June 30, 2015
Supreme Court Denies Review in Reverse Stock Drop Case
On June 29, the U.S. Supreme Court denied certiorari and will not hear an appeal of the decision of the U.S. Court of Appeals for the Fourth Circuit in Tatum v. R.J. Reynolds, which found that the plan sponsor failed to prove that its breach of fiduciary duty did not cause loss to the plan participants when the plan sponsor eliminated the company stock investment option from the company’s 401(k) plans shortly after a spinoff.
In a traditional “stock drop” case, plaintiffs contend the plan sponsor breached their fiduciary duty by allowing the plan to offer a particular stock that has lost significant value. In Tatum v. R.J. Reynolds, the plaintiffs asserted a breach of fiduciary duty because of the elimination of the Nabisco single-stock investment option from the R.J. Reynolds (RJR) 401(k) plans shortly after RJR was spun off from Nabisco in 1999. After the fund’s removal, Nabisco received an unsolicited takeover bid and the resulting bidding war drove the price of Nabisco stock significantly higher. This is commonly referred to as a “reverse stock drop.”
A three-judge panel of the U.S. Court of Appeals for the Fourth Circuit was the last court to rule in the case, finding in favor of the plaintiffs. The Fourth Circuit panel’s majority opinion accepted the arguments of the plaintiffs (and the U.S. Department of Labor, as outlined in its amicus “friend of the court” brief) that the district court applied an erroneous legal standard to determine whether the breach resulted in losses to the plan. The panel therefore remanded the case back to the district court level “to review the evidence to determine whether RJR has met its burden of proving … that a prudent fiduciary would have made the same decision” (see the August 7, 2014, Benefits Byte).
The Supreme Court later responded to a petition from R.J. Reynolds and asked the U.S. Solicitor General – the U.S. Department of Justice official responsible for arguing cases before the high court – to submit a brief in the case. Such a request is typically considered a prelude to possible consideration of a case by the U.S. Supreme Court (see the March 9 Benefits Byte). The solicitor general recommended that the high court deny certiorari.
For more information, contact Jan Jacobson, senior counsel, retirement policy, at 202-289-6700.