For Your Benefits
ERISA Litigation Issue 05/23/11 Amy A. Ciepluch, Angela Marie Hubbell, David P. Olson, Robert D. Rothacker
This edition contains the following articles:
Welcome to this May 2011 edition of the Quarles & Brady Employee Benefits and Executive Compensation Group's For Your Benefits, a newsletter dedicated to keeping benefit plan managers and HR and compensation professionals informed of legal changes affecting benefit programs. This special edition focuses on significant developments in the ERISA litigation world affecting all types of employee benefit plans.
A recent Seventh Circuit decision clarified the standard for when an employer can rely on ERISA §4204's exemption to withdrawal liability. In Central States, Southeast and Southwest Areas Pension Fund v. Georgia-Pacific LLC, the Seventh Circuit affirmed a decision holding that an employer did not trigger an obligation to pay withdrawal liability as a result of the sale of one of its divisions. In this case, the employer originally contributed to the Fund on behalf of employees working in two divisions: Pulp and Paper Transport and Building Products. In 1994, Georgia-Pacific outsourced the covered work performed by the Pulp and Paper Transport Division before closing that division entirely in 1995. Georgia-Pacific did not incur withdrawal liability as a result of either event. Between 1994 and 1997, Georgia-Pacific reduced contributions to the Fund on behalf of employees in the Building Products Division, and the Fund assessed withdrawal liability for a partial withdrawal.
In 2004, Georgia-Pacific sold the Building Products Division in a sale intended to comply with ERISA's §4204 assets sale exemption from withdrawal liability. The Fund's withdrawal liability demand asserted that Georgia-Pacific was nonetheless liable for withdrawal liability because the sale of assets was not the "sole" reason for the withdrawal, such that the requirements of §4204 were not satisfied. In the assessment, the Fund excluded the contribution history for employees whose contributions were assumed by the purchaser in the asset purchase agreement. Georgia-Pacific challenged the withdrawal liability assessment.
The arbitrator ruled in favor of Georgia-Pacific finding that the sale of the Building Products Division was covered by §4204, and that the employer did not owe withdrawal liability as a result of the sale. Specifically, the arbitrator found that the length of time between the events in 1994-1997 and the sale in 2004 supported treating the events as distinct, found that there was no common scheme or pattern among the different events, and found that the 2004 sale was motivated by identifiable business considerations. The district court enforced the arbitration decision.
The Court's Decision
On appeal, the Seventh Circuit focused on the question of whether, if the sale had not occurred, the employer would have incurred withdrawal liability. According to the court, this question separates out "the role of the sale from the role of everything else." In addition, the court considered the tax law step-transaction doctrine, finding no reason to overturn the arbitrator's conclusion that the earlier transactions were independent and should not be consolidated and treated as a single withdrawal. Ultimately, the court found that the protections of §4204 applied because Georgia-Pacific's sale of the Building Products Division was not part of a plan to withdraw in stages and because the sale transferred an ongoing business to an entity willing and able to make pension contributions.
Q&B Key: For employers who are making contributions to multi-employer plans, this case underscores the importance of indentifying and articulating the underlying business reasons for decisions that impact contributions to such funds. The court's consideration of the step-transaction doctrine in this context suggests that courts will continue to look beyond the current circumstances to determine whether an employer has attempted to "evade or avoid" withdrawal liability. Employers - especially those who contribute to the Central States Plan, a fund the court noted was "a uniquely aggressive seeker of withdrawal payments," are encouraged to document the business reasons for decisions that impact their contributions to multi-employer funds.
On April 11, 2011, the Seventh Circuit Court of Appeals in Chicago issued a ruling that was a setback for employers fighting lawsuits claiming excessive 401(k) plan fees and other 401(k) plan mismanagement. Prior to this recent decision, almost all court decisions favored employers. In Gerald George, et.al. v. The Kraft Foods Global, Inc., et.al., the Court reversed parts of a lower court decision that granted summary judgment for Kraft and its retirement plan committee. In the lawsuit, the plaintiffs allege that the Kraft plan paid excessive fees to the plan record-keeper and maintained excessive cash in the Kraft stock fund, which was an investment choice under the Kraft plan. The claim relating to the Kraft stock fund arose because the fund was a "unitized" stock fund containing Kraft stock and a small amount of cash to allow participants to move in and out of stock without the plan having to make daily purchases and sales in the market. The lower court also ruled that fees were reasonable based on the plan committee's reliance on a consultant who opined as to the reasonableness of the fees. The lower court also had dismissed the plaintiff's claim with respect to the stock fund.
The Court's Decision
The Seventh Court of Appeals reversed the lower court's rulings with respect to the unitized stock fund and the reasonableness of the fees. On the fee issue, the Court ruled that summary judgment was not appropriate because it was not clear whether reliance on the consultant was sufficient to show that the plan committee acted appropriately. With the respect to the unitized stock fund issue, the appeals court also reversed the district court concluding that while the fiduciaries discussed moving away from a unitized stock fund to purchases of actual stock, there was no evidence of a decision to retain the unitized stock fund. Kraft was hurt in this case by the fact that a plan of a related employer, Altria, moved from a unitized stock fund to the direct purchase of stock and engaged in an RFP process to ensure that 401(k) plan administration fees were reasonable. The Court sent the case back to the lower court for further evidence with respect to whether the unitized stock fund was prudent and whether the fees were reasonable.
Q&B Key: In light of the Kraft decision, retirement plan committees should do the following:
- Hold regular plan committee meetings, make decisions and keep minutes of those decisions. (The Kraft decision suggests that if committee minutes had reflected express approval of the unitized stock fund, that the lower court decision would have been affirmed).
- Ensure that committee minutes reflect the factors that were considered in making the decision (It would have been helpful to the Kraft committee if it had been able to distinguish why it was not taking the same actions as Altria).
- Regularly evaluate the relationship with your Plan Administrator on a periodic basis. Most committees regularly evaluate the mutual funds offered by their retirement plans, but do not regularly evaluate the overall administration relationship.
- Ask your consultant and other advisors whether there were any administrative practices where the plan is in a minority relative to other plans of its size, and whether there are any other trends with respect to investment or administration issues that the committee should be aware of (For example, technological changes have facilitated the move away from unitized stock funds.)
SUPREME COURT CLOSES ONE DOOR...BUT MAY HAVE OPENED ANOTHER
The Supreme Court recently ruled in CIGNA Corp. v. Amara that misleading summaries and descriptions cannot be used to reform the terms of an ERISA benefit plan, and provide a basis for recovery under ERISA Section 502(a)(1)(B). However, the Court suggested that the communications may be used as a basis for recovery under ERISA Section 502(a)(3), which authorizes "appropriate equitable relief" for violations of ERISA.
In 1998, CIGNA Corporation changed the nature of its basic pension plan for employees. Previously, the plan provided a retiring employee with a defined benefit in the form of an annuity calculated on the basis of pre-retirement salary and length of service. The new plan provided most retiring employees with a (lump sum) cash balance calculated on the basis of a defined annual contribution from CIGNA, as increased by compound interest. Because many employees had already earned at least some old-plan benefits, the new plan translated the participants previously accrued benefits into an opening amount in the employee's cash balance account.
The plan descriptions provided to participants described how the new benefit was calculated, but did not compare the new benefit to the old benefit. CIGNA did send the employees a newsletter that said the new plan would "significantly enhance" its "retirement program," would produce "an overall improvement in retirement benefits," and would provide "the same benefit security" with "steadier benefit growth." CIGNA also told its employees that they would "see the growth in [their] total retirement benefits from CIGNA every year," that its initial deposit "represent[ed] the full value of the benefit [they] earned for service before 1998," and that "[o]ne advantage the company will not get from the retirement program changes is cost savings."
The plaintiffs, acting on behalf of approximately 25,000 beneficiaries of the CIGNA Pension Plan, challenged CIGNA's adoption of the new plan. They claimed that CIGNA had failed to give them a proper explanation of the changes to their benefits, particularly because the new plan - in certain respects - provided them with less generous benefits.
The District Court agreed that the disclosures made by CIGNA violated its obligations under ERISA. In determining relief, the Court found that CIGNA's notice failures had caused the employees "likely harm." The Court then reformed the new plan and ordered CIGNA to pay benefits accordingly. It found legal authority for doing so in ERISA Section 502(a)(1)(B) (authorizing a plan "participant or beneficiary" to bring a "civil action" to "recover benefits due to him under the terms of his plan"). The Second Circuit affirmed.
The Supreme Court's Decision
The Supreme Court concluded that the District Court erred when it concluded that plaintiffs could recover plan benefits under Section 502(a)(1)(B) of ERISA based upon the terms of the reformed plan. Then, in what Justice Scalia referred to as "blatant dictum," the Supreme Court suggested that the plan participants may be able to recover for any harm caused by the misleading or incorrect information under ERISA Section 502(a)(3), which authorizes "appropriate equitable relief" for violations of ERISA. The Supreme Court further suggested the equitable principles that the District Court might apply on remand, and noted that there is no general principle that "detrimental reliance" must be proved before a remedy is decreed.
It is difficult to determine how the Supreme Court's "blatant dictum" will be interpreted by future courts, but it may open the door to equitable claims by participants asserting that they were harmed or misled by an employer's misleading communications.
Q&B Key: The basis for the participants' claim in the CIGNA case is that the information provided by the company was incorrect or misleading. Plan sponsors and plan administrators should review employee benefit communications carefully to make sure that the descriptions are accurate and that they do not mislead plan participants. Plans sponsors should also be aware that generic statements regarding benefits may potentially be used in a claim for appropriate equitable relief.
- Retiree Health Benefits. Serving as co-counsel and with efforts from members of our Employee Benefits and ERISA Litigation Teams, Quarles & Brady assisted Briggs & Stratton Corporation in obtaining dismissal of a suit by retirees of the Company challenging the Company's decisions to modify retiree health benefits, as described in more detail at http://www.quarles.com/employer_right_modify_retiree_benefits_2011/.
Q&B Key: Contractual rights are key in retiree health litigation. Plan sponsors should ensure that their summary plan descriptions, other plan documents and collective bargaining agreements properly preserve the sponsor's right to amend, modify or terminate a health plan at any time. Also, although not specifically addressed in the Merrill decision, we recommend inclusion of administrative procedures that require participants to run challenges to eligibility for participation or cost of coverage through a sponsor's fiduciary claims and appeals committee before they are permitted to file a lawsuit under ERISA. If a plan administrator implements and properly follows such procedures, a court should give deference to the plan administrator's decision to enforce changes in retiree health coverage.
- Disability Pension Benefits. In Edwards v. Briggs & Stratton Retirement Plan (Seventh Circuit No. 09-2326, April 29, 2011), Joe Wilson (ERISA Litigation) helped this pension plan defeat a claim for disability retirement benefits. The court held that the plaintiff had failed to exhaust her administrative remedies because she had filed an appeal of the plan administrator's claim denial eleven days after the deadline set in the plan. In reaching its decision, the court held that the claimant's tardy appeal could not be resurrected under the doctrine of substantial compliance, or under Wisconsin's notice-prejudice rule. This decision was significant in that it was the first to address a claimant's failure to meet an appeals deadline by a very short period of time, and establishes that a deadline is a deadline when a plan administrator has properly followed ERISA's claims and appeals procedures.
Q&B Key: Once again, its procedure, procedure, procedure. If your company's appeals committee ensures that it follows ERISA claims and appeals procedures in deciding participant claims, you will greatly increase the plan's chances of success in litigation.
Multi-Employer Plan Withdrawal Liability. Paul Jacobson (Employee Benefits) and Jeff Morris (ERISA Litigation) recently combined forces to obtain a very favorable result for an employer client in a withdrawal liability dispute. The dispute arose out of the withdrawal liability assessed to the client when it withdrew from a multi-employer pension plan in December 2007. Had the client withdrawn the previous year, its withdrawal liability would have been a mere $27,000; instead, the client received a bill that was more than 200 times - yes you read right, more than 200 times - that amount after its December 2007 withdrawal. Upon further investigation, the client learned that the principal reason for the whopping increase was a change in the methodology for calculating withdrawal liability.
- Under ERISA, the plan's determination was entitled to a very strong presumption that it was reasonable and correct; ERISA also requires actuarial determinations to be given great deference. In addition, there had not previously been a successful challenge to the new method the plan started using in 2007, which is widely used by other plans.
- Undaunted, Paul developed legal arguments that included a frontal assault on the new method itself. He then enlisted Jeff's assistance and the two collaborated in commencing and prosecuting an arbitration proceeding. After three days of hearings, it became apparent that on the particular facts of this case, the arbitrator could go so far as to invalidate the use of method entirely and reduce the client's liability to $0. As a result, the plan administrators finally agreed to a very significant reduction in client's total liability and the client was also afforded two full years over which to pay off the reduced balance.
Q&B Key: With so many multi-employer plans being underfunded, those plans are aggressively seeking withdrawal liability payments. We have had considerable success in negotiating reduced liability for our clients, and would encourage employers to take a hard look at any withdrawal liability assessment as there may be a legitimate basis for reducing or defeating the assessment.
Angela Marie Hubbell recently joined the Employee Benefits & Executive Compensation Group at Quarles & Brady. Angie's practice is a blend of transactional work, ERISA litigation, and counseling on benefit plan design, operations and corrections. Her practice involves counseling and representing employers on a broad range of employee benefits issues, including multi-employer pension plan issues, executive compensation, ERISA compliance and benefits-related tax issues.
Angie has extensive experience with employee benefit plan design and administration. She frequently designs incentive compensation, equity compensation, and executive compensation plans, and she advises on retirement, severance and change-in-control programs. She also advises on the employee benefits aspects of mergers and acquisitions, the benefits issues arising in collective bargaining and employee communications surrounding benefits plans.
In addition, Angie has defended numerous benefit claim denial decisions in federal court, including claims for long-term disability benefits and life insurance benefits. She has also defended ERISA retaliation claims arising out of employment termination decisions. Many of the employers Angie represents have a unionized or partially unionized work force, and Angie has represented several employers in disputes with multi-employer funds, including disputes over putative delinquent contributions to plans arising from disputes over worker classification, post-employment payments, and audit findings. She also represents in employers in disputes with multi-employer plans over withdrawal liability.
Angie previously served as a federal judicial law clerk to the Judge Pierce Lively, United States Court of Appeals for the Sixth Circuit, and Judge David W. McKeague, U.S. District Court for the Western District of Michigan. When not thinking about benefits issues, she likes to travel and has set foot on all seven continents.
If you have any questions regarding benefit plan matters, please contact one of the of the following members of the Employee Benefits and Executive Compensation Law Group or your Quarles & Brady attorney: Marla Anderson at (414) 277-5453 / [email protected], Amy Ciepluch at (414) 277-5585 / [email protected], Kerri Hutchison at (414) 277-5287 / [email protected], Paul Jacobson at (414) 277-5631 / [email protected], Sarah Linsley at (312) 715-5075 / [email protected], David Olson at (414) 277-5671 / [email protected] or Robert Rothacker at (414) 277-5643 / [email protected].
If you have questions regarding ERISA litigation matters, please contact one of the following members of the ERISA Litigation Group or your Quarles & Brady attorney: Valerie Bailey-Rihn at (608) 283-2407 / [email protected], Paul Bauer at (414) 277-5139 or [email protected], Tracy Bradford Farley at (312) 715-5214 / [email protected], Gary Clark at (312) 715-5040 / [email protected], Daniel Conley at (414) 277-5609 / [email protected], Jeffrey Davis at (414) 277-5317 / [email protected], Emily Feinstein at (608) 283-2470 / [email protected], Matthew Flynn at (414) 277-5315 / [email protected], Fred Gants at (608) 283-2618 / [email protected], Michael Gonring at (414) 277-5359 / [email protected], Charles Harper at (312) 715-5076 / [email protected], Angie Hubbell at (312) 715-5097 / [email protected], Otto Immel at (239) 659-5041 / [email protected], Craig Kaufman at (520) 770-8707 / [email protected], David Kern at (414) 277-5653 / [email protected], Joshua Maggard at (414) 277-5855 / [email protected], Jeffrey Morris at (414) 277-5659 / [email protected], Mitchell Moser at (414) 277-5333 / [email protected], Mary Pat Ninneman at (414) 277-5153 / [email protected], Paul Parrish at (813) 387-0267 / [email protected], Jon Pettibone at (602) 230-5572 / [email protected], Jeffrey Piell at (312) 715-5216 / [email protected], Dawn Valdivia at (602) 229-5291 / [email protected], Joe Wilson at (414) 277-5839 / [email protected], Judith Willams-Killackey at (414) 277-5439 / [email protected] or Marian Zapata-Rossa at (602) 229-5447 / [email protected].