The 4th U.S. Circuit Court of Appeals once again sided with RJR Tobacco retirement plan fiduciaries in an Employee Retirement Income Security Act (ERISA) lawsuit related to the spinoff of Nabisco assets from the tobacco portions of the business and as holdings in the retirement plan. 

At its heart, the case is about participants who feel their employer sold their Nabisco stock holdings at a remarkably inopportune moment, when the stock value was severely depressed and right before a major rally. While the court acknowledges the participants’ substantial financial losses are unfortunate, it does not agree that the losses can be blamed on fiduciary imprudence. 

By way of background, previously the U.S. District Court for the Middle District of North Carolina determined that, under ERISA prudence standard, RJR did in some respects breach its fiduciary duty of procedural prudence to investigate the investment decision, made post-spinoff, to eliminate the Nabisco funds from the RJR retirement plan. Nevertheless, RJR was found to have met its burden to show that removing the funds was an objectively prudent decision at the time. Specifically, the court ruled “that the decision to remove the stock, under the circumstances of this case, is one which a reasonable and prudent fiduciary could have made after performing such an investigation.”           

On the first appeal, the 4th Circuit affirmed the holding that RJR breached its duty of procedural prudence and therefore bore the burden of proof as to causation. However, the appellate court found that the district court did not apply the correct legal standard in determining RJR’s liability, reversed the judgment, and remanded with instructions “to review the evidence to determine whether RJR has met its burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same decision.” Plaintiffs also petitioned the U.S. Supreme Court to decide on this standard, but the high court denied the petition.

Then the district court ruled that RJR Tobacco had “proven by a preponderance of the evidence” that a prudent fiduciary would have decided to divest Nabisco company stock funds from its 401(k) plan—leading to the current appellate decision. It’s a complicated story, and that’s not even the full case history, as Circuit Judge Diana Gribbon Motz explains.

“This Employee Retirement Income Security Act case returns to us for a third time,” she writes in the latest opinion. “The beneficiaries of an ERISA retirement plan appeal the judgment, issued after a full bench trial, that the fiduciary’s breach of its duty of procedural prudence did not cause the substantial losses in the retirement plan resulting from the sale of non-employer stock funds. We had previously remanded the case to the district court so that it could apply the correct legal standard for determining loss causation, but we expressed no opinion as to the proper outcome of the case. On remand, applying the correct standard, the court found that the fiduciary’s breach did not cause the losses because a prudent fiduciary would have made the same divestment decision at the same time and in the same manner. For the reasons that follow, we affirm.”

NEXT: Investment versus divestment 

The text of the new appellate court decision offers some food for thought about whether and to what extent there is a “distinction between investment decisions and divestment decisions” under ERISA prudence standards.

“Tatum principally contends that in evaluating the evidence the district court applied two incorrect legal standards,” the appellate decision states. “The bulk of this argument rests on the assertedly critical distinction between investment decisions and divestment decisions. Tatum maintains that because the court failed to recognize this distinction, it ignored factors relevant to a divestment decision. Tatum also claims that the district court, despite its explicit statements to the contrary, applied the improper ‘could have’ standard that we rejected in Tatum IV.”

After “reviewing the district court’s factual findings for clear error and its legal conclusions and application of the law to the facts de novo,” the appellate court calls this argumentation “wishful thinking.”

“In remanding the case, we explicitly recognized the possibility that, using the correct ‘would have’ standard, the district court might find that RJR had met its burden,” the decision concludes. “We explained that perhaps, after weighing all of the evidence, the district court will conclude that a prudent fiduciary would have sold employees’ existing investments at the time and in the manner RJR did because of the funds’ high-risk nature, recent decline in value, and RJR’s interest in diversification. If the trial evidence had permitted the court to find only that a prudent fiduciary would not have divested the Nabisco Funds, we would not have remanded the case at all.”

Tatum’s remaining contention as to the district court’s asserted adoption of an incorrect legal standard proceeds in two parts. First, Tatum “contends that the district court improperly failed to require a more demanding justification for a fiduciary’s divestment decisions than for its investment decisions.” Second, he “argues that the court’s failure to recognize this allegedly critical distinction led the court to assess the trial evidence incorrectly.”

The combined argument is that “a fiduciary needs a compelling reason to divest, while the decision to invest requires less critical motivation.” In support of this argument, the skeptical appellate court writes, Tatum “offers only ERISA’s directive that a court examine a fiduciary’s decision in light of an enterprise of a like character and with like aims.”

“The Supreme Court ... has explained that an ERISA enterprise of a like character and with like aims is broadly defined as ‘an enterprise with the exclusive purpose of providing benefits to participants and their beneficiaries’ while ‘defraying reasonable expenses of administering the plan’ … Given the Supreme Court’s expansive definition, we can hardly hold that a trial court commits legal error when it considers evidence related to prudent investment decisions to determine the propriety of a hypothetical prudent fiduciary’s divestment decisions.”

Tatum does not cite a single court that has so held, the appellate decision states, “and we refuse to do so in this case.”

Because the district court did not err in refusing to require a more compelling reason for divestment decisions than for investment decisions, what remains of Tatum’s argument on this issue is reduced to “a factual dispute over whether a prudent fiduciary would have refrained from divesting when RJR did and instead waited to see if the Nabisco Funds rebounded. The evidence presented at trial simply does not compel the conclusion that a prudent fiduciary would have done so.”

The full text of the most recent appellate decision, which also includes a deep dive on the important role of precedents set in Fifth Third vs. Dudenhoeffer and a full dissenting opinion, is available here.