ERISA & Employee Benefits Litigation Blog

Moench Presumption Is Here To Stay: Two Appellate Courts Affirm Dismissal of Stock Drop Cases At Pleadings Stage

By Seyfarth Shaw on Posted in Employer Stock Litigation

By: Ian Morrison, Meg Troy and Sam Schwartz-Fenwick

On May 8, 2012, the Eleventh and Second Circuits affirmed two district court dismissals of “stock drop” cases at the pleadings stage, joining the long line of recent decisions that demonstrate skepticism towards stock drop claims.  We have reported on some of those decisions here and here.

In Lanfear v. Home Depot, Inc., No. 10-12002 (11th Cir. May 8, 2012), the Eleventh Circuit joined the Second, Ninth, Fifth and Sixth Circuits in adopting the Moench presumption, holding that a 16.5% drop in stock price over a period of more than two months did not indicate that the company was on the “brink of financial collapse” which would have required defendants to deviate from the Plan. 

Plaintiffs alleged that company stock became an imprudent investment when, unknown to the public, company officials engaged in misconduct that artificially inflated the company’s stock price.  The Plan required one of the available investment options to be a Company Stock Fund, which was to be invested primarily in company stock.  The Court held that because the Plan used the term “primarily” instead of “exclusively,” defendants retained limited discretion over investment decisions and were subject to judicial review consistent with the Moench presumption. 

Explaining that the term “presumption” is not an evidentiary presumption, but a standard of review applied to a decision made by an ERISA fiduciary to continue to invest in or hold company stock in compliance with the directions of the Plan, and that “[m]ere stock fluctuations, even those that trend downward significantly, are insufficient to establish that a fiduciary abused its discretion . . . .”  Op. at 30-31 (internal quotations omitted), the Court affirmed the district court’s holding that plaintiffs did not plead facts establishing that the defendants abused their discretion by following the Plan’s directions.

In Fisher v. JP Morgan Chase & Co., No. 10-1303-cv (2d Cir. May 8, 2012) (unpublished), the Second Circuit affirmed a district court’s decision granting defendants’ judgment on the pleadings where, between April 1, 1999 and January 2, 2003, JP Morgan stock fell 55%.

Relying on recent opinions that adopted and applied the Moench presumption of prudence, In re Citigroup ERISA Litig., 622 F.3d 128 (2d Cir. 2011) and Gearren v. McGraw-Hill Cos., 660 F.3d 605 (2d Cir 2011), the Court explained that Plan fiduciaries are only required to divest an EIAP or ESOP of employer stock where the fiduciaries know or should know that the employer is in a “dire situation.”  The Court found plaintiffs did not meet this burden and emphasized that JP Morgan remained a viable company at all times and that, even when the stock was at its lowest price of $15 per share, it still retained significant value.

The court in Fisher further explained that the Moench presumption applies to “all EAIPs and ESOPs,” even when the Plan does not expressly require fiduciaries to offer company stock as an investment option, but rather when the Plan provisions “strongly favor” employee investment in the company.  Op. at 5 (emphasis in original).

Lanfear and Fisher reinforce the increasing degree to which courts are skeptical of ERISA stock drop claims and demonstrate the heightened factual threshold that plaintiffs must overcome at the pleadings stage if the plan at issue is “hard-wired” to provide for an employer stock investment option. 

 Despite increasing judicial skepticism it is important to recognize that some stock drop claims continue to survive motions to dismiss.  For example, in Guididas v. Community Nat’l Bank Corp., No. 11-cv-2545 (M.D. Fla. May 10, 2012), the court denied a motion to dismiss a stock drop claim where plaintiffs alleged that Plan fiduciaries continued to offer company stock as an investment option even after they knew that company stock was worthless in light of the company’s improper business and banking practices.  Relying on Lanfear, the court found these allegations sufficient to state a claim because, taken as true, they demonstrate that the Plan fiduciaries abused their discretion by following the Plan’s directions. 

 

Second Circuit Rules That Employer Cannot Use Asset Sale Exception to Avoid Withdrawal Liability Because Purchaser Had No Obligation to Maintain Same Number of Employee Hours of Pay

By Seyfarth Shaw on Posted in Withdrawal Liability

 By D. Ward Kallstrom and Justin T. Curley

In HOP Energy, LLC v. Local 553 Pension Fund, No. 10-3889-cv, the Second Circuit affirmed a district court’s ruling that Plaintiff HOP Energy, LLC (“HOP”) could not use ERISA’s asset sale exception to avoid $1.2 million in withdrawal liability, because the purchaser was permitted under the purchase agreement to reduce the number of employee hours of pay and, consequently, the purchaser’s pension fund contribution obligation.

 In 2007, HOP sold the operating assets of its subsidiary, Madison Oil (“Madison”), to Approved Oil Company (“Approved”).  HOP and Approved entered into a purchase agreement which stated in relevant part that Approved could “reduce to any extent the number of contribution base units with respect to which [Approved] has an obligation to contribute to any plan.” Madisonand Approved were each signatories to a collective bargaining agreement which provided that the “contribution base units” to the union’s multiemployer pension fund were employee hours of pay. 

 After the sale to Approved, HOP stopped contributing to the pension fund and the fund assessed HOP $1.2 million in withdrawal liability.  HOP challenged the assessment, asserting that theMadisonsale to Approved was exempt from withdrawal liability as a bona fide asset sale under ERISA § 4204(a)(1), 29 U.S.C. § 1384(a)(1).  The fund upheld the assessment, as did the arbitrator and the district court.  HOP appealed. 

 Under the Multiemployer Pension Plan Amendments Act (“MPPAA”), an employer that withdraws from a multiemployer pension plan is liable for its aliquot share of the unfunded vested benefits, with certain exceptions.  At issue in HOP Energy was the asset sale exception, which provides that an employer can avoid withdrawal liability if it has sold its assets to another employer, provided that three statutory requirements are met.  See ERISA § 4204(a)(1)(A)-(C), 29 U.S.C. § 1384(a)(1)(A)-(C).  The only issue before the Second Circuit in HOP Energy was whether the sale satisfied the criterion that Approved have a post-sale obligation to contribute “substantially the same number of contribution base units” as HOP.  ERISA § 4204(a)(1)(A), 29 U.S.C. § 1384(a)(1)(A).

 HOP argued on appeal that Approved had an identical obligation as HOP pre-sale to contribute to the pension plan for each Madisonemployee’s hour of pay.  The Second Circuit agreed with HOP on this point.  However, the court went a step further, concluding that HOP’s point addressed only the rate at which Approved had to contribute to the plan, not the number of contribution base units (i.e., hours of employee pay).  Approved had no obligation under the purchase agreement to maintain substantially the same number of hours of employee pay.  As a result, the Second Circuit held that the Madison sale did not qualify for the asset sale exception.

 The Second Circuit explained that for HOP to qualify for ERISA’s asset sale exception, Approved had to assume post-sale substantially the same contribution obligation as HOP, which, according to the court, meant that Approved had to have an obligation to contribute for substantially the same number of hours of employee pay as HOP had contributed for before the sale, not just at the same rate per hour of pay.  Because the purchase agreement made plain that Approved had no obligation to contribute for substantially the same number of hours of pay, the criteria for the asset sale exception were not satisfied. 

 Critically, as the dissent in HOP Energy pointed out, the majority’s interpretation of the sale of assets exception implied that a business asset purchaser would be required to maintain the seller’s historical pension contribution levels into perpetuity.  In the dissent’s view, ERISA § 4204(a)(1)(A)’s requirement that a purchaser contribute “substantially the same number of contribution base units” is a test to be determined only at the time of the sale, and the requirement should not continue into some unknown point in the future. 

 The dissent concluded that Approved undertook substantially the same contribution obligation that HOP had prior to the sale, which was to contribute a particular amount to the pension fund for each hour of employee pay.  HOP had no obligation pre-sale to maintain any particular contribution level and, the dissent reasoned, ERISA § 4204(a)(1)(A) does not require anything more from Approved post-sale.

 The majority recognized that the dissent raised an “issue of concern.”  However, the majority noted that neither party raised on appeal the issue of the duration of the purchaser’s obligation to contribute at the same level as the seller under ERISA § 4204(a)(1)(A) and, further, commented that if the statute impairs the ability of an employer to sell its assets, “the problem lies with the statute and not this Court.”

 Employers who contribute to multiemployer pension plans must be mindful of the HOP Energy decision because it suggests — although it did not hold — that such employers must ensure as part of any business asset sale that the purchaser agree never to materially reduce its contributions to a multiemployer plan.  Therefore, any employer contemplating use of the asset sale exception should consider the risk raised by HOP Energy.  However, HOP Energy is not binding outside the Second Circuit, and no other court has interpreted the law in the manner suggested by the HOP Energy majority.  Hopefully, the Second Circuit will have an opportunity in the near future to rule on the question of the duration of the purchaser’s obligation to contribute at the same level as the seller under ERISA § 4204(a)(1)(A), and thereby provide more clarity to the HOP Energy decision.

Well, At Least We Know They Haven’t Decided The Issue. The Sixth Circuit Refuses To Decide Whether ERISA’s Fiduciary Liability Statute Of Limitations Is Tolled Absent Active Concealment.

By Seyfarth Shaw on Posted in General Fiduciary Breach Litigation

By: Ian Morrison and Michelle M. Scannell

In Cataldo v. United States Steel Corp., No. 10-3583, the Sixth Circuit Court of Appeals affirmed a district court’s ruling that the claims of 225 current and former employees of U.S. Steel Corporation (“U.S. Steel”) for breach of fiduciary duty were time-barred under ERISA’s applicable statute of limitations.  In doing so, the court “clarified” that earlier decisions did not resolve whether active concealment is required to toll the ERISA statute of limitations.  In Cataldo it declined to weigh in on this issue.  The unresolved state of the law on this issue will likely encourage the filing of more tenuous claims in the Sixth Circuit.

 Plaintiffs in Cataldo were current and former employees of steel mills in Lorain, Ohio that underwent ownership changes.  Plaintiffs alleged that during an ownership change in 1999, they were led to believe that despite changes to the pension calculation formula, they would receive the same pension benefits as all other U.S. Steel employees.  Plaintiffs alleged that when U.S. Steel offered an early retirement program in 2003, they were reassured that they would receive the same benefits as all other U.S. Steel employees with respect to pension benefits, meaning that the prior change in pension calculation formula would not be enforced.  Plaintiffs who retired under the early retirement program in 2003 and thereafter, however, received significantly lower pension benefits than they felt they had been promised. 

Six years later, in 2009, Plaintiffs filed a lawsuit against numerous entities, including U.S. Steel and their union for breach of ERISA’s fiduciary duties, seeking remedies that included equitable accounting and restitution.  The district court dismissed the fiduciary breach claims as untimely under ERISA’s statute of limitations, 29 U.S.C. 1113, which generally provides that a claim for fiduciary breach must be commenced within the earlier of: three years of the date the plaintiff obtained “actual knowledge” of the breach or violation forming the basis for the claim, or six years after the breach or violation.  In cases of “fraud or concealment,” an action must be brought within six years of knowledge of the breach (“fraud or concealment exception”).  Id. 

Courts differ as to whether the fraud or concealment exception requires proof of concealment by the fiduciary or applies in all cases of an allegedly fraudulent breach of fiduciary duty.  The majority of circuits interpret Section 413 as incorporating the common law fraudulent concealment doctrine, which postpones the beginning of the limitation period from the date of injury to the date the injury is discovered, but they disagree as to whether active concealment of the breach is required for tolling.  See Minnkota Ag. Prods., Inc. v. Norwest Bank N.D., 30 Fed. Appx. 676, 677-78 (8th Cir. 2002); In re Unisys Corp. Retiree Med. Benefit “ERISA” Litig., 242 F. 3d 497 (3d Cir. 2001); J. Geils Band Employee Benefit Plan v. Smith Barney Shearson, Inc., 76 F. 3d 1245, 1253 (1st Cir. 1996); Barker v. American Mobil Power Corp., 64 F. 3d 1397, 1401-1402 (9th Cir. 1995); Larson v. Northrop Corp., 21 F. 3d 1164, 1172 (D.C. Cir. 1994); Radiology Ctr., S.C. v. Stifel, Nicolaus & Co., 919 F. 2d 1216 (7th Cir. 1990).  The Second Circuit, however, has rejected the majority approach and applied the fraud or concealment exception upon a showing of fraud OR concealment.  See Caputo v. Pfizer, Inc., 267 F. 3d 181, 188-190 (2d Cir. 2001).  In Cataldo, the Sixth Circuit declined to take sides on this issue, based on plaintiffs’ failure to sufficiently plead fraud.  It did, however, note that the Second Circuit offered a “persuasive” contrary interpretation of Section 413.  Ultimately, the Sixth Circuit “assume[d], but [did not] decide, that a claim of fiduciary fraud not involving separate acts of concealment is subject to a six-year statute of limitations period that begins to run when the plaintiff discovered or with due diligence should have discovered the fraud.”  

The Sixth Circuit has long been a favored forum for plaintiffs in ERISA cases because of many pro-plaintiff rulings.  Cataldo continues that trend by leaving open avenues for plaintiffs to keep claims alive that would be deemed untimely in other circuits and implying that if squarely presented with the issue it might endorse the Second Circuit’s outlier interpretation of Section 413.  Employers and plan sponsors with operations in the Sixth Circuit would be well advised to take action to head off a claim there, or at a minimum, ensure that their plan communications are timely, accurate, and comprehensive so as to defeat assertions of fraud or concealment.

PUBLIC SECTOR UPDATE: NEW HAMPSHIRE SUPREME COURT FINDS A CONSTITUTIONAL RIGHT TO A PENSION BASED ON A SALARY AT THE POINT OF HIRE

By Seyfarth Shaw on Posted in Non-ERISA Employee Benefits Litigation

 By: Mark Casciari and Barbara Borowski

In Cloutier v. State, No. 2010-714, 2012 N.H. LEXIS 42 (N.H.Mar. 30, 2012), a retired probate judge contested the validity of certain changes that the State of New Hampshire made to the Judicial Retirement Plan. 

 Under the prior retirement statutes, “as additional compensation for services rendered and to be rendered,” a judge who retired upon attaining the age of seventy years having served as a judge for at least seven years, or upon attaining the age of sixty-five years having served for at least ten years, was entitled to receive for the rest of his or her life an annual amount equal to seventy-five percent of the currently effective annual salary of the office from which the judge was retired.  Under the new statute, effective in 2005, benefits were limited to seventy-five percent of the judge’s final year’s salary with the board’s discretion to award cost-of-living adjustments to retired judges up to an aggregate amount of $50,000 per year, and to award more than that amount with the approval of the legislature.  Under the new statute, the plan became self-funding, relying upon contributions from the State and the judges.

 The judges alleged that the State’s action constituted an impairment of contract in violation of the New Hampshire Constitution.  The trial court found that the application of the changes to the Plan to judges who accepted their positions before its enactment in 2005 violated the Constitution’s contract clause.  The State appealed the court’s decision that the changes to the Plan violated the Constitution and argued that, at most, it is unconstitutional only as to those judges who met the service and age requirements for retirement as ofJanuary 1, 2005. 

 The Supreme Court of New Hampshire stated that whether a public retirement plan creates a contract between a public employee and the State is a question of first impression inNew Hampshire.  Contract clause analysis inNew Hampshirerequires a threshold inquiry as to whether the legislation operates as a substantial impairment of a contractual relationship.  This inquiry has three components: (1) whether there is a contractual relationship; (2) whether a change in law impairs that contractual relationship; and (3) whether the impairment is substantial.  If the legislation substantially impairs the contract, a balancing of the police power and the rights protected by the contract clause must be performed, and the law may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose.

 The Court found the prior statute created an implied-in-fact contract between the State and the judges who entered into employment when the statutes were in effect, which vested when they were appointed to be judges, subject to attaining the age and service requirements.  The Court reasoned: “One of the primary purposes of providing benefits to public employees is to induce competent persons to enter and remain in public employment.  Benefits would serve as little inducement if they could be whisked away at the whim of the public employer.”

 The Court went on to find an impairment of vested rights because the prior retirement statute based benefits on the most recent adjustments in judicial salaries, whereas the new statute based benefits on the amount the judge was being paid at the time of retirement.  As for whether the impairment was substantial, the Court remanded the case to allow the trial court to determine whether the impairment was offset by any compensating benefits.  The Court explained that prior to retirement, a plan may be changed only if there is a corresponding change of a beneficial nature to the employee. 

 This case is noteworthy because as the Court indicated the prior retirement statutes stated unequivocally that judicial retirement pay was “additional compensation for services rendered.”  State and local governmental entities may be able to avoid creating implied vested contractual rights by de-linking, to the extent possible, retirement benefits from compensation.  We note as well that when a public employee’s retirement benefit becomes vested varies from state to state.  Some states have found that vesting occurs when an employee is hired.  Others have found that vesting begins when an employee actually retirees.  Still others have found that vesting begins when an employee is eligible to retire.

Court Rejects Windfall For One Participant; Affirms Fiduciaries May Consider The Impact of One Participant’s Demand For Benefits On The Health Of The Plan As A Whole

By Seyfarth Shaw on Posted in General Fiduciary Breach Litigation

By: Ian Morrison

Plan fiduciaries often face difficult decisions when unexpected economic conditions cause significant swings in plan asset values.  A recent decision from Judge Charles Breyer of the Northern District of California gives fiduciaries some comfort that if they are called to task about their handling of these situations, reason will prevail.  Specifically, Judge Breyer ruled that it was permissible for a pension plan administrator to consider the impact on the plan as a whole when deciding what valuation date to use for purposes of a distribution. 

In Wakamatsu v. Oliver, No. C 11-00482 CRB (N.D. Cal. April 9, 2012), a former employee of a dental practice sued the plan administrator of the practice’s profit sharing plan (Dr. Perry) asserting that her benefit should have been determined based upon a December 31, 2007 valuation (which would have yielded a benefit of $195,317) rather than upon a later valuation that reflected the impact of the economic downturn on overall plan assets (resulting in approximately $60,000 less).  Under the plan, a participant’s account consisted of “the fair market value” of the participant’s share of the trust assets.  The plan normally required distributions to be made using the valuation that immediately precedes the distribution from the plan.  The plaintiff requested a distribution in December 2008, at which time the most recent valuation was from December 31, 2007.  Dr. Perry, as plan administrator, determined that it would have been a breach of fiduciary duty to the plan’s remaining participants to use the 2007 valuation, given the substantial decline in asset values and instead applied a year-end 2008 valuation.

The court upheld the plan administrator’s decision.  Initially, the parties agreed that Dr. Perry had discretion to interpret the plan.  Plaintiff nevertheless asserted that Dr. Perry had a conflict of interest because his family members were participants in the plan and granting plaintiff’s claim would have harmed their interests.  The court largely rejected this claim, finding that the family members’ interest would have had only a de minimis impact on Dr. Perry’s analysis.  The court likewise rejected plaintiff’s claim that Dr. Perry had a conflict because he had acted to avoid fiduciary liability claims from other plan participants, calling that claim “illogical” and noting that because ERISA requires fiduciaries to act in the interest of all fiduciaries, this type of “conflict” would be present in every ERISA plan.

Turning to the merits, the court found that it was reasonable for Dr. Perry to conclude that the 2007 valuation did not accurately reflect the value of the account when the plaintiff sought to take her distribution.  The plan had a presumptive March 31 valuation date, but permitted the administrator to use another date “when necessary to avoid prejudice to any participant.”  The Court found it reasonable for Dr. Perry to consider how using the 2007 valuation would affect other participants.  Fundamentally, the court said that using a later valuation “merely ensured that Plaintiff bore her share of the losses that the Plan suffered . . . .”  Noting that many other courts had found that it was permissible for ERISA plan administrators to take similar steps in “anomalous market conditions,” Judge Breyer found it was reasonable to use the year-end 2008 valuation, rather than request a special valuation, because plaintiff’s request for a distribution came only two weeks before the year end and was consistent with past practice.

While the facts of the Wakamatsu case are somewhat unusual in today’s retirement plan world because they do not involve self-directed investments, the decision is noteworthy nonetheless.  First, the decision is helpful for ERISA plan administrators because it confirms that they may consider how the treatment of one participant will affect the plan as a whole and because it rejects the notion that doing so is evidence of some kind of conflict of interest.  In addition, the decision confirms that ERISA fiduciaries may take reasonable steps to protect plans when unusual economic circumstances arise– which should be encouraging to fiduciaries who must handle plan administration matters in volatile financial markets.

The Eighth Circuit Makes It Tougher To Mount An ADEA Challenge In Litigation Over Pension Plan Benefits

By Seyfarth Shaw on Posted in Uncategorized

By Mark Casciari and Alexis Hawley

In Northwest Airlines, Inc. v. Phillips, Case No. 11-1730, 2012 U.S. App. LEXIS 7072 (8th Cir. Apr. 9, 2012), the U.S. Court of Appeals for the Eighth Circuit recently issued an important decision for employers on the application of the Age Discrimination in Employment Act (ADEA) to employee pension benefit plans. In the current economic climate and on-going corporate belt-tightening, the issues in Phillips are apt to play out in workplace litigation in an increasing fashion.

Facts Of The Case

Prior to declaring bankruptcy in 2005, Northwest Airlines provided pension benefits through a defined benefit plan, under which pilots could receive up to 60% of their final average earnings.  After declaring bankruptcy, Northwest froze the plan and established a new target benefit plan and made contributions to a retirement savings account for each pilot based on a defined percentage of pilot earnings, with the goal that benefits under the frozen plan and the new plan would approximate 50% of final average earnings.  Benefits under the frozen plan served as off-sets to the target plan benefits. To arrive at the 50% goal, Northwest projected a pilot’s final average earnings, using age and years of service as considered factors. This caused older pilots with only a few years of service to have their contributions to the target plan significantly reduced.  As older pilots with long service records had already accumulated significant benefits under the frozen plan, they sued (among other theories) for alleged ADEA violations. The U.S. District Court for the District of Minnesota granted summary judgment against the ADEA claims in 2009.

The Eighth Circuit’s Ruling

On appeal, the pilots argued that use of a pilot’s projected final average earnings to determine contribution levels is “inextricably linked to age,” and therefore a violation of the ADEA. Id. at 8. The Eighth Circuit rejected this argument. Relying on the Supreme Court decisions in Kentucky Retirement Systems v. EEOC, 554 U.S. 135 (2008), and Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), the Eighth Circuit determined that pension plans often include age as a factor that determines benefits, and that plaintiffs must show that age, as opposed to pension status, motivated that use in order to assert a valid ADEA claim. The Eight Circuit concluded that any reduction in target plan benefits was not because of age. In affirming summary judgment, it noted that Congress did not legislate against the fact that younger workers have more time left before retirement, and thus a greater opportunity to earn benefits than do older workers. 

Implications For Employers

This is a pro-employer ruling. As a result of the Phillips case, it will be even tougher for employees to show that a pension plan’s consideration of age violates the ADEA, as long as other factors such as years of service also are considered.

Third Circuit Rules That Employees Not Entitled To Permanent Job Separation Benefits

By Seyfarth Shaw on Posted in Plan Administration Litigation

By: Amanda Sonneborn and John Duke

In Shaver v. Siemens Corporation, Nos. 10-4147, 10-4279, 10-4791, 10-4792 (February 29, 2012), the Third Circuit overruled a lower court decision and held that former Westinghouse Electric Corp. employees were not entitled to permanent job separation pension benefits from Siemens Corporation.  The Court based its decision on two factors: (1) Siemens did not adopt Westinghouse’s pension plan as an ERISA “transition” plan; and (2) the former employees had not satisfied, and could not satisfy, the conditions for permanent job separation benefits prior to Westinghouse’s transfer of liabilities. 

In this case, the plaintiffs, former Westinghouse employees who were transferred to Siemens as part of a corporate transaction, sued Siemens and its pension plans, alleging that an asset purchase agreement (A.P.A.) between Siemens and Westinghouse required Siemens to provide them permanent job separation benefits under the pension plans.  The plaintiffs’ primary argument was that Siemens violated the A.P.A. and ERISA’s anti-cutback rule by amending the Westinghouse plan to eliminate the permanent job separation benefits. 

The Third Circuit reversed a lower court’s decision in favor of the plaintiffs. In doing so, the court first held that while Siemens agreed to reimburse the Westinghouse plans for benefits accrued during the transition period, Siemens assumed no obligation to establish and maintain a separate and ongoing administrative scheme during that time.  Because the only plan in effect during the transition period was the Westinghouse plan, Siemens’ later adoption of its own plans, which lacked permanent job separation benefits, was not an “amendment” of a “transition” plan.  Thus, it was not a violation of ERISA to change the benefits

Second, the Court held that the failure of the Siemens plans to provide the permanent job separation benefits did not violate ERISA.  The Westinghouse employees who transferred to Siemens plans were never eligible for the job separation benefits under the Westinghouse plan, pursuant to the plan’s specific terms.  Therefore, the separation benefits were not “accrued benefits” and ERISA did not require the Siemens plans to protect them.

The Third Circuit’s decision reaffirms the basic ERISA principle that while the statute protects accrued benefits, nothing in the statute requires employers to offer additional benefits not provided for in the written plan documents.  Moreover, ERISA protects benefits for which participants fulfill all conditions of eligibility and the statute does not preclude an employer from enforcing those conditions. As demonstrated by the careful planning of the corporate transaction at issue here, this case does show the importance of involving employee benefits attorneys and other professionals in all corporate transactions to ensure the proper treatment of employee benefit obligations both before and after the transaction.

2nd Circuit: ERISA Preempts Breach of Employment Contract Claims

By Seyfarth Shaw on Posted in Uncategorized

By: Ronald J. Kramer and Jim Goodfellow

On March 9, 2012, in Arditi v. Lighthouse International, No. 11-cv-423, the Second Circuit dove into what sometimes can be the murky waters of ERISA preemption, as demonstrated by the dissenting opinion.

Plaintiff Arditi, a former Lighthouse employee with 18.83 years of service in its pension plan (“Plan”), was reemployed by Lighthouse in June 2002.  Prior to Arditi’s rehire, Lighthouse had amended the Plan so that an employee could retire and collect pension benefits before turning 65 if the sum of that employee’s age and years of vested service were equal to or greater than 85 (the “Rule of 85”).  Arditi signed a written employment agreement that stated: (i) he was reinstated as a Plan member with his prior service credit; (ii) the Plan had added a Rule of 85 provision; and (iii) assuming he worked to age 59, his age and years of service would equal 85, thus, if he retired then he “will receive an unreduced pension benefit.”  In June 2007, Lighthouse froze the Plan.  As a result, when Arditi retired in 2010 at age 59, he was not eligible to take advantage of the Rule of 85 since he had not received service credit since the freeze.

Arditi filed suit in state court alleging two state law breach of contract claims.  Lighthouse removed the suit to federal court and sought to dismiss on ERISA preemption grounds.  Arditi moved to remand, arguing that he was not seeking benefits under the Plan.  Rather, he sought damages for breach of his employment agreement which contained a promise separate and independent from the Plan — that he could retire at age 59 and receive an unreduced pension benefit.  Arditi stated that the Plan need only be used as a benchmark for calculating his damages against Lighthouse.  The district court denied Arditi’s motion and dismissed the complaint.

Arditi appealed and the Second Circuit affirmed.  The court applied the two-prong test established in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), and determined that the claims were completely preempted by ERISA.  The first prong — whether Arditi, at some point in time, could have brought his claim under ERISA § 502(a)(1)(B) — had been met because Arditi was a Plan participant when he filed his lawsuit, and he sought the Plan’s Rule of 85 benefits.  The second prong — whether Lighthouse’s actions implicated no other independent legal duty other than under ERISA — had been met because Lighthouse’s obligations under the employment agreement were “inextricably intertwined” with the interpretation of the Plan.  The panel reasoned that Arditi’s employment agreement, by expressly referencing his Plan reinstatement and the new Plan Rule of 85, made it clear that the benefit he would receive at age 59 arose from and was governed by the Plan.  In other words, the Plan was something more than a mere “benchmark.”  The court also agreed that dismissal was appropriate because Arditi had no basis to dispute Lighthouse’s authority to freeze the Plan.

One judge strongly dissented, stating that preemption does not occur simply because a state law claim may present facts that could also state a claim under ERISA.  The dissent argued that the majority improperly collapsed Davila’s two prongs into one.  She concluded that preemption was improper as Arditi raised at least a colorable claim that his employment agreement contained an enforceable promise for an unreduced pension upon retirement that was independent of and different from the Plan benefit.

Arditi serves as a reminder to consider ERISA preemption in responding to contract claims involving employee benefit plans.  The dissent serves as a good reminder to be careful when drafting employment agreements to insure that the agreement makes clear that certain described employee benefits are governed by their respective employee benefit plans, which may be changed from time to time.

This is news: A solid, pro-defense ruling on ERISA from the Ninth Circuit

By Seyfarth Shaw on Posted in Plan Administration Litigation

By: Ian Morrison

On March 16, 2012, the Ninth Circuit ruled that two plan participants had no remedy for an allegedly faulty Summary Plan Description (“SPD”).  Skinner v. Northrop Grumman Retirement Plan B, No. 10-55161 (9th Cir. March 16, 2012).  The two participants claimed additional pension benefits because the SPD did not adequately disclose an “annuity equivalent offset” that was used in calculating their pensions.  Despite having previously given credence to this theory, the Ninth Circuit held the case when it came back a second time until after the Supreme Court decided CIGNA Corp. v. Amara, 131 S.C. 1866 (2011).  In light of Amara, the Court acknowledged that the plaintiffs’ claim for recovery based upon the SPD failed as a matter of law.  The Court went on to consider whether the plaintiffs were entitled to any equitable relief pursuant to ERISA § 502(a)(3). 

After Amara, the Ninth Circuit identified three possible equitable remedies:  estoppel, reformation, or surcharge.  The Court noted that the plaintiffs did not offer evidence of reliance on the inaccurate SPD and did not allege estoppel.  According to the Court, reformation is available under either trust or contract law and based upon either mistake or fraud.  Trust law allows an instrument to be reformed if it is clear that a mistake of law or fact caused it to not reflect the settlor’s intent.  Under contract law, the mistake must be mutual.  In either instance, the written instrument can be reformed to match the drafter’s intent.  The Court found both varieties of reformation inapplicable because there was no evidence of a mistake in drafting the applicable plan documents.  Reformation based upon fraud requires (in trust law) evidence that the trust was procured by fraud or (in contract) that one party’s assent to the contract was induced by the other party’s misrepresentations.  The Court found no evidence that the inconsistency between the plan and the SPD was obtained by fraud, distinguishing Amara’s dictum on this issue because there the Court assumed that the employer had “intentionally misled its employees.”

The Court held that surcharge can be used either in the case of unjust enrichment or to address harm based upon a breach of fiduciary duty.  The Court found no evidence, however, that the defendants had profited by failing to ensure publication of an accurate SPD or that the plaintiffs had relied upon (i.e., been harmed by) the alleged misrepresentation.  Finding no possible remedy, the Court affirmed summary judgment to the defendants.

Skinner is an important decision for ERISA litigators because it is one of the first and most comprehensive appellate court discussions of equitable remedies after Amara.  It also suggests that many of these remedies are fundamentally incompatible with the facts of many ERISA cases.

SIXTH CIRCUIT UPHOLDS UNION CONTRACT OBLIGATION TO INDEMNIFY EMPLOYER FOR WITHDRAWAL LIABILITY

By Seyfarth Shaw on Posted in Withdrawal Liability

By: Ronald Kramer and Jim Goodfellow

On March 16, 2012, the Sixth Circuit Court of Appeals joined the Third Circuit in finding that when a union agrees in a collective bargaining agreement to indemnify an employer in the event that the employer is assessed multiemployer pension plan withdrawal liability, there is no violation of public policy.  In Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, Case No. 11-5450 (6th Cir.Mar. 16, 2012), the court affirmed the decision of the district court enforcing an arbitrator’s decision that the Union contractually was obligated to indemnify the employer, Shelter Distribution (“Shelter”), for the $57,291.50 of withdrawal liability Shelter was assessed by the Central States Pension Fund.

The collective bargaining agreement in question required Shelter to participate in the Central States Pension Fund, but it contained an indemnification provision, which provided in relevant part:  “The Union shall indemnify the Company for any contingent liability which may be imposed under the Multiemployer Pension Plan Amendments Act of 1980.”  Slip op. at 3.

Shelter sought to enforce this provision after it was assessed withdrawal liability.  The Union claimed that the indemnification agreement violated a public policy, allegedly established by the Multiemployer Pension Plan Amendments Act (“MPPAA”), that prohibits employers and unions from shifting withdrawal liability through a collective bargaining agreement.  The union claimed such burden shifting defeated the purpose of the statute.  Slip op. at 3.  Both the grievance arbitrator in finding for Shelter, and then the district court in enforcing the award, relied on Pittsburgh Mack Sales & Services, Inc. v. International Union of Operating Engineers, Local Union No. 66, 580 F.3d 185 (3d Cir. 2009), a Third Circuit decision finding a similar agreement enforceable.  Slip. op. at 3-4.

The Sixth Circuit, in a matter of first impression, agreed.  The court recognized that the MPPAA was enacted to minimize the financial burden to a retirement plan when an employer withdraws and to provide more security to employee retirement plans.  Yet Congress saw no problem with allowing a fiduciary (or an employer on the fiduciary’s behalf) to purchase liability insurance, and the court earlier had recognized a fiduciary could similarly contractually obligate a third party to indemnify it for that liability under ERISA.  The court saw “no logical difference” between contracting with an insurance company and negotiating an indemnification agreement with the Union.  The court saw no public policy concerns given that Shelter was still at all times primarily liable to the Fund; rather it simply had a contractual right to collect against the Union.  Slip op. at 7.  The court agreed with the Third Circuit in Pittsburgh Mack that such indemnification agreements are enforceable.

With two strong Circuit Court decisions finding withdrawal liability indemnification agreements are not void as against public policy, it will be harder for other courts or, for that matter, grievance arbitrators to find otherwise.  Employers that participate in multiemployer pension plans should consider negotiating such provisions.  Though they are very difficult to achieve, and may not be of much value if the union has no money, they can provide a possible source of funds in the event of an assessment.