In light of the Ninth Circuit’s third rejection of their efforts to dismiss breach-of-duty claims, Amgen retirement plan fiduciaries asked the Supreme Court to grant certiorari. The Court earlier remanded the Amgen case in light of its 2014 decision in Fifth Third, but the Ninth Circuit reiterated its preceding holding and denied rehearing en banc. In their petition for certiorari, the Amgen fiduciaries argue that the Ninth Circuit instated a pleading standard that directly contradicts Fifth Third and erroneously applied the Basic reliance presumption to a case that does not involve purchases or sales of stock (Amgen Inc. v. Harris, September 3, 2015).
Background. Current and former employees of Amgen, Inc. filed a class action under ERISA after their employer-sponsored pension plans lost significant value due to concerns about the safety of certain Amgen drugs. The employees alleged that the plans violated their fiduciary duties by continuing to invest in Amgen common stock when they knew, or should have known, that its price was artificially inflated. The plaintiffs also alleged that the fiduciaries violated the duties of loyalty and care by failing to provide them with material information about Amgen stock.
Procedural history. The district court dismissed the complaint, but the Ninth Circuit reversed, finding that the presumption of prudence did not apply and that, under the normal prudence standard, the employees specifically alleged fiduciary-duty violations. The defendants petitioned the Supreme Court for a writ of certiorari, but the Court deferred ruling while it considered Fifth Third. After unanimously ruling in Fifth Third that fiduciaries of employee stock ownership plans are not entitled to a special presumption of prudence, the Supreme Court then remanded the Amgen case to the Ninth Circuit for reconsideration.
On reconsideration, the Ninth Circuit again reversed. The defendants asked the court to rehear the matter en banc, but the court denied that request and the panel amended its October 2014 opinion. Judges Kozinski, O’Scannlain, Callahan, and Bea dissented from the denial of rehearing en banc. In the dissenting judges’ view, the decision “creates almost unbounded liability for ERISA fiduciaries” and will leave corporations vulnerable to meritless lawsuits and judicially created disclosure requirements. “I sincerely regret that a majority of our court did not see fit to take this case en banc,” Judge Kozinski wrote. “I expect the Supreme Court will promptly correct our error.”
“Quite plausible” standard. The petitioners, represented by former Solicitor General Seth Waxman, argue that the Ninth Circuit decision is flawed in two ways. First, echoing the arguments of the four judges who dissented from the denial of en banc rehearing, the Amgen fiduciaries maintain that the appeals court adopted a pleading standard that directly contradicts Fifth Third. There, the Court rejected a holding that ERISA creates a presumption of prudence. Instead, it instructed that to state a claim that ERISA fiduciaries breached their duty of prudence by failing to act on 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.”
Rather than apply this standard, the petition argues, the Ninth Circuit reversed the lower court’s dismissal of the breach-of-duty claims because it was “quite plausible” that the petitioners “could remove the Fund from the list of investment options without causing undue harm to plan participants.” The Amgen parties urge this to be error because what a court deems “quite plausible” in hindsight does not satisfy Fifth Third’s directive that a plaintiff allege that a prudent fiduciary in the defendant’s position could not have concluded that a proposed alternative would have done more harm than good.
Extension of Basic presumption. The second challenge to the Ninth Circuit opinion takes issue with its application of Basic Inc. v. Levinson. The appeals court, sua sponte, held that the plaintiffs could invoke Basic’s presumption of indirect reliance. The extension of that case—which rests on the fraud-on-the-market theory and concerns traders in, not holders of, securities—to ERISA plaintiffs who made no purchase or sale of securities during the class period was in error, the petitioners maintain. Extending Basic to the Amgen case “conferred a presumption of reliance on persons who have not taken any reliant action at all.”
Consequences for industry. The scope of liability for ERISA fiduciaries affects thousands of companies and millions of employees participating in stock-ownership plans, the Amgen fiduciaries argue. The Ninth Circuit’s “quite plausible” standard will invite a flood of lawsuits and increase litigation costs. Likewise, substantial litigation and a potential for erroneous rulings will follow from the extension of Basic to plaintiffs who held, rather than traded in, stock. In the long term, the petitioners claim, companies will withdraw company stock as an investment option. This result, which goes against Congress’ intent to encourage ESOPs and other employee-stock plans, warrants correction by the Supreme Court.
The case is No. 15-278.