Schweitzer v. Inv. Comm. of the Phillips 66 Sav. Plan

• Decision Date: 22 May 2020
• Docket Number: No. 18-20379,18-20379
• Citation: 960 F.3d 190
• Parties: Jeffery SCHWEITZER; Jonathan Sapp; Raul Ramos; Donald Fowler, Plaintiffs - Appellants v. The INVESTMENT COMMITTEE OF the PHILLIPS 66 SAVINGS PLAN; Sam Farace; John Does 1-10, Inclusive, Defendants - Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

960 F.3d 190

Jeffery SCHWEITZER; Jonathan Sapp; Raul Ramos; Donald Fowler, Plaintiffs - Appellants

v.The INVESTMENT COMMITTEE OF the PHILLIPS 66 SAVINGS PLAN; Sam Farace; John Does 1-10, Inclusive, Defendants - Appellees

No. 18-20379

United States Court of Appeals, Fifth Circuit.

FILED May 22, 2020

Mark P. Kindall, Izard, Kindall & Raabe, L.L.P., West Hartford, CT, Gregory Y. Porter, Esq., Attorney, Bailey & Glasser, L.L.P., Washington, DC, Thomas R. Ajamie, John Saul Edwards, Jr., Esq., Ajamie, L.L.P., Houston, TX, for Plaintiffs - Appellants

Travis James Sales, Tina Quy Phi Nguyen, Aaron Michael Streett, Baker Botts, L.L.P., Houston, TX, for Defendants - Appellees

Before HIGGINBOTHAM, SMITH, and HIGGINSON, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Four participants in Phillips 66’s retirement plan bring this putative class action against the plan’s Investment Committee for breach of fiduciary duties under the Employee Retirement Income Security Act. They allege that the Defendants failed to monitor properly and divest ConocoPhillips stock from the retirement plan. The district court granted Defendants’ motion to dismiss for failure to state a claim, and Plaintiffs timely appealed. We affirm.

I.

In 2012, ConocoPhillips Corporation, a large oil and gas company, spun off Phillips 66 as a separate, independent company. ConocoPhillips retained its upstream business, namely exploration and production, while Phillips 66 took on the downstream business, including refining, marketing, and transportation operations.

With the separation, 12,000 ConocoPhillips employees became employees of Phillips 66. Many of them had held assets in individual retirement accounts in the ConocoPhillips Savings Plan at the time of the separation. These accounts included large investments in two single-stock funds comprised of ConocoPhillips stock. As a result of the separation, each employee received one share of Phillips 66 stock for every two shares of ConocoPhillips stock held in their account. Afterward, Phillips 66 employees had $2.9 billion in ConocoPhillips Plan assets, including $1.1 billion invested in the ConocoPhillips Funds. The ConocoPhillips Plan transferred these assets to the Phillips 66 Savings Plan, the newly established retirement plan for Phillips 66 employees. After the transfer, Phillips 66 Plan participants could retain or sell their investments in the ConocoPhillips Funds, but could not make new investments in the Funds.

As the Phillips 66 Plan is a defined contribution plan, each participant has an individual account and benefits are based on the amounts contributed to that participant’s account.¹ Plan participants decide how much to contribute to their accounts and how to allocate their assets among an array of investment options selected by the Plan’s Investment Committee. The Phillips 66 Plan allows participants to invest in two single-stock funds comprised of Phillips 66 stock.² Just a few months after the spin-off, the Plan had $1.1 billion invested in the ConocoPhillips Funds and $0.9 billion in the Phillips 66 Funds. Together, these funds accounted for 58% of the Plan’s assets.

When ConocoPhillips spun off Phillips 66 on April 30, 2012, ConocoPhillips’s share price was about $55. Over the next two years, its share price increased by more than 50%, reaching $86 by June 2014. Plaintiffs allege, however, that by the second half of 2014, there were red flags indicating ConocoPhillips was a risky investment. Plaintiffs point to publicly available information, including declining share prices, uncertainty in the price of oil, and Berkshire Hathaway’s sale of its stake in ConocoPhillips. ConocoPhillips’s share price fell to $69 by the end of 2014, $46 by the end of 2015, and $40 by February 2016. When Plaintiffs filed this lawsuit in October 2017, the share price was $50.³

Plaintiffs allege that the Investment Committee and its members (the "Fiduciaries") breached their fiduciary duties of diversification and prudence under ERISA by failing to independently review the merits of divesting the ConocoPhillips Funds. According to Plaintiffs, the Fiduciaries incorrectly believed that ConocoPhillips was a "qualifying employer securit[y]," an ESOP, and thus exempt from certain diversification requirements.⁴

The district court held that Plaintiffs failed to state a claim based on the duty to diversify because the Phillips 66 participants were not allowed to make new investments in the ConocoPhillips Funds and could elect to exchange their assets out of the Funds at any time. It also held that Plaintiffs’ duty-of-prudence claim was foreclosed by the Supreme Court’s holding in Fifth Third Bancorp v. Dudenhoeffer.⁵ This appeal followed.

II.

"This court reviews de novo a district court’s grant or denial of a Rule 12(b)(6) motion to dismiss, ‘accepting all well-pleaded facts as true and viewing those facts in the light most favorable to the plaintiff[.]’ "⁶ "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ "⁷ "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."⁸ However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions" or "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements."⁹

III.

ERISA governs employee benefit plans and their invested funds. Congress enacted the statute to "promote the interests of employees and their beneficiaries" in these funds.¹⁰ To that end, ERISA fiduciaries are assigned "a number of detailed duties and responsibilities, which include ‘the proper management, administration, and investment of [plan] assets, the maintenance of proper records, the disclosure of specified information, and the avoidance of conflicts of interest.’ "¹¹ Their duties to plan participants are "derived from the common law of trusts"¹² and are "the highest known to the law."¹³

Section 1104(a)(1) sets out "several overlapping duties."¹⁴ The duty of prudence requires a fiduciary to "discharge his duties.... with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."¹⁵ The duty to diversify requires a fiduciary to "diversify[ ] the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so."¹⁶ ERISA also requires fiduciaries to adhere to a duty of loyalty and to act in accordance with the plan insofar as it does not conflict with the Act.¹⁷ To state a claim under this section, a plaintiff must plausibly allege that a fiduciary breached one of these duties, causing a loss to the employee benefit plan.¹⁸

Plaintiffs contend that the Fiduciaries breached their duty to diversify under § 1104(a)(1)(C) and their duty of prudence under § 1104(a)(1)(B) by failing to consider reducing their holdings in the ConocoPhillips Funds.

A.

The Fiduciaries first argue that Plaintiffs’ claims never get off the ground because the ConocoPhillips Funds are "qualifying employer securities," which are statutorily exempt from "the diversification requirement of [ § 1104(a)(1)(C) ] and the prudence requirement (only to the extent that it requires diversification) of [ § 1104(a)(1)(B) ]."¹⁹ The Fiduciaries contend that the ConocoPhillips Funds were employer securities when they were issued by ConocoPhillips and therefore retained that status after separating from Phillips 66.

But ERISA’s plain text does not support this conclusion. A qualifying employer security is a "security issued by an employer of employees covered by the plan, or by an affiliate of such employer."²⁰ An employer is a party "acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan."²¹ So an employer security is one that is issued by a party "acting ... as an employer" "of employees covered by the plan."²²

Although ConocoPhillips had employed the Phillips 66 Plan’s participants, Phillips 66 is the only entity now "acting" as the employer of employees covered by the Phillips 66 Plan. The ConocoPhillips Funds are qualifying employer stock only if they were issued by Phillips 66.²³ They were not. The ConocoPhillips Funds were not "employer securities" after the spinoff and were no longer exempt from the duties under § 1104(a)(1)(B) and (C).

B.

Under § 1104(a)(1)(C), fiduciaries have a duty to "diversify[ ] the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so."²⁴ This duty looks to a pension plan as a whole, not to each investment option.²⁵

Plaintiffs argue that the Fiduciaries breached this duty by holding an excessive percentage of Plan assets in ConocoPhillips Funds, exposing participants to a high risk of large losses. They rely primarily on a case in which fiduciaries for a defined benefit plan breached their duty to diversify by placing 23% of plan assets in a single investment.²⁶

But the duty to diversify under § 1104(a)(1)(C) imposes obligations on fiduciaries for defined benefit plans that are different from those for defined contribution plans, like the Phillips 66 Plan. As fiduciaries for defined benefit plans choose the investments and allocate the plan’s assets, they must ensure the plan’s assets as a whole are well diversified. The fiduciaries for a defined contribution plan, however, only select investment options; the participants then choose how to allocate their assets to the available options. These fiduciaries therefore need only provide investment options that enable participants to create...