Opinion
Ronald Lovitt, Erin Maura Riley, Laurie B. Ashton, Marc I Machiz, Counsel for Plaintiff(s).
Heather Reinschmidt, James P. Baker, Counsel for Defendant(s).
ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
RONALD WHYTE, District Judge.
Defendants Fujitsu Group 401(k) Plan and Fujitsu America, Inc. ("Fujitsu") and plaintiff Xiaoning Zhu, on behalf of himself and class of persons similarly situated ("Zhu"), cross-move for summary judgment. The motions were heard on April 23, 2004. Thereafter, the parties submitted supplemental papers which the court has reviewed. For the reasons set forth below, the court grants Zhu's motion for summary judgment and denies Fujitsu's motion.
I. BACKGROUND
This is a case under the Employee Retirement Investment Security Act ("ERISA"), 29 U.S.C. 1001 et seq. Defendant Fujitsu America Inc. operates a 401(k) plan ("Plan") for employees of Fujitsu and its subsidiaries. Plaintiff Xiaoning Zhu had been an engineer at Fujitsu Network Communications ("FNC"), a participating subsidiary, for approximately four years and three months when his employment was terminated in August 2002 in a reduction in force.
The Plan allows employees to make pre-tax salary deferral contributions and, in addition, provides for two different types of employer contributions: Matching Contributions and Dedicated Retirement Account ("DRA") contributions. Each participating company retains the discretion to determine each year whether to make either type of contribution. Matching Contributions become 50% vested after two years of service, 75% vested after three years, and 100% vested after four years. DRA contributions are 0% vested if the employee has less than five years of service and are 100% vested after five years of service. The Plan also provided, until the Amendment effective January 1, 2002 ("2002 Amendment"), that "You will be 100% vested regardless of your years of credited service... if your employment is terminated... as a result of a reduction in force as determined by your employer." (FNC's Summary Plan Description dated 5/98, pp. 9-10) ("RIF Vesting"). By the 2002 Amendment, Fujitsu amended the Plan to eliminate RIF Vesting for FNC employees.
Since Zhu had been employed for less than five years at the time of the reduction in force, Fujitsu forfeited his DRA balance of approximately $8, 373.00 because he did not have five years of service. Other employees who were laid off in the reduction in force and had less than four years of service also forfeited a portion of their accruals in Matching Contributions.
At the time of his lay-off as a result of the reduction in force, Zhu signed a Termination Agreement and Release of All Claims ("Release ") by which Zhu, according to Fujitsu, waived all claims against Fujitsu. Zhu disagrees and argues that the Release did not give up any rights to vested 401(k) benefits. In exchange for the Release, plaintiff received a severance payment of four additional weeks base salary amounting to $6, 818.08.
Plaintiff Zhu claims the plan administrator breached its fiduciary duty under section 1104(a)(1)(D) of Title 29 of the United States Code by applying the Amendment to Zhu's case and forfeiting his DRA balance. Zhu asserts that his DRA balance was vested and not subject to forfeiture because he was entitled to elect under section 1053(c)(1)(B) of Title 29 to have his nonforfeitable percentage computed under the Plan without regard to the Amendment. Section 1053(c)(1)(B) states:
A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of subsection (a)(2) of this section unless each participant having not less than 3 years of service is permitted to elect, within a reasonable period after adoption of such amendment, to have his nonforfeitable percentage computed under the plan without regard to such amendment.
Therefore, Zhu claims that since he had over four years of service, his nonforfeitable percentage of his Matching Contribution and DRA accounts is 100% of the amount accrued on the date of the termination of his employment.
On March 3, 2004 the court certified a class consisting of:
All persons who were participants in the Plan, who, at the time of the Plan's amendment in January, 2002, had at least three years of service, within the meaning of ERISA §203(b)(1), and less than five years of service, for an employer who participated in the Plan, and who, subsequent to the January, 2002 Plan Amendment, were laid off from their job due to a reduction in force, and did not receive their automatically vested interests in the Plan DRA and/or the Matching Contributions.
3/3/04 Order at 11. Fujitsu unsuccessfully opposed class certification on the ground that all but one of the proposed class members signed the Release.
Defendants now move for summary judgment on the grounds that: (1) section 1053(c)(1)(B) does not apply to plaintiff's claim; (2) neither Fujitsu nor the plan can be sued for breach of fiduciary duty; and (3) plaintiff's claim is barred by the Release. Plaintiff cross-moves for summary judgment for an adjudication that: (1) the Amendment as applied to plaintiff violates section 1053(c)(1)(B); (2) defendants can be sued for breaching their fiduciary duty by implementing an illegal amendment to the pension plan; and (3) the Release does not bar plaintiff's claim.
II. ANALYSIS
A. Plan Amendment
When a plan is amended to change "any vesting schedule under the plan, " section 1053(c)(1)(B) allows plan participants having not less than three years of service to elect to have the "nonforfeitable percentage [of the accrued benefit derived from employer contributions] computed under the plan without regard to such amendment." 29 U.S.C. 1053(c)(1)(B). If the plan is amended without allowing such an election, the plan is treated as not satisfying the minimum vesting standards of section 1053(a)(2). See id.
Section 1053(a)(2) requires that a plan's vesting standards, at a minimum, satisfy one of the two alternative vesting schedules described in subsections A and B. The first alternative, under subsection (A), is a five year cliff vesting scheme, where after five years of service, the participant has a nonforfeitable right to 100% of his or her accrued benefits. 29 U.S.C. §1053(a)(2)(A). The second alternative, under subsection (B), is a graduated vesting scheme where the participant obtains a nonforfeitable right to at least 20% of his or her accrued benefits after three years of service with the percentage increasing annually to 100% after seven years of service. 29 U.S.C. §1053(a)(2)(B). However, under section 1053(d) a plan may allow vesting "after a lesser period and in greater amounts than are required by this part." 29 U.S.C. § 1053(d).
The minimum graduated vesting schedule set forth in § 1053(a)(2)(B) is as follows:
B. Vesting Schedule Change
The prerequisite to the application of section 1053(c)(1)(B) is that the plan amendment change "any vesting schedule." Defendants argue that ERISA draws a distinction between service-based vesting and event-based vesting. Under defendants' view, vesting upon a reduction in workforce is an example of event-based vesting. In contrast, defendants define service-based vesting as predicated solely on the employee's years of service. Therefore, they assert that section 1053(c)(1)(B) does not cover vesting that occurs on a reduction in force. Primary support for defendants' contention comes from section 1053(c)(1)(B)'s cross reference to section 1053(a)(2) which sets forth two types of vesting schedules both relying solely on years of service.
Defendants also point to 26 C.F.R. §1.411(a)-8, a regulation pertaining to amendments of vesting schedules. In relevant part, the regulation states "such an amendment, for example, includes each change in the plan which affects either the plan's computation of years of service or of vesting percentages for years of service." 26 C.F.R. §1.411(a)-8. However, the regulation merely provides a non-exhaustive example of types of vesting schedule amendments, not an exhaustive list.
"Vesting schedule" as used in § 1053(c)(1)(B) was defined in Stewart v. Nat'l Shopmen Pension Fund , 730 F.2d 1552, 1562 (D.C. Cir. 1983). According to that court, "vesting schedule' specifies the time at which an employee obtains his nonforfeitable right to a particular percentage of his accrued benefit." Id. (drawing a distinction between the concepts of "vested rights" and "accrued benefits"); see Oster v. Barco of California Employees' Ret. Plan , 869 F.2d 1215, 1221 n.6 (reconciling and affirming portions of Stewart to the extent they could be read to conflict with Fentron Indus. v. Nat'l Shopmen Pension Fund , 674 F.2d 1300 (9th Cir. 1982)).
Defendants' limitation upon what is included in a "vesting schedule" is not warranted. RIF Vesting does specify a time at which the employee obtains a nonforfeitable right to his or her accrued benefit, namely when he or she is laid off pursuant to a reduction in force. At that time, the employee is entitled to 100% of his or her accrued benefit. Therefore, eliminating reduction in force vesting constitutes a change to the "vesting schedule" for purposes of section 1053(c)(1)(B).
C. Scope of Section 1053(c) Amendment Protection
Plaintiff argues that under section 1053(c)(1)(B) the vesting schedule in the Plan could not be amended and applied to him and other participants with three or more years of service. Defendants maintain that section 1053(c)(1)(B) covers only those vesting standards required by section 1053(a). Since RIF Vesting is not a minimum vesting requirement of section 1053(a), defendants contend, vesting on the occurrence of that contingency may freely be eliminated through plan amendment without invoking the protections of section 1053(c).
The resolution of the parties' dispute requires interpretation of the statutory language. On one hand, section 1053(c)(1)(A), a subpart of the plan amendment section, makes reference to "not satisfying the requirements of subsection (a)(2), " which defendants submit dictates the adoption of their interpretation. Defendants argue that Congress, by drafting section 1053(c)(1)(B) to say plan amendments failing to comply with that subsection "shall be treated as not satisfying the requirements of subsection (a)(2), " expressed an intent to only protect those vesting provisions designed to comply with section 1053(a)(2). Defendants say that Congress would have included a reference to section 1053(d) within the text of section 1053(c)(1)(B) if it had intended to include event based amendments within the scope of section 1053(c)(1)(b)'s protection.
Subsection § 1053(d) states that "[a] pension plan may allow for nonforfeitable benefits after a lesser period and in greater amounts than are required by this part."
Defendants appear to overlook that section 1053(c)(1)(B) covers "[a]n amendment changing any vesting schedule."(emphasis added). Section 1053(d) expressly provides that plans may offer vesting schedules in excess of that required by section 1053(a). Nothing in section 1053(c)(1)(B) indicates its protection is limited to vesting schedules described in section 1053(a)(2). Further, "[t]here is no doubt about the centrality of ERISA's object of protecting employees' justified expectations of receiving the benefits their employers promise them." Cent. Laborers' Pension Fund v. Heinz , 124 S.Ct.2230, 2235 (2004).
Subsection 1053(a)(2) sets forth the minimum vesting schedule. See Hughes Aircraft Co. v. Jacobson , 119 S.Ct. 755, 761 (1999). The reference in section 1053(c)(1)(B) to subsection (a)(2) appears to have been used because (a)(2) sets the minimum required vesting standard. The reference cannot be reasonably read to allow a more employee favorable schedule to be amended to trim or eliminate nonforfeitable benefits of participants having at least three years of service.
There is little case law concerning the circumstances that mandate that a participant be given the right to elect under section 1053(c)(1)(B). In Fentron, a plan amendment cancelled past service credits for years of service before the plan came into effect in calculating the years of service both vested and nonvested employees had accumulated. Id. at 1305. The district court found the amendment invalid on two separate grounds. Id. First, the district court found the amendment "so susceptible of unlawful use that it was void for all purposes." Id. Second, the district court found that since the amendment divested previously vested employees, it violated section 1053(c)(1)(B). Id. at 1306.
The Ninth Circuit reversed the decision that the amendment was invalid on its face. Id. The court began by stating that "[a] pension plan may cancel benefits not required by ERISA's minimum vesting standard." Id. at 1306. Defendants seize upon this language to argue that the Ninth Circuit has rejected plaintiff's interpretation of section 1053(c)(1)(B). However, defendants take this statement out of context. Id. The Fentron court explained that since section 1053(b)(1)(C) expressly allowed the plan trustees to disregard the years of service of nonvested employees for the period they worked before the employer participated in the plan, the amendment was not unlawful on its face simply because it canceled these past service credits. Id. The plaintiff here does not argue that the plan Amendment, as it impacted all of defendants' employees, is invalid on its face. Plaintiff's argument is that the Amendment (without an election) violated section 1053(c)(1)(B) for only those employees who had at least three years of service and thus who had a nonforfeitable right to benefits upon termination of their employment in a reduction in force.
The plan trustees in Fentron made an argument very similar to defendants' position here. They argued that cancellation of past service credits is "not a vesting schedule" amendment and that section 1053(c)(1)(B) "should not be read to prohibit the cancellation of credits not otherwise required by ERISA." Id. The Ninth Circuit disagreed. Id. The court explained that the amendment indirectly divested previously vested employees and, therefore, it was an impermissible change of vested rights prohibited by section 1053(c)(1)(B). Id.
It is true that the reduction in force in the instant case did not occur until after the effective date of the Amendment as distinguished from the situation in Fentron where the vested employees had already received their service credits. However, this distinction does not seem significant as the Fujitsu employees with three years service had served the time required to obtain the promised full vesting upon a reduction in force. In fact, "[d]efendants do not contend that [section 1053(c)(1)(B)] protects only benefits that have already vested at the time of the change of the vesting schedule." (Def. Opp. to Pl's Cross Mot. for Summ. J. at 4.).
The court concludes that section 1053(c)(1)(B) applies to Fujitsu's plan Amendment and that Zhu, who was a participant having not less than three years of service, was entitled to elect to have his nonforfeitable percentage of accrued benefit derived from employer contributions computed when the reduction in force took place. This conclusion is supported by the policy behind ERISA.
There is no doubt about the centrality of ERISA's object of protecting employees' justified expectations of receiving the benefits their employers promise them. "Nothing in ERISA requires employers to establish employee benefits plans. Nor does ERISA mandate what kind of benefits employers must provide if they choose to have such a plan. ERISA does, however, seek to ensure that employees will not be left empty-handed once employers have guaranteed them certain benefits...."
Heinz , 124 S.Ct. at 2235. (Internal citations omitted); see J. Langbein & B. Wolk, Pension and Employee Benefit Law 121 (3d ed. 2000) ("The central problem to which ERISA is addressed is the loss of pension benefits previously promised.").
Defendants argue that a central policy behind ERISA is to allow flexibility in the design of plans thus encouraging employers to offer them. However, a participant like plaintiff may have reasonably relied on the promise of RIF vesting, in both choosing to work for FNC and in continuing employment with FNC for at least three years. Flexibility in plan design must be balanced against ERISA's underlying concern for ensuring fairness to employees. The court finds that its conclusion that section 1053(c)(1)(B) applies to the Amendment is consistent with a balance of flexibility and fairness.
D. Breach of Fiduciary Duty
Defendants argue that the breach of fiduciary duty claims against defendant Fujitsu arising out of the act of amending the plan should be dismissed because in doing so it was acting as a "settlor" and not in a fiduciary capacity. See Lockheed Corp. v. Spink , 517 U.S. 882, 890-91 (1996) (when employers exercise the right to modify or terminate terms of a pension plan they act in a role analogous to the settlor of a trust and not as a fiduciary). Plaintiff does not dispute this point and observes that "[p]laintiff's Complaint nowhere alleges that Fujitsu violated its fiduciary duties by adopting the illegal amendment." (Pl.'s Mot. at 22.).
Plaintiff's claim against Fujitsu for breach of a fiduciary duty is for implementing the allegedly illegal Amendment. (Id.) Defendants' argument against this claim is that the Amendment was not illegal, so its implementation was not a breach of fiduciary duty. Since the court has concluded that defendants were required to give employees with three or more years of service, such as plaintiff, the option to have their nonforfeitable percentage of benefits computed under the plan without the Amendment, plaintiff's implementation of the Amendment constituted a breach of the fiduciary duty owed to plaintiff.
E. The Plan As a Defendant
Defendants assert that the Plan is not a proper defendant because a plan covered by ERISA cannot, as an entity, act as a fiduciary with respect to its own assets. Acosta v. Pacific Enterprises , 9500 F.2d 611, 618 (9th Cir. 1992). The plaintiff does not disagree. However, this does not mean that a plan cannot be properly named in a suit alleging breach of fiduciary duty. Since plaintiff here seeks ensure that it gets complete relief, the Plan is properly named as a defendant. Even though plaintiff cannot sue the Plan for breach of fiduciary duty per se, he may, as he has done here, join the Plan in his action for breach of fiduciary duty in order that he may obtain the relief he seeks. See id.
F. The Release
Defendants contend that plaintiff's claim is barred because he signed the Release. The first paragraph of Section 3 of the Release states in relevant part:
In... consideration of the mutual promises herein, Employee... unconditionally releases and forever discharges... the Company, [the] employee benefit plans, fiduciaries and plan administrators... from any and all charges, claims, ... liabilities, ... known or unknown, ... that the Employee may now have or has ever had against Fujitsu by reason of any act, omission, ... or event occurring up to and including the date of the signing of this Agreement.... This waiver, release and discharge includes, without limitation, ... any claims for or relating to... compensation including... the Fujitsu Group Retirement Plan, the 401(k) plan and the management thereof.... This waiver, release and discharge further applies... to any claims based on... the Age Discrimination in Employment Act ("ADEA")... [and] the Employee Retirement Income Security Act of 1974.
(Decl. James Baker in Support of Def.'s Mot., Ex. A2.).
However, the second paragraph of section 3 in the Release contains the following exclusionary language:
Nothing in this Agreement is intended to interfere with or deter Employee's right to challenge the knowing and voluntary nature of the waiver of an ADEA claim or to file an ADEA charge, complaint or lawsuit or to participate in any investigation or proceeding conducted by the Equal Employment Opportunity Commission or applicable state agency. However, in response to any such claim or proceeding, the Company will assert that all claims have been released in a final binding agreement. The foregoing shall not discharge the Company's obligations under this Agreement and the Plan or with respect to Employee's vested 401(k) benefits, or accrued but unused vacation.
(Id. (emphasis added).)
Plaintiff argues the exclusionary sentence, emphasized above, exempts the present claim from the general bar of employment related claims agreed to in the first paragraph of section 3 in the Release. As the court discussed in the March 3, 2004 Order Granting Plaintiff's Motion For Class Certification, unlike the previous sentences in the second paragraph of Section 3, the final exclusionary sentence was not intended to relate only to ADEA claims. (3/3/04 Order at 5). Rather, the sentence expressly excludes from the general release claims to vested benefits.
Defendants now argue that:
In exchange for an additional $6, 818, Mr. Zhu signed the Release Agreement and agreed to the amount of "vested" or "unconditional" funds in his Plan account, and Fujitsu agreed that should Mr. Zhu ever request those "vested" or "unconditional" funds that he would be entitled to them.... The comprehensive nature of the general release agreement together with the narrow definitions applicable to "vested" benefits meant that Mr. Zhu waived any claim to dispute the amount of his "vested" benefits, he waived any claim as to how the Plan was managed, he waived any claim about improper amendments to the Plan, and he waived any claim he might have had as to fiduciary breaches.
(Def.'s Memo in Opp. to Pltf.'s Cross-Motion, pp. 22-3). The court finds defendants' reading of the Release too narrow-the Release cannot be read as including an agreement by Zhu that his "vested benefits" totaled $6, 818 or any other particular amount. The Release expressly states that it does "not discharge... the Company's obligations... with respect to Employee's vested 401(k) benefits." ((Decl. James Baker in Support of Def.'s Mot., Ex. A2.). Further, any ambiguity in the language must be construed against Fujitsu, the drafter. See Barnes v. Independent Automobile Dealers Association of California Health and Welfare Benefit Plan , 64 F.3d 1389, 1393 (9th Cir. 1995).
Plaintiff's claim is for unpaid benefits that vested upon his layoff pursuant to a reduction in force. These are vested benefits because the elimination of the RIF vesting provision by a plan Amendment, without an election, was unlawful under § 1053(c)(1)(B) as applied to the class members. Therefore, since plaintiff is simply seeking to enforce defendants' obligations with respect to his vested benefits, the exclusionary language of the Release applies, and the Release does not bar his claim.
III. ORDER
For the foregoing reasons, the court grants plaintiff's motion and denies defendants' motion. The court adjudicates that: (1) the Amendment of the Fujitsu Inc. 401(k) Plan effective January 1, 2002 violates section 1053(c)(1)(B) of Title 29 of the United States Code as to class members; (2) Fujitsu breached its fiduciary duty to class members by implementing the Amendment without permitting the class members to elect to have the nonforfeitable percentage of their benefits computed under the Plan without regard to the Amendment: and (3) the Release of the type signed by Zhu does not bar claims for RIF vested benefits under the Plan.
A further case Management Conference is set for April 15, 2005 at 10:30 a.m.
Years of Service The nonforfeitable percentage is: 3... 20 4... 40 5... 60 6... 80 7 or more.... 100