Court Revisits Ruling in Light of Dudenhoeffer Decision

The 9th U.S. Circuit Court of Appeals has revisited its ruling in a retirement plan stock drop suit in light of the U.S. Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer.

In Harris v. Amgen, the 9th Circuit previously reversed a district court’s dismissal of the case based on a presumption of prudence for fiduciaries of retirement plans that invest in company stock. In that ruling, the appellate court relied on a 2nd U.S. Circuit Court of Appeals opinion that since the plan terms did not require or encourage fiduciaries to invest primarily in employer stock, the presumption of prudence did not apply.

While it still reversed the district court dismissal and remanded the case back to the court, in its most recent decision, the 9th Circuit based its discussion on the U.S. Supreme Court’s finding in Dudenhoeffer that there is no presumption of prudence for employee stock ownership plan fiduciaries beyond the Employee Retirement Income Security Act (ERISA) exemption from the otherwise applicable duty to diversify. This overrode the previous decision that no presumption of prudence applies if the plan does not require employer stock investments.

With no presumption of prudence, the appellate court addressed the arguments put forth by Amgen that its stock was not an imprudent investment for the retirement plan. The 9th Circuit said Amgen’s argument that the stock was not imprudent because the company was not experiencing financial difficulties and remains strong and viable is “beside the point.” It noted that the fact Amgen is strong, viable and profitable does not mean the company stock was not artificially inflated during the class period defined in the case.

Amgen next argued that the decline in the price of Amgen stock was not sufficient to show it was an imprudent investment. But, the court noted that the question was not whether the investment results were unfavorable, but whether the fiduciaries used appropriate methods to investigate the merits of continuing to invest in the stock.

The Amgen defendants argued that divestment from the company stock would have caused a drop in stock price, but the court found it plausible the fiduciaries could have removed the Amgen Common Stock Fund as an investment option in the plan without causing harm to participants. It said it was unclear how much the stock price would have declined, and removing the fund as an investment option would not have meant liquidation of the fund, just that participants would not have been able to invest more in the fund at an artificially inflated price.

Amgen also argued that it could not have removed the stock fund based on undisclosed alleged adverse information because that would violate securities laws. The appellate court said the central problem is that Amgen officials made material misrepresentations and omissions in violation of securities laws. “If defendants had revealed material information in a timely fashion to the general public (including plan participants), thereby allowing informed plan participants to decide whether to invest in the Amgen Common Stock Fund, they would have simultaneously satisfied their duties under both securities laws and ERISA,” the court wrote in its opinion.

On remand in light of the Dudenhoeffer decision, the Amgen defendants presented a new argument that the Supreme Court established new pleading requirements applicable to cases such as this one. The 9th Circuit noted that the Supreme Court’s citation of cases that had been previously decided indicated it was not articulating a new, higher pleading standard. To the extent that the Amgen defendants were arguing that the Supreme Court decision established new standards of liability to be considered, the 9th Circuit noted that it had already considered in its previous case that fiduciaries are not required to perform an act that would do more harm than good to retirement plan participants.

The 9th Circuit’s most recent decision in Harris v. Amgen is here.