RJR Wins Third Appellate Decision in ERISA Case

The text of the latest appellate court decision offers some food for thought about whether and to what extent there is a “distinction between investment decisions and divestment decisions” under ERISA prudence standards.

By John Manganaro | May 02, 2017
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The 4th U.S. Circuit Court of Appeals once again sided with RJR Tobacco retirement plan fiduciaries in an Employee Retirement Income Security Act (ERISA) lawsuit related to the spinoff of Nabisco assets from the tobacco portions of the business and as holdings in the retirement plan. 

At its heart, the case is about participants who feel their employer sold their Nabisco stock holdings at a remarkably inopportune moment, when the stock value was severely depressed and right before a major rally. While the court acknowledges the participants' substantial financial losses are unfortunate, it does not agree that the losses can be blamed on fiduciary imprudence. 

By way of background, previously the U.S. District Court for the Middle District of North Carolina determined that, under ERISA prudence standard, RJR did in some respects breach its fiduciary duty of procedural prudence to investigate the investment decision, made post-spinoff, to eliminate the Nabisco funds from the RJR retirement plan. Nevertheless, RJR was found to have met its burden to show that removing the funds was an objectively prudent decision at the time. Specifically, the court ruled “that the decision to remove the stock, under the circumstances of this case, is one which a reasonable and prudent fiduciary could have made after performing such an investigation.”           

On the first appeal, the 4th Circuit affirmed the holding that RJR breached its duty of procedural prudence and therefore bore the burden of proof as to causation. However, the appellate court found that the district court did not apply the correct legal standard in determining RJR’s liability, reversed the judgment, and remanded with instructions “to review the evidence to determine whether RJR has met its burden of proving by a preponderance of the evidence that a prudent fiduciary would have made the same decision.” Plaintiffs also petitioned the U.S. Supreme Court to decide on this standard, but the high court denied the petition.

Then the district court ruled that RJR Tobacco had “proven by a preponderance of the evidence” that a prudent fiduciary would have decided to divest Nabisco company stock funds from its 401(k) plan—leading to the current appellate decision. It’s a complicated story, and that’s not even the full case history, as Circuit Judge Diana Gribbon Motz explains.

“This Employee Retirement Income Security Act case returns to us for a third time,” she writes in the latest opinion. “The beneficiaries of an ERISA retirement plan appeal the judgment, issued after a full bench trial, that the fiduciary’s breach of its duty of procedural prudence did not cause the substantial losses in the retirement plan resulting from the sale of non-employer stock funds. We had previously remanded the case to the district court so that it could apply the correct legal standard for determining loss causation, but we expressed no opinion as to the proper outcome of the case. On remand, applying the correct standard, the court found that the fiduciary’s breach did not cause the losses because a prudent fiduciary would have made the same divestment decision at the same time and in the same manner. For the reasons that follow, we affirm.”

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