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holding that an employer can act according to its business interests in amending or terminating a benefits plan
Summary of this case from In re Unisys Savings Plan LitigationOpinion
Nos. 98-6298, 98-6328, and 98-6432
Argued July 15, 1999
Filed August 25, 1999 Dated October 18, 1999
On Appeal from the United States District Court, for the District of New Jersey, (D.C. Civ. No. 93-02227/28/29), District Judge: Honorable Katharine S. Hayden.
Paul Z. Lewis (argued), Lewis McKenna, 82 East Allendale Road, Saddle River, NJ 07458, Attorneys for appellants-cross appellees Thomas Betts Corp., and Employee Benefit Plan of Thomas Betts Corp.
Peter S. Pearlman (argued), Audra DePaolo, Cohn Lifland Pearlman Hermann, Knopf, Park 80 Plaza West One, Saddle Brook, NJ 07663, Attorneys for appellees-cross appellants, Peter Noorily, Raymond P. Nastawa, Sidney Levy, and William O. Deck.
OPINION OF THE COURT
I. FACTUAL AND PROCEDURAL HISTORY
[3] A. IntroductionThis matter comes on before this court in this action under the Employment Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq., on the defendants' appeal from orders of the district court entered August 6, 1998, awarding severance benefits and October 19, 1998, awarding the plaintiffs attorney's fees and prejudgment interest. In addition, the matter is before this court on the plaintiffs' cross-appeal from an order entered August 17, 1995, dismissing plaintiffs' appeal to the district court from a magistrate judge's order imposing sanctions on the plaintiffs and from a subsequent order of the district court on June 23, 1998, expanding the sanctions by precluding the plaintiffs from offering certain testimony at trial. This litigation stems from the defendant Thomas Betts ("TB") Corporation's decision to relocate particular business operations and employees from Bridgewater, New Jersey, to Memphis, Tennessee, and its related determination that certain employees who refused to relocate would not receive benefits under its severance plan. TB manufactures and sells connectors, fittings and wiring accessories for the electrical and electronic industries. Plaintiffs Peter Noorily, Raymond Nastawa, Sidney Levy and William Deck were product engineers in TB's Electrical Division in Bridgewater who refused to relocate to Memphis.
B. Factual History
In November 1991, TB signed an agreement to acquire American Electric, a manufacturer of electrical products and accessories. Inasmuch as TB then decided to relocate its Electrical Division to Memphis it held meetings in early December 1991 to inform its employees of the impending relocation. In at least one of these meetings TB's management, in response to a question posed by a product engineer, stated that employees choosing not to relocate would receive severance payments from TB's unfunded benefit plan. Additionally, Richard Lovell, then director of Human Resources in TB's Electrical Division, told Noorily and Levy that TB would make severance payments to employees who decided not to relocate. Plaintiffs, however, do not dispute TB's assertion that it wanted them to relocate to Memphis and they concede that "this action does not involve any claims of discrimination." Br. at 21.
On December 6, 1991, Lovell issued a memorandum discussing TB's severance policy in connection with the relocation. Although TB marked the memorandum confidential and intended it merely to be a guide to managers seeking to answer employee questions, it acknowledges that the memorandum was circulated widely among the employees. The memorandum stated that TB would deny severance benefits only to employees who left prior to the release date or who agreed to relocate and then changed their minds. Moreover, it specified that employees who chose not to relocate but who remained with TB until the release date would receive severance payments. At that time, TB's severance policy provided for benefits to employees who were "involuntarily terminated" when "the terminating manager believes the granting of such pay is appropriate."
TB's management made the statements concerning severance benefits believing that a large majority of the 35 product managers and engineers in its Electrical Division would relocate. TB regarded their relocation as critical because it viewed its product managers and engineers as "key" employees. By the end of December 1991, however, TB's management recognized that many of the product engineers did not want to relocate. TB was concerned about their reluctance as it considered that the engineers' absence could affect the success of the pending merger. Moreover, TB's management decided that it would be counterproductive to offer the engineers who refused to relocate severance benefits as the benefits themselves would encourage them not to relocate. Therefore, Kevin Dunnigan, the president of TB, determined that any engineer whom TB asked to relocate, but who refused, would not receive severance benefits because TB would consider the refusal as a voluntary resignation. The plaintiffs received a memorandum on January 6, 1992, informing them of this decision but each objected to TB's position and refused to sign an attached document indicating he was resigning. There can be no doubt that TB's stated wish that the engineers relocate was not pretextual as TB offered them substantial financial incentives to do so.
The plaintiffs, however, for compelling personal reasons decided not to relocate. All had longstanding ties to their communities as well as obligations to family members. Further, the plaintiffs considered their age and TB's refusal to guarantee them long-term work in Memphis as reasons not to relocate. Thus, Noorily was 61 years old at the time of the relocation and had worked for TB for over 22 years. With his wife, he was responsible for caring for both his mother and mother-in-law, who was nearly bedridden. Nastawa was 45 years old in January 1992, and had worked for TB for 17 years. He also cared for his extremely ill mother-in-law and had children attending school in New Jersey. Furthermore, his wife had an established career in the area. Levy had worked for TB for over 20 years at the time of the relocation and was 59 years old. He and his wife provided care to his mother and mother-in-law. Finally, Deck was 59 years old at the time of the relocation and had worked for TB for over 25 years. Like the other plaintiffs, he had significant family responsibilities as he was the primary caregiver for his ill mother. Inasmuch as the plaintiffs would not relocate, Noorily's and Nastawa's employment with TB ended on February 14, 1992, and Deck and Levy, each of whom performed transition work for TB, left the company in June and September 1992, respectively.
C. Procedural History
Noorily and Nastawa originally filed suit in the Superior Court of New Jersey alleging that TB's refusal to pay them severance benefits was a breach of their employment contract. After TB moved for dismissal on ERISA preemption grounds, the parties executed a stipulation of dismissal without prejudice. Then on May 19, 1993, Noorily and Nastawa filed this action as plan participants in the district court under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), against TB and its Employee Benefit Plan seeking benefits they claimed were due to them under TB's severance plan. Levy and Deck filed separate, similar complaints on that date in the district court. The district court consolidated the three actions in June 1997 at plaintiffs' request. As a matter of convenience we refer to the defendants simply as TB.
It appears that the case could have proceeded under ERISA in the state courts. See ERISA § 502(e)(1), 29 U.S.C. § 1132(e)(1).
On November 4, 1994, TB moved for sanctions against plaintiffs' attorneys for having allegedly improper ex parte contacts with three former TB employees. A magistrate judge granted the sanctions motion on December 6, 1994, and precluded plaintiffs from calling these witnesses at trial. The plaintiffs then appealed to the district court which, through Judge Bissell, on August 17, 1995, upheld the order and dismissed the plaintiffs' appeal. At the outset of the trial Judge Hayden, on TB's motion, expanded the scope of the sanctions by prohibiting the plaintiffs and their witnesses from testifying at the trial with respect to representations by these improperly contacted employees.
The parties tried the case at a bench trial before Judge Hayden from June 23, 1998, to June 29, 1998. The court ruled in favor of the plaintiffs on July 7, 1998, in a comprehensive oral decision, finding that TB had involuntarily terminated the plaintiffs' employment and had violated its fiduciary duty under ERISA by arbitrarily and capriciously denying them severance benefits under its severance plan. In an August 6, 1998 judgment order, the court granted the plaintiffs substantial severance benefits, which included severance pay and medical benefits according to the schedule provided in TB's plan. On plaintiffs' post-trial motion, the court by an order of October 19, 1998, awarded them attorney's fees, costs, and prejudgment interest.
TB has filed timely notices of appeal both from the August 6, 1998 order awarding plaintiffs severance benefits and from the October 19, 1998 order granting them attorney's fees, costs, and prejudgment interest. The plaintiffs have cross appealed from the order dismissing the appeal from the imposition of sanctions against them as well as from the determination limiting the use at trial of evidence regarding the improperly contacted employees' representations. The district court had subject matter jurisdiction under ERISA § 502(e)(1), 29 U.S.C. § 1132(e)(1), and 28 U.S.C. § 1331, and we have jurisdiction under 28 U.S.C. § 1291.
II. DISCUSSION
A. Standard of review
We exercise plenary review on this appeal because the outcome determinative historical facts are not in dispute, and we accept the district court's factual findings. Thus, this case essentially involves questions of law"with respect to the legal effect" of the severance plan. Atacs Corp. v. Trans World Communications, Inc., 155 F.3d 659, 665 (3d Cir. 1998).
B. Was TB Acting as a Fiduciary When It Decided That It Would Not Provide the Plaintiffs with Severance Benefits Under Its Severance Plan?
We first address TB's contention that its determination to deny the plaintiffs severance benefits was a "business decision" immune from the standards that section 404 of ERISA, 29 U.S.C. § 1104, establishes for fiduciaries. In considering this point we note that TB acknowledges that its severance policy was a "welfare plan" as that term is defined in ERISA § 3(1), 29 U.S.C. § 1002(1). TB's dual role as the plan's administrator as well as the employer, however, complicates our analysis. The plan clearly reflects this dual role as it provides that "[a]ll fringe benefits covered under this policy are administered by the Corporate Benefits Committee" which consists of certain TB officers. On the other hand, the plan provides that an award of severance pay is made when "the terminating manager believes the granting of such pay is appropriate."
When an employer makes decisions about the design of a welfare plan, such as a severance plan, it functions as an employer and not as an administrator and thus it is not acting as a fiduciary. See Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 285 (3d Cir. 1988). Accordingly, an employer can create a plan that furthers its business interests, and it can act according to these interests in amending or terminating the plan. See Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1162 (3d Cir. 1990). Moreover, to the degree that the plan gives an employer discretion, the employer is not a fiduciary when it makes determinations according to the plan's terms that affect employees' eligibility for benefits. See Berger v. Edgewater Steel Co., 911 F.2d 911, 918 (3d Cir. 1990). Thus, in Berger, we held that the employer was not acting in a fiduciary capacity when it determined, as the plan permitted it to do, that the early retirement of certain employees was not in its best interest. See id. at 918-19. However, when the employer is administering the plan and paying out benefits, it acts as a fiduciary and must act in the interest of the plan's participants. See Hozier, 908 F.2d at 1158-59 (citing ERISA § 404, 29 U.S.C. § 1104, which establishes fiduciary standards under ERISA).
In sum, then, the employer acts as a fiduciary when administering a plan but not when designing a plan or making business decisions, even though in all three situations its determinations may impact on its employees. It is important to keep these distinctions in mind when considering an ERISA case.
As we have indicated, the severance plan in this case provided TB with discretion in determining whether to award severance benefits for it provided for an award only if the terminating manager thought that it was "appropriate" to do so. Inasmuch as the plan gave this discretion to TB as an employer through its terminating manager rather than as an administrator through its Corporate Benefits Committee, TB is correct in its contention that it was not acting in a fiduciary capacity when it determined that granting severance benefits to the plaintiffs would not be "appropriate" because it was not in TB's interest to do so. Once TB made this management determination, TB as the administrator through its Corporate Benefits Committee was obliged to implement the decision and thus cannot be deemed to have violated its fiduciary duties by acting according to the "employer's" determination. See Berger, 911 F.2d at 918-19. Similarly, if TB as employer had determined to award severance benefits then its Corporate Benefits Committee would have been obliged to implement that decision. The district court therefore erred in concluding that TB had breached its fiduciary duties to the plaintiffs.
Nevertheless, our conclusion that TB did not act in a fiduciary capacity in its determination to deny severance benefits does not end the case because the plaintiffs are not suing simply for breach of fiduciary duty. Rather, their complaint and their arguments at trial and in this court show that they believe that they are entitled to benefits under the plan and that TB misapplied the plan in denying them benefits. Thus, they have predicated their claims on breach of contract principles and, upon a proper showing, the claims could be upheld on that basis under ERISA. See Kemmerer v. ICI Americas Inc., 70 F.3d 281, 287 (3d Cir. 1995). Of course, if we agree with the plaintiffs on their contract theory we can affirm even though we are rejecting the district court's reasoning that TB violated its fiduciary obligations. See United States v. Soberon, 929 F.2d 935, 940 (3d Cir. 1991).
TB argues that plaintiffs cannot recover on contract principles as the severance plan does not create "vested contractual" rights. In view of our result we have no need to address this point.
C. Does TB's Severance Plan Entitle the Plain tiffs to Severance Benefits?
TB argues that in rejecting the plaintiffs' claims for severance benefits, it properly exercised the discretion the plan allowed to it. In focusing upon the discretion granted in the plan, TB invokes a body of case law providing that in cases brought under ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), a court applies de novo review in construing an employee benefit plan unless "the benefit plan gives the administrator . . . discretionary authority to determine eligibility for benefits or to construe the terms of the plan." Ulmer v. Harsco Corp., 884 F.2d 98, 101 (3d Cir. 1989) (citing Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 111, 109 S.Ct. 948, 954-55 (1989)). If the plan does grant such discretion, then a deferential standard of review is appropriate. See Bruch, 489 U.S. at 111-14, 109 S.Ct. at 954-57. However, these cases apply only to decisions reached by administrators or fiduciaries, not employers. As TB itself has argued that it did not act as a fiduciary in denying benefits, it cannot now rely on this case law. Accordingly, in evaluating the plaintiffs' claims on breach of contract principles, these cases are not controlling.
The district court held that TB involuntarily terminated the plaintiffs and that its decision to deny them benefits was arbitrary and capricious. Thus, the parties regard the court as having held that TB "constructively discharged" plaintiffs, although in its opinion of July 7, 1998, the court did not explicitly so hold. In the circumstances the parties quite naturally focus on the constructive discharge issue. But we need not review the district court's decision that the plaintiffs were involuntarily terminated because, assuming without deciding that the district court was correct on that point, the plan provides for the granting of severance pay only when "the terminating manager believes the granting of such pay is appropriate."
The court did suggest, however, during oral argument at the conclusion of the trial that a constructive discharge and an involuntary termination were the same thing. App. at 1802.
Unquestionably ERISA permits corporations to create welfare plans that give their managers wide discretion. See, e.g., McNab v. General Motors Corp., 162 F.3d 959, 962 (7th Cir. 1998). Indeed, it might be possible to read TB's plan to render unreviewable the terminating manager's decision to deny severance benefits. Nevertheless we have no reason to consider that possibility for the district court's factual findings make it clear that TB's decision to deny plaintiffs severance benefits was not "arbitrary or capricious" and thus we must uphold it. Of course, we refer to arbitrary or capricious with respect to TB's conduct as an employer not as a fiduciary for, as we have explained, the cases establishing a standard for reviewing a fiduciary's conduct are not controlling. Clearly, there is a class of decisions that might be arbitrary when considered from the point of view of a plan participant that are perfectly appropriate for an employer.
TB argues that we should use a "bad faith" standard in reviewing its conduct. This argument is substantial because in Berger, after we rejected the application of a fiduciary standard with respect to an employer's decisions denying requests for retirement, we indicated that the employer's determination nevertheless was "subject to no more than the minimal obligation of good faith." Berger, 911 F.2d at 919. We are aware, however, that other courts have applied an "arbitrary and capricious" standard for judicial review in circumstances similar to those here. See McNab, 162 F.3d at 962. While a "bad faith" standard would be more deferential than the "arbitrary or capricious" standard, we have no need to consider if it is applicable here as TB did not act arbitrarily or capriciously and therefore it cannot possibly have acted in bad faith. Finally, on the standard of review issue, we point out that we cannot conceive how a court could impose a more exacting standard than that the employer's decision not be arbitrary or capricious.
The district court in reaching its result indicated that TB's policy always has been to pay terminated employees, except those who left voluntarily, severance pay. Thus, when TB moved its Electronic Division to South Carolina in 1990 it made severance payments to employees who declined to move. The court understandably also indicated that each of the plaintiffs had a compelling personal reason to decline TB's offer of employment in Memphis. Moreover, the court indicated that "[o]ther than the engineers in the engineering department, all employees who did not move to Memphis received severance payment[s] in accord with [TB's] policy."
The Electronic Division is apparently distinct from the Electrical Division.
The court further stated that TB's management considered the plaintiffs to be critical employees but that TB was thinking of its interests rather than those of the plaintiffs' in wanting them to move to Memphis. Thus, the court said that it was only when TB discovered the extent of the reluctance of the engineers to move that it determined that "anyone who did not transfer his position would not receive severance and would be considered as having resigned." Yet the court recognized that TB perceived that its employees' unanticipated decision not to relocate was threatening its decision to move its Electrical Division.
The plaintiffs contend that they were not critical to TB and that subsequent events have demonstrated it has prospered without their services. While plaintiffs may be correct in that assertion, their argument is immaterial because the significant fact is that, as the district court found, TB thought that the engineers were critical, and we judge TB's conduct on the basis of its view of the situation.
Significantly, the court made the following findings:
The management decision in this case which isolated the engineers who declined to transfer out of all others directly affected the administration of severance to all employees who did not relocate, and as such I find that it was a breach of fiduciary duty to administer the plan.
I find the act of applying the severance plan benefits to all employees, whether they were going or staying, whether they were in transition, not in transition, was an act of welfare plan administration, and in so undertaking that act I find under the [Hozier v. Midwest Fasteners, 908 F.2d 1155] analysis that the company had a fiduciary duty to administer the plan with the benefit of the employees in mind and not its own management welfare in mind.
I find therefore that by arbitrarily denying welfare benefits to certain employees whose jobs were significantly affected by the acquisition and conferring those benefits arguably to people equally affected by the acquisition was a breach of that duty.
The court also indicated that "the uncontroverted testimony supports my analysis that in an effort to combat a threat to its management decision to [acquire] the Tennessee based company, management decided in midstream to administer its severance policy in a way that perverted the spirit and intent of the severance plan under ERISA and its own written policy."
Ultimately the court concluded that:
Overall then, I find the acquisition of American Electric created a termination event that required administration of severance plan to all employees. Those employees choosing to accept . . . an offer of continued employment were not terminated. Those declining the offer were effectively terminated under the circumstances established by the evidence, which include geographical distance of the relocation, the certainty of continued employment unameliorated by management, and foreseeable effects on family life which was specifically not considered on a individual basis by management.
Thus, the court believed "that management's withholding of these employees' severance pay was based on punitive coercive motives designed solely to protect and benefit the employer to the detriment of plaintiffs." Consequently, in the court's view the plaintiffs were entitled to severance benefits.
We cannot accept the district court's legal conclusions. First of all, of course, for the reasons we already have set forth we reject the district court's application offiduciary standards here. Moreover, we see no reason for concluding that "the terminating manager [who did not] believe[ ] the granting of [severance] pay [was] appropriate" was arbitrary or capricious in reaching that conclusion. In Berger we indicated "that only the employer determines whether an employee's retirement is in the company's best interest.
Neither the plan administrator nor the pension board have the authority to override the company's business decision." Berger, 911 F.2d at 918.
The TB plan provided that the test for granting severance pay upon involuntary termination was whether the terminating manager believed "the granting of such pay is appropriate." We fail to see how the denial of severance pay was inappropriate as a business decision reached by TB. Plainly, there was nothing arbitrary or capricious about TB's decision to discourage employees it regarded as critical from terminating their employment. Indeed, the sincerity and reasonableness of TB's decision was demonstrated by its willingness to absorb substantial expenses to relocate the plaintiffs.
The fact that in some other circumstances TB awarded severance pay to other employees who would not relocate in no sense required it to find that it was appropriate to do so in plaintiffs' cases. Obviously, an employer may make a determination as to the appropriateness of granting severance pay based on the circumstances of each case and thus past practice cannot control its exercise of discretion in other circumstances. See McNab, 162 F.3d at 961-62; Nevill v. Shell Oil Co., 835 F.2d 209, 211 (9th Cir. 1987); cf. Nazay v. Miller, 949 F.2d 1323, 1336 (3d Cir. 1991) (administrator's decision). The district court's reasoning was flawed as it considered whether TB was acting arbitrarily or capriciously as a fiduciary, and thus the court was taking into account only the interests of the employees as plan participants or beneficiaries. Viewed from the correct prospective, TB plainly was not arbitrary or capricious in denying severance benefits and accordingly it is entitled to a judgment in its favor.
TB also argues that the district court abused its discretion by awarding plaintiffs attorney's fees and costs under ERISA § 502(g)(1), 29 U.S.C. § 1132(g)(1), as well as prejudgment interest. Obviously, we have no need to linger on this point as the reversal of the award of severance benefits compels the reversal of the award of prejudgment interest and attorney's fees and costs because plaintiffs are no longer prevailing parties. Finally, TB argues that the district court erred in certain evidentiary rulings, but in view of our result this issue is moot.
We carefully have examined plaintiffs' cross-appeal with respect to the sanctions and find that it is clearly without merit. In any event, we find nothing in plaintiffs' brief to support a conclusion that the excluded evidence if admitted could have created a record that would have led us to reach a different result than the one we set forth. While plaintiffs suggested at trial that the testimony would establish TB's liability, in view of our conclusions which are predicated on legal determinations based on the plan itself, we reject this contention.
It is questionable whether plaintiffs have preserved the sanctions issue as they apparently intend to pursue it only if we remand the case for "a new trial." Br. at 51 n. 10; Reply Br. at 1 n. 1. Of course, we are not remanding for a new trial. Nevertheless, we are rejecting their contentions on the merits.
III. CONCLUSION
In closing our opinion we emphasize that while we are treating this case as involving involuntary terminations and that our result for this reason may seem harsh, the term "involuntary termination" must be understood in the context of this case. The parties agree that TB wanted the plaintiffs to remain in its employ, and thus TB offered them significant incentives to move to Memphis. Accordingly, this case is not one in which the employees were intentionally set adrift by an uncaring employer. Moreover, this case in no sense involved oppressive or intolerable employment conditions such as might have constituted a constructive discharge in a discrimination case. Quite to the contrary, this case concerns the effect on the plaintiffs of TB's unassailable business decision to move its Electrical Division to Memphis. At bottom, then, this case involves nothing more than an employer determining that it is not appropriate to grant severance benefits to employees leaving their employment when the employer wishes them to remain. We will not reject such a decision.
We also point out that the decision to deny severance pay did not nullify the plaintiffs' pension rights.
For the foregoing reasons the orders of August 6, 1998, and October 19, 1998, will be reversed, and the order of August 17, 1995, will be affirmed. The matter will be remanded to the district court for entry of a judgment in favor of TB.
A True Copy: Teste:
Clerk of the United States Court of Appeals for the Third Circuit