On August 23, 2021, the U.S. District Court for the Northern District of Illinois dismissed an ERISA stock-drop lawsuit brought against fiduciaries of Kraft Heinz Food Company’s employee stock ownership plan (ESOP), holding that the plaintiffs failed to meet the “more harm than good” pleading standard set forth in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 428 (2014). Osborne v. Emp. Benefits Admin. Bd. of Kraft Heinz, No. 20-cv-2256, 2021 WL 3725613 (N.D. Ill. Aug. 23, 2021).
The plaintiffs in Osborne, all participants in various defined contribution retirement plans sponsored by Kraft Heinz (and who invested their retirement savings in Kraft Heinz stock), alleged that the Kraft Heinz fiduciaries breached their fiduciary duties of prudence and loyalty under ERISA by allowing the company’s ESOP to remain invested in company stock while the price of the stock was artificially inflated. The plaintiffs alleged that Kraft Heinz’s stock price was artificially inflated because the company was recording inaccurate amounts of goodwill and intangible assets, which allegedly had been damaged by the company’s strategy of “harsh cost-cutting to create earnings growth.” After Kraft Heinz disclosed in 2018 that the company took a $15.4 billion impairment charge to lower the carrying amount of its goodwill and certain intangible assets, the company’s shareholders experienced a net loss of $12.6 billion. The plaintiffs alleged that the Kraft Heinz fiduciaries, as corporate insiders, knew or should have known the negative information regarding the value of Kraft Heinz’s goodwill and intangibles that ultimately led to the $15.4 billion impairment. They also alleged that the fiduciaries should have caused or tried to cause the company to disclose that negative information earlier in order to correct the stock’s artificially inflated price, and that failing to do so was a breach of their duties of prudence and loyalty under ERISA.
The district court dismissed the plaintiffs’ claims for failing to satisfy Dudenhoeffer’s more-harm-than-good standard. The court held that the plaintiffs failed to state a fiduciary breach claim under Dudenhoeffer because they did not specify precisely what the Kraft Heinz fiduciaries should have disclosed and when. Furthermore, the court noted that it was entirely possible that public disclosure would have spooked the market and resulted in an outsized drop in the value of the company’s stock — harming the plan and its participants. Agreeing with other circuits, and distinguishing the Second Circuit’s decision in Jander v. Retirement Plans Committee of IBM, the court also emphasized that general economic principles (e.g., “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.
Faegre Drinker Perspective
The district court’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.