On June 25, 2014, the Supreme Court, in a unanimous decision, ruled in Fifth Third Bancorp v. Dudenhoeffer that fiduciaries of employer stock ownership plans (“ESOPs”) are not entitled to a special “presumption of prudence.” That is, ESOP fiduciaries are subject to the same duty of prudence that applies to all other fiduciaries of plans subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).  In doing so, the Court reversed the decision of the 6th Circuit, which previously held that the peculiar nature of an ESOP entitles ESOP fiduciaries to a special presumption of prudence.  Prior to this ruling, six of the U.S. Circuit Courts of Appeals had adopted a variation of this special presumption of prudence, including the following: the 3rd, 6th, 2nd, 5th, 9th, and 11th Circuits.

 Justice Breyer, writing for the Court, stated that other than the general duty to diversify, ESOP fiduciaries are treated like all other ERISA fiduciaries, and the same duty of prudence applies. Additionally, the Court rejected the notion that an ESOP’s plan documents can waive the duty of prudence to the extent that it comes in conflict with the ESOP’s investment mandate to invest funds into the employer’s stock.  This makes clear that the ESOP fiduciary’s duty of prudence trumps any language in the plan document that instructs a fiduciary to solely invest in the employer’s stock even if it is not in the plan participant’s best financial interest.  

 The Court did recognize employers’ and ESOP fiduciaries’ concern that this change in policy will result in potentially numerous meritless claims of breach of fiduciary duty.  The Court stated that where a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was not valuing the employer’s stock properly are not plausible without “special circumstances.”  The Court did not define “special circumstances,” leaving that for another day.  The Court also reminded the parties that if an ESOP fiduciary is an officer, securities laws under the Securities Exchange Act must be followed; therefore, an ESOP fiduciary cannot make decisions based upon inside information, and a plan participant cannot bring a claim against an ESOP fiduciary for failure to use such information.   

 This ruling rejects every ruling among the Circuits on this issue and will have a significant impact on future litigation for employers and fiduciaries who maintain ESOPs.

 For a copy of the Court’s opinion, click here.

 For more information about the opinion, or the impact on ESOPs, contact your  SGR Executive Compensation and Employee Benefits Counsel at Smith, Gambrell & Russell.