Paul Saumer; Walter A. Skalsky, individually and on behalf of all others similarly situated, Plaintiffs-Appellants,
Cliffs Natural Resources Inc., et al., Defendants-Appellees.
from the United States District Court for the Northern
District of Ohio at Cleveland. No. 1:15-cv-00954-Dan A.
Polster, District Judge.
W. Ciolko, Mark K. Gyandoh, Julie Siebert-Johnson, KESSLER
TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, for
M. Newman, Geoffrey J. Ritts, Adrienne Ferraro Mueller,
Emmett E. Robinson, JONES DAY, Cleveland, Ohio, for
Before: MERRITT, COOK, and McKEAGUE, Circuit Judges.
Employee Retirement Income Security Act ("ERISA")
regulates employer-administered retirement plans. To
safeguard employees' retirement assets, ERISA requires
plan fiduciaries to, among other things, manage plan assets
prudently and diversify investments "so as to minimize
the risk of large losses." 29 U.S.C. § 1104(a)(1).
For the past forty years, however, ERISA has also encouraged
employee ownership of employer stock. To promote this goal,
ERISA permits companies to offer an Employee Stock Ownership
Plan ("ESOP")-a retirement option designed to
invest primarily in employer stock. Id. §
1107(d)(6)(A). Because ESOPs are, by definition, not
prudently diversified, Congress fashioned an exemption to
these core fiduciary duties: "the diversification
requirement . . . and the prudence requirement (only to the
extent that it requires diversification) of [§
1104(a)(1) are] not violated by acquisition or holding of
[employer stock]." Id. § 1104(a)(2).
case requires us to reconcile ERISA's requirement that a
fiduciary act prudently with its blessing of undiversified
Natural Resources ("Cliffs") is a publicly traded
iron-ore and coal-mining company. Cliffs's business
depends on the price of iron ore, which in turn depends on
Chinese economic growth. In 2011, Chinese construction
projects drove iron-ore prices to all-time highs. Betting on
continued high prices, Cliffs financed the purchase of a mine
located in Northern Quebec ("Bloom Lake Mine").
Projecting that the mine would increase cash-flow, Cliffs
upped its stock dividend to double the S&P 500 average.
2012, a global demand slump halved the price of iron ore,
cutting deeply into Cliffs's revenue. The Bloom Lake Mine
quickly turned from the company's lifeblood to, in the
words of Cliffs's CEO, "the cancer that we have to
take out." The mine's costs exceeded predictions,
often by significant margins. And the company's decreased
revenue and high costs exacerbated its financial weakness.
The market responded: in 2013, Cliffs stock performed worse
than any other company in the S&P 500. All told, Cliffs
lost 95% of its value between 2011 and 2015 (compared to a
roughly 50% gain for the broader market during the same
are Cliffs employees who participated in the company's
defined-contribution plan, commonly known as a 401(k). The
plan allowed participants to invest in twenty-eight mutual
funds, including an array of target-date, stock, and bond
funds. The plan also offered an ESOP that invested solely in
Cliffs stock. Employees enjoyed discretion about whether to
invest their income and matching contributions in the ESOP.
If the employee failed to choose an investment option, the
fiduciary directed contributions into a money-market fund.
Cliffs stock cratered, plaintiffs filed a class action
claiming that the plan's fiduciaries-investment-committee
members and corporate officers-imprudently retained Cliffs
stock as an investment option. In particular, plaintiffs
allege that it was imprudent to continue investing in Cliffs
stock because 1) the company's "risk profile and
business prospects dramatically changed from when the
investment was introduced . . . due to . . . the collapse of
iron ore and coal prices" and Cliffs's deteriorating
financial condition, and 2) the fiduciaries possessed inside
information showing that the stock was overvalued.
defendants filed a motion to dismiss, which the district
court granted. For the following reasons, we AFFIRM.
review de novo the district court's dismissal of a
complaint for failure to state a claim. Bennett v. MIS
Corp., 607 F.3d 1076, 1091 (6th Cir. 2010) (citations
omitted). We "accept all well-pleaded factual
allegations as true and construe the complaint in the light
most favorable to plaintiffs." Id. (citation
omitted). To survive a motion to dismiss, the complaint must
include sufficient factual allegations to state a plausible
claim to relief. Ashcroft v. Iqbal, 556 U.S. 662,
have struggled to define a fiduciary's duties when
administering an ESOP. To understand why, one must grasp the
"efficient market hypothesis" and the importance of
diversification to prudent portfolio construction.
efficient market hypothesis posits that "a stock price
on an efficient market reflects all publicly available
information." Coburn v. Evercore Trust Co., 844
F.3d 965, 969 (D.C. Cir. 2016). According to the theory,
"a security price in an efficient market 'represents
the market's most accurate estimate of the value of a
particular security based on its'" risk profile and
expected future earnings. Id. (quoting Yesha Yadav,
How Algorithmic Trading Undermines Efficiency in Capital
Markets, 68 Vand. L. Rev. 1607, 1633 (2015)).
Fiduciaries may therefore rely on a "security's
market price as an unbiased assessment of the security's
value in light of all public information." Fifth
Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 2471
(2014) (quoting Halliburton Co. v. Erica P. John Fund,
Inc., 134 S.Ct. 2398, 2411 (2014)).
new information and changing circumstances can alter
the market's assessment of a company's value-and
cause extreme fluctuations in a security's price-ERISA
requires fiduciaries to diversify their investments.
See 29 U.S.C. § 1104(a)(1). By purchasing
multiple securities, fiduciaries can mitigate company- and
industry-specific risks. See Summers v. State St. Bank
& Trust Co., 453 F.3d 404, 409 (7th Cir. 2006).
Furthermore, by investing in multiple asset classes (real
estate, domestic stocks, foreign stocks, bonds) that respond
differently to market-wide economic events-such as
recessions, wars, or elections-a ...