Todd Graham v. Richard Fearon
17-3407
| 6th Cir. | Jan 8, 2018Background
- Eaton sponsored an ESOP (Eaton Company Stock Fund) within its defined-contribution plan; participants purchased about $40M in Eaton stock during the Class Period (Nov 13, 2013–Jul 28, 2014) in addition to $909M already held.
- Plaintiffs are former Eaton employees who bought Fund shares during the Class Period and sued plan fiduciaries (senior Eaton officers) under ERISA §502 for breach of the duty of prudence, alleging Eaton executives’ misrepresentations artificially inflated the stock.
- Plaintiffs alleged fiduciaries could have (1) issued corrective public disclosures, (2) halted new contributions to the Fund, or (3) shifted a portion of holdings into a low-cost, non-derivative hedging product to prevent or mitigate losses.
- After the merger with Cooper (2012), Eaton executives repeatedly stated there were no plans to spin off its vehicle business; on July 29, 2014 they disclosed a five-year restriction on tax-free spin-offs, after which Eaton stock dropped sharply.
- Defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6); the district court dismissed for failure to state a claim and denied leave to amend; the Sixth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the complaint plausibly alleges an alternative action that a prudent fiduciary could not have concluded would do more harm than good (Fifth Third standard) | Plaintiffs: fiduciaries should have taken alternatives (disclosure, freeze, hedging) because stock was fraudulently inflated | Defendants: the proposed alternatives could plausibly do more harm than good (market overreaction, signaling problems, duty-exempt ESOP diversification) | Court: Plaintiffs did not plausibly allege any alternative so clearly beneficial that a prudent fiduciary could not have concluded it would do more harm than good; dismissal affirmed |
| Corrective public disclosure as the required alternative | Plaintiffs: disclosure would correct market overvaluation and limit later harm | Defendants: disclosure could cause immediate price collapse harming participants already invested; prudent fiduciary could reasonably avoid disclosure | Held: Disclosure not plausibly alleged to be so clearly beneficial; courts routinely reject disclosure as because it may do more harm than good |
| Halting new contributions / closing the Fund | Plaintiffs: stopping purchases would prevent further overpaying into inflated stock | Defendants: freezing the Fund signals insider concern and can precipitate worse market declines; may harm participants | Held: Halting purchases plausibly could do more harm than good; plaintiffs failed to plead it would be clearly beneficial |
| Hedging / diverting a portion of holdings into a low-cost, non-derivative product | Plaintiffs: a small hedge could offset losses without violating securities laws | Defendants: plaintiffs’ allegation lacked specificity about the product and may impose an impermissible duty to diversify (ESOP exception) | Held: Complaint lacks factual specificity about any practicable hedging product; claim fails and would require more concrete allegations |
Key Cases Cited
- Courtright v. City of Battle Creek, 839 F.3d 513 (6th Cir. 2016) (pleading standard — accept well-pleaded facts as true on 12(b)(6))
- Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (U.S. 2014) (ESOP fiduciaries must plead an alternative action a prudent fiduciary could not have reasonably concluded would do more harm than good)
- Amgen Inc. v. Harris, 136 S. Ct. 758 (U.S. 2016) (summarily reversing a Ninth Circuit finding; emphasized Fifth Third’s standard and need for factual detail)
- Saumer v. Cliffs Nat. Res. Inc., 853 F.3d 855 (6th Cir. 2017) (applied Fifth Third to reject disclosure/closure alternatives as plausibly more harmful than beneficial)
- Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56 (2d Cir. 2016) (dismissal where complaint failed to plead that disclosure would necessarily help the fund)
- Whitley v. BP, P.L.C., 838 F.3d 523 (5th Cir. 2016) (held that disclosure could plausibly do more harm than good and dismissed similar claims)
- Harris v. Amgen, Inc., 788 F.3d 916 (9th Cir. 2015) (earlier decision finding removing the ESOP option might plausibly benefit participants — later reversed by Amgen)
- Beydoun v. Sessions, 871 F.3d 459 (6th Cir. 2017) (party must present substance of proposed amendment to obtain leave to amend)