Supreme Court Remands IBM Retirement Case to 2nd Circuit

WASHINGTON (CN) — Sending back a class action over how IBM handled employee retirement plans, the Supreme Court ruled Tuesday that arguments raised first at this stage merit consideration from the lower court.

The dispute traces back to 2014 when IBM announced it had sold its microelectronics business to GlobalFoundaries. As part of the deal, IBM agreed to pay $1.5 billion, while GlobalFoundaries would supply IBM with semiconductors.

Together with poor third-quarter number the company announced the same day, the deal sent stock prices for IBM plummeting more than $12 per share. 

A group of IBM employees who held shares as part of the company’s employee stock option plan sued in 2015, claiming IBM executives were, or at least should have been well aware, that the microelectronics business was floundering, but concealed that information. 

The employees argued this artificially inflated the value of IBM’s stock, causing them to buy high and suffer an unnecessarily deep crater in value from which the stock has yet to recover. 

The Employee Retirement Income Security Act imposes a set of regulations on how private companies must manage employee retirement plans, including employee stock option plans. Under the law, those who manage a company’s retirement plan must act in the best interest of its participants and plan participants can sue if they do not.

The Supreme Court has set up guidelines for what plan participants must prove in such lawsuits, including in the 2014 case Fifth Third Bancorp v. Dudenhoeffer, in which the court held that managers of employee stock option plans are under the same obligations as those who manage other types of plans under ERISA. The case also set out the standards that plan participants must meet to sue managers over how they acted based on inside information.

Citing the standard the court set out in that case, a federal court in New York tossed out the employees’ claims. The Second Circuit reversed, however, and the retirement plan managers appealed to the Supreme Court.

In an unsigned opinion Tuesday, the court noted that both the federal government and the plan managers raised arguments in briefing that the Second Circuit had not considered. The justices decided the views of the Securities and Exchange Commission could be helpful to the appeals court and that the judges on that court should have a chance to consider them before the high court weighs in.

While the court’s holding Tuesday does not touch on the merits of the fight, a pair of concurring opinions from the court’s conservative and liberal wings revealed how the case might play out if it returns to the high court.

Justice Neil Gorsuch, an appointee of President Donald Trump, wrote that the plan participants were seeking to raise the bar set out in Dudenhoeffer, as the managers would only be able to make the disclosures described by the participants in their roles as company executives, not as managers of the retirement plans.

“Because ERISA fiduciaries are liable only for actions taken while ‘acting as a fiduciary,’ it would be odd to hold the same fiduciaries liable for ‘alternative action[s they] could have taken’ only in some other capacity,” Gorsuch wrote. 

In a concurring opinion joined by Justice Ruth Bader Ginsburg, Justice Elena Kagan wrote she “cannot see how” the arguments raised in the case by the government and plan managers align with the Dudenhoeffer precedent.

The retirement plan managers are represented by Paul Clement with the Washington, D.C., firm Kirkland & Ellis. Clement did not immediately return a request for comment on the decision.

A spokesman for IBM lauded the court for vacating the Second Circuit decision as part of its order.

“The case has important implications for business’ ability to offer strong employee stock ownership plans and for employees, across all industries, to invest in their companies,” IBM said in a statement.

Samuel Bonderoff with the New York City firm Zamansky said he was happy with the court’s decision Tuesday and prepared to argue for the plan participants back at the appeals court.

“We are pleased that the court agreed that petitioners’ and the government’s arguments went beyond the question presented,” Bonderoff said in a statement. “We look forward to pressing our clients’ rights in the Second Circuit.”

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