Ninth Circuit Limits Reach of Moench Presumption of Prudence for ERISA Plan Fiduciaries | Practical Law

Ninth Circuit Limits Reach of Moench Presumption of Prudence for ERISA Plan Fiduciaries | Practical Law

The US Court of Appeals for the Ninth Circuit ruled in Harris v. Amgen that an eligible individual account plan (EIAP) that merely permits the option of investment in a company stock fund will not by itself entitle plan fiduciaries to the Moench presumption of prudence for the continued inclusion of that fund as a plan investment option in an action alleging breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).

Ninth Circuit Limits Reach of Moench Presumption of Prudence for ERISA Plan Fiduciaries

by Practical Law Employee Benefits & Executive Compensation
Published on 06 Jun 2013 • USA (National/Federal)
The US Court of Appeals for the Ninth Circuit ruled in Harris v. Amgen that an eligible individual account plan (EIAP) that merely permits the option of investment in a company stock fund will not by itself entitle plan fiduciaries to the Moench presumption of prudence for the continued inclusion of that fund as a plan investment option in an action alleging breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).
On June 4, 2013, the US Court of Appeals for the Ninth Circuit ruled in Harris v. Amgen that eligible individual account plan (EIAP) language that merely permits the option of investment in a company stock fund will not by itself entitle plan fiduciaries to the Moench presumption of prudence for the continued inclusion of that fund as a plan investment option in an action alleging breach of fiduciary duties under ERISA. The decision also clarifies that a plan must make a clear and exclusive delegation of fiduciary authority to an entity other than the company if that company is to avoid fiduciary liability.
Update: On October 23, 2013, the Ninth Circuit reissued its opinion, adding that the incorporation of SEC filings by reference in a summary plan description (SPD) qualifies as an act performed in a fiduciary capacity under ERISA. The reissued decision leaves the court's holdings intact. For more information, see Legal Update, Ninth Circuit: Incorporation of SEC Filings by Reference in SPDs is Fiduciary Act.

Key Litigated Issues

In Amgen, the key litigated issues were whether:
  • The plan fiduciaries of an eligible individual account plan (EIAP) governed by ERISA that permitted, but did not require, an investment option in company stock were entitled to the Moench presumption of prudence for the decision to continue offering the stock after they became aware of its artificial price inflation.
  • The plan fiduciaries violated ERISA's fiduciary standards for prudence and their duty of loyalty and care.
  • Amgen qualified as a fiduciary under the plan.

Background

The plaintiffs, current and former employees of biotechnology company Amgen, Inc. (Amgen) and an Amgen subsidiary, participated in two employer-sponsored eligible individual account plans (EIAPs) under ERISA. The plans offered a number of investment funds to participants, one of which was the Amgen Common Stock Fund.
During 2006, roughly half of Amgen's revenues came from the sale of Aranesp, a drug used to treat anemia. At the urging of federal regulators, Amgen undertook clinical trials of Aranesp which indicated potential safety concerns about the drug. Despite these results, Amgen publicly defended the drug's safety and effectiveness, and engaged in extensive marketing to encourage on-label and off-label use of Aranesp and similar drugs. Amgen also failed to disclose that one of its trials was temporarily halted due to information about potential unexpected negative effects.
In February 2007, news outlets reported on the clinical trials and the possibility that Aranesp might aggravate existing cancers. The following month, the FDA mandated a "black box" warning for off-label use of Aranesp, and the US House of Representatives opened an investigation into the safety of Aranesp. In May 2007, the FDA noted on its website that Aranesp was clearly demonstrated to be unacceptable in high doses, and a FDA-associated committee of oncology experts voted to restrict its use.
Between September 2005 and May 2007, Amgen's stock price dropped by a third. Amgen's president and CEO, Kevin Sharer, noted that safety concerns about Aranesp accounted for a decrease in operating income of between $800 million and $1 billion.
In August 2007, two participants in each of the EIAPs filed a class action suit alleging that the Amgen and other defendants breached their fiduciary duties by continuing to offer the Amgen Common Stock Fund despite knowing that the price of the stock was artificially inflated due to illegal off-label use and other material omissions and misrepresentations by company officers. The district court dismissed the plaintiffs' complaint, holding that:
  • The defendants were entitled to a "presumption of prudence" regarding their decision to continue offering the Amgen stock fund as a plan investment option under Quan v. Computer Sciences Corp., which adopted the standard articulated by the Third Circuit Court of Appeals in Moench v. Robertson.
  • Even if the Moench presumption did not apply, the defendants did not violate their fiduciary duties.
  • Amgen was not a fiduciary of the plan.
The plaintiffs appealed to the Ninth Circuit.

Outcome

On June 4, 2013, in Harris v. Amgen, a three-judge panel of the US Court of Appeals for the Ninth Circuit issued an opinion reversing the decision of the district court. The court held that:
  • The Moench presumption of prudence does not apply to the plan fiduciaries' decision to continue offering Amgen stock under the EIAPs because the terms of the EIAPs did not require or encourage the fiduciaries to offer or continue the Amgen stock fund as a plan investment option.
  • The plaintiffs sufficiently alleged that fiduciary defendants violated their duty of care and loyalty under ERISA.
  • Amgen was a plan fiduciary because it did not clearly and exclusively delegate its fiduciary authority to any other party.

The Moench Presumption

In Quan, the Ninth Circuit adopted the so-called Moench presumption, which provides that if a plan's language requires or encourages investment in employer stock, plan fiduciaries are entitled to a presumption of prudence for allowing employer stock to continue to be offered as an investment option in the plan. The presumption can only be rebutted by establishing that the fiduciaries abused their discretion.
The defendants acknowledged that the EIAPs did not require them to provide a company investment fund as a plan investment option. To determine whether the Amgen EIAPs encouraged the use of the Amgen stock fund as a plan investment option, the Ninth Circuit looked to the language of the EIAPs. The plans:
  • Do not mandate that the Amgen stock fund be established or continued as a plan investment option but rather offer a discretionary option to invest in that fund to participants.
  • Provide restrictions and limitations on a participant's purchase, transfer from and distribution of the Amgen stock fund, including limiting a participant's holding in the fund to 50% of his total plan account.
The Ninth Circuit concluded that these provisions do not constitute encouragement to invest in Amgen stock, reasoning that:
  • The offering of company stock as a discretionary option to participants, as is common in an EIAP, is insufficient to entitle fiduciaries to the Moench presumption. The court cited Taveras v. UBS AG, in which the Second Circuit held that an EIAP's offering of a discretionary company stock fund in the plan does not constitute encouragement of that fund.
  • Other provisions in the plan, including the 50% limitation on investments in company stock, discouraged rather than encouraged investment in Amgen stock.
In the absence of the Moench presumption, the court concluded that the defendants' decision to continue to offer the Amgen fund in light of the artificial price inflation allegations surrounding the stock were subject to ERISA's prudent man standard of care (see Practice Note, ERISA Fiduciary Duties: Overview).

The Fiduciaries' Duty of Care under ERISA

The Ninth Circuit also concluded that the plaintiff's allegations that the fiduciaries continued to permit investments in the Amgen stock fund after they knew or should have known that the Amgen stock fund was purchasing stock at an artificially inflated price due to material misrepresentations and omissions by company officers, as well as by illegal off-label marketing, are sufficient to state a claim for a violation of the fiduciaries' duty of care under ERISA.
The court also pointed to the district court's decision upholding a federal securities class action against Amgen based on the same series of events, noting that if the alleged misrepresentations and omissions in that action were sufficient to state a claim for violations of Section 10(b) of the Securities Exchange Act of 1934, the allegations raised by the plaintiffs were sufficient to state a claim under ERISA's more stringent duty of care.
The court rejected several arguments raised by the defendants, concluding that the current financial health of the company and the rate of stock decline are not relevant in determining whether the defendants' decisions regarding the Amgen stock fund were prudent (particularly in light of the artificially inflated price claim). The court also rejected the defendants' argument that they may have violated federal securities laws if these allegations were to plan participants, reasoning that had the company revealed material information in a timely fashion to the public (including participants), they likely would have satisfied their duties under both securities laws and ERISA.
The court also held that the plaintiffs stated claims for a violation of the duty of loyalty under ERISA, brushing aside the defendants' argument that a defrauded investor (such as a plan participant) must show actual reliance on the particular omissions or representations.

Amgen's Fiduciary Status

The Ninth Circuit reversed the district court's holding that Amgen was not a fiduciary of the plan because it had delegated its authority to trustees, the plan's fiduciary committee and investment managers. The court reasoned that while the plan document authorized the fiduciary committee to take action on behalf of Amgen:
  • It did not provide exclusive fiduciary authority to the committee.
  • It did not preclude Amgen from acting on its own behalf.
The Ninth Circuit noted that other courts have identified an exclusive grant of fiduciary authority and an express disclaimer of authority as critical elements of a successful delegation of fiduciary duty by a company (see Maher v. Mass. General Hosp. Long Term Disability Plan and Costantino v. Wash. Post Multi-Option Benefits Plan).
In the absence of a clear delegation of exclusive fiduciary authority from the company to another party, the Ninth Circuit held, Amgen remained a fiduciary and a proper defendant to the action.

Practical Impact

The Ninth Circuit in its decision joins with the Second Circuit in narrowing the reach of the Moench presumption, concluding that an EIAP that merely offers the option of a company stock fund does not require or encourage the investment of plan assets in the stock fund and, therefore, will not entitle plan fiduciaries to the Moench presumption of prudence for their decision to continue to offer company stock as a plan investment option.
The decision also clarifies the stringent plan terms necessary for a company to delegate fiduciary status, emphasizing the importance of a clear and complete delegation of exclusive fiduciary authority from the company to another party to avoid fiduciary liability.

Court Documents