The 5th U.S. Circuit Court of Appeals has ruled that a district court erred in finding that participants in BP’s employee stock ownership plan (ESOP) plausibly stated a claim that BP breached its fiduciary duties under heightened company stock case pleading standards established by the U.S. Supreme Court in Fifth Third v. Dudenhoeffer.

The lawsuit was filed in 2010 after BP shares dropped following the Deepwater Horizon offshore drilling rig explosion. In its first ruling, the U.S. District Court for the Southern District of Texas applied the then-prevailing Moench v. Robertson presumption of prudence for ESOP fiduciaries offering company stock as a plan investment.

However, while an appeal of this decision was pending. The U.S. Supreme Court ruled in Fifth Third that ESOP fiduciaries did not have a presumption of prudence. In addition it set the following pleading standard: “To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” The appellate court revived the lawsuit based on the Supreme Court’s ruling.

The 5th Circuit noted that on remand to the district court, the plaintiffs moved to file an amended complaint alleging, as per Fifth Third, that the fiduciaries possessed unfavorable inside information about BP and that they could have taken various alternative actions that would not have done more harm than good to the BP stock fund. The district court held that the stockholders had plausibly alleged that the defendants had inside information; and the stockholders had plausibly alleged two alternative actions that the defendants could have taken that met the Fifth Third standard: freezing, limiting, or restricting company stock purchases; and disclosing unfavorable information to the public.

However, the appellate court pointed out that “Aside from these conclusory statements, the stockholders do not specifically allege, for each proposed alternative, that a prudent fiduciary could not have concluded that the alternative would do more harm than good, nor do they offer facts that would support such an allegation. This runs counter to the Supreme Court’s directive that ‘the facts and allegations supporting’ an alternative action that could satisfy Fifth Third’s standards ‘should appear in the stockholders’ complaint.’”

The appellate court added that the amended complaint states that BP’s stock was overvalued prior to the Deepwater Horizon explosion due to “numerous undisclosed safety breaches” known only to insiders. Based on this fact alone, the court said, it does not seem reasonable to say that a prudent fiduciary at that time could not have concluded that disclosure of such information to the public or freezing trades of BP stock—both of which would likely lower the stock price—would do more harm than good. “In fact, it seems that a prudent fiduciary could very easily conclude that such actions would do more harm than good,” the court concluded.

The 5th Circuit reversed the district court’s decision and remanded the case back to the lower court for further proceedings. Its opinion in Whitley v. BP, P.L.C. is here.