On April 19, 2021, in Wilson v. Craver, No. 18-56139, 2021 WL 1523253 (9th Cir. Apr. 19, 2021), the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of an ERISA stock-drop lawsuit brought against fiduciaries of Edison International’s employee stock ownership plan (ESOP), holding that the plaintiff failed to meet the “more harm than good” pleading standard set forth in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 428 (2014).
The plaintiff in Wilson, a participant in the Edison 401(k) Savings Plan — which included the Edison Company Stock Fund as an investment option — alleged that the Plan’s fiduciaries breached their fiduciary duty of prudence under ERISA by allowing the company’s ESOP to remain invested in company stock while the price of the stock was artificially inflated. The plaintiff contended that Edison’s stock price was artificially inflated because the Plan’s fiduciaries failed to disclose misrepresentations that Edison allegedly made to California public utility regulators relating to the past closure of an Edison power plant. When these allegedly improper communications came to light, Edison’s stock price declined by 15%, and the plaintiff filed suit.
After the district court dismissed the plaintiff’s claims for failing to satisfy Dudenhoeffer’s “more-harm-than-good” standard, the Ninth Circuit affirmed. The appellate court held that the plaintiff failed to state a fiduciary breach claim under Dudenhoeffer, because the alternative action that she alleged the Plan’s fiduciaries should have taken — issuing an earlier corrective disclosure — was not supported by enough context-specific allegations to plausibly explain why a prudent fiduciary in the defendants’ position “could not have concluded” that a corrective disclosure would do more harm than good to the Edison Company Stock Fund.
Agreeing with other circuits, and distinguishing the Second Circuit’s decision in Jander v. Retirement Plans Committee of IBM, the court emphasized that general economic principles — such as, “the longer a fraud is concealed, the greater the harm to the company’s reputation and stock price” — are not enough on their own to meet the Dudenhoeffer pleading standard. This puts the Ninth Circuit squarely in harmony with decisions from the Fifth, Sixth, and Eighth Circuits, and further marginalizes the Second Circuit’s contrary decision in Jander.
Faegre Drinker Perspective:
The Ninth Circuit’s ruling is significant for three reasons:
- First, it reinforces the significant pleading burden that plaintiffs face when bringing stock-drop class actions based on theories of “inside information.”
- Second, it rejects the ever-more-common attempt by plaintiffs to overcome that burden by pleading general economic principles that would apply in every case.
- And third, it joins the chorus of decisions distinguishing the Second Circuit’s decision in Jander — further relegating Jander to outlier status.