In the document, submitted for the case Fifth Third Bancorp v. John Dudenhoeffer in support of Third Fifth Bancorp, the Chamber of Commerce of the United States, the ERISA Industry Committee, the American Benefits Council, the Plan Sponsor Council of America and the National Association of Manufacturers argue plan sponsors will be discouraged from offering employer stock absent a strong presumption of prudence that applies at the pleading stage of the court process.

The groups say if the standard for overcoming the presumption of prudence is weakened or rendered inapplicable at the pleading phase, the costs of offering employer stock could increase dramatically. There is also a concern that employees would file nuisance suits every time a company’s stock price decreased.

“If fiduciaries cannot obtain dismissal of baseless stock-drop suits at an early stage of the litigation, they will be less likely to offer employer stock funds in the first instance for fear of incurring significant legal fees to defend the prudence of their decisions,” states the brief.

The brief asks that the Supreme Court should “hold that a plaintiff claiming that it was imprudent for a plan fiduciary to offer an employer stock fund must plead plausible facts to establish that the employer was not viable as a going concern.” Further, the brief asks that the judgment of the 6th U.S. Circuit Court of Appeals should be reversed.

The decision issued by the 6th Circuit was that the presumption of prudence is not to be applied at the pleading stage of such a lawsuit (see “SCOTUS Takes Up Presumption of Prudence Issue”).

In addressing the decision by the 6th Circuit, the brief argues that for ESOPs, “short-term stock price fluctuations should not compel a fiduciary to jettison an employer stock fund,” since even if the stock loses money in the short term, its purpose of “fostering employees’ ability to share in the ownership of their employer would still be fulfilled.”

The brief acknowledges that companies can face “dire circumstance” scenarios, such as bankruptcy, where “increasing employee ownership…is not beneficial to anyone and a fiduciary should not be presumed prudent for continuing to offer company stock that will soon be worthless.” However, the brief argues that the 6th Circuit rejected such a “dire circumstances” test, instead ruling that “whether a fiduciary acts prudently by offering an employer stock fund turns on whether a prudent fiduciary acting under similar circumstances would have made a different investment decision.”

The brief further argues that “a plan fiduciary demonstrates his prudence by analyzing the fund’s performance against various objective benchmarks, such as the risk-return ratio, the performance of the fund relative to similar ‘peer’ funds, and the qualities and costs of the fund manager,” with a fiduciary who considers and acts upon these measures being “insulated from claims of imprudence even if the fund’s value subsequently declined.”

The brief also points out that as per Bell Atlantic Corp v. Twombly, “it is now well established that a plaintiff must plead facts that, if proven, would raise a right to relief beyond a speculative level,” but that despite this “the Sixth Circuit became the only circuit to refuse to apply the presumption of prudence on a motion to dismiss.”

The brief’s authors conclude that in light of Twombly, a plaintiff’s complaint in a stock drop case must “articulate plausible facts that, if proven, would support a theory sufficient to overcome the presumption of prudence. Indeed, a straightforward application of Twombly leads to the inexorable conclusion that if a plaintiff does not plead facts that, if proven, would be sufficient to overcome the presumption of prudence, then the complaint must be dismissed.”

The full text of the brief can be downloaded here.