The Supreme Court decisions in Dudenhoeffer (2014) and Amgen (2016) made it more difficult, as a practical matter, for plaintiffs to bring ERISA duty of prudence claims involving employer stock. In the ensuing years, every stock drop complaint filed by ERISA plan participants around the country was dismissed for failure to allege facts satisfying Dudenhoeffer – until defendants’ winning streak was broken in December 2018.

In Jander v. Retirement Plans Committee of IBM, 910 F. 3d 620 (2d Cir., Dec. 10, 2018) (cert granted), the Second Circuit held that a complaint against the fiduciaries of an ESOP sponsored by IBM sufficiently pled a claim for violation of ERISA’s duty of prudence in connection with alleged overinflated employer stock, and that it was improper for the lower court to have dismissed the complaint.

This ruling caught many observers by surprise, given that all complaints of this type filed in the past 4-5 years have been dismissed.

Aberration or start of a plaintiff-friendly trend in employer stock cases?

General allegations of stock volatility or downward declines in stock price (even those resulting in bankruptcy) have been found insufficient to support a duty of prudence claim since Dudenhoeffer. But the more specific factual allegations in IBM highlight a potential roadmap for plaintiffs:

  1. Allege that plan defendants knew that the company stock was overvalued due to a failure to disclose some adverse information.

In IBM’s case, the defendants allegedly failed to disclose that the value of a business unit, and therefore the overall stock price, was artificially inflated through accounting violations.

  1. Allege that the plan fiduciaries had the power to disclose the truth and correct the artificial inflation, but did not.

In IBM’s case, the plan fiduciaries were also the CAO, CFO and GC.

  1. Allege that the company stock traded on an efficient market such that correcting the accounting fraud would reduce the stock price only by the amount by which it was artificially inflated and that earlier disclosure of the accounting fraud (as opposed to later disclosure) would have reduced the risk of over-correction.

IBM stock is traded on a national exchange.

  1. Allege that the plan fiduciaries knew that disclosure of the truth was “inevitable.”

In IBM’s case, the court found disclosure was inevitable because IBM was looking to sell this particular business unit and would be unable to hide the overvaluation from the public once a third party buyer vetted the business and a purchase price was disclosed – in the end, IBM actually paid $1.5 billion to a buyer to take the business unit off IBM’s hands, and IBM’s stock dropped by $12 per share.

IBM Distinguished

In the first post-IBM employer stock drop decision, a court made a strong effort to limit IBM to its facts. In Fentress v. Exxon Mobil Corp., No. 4:16-cv-3484 (S.D. Tex., Feb. 4, 2019), the District Court granted Exxon Mobil’s motion to dismiss an employer stock drop case, IBM notwithstanding.

The Exxon court addressed plaintiff’s allegations that defendants violated their duty of prudence because they knew that Exxon’s stock prices were artificially inflated and yet continued to invest in Exxon stock. Plaintiff alleged that defendants should have sought out those responsible for Exxon’s disclosures under federal securities laws and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s oil reserves. The parties submitted briefing on the impact of IBM on the pending motion to dismiss.

The Exxon court held that the two arguments the IBM court appeared to find most persuasive – “that the fraud became more damaging over time and that the eventual disclosure was inevitable” – do not apply to Exxon.

As to reputational damage, the Exxon court held that the Fifth Circuit recently rejected the identical argument in the Whole Foods stock drop case.

As to inevitability, the Exxon court held that there was no major triggering event that made Exxon’s eventual disclosure of its oil reserve troubles inevitable. Though Exxon was being investigated by authorities regarding statements about its oil reserves, investigations are often long and may not result in any charges against a company. Thus, while Exxon’s eventual disclosure was probably foreseeable, the Court could not say it was inevitable.

Supreme Court Agrees to Hear IBM’s Appeal

On June 3, 2019, the Supreme Court granted IBM’s cert petition, adding this employer stock drop case to its docket. The high court will hear at least one other ERISA matter next term (a statute of limitations issue under ERISA’s “actual knowledge” standard). As IBM phrased the issue to be decided on appeal: Whether Dudenhoeffer’s “more harm than good” pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time?

Next Bite at the Apple

Plaintiffs recently sued Boeing in an ERISA stock drop case, explicitly raising IBM as a benchmark in the complaint. Plaintiffs allege that Boeing knew about problems with its 737 MAX aircraft before two high-profile crashes brought worldwide attention to this particular aircraft’s issues.

The complaint cites the IBM case, and argues that, as in IBM, here “disclosure [of the allegedly non-disclosed negative information] was inevitable” because Boeing is in a highly-regulated industry. Burke v. The Boeing Company, No. 1:19-cv-02203, N.D. Ill (complaint filed on 3/31/19). Soon the court in Boeing will have a chance to weigh in on whether IBM is a crack in the Dudenhoeffer dam, or simply an aberration.

Stay tuned to for updates on these cases.

Plaintiffs’ lawyers have filed a series of cases challenging the lawfulness of the actuarial assumptions used in certain defined benefit retirement plans.  The seventh such case was filed on May 20, 2019 in the Eastern District of Virginia.

All seven complaints are based on the same general theories and the same specific claims for relief under ERISA.  In general, plaintiffs allege the plan fiduciaries of a defined benefit plan fail to pay alternative forms of benefits in amounts that are actuarially equivalent to the plan’s default benefit, a single life annuity.

In particular, plaintiffs challenge the use of outdated mortality tables, unreasonable interest rates, and/or other unreasonable custom conversion factors used to calculate alternative benefits, such as joint and survivor annuities or life-certain annuities, saying they are not actuarially equivalent to single life annuities.

Plaintiffs contend the fiduciaries have caused retirees to lose part of their vested retirement benefits in violation of ERISA § 203(a) (nonforfeitability requirements).  They style their claims for relief as “reformation of the plan”; benefits due; and breach of fiduciary duty.

In their complaints, plaintiffs focus on the use of allegedly “outdated” mortality tables and other allegedly inappropriate “conversion factors” as the centerpiece of their claims:

Court Mortality Table or Other Assumption Used Interest Rate Used
Case 1 (S.D.N.Y.) 1971 Group Annuity Mortality Table for Males (“1971 GAM”), set back one year for participants and set back five years for beneficiaries 6%
“         ” 1983 Group Annuity Mortality Table for Males (“1983 GAM”), set back one year 5%
Case 2 (N.D. Texas) 1984 Unisex Pension Mortality Table (“UP 1984”) 5%
Case 3 (S.D.N.Y.) Custom “conversion factors”
Case 4 (D. Minnesota) Custom “early commencement factors”
Case 5 (E.D. Wisconsin) 1971 GAM 7%
“        ” UP 1984 6%
Case 6 (E.D. Missouri) 1984 UP, adjusted for likely increases in life expectancy 7%
“        ” 1984 UP, adjusted for likely increases in life expectancy 6.5%
Case 7 (E.D. Virginia) 1971 GAM 6%

In the first four cases, the defendants have filed motions to dismiss.  The briefing shows the following three primary categories of arguments raised in support of dismissal:

  1. General ERISA defenses
  • It’s a matter of plan design: benefits were calculated using assumptions mandated by the plan.
  • Plaintiffs are suggesting that the sponsor must change the mortality tables in a collectively bargained plan without union input – a perceived non-starter.
  • Plaintiffs ignore the interplay of mortality assumptions and interest rates: a high interest rate can offset outdated mortality rates.
  • Statute of limitations (more than six years since plaintiff received retirement paperwork).
  • Failure to exhaust administrative remedies (claim depends on administrative interpretation).
  • Standing issues (if no harm suffered by plaintiff).
  1. Regulations
  • The ERISA regulations cited by plaintiffs do not require the use of any particular assumptions in this context, and in other contexts (ERISA’s non-discrimination rules) the regulations specifically authorize the use of the same mortality tables used here.
  • Nothing in ERISA’s statutory provisions requires that actuarial assumptions used in calculating early conversion factors be “reasonable” or imposes liability when those factors are not reasonable (addressing 29 U.S.C. §§1053 and 1054).
  • Congress could have required that plans only use “reasonable” actuarial factors for calculating benefits at early commencement, but it did not. (Contrasting plan-funding provisions of 29 U.S.C. §1085a, withdrawal liability provisions of 29 U.S.C. §1393(a)(1), and lump sum benefit provisions of 29 U.S.C. §1055(g)(3)(B)).
  • There is no private right of action under ERISA to enforce the Code regulation upon which plaintiffs rely (26 C.F.R. §1.401(a)-11). ERISA’s relevant enforcement mechanism allows redress of any violation of “any provision of this subchapter” – not the Code or regulations.
  • Other regulations expressly say the mortality table used in a certain plan is a “standard mortality table” that is “reasonable” for plan administrators to use. (citing 26 C.F.R. § 1.401(a)(4)-12 and (a)(4)-3f(7)).
  • When Congress intends mortality tables to be updated, it specifies that timing expressly.
  1. Reasonableness
  • Complaint does not identify what conversion factor would be reasonable or why the ones used were unreasonable.
  • Plaintiffs allege a less than 3% difference between the benefits calculated using the actuarial factors in the plan and the actuarial factors they argue are acceptable (for lump sum calculations). Treasury regulations make clear that a benefit difference of 5% or less is not only reasonable, but is deemed “approximately equal in value” as a matter of law. (citing 26 C.F.R. § 1.417(a)(3)-1(c)(2)(iii)(C)).
  • Life expectancy has been falling for years, contrary to plaintiffs’ underlying premise.

Geographic Diversity

Given the dispersion of cases filed so far, one cannot be faulted for concluding that plaintiffs’ strategy includes filing these early test cases in as many different federal circuits as possible.  To date, the seven cases have been filed in five different circuits.

U.S. Circuit Courts - Actuarial Cases Filed

Rulings Expected this Summer or Fall

In four of the earliest filed cases, briefing on the defendants’ motion to dismiss is complete,  meaning that courts could start issuing rulings as soon as this summer. Stay tuned to for the latest updates.