Quan v. Computer Sciences Corp.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

FREDERICO QUAN, individually and 

on behalf of all others similarly

situated; WALTER GRAY,

individually and on behalf of all

others similarly situated; DON

TYRONE BALLARD, individually and

on behalf of all others similarly

situated; JEANINE L. SHAMALY,

Plaintiffs-Appellants, No. 09-56190

v.

 D.C. No.

2:08-cv-02398-

COMPUTER SCIENCES CORPORATION;

CSC RETIREMENT AND EMPLOYEE SJO-JWJ

BENEFITS PLANS COMMITTEE; LEON

J. LEVEL; VAN B. HONEYCUTT;

IRVING W. BAILEY, II; F. WARREN

MCFARLAN; THOMAS H. PATRICK;

DONALD G. DEBUCK; HOWARD D.

FISK; MICHAEL E. KEANE; NATHAN

SIEKIERKA; FREDERICK F. VOLLRATH,

Defendants-Appellees.



16665

16666 QUAN v. COMPUTER SCIENCES CORPORATION

FREDERICO QUAN, individually and 

on behalf of all others similarly

situated; WALTER GRAY,

individually and on behalf of all

others similarly situated; DON

TYRONE BALLARD, individually and

on behalf of all others similarly

situated; JEANINE L. SHAMALY,

Plaintiffs-Appellees,

v. No. 09-56248

COMPUTER SCIENCES CORPORATION; D.C. No.

CSC RETIREMENT AND EMPLOYEE  2:08-cv-02398-

BENEFITS PLANS COMMITTEE; LEON SJO-JWJ

J. LEVEL; FREDERICK F. VOLLRATH; OPINION

DONALD G. DEBUCK; MICHAEL E.

KEANE; NATHAN SIEKIERKA; IRVING

W. BAILEY, II; F. WARREN

MCFARLAN; THOMAS H. PATRICK,

Defendants-Appellants,

and

VAN B. HONEYCUTT; HOWARD D.

FISK,

Defendants.



Appeal from the United States District Court

for the Central District of California

S. James Otero, District Judge, Presiding

Argued and Submitted

June 10, 2010—Pasadena, California

Filed September 30, 2010

QUAN v. COMPUTER SCIENCES CORPORATION 16667

Before: Alex Kozinski, Chief Judge, Johnnie B. Rawlinson,

Circuit Judge, and Mark W. Bennett, District Judge.*

Opinion by Judge Bennett

*The Honorable Mark W. Bennett, District Judge for the Northern Dis-

trict of Iowa, sitting by designation.

16670 QUAN v. COMPUTER SCIENCES CORPORATION

COUNSEL

Patrice L. Bishop, Stull, Stull & Brody, Los Angeles, Califor-

nia; Edwin J. Mills, Michael J. Klein, Stull, Stull & Brody,

QUAN v. COMPUTER SCIENCES CORPORATION 16671

New York, New York, for plaintiffs-appellants-cross-

appellees.

Charles C. Jackson, Thomas F. Hurka, Christopher J. Boran,

Morgan, Lewis & Bockius, L.L.P., Chicago, Illinois; Dean J.

Kitchens, Gibson, Dunn & Crutcher, L.L.P., Los Angeles,

California; Perrie M. Weiner, Edward D. Totino, Joshua

Briones, DLA Piper, L.L.P., Los Angeles, California; Paul

Blankenstein, Gibson, Dunn & Crutcher, L.L.P., Washington,

D.C., for defendants-appellees-cross-appellants.

OPINION

BENNETT, District Judge:

This is a class action pursuant to ERISA by participants in

an employer’s 401(k) plan against named and de facto fidu-

ciaries of the plan. The participants appeal the district court’s

order granting the fiduciaries’ summary judgment motion on

the participants’ claims that the fiduciaries 1) imprudently

invested plan assets in the employer’s stock; 2) negligently

misrepresented and failed to disclose material information

about the employer’s finances and operations; and 3) failed to

properly appoint, monitor, and inform the retirement plans

committee and its members. The fiduciaries cross-appeal the

district court’s failure to award them costs as the prevailing

parties in the litigation. We affirm the district court’s grant of

summary judgment and remand for findings regarding

whether to award costs under Federal Rule of Civil Procedure

54(d). We also join the United States Courts of Appeals for

the Third, Fifth, and Sixth Circuits by adopting the rebuttable

“Moench presumption” that fiduciaries acted consistently with

ERISA in their decisions to invest plan assets in employer

stock. See Moench v. Robertson, 62 F.3d 553, 571 (3d Cir.

1995); see also In re Syncor ERISA Litig., 516 F.3d 1095,

1102 (9th Cir. 2008) (declining to adopt the Moench presump-

tion).

16672 QUAN v. COMPUTER SCIENCES CORPORATION

I. BACKGROUND

A. Factual Background

This case involves a participant-directed 401(k) Matched

Asset Plan (the Plan) offered by Computer Sciences Corpora-

tion (CSC) to certain of its employees. CSC is a multibillion

dollar Fortune 500 information technology company with

major operations in the United States and more than 60 other

countries. Its revenue grew in every year but one between

December 31, 1998, and January 23, 2008, the Class Period,

and it was profitable in every year during that period. Its stock

was and is heavily held by private and institutional investors,

including public pension funds.

Participants in the Plan could contribute up to 50% of their

salaries to their individual investment accounts. At regular

intervals, the Plan gave participants full discretion to allocate

and reallocate the voluntary contributions among fourteen

diverse investment alternatives, which included a non-

diversified fund holding CSC stock (the CSC Stock Fund).

Under the Plan’s governing document, the CSC Stock Fund

was a mandatory investment offering designed to allow par-

ticipants to “own part of the company for which [they] work.”

CSC then matched a part of these voluntary contributions

with “matching contributions” equal to fifty cents for every

dollar a participant contributed to his individual account, up

to 3% of the participant’s salary. Prior to January 2007,

matching contributions were allocated to the CSC Stock

Fund, and plan participants could only reallocate the contribu-

tions to other diversified funds in the Plan when they met cer-

tain age and service requirements.1 Later, from January 2007

1

The Plan provides for an individual account for each participant, mak-

ing it an eligible individual account plan (“EIAP”) under ERISA Section

407(d)(3). An EIAP is “(i) a profit-sharing, stock bonus, thrift, or savings

plan; (ii) an employee stock ownership plan; or (iii) a money purchase

plan which . . . invested primarily in qualifying employer securities.” 29

QUAN v. COMPUTER SCIENCES CORPORATION 16673

onward, Plan participants could direct and reallocate “match-

ing contributions” to any fund or funds in the Plan.

At times during the Class Period, the Plan held approxi-

mately ten million shares of CSC common stock. The CSC

Retirement Plans Committee (the Committee), which con-

sisted of CSC officers, was responsible for selecting Plan

investment options. The Plan required that the CSC Stock

Fund be one of the investment options.

Plaintiffs are a class of current and former employees of

CSC and participants in the Plan (the Participants). Defen-

dants are named and allegedly de facto fiduciaries of the Plan

(the Fiduciaries), consisting of CSC, the Committee, and cur-

rent and former officers and directors of CSC. The Partici-

pants’ claims arise from alleged material weaknesses in

CSC’s stock option granting and tax accounting practices.

The Participants allege that these material weaknesses caused

over 9,000 errors in the pricing of stock options; deficiencies

relating to accounting for income taxes; two restatements of

CSC’s financial statements within seven months; a one-day

12% drop in CSC’s stock price; and an alleged loss of hun-

dreds of millions of dollars in retirement savings to CSC

employees and retirees.

CSC provided stock options as incentives to certain execu-

tives. The stock options purportedly had an exercise price

equal to 100% of the market value on the option grant date.

However, CSC followed a common practice for identifying

the measurement date as the earliest date on which a company

knows the option recipients, number of options to be issued,

U.S.C. § 1107(d)(3)(A). Because CSC’s matching contributions were to

the non-diversified CSC Stock Fund, the Plan is also an employee stock

ownership plan (“ESOP”) under ERISA Section 407(d)(6). An ESOP is a

stock bonus plan “which is designed to invest primarily in qualifying

employer securities.” 29 U.S.C. § 1107(d)(6).

16674 QUAN v. COMPUTER SCIENCES CORPORATION

and the exercise price of the options. Thus, the stock option

grant dates were actually changed between 5% and 10% of

the time to adjust the market value of the stock options. On

June 29, 2006, CSC announced that the Securities and

Exchange Commission (SEC) had made an informal request

for information about CSC’s stock option granting practices.

Other significant matters were also announced on June 29,

2006, including that CSC was no longer for sale and had

decided to repurchase up to $2 billion of its common stock,

amounting to about 19% of its outstanding shares. The fol-

lowing day, CSC’s stock suffered a one-day drop of about

12% in value (from $55.88 to $48.56). The stock price

quickly rebounded after the announcements, to $52.72 within

a week, to $53.57 within two weeks, and to $61.79 approxi-

mately a year later.

In September 2006, the SEC’s Office of the Chief Accoun-

tant issued new guidance on how the measurement date for

stock options was to be determined, recognizing that there had

been widespread confusion on that point. CSC established a

special committee of directors to oversee an internal investi-

gation into CSC’s stock option granting practices. The inves-

tigation involved a law firm and an accounting firm, and cost

more than $22 million. The special committee identified no

intentional wrong-doing, but did identify necessary adjust-

ments to CSC’s pricing of 9,234 stock option grants. In addi-

tion, an independent audit had revealed tax deficiencies

including accounting for income taxes, errors in income tax

expenses and related liabilities, and errors in deferred tax

assets. As a consequence of repricing its stock options and

correcting its tax deficiencies, CSC restated its financial state-

ments twice, on June 13, 2007, and on January 11, 2008.

The Participants allege that the Fiduciaries misrepresented

CSC’s accounting and income tax problems by stating that

stock options were granted at 100% of the market value on

the day of the grant; by filing financial statements with the

SEC on Forms 10-Q and 10-K that later had to be restated in

QUAN v. COMPUTER SCIENCES CORPORATION 16675

2007 and 2008, after they had been incorporated into informa-

tion to Plan participants about the CSC Stock Fund; and by

stating that the June 2006 stock price drop was caused by “the

market, not CSC.” The Participants also assert that certain of

the Fiduciaries breached their monitoring duties by failing to

ensure that the Committee had access to information about

CSC’s business problems, which made CSC stock an impru-

dent retirement investment; and by failing to ensure that the

monitored fiduciaries completely appreciated the huge risk of

investing a significant amount of rank and file employees’

retirement savings in CSC stock.

The Participants assert that the Fiduciaries’ improper con-

duct caused class period damages to the Plan of over $700

million. The Fiduciaries concede that the total charge result-

ing from the 2007 and 2008 Restatements was a reduction of

reported income for fiscal years 2005 to 2007 and retained

earnings for fiscal year 2004 of $458.9 million, but they argue

that those charges had no impact on the financial health of

CSC, and were later largely offset by a settlement with the

IRS concerning historic tax positions and accounting prac-

tices. The Fiduciaries also contend that the charges resulting

from the stock option pricing errors amounted to only about

$68 million in cumulative non-cash charges to CSC’s earn-

ings spread out over eleven fiscal years, which amounted to

only about 1.4% of CSC’s net income, and only about 0.1%

of its revenues over the same period.

B. Procedural Background

This action pursuant to sections 409(a) and 502(a)(2) of the

Employee Retirement Income Security Act (ERISA), 29

U.S.C. §§ 1109(a) and 1132(a)(2), was transferred to the

United States District Court for the Central District of Califor-

nia from the Eastern District of New York. The court certified

a class of Participants on December 29, 2008,2 and set trial for

July 28, 2009.

2

The class in question was defined as follows:

[A]ll participants in the Plan for whose individual accounts the

16676 QUAN v. COMPUTER SCIENCES CORPORATION

Before trial, the parties filed cross-motions for summary

judgment. The Participants sought summary judgment on

their imprudent investment and misrepresentation claims, and

the Fiduciaries sought summary judgment on all of Partici-

pants’ claims. The district court issued an order denying the

Participants’ summary judgment motion, but granting the

Fiduciaries’ motion. The district court considered the Partici-

pants’ imprudent investment claim under both the “Moench

presumption,” which the court noted that the Ninth Circuit has

not yet adopted, and the prevailing “prudent man” standard of

29 U.S.C. § 1104(a)(1)(B). The district court concluded that

the Participants had presented no evidence or argument that

the Fiduciaries failed to use the care, skill, prudence, and dili-

gence that a prudent man would use in the conduct of an

enterprise of a like character and with like aims. In the alter-

native, the district court concluded that the Participants had

presented no evidence or argument that a prudent investor

under the circumstances would not have followed the plan’s

mandate to invest in employer securities, and thus failed to

rebut the Moench presumption that the Fiduciaries acted con-

sistently with ERISA in their decisions to invest Plan assets

in CSC stock. The district court also concluded that the Par-

ticipants had failed to establish or to create a triable issue as

to losses from the allegedly imprudent investment. The dis-

trict court granted summary judgment in favor of the Fidu-

ciaries on the Participants’ improper monitoring claim

because the claim was derivative of the Participants’ failed

imprudent investment claim.

Plan held shares of the common stock of Computer Sciences Cor-

poration as part of the Company Stock Fund or CSC Stock Fund

investment option in the Plan, at any time between December 31,

1998, and January 23, 2008, inclusive (the “Class” and “Class

Period, respectively.”) Excluded from the Class are Defendants;

members of the individual Defendants[’] immediate families; and

directors and/or senior officers of Computer Sciences Corpora-

tion; any entity in which any excluded person has a controlling

interest; and their legal representatives, heirs, successors and

assigns (“the Class”).

QUAN v. COMPUTER SCIENCES CORPORATION 16677

As to the Participants’ misrepresentation and nondisclosure

claim, the district court first concluded that such a claim could

be based on corporate documents and filings, if they were

incorporated into Plan documents. Nevertheless, the district

court found that the Participants had not generated any genu-

ine issues of material fact that the alleged misrepresentations

and nondisclosures at issue were material. The district court

also found that the Participants had not generated genuine

issues of material fact that they detrimentally relied on the

alleged misrepresentations.

The district court’s summary judgment order did not award

costs. Nevertheless, the subsequent Judgment stated, without

explanation, “The parties shall bear their own costs.”

The Participants appeal the summary judgment ruling

against them,3 and the Fiduciaries cross-appeal the district

court’s failure to award them costs.

II. REVIEW OF SUMMARY JUDGMENT IN AN

ERISA CASE

In ERISA cases, as in other cases, this court “review[s] de

novo the district court’s grant of summary judgment and,

viewing the evidence in the light most favorable to the non-

moving party, determine[s] whether there are any genuine

issues of material fact for trial.” Syncor, 516 F.3d at 1100. We

“may affirm [summary judgment] on any ground supported

by the record.” Alexander Mfg., Inc. Emp. Stock Ownership

Plan & Trust v. Ill. Union Ins. Co., 560 F.3d 984, 986 (9th

Cir. 2009); Cline v. Indus. Maint. Eng’g & Contracting Co.,

200 F.3d 1223, 1229 (9th Cir. 2000). For the reasons

explained, the Participants fail to demonstrate that there are

3

The Participants do not assert any issues on appeal relating to summary

judgment in favor of the Fiduciaries on their improper monitoring claim.

16678 QUAN v. COMPUTER SCIENCES CORPORATION

genuine issues of material fact that make summary judgment

improper.4

III. IMPRUDENT INVESTMENT

A. The Statutory Standard

The statutory framework for breach-of-fiduciary-duty

claims under ERISA, including imprudent investment claims,

involves sections 404, 409, and 502 of ERISA, 29 U.S.C.

§§ 1104, 1109, and 1132. See generally Vaughn v. Bay Envtl.

Mgmt., Inc., 567 F.3d 1021, 1025 (9th Cir. 2009). Section

404(a)(1) of ERISA imposes a duty on Plan fiduciaries to

invest Plan assets as a “prudent man” would do. 29 U.S.C.

§ 1104(a)(1).5 Section 409 of ERISA imposes liability for

breach of fiduciary duty, 29 U.S.C. § 1109(a), and section 502

provides, in pertinent part, that a civil action for breach of

fiduciary duty may be brought “by a participant, beneficiary

or fiduciary for appropriate relief under section 1109 of this

title.” 29 U.S.C. § 1132(a)(2).

4

In their opening brief, the Participants listed one of the issues on appeal

to be whether the district court erred in granting summary judgment in

favor of the Fiduciaries “given [the Participants’] jury demand and their

entitlement to trial by jury,” but they offered no argument on this issue.

They presented arguments on this issue for the first time in their reply

brief. We deem an argument waived if it is raised for the first time only

in a reply brief. See, e.g., United States ex rel. Meyer v. Horizon Health

Corp., 565 F.3d 1195, 1199 n.1 (9th Cir. 2009). Additionally, an order

granting summary judgment “does not deprive the losing party of its Sev-

enth Amendment right to a jury trial.” Gordon v. Virtumundo, Inc., 575

F.3d 1040, 1066 (9th Cir. 2009).

5

The statute requires a fiduciary to act “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” and “in

accordance with the documents and instruments governing the plan insofar

as such documents and instruments are consistent with the provisions of

this subchapter and subchapter III of this chapter.” 29 U.S.C.

§ 1104(a)(1)(B), (D).

QUAN v. COMPUTER SCIENCES CORPORATION 16679

[1] Section 404(a)(1) requires a fiduciary to act prudently

“by diversifying 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.” 29 U.S.C. § 1104(a)(1)(C).

However, section 404(a)(2) expressly exempts “acquisition or

holding of qualifying employer real property or qualifying

employer securities,” in the case of an EIAP, like the Plan at

issue here, from the obligation to diversify. 29 U.S.C.

§ 1104(a)(2). We have explained, “The plain language of 29

U.S.C. § 1104(a)(2) does not require fiduciaries of an eligible

individual account plan to diversify their investment outside

of company stock in order to meet the prudent man standard

of care.” Syncor, 516 F.3d at 1102; Wright v. Oregon Metal-

lurgical Corp., 360 F.3d 1090, 1094 (9th Cir. 2004). On the

other hand, “29 U.S.C. § 1104(a)(2) does not exempt fidu-

ciaries [for EIAPs] from the first prong of the prudent man

standard, which requires a fiduciary to act with care, skill,

prudence, and diligence in any investment the fiduciary

chooses.” Syncor, 516 F.3d at 1102; Wright, 360 F.3d at 1097.

Thus, fiduciaries are required to act “prudently” when deter-

mining whether or not to invest, or continue to invest, ERISA

plan assets in the plan participants’ employer’s stock. This is

true, even though the duty of prudence may be in “tension”

with Congress’s expressed preference for plan investment in

the employer’s stock. Kirschbaum v. Reliant Energy, Inc., 526

F.3d 243, 253 (5th Cir. 2008).

As we have explained, there are a “myriad of circum-

stances” that could violate the “prudent man” standard for

investment of ERISA plan assets in a company’s own stock.

Syncor, 516 F.3d at 1102. Generally, “[a] court’s task in eval-

uating a fiduciary’s compliance with this standard is to

inquire ‘whether the individual trustees, at the time they

engaged in the challenged transactions, employed the appro-

priate methods to investigate the merits of the investment and

to structure the investment.’ ” Wright, 360 F.3d at 1097 (quot-

ing Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir.

1983)).

16680 QUAN v. COMPUTER SCIENCES CORPORATION

B. The Moench Presumption

The Fiduciaries urge us to adopt the so-called “Moench

presumption,” first formulated by the Third Circuit in

Moench, 62 F.3d at 571, for assessing whether fiduciaries

imprudently invested in employer stock. The Participants

point out that we have twice declined to adopt it and have

even criticized it.

In Moench, the Third Circuit was confronted with the ques-

tion, “To what extent may fiduciaries of [ESOPs] be held lia-

ble under [ERISA] for investing solely in employer common

stock, when both Congress and the terms of the ESOP provide

that the primary purpose of the plan is to invest in the employ-

er’s securities[?]” Moench, 62 F.3d at 556. The court con-

cluded that “in limited circumstances, ESOP fiduciaries can

be liable under ERISA for continuing to invest in employer

stock according to the plan’s direction.” Id.

The plan at issue in Moench required the fiduciaries to

invest “primarily” in the employer’s stock.6 Based on this lan-

guage, the Third Circuit concluded that the plan “did not

absolutely require the [fiduciaries] to invest exclusively in

[the employer’s] stock,” so that the district court erred in

holding that the fiduciaries had “no latitude but to continue

investing in [the employer’s] stock.” Id. at 568.

[2] The fiduciaries in Moench argued that they neverthe-

less could not be liable under ERISA, because of the nature

6

The Plan in this case stated that matching contributions “shall be”

invested in the CSC Stock Fund, and that the “Trustee shall promptly

invest” these contributions. However, the “trustee may defer investment of

Matching Contributions . . . in such Stock for a reasonable period . . . if

such action is deemed by it to be in the best interest of the Participants.

The Trustee may sell any such Stock and defer reinvestment of the pro-

ceeds therefrom for a reasonable period . . . if such action is deemed by

it to be in the best interests of the Participants.” [ER 2468].

QUAN v. COMPUTER SCIENCES CORPORATION 16681

of the ESOP.7 Therefore, the court turned to the standard of

review for an ESOP fiduciary’s decisions, and ultimately con-

cluded that “the most logical result is that the fiduciary’s deci-

sion to continue investing in employer securities should be

reviewed for an abuse of discretion. . . . [A]n ESOP fiduciary

who invests the assets in employer stock is entitled to a pre-

sumption that it acted consistently with ERISA by virtue of

that decision.” Id. at 571. The court went on to explain, in

somewhat more detail, what a claimant would be required to

show to rebut the presumption of prudent investment.

Moench, 62 F.3d at 571-72. The Third Circuit has since elab-

orated on the scope and effect of the Moench presumption.

See In re Schering-Plough Corp. ERISA Litig., 420 F.3d 231

(3d Cir. 2005); Edgar v. Avaya, Inc., 503 F.3d 340 (3d Cir.

2007).

The Fifth and Sixth Circuits have expressly adopted the

Moench presumption. See Kuper v. Iovenko, 66 F.3d 1447,

1459 (6th Cir. 1995); Kirschbaum, 526 F.3d at 254-56. No

federal appellate court has rejected the Moench presumption

on its merits. But see Bunch v. W.R. Grace & Co., 555 F.3d

1, 10 (1st Cir. 2009) (declining to adopt a Moench presump-

tion that retention of employer stock was reasonable in a case

challenging the fiduciary’s decision to divest the plan of the

employer’s stock, as doing so would controvert the purpose

of the presumption and transform the intended shield into a

sword to be used against a prudent fiduciary).

Until now, we have declined to adopt the Moench presump-

tion. See Syncor, 516 F.3d at 1102; Wright, 360 F.3d at 1098

n.3. On the other hand, we have also declined to reject

7

ESOPs are intended to reward and motivate employees by making

them stakeholders in the success of the companies that employ them.

Linking worker pay to company performance is thought to increase

worker productivity and company loyalty, and for that reason “Congress

. . . enacted a number of laws designed to encourage employers to set up

such plans.” Donovan v. Cunningham, 716 F.2d 1455, 1458 (5th Cir.

1983).

16682 QUAN v. COMPUTER SCIENCES CORPORATION

Moench. Wright did express reservations about the presump-

tion:

The Third Circuit’s intermediate prudence standard

is difficult to reconcile with ERISA’s statutory text,

which exempts EIAPs from the prudence require-

ment to the extent that it requires diversification.

Interpreting ERISA’s prudence requirement to sub-

ject EIAPs to an albeit tempered duty to diversify

arguably threatens to eviscerate congressional intent

and the guiding rationale behind EIAPs themselves.

Wright, 360 F.3d at 1097 (internal citations omitted). Wright

also observed that “[t]he Moench standard seems problematic

to the extent that it inadvertently encourages corporate offi-

cers to utilize inside information for the exclusive benefit of

the corporation and its employees.” Id. at 1098 n.4.

[3] We are not persuaded by either of the objections to the

Moench presumption raised in Wright, that 1) the presumption

conflicts with ERISA’s diversification exemption, 29 U.S.C.

§ 1104(a)(2); and 2) the presumption encourages fiduciaries

to engage in insider trading. We conclude that the Moench

presumption is fully reconcilable with ERISA’s statutory text

and does not encourage insider trading, when properly formu-

lated.

[4] First, the Wright court was concerned that the Moench

presumption was at odds with ERISA’s exemption of ESOPs

and other EIAPs from its diversification requirements. “ ‘If

there is no duty to diversify ESOP plan assets under the stat-

ute, it logically follows that there can be no claim for breach

of fiduciary duty arising out of a failure to diversify, or in

other words, arising out of allowing the plan to become heav-

ily weighted in company stock’ ” Wright, 360 F.3d at 1097

(citing In re McKesson HBOC, Inc. ERISA Litig., No. C00-

20030RMW, 2002 WL 31431588, at *5 (N.D. Cal. Sept. 30,

2002) (unpublished disposition)). We were likely concerned

QUAN v. COMPUTER SCIENCES CORPORATION 16683

about this conflict between Moench and ERISA’s text because

Moench itself cites § 1104(a)(2) for the proposition that

“under normal circumstances, ESOP fiduciaries cannot be

taken to task for failing to diversify investments, regardless of

how prudent diversification would be under the terms of an

ordinary non-ESOP pension plan.” Moench, 62 F.3d at 568.

That is not the scenario in which the Moench presumption

would do its work, however: “Moench . . . would not apply

to allegations . . . which fairly state only a violation of the

fiduciaries’ duty to diversify. . . .” Kirschbaum, 526 F.3d at

254 n.8. We do not read the Moench presumption to apply to

a “diversification” claim, because a presumption of prudence

is unnecessary where fiduciaries are not subject to a prudence

requirement to begin with. On the other hand, where

employer stock is only one of the possible plan investments,

and plaintiffs assert a claim that the fiduciary should have

divested the plan of employer stock, the fiduciaries would be

entitled to the presumption that investment in employer stock

was prudent. Thus, the Moench presumption does not run

afoul of the exemption from diversification in § 1104(a)(2).

[5] The Wright court’s second concern was that “[t]he

Moench standard seems problematic to the extent that it inad-

vertently encourages corporate officers to utilize inside infor-

mation for the exclusive benefit of the corporation and its

employees,” which would “potentially run afoul of the federal

securities laws.” 360 F.3d at 1098 n.4. Quite the opposite is

true: In contrast to ERISA’s prudence requirement, Moench

gives fiduciaries a safe harbor from failing to use insider

information to divest from employer stock. In Kirschbaum,

the Fifth Circuit noted that an objection to tempering the

Moench presumption was that doing so would effectively

require the fiduciary to trade on insider information. Kirsch-

baum, 526 F.3d at 256. We believe that if the burden to rebut

the presumption of prudent investment is sufficiently heavy,

plan fiduciaries will not be tempted to act on insider informa-

tion to protect themselves from liability for decisions about

continued investment in employer stock.

16684 QUAN v. COMPUTER SCIENCES CORPORATION

[6] We therefore adopt the Moench presumption. The pre-

sumption is consistent with the statutory language of ERISA

and the trust principles by which ERISA is interpreted,

whether the plan is an ESOP or other EIAP. See Wright, 360

F.3d at 1098 n.3. At its core, our objection to adopting the

Moench presumption in Wright was that it was not sufficiently

deferential to or protective of fiduciaries, not that it placed too

great a burden on those asserting breach-of-fiduciary-duty

claims. We believe that if properly formulated, the Moench

presumption can strike the appropriate balance between the

employee ownership purpose of ESOPs and other EIAPs, and

ERISA’s goal of ensuring proper management of such plans.

Plans that tie employee compensation to the company’s

success are widely believed to be good for employee produc-

tivity and loyalty: They “expand[ ] the national capital base

among employees—an effective merger of the roles of capi-

talist and worker.” Moench, 62 F.3d at 568 (citing Donovan,

716 F.2d at 1458). Congress has granted favored status to

ESOPs and other EIAPs by exempting them from certain

ERISA requirements. Congress has also expressed concern

that “regulations and rulings which treat employee stock own-

ership plans as conventional retirement plans . . . block the

establishment and success of these plans.” Id. at 569 (citing

Tax Reform Act of 1976, Pub. L. No. 94-455, § 803(h), 90

Stat. 1583, 1590).

We adopt the Moench presumption because it provides a

substantial shield to fiduciaries when plan terms require or

encourage the fiduciary to invest primarily in employer stock.

Fiduciaries are not expected to predict the future of the com-

pany stock’s performance; without the Moench presumption,

a fiduciary “could be sued for not selling if he adhered to the

plan [and the company stock dropped], but also sued for devi-

ating from the plan [and selling] if the stock rebounded.”

Kirschbaum, 526 F.3d at 256. Moreover, the “long-term hori-

zon of retirement investing” requires protecting fiduciaries

from pressure to divest when the company’s stock drops. Id.

QUAN v. COMPUTER SCIENCES CORPORATION 16685

at 254. The Moench presumption should also make it less

likely that a plan fiduciary would be tempted to use insider

information to divest the plan from company stock, since con-

tinued investment in the plan will be presumed prudent.

The presumption does not entirely insulate a fiduciary from

a breach-of-fiduciary-duty claim because it may be rebutted

by a showing that the fiduciary abused its discretion by

investing in employer stock. Moench itself does not fully spell

out what plan participants must show to rebut the presumption

of prudent investment. The Moench court explained that the

presumption would be rebutted if “ ‘owing to circumstances

not known to the settlor and not anticipated by him [the mak-

ing of such investment] would defeat or substantially impair

the accomplishment of the purposes of the trust.’ ” Moench,

62 F.3d at 571 (quoting Restatement (Second) of Trusts § 227

cmt. g). We agree and add that if there is room for reasonable

fiduciaries to disagree as to whether they are bound to divest

from company stock, the abuse of discretion standard protects

a fiduciary’s choice not to divest. This will allow fiduciaries

to “fulfill their duties in the safe harbor that Congress seems

to have intended to provide them” for managing EIAPs and

ESOPs. In re Ford Motor Co. ERISA Litigation, 590 F. Supp.

2d 883, 910 n.14 (E.D. Mich. 2008).

How bad do things have to be before no reasonable fidu-

ciary in similar circumstances would have continued investing

in company stock? A plaintiff in Moench pled the impending

collapse of the company in order to overcome the presump-

tion of prudent investment on a motion to dismiss. Moench

determined the “precipitous decline” in company stock com-

bined with an insider fiduciary’s knowledge of the stock’s

“impending collapse” and the fiduciary’s own “conflicted sta-

tus” would constitute the type of change in circumstances that

was not anticipated by the settlor of the trust. 62 F.3d at 571-

72. Similarly, in Wright, we contemplated the need for dire

circumstances before the presumption would be rebutted,

observing that “[u]nlike Moench, this case does not present a

16686 QUAN v. COMPUTER SCIENCES CORPORATION

situation where a company’s financial situation is seriously

deteriorating and there is a genuine risk of insider self-

dealing.” 360 F.3d at 1098.

[7] To overcome the presumption of prudent investment,

plaintiffs must therefore make allegations that “clearly impli-

cate[ ] the company’s viability as an ongoing concern” or

show “a precipitous decline in the employer’s stock . . . com-

bined with evidence that the company is on the brink of col-

lapse or is undergoing serious mismanagement.” Id. at 1099

n.5; Lalonde v. Textron, Inc., 270 F. Supp. 2d 272, 280

(D.R.I. 2003), rev’d on different grounds in Lalonde v. Tex-

tron, Inc., 369 F.3d 1 (1st Cir. 2004). It will not be enough for

plaintiffs to prove that the company’s stock was not a “pru-

dent” investment or that defendants ignored a decline in stock

price. Plan participants can only rebut the Moench presump-

tion by showing publicly known facts that would trigger the

kind of “careful and impartial investigation” by a reasonable

fiduciary that the plan’s fiduciary failed to perform. Moench,

62 F.3d at 572 (internal quotation marks omitted).8 In Wright,

8

One premise of the Participants’ imprudent investment claim is that the

Fiduciaries should have acted on insider information to divest the plan of

company stock, because such insider information was purportedly con-

trary to the company’s public representations about the company’s finan-

cial practices and financial health. However, throughout the Class Period,

CSC did not encounter problems grave enough to rebut the Moench pre-

sumption, so that we need not address this claim. We do note, however,

that fiduciaries are under no obligation to violate securities laws in order

to satisfy their ERISA fiduciary duties. Restatement (Second) Trusts

§ 166, cmt. a (“The trustee is not under a duty to the beneficiary to do an

act which is criminal or tortious.”). Moreover, plan participants are not

entitled to profit from artificially inflated stock prices or to avoid financial

loss by selling before public disclosure of a company’s deteriorating

health. If material information about a company’s precarious financial sta-

tus is made public, and plan fiduciaries did not divest before the plan par-

ticipants could make a profit or reduce a substantial loss, “the damage to

the plan participants would not be the fault of the plan fiduciary but of . . .

the corporate officials who [concealed misconduct], and against whom the

plan would have a cause of action.” In re Enron Corp. Secs., Derivative

& ERISA Litig., 284 F. Supp. 2d 511, 565 (S.D. Tex. 2003). We do not

construe an ERISA fiduciary’s duties of loyalty and prudence to include

violating the law to serve a plan’s beneficiaries. See also In re McKesson

HBOC, 2002 WL 31431588, at *6-*7.

QUAN v. COMPUTER SCIENCES CORPORATION 16687

we said that, under ERISA’s prudence requirement, the

court’s task “is to inquire ‘whether the individual trustees, at

the time they engaged in the challenged transactions,

employed the appropriate methods to investigate the merits of

the investment and to structure the investment.’ ” 360 F.3d at

1097 (quoting Donovan, 716 F.2d at 1232). In contrast, under

the Moench presumption, a fiduciary’s decision not to divest,

when faced with “[m]ere stock fluctuations, even those that

trend downward significantly,” does not give rise to the infer-

ence that the fiduciary did not properly investigate the merits

of continued investment in employer stock. Wright, 360 F.3d

at 1099.

[8] There is no bright-line rule as to how much evidence

is needed to rebut the Moench presumption because Congress

has not chosen to create one: “[T]he statutory standard itself

—‘prudence’—has no tidy limiting principle. . . . In this mat-

ter as in many others, fiduciaries and courts alike must rely on

common sense and experience to supplement airtight logic.”

In re Ford Motor Co., 590 F. Supp. 2d at 892. A guiding prin-

ciple, however, is that the burden to rebut the presumption

varies directly with the strength of a plan’s requirement that

fiduciaries invest in employer stock. For a directed trustee,

there is “a lesser degree of judicial scrutiny,” while the more

discretion a fiduciary has to invest in “less-risky holdings as

necessary,” the more his decisions will be subject to judicial

scrutiny. Kirschbaum, 526 F.3d at 255 & n.9. In any event,

however, the Moench presumption would be difficult to rebut.

See id. at 256 n.12 (citing cases with facts insufficient to rebut

the Moench presumption, including an “ill-fated merger,

reverse stock split, and seventy-five percent drop in stock

price,” “company-wide financial woes and eighty percent

drop in stock price” and “widespread accounting violations,

restated revenues for three years, and seventy-five percent

drop in stock price”).

C. The Imprudent Investment Claim

[9] The Participants assert that investment of the Plan’s

assets in CSC stock was imprudent, because of material weak-

16688 QUAN v. COMPUTER SCIENCES CORPORATION

nesses in both CSC’s stock option granting program and

CSC’s accounting for income taxes. The Moench presumption

applies to this claim of breach of fiduciary duty by an EIAP

fiduciary for offering employer stock in the plan and failing

to divest the plan of the employer’s stock. The Moench pre-

sumption applies even if, prior to January 2007, the Fidu-

ciaries were not only required to offer employer stock as an

investment option, but also required to invest “matching con-

tributions” in employer stock. We note that the Participants

did not show that the Committee had discretion to halt pur-

chases of CSC’s common stock or to invest Plan assets that

were required to be invested in the CSC stock fund in other

assets instead. The question is whether the district court cor-

rectly found that the Participants did not generate any genuine

issues of material fact that the Fiduciaries nevertheless should

have stopped Plan investments in CSC stock. See Kirsch-

baum, 526 F.3d at 253; Syncor, 516 F.3d at 1102 (the claim-

ant must show that “a prudent investor under the

circumstances would not have followed the plan’s mandate to

invest in employer securities”).

The Participants contend that the district court erred in

granting summary judgment in favor of the Fiduciaries on

their imprudence claim, because the record is “rich” with evi-

dence that it was imprudent for the Fiduciaries to hold or offer

CSC stock in the Plan. We agree with the district court, how-

ever, that the Participants did not generate a genuine issue of

material fact sufficient to rebut the Moench presumption that

continued investment in CSC stock was prudent.

[10] Even assuming that the Fiduciaries were aware of

problems with the stock option granting practices and income

tax accounting—and contrary to the Participants’ assertions,

the record giving rise to inferences that the Fiduciaries would

have known of these problems is rather scant—“[o]ne cannot

say that whenever plan fiduciaries are aware of circumstances

that may impair the value of company stock, they have a fidu-

ciary duty to depart from [Plan] provisions.” Kirschbaum, 526

QUAN v. COMPUTER SCIENCES CORPORATION 16689

F.3d at 256. “Instead . . . there ought to be persuasive and ana-

lytically rigorous facts demonstrating that reasonable fidu-

ciaries would have considered themselves bound to divest.”

Id. The Participants here have presented no evidence that it

was unreasonable for the Fiduciaries to believe that CSC

would overcome its problems with stock options pricing and

income tax accounting, especially in light of CSC’s internal

investigations of those problems. Thus, the Participants’ evi-

dence is insufficient to rebut the Moench presumption of pru-

dence.

[11] Nor do the Participants point to evidence that would

generate a genuine issue of material fact that, at the time that

the Fiduciaries continued to hold CSC common stock as part

of the Plan’s investment, the Fiduciaries failed to employ

appropriate methods to investigate the merits of the invest-

ment and to structure the investment. Wright, 360 F.3d at

1097; see also Moench, 62 F.3d at 572. First, “[m]ere stock

fluctuations, even those that trend downward significantly, are

insufficient to establish the requisite imprudence to rebut the

Moench presumption.” Wright, 360 F.3d at 1099. Thus, the

district court properly found that the decline in CSC’s stock

price did not give rise to an inference that the Fiduciaries did

not properly investigate the merits of continued investment in

CSC stock.

[12] Second, contrary to the Participants’ contentions, the

district court did not engage in a “faulty analysis” by consid-

ering that the Fiduciaries might also have been sued if they

had stopped offering CSC stock. Courts applying the Moench

presumption have recognized that this very principle applies,

not only where fiduciaries allegedly fail to maximize returns,

but also where they allegedly held employer stock impru-

dently. See Moench, 62 F.3d at 571-72; see also Kirschbaum,

526 F.3d at 256. Moreover, the Participants’ argument against

considering whether the fiduciary might also be sued for

divesting improperly relies on the hindsight conclusion that

the fiduciary acted imprudently by holding the company stock

16690 QUAN v. COMPUTER SCIENCES CORPORATION

in the first place. See DiFelice v. U.S. Airways, Inc., 497 F.3d

410, 424 (4th Cir. 2007) (“[W]hether a fiduciary’s actions are

prudent cannot be measured in hindsight, whether this hind-

sight would accrue to the fiduciary’s detriment or benefit.”).

[13] Third, the district court properly rejected the Partici-

pants’ claim that the one-day drop in CSC’s stock price in late

June 2006 was sufficient to show that the Fiduciaries did not

properly investigate their continued investment in CSC stock.

It is true that “[a] violation may occur where a company’s

stock did not trend downward over time, but was artificially

inflated during that time by an illegal scheme about which the

fiduciaries knew or should have known, and then suddenly

declined when the scheme was exposed.” Syncor, 516 F.3d at

1102 (emphasis added). However, the Participants did not

argue below, and do not argue on appeal, that any alleged

problems in the handling of stock options, which purportedly

caused the one-day drop in CSC’s stock price, amounted to an

“illegal scheme.” That one-day drop also does not generate a

genuine issue of material fact as to imprudence of continued

investment in CSC stock on the basis of allegations of wrong-

doing short of illegal conduct, where the price of the stock

rebounded to more than its trading price within a reasonably

short time frame. See Edgar, 503 F.3d at 349 n.13.

[14] Fourth, equally unavailing is the Participants’ asser-

tion that the Fiduciaries’ knowledge of problems with CSC’s

stock option granting practices and accounting for income

taxes shows that the Fiduciaries failed to evaluate the merits

of continued investment in company stock. Courts have held

that a duty to investigate whether continued investment in

company stock is prudent “only arises when there is some rea-

son to suspect that investing in company stock may be

imprudent—that is, there must be something akin to a ‘red

flag’ of misconduct.” Pugh v. Tribune Co., 521 F.3d 686, 700

(7th Cir. 2008) (citing Barker v. Am. Mobil Power Corp., 64

F.3d 1397, 1403 & n.4 (9th Cir. 1995)).9 The Participants

9

In Barker, we observed, “Not to investigate suspicions that one has

with respect to the funding and maintenance of the plan constitutes a

breach of [fiduciary] duty.” Barker, 64 F.3d at 1403.

QUAN v. COMPUTER SCIENCES CORPORATION 16691

alleged that the fiduciaries ignored “red flags,” but CSC

responded to the “red flag” issues by appropriately investigat-

ing and addressing the alleged problems. The Fiduciaries did

not breach their duty by failing to divest the Plan of company

stock. See id.

[15] Finally, to generate genuine issues of material fact on

an imprudent investment claim, the Participants “ ‘must show

a causal link between the failure to investigate [or divest] and

the harm suffered by the plan.’ ” Wright, 360 F.3d at 1099.

They have not done so. The evidence they present does noth-

ing to distinguish the causal effect on the stock price, if any,

of the announcement of the SEC’s request for information

about CSC’s stock option granting practices from the causal

effect of the announcement of other significant matters that

same day, including the fact that CSC was no longer looking

for a buyer and would buy back a substantial amount of its

stock.10 The record is also devoid of evidence that CSC’s

repricing its stock options, after its internal investigation and

after the SEC’s clarification of the guidelines for stock option

pricing, was out of step with adjustments that other companies

were forced to make in light of the SEC’s clarification.

[16] Upon de novo review, we affirm the district court’s

grant of summary judgment to the Fiduciaries on the Partici-

pants’ imprudent investment claim.

10

The Participants also fault the district court for not considering the

report of one of their experts, Mr. Miller, which purportedly calculated

huge losses to the Plan. Mr. Miller’s “report” was actually an affidavit,

and as the district court noted, his only example of loss from allegedly

imprudent conduct was the one-day drop in CSC’s stock price on June 30,

2006. See Miller’s Report, ¶ 7. Because neither the one-day drop, nor any

of the other alleged problems, were sufficient to make investment in CSC

stock imprudent, Mr. Miller did not show a causal link between imprudent

investment and losses to the Plan.

16692 QUAN v. COMPUTER SCIENCES CORPORATION

IV. THE MISREPRESENTATION CLAIM

[17] The Participants assert that the Fiduciaries concealed

and negligently misrepresented the truth about CSC’s

accounting and income tax problems. We have recognized

“[ERISA] fiduciaries breach their duties if they mislead plan

participants or misrepresent the terms or administration of a

plan. . . . A fiduciary has an obligation to convey complete

and accurate information material to the beneficiary’s circum-

stance, even when a beneficiary has not specifically asked for

the information.” Barker, 64 F.3d at 1403 (internal citations

omitted). “[T]he same duty applies to ‘alleged material mis-

representations made by fiduciaries to participants regarding

the risks attendant to fund investment.’ ” Edgar, 503 F.3d at

350.

[18] As the Third Circuit has explained, “ ‘a misrepresen-

tation is ‘material’ if there was a substantial likelihood that it

would have misled a reasonable participant in making an ade-

quately informed decision about whether to place or maintain

monies’ in a particular fund.” Id. This definition of “materiali-

ty” is consonant with this court’s formulations of “materiali-

ty” in other ERISA contexts. See Washington v. Bert

Bell/Pete Rozelle NFL Ret. Plan, 504 F.3d 818, 823-24 (9th

Cir. 2007) (ERISA disability benefits case); Thomas, Head &

Greisen Emps. Trust v. Buster, 24 F.3d 1114, 1121 (9th Cir.

1994) (action by an ERISA trust against the seller of deed of

trust notes). The definition applies here, too.

The Participants’ misrepresentation claim is premised on 1)

a statement purportedly to the effect that the June 2006 stock

price drop was caused by “the market, not CSC”; 2) state-

ments that stock options have an exercise price equal to 100%

of the market value on the day they were granted; and 3)

financial statements filed with the SEC on Forms 10-Q and

10-K that were incorporated into information to Plan partici-

pants about the CSC Stock Fund. We assume, without decid-

ing, that alleged misrepresentations in SEC disclosures that

QUAN v. COMPUTER SCIENCES CORPORATION 16693

were incorporated into communications about an ERISA plan

are “fiduciary communications” on which an ERISA misrep-

resentation claim can be based. Even with this assumption,

the district court’s order granting summary judgment in favor

of the Fiduciaries on the Participants’ misrepresentation claim

must be affirmed because the Participants failed to generate

genuine issues of material fact that each of the communica-

tions in question was a misrepresentation that was material.

[19] First, and easiest to dispose of, is the Participants’

contention that the Fiduciaries made a material misrepresenta-

tion in the CSC newsletter entitled “Solutions” that “it was the

market, not CSC” that caused the significant late-June 2006

market decline. As the district court correctly found, this

statement could not possibly be a misrepresentation about the

cause of the late-June 2006 market decline, because the state-

ment was actually made based on information known to the

commentator for the period ending June 15, 2006. The Partic-

ipants ignore this fact, or attempt to direct the court’s atten-

tion away from it, by concentrating their appeal on the district

court’s determination that the statement was not made by the

Fiduciaries, but by a third party. Even supposing that the

statement was adopted by the Fiduciaries, it still is not a mis-

representation about the cause of the stock drop on June 30,

2006.

Second, the Participants contend that the Fiduciaries made

material misrepresentations in statements about pricing of

stock options at 100% of market value at the time they were

granted. Those statements may have been untrue in light of

the post-hoc clarification of the standard for pricing of stock

options in the SEC guidance in September 2006. Neverthe-

less, it is not clear that anything in the record generates a gen-

uine issue of material fact that the statements were untrue

prior to that guidance. Also, even assuming that they were

untrue when made, the Participants did not generate any genu-

ine issues of material fact that the statements were “material,”

in the sense that there was a substantial likelihood that they

16694 QUAN v. COMPUTER SCIENCES CORPORATION

would have misled a reasonable participant in making an ade-

quately informed decision about whether to place or maintain

monies in the CSC stock fund. Edgar, 503 F.3d at 350. The

stock options pricing errors amounted to only about $68 mil-

lion in charges over eleven fiscal years, only about 1.4% of

CSC’s net income, and only about 0.1% of its revenues over

the same period. The Participants attempt to direct the court’s

attention only to the charges from repricing of stock options

in the aggregate, and at the percentage error in relation only

to stock option pricing claimed in particular years. Doing so,

however, does not generate a genuine issue of material fact

that the allegedly erroneous statements about the stock

options pricing were material to CSC’s financial condition as

a whole or material to decisions about investment in CSC

stock.

The Participants assert that United States v. Reyes, 577 F.3d

1069, 1076 (9th Cir. 2009), stands for the broad proposition

that improper accounting of backdated stock options is neces-

sarily a material misstatement. We disagree. Reyes is about

criminal backdating but recognizes that “backdating” is not

itself illegal if properly recorded. Reyes, 577 F.3d at 1073.

The Reyes decision also states the same test of materiality as

Edgar, whether there is “ ‘a substantial likelihood that the dis-

closure of the omitted fact would have been viewed by the

reasonable investor as having altered the “total mix” of infor-

mation made available.’ ” Id. at 1075 (quoting Basic, Inc. v.

Levinson, 485 U.S. 224, 231-32 (1988)). We concluded,

above, that information about the pricing of stock options was

not material under this standard.

[20] Thus, as the district court concluded, it was highly

unlikely that a reasonable participant would have been misled

in making an adequately informed decision about whether to

place or maintain monies in the CSC stock fund by statements

about the pricing of stock options later shown to be arguably

inaccurate. Edgar, 503 F.3d at 350. Because the Participants

failed to generate any genuine issue of material fact that the

QUAN v. COMPUTER SCIENCES CORPORATION 16695

Fiduciaries made “material” misstatements or nondisclosures,

the district court properly granted summary judgment on their

misrepresentation claim.

V. THE FIDUCIARIES’ COSTS

[21] The Fiduciaries cross-appeal the district court’s fail-

ure to award them costs as “prevailing parties” pursuant to

Rule 54 of the Federal Rules of Civil Procedure. Although the

district court’s summary judgment ruling was silent on the

matter, the subsequent Judgment stated, without explanation,

“The parties shall bear their own costs.” Rule 54 provides that

“[u]nless a federal statute, these rules, or a court order pro-

vides otherwise, costs—other than attorney’s fees—should be

allowed to the prevailing party.” Fed. R. Civ. P. 54(d)(1)

(emphasis added). ERISA § 502(g)(1) also provides for an

award of costs: “In any action under this subchapter . . . by

a participant, beneficiary, or fiduciary, the court in its discre-

tion may allow a reasonable attorney’s fee and costs of action

to either party.” 29 U.S.C. § 1132(g)(1) (emphasis added).

[22] This court has not resolved the question of whether

Rule 54(d)(1) is supplanted or supplemented by 29 U.S.C.

§ 1132(g)(1), nor has any other circuit court. But see Agre-

dano v. Mutual of Omaha Cos., 75 F.3d 541, 543-44 (9th Cir.

1996) (using Rule 54(d)(1) to assist in the interpretation of

allowable costs under § 1132); Leonard v. Sw. Bell Corp. Dis-

ability Income Plan, 408 F.3d 528, 532-33 (8th Cir. 2005)

(considering whether an award of costs was appropriate pur-

suant to Rule 54(d)(1) in an ERISA case otherwise brought

pursuant to 29 U.S.C. § 1132). Federal district courts to con-

sider the question appear to be split. Compare Brieger v. Tel-

labs, Inc., 652 F. Supp. 2d 925, 926-27 (N.D. Ill. 2009)

(awarding costs under § 1132(g)(1) because it “provide[s]

otherwise” within the plain language of Rule 54(d)(1)), with

MacLeod v. Procter & Gamble Disability Ben. Plan, 460 F.

Supp. 2d 340, 350-51 (D. Conn. 2006) (awarding costs under

16696 QUAN v. COMPUTER SCIENCES CORPORATION

rule 54(d)(1) while recognizing that § 1132(g) allows an

award of costs to either party, not just to a prevailing party).

[23] We hold § 1132(g)(1) does not plainly “provide other-

wise” than Rule 54(d)(1) for the award of costs to a prevailing

party. To “provide otherwise” than Rule 54(d)(1), the statute

or rule would have to bar an award of costs to a prevailing

party. Section 1132(g)(1), however, in no way precludes an

award of costs to a prevailing party; it simply provides that,

in any action by a plan participant pursuant to ERISA, “the

court in its discretion may allow a reasonable attorney’s fee

and costs of action to either party.” 29 U.S.C. § 1132(g)(1)

(emphasis added). Thus, § 1132(g)(1) may apply to the award

of costs where Rule 54(d)(1) does not, but it does not neces-

sarily preclude an award of costs pursuant to Rule 54(d)(1) or

make an award of costs pursuant to Rule 54(d)(1) superfluous.

Rule 54(d)(1) applies here to determine whether the prevail-

ing Fiduciaries were entitled to an award of costs.

Although Rule 54(d)(1) does “create[ ] a presumption for

awarding costs to prevailing parties,” it also places on the los-

ing party the burden to “show why costs should not be award-

ed.” Save Our Valley v. Sound Transit, 335 F.3d 932, 944-45

(9th Cir. 2003); see also Dawson v. City of Seattle, 435 F.3d

1054, 1070 (9th Cir. 2006). In Save Our Valley, this court

held that the district court must “specify reasons” only when

it refuses to tax costs:

[A] district court need not give affirmative reasons

for awarding costs; instead, it need only find that the

reasons for denying costs are not sufficiently persua-

sive to overcome the presumption in favor of an

award. The presumption itself provides all the reason

a court needs for awarding costs, and when a district

court states no reason for awarding costs, we will

assume it acted based on that presumption.

Save Our Valley, 335 F.3d at 945; Ass’n of Mex.-Am. Educa-

tors v. State of California, 231 F.3d 572, 591-92 (9th Cir.

QUAN v. COMPUTER SCIENCES CORPORATION 16697

2000). Proper grounds for denying costs include “(1) a losing

party’s limited financial resources; (2) misconduct by the pre-

vailing party; and (3) ‘the chilling effect of imposing . . . high

costs on future civil rights litigants,’ ” as well as 4) whether

“the issues in the case were close and difficult”; 5) whether

“the prevailing party’s recovery was nominal or partial”; 6)

whether “the losing party litigated in good faith”; and 7)

whether “the case presented a landmark issue of national

importance.” Champion Produce, Inc. v. Ruby Robinson Co.,

Inc., 342 F.3d 1016, 1022 (9th Cir. 2003).

[24] Here, the district court stated no reasons for failing to

award the Fiduciaries their costs as the prevailing parties.

That omission was contrary to established law of this Circuit.

Because the district court retains the discretion to deny an

award of costs to a prevailing party under Rule 54(d)(1), the

proper remedy is to reverse the portion of the Judgment

requiring each party to bear its own costs, and to remand to

the district court the limited question of whether or not to

award costs to the Fiduciaries pursuant to Rule 54(d)(1) in

light of the facts presented.

VI. CONCLUSION

Upon de novo review, we conclude that the district court

properly granted summary judgment to the Fiduciaries on the

Participants’ imprudent investment and misrepresentation

claims. The Participants did not challenge on appeal the dis-

trict court’s grant of summary judgment to the Fiduciaries on

the Participants’ monitoring claim. Therefore, the district

court’s Order granting summary judgment to the Fiduciaries

on all claims is affirmed.

On the Fiduciaries’ cross-appeal, we conclude that the dis-

trict court failed to explain why an award of costs pursuant to

Rule 54(d)(1) should be denied, where the Fiduciaries are the

prevailing parties. Therefore, the portion of the Judgment

requiring each party to bear its own costs is reversed, and this

16698 QUAN v. COMPUTER SCIENCES CORPORATION

matter is remanded for the limited purpose of determining

whether or not costs should be awarded to the Fiduciaries pur-

suant to Rule 54(d)(1).

AFFIRMED as to the Participants’ appeal, and

REVERSED AND REMANDED as to the Fiduciaries’ cross-

appeal.