Supreme Court Addresses First of Numerous Issues Arising in ERISA “Stock Drop” Litigation

February 25, 2008

The Supreme Court’s decision last week in LaRue v. DeWolff, Boberg & Associates, No. 06-856, slip op. (U.S. 2008), addressed the first of several issues that have divided the courts in ERISA "stock drop" cases, which concern losses to company 401(k) plans resulting from downturns in the company’s stock.

The defendant employer in the case, DeWolff, maintained a 401(k) plan in which plaintiff LaRue had been a participant. LaRue alleged that he directed the company to make certain changes in the investments in his account; the changes were not made, LaRue alleged, resulting in a $150,000 loss to his retirement account. LaRue sued under ERISA Section 502(a)(2), which provides relief for losses to plans resulting from fiduciary breaches. The Fourth Circuit rejected LaRue’s claim, ruling that a claim under 502(a)(2) must seek relief for the plan as a whole, not for an individual account as LaRue was attempting.

In a February 20th opinion by Justice Stevens, the Supreme Court vacated and remanded. An individual can recover under Section 502(a)(2) for "fiduciary breaches that impair the value of plan assets in a participant’s individual account," Justice Stevens wrote. An earlier Supreme Court decision had referred to the necessity of injury to "the entire plan, rather than the rights of an individual beneficiary," the Court acknowledged, but that case concerned a defined benefit plan rather than defined contribution plans (such as 401(k)’s), which "dominate the retirement plan scene today." The language from the earlier decision "does not apply to defined contribution plans," the Court stated.

Justice Thomas, joined by Justice Scalia, concurred in the judgment, stating that losses to individual 401(k) accounts are in effect losses to the "entire plan" within the meaning of the Court’s earlier decision, and therefore a separate principle for defined contribution plans need not be articulated. "Because a defined contribution plan is essentially the sum of its parts, losses attributable to the account of an individual participant are necessarily ‘losses to the plan,’" Justice Thomas explained. Chief Justice Roberts, joined by Justice Kennedy, concurred in part and in the judgment, suggesting that individuals seeking relief for losses to their individual accounts may be required to sue under Section 502(a)(1)(B) (for "benefits due . . . under the terms of the plan"), rather than under Section 502(a)(2) as indicated by the seven other Justices. The distinction is important because Section 502(a)(1)(B) carries enhanced procedural safeguards, including a requirement to exhaust remedies under the plan. (The majority suggested in a footnote that plaintiff’s 502(a)(2) claim could carry an exhaustion requirement, but it declined to resolve the issue.)

LaRue is among the very first Supreme Court cases to address fiduciary breach claims for losses to 401(k) accounts; the divergent approaches of the Justices reflect the considerable uncertainty and room for innovation in this area. LaRue itself was not a "stock drop" case, and the Court’s decision leaves unanswered many significant questions that have divided the lower courts. These questions include (1) the circumstances–if any–in which fiduciaries should override the investment choices of plan participants; (2) the additional communications–if any–that fiduciaries owe company employees invested in company stock when a significant drop in stock price appears imminent; and (3) the applicability in "stock drop" cases of the special defense provided in ERISA Section 404(c). In addition, while the Court’s opinion noted that the participants entitled to sue on behalf of plans under 502(a)(2) "may" include former participants who have liquidated their 401(k) accounts, the Court did not conclusively resolve whether former participants have standing to sue under ERISA. 

Gibson, Dunn & Crutcher LLP

Gibson Dunn & Crutcher LLP has one of the nation’s foremost ERISA litigation groups. The firm successfully represented parties in two recent Supreme Court ERISA cases, and represents the party in a third case this Term. The firm has handled ERISA "stock drop" cases in federal district and appellate courts across the country, and two Gibson Dunn partners formerly served as Solicitor (general counsel) of the U.S. Department of Labor, with responsibility for all the federal government’s civil ERISA litigation. 

To learn more about the LaRue decision or for help with other questions on ERISA litigation, please contact the Gibson Dunn attorney with whom you work, or
William J. Kilberg (202-955-8573, wkilberg@gibsondunn.com) or 
Labor and Employment Practice Group Co-Chair Eugene Scalia (202-955-8206, escalia@gibsondunn.com) in Washington, D.C.; 
Joseph Busch III (949-451-3898, jbusch@gibsondunn.com) in Orange County;
Karl Nelson
(214-698-3203, knelson@gibsondunn.com) in Dallas; or
Pamela Hemminger (213-229-7274, phemminger@gibsondunn.com) in Los Angeles.

© 2008 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.