OVERVIEW OF CURRENT ERISA LITIGATION LANDSCAPE
By: Kimberly M. Melvin and John E. Howell*
I.
STOCK DROP CASES POST- DUDENHOEFFER
In Fifth Third Bancorp v. Dudenhoeffer, the United States Supreme Court rejected the so-
called “Moench presumption” embraced by federal courts in ERISA stock drop cases for over
two decades. The court determined that ESOP fiduciaries are not entitled to any special
presumption of prudence, but are subject to the same duties as other ERSIA fiduciaries, except
that they need not diversify the fund’s assets. Because the Moench presumption has been a
powerful tool in defeating stock drop cases at the motion to dismiss stage, this ruling
undoubtedly alters the litigation risks and costs facing fiduciaries and their insurers. Yet, as the
Court closed one door, it opened another.
The Court emphasized that the Iqbal/Twombly “plausibility” standard still poses a
significant bar to these claims for plaintiffs, delineating guidelines for lower courts’ “careful
consideration” of whether the fiduciaries are alleged to have acted imprudently. Where plaintiffs
allege that fiduciaries failed to act in the face of publicly available information alone, the Court
posited that these claims “are implausible as a general rule,” which does not sound dramatically
different than a presumption of prudence. The court did find, however, that such a claim may
survive a pleadings challenge if there are “special circumstances affecting the reliability of the
market price.” The court did not attempt to define all of the “special circumstances” it
contemplates, but suggests that plaintiffs may attempt to show that the market for a particular
stock was not efficient and failed to factor in some publicly-available information.
Where ESOP fiduciaries are alleged to have acted or failed to act based on non-public,
inside information, the Court’s opinion provides less of a roadmap for the lower courts. The
*Kimberly M. Melvin is a partner and John E. Howell is an associate at Wiley Rein LLP where they both
regularly handle fiduciary liability insurance claims on behalf of their insurance clients.
decision sets a rule that a plaintiff alleging a breach of the duty of prudence based on inside
information must “plausibly allege an alternative action that the defendant could have taken and
that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm
the fund than to help it.” So, while insiders are not required to—and legally may not—engage in
insider trading, fiduciaries must also consider whether refraining from making additional
purchases or disclosing inside information would violate securities laws or do more harm to the
ESOP than good by signaling to the market that company stock is a bad investment.
A number of open questions are raised by Dudenhoeffer, including:

For cases relying on public information, the motion to dismiss stage in stock drop
cases may end up looking more like the class certification stage in securities
litigation, as the parties grapple with whether the market for the company’s stock
was efficient and reliable factored in publicly available information.

Where plaintiffs rely on non-public information, the courts will need to determine
whether there really is any plausible way for fiduciaries to respond to non-public
information without violating the securities laws and harming the plan
participants. The moment a plan halts trading in company stock, an efficient
market will react and the plan participants will likely suffer the very loses that the
fiduciaries are attempting to avoid. Courts, however, are likely to take differing
views of the necessary showing required for plaintiffs to meet the plausibility
standard.

Dudenhoeffer’s pronouncement that “the duty of prudence trumps the instructions
of a plan” may have repercussions beyond stock drop cases in circumstances
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where defendants commonly argue that they had no discretion with respect to the
challenged action and therefore cannot be held liable for a fiduciary breach.
As the parties and lower courts address these questions and others, the motion to dismiss
stage will continue to be a critical signal event in ERISA stock drop cases that will likely become
more expensive for fiduciaries and their carriers, particularly if experts are involved, even in
“meritless goat” cases. Companies are certain to review their current ERISA plan structures in
light of the Dudenhoeffer decision. Predictions that companies will stop offering company stock
to employees seem overstated given the tax incentives promoting ESOPs. Plans may consider,
however, relying more heavily on independent trustees that are unburdened by inside
information to manage their plans.
II.
401(K) EXCESSIVE FEE CASES
Beginning in 2006, plan participants have filed dozens of lawsuits seeking to challenge
the fees charged by 401(k) plans. These lawsuits have largely been pursued by a single firm –
Schlichter Bogard & Denton, LLP. As originally pled, these lawsuits maintained plan fiduciaries
breached their fiduciary duties by selecting investment options with excessive “hard dollar” fees,
such as retail mutual funds.
As these cases have made their way through court and participants have gained access to
discovery, the plaintiffs’ claims have evolved and frequently include one or more of the
following common legal theories:

Revenue-Sharing Claims: fiduciaries imprudently managed fund assets by
allowing and/or failing to monitor and properly disclose the impact of revenue
sharing on the plan’s recordkeeping and other administrative fees.
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
Imprudent Selection of Investment Options: fiduciaries imprudently selected
and/or monitored plan investments options that resulted in excessive fees or
investments not suitable for retirement investments.

Company Stock Fund Claims: fiduciaries violated their fiduciary duties by
offering a unitized company stock fund rather than allowing direct investment in
company stock and/or by maintaining to large of a cash buffer in such funds,
which caused the company stock fund to underperform the company stock.

Stable Value Fund Claims: fiduciaries breached their fiduciary duties by offering
a stable value fund that is too conservative and therefore not suitable as a
retirement investment option.
While the defendants had been largely successful in dismissing or otherwise resolving
these cases, more recently plan participants have obtained litigation success resulting in several
sizeable settlements. In Tussey v. ABB, the plan participants succeeded at trial and subsequently
on appeal with respect to its $13.4 million judgment that the plan fiduciaries violated ERISA by
permitting unreasonable and excessive recordkeeping fees as a result of revenue-sharing. On
remand, the Missouri federal district court will consider plaintiffs’ $21.8 million claim based on
allegedly imprudent investment selections employing a deferential standard of review. In Abbott
v. Lockheed Martin Corp. and Spano v. Boeing Co., plan participants have also succeeded in
securing class certification on appeal in the United States Court of Appeals for the Seventh
Circuit. Finally, plaintiffs have settled two recent cases filed in Illinois, Beesley v. International
Paper Co. and Nolte v. CIGNA Corp., for $30 million and $35 million respectively.
As a result of these developments, the Schlichter firm has filed several more fee cases,
and the pending cases appear headed for trial. Plan sponsors, fiduciaries and their insurers are
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closely watching these cases and hoping for defense victories on the merits that can serve to curb
future litigation and reduce the potential exposure presented by pending cases.
III.
ERISA CHURCH PLAN LITIGATION
Recently, plan participants have filed seven cases challenging whether ERISA’s church
plan exemption applies to pension plans sponsored by non-profit hospital systems that are
affiliated with the Roman Catholic Church or the United Church of Christ and the Evangelical
Lutheran Church in America. According to ERISA, a “church plan” is a retirement plan that is
established and maintained “by a church or by a convention or association of churches which is
exempt from tax under section 501 of title 26.” 29 U.S.C. § 1002(33)(A). Such plans are exempt
from ERISA’s reporting, disclosure, participation, vesting and funding requirements. In these
cases, the plaintiffs contend that the operative plans are not directly “established or maintained”
by a church and therefore they are not exempt from ERISA, including its minimum funding
requirements.
To date, there have been three substantive rulings at the motion to dismiss stage. In two
of these cases, the courts have denied motions to dismiss, finding that the operative plans were
not church plans exempt from ERISA because of the Roman Catholic Church’s lack of a direct
role in the establishment of the plan. See Starla Rollins v. Dignity Health, et al., No. 3:13-cv01450-THE (N.D. Cal. Dec. 12, 2013); Laurence Kaplan v. Saint Peter’s Healthcare System et.
al., No. 3:13-cv-02941-MAS-TJB (D.N.J. Mar. 31, 2014). Defendants posit that these two
rulings are contrary to guidance offered by the Internal Revenue Service and other decisions that
permit church plan sponsorship by church-affiliated organizations. In one case, the court
disagreed with Rollins and Kaplan, granting the hospital’s motion to dismiss. See Overall v.
Ascension Health, No. 13-11396 (E.D. Mich. May 9, 2014).
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To the extent plaintiffs are successful, the potential exposure for the defendants is
significant given ERISA’s minimum funding levels. To this end, the plaintiffs contend that the
sued plans collectively are underfunded by more than $3 billion. In addition, depending on the
potential remedies ultimately available in these cases, questions may exist regarding whether the
amounts plaintiffs seek are covered under fiduciary liability policies.
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