ERISA Litigation ADVISORY - May 10, 2012
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ERISA Litigation ADVISORY
May 10, 2012
This Is No Fable: Eleventh Circuit Adopts Moench Presumption and Rejects Duty
to Disclose Non-Public Information under ERISA with Regard to Employer Stock
On May 8, 2012, the Eleventh Circuit adopted the Moench1 presumption of prudence in affirming
the dismissal of employer-stock drop case Lanfear, et al., v. Home Depot, Inc., et al.2 The court
likewise rejected the notion that allegedly inaccurate and incomplete public securities filings lead to
plausible claims under ERISA. With these holdings, the Eleventh Circuit followed the majority of its
sister courts,3 yet managed to keep the opinion anything but ordinary, regaling us with allusions from
none other than Aesop and his famed fables.
Background
The plaintiffs were employee-participants of Home Depot, Inc.’s 401k retirement plan, the Home
Depot FutureBuilder Plan (“the Plan”). The Plan is both an eligible individual account plan (EIAP)
and an employee stock ownership plan (ESOP) under the Employee Retirement Income Security
Act of 1974 (ERISA). The Plan requires that one of the available investment funds be a “Company
Stock Fund,” invested primarily in shares of Home Depot stock.4
In the wake of a drop in the price of Home Depot stock and alleged internal wrongdoing, the plaintiffs
alleged the usual claims against the usual suspects—Home Depot, as well as Home Depot’s board
of directors, two committees and various Home Depot directors and officers.5 The complaint included
the standard duty of prudence claim based on a failure to sell Home Depot stock from the Company
Stock Fund. Specifically, plaintiffs alleged that Home Depot stock became an imprudent investment
when, unknown to the public, some officials and employees of Home Depot allegedly engaged in
misconduct that inflated the company’s stock price. According to the plaintiffs, some Home Depot
stores were improperly using return-to-vendor chargebacks to charge vendors not only for defective
merchandise, but also for merchandise that had been used or damaged in the stores, stolen or later
1
See Moench v. Robertson, 62. F3d 553 (3d Cir. 1995).
2
No. 10-13002, 2012 U.S. App. LEXIS 9321 (11th Cir. May 8, 2012).
3
See Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995); Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008); Quan v.
Computer Scis. Corp., 623 F.3d 870 (9th Cir. 2010); In re Citigroup ERISA Litig., 662 F. 3d 128 (2d Cir. 2011).
4
Home Depot, 2012 U.S. App. LEXIS 9321, at *4-6.
5
Id. at *3 n.2.
This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends.
It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also
be considered attorney advertising under court rules of certain jurisdictions.sold to customers.6 In October 2004, Home Depot stopped the illicit return-to-vendor chargebacks,
which allegedly resulted in an immediate drop in stock price. Home Depot stock fell from $42.02 per
share to $35.09 per share over the course of a few months.7 The plaintiffs also complained about
certain stock option practices that were made public, but as the court pointed out, the disclosure of
such practices apparently had no impact on the price of the stock. The Eleventh Circuit commented
that, while the ant in Aesop’s fable “The Ant and the Grasshopper” was able to store up for the winter
without being protected by ERISA, the plaintiffs here claimed that violations of ERISA had damaged
their efforts to stockpile savings for their winter years.8
The plaintiffs’ amended complaint also included “duty of loyalty” claims alleging that the defendants
(1) provided inaccurate information to Plan participants in fiduciary communications and (2) did not
disclose Home Depot’s “deceitful business practices” and the effect that those practices had on the
prudence of buying or holding Home Depot stock.9
The District Court Dismissed All Claims
The Northern District of Georgia granted the defendants’ motion to dismiss in its entirety. In doing
so, Judge Evans determined that the prudence claim was “at its core a diversification claim” barred
by § 404(a)(2). In the alternative, the district court held that because the Plan required investment
in Home Depot stock, such investment decisions were immune from judicial review. Further, the
court held that even if the defendants had discretion to not invest in Home Depot stock, the plaintiffs’
allegations were insufficient to rebut the Moench presumption of prudence because they did not
allege Home Depot was on the “brink of financial collapse.”10 While the district court analyzed the
issues under Moench, it declined to adopt the presumption in the absence of controlling authority.
Regarding the disclosure/duty of loyalty claims, the district court concluded that the Home Depot
officers did not make the SEC filings in their capacity as Plan fiduciaries and that incorporation of the
SEC filings by reference into the Form S-8s and stock prospectuses did not give rise to ERISA liability.
It also concluded there was no ERISA-imposed duty to disclose non-public corporate information.11
6
Id.at *7-8.
7
Id. at *9-10.
8
Id. at *2.
9
Id. at *13.
10
Id. at *15.
11
Id. at *15-16.
-2-The Eleventh Circuit Affirmed
Despite the image evoked by the court’s reference to an ant and his diminishing savings versus the
alleged “big, bad” fiduciaries, the “ant” in this story does not fare as well as Aesop’s ant. On appeal,
the Eleventh Circuit affirmed the district court’s dismissal of all claims under Rule 12(b)(6). Most
significantly, the Eleventh Circuit joined the Second, Third, Fifth, Sixth and Ninth Circuits by explicitly
endorsing the Moench presumption of prudence as the applicable standard of review with regard to a
plan fiduciary’s decision to offer company stock as an investment option in eligible individual account
plans.12 The Eleventh Circuit also held that the Moench analysis can be applied to dismiss a claim
under Rule 12(b)(6), finding that it was not an evidentiary presumption.13 In so holding, it considered
and rejected the Sixth Circuit’s recent decision in Pfeil v. State Street Bank & Trust Company14 and
joined all other circuits that have addressed this issue.15
The Prudence Claim
Although the Eleventh Circuit affirmed the district court’s dismissal of the plaintiffs’ prudence claim,
it did so for entirely different reasons. First, the court disagreed with the district court’s conclusion
that the prudence claim was a camouflaged diversification claim:
Although we agree that courts must keep an eye out for wolves in sheep’s clothing, we are
convinced that the plaintiff’s prudence claim is instead a sheep in sheep’s clothing…the plaintiffs
here allege that, even putting aside diversification concerns, Home Depot stock was an imprudent
investment and for that reason the defendants had a duty to divest the Plan of the stock and
stop purchasing it. That is not a wolf in a wool sweater; it is a sure-enough sheep. It does not
howl “diversify”; it bleats “prudence.”16
Second, the court disagreed with the district court’s alternative conclusion that the defendants “had
no discretion not to invest in Home Depot stock.”17 The court noted that the Plan does provide the
defendants with some discretion; it requires only that the Company Stock Fund be invested primarily
(not exclusively) in Home Depot stock.18
12
See In re Citigroup ERISA Litig., 662 F.3d 128 (2d Cir. 2011); Moench v. Robertson, 62. F3d 553 (3d Cir. 1995); Kirschbaum v.
Reliant Energy, Inc., 526 F.3d 243 (5th Cir. 2008); Kuper v. Iovenko, 66 F.3d 1447 (6th Cir. 1995); Quan v. Computer Scis. Corp.,
623 F.3d 870 (9th Cir.).
13
Home Depot, Inc., 2012 U.S. App. LEXIS 9321, at *35.
14
671 F.3d 585 (6th Cir. 2012).
15
See In re Citigroup ERISA Litig., 662 F.3d 128, 139 (2d Cir. 2011); Edgar v. Avaya, Inc., 503 F.3d 340, 349 (3d Cir. 2007).
16
Home Depot, Inc., 2012 U.S. App. LEXIS 9321, at *21.
17
Id.
18
Id. at *21-22.
-3-Nonetheless, the Eleventh Circuit agreed with the district court’s third alternative holding that even if
the defendants’ decisions were subject to judicial review, the plaintiffs’ allegations were insufficient
to rebut the Moench presumption of prudence. However, it again reached this conclusion for entirely
different reasons than the district court.
While adopting Moench’s abuse of discretion standard for review of ESOP plan fiduciaries’ investments
in company stock, the Eleventh Circuit rejected the district court’s “brink of financial collapse” test
for determining whether the presumption is overcome. Instead, the Eleventh Circuit adopted the
test of other circuits, stating that “a fiduciary abuses his discretion by acting in compliance with the
directions of the plan only when the fiduciary could not have reasonably believed that the settlors
would have intended for him to do so under the circumstances.”19 Thus, the standard for such claims
in the Eleventh Circuit is whether the plan fiduciaries could reasonably believe the plan sponsor would
want them to continue investing in the employer securities.
In applying this test to the facts of the case, the Eleventh Circuit looked at the alleged stock drop—
approximately 16.5 percent over two months, followed by a rebound in the price a few months later—
and held “there is nothing in this Plan to indicate that those who created it intended for fiduciaries to
disregard their instructions based on short-term events and fluctuations in the market.”20 In reaching
this result, the Eleventh Circuit noted that participants “have no right to insist that fiduciaries who are
corporate insiders use inside information to the advantage of the participants.”21
The Duty of Loyalty Claims
The plaintiffs also alleged that the defendants violated their fiduciary duty of loyalty in two ways. First,
they alleged that the defendants made misrepresentations in their SEC filings that were incorporated
by reference into plan documents. In responding to this claim, the Eleventh Circuit noted, “ERISA
recognizes that a person may be a fiduciary for some purposes and not others.” Here, it was securities
law that required the SEC filings and distribution of stock prospectuses. Thus, in making such filings,
the defendants “were acting in their corporate capacity and not in their capacity as ERISA fiduciaries.”
As such, any alleged misrepresentations in the SEC filings did not violate ERISA.22
For their second breach of the duty of loyalty claim, the plaintiffs alleged that the defendants had a
duty to inform the Plan participants of Home Depot’s “deceitful business practices [involving the return-
to-vendor chargebacks] and how these activities adversely affected Company stock as a prudent
investment option under the Plan.” The Eleventh Circuit noted, “ERISA does not explicitly impose a
duty to provide participants with nonpublic information affecting the value of the company’s stock.”23
19
Id. at *34.
20
Id. at *38-39.
21
Id. at *39.
22
Id. at *43.
23
Id. at *45.
-4-The court agreed with opinions from the Second and Third Circuits, finding that warnings regarding
the non-diversified and thus highly risky nature of the stock fund in the summary plan description
adequately informed participants regarding the fund as required by ERISA.24
Analysis
As mentioned above, the Eleventh Circuit has now officially adopted the Moench presumption of
prudence, thereby joining the Second, Third, Fifth, Sixth and Ninth Circuits. The Eleventh Circuit
also joins those courts in applying the presumption at all stages of litigation (including the pleading
stage). Further, the Eleventh Circuit adopted the “sponsor intent” test originally promulgated in Moench
(rather than a viability or brink of collapse test). As such, we reiterate our prior recommendation that
sponsors include an explicit statement of their intent regarding the employer stock fund.
The case is also a “win” for defendants in its recognition that incorporation by reference of public
filings (10ks and 10Qs) into an S-8 and/or a prospectus is not a fiduciary act, so such public filings
are not subject to ERISA. This affirms again that plan fiduciaries wear multiple hats and are not
acting as fiduciaries when making SEC filings. Nonetheless, we continue to recommend that clients
separate their employer stock prospectus from the SPD, just to make it clear that any incorporation by
reference of public filings is into a prospectus—not the SPD separate and apart from a prospectus.
Finally, the case is significant for its rejection of a duty to disclose non-public information under ERISA.
It is helpful that the court explicitly found that participants are not entitled to a market advantage
over other shareholders and that disclosures to plan participants of inside information could not
practically be done in a way that would benefit them in any event. However, the court’s reliance
on language in Home Depot’s summary plan descriptions as adequately informing participants of
the inherent risks of the undiversified employer stock fund may create problems for companies that
do not have such aggressive warnings in their SPDs. As such, we recommend that clients review
their SPDs and other information provided to participants regarding an employer stock fund and
make sure they provide clear warnings regarding the undiversified and risky nature of such a fund.
The case is Lanfear, et al. v. Home Depot, Inc., et al., No. 10-13002 (11th Cir. May 8, 2012).
This advisory was written by H.Douglas Hinson and Emily Hootkins.
24
Id. at *46-47. See In re Citigroup ERISA Litig., 662 F.3d 128, 143 (2d Cir. 2011); Edgar v. Avaya, Inc., 503 F.3d 340, 349-50
(3d Cir. 2007).
-5-If you would like to receive future ERISA Litigation Advisories electronically, please forward
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