Friday, October 1, 2010

Significant Stock-Drop Decision Adopts Presumption of Prudence

In what many are already calling a major victory for the ERISA defense bar, the U.S. Court of Appeals for the Ninth Circuit recently adopted the rebuttable “presumption of prudence” for fiduciaries defending ERISA "stock-drop" lawsuits in Quan v. Computer Sciences Corp. (9th Cir., No. 09-56190, 9/30/10). Following what has been labeled as the “Moench” presumption, the Ninth Circuit joined with the U.S. Courts of Appeals for the Third, Fifth, and Sixth Circuits, which have all applied the presumption in cases where employers who offered employer stock in their defined contribution plans were sued by plan participants after the value of the employer stock sharply decreased. The presumption originated with the Third Circuit's decision in Moench v. Robertson, 62 F.3d 553, 19 EBC 1713 (3d Cir. 1995), and is often relied upon by the defense bar in support of early motions to dismiss in such stock-drop lawsuits.

According to the Ninth Circuit, "if properly formulated, the Moench presumption can strike the appropriate balance between the employee ownership purposes of [employee stock ownership plans and other eligible individual account plans], and ERISA's goal of ensuring proper management of such plans.” “We adopt the Moench presumption because it provides a substantial shield to fiduciaries when plan terms require or encourage the fiduciary to invest primarily in employer stock. Fiduciaries are not expected to predict the future of the company stock's performance." The Ninth Circuit noted its view that the Moench presumption will not “entirely insulate” a fiduciary from liability, because the presumption can be rebutted by a showing that a fiduciary abused its discretion by investing in employer stock. To overcome the presumption, a plaintiff must make allegations that “clearly implicate a company's viability as an ongoing concern” or show a “precipitous decline in employer stock ... combined with evidence that the company is on the brink of collapse or is undergoing serious mismanagement,” the court said. In addition, the court said there is no bright-line rule as to how much evidence is needed to rebut the Moench presumption. “A guiding principle, however, is that the burden to rebut the presumption varies directly with the strength of a plan's requirement that fiduciaries invest in employer stock,” the court said. The court then found that the CSC plan participants were unable to overcome the Moench presumption because they presented no evidence that it was unreasonable for the plan fiduciaries to believe that CSC would overcome its financial problems. The Ninth Circuit also determined that the CSC plan fiduciaries did not breach their ERISA duties by allegedly making misrepresentations to plan participants about the quality of CSC stock.