(This is another post in our series, Looking Back at the U.S. Supreme Court’s 2013 Term.) This blog post is the third of three on labor and employment law cases by the United States Supreme Court in the last Term. This post focuses on two employee benefit law/ERISA cases: Fifth Third Bancorp v. Dudenhoeffer and Burwell v. Hobby Lobby Stores, Inc. First, a disclosure: Along with six other law professors, I co-wrote an Amicus Curiae brief in support of the Dudenhoeffer plaintiffs.

Dudenhoeffer involves so-called ERISA stock-drop litigation, which has been rampant in the federal courts for a couple of decades now. The basic formula of these cases is that, as part of the employer-sponsored retirement plan (whether an employee stock ownership plan (ESOP) or a participant-directed 401(k) plan), the employer offers its own stock as either the entire pension plan investment or part of the pension plan investment.   When the company goes south and its stock price falls, plan fiduciaries find themselves in a difficult position as far as whether to sell the stock or to hold on to it. This is especially so when the plan fiduciary has conflicting duties as an officer of the company and as a fiduciary of the plan. As a corporate officer, not only is the person supposed to act in the best interests of shareholders to maximize the value of the company, but securities law forbids them to trade stock based on non-public material information. As a fiduciary to the ESOP or 401(k) plan, ERISA gives that same person an obligation to act in the best interest and with the same care as a prudent fiduciary would when making decisions about that employee benefit plan. And in case you are wondering, ERISA Section 408(c)(3) gives employers the ability to assign the same person both officer and plan fiduciary roles or set up so-called “dual-role fiduciaries.”

So in Dudenhoeffer, 134 S. Ct. 2459 (June 25, 2014), a class action was filed by Fifth Third Bancorp employees who invested in company stock as part of the company’s retirement plan. The employee participants alleged that the plan violated its fiduciary duties under ERISA when plan fiduciaries allowed the participants to invest in Fifth Third stock during a period of time when the company “switched from being a conservative lender to a subprime lender” and that the Fifth Third fiduciaries had “either failed to disclose the resulting damage to the company and its stockholders or provided misleading disclosures.” The federal trial court dismissed the claim, finding (like many other courts) that the fiduciaries were entitled to a “presumption of prudence” when investing in their own stock and the participants had not shown the fiduciaries abused their discretion in continuing to invest in company stock. Under this so-called Moench presumption, participants would have to show that the fiduciaries knew the company was literally about to fail before pulling out its pension money from the company. The Sixth Circuit reversed, not because it disagreed with the Moench presumption, but because it though the presumption of prudence should not be applied at the motion to dismiss stage of the case.

The Supreme Court, in a unanimous decision, overruled the Moench presumption completely, finding no statutory anchor in ERISA that supported the presumption of prudence. Indeed, Section 404(a)(2) of ERISA only says that retirement plans that invest in company stock are free from the normal duty to diversify its holdings, not from the normal fiduciary duties of loyalty and care that apply to all ERISA fiduciaries. However, although ERISA stock-drop plaintiffs may have won the battle over the viability of the Moench presumption, they may have lost the war as far as stock-drop litigation overall. This is because even without a presumption of prudence, the Court in Dudenhoeffer made it very difficult for plaintiffs to plead a breach of fiduciary claim in these stock-drop cases. Any ERISA participant seeking to show that a fiduciary should have sold employer stock (or refrained from purchasing employer stock) will need to plausibly allege “special circumstances” beyond a simple claim that the price of the stock declined in value or that it was imprudent to purchase or hold the stock. Not only is a price drop not evidence of imprudence (especially where the stock is appropriately valued on a public exchange), but prudent fiduciaries should not violate securities law by divulging non-public material information to plan participants concerning whether the company stock may decline in value in the future. In all, this will be a very high bar for plaintiffs to meet. In Dudenhoeffer itself, the Court remanded the case so that the lower courts could give the plaintiffs a chance to plausibly plead such special circumstances.

In the previous post on labor law cases, I made mention that Noel Canning is anything but a normal labor law case. Similarly, Hobby Lobby, 134 S. Ct. 2751 (Jun. 30, 2014), is anything but a normal employee benefits case. In fact, although the holding that closely-held religious corporations do not have to meet the mandate of the Affordable Care Act (ACA) and supply contraceptive coverage to their employees is certainly one concerning benefits under an employer-sponsored health insurance plan, the case largely deals with issues under the Religious Freedom and Restoration Act (RFRA). I am not a RFRA scholar, and only have my own personal views about whether corporations should have religious liberty rights under that law. However, as an ERISA person who focuses on the employer side of ACA, I can explain how Hobby Lobby fits into the larger ACA picture.

The ACA was passed into law in March 2010 and creates new federal requirements for group health plans. In 2012, the individual mandate of ACA, requiring all Americans to have health insurance coverage of some form, was upheld against constitutional challenge in NFIB v. Sebelius, 132 S. Ct. 2566 (2012). Over the last four years and more, then, different provisions have come into effect, including an HHS mandate that requires all employers to include within their health insurance coverage certain contraceptive/birth control services and drugs without patient cost-sharing. Allowances were made for non-profit religious organizations that had religious objections to these health insurance provisions so that such coverage could be provided to their employees without their involvement, but no allowance was made for private corporations that had religious orientations. One such company, Hobby Lobby, a closely-held corporation, challenged the contraceptive provisions of ACA under RFRA as incompatible with its sincerely-held religious beliefs.

In a 5-4 partisan decision (Justice Ginsburg dissenting), the majority held that these corporations were “persons” under RFRA and that the law interfered with their religious rights without compelling justification and without consideration of less religious discriminatory alternatives. Thus, for these closely-held, religious private corporations, the contraceptive mandate was struck down, and women who work for these companies are now supposed to be eligible for the same accommodation that previously applied only to employees at non-profit religious corporations.

The scope of the Hobby Lobby decision is still not clear (and the majority and dissenting vigorously argue over the decision’s implications). For instance, is the contraceptive mandate unique or are other coverage requirements susceptible to religious challenge now, as the dissenting opinion suggests? In any event, Hobby Lobby does appear to indicate an on-going attempt by opponents of ACA to continue attacks on various provisions of the law and ACA litigation will continue for many years to come, having a sizable impact on the provisions of health insurance by employers.