case. The Third Circuit made a similar announcement in the Allergan case, as did a federal judge in Chicago in a case against Boeing.
The Ninth Circuit is weighing a stock-drop challenge involving Edison International’s 401(k) plan. That case, which hasn’t been paused, is set for argument Dec. 13.