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Compliance March 11, 2015
Supreme Court Could Consider RJR Stock Drop Case
The U.S. Supreme Court may take up important fiduciary liability
questions related to a “reverse stock-drop” case leveled against a major
tobacco producer.
Reported by John Manganaro
An updated docket sheet on the U.S. Supreme Court website shows the court has invited the U.S. Solicitor General to file a brief in the case of Tatum v. RJR Pension Investment Committee et al., which asks whether an employer breaches its fiduciary duty to retirement plan participants under the Employee Retirement Income Security Act (ERISA) by dropping an investment from a plan without thoroughly investigating the prudence of doing so.
The case also asks important procedural questions about what legal standards a fiduciary retirement plan committee should be judged against if it is found to have caused a loss to participant accounts—as well as questions about which party bears the burden of proof in ERISA litigation.
The long-running case was most recently argued before the 4th U.S. Circuit Court of Appeals, though its history extends back to retirement plan committee decisions made in 1999, and a subsequent 2002 class action. In something of a different take on the “classic” stock drop litigation, which claims an employer waited too long or never moved to remove poorly performing company stock from its ERISA retirement plan, the participants claimed RJR sold employer stock at an inopportune moment, leading to significant but unnecessary losses to participant accounts.
According to case documents, on the day of liquidation, the Nabisco Holdings stock in question traded at $8.62 a share (60% less than its value after the spinoff of Nabisco from RJR) and Nabisco common stock at $30.18 (28% less). Within a few months the stock prices started rising, and less than a year later, after Nabisco became the object of a bidding war, the prices had climbed 247% and 82%, respectively.
In the Circuit Court’s decision, Judges Diana Gribbon Motz and Albert Diaz partly affirmed, vacated and reversed the decision of the U.S. District Court for the Middle District of North Carolina, for a second time remanding the case for additional lower-court judgments. Judge J. Harvie Wilkinson III wrote a dissenting opinion—for a 2-1 decision.
The appellate court majority upheld the lower court’s ruling that the RJR retirement plan committee had indeed breached its fiduciary duty by dumping the employer stock as an investment. “[T]he extent of [the committee’s] procedural imprudence appears to be unprecedented in a reported ERISA case,” the circuit court majority wrote. Still, it rejected the district court’s legal standard for determining RJR’s liability and reversed the lower court’s order dismissing the two plan committees as defendants.
After this, RJR Tobacco Company petitioned the Supreme Court for a writ of certiorari, asking the top court to step in and overturn parts of the 4th Circuit decision.
RJR argues the 4th Circuit decision “deepened a well-documented circuit split over which party bears the burden of proof on loss causation under §1109.”
“Five circuits hold that the burden remains on the plaintiff at all times,” the writ suggests. “The Fourth Circuit, however, has joined the Fifth and Eighth Circuits in holding that the burden of proof on loss causation shifts to the defendant after a finding that the defendant breached a fiduciary duty and the plan incurred a loss.”
RJR says the 4th Circuit then further distanced itself from the majority approach by holding that a fiduciary with a duty of prudence can be held liable for an “objectively prudent decision.”
“Specifically, the majority held that the defendant can satisfy its shifted burden only by showing that it is ‘more likely than not’ that a hypothetical prudent fiduciary would have made the exact same decision as the defendant,” the writ continues. Judge Wilkinson dissented from the appellate panel’s majority decision regarding both the burden of proof and the substantive standard for loss causation.
The writ concludes that the questions the Supreme Court should consider are as follows:
(1) Whether the plaintiff bears the burden of proving loss causation under §1109 or whether it can shift the burden on that element to the defendant by carrying its burden on the analytically distinct elements of breach of fiduciary duty and loss to the plan; and
(2) Whether an ERISA fiduciary with a duty of prudence can be held liable for money damages under §1109 even though its ultimate investment decision was objectively prudent.
The full RJR writ is available here.