Petition for Writ of Certiorari — Jeffrey Schweitzer, et al., Petitioners v. Investment Committee of the Phillips 66 Savings Plan, et al.

Supreme Court briefMar 8, 2021

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No. _______

In the Supreme Court of the United States

JEFFREY SCHWEITZER, JONATHAN SAPP, RAUL RAMOS,

DONALD FOWLER,

Petitioners,

INVESTMENT COMMITTEE OF THE PHILLIPS 66 SAVINGS

PLAN, SAM FARACE, JOHN DOES 1-10, INCLUSIVE,

Respondents.

On Petition for Writ of Certiorari to

the United States Court of Appeals for the Fifth Circuit

PETITION FOR A WRIT OF CERTIORARI

GREGORY Y. PORTER

BAILEY & GLASSER,

L.L.P.

1055 Thomas Jefferson

St., NW, Suite 540

Washington, DC 20007

(202) 463-2101

MATTHEW W.H. WESSLER

Counsel of Record

GREGORY A. BECK

GUPTA WESSLER PLLC

1900 L St., NW, Suite 312

Washington, DC 20036

(202) 888-1741

matt@guptawessler.com

Counsel for Petitioners

(additional counsel listed on inside cover)

March 8, 2021

-iMARK P. KINDALL

IZARD, KINDALL & RAABE, L.L.P.

29 S. Main St., Suite 305

West Hartford, CT 06107

(860) 493-6294

THOMAS R. AJAMIE

JOHN SAUL EDWARDS, JR.

AJAMIE, L.L.P.

Pennzoil Pl. S. Tower

711 Louisiana St., Suite 2150

Houston, TX 77002

(713) 860-1600

-iQUESTION PRESENTED

Is an ERISA fiduciary entitled to dismissal on the

pleadings of a plan participant’s claim that the fiduciary

imprudently maintained an undiversified, single-stock

fund in a defined contribution plan where the plan does not

restrict participants’ ability to sell their shares of the

undiversified fund and reinvest in other, diversified funds?

-iiLIST OF PARTIES TO THE PROCEEDINGS

Petitioners Jeffrey Schweitzer, Jonathan Sapp, Raul

Ramos, and Donald Fowler were plaintiffs in the district

court and appellants in the court of appeals.

The following respondents were defendants in the district court and appellees in the court of appeals: Investment Committee of the Phillips 66 Savings Plan,

Sam Farace, and John Does 1-10.

RELATED PROCEEDINGS

This case arises from the following proceedings:

Schweitzer on behalf of Phillips 66 Sav. Plan v. Inv.

Comm. of Phillips 66 Sav. Plan, 312 F. Supp. 3d 608

(S.D. Tex. 2018)

Schweitzer v. Inv. Comm. of Phillips 66 Sav. Plan, 960

F.3d 190 (5th Cir. 2020)

There are no related proceedings.

-iiiTABLE OF CONTENTS

Question presented ............................................................... i

List of parties to the proceedings .......................................ii

Related Proceedings ............................................................ii

Table of authorities ............................................................. iv

Opinions Below ..................................................................... 1

Jurisdiction............................................................................ 1

Constitutional and stautory provisions involved............... 1

Statement .............................................................................. 1

A. Statutory background............................................ 1

B. Factual and procedural background .................... 4

Reasons for granting the petition ....................................... 7

Conclusion ............................................................................. 9

-ivAPPENDIX

Appendix A

Opinion of the United States Court

of Appeals for the Fifth Circuit

(May 22, 2020) ....................................App. 1a

Appendix B

Memorandum Opinion and Order of

the United States District Court for

the Southern District of Texas

(May 09, 2018) ..................................App. 17a

Appendix C

Amended Final Judgment of the

United States District Court for the

Southern District of Texas

(May 15, 2018) ..................................App. 45a

Appendix D

Order denying petition for rehearing en banc by the United States

Court of Appeals for the Fifth Circuit

(October 8, 2020) ..............................App. 48a

-vTABLE OF AUTHORITIES

Cases

Armstrong v. LaSalle Bank National Association,

446 F.3d 728 (7th Cir. 2006) ......................................... 3

Fifth Third Bancorp v. Dudenhoeffer,

573 U.S. 409 (2014) ........................................................ 2

Kopp v. Klein,

722 F.3d 327 (5th Cir. 2013) ......................................... 9

Massachusetts v. Morash,

490 U.S. 107 (1989) ........................................................ 2

Mertens v. Hewitt Associates,

508 U.S. 248 (1993) ........................................................ 2

Shaw v. Delta Air Lines, Inc.,

463 U.S. 85 (1983) .......................................................... 2

Smith v. Penrod Drilling Corp.,

960 F.2d 456 (5th Cir. 1992) ......................................... 9

Stegemann v. Gannett Co., Inc.,

970 F.3d 465 (4th Cir. 2020) ............................. 2, 3, 4, 8

Young v. General Motors Investment Management

Corp.,

325 F. App’x 31 (2d Cir. 2009) ...................................... 5

Statutes and Regulations

28 U.S.C. § 1254(1) ............................................................... 1

29 U.S.C. § 1001(a) ............................................................... 2

-vi29 U.S.C. § 1104(a)(1)(B) ................................................. 1, 2

29 U.S.C. § 1104(a)(1)(C) ................................................. 1, 2

29 U.S.C. § 1104(a)(2) ........................................................... 3

Other Authorities

Restatement (Third) of Trusts § 90 cmt. e(1) .................... 3

-1OPINIONS BELOW

The Fifth Circuit’s opinion is reported at 960 F.3d 190

(5th Cir. 2020). App. 1a. The order of the Fifth Circuit

denying the plaintiffs’ petition for rehearing en banc is not

reported. App. 48a. The district court’s order granting the

defendants’ motion to dismiss is reported at Schweitzer on

behalf of Phillips 66 Sav. Plan v. Inv. Comm. of Phillips 66

Sav. Plan, 312 F. Supp. 3d 608 (S.D. Tex. 2018).

JURISDICTION

The Fifth Circuit filed its opinion on May 22, 2020, and

denied a petition for rehearing en banc on October 8, 2020.

This Court has jurisdiction under 28 U.S.C. § 1254(1).

CONSTITUTIONAL AND STAUTORY PROVISIONS

INVOLVED

29 U.S.C. § 1104(a)(1)(B) provides that:

a fiduciary shall discharge his duties with respect

to a plan solely in the interest of the participants

and beneficiaries and ... 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.

29 U.S.C. § 1104(a)(1)(C) 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.”

STATEMENT

A. Statutory background

Congress enacted ERISA to “promote the interests of

employees and their beneficiaries in employee benefit

-2plans.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90

(1983). Congress’s primary concern was “the mismanagement of funds accumulated to finance employee benefits

and the failure to pay employees benefits from accumulated funds.” Massachusetts v. Morash, 490 U.S. 107, 115

(1989). The “inadequacy” of existing management standards, it found, was a threat to “the soundness and stability

of plans.” 29 U.S.C. § 1001(a). Congress thus imposed

safeguards intended to “insure against the possibility that

the employee’s expectation of the benefit would be defeated through poor management.” Morash, 490 U.S. at

115.

To that end, the law imposes “strict standards of trustee conduct … derived from the common law of trusts.”

Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 416

(2014). Those standards include “a number of detailed duties and responsibilities, which include ‘the proper management, administration, and investment of [plan] assets.’” Mertens v. Hewitt Assocs., 508 U.S. 248, 251–52

(1993). “Courts have often called these fiduciary duties the

‘highest known to the law.’” Stegemann v. Gannett Co.,

Inc., 970 F.3d 465, 469 (4th Cir. 2020).

This case involves two distinct but related duties under ERISA. First, the duty to diversify requires a plan 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.” 29 U.S.C.

§ 1104(a)(1)(C). Second, the duty of prudence requires

that fiduciaries 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.” Id. § 1104(a)(1)(B). Prudence requires

fiduciaries to “determine that each investment is

-3reasonably designed, as part of the portfolio, to further the

purposes of the plan, taking into consideration the risk of

loss and the opportunity for gain.” App. 9a (cleaned up).

Although the two statutory duties are separate, they

significantly “overlap[],” because diversification is itself a

key principle of prudent investing. Id. at 5a. “In a ‘diversified’ portfolio, that is, one which contains a variety of investments, ‘the risks of the various components of such a

portfolio tend to cancel out; that is the meaning and objective of diversification.’” Gannett, 970 F.3d at 475 (quoting

Summers v. State St. Bank & Tr. Co., 453 F.3d 404, 409

(7th Cir. 2006)). Thus, “trust law, ERISA case law, and the

text of ERISA all understand diversification as an element of prudence.” Id. at 477; see 29 U.S.C. § 1104(a)(2)

(recognizing that “the prudence requirement” normally

“requires diversification”); Armstrong v. LaSalle Bank

Nat’l Ass’n, 446 F.3d 728, 732 (7th Cir. 2006) (“The duty to

diversify is an essential element of the ordinary trustee’s

duty of prudence … .”); see also Restatement (Third) of

Trusts § 90 cmt. e(1). “After all, the point of the duty to

diversify is not diversification for diversification’s sake,

but risk management.” Gannett, 970 F.3d at 477.

Finally, section 1104(a)(2) exempts investments in

employer stock from “the diversification requirement of

paragraph (1)(C) and the prudence requirement (only to

the extent it requires diversification) of paragraph (1)(B).”

Congress would not have exempted employer stock from

the prudence requirement “to the extent it requires diversification” unless diversification was an element of prudence.

Accordingly, ERISA actually creates two duties to diversify: the freestanding diversification duty under section 1104(a)(1)(C), and the diversification required for

-4prudent investing under section 1104(a)(1)(B). Under the

“somewhat circular” structure of those provisions, “each

duty implicates the other.” Gannett, 970 F. 3d at 474 n.7.

B. Factual and procedural background

In 2012, oil-and-gas company ConocoPhillips Corp.

spun off its downstream refining, marketing, and transportation operations to a new, independent company

called Phillips 66. App. 2a. Before the spinoff, the retirement accounts of many ConocoPhillips employees included investments in single-stock funds of the company’s

own stock. Id. The accounts of employees who transferred

from ConocoPhillips to the newly spun-off Phillips 66, for

that reason, included investments in ConocoPhillips stock.

Id.

As a consequence, Phillips 66’s employee retirement

plan wound up with a substantial proportion of its investments in single-stock funds exclusively holding stock in

ConocoPhillips—now a separate company. Id. at 2a–3a.

Indeed, about 30% of the plan’s total assets at the time of

the spinoff were invested in ConocoPhillips stock. Id. at

3a. But although the defendants froze new investments in

the single-stock funds, they continued maintaining the

funds for years as ConocoPhillips stock fluctuated in

value—first rising, then plummeting to less than half its

value. Id. at 3a.

Four participants in Phillips 66’s retirement plan filed

suit under ERISA, claiming that Phillip 66’s investment

committee violated its fiduciary duty to diversify under

section 1104(a)(1)(C) and duty of prudence under section

1104(a)(1)(B) by failing to monitor and timely divest from

the ConocoPhillips stock funds. Id. at 3a–4a. The district

court granted the defendants’ motion to dismiss for failure

to state a claim. Id. at 4a. As to the plaintiffs’ duty-to-

-5diversify claim, the court held that the complaint did not

allege a breach of the duty because the participants could

have withdrawn from the ConocoPhillips stock funds and

independently created their own, more diversified portfolios. Id. As to the duty-of-prudence claim, the court held

that the claim was foreclosed by this Court’s decision in

Dudenhoeffer. Id.

The Fifth Circuit affirmed, but for different reasons.

Relying on the Second Circuit’s unpublished decision in

Young v. Gen. Motors Inv. Mgmt. Corp ., the court rejected the plaintiffs’ duty-to-diversify claim on the ground

that the duty “looks to a pension plan as a whole, not to

each investment option.” Id. at 7a–9a (citing Young v. Gen.

Motors Inv. Mgmt. Corp., 325 F. App’x 31, 33 (2d Cir.

2009)). In a defined-contribution plan like the one at issue

here, it held, fiduciaries “need only provide investment options that enable participants to create diversified portfolios; they need not ensure that participants actually diversify their portfolios.” Id. at 8a. Because the plaintiffs had

“not alleged that the Fiduciaries did not offer sufficient investment options,” it concluded, “their § 1104(a)(1)(C)

claim fails.” Id.

As to the plaintiffs’ duty-of-prudence claim, on the

other hand, the Fifth Circuit held that the plaintiffs had

“plausibly alleged that the ConocoPhillips Funds, by its

resulting concentration of investment, became an imprudent investment with the spinoff.” Id. at 13a. In reaching

that conclusion, the court first rejected the district court’s

conclusion that Dudenhoeffer foreclosed the plaintiffs’

claim. Id. at 11a. “Unlike the claim in Dudenhoeffer,” it

noted, the plaintiffs’ claim “that the ConocoPhillips Funds

were imprudent because of the risk inherent in failing to

diversify” did “not turn on publicly available information

-6or whether Fiduciaries can beat the market.” Id. “Moreover, Dudenhoeffer … involved employer securities, which

are exempt from the duty of prudence ‘to the extent that

it requires diversification.’” Id. (quoting 29 U.S.C.

§ 1104(a)(2)). It thus did not “address the prudence of

holding a single-stock fund in the first place.” Id. For

those reasons, the Fifth Circuit concluded, the plaintiffs’

“duty-of-prudence claim [did] not implicate Dudenhoeffer.” Id.

The court next held that the duty of prudence, unlike

the duty to diversify, applies to individual funds rather

than just to the plan as a whole. Id. at 12a. Although

“ERISA contains no prohibition on individual account

plans’ offering single-stock funds,” the court recognized,

“a single-stock investment option may be imprudent in

some circumstances, as it may encourage investors to put

too many eggs in one basket.” Id. at 11a–12a. The court

relied on the Fourth Circuit’s holding in DiFelice v. U.S.

Airways, Inc. in “rejecting the view that ‘any single-stock

fund … would be prudent if offered alongside other diversified Funds.’” Id. at 15a n.49 (quoting DiFelice v. U.S.

Airways, Inc., 497 F.3d 410, 423-24 (4th Cir. 2007)). Such

funds, it noted, “‘carr[y] significant risk, and so would

seem generally imprudent for ERISA purposes.’” Id. at

13a (quoting DiFelice, 497 F.3d at 424).

Nevertheless, the court affirmed the district court’s

dismissal of the plaintiffs’ claims. The defendants, it noted,

had closed the ConocoPhillips stock fund to new investments. App. 15a. At that point, the plaintiffs “were free to

sell off their investments at any time and reinvest in other

funds.” Id. Because they chose not to, it concluded, the

plaintiffs could not “blame the Fiduciaries for declining to

second guess that judgment.” Id. at 16a. For that reason,

-7the court affirmed the district court’s dismissal on the

pleadings. Id. at 16a.

REASONS FOR GRANTING THE PETITION

The pending petition for a writ of certiorari in Gannett

Co. v. Quatrone, No. 20-609, asks this Court to resolve a

purported circuit split between the Fourth Circuit there

and the Fifth Circuit in this case on the question whether

a plan fiduciary’s duty under ERISA requires only that

the fiduciary offer a diversified “menu of investment options,” or whether the fiduciary must also diversify “each

separate option on the menu”—whether, in other words,

the fiduciary’s duty to diversify applies at the plan or the

fund level. The petition argues (at i) that the Fifth Circuit’s decision here, along with the Second Circuit’s unpublished decision in Young, 325 F. App’x at 33, “require

fiduciaries to provide a diversified menu, but do not require that each separate option on the menu be diversified.” But the Fourth Circuit, it claims, “expressly disagreed” with those decisions by applying the duty instead

to “each available fund on a menu.” Id.

For the reasons explained in the respondent’s brief (at

9–14) in Gannett, the purported circuit split does not exist.

The decision below agreed with the Fourth Circuit that

single-stock funds “‘carr[y] significant risk, and so would

seem generally imprudent for ERISA purposes.’”

App. 13a (quoting DiFelice, 497 F.3d at 424). Indeed, the

court relied on Fourth Circuit precedent in “rejecting the

view that ‘any single-stock fund … would be prudent if offered alongside other diversified Funds.’” Id. at 15a n.49

(quoting DiFelice, 497 F.3d at 423-24). Instead, the court

held, “the prudence of investments or classes of investments offered by a plan must be judged individually.” App.

15a n.49 (emphasis added). And it concluded that, under

-8that test, the plaintiffs had “plausibly alleged that the

ConocoPhillips Funds, by its resulting concentration of investment, became an imprudent investment with the

spinoff.” Id. at 13a. That is exactly what the petitioners in

Gannett (at 16) argue that the Fourth Circuit held there.

Although the petitioners in Gannett rely heavily on

the Fourth Circuit’s statement that it “disagree[d]” with

the Fifth Circuit’s decision here, see Gannett, 970 F.3d at

481, that disagreement relates to a separate timing issue

that the Fifth Circuit appears to have simply overlooked.

The Fourth Circuit in Gannett, like the decision below,

recognized that a plan participant’s choice to invest in a

single-stock fund can defeat the participant’s claim that

the fund is imprudently diversified. See id. But the Fourth

Circuit went one step further, examining the stage of the

case at which participant choice becomes a relevant consideration. See id. at 481–82. Relying on ERISA’s text, its

implementing regulations, and the consensus of other circuits, the court concluded that participant choice is an affirmative defense turning on questions of fact that are inappropriate for resolution on a motion to dismiss. See id.

For that reason, it vacated the district court’s dismissal on

the pleadings, leaving the defendant free to assert its defense on remand. See id. at 484. That is the only issue on

which the Fourth Circuit in Gannett “disagree[d]” with

the Fifth Circuit’s decision here.

Because the decision below appears to have simply assumed that dismissal on the pleadings was proper, nothing

in the decision touches on, let alone conflicts with, the

Fourth Circuit’s contrary conclusion. And although the

Fifth Circuit ignored the issue here, earlier Fifth Circuit

precedent holds—exactly like the Fourth Circuit in Gannett—that participant choice is an affirmative defense

-9unfit for resolution on the pleadings. See Kopp v. Klein,

722 F.3d 327, 335 (5th Cir. 2013). Notwithstanding the decision below’s silence on the issue, that earlier precedent

remains the law of the Fifth Circuit. See Smith v. Penrod

Drilling Corp., 960 F.2d 456, 459 n.2 (5th Cir. 1992) (holding that the decision of an earlier Fifth Circuit panel controls). Although the decision below was thus wrongly decided under ERISA and the Fifth Circuit’s own precedent,

it does not create a circuit split requiring this Court’s review.

If, however, this Court agrees with the petitioners in

Gannett and grants certiorari to resolve a split between

the Fourth Circuit and the Fifth Circuit’s decision here,

the same question would necessarily be implicated in both

cases. Accordingly, the Court should hold this petition

pending the disposition of Gannett, and then dispose of the

petition in light of its decision in that case.

CONCLUSION

The petition for a writ of certiorari should be held

pending this Court’s disposition of Gannett Co. v. Quatrone, No. 20-609, and then disposed of accordingly.

-10Respectfully submitted,