A battle over the company stock in
“This is a securities law complaint,” Paul D. Clement, the Kirkland & Ellis partner who argued on behalf of the IBM defendants, told the justices.
The case asks whether IBM insiders can be liable under the Employee Retirement Income Security Act for failing to promptly disclose struggles in the company’s microelectronics division that led to a 7% drop in stock price. The federal government argued in court and in a brief that ERISA generally doesn’t require corporate insiders to make disclosures beyond what’s required by the securities laws.
Justice Stephen G. Breyer attempted to steer the conversation away from securities law, saying the question the court agreed to decide was under ERISA, not the securities regime.
Justice Ruth Bader Ginsburg appeared to agree. She told Jonathan Y. Ellis, assistant to the Solicitor General who argued on behalf of the federal government, that the issues he emphasized weren’t addressed in the opinions below.
If the court accepts the government’s position, “we’ll be back here in five years trying to figure out what that means,” Samuel Bonderoff, who argued for the IBM plan participants and is a partner with Zamansky LLC, told the justices.
Justice Neil M. Gorsuch appeared more sympathetic to the government’s position. He asked whether the securities law might be a good place to start “and maybe finish” when deciding what’s required of an ERISA fiduciary.
Justice Sonia Sotomayor appeared to disagree, saying that “contrary to the government’s position,” the securities laws “don’t purport to govern your fiduciary duties.”
Jaime A. Santos, a partner with Goodwin Procter who attended the arguments, said it wasn’t clear from the back-and-forth how the case would be resolved.
Santos said that for the most part, the justices didn’t appear interested in the “bright line” rule offered by the IBM defendants, which would relieve ERISA fiduciaries of any obligation to disclose inside information in most cases. But the justices didn’t seem taken with the government position largely basing ERISA’s fiduciary duties on securities laws, Santos said.
The main reason for the justices’ disinterest is that these weren’t the issues the court agreed to decide when it took the case, and they haven’t been fleshed out by lower courts, Santos said.
“I am not at all sure what the justices will do with this case,” Santos told Bloomberg Law.
The dispute over IBM’s 401(k) plan is one of dozens of proposed class lawsuits using ERISA to challenge drops in a company’s stock price. The lawsuits claim plan fiduciaries, including corporate insiders, have a duty under ERISA to protect workers’ retirement savings when corporate fraud or other wrongdoing causes stock prices to fall.
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 an ERISA stock-drop challenge. After Dudenhoeffer, 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 court said the IBM defendants may have had a duty to more promptly disclose the problems that led the stock price to drop.
The Supreme Court’s ruling is likely to drive the outcomes of pending cases involving Target Corp., Wells Fargo & Co., Allergan PLC, Boeing Co., and others.
Other points of disagreement involved how much purchase Dudenhoeffer has going forward and what can be reasonably expected of ERISA plan fiduciaries.
“I mean, it does sound like you want us to scrap Dudenhoeffer” and “start all over again,” Justice Elena Kagan told Ellis during his arguments on behalf of the federal government.
Ellis disagreed, calling the government’s position “fully consistent” with Dudenhoeffer.
Justice Samuel Alito appeared skeptical of the idea that ERISA can require plan fiduciaries to make public disclosures of inside corporate information.
“Do you think that it is workable, practical, to require an insider fiduciary to determine” whether the disclosure of inside corporate information at a particular point in time “will do more harm than good?” he asked.
“It seems to me, in that situation, the fiduciary has to make a very complicated calculation. But maybe—maybe it’s more doable than it seems to me,” Alito said.
Justice Gorsuch expressed doubt over the wisdom of allowing corporate insiders to serve as ERISA fiduciaries in the first place.
“It’s not an inevitability that insiders would serve as trustees,” he said. “And I guess I’m not clear exactly what employees gain from having insiders as trustees if, at the end of the day, they wind up being know-nothings, because they can’t do anything.”
Bonderoff, who represents the plan participants, said it’s an “advantage” to have a corporate insider serve as a plan fiduciary, because their inside information better positions them to protect plan participants.
Clement registered “emphatic” disagreement with that point, saying this could lead to securities violations.
At multiple points, Justice Brett M. Kavanaugh steered the conversation to the idea that disclosures of corporate troubles could help some plan participants while harming others, depending on whether the participants were buying or selling company stock.
Kavanaugh’s questioning hinted at the idea that plan fiduciaries couldn’t be liable for failing to take an action that could help some plan participants while hurting others.
In that situation, “it’s a little hard to hold the fiduciary liable for violating the duty of prudence, given the different interests of the different classes of beneficiaries,” he said.
The case is Ret. Plans Comm. of IBM v. Jander, U.S., No. 18-1165, argued 11/6/19.