Relief for Fiduciary Breach?

A Seventh Circuit panel that included Judge Easterbrook recently invited an ERISA plaintiff to seek "make-whole" relief against a fiduciary in McDonald v. Household International, Inc. This has been a vexing issue for plan participants since the Supreme Court's decision in Great-West, which many courts have interpreted to limit severely the kind of relief a participant may obtain from fiduciaries and others.

Mr. McDonald started working for his employer on November 19, 2001. His health insurance coverage was supposed to be effective as of December 19. For some reason, this did not occur. After December 19, he repeatedly tried to get a prescription filled for blood pressure medicine. Each time he was told that he did not have insurance coverage. Because he could not afford to pay for the drugs himself, he went without them from December 19 to January 15, 2002. He pleaded with his employer and the HMO to fix the problem but nothing happened. On January 15, he suffered a "catastrophic stroke." Subsequently, he and his wife filed the lawsuit, which raised a variety of state negligence and contract claims, but no ERISA claims. The McDonalds obviously hoped to avoid ERISA's limitations on available relief.

Naturally, all of their claims were preempted by ERISA. Judge Wood, however, writing for the court, suggested that the McDonalds take a look at Justice Ginsburg's concurring opinion in Davila:

where she drew attention to the Government's suggestion that ERISA "as currently written and interpreted, may allo[w] at least some form of 'make-whole' relief against a breaching fiduciary in light of the general availability of such relief in equity at the time of the divided bench."

Mr. McDonald should have been covered by a health plan and should have been able to obtain his medicine, which likely would have prevented his stroke. Either the employer or the HMO dropped the ball. The McDonalds are now burdened with presumably massive medical expenses. Yet, since the Supreme Court issued its decision in Great-West, many courts would rule that the McDonalds have no right under ERISA to monetary relief from any party, fiduciary or not.

It is settled law that ERISA prevents participants from receiving tort-type compensation for pain and suffering. However, the McDonalds should be able to recover from a breaching fiduciary monetary compensation at least equal to their medical bills. Three judges from the Seventh Circuit seem to believe that the issue is worth exploring further, at a minimum.

The Department of Labor is pressing courts to rethink the assumption that monetary payments from a fiduciary to a participant can never qualify as equitable relief. A recent brief on that point is here.

Federal Judge Agrees: Nine Is Greater Than Four

As discussed in an earlier post, a federal judge was taking a second look at her decision barring the EEOC from publishing regulations that would permit employers to coordinate retiree health care benefits with Medicare eligibility. The EEOC contended that the Supreme Court's decision in Brand X confirmed the EEOC's authority to issue the challenged regulations, despite the Third Circuit's Erie County decision that the ADEA prohibited benefit plans from reducing medical benefit coverage when retirees became eligible for Medicare.

Yesterday, the judge reversed her previous decision and upheld the EEOC's proposed regulations. The judge ruled that Brand X:

dramatically altered the respective roles of courts and agencies under Chevron. Brand X held that a court's interpretation of a statute only bars an agency from interpreting that statute differently from the court if the court has determined the only permissible meaning of the statute. . . .Because the Third Circuit's Erie County decision did not determine the only permissible meaning of the relevant provisions of the ADEA, under Brand X, I am not bound by Erie County in reviewing the EEOC's regulation.

In other words, because Section 4 did not specifically cover retiree benefits, there was room for an interpretation that such benefits were not covered. Writing on a "clean slate," the court agreed with the EEOC that under Section 9, the EEOC had the "flexibility to decide whether retiree benefits are covered by the Act at all." Given that broad authority, the EEOC was allowed "to interpret the ADEA to cover retiree benefits generally, while exempting the practice of Medicare coordination of health benefits."

Nine is greater than four, after all.

The court's decision is here.

Off Payroll Employees Ineligible for Benefits

What is the benefit status of off-payroll workers? That was the question in Edes v. Verizon Communications, Inc., a recent decision from the First Circuit. The short answer is that the worker's benefit status depends on the language of the benefit plans at issue. The Edes plaintiffs were hired directly by GTE but received their paychecks from one of two payroll agencies. In all other respects the plaintiffs were indistinguishable from employees who received paychecks from GTE. Nevertheless, because the plan excluded workers who were not "paid directly" by the employer, the plaintiffs lost their claims under Section 502(a)(1)(B).

Given the plan language as described in the decision, the result was not surprising in light of similar decisions from other courts. But the plaintiffs also had a claim under Section 510, which prohibits employers from discriminating against "participants" for the purpose of interfering with their right to attain benefits. The plaintiffs argued that GTE should have moved them to the GTE payroll after they were hired but instead, deliberately kept them off payroll for the purpose of excluding them from GTE's benefit plans.

The court avoided a decision on the merits because it found that the Section 510 claim was time-barred. But if the claim was timely what might be the outcome? Plaintiffs argument is intriguing, but, in my view, not a winner.

Under ERISA, a "participant" is any "employee" of the employer who becomes eligible for benefits. The Supreme Court previously ruled that the term "employee" as used in ERISA means any common-law employee of the employer. The Edes plaintiffs likely were GTE's common-law employees if the facts as alleged in the complaint were true and, therefore, may have become benefit eligible if they were on the GTE payroll. So, the argument goes, GTE's failure to move them to the payroll discriminated against the plaintiff class.

If that's the argument, how does it square with the general principle that an employer's plan design decisions are not subject to ERISA? For example, employers are permitted to create separate plans for salaried and union personnel, with different benefits, so why not two (or more) classes of worker, common-law or otherwise. Moreover, the Third Circuit has held that Section 510 does not apply to hiring decisions. So, if GTE could hire the Edes plaintiffs into non-benefit positions, why would GTE later have an obligation to move them to the payroll so that they could become benefit eligible?

Recall that in the Supreme Court's Inter Modal decision, the Court stated:

But in the case where an employer acts with a purpose that triggers the protection of §510, any tension that might exist between an employer's power to amend the plan and a participant's rights under §510 is the product of a careful balance of competing interests, and is most surely not the type of "absurd or glaringly unjust" result . . . that would warrant departure from the plain language of §510.

The Supreme Court was acknowledging the tension between Section 510 and the employer's right to amend benefit plans -- in certain instances, an employer's decision-making may be subject to Section 510 constraints. The Edes plaintiffs, however, go farther. In Inter Modal, the issue was whether Section 510 applied to discharged employees who had not vested in certain "welfare" (e.g. non-pension) benefits. But in Inter Modal, there was no question that the plaintiffs were employees of the defendant employer, at least until they were fired.

In other words, before the Inter Modal plaintiffs were fired, they were eligible to receive, or would become eligible to receive, certain benefits. The employer had promised to provide the benefits to its existing employees (who were recognized as such) and Section 510 "helps make such promises credible." By contrast, in Edes, GTE never promised the plaintiffs any benefits because, from day one, they were off-payroll.

There are other theories that could support the claims of off-payroll employees, but Section 510 does not appear to help those individuals who never were on the employer's payroll.

Overtime Pay for Stockbrokers

As reported in the New York Times today, Merrill Lynch agreed to pay $37 million to settle an overtime pay case involving up to 3000 California stockbrokers. Financial industry employees are perceived generally to be exempt from overtime rules, but that is not necessarily true. The FLSA overtime exemptions are based on a two part duties and salary test. If both tests are satisfied, the employee is exempt from overtime. If only one test is met, the employee must be paid overtime.

The new "Fair Pay" regulations provide:

Employees in the financial services industry generally meet the duties requirements of the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer's income, assets, investments or debts; determining which financial products best meet the customer's needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer's financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

So one area of uncertainty is whether the broker's "primary duty" is selling financial products.

The salary basis test requires that employees receive a minimum salary of $455 per week. While the salary can be paid on a bi-weekly or monthly basis, a pure commission arrangement does not qualify. Apparently, the Merrill Lynch brokers may not have received this guaranteed salary.

Merrill Lynch also contended that the brokers were exempt from overtime rules because they were employed in a retail business (e.g. selling stock to individual customers). However, the regulations specifically exclude "stock or commodity" brokers from the exemption for retail businesses. In other words, stockbrokers must be paid overtime pay unless they meet the duties and salary test.

Comment: The new "Fair Pay" regulations went into effect in August of 2004. The old rules, however, were similar enough to the new "Fair Pay" rules that brokers who were improperly classified as exempt before August 2004 likely remain entitled to overtime pay under the new rules.

Some Contract Issues Facing Professional Sports Players

The Sports Law Blog has two interesting posts on professional sports player contracts. In one post, the author raises the question of whether certain players for the Washington Nationals have a misrepresentation claim against the team because the dimensions of the RFK field turned out to be larger than represented. As pointed out, the key issue is whether the ballpark dimensions are "material" to the player's decision to sign with the team. The article concludes that the players probably have only a small chance of succeeding.

The other post discusses the longing of NFL players for guaranteed contracts. The players union continues to believe that the current system of up-front bonuses in lieu of guaranteed contracts best protects the players, but the players see it differently.

Is 4 Greater than 9?

The AARP, the EEOC and interested retirees are waiting to hear from the U.S. District Court for the Eastern District of Pennsylvania whether four is greater than nine or whether nine is greater than four. The district court previously enjoined the EEOC from publishing regulations that would explicitly permit employers to coordinate retiree health care benefits with Medicare eligibility. Those regulations were designed to overturn the Third Circuit's ruling in the Erie County case in 2000 that it was a violation of the ADEA age discrimination rules for benefit plans to reduce coverage when retirees became eligible for Medicare. The district court ruled that in the wake of the Third Circuit's ruling, the ADEA was not ambiguous and, therefore, the EEOC had no authority to issue contrary regulations.

The Supreme Court's Brand X decision however, opened the door for the district court to take a second look at the issue. In Brand X, the Supreme Court held that "[o]nly a judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction." According to the EEOC, Brand X requires the district court to ignore Erie County in determining whether the EEOC has the authority to issue the challenged regulations.

While the EEOC concedes that Section 4 of the ADEA prohibits the practice of coordinating retiree health benefits with Medicare, Section 9 specifically authorizes the EEOC to issue regulatory exemptions as necessary and proper. Because Erie County analyzed Section 4 only, the EEOC believes that Erie County simply doesn't apply to the EEOC's regulatory activity under Section 9. In short, 9 is greater than 4.

The AARP, by contrast, argues that after Erie County, the ADEA is clear on its face that health benefits cannot be reduced when retirees become Medicare eligible. As such, there is no ambiguity and no gap for the EEOC to fill with a new regulation. In essence, the AARP is arguing that there is no need to analyze the ADEA beyond Section 4. In short, 4 is greater than 9.

Calling Judge Roberts?

The AARP and EEOC briefs can be found at the ERISA Industry Committe website here.

Pension Wonderland

Imagine you retire and start to receive a pension check from your employer's pension plan. As a careful person, you make your own calculation of your monthly pension and it seems that the pension plan made a mistake. Your pension should be larger. So you send a letter to the plan administrator asking for an explanation of your benefit payment. You send the letter to the address provided in the summary plan description and, to be extra careful, you send it by certified mail. You receive no response. So you send another letter. And another. You make phone calls. Still, no response. You visit the benefits office, only to be told that the benefits administrator left for a meeting, and you are not permitted to look at the pension documents. Five years pass while you work to get an answer to a basic question: How did the plan calculate my benefit? Finally you get your first written response -- from the company's outside legal counsel. He offers an explanation of why your benefit is not as large as you think it should be, but then advises you that it is too late to appeal, too late to go to court, because you failed to challenge the benefit payment five years ago! Sound unreal? Well, it's not, as recounted in this saga of a Motorola retiree.

The retiree finally retained counsel, who a filed a class action. It wasn't too late and the retiree had a right to review the plan documents that supposedly guided the calculation of his pension benefit. The case is now poised for settlement, more than seven years after the retiree first inquired about his benefit calculation.

Tips for Retirees

• Retirees who have a question about their benefit but face an unresponsive pension bureaucracy, may not want to wait five years to consult an attorney. Consider consulting an attorney with ERISA experience early in the process if your pension plan is ignoring your inquiries.

• Consider contacting the local office of the Employee Benefits Security Administration of U.S. Department of Labor. The DOL has responsibility for enforcing ERISA requirements. While the DOL typically does not file lawsuits on behalf of individuals with benefit claims, the EBSA offices have staffers who can contact the plan on your behalf to help obtain the requested documents and an explanation of the benefit payment. A phone call or letter from the DOL may bring more urgency to your inquiry.
  

• If you have received a response to your inquiry about the benefit calculation, and you are not satisfied with the response, you may have to start or continue with the administrative appeals process. If you do not complete the administrative process, or if you wait too long, you may lose your right to pursue your claim. Again, consider consulting with an attorney, if you have not done so previously.
  
  

EDS ERISA Litigation Update

As reported on The ERISA Blog, the District Court for the Eastern District of Texas rejected a proposed settlement in the EDS litigation because it was not in the best interest of the class members. Under the proposed settlement, the class members would only receive two or three cents on the dollar of their losses. So the court concluded that a reasonable class member would rather risk litigation rather than accept such a discounted settlement.

As discussed in more detail here, EDS had appealed the class certification order contending that the plaintiffs did not have standing to bring a lawsuit under Section 502(2)(2) on behalf of the plan as a whole. Apparently, the plaintiffs' counsel faced some tough questions during oral argument, reconsidered the value of the their claims and agreed to the proposed settlement. But the district court suggested that plaintiffs' counsel should rethink their position:

[R]igorous questioning during oral argument does not necessarily indicate how an appellate court will ultimately rule on a particular legal issue, especially one as important as the issue in this case. . . . Whatever the risk of a different ruling by the Fifth Circuit, that risk must be considered in light of the potential benefits of the settlement proceeds to the proposed settlement class.

So the ball is back in the Court of Appeals. I will have more to say about this case when the 5th Circuit publishes its decision.

A Cogent Explanation of Age Discrimination Claims in Cash Balance Plan Conversion Cases

Mary Williams Walsh, of the New York Times, wrote an article earlier this week about a lawsuit filed by employees of the Southern California Gas Company challenging the 1998 conversion of their traditional pension plan to a cash balance pension. Conversions of pension plans to cash balance plans raise many thorny issues, with "wearaway" at the top of the list. As with other cash balance plan conversions, older employees claim that the conversion deprives them of benefits in violation of age discrimination laws. Ms. Walsh nicely captured the essence of these claims in her article. She wrote:

The legal problems have generally come up at companies that converted their pension plans when older workers were about to enter the final years of their careers, when they expected to build up their pensions at the fastest rate. The conversions deprived them of their chance to earn the biggest part of their pensions. Younger workers lose this high-earning phase as well, but for them it does not matter because they are likely to have more years in the new plan, and thus will have the chance to offset the loss of the late-career pension increases.

This difference in the way older and younger workers fare in a conversion is the source of the age-discrimination claims. The wearaway effect makes the discrepancy even greater. Wearaway happens in cases where some employees - usually people in their 40's and 50's - have already earned bigger benefits under the old plan than they would have earned, in theory, if the new plan had been in place throughout their careers. The employer stops their accruals for several years, until the theoretical amount they would have earned catches up with the amount they actually did earn. This period of zero accruals is called wearaway.

Janell Grenier's ERISABlog has additional links for information on cash balance plan issues, including pending legislation in Congress.

ERISA Section 510 Claim Survives Summary Judgment

ERISA Section 510 prohibits employers from firing employees to prevent them from attaining a benefit. A recent decision from the Eastern District of Pennsylvania recognized that even employees fired allegedly "for cause" can make use of Section 510.

In Leszczuk v. Lucent Technologies, Inc., three Lucent employees claimed that their employer fired them"for cause" to prevent them from receiving severance benefits. Lucent had established a severance benefit program for employees terminated under certain circumstances, including a reduction in force. The employees were notified that their facility was closing and that they would become eligible to participate in the severance plan by the end of the year. With a little more than two months remaining in the year, the employees were terminated "for cause" allegedly because they failed to work for 40 hours per week at their facility. The employees maintained that Lucent permitted them to perform some of their work off site and that Lucent never raised the issue of their work hours until after they were identified as potential severance plan participants.

Lucent filed for summary judgment. First, it argued that the employees did not have standing to file the lawsuit because they were terminated before they satisfied all the conditions necessary to participate in the severance plan. Under ERISA, employees must be plan "participants" to have standing to file a lawsuit. While standing issues can be tricky, the court recognized that Section 510 is designed to cover employees who are fired before they vest in (become eligible for) the disputed benefits. An employer "should not be able through its own malfeasance to defeat the employee's standing."

Next, Lucent argued that the employees' claims failed on the merits. Section 510 requires proof that the employer specifically intended to violate ERISA; if the employee offers only evidence of the lost opportunity to accrue benefits, he loses. The court ruled, however, that the Lucent employees had offered sufficient evidence to allow the case to proceed to trial. In particular, it seems that the timing of investigation leading to the firing weighed heavily in the judge's ruling.

Comment: For larger employers and smaller claims, there is often little apparent reason why an employer would choose to fire an employee to save a few dollars. Hence, Section 510 claims can be difficult to prove. The plaintiffs in this case contended that Lucent saved almost $200,000. The court, however, gave no weight to value of the contested benefits because the plaintiffs did not offer any supporting evidence. Nevertheless, the court was persuaded to permit the case to go to trial by plaintiffs' other evidence. In other words, the amount at stake was not important to this court, at least at the summary judgment stage.

DOL Supports ERISA Plaintiffs

The US Department of Labor has filed "friend of the court" briefs in two Fifth Circuit cases where the issue is whether employees who participate in 401(k) plans can obtain money damages from fiduciaries whose alleged imprudent conduct causes the participants to lose money. First, a little background. ERISA opens two roads for a plaintiff to travel. By the first road, the plaintiff can try to get a court to order a fiduciary to pay money to the plan to restore losses suffered by the plan as a whole. Plaintiffs traditionally traveled this road when fiduciaries did not live up to their responsibilities when making investment decisions or administering the plan. Call this road Route 409/502(a)(2).

Traveling on the second road, plan participants can sue fiduciaries for decisions that caused some harm to the individual, but not necessarily to the plan as a whole. Call this road Route 502(a)(3). The problem for plaintiffs is that Route 502(a)(3) gets too narrow at the end of the road. Route 502(a)(3) limits individuals to "equitable relief" and the Supreme Court has made it clear that equitable relief does not include monetary damages. So, for example, when a fiduciary gives the participant wrong information (such as bad tax advice) that costs the participant some money, many courts will find that the participant cannot recover her losses from the fiduciary.

In the two cases where the DOL has intervened, the defendants argue that the 401(k) plan participants are limited to traveling along Route 502(a)(3) either because (1) the plan participants, not the plan itself, assumed the risk of investment losses, (Langbecker v. EDS) or (2) because only a subset of participants were harmed by the fiduciary misconduct, but not every single participant (Milofsky v. American Airlines, Inc.). The DOL contends that ERISA treats 401(k) plans like any other pension plan so that when fiduciaries make imprudent decisions, participants can obtain remedies through payment of damages to the plan, which then can be allocated as appropriate to the accounts of individuals who suffered losses.

Langbecker was filed as a class action after EDS stock suffered a steep decline in value following the EDS's disclosure of some adverse financial information in September 2002. The plaintiffs claimed that because the plan fiduciaries had access to company information about certain previously undisclosed risks, the fiduciaries should have known that EDS stock was overvalued and an imprudent investment and should have taken action to protect the 401(k) participants, most of whom were invested in company stock. The district court agreed with the plaintiffs that the case could be certified as a class action because their claims were on behalf of the plan as a whole. The defendants contend on appeal that a 401(k) plan is merely a collection of individual accounts so that the individual participants do not have "standing" to file a suit on behalf of the plan -- i.e. they cannot follow Route 409/502(a)(2). In other words the fiduciary does not have plan wide responsibilities, but only responsibilities to each individual participant. So, in the defendants' view, the participant's only remedy, if there is one at all, is for equitable relief via Route 502(a)(3).

The DOL says that this is nonsense. ERISA sections 409 and 502(a)(2) do not exempt 401(k) or other defined contribution plans. Moreover, the plaintiffs are not bringing individual benefit claims. Instead, they are challenging the fiduciaries' decision to retain EDS stock as an investment option and to permit the company the continue to make matching contributions in form of EDS stock. By these decisions, the fiduciaries made an allegedly imprudent investment choice available to virtually all participants.

I think DOL has the better argument here. ERISA specifically permits participants to file a lawsuit on behalf any plan, and the plaintiffs' allegations go to the management of the plan itself: disclosure of information to participants and the prudence of certain investments options. Moreover, virtually all participants were invested in EDS stock, so the fiduciary misconduct, as a practical matter, affected the plan as a whole. Interestingly, the ERISA Industry Committee ("ERIC") offers a compromise in its brief filed in support of the defendants. ERIC suggests that class action suits under section 502(a)(2) are appropriate in cases of corporate failure such as Enron and World Com, but not when the plan sponsor remains viable and the employer stock remains a sound investment for at least some participants (presumably those participants who bought the stock when after bad news depressed the price).

The other case, Milofsky, involved the claims of 218 pilots who participated in a 401(k) plan offered by a company that was acquired by American Airlines. The transfer of their plan assets was allegedly botched and they sued American Airlines and others, alleging that they were misled about the transfer process and that because of fiduciary breaches regarding the timeliness of the transfer, the value of their accounts -- and thus the overall value of the plan -- decreased. The pilots sought to recover their actual damages suffered through a payment to the plan that would then be allocated to their individual accounts. The pilots lost at the district court and on appeal to a Fifth Circuit panel. They now are seeking "en banc" review of the panel's decision and DOL is supporting the request for rehearing.

The Fifth Circuit panel ruled in a 2-1 decision that the pilots could not sue under section 502(a)(2) because their claim was essentially about a particularized harm that targeted only a specific subset of plan participants and the remedy they sought would benefit only themselves, not the plan. The panel relied heavily on the Supreme Court's 1985 decision in Russell that recoveries under sections 409 and 502(a)(2) must benefit the plan as a whole. DOL contends, however, that because all of a participant's investments in a 401(k) plan are "plan assets," any imprudent fiduciary decision that diminishes plan assets can be remedied through monetary damages even if only some plan participants were harmed. The panel's contrary reasoning would leave participants without a remedy even in cases of blatant misconduct such as a fiduciary diversion of employee contributions, as long as only some, but not all participants are harmed.

DOL correctly argues, in my view, that a distinction between remedies (or roads traveled) based on the number of participants harmed unduly limits ERISA's protections. The plaintiffs are not seeking "extra-contractual" relief: they want what their plan promised them: prudent management. The Sixth Circuit and at least one district court have ruled that a subclass of participants may follow Route 409/502(a)(2) as long as the claim seeks damages payable to the plan. If the Fifth Circuit reverses Langbecker or fails to overturn Milofsky after en banc review, the Supreme Court may have another ERISA case on its agenda next Term.

Both DOL briefs can be found here and the ERIC brief is here.

Ketchup Blots Lawyer's Career

In 2001: A Space Odyssey, a mysterious rectangular slab appears at critical times to change the course of human destiny. In the case of a London, England lawyer, a blob of ketchup, perhaps from one of those rectangular packets, has apparently derailed a career. As reported in Scotsman.com and elsewhere, a secretary to a well-paid London lawyer dribbled some ketchup on the lawyer's trousers (exactly how remains unclear). The lawyer later e-mailed the secretary asking for the £4 his cleaner would charge to remove the stain. And he wanted the cash that day. The secretary did not see the e-mail until she returned from her mother's funeral and was outraged. Her withering reply, detailed in the article, circulated in the firm and across the globe. Following the furor generated by the e-mail, the lawyer resigned, although he says he made the decision to resign long before the ketchup incident. The complete e-mail is at Snopes.com, a website devoted to verifying internet stories and urban legends.

Employees Have an Uphill Battle to Win Discrimination Claims. Is There Appellate Court Bias?

A study by two Cornell Law School professors confirms what many employment lawyers intuitively understand: employment discrimination plaintiffs find it more difficult to prevail than other plaintiffs. As noted on lawmemo.com, the study is now available on-line. The authors write:

Employment discrimination plaintiffs have a tough row to hoe. They manage many fewer happy resolutions early in litigation, and so they have to proceed toward trial more often. They win a lower proportion of cases during pre-trial and at trial. Then, more of their successful cases are appealed. On appeal, they have a harder time upholding their successes and reversing adverse outcomes.

Some of the key (post-1991) findings of the Cornell Study are:

1. Employment cases spend an average of 410 days on the court's docket, compared to 354 days for all other plaintiff categories.
2. About 50% of non-employment cases are resolved early in the litigation process, compared to only 35% of employment cases.
3. Employment plaintiffs obtain summary judgment in about 2% of cases, compared to 22% of other plaintiffs.
   
4. At trial, employment plaintiffs prevail in about 37% of jury trials and 21% of bench trials compared to 45% and 46% respectively for other plaintiffs.

But it is the results at the appellate level that are perhaps the most intriguing. According to the study, losing defendants in employment discrimination cases are able to obtain a reversal from the court of appeals in 42% of cases, while losing plaintiffs prevail on appeal only about 10% percent of the time. The spread between defendants and plaintiffs in other types of cases is much smaller. What accounts for the success of the defendants?

The authors believe they have unearthed an "anti-plaintiff effect" in the federal appellate courts. In essence, most employment discrimination cases that reach the trial stage turn on the intent of the employer, and "intent" is a factual issue that depends on witness credibility. If an employee plaintiff proves to the satisaction of the factfinder that the employer's decisions were motivated by wrongful intent, "that finding should be largely immune from appellate reversal, just as defendants' trial victories are largely immune from reversal." In other words, appellate courts are supposed to focus on the legal framework applied by the district court, deferring to the trier of fact on issues of fact. But according to the Cornell study, appellate courts unduly favor employers by stepping outside the usual boundaries for reversing the result of a trial.

You can download the complete research paper here.

New Pennsylvania Law Protects Employer Disclosure of Work History

Pennsylvania employers that disclose information about current or former employees to a prospective employer will enjoy a presumption that the disclosure was in good faith. This means, according to the law, that the employer will be "immune from civil liability for such disclosure or its consequences" in any lawsuit brought by the employee or former employee. Employees will be able to rebut the presumption of good faith only by presenting "clear and convincing evidence" that the employer disclosed information that:

• the employer knew or should have known was false
• the employer knew was materially misleading
• was false and disclosed with reckless disregard for the truth; or
• was probibited from disclosure by contract or other law.

Comment: Pennsylvania was one of only 14 states that did not provide statutory protection to employers for disclosures of job performance information to prospective employers. Pennsylvania employers previously had a comon law conditional privilege to make such disclosures. The new statute does not affect immunities available under common law, so the existing immunities should be available in addition to the immunity offered by the new statute.

Pension Legislation

Janell Grenier has posted Helpful Links Regarding Pension Legislation Introduced Last Week.

Advertising Industry Soap Opera Raises Issues of Employee Loyalty

The June 20 issue of New York Magazine recounts the saga of Mike Burns and 17 other former Saatchi advertising executives who left Saatchi because they were not comfortable, to say the least, with Saatchi chief Kevin Roberts's management of the agency. Burns, a top Saatchi executive in charge of the lucrative General Mills account, resigned and negotiated a separation package that included a one year non-compete clause, primarily to stop him from taking the General Mills business. The 17 other executives quit a few days after Burns quit. Saatchi then filed a $3 million lawsuit against Burns, alleging that he breached his contract and violated his fiduciary duties by engineering the departure of the 17 with the ultimate goal of taking the General Mills account.

Interestingly the other 17 executives did not have employment contracts and are not defendants in the lawsuit. But did these employees have any obligations to Saatchi during their employment that might form the basis of a lawsuit? Many states recognize that employees, even at-will employees, have a fiduciary duty of loyalty to their employer. For example, employees are not permitted to use confidential information to undermine their employer. More generally, employees may not act in ways that are contrary to the interests of the employer. It is not clear what, if any, claims Saatchi may have against the 17 former executives. But employees who are considering leaving their current employer to join competitors or start a rival firm of their own should be mindful of their legal obligations before, during and after their departure and should consult with legal counsel for guidance.

Read more about the Saatchi saga here.

Former NFL Player Loses Disability Claim

NFL players can reap large monetary rewards during their playing years but face potentially disabling degenerative conditions afterwards. The NFL's retirement plan for players includes disability benefits but the players face the same hurdles to obtain those disability benefits as employees in less glamorous occupations. ERISA governs claims under the NFL's disability plan, so benefits denials are subject to an arbitrary and capricious standard of review, as demonstrated in a recent case, Boyd v. Bell. Boyd, a former NFL lineman, played from 1980 to 1987. After retiring from the NFL, Boyd held various jobs until 1999 when he was no longer able to work. Boyd's claimed he was suffering from organic brain problems that he traced back to a 19980 preseason game where he was knocked unconscious, suffered temporary blindness in one eye but continued to play. During his football career, Boyd noticed various symptoms that are traditionally associated with concussions such as lack of focus and forgetfulness.

The NFL Plan provides a range of disability benefits depending on the timing of the disabling condition's onset, its severity and origin. In this case, the NFL Plan initially determined that Boyd was totally and permanently disabled arising from non-football related activities. Boyd, however, claimed he was entitled to Football Degenerative disability, which would entitle him to a much higher benefit payment. Two doctors performed a special brain scan and concluded that Boyd was disabled due to a brain injury or head trauma. Another doctors, a neurologist, described as a "plan neutral" physician (i.e. not Boyd's treating physician) concluded that Boyd had "several problems that may arise out of head injuries suffered in the course of his NFL career" and checked the "yes" box when asked whether the injury was football-related. A psychologist also concluded that Boyd's disabling psychological problems were due to football-related injuries.

The Plan, however, referred Boyd to a fifth doctor (not described as plan neutral), also a neurologist, who concluded that the August 1980 head injury could not be the cause of Boyd's problems. The Plan subsequently denied Boyd's claim for Football Degenerative benefits based on the fourth doctor's opinion. The court held that the Plan's denial was not an abuse of discretion. The Plan was not required merely to tally the opinions and decide based on numbers. The court also noted that some of the favorable evidence was equivocal, especially the neurologist's opinion that Boyd's problems "may" arise out football-related head injuries. On the other hand, the fourth doctor seemed to downplay the severity of the 1980 head injury (describing it as "alleged") and the results of a special scan performed by the two doctors who concluded that Boyd's disability was due to brain injury.

Former NFL players seem to be in a third and long situation when it comes to seeking disability benefits. As an article from a Pittsburgh newspaper shows, many players are unaware of the benefits and those who do apply must overcome the Plan's strict rules and the arbitrary and capricious standard to prevail. Although a daunting task, it is not impossible. Recently, the estate of Mike Webster convinced a federal judge that the NFL Plan abused its discretion by denying Webster's brain-injury based disability claims. It is likely that more such claims will be litigated in the future, given the nature of the sport.

More Fallout from United Bankruptcy

United's default on its pension promises continues to reverberate. An article posted on MSNBC focuses on how the retirees are being affected by the benefit cutback and a PBGC official warned that United's problems are not unique:

PBGC Executive Director Bradley D. Belt said in an interview that United is only the latest — and largest — illustration of what ails the federal pension protection system: It allows companies to drastically underfund pensions, and even to disguise the problem. Defaults have so escalated in troubled sectors of the economy, Belt said, that the PBGC now is on the hook for $450 billion in pension obligations, compared with $50 billion only three or four years ago. In three years, it has gone from having a $7 billion surplus to a $23 billion deficit. Without changes to the 30-year-old pension protection system, he said, the PBGC could itself become insolvent.

Many retirees face a double hit because they had also invested heavily in United stock that lost much of its value over the past few years. Although the situation is clearly not the fault of the United employees, there is a lesson here for employees of other companies: diversification. Just as the collapse of Enron exposed the danger of investing 401(k) money too heavily in company stock, the United pension debacle shows that employees should review their entire investment and retirement portfolio as a whole to determine whether their financial security depends on the performance of a single company.

25% of Private Companies Sued By Employees

According to a Chubb Group survey, one in four privately held companies has been sued by an employee or former employee. More than half of the surveyed executives estimated that it would cost $100,000 or more to settle a lawsuit while 10 percent estimated that it would cost at least $1 million.

Casting a Larger Net

The Tenth Circuit has weighed in on who might be held responsible for theft of assets from an ERISA plan in addition to the thieving fiduciary. The case, Coldesina, D.D.S. P.C. Employee Profit Sharing Plan and Trust v. Simper, involved an investment advisor who embezzled plan assets under his control. When the dentist/plan sponsor became dissatisfied with the plan's investments, he asked the advisor to turn over the plan's account documentation. On the day he was supposed to turn over the documents, the advisor committed suicide, leaving a note that confessed his embezzlement. The dentist sued estate of the advisor, certain companies for whom the advisor was an agent or broker/dealer (KCL and Sunset), and an accountant (and his company) who provided administrative services to the plan.

The Tenth Circuit ruled that the accountant was a fiduciary because he accepted plan contributions into his business account and then wrote checks to one of the advisor's companies. Initially, the accountant wrote the checks payable to KCL. The dentist was apparently aware that the checks were being paid to KCL but there were no explicit plan policies covering the accountant's check-writing activities. Later, without the dentist's knowledge, the advisor directed the accountant to make the checks payable to Greystone Marketing, a company owed by the advisor. The accountant was thus not acting at the plan's direction but using his own judgment to follow the advisor's instructions. This made the accountant a fiduciary subject to ERISA's fiduciary rules and exposed him to potential liability for the plan's losses.

The court then turned to the issue of whether the dentist's state law claims against KCL and Sunset were preempted. The advisor had encouraged the plan to buy investment products sold by these companies and, indeed, the advisor's recommendations were almost entirely limited to products sold by KCL and Sunset. The court ruled that KCL and Sunset had an independent state law duty to the plan to supervise the advisor (a negligent supervision claim) that was not preempted by ERISA. A vicarious liability claim, however, was preempted. The difference for the court seemed to be that negligent supervision claim was not based on the advisor's behavior, but the behavior of KCL and Sunset.

Wages, Not Capital

As the Philadelphia Phillies turn around their season and the Eagles face a T.O. hold-out, thoughts turn naturally to the tax treatment of signing bonuses. The IRS ruled at the end of 2004 that signing bonus for a baseball contract are wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and for income tax treatment. The ruling specifically revoked older rulings that signing bonuses that were not contingent on performance of future services could be treated as "capital" taxed at lower capital gains rates and were not subject to FICA and FUTA. The new ruling also applies to bonuses paid to union members when CBAs are ratified, so at least there is equal treatment of sports stars and ordinary working people.

The rationale for the ruling was that a signing or ratification bonus is ordinary income because it is payable in connection with the establishment of an employment relationship. Under the now revoked ruling, bonuses that were not contingent on the performance of past or future services did not meet the definition of wages. That argument is no longer viable.

In T.O.'s case, he received a signing bonus of roughly $7.5 million early in 2004 when he signed with the Eagles. That signing bonus theoretically was contingent on T.O.'s playing for the Eagles, unless he was injured. So that bonus likely was considered as wages even under older IRS rulings. T.O.'s contract, however, also calls for a "roster bonus" of approximately $6 million if he is on the roster as of a date certain in 2006. Perhaps T.O. assumed that roster bonus would be treated as capital gains and taxed at the lower capital gains rate. Now it is clear that any bonus paid in connenction with employment meets the definition of wages. Perhaps it is no coincidence that T.O.'s hold out came after the IRS ruling.

Pension Plan Accounting

As reported in the New York Times today, United's pension plans were in trouble years before it filed for bankruptcy, but pension funding rules permitted United to treat the plans as if they were safe and sound. ERISA pension funding rules create opportunities for plan sponsors to report their plans as fully funded (or close to fully funded) even though analysis of the plan under SEC accounting rules show that the plans are seriously underfunded. The discrepancy between SEC and ERISA accounting rules is nothing new and United's actions were perfectly legal. ERISA accounting rules essentially permit plan sponsors to smooth out over time their funding obligations because it was assumed that the plans would be able to pay plan benefits over long time periods, so spikes and valleys in asset valuations could be ignored. However, the economy has changed since 1974, when ERISA was enacted and the losses suffered in the financial markets in recent years has now exposed problems that Congress now needs to address.

It was the failure of a number of pension plans in the 1960's and early 1970's that led to ERISA. Now, there appears to be a new pension plan crisis perhaps analagous to the problems faced by the savings and loan industry in the 1980's. At this juncture, the PBGC, and by implication, the American taxpayer, is at risk to bear more and more of the burden of "private" pension plans.

Retiree Benefits in Bankruptcy

The Bankruptcy Code has a special provision that prevents the bankrupt employer from unilaterally modifying or terminating retiree medical, accident or death benefits without either a court order or agreement of the retiree's authorized representatives. Typically, this provision, known as Section 1114, comes into play when bankrupt companies seek to modify or end a medical benefit plan for unionized employees. However, the Third Circuit recently ruled that Section 1114 protected a special retiree benefit plan for a company's top executives, even though the company fired the executives before they could officially retire. In Re: General DataComm Industries, Inc.

The executives were founders and key employees of General DataComm Industries, Inc. an dall were over age 65. The executives participated in a benefit plan that provided payment of the annual premium for long term care insurance coverage for the life of each participant and his or her spouse. The benefit plan also provided that each executive and spouse would receive lifetime coverage under the company's health insurance plan. A few years later, the company filed for bankruptcy, sought to "reject" the benefit plan under Section 365 of the Bankruptcy Code and fired the executives. The executives argued that the benefit plan was protected by Section 1114 and could not be rejected. The company argued that Section 1114 applies to "retired employees" only, so because the executives were fired, they never retired and did not qualify as "retired employees."

The Third Circuit sided with the executives. It was clear from the benefit plan that the intent of the DataComm and the executives was that the executives would receive the benefits unless they were terminated for cause. Moreover all of the executives were on the verge of retirement. Under those circumstances, the termination of the executive's employment constituted a "forced retirement" that qualfied the executives as "retired employees." In short, the Court would not permit DataComm to "deliberately interfere with [the executive's] retirement benefits."

Although not mentioned in the decision, Section 510 of ERISA also prevents employers from firing employees with the purpose of interfering with the employee's ability to secure retirement benefits. The Court's use of the term "interfere" suggests that the judges might have been thinking along those lines.

It will be interesting to see how courts will apply DataComm in other situations where a bankrupt company seeks to reduce retiree medical benefit liability by firing employees, whether at the executive level or below.

More on Pension Plan Overpayments

Retirees faced with demands for repayment of overpayments should consult competent legal counsel, or at the very least, file an appeal with the plan administrator and request all documents that the plan administrator reviewed in reaching its decision. The ERISA claims procedures are very clear: the plan administrator must provide the claimant with all documentation relevant to the claim. This would include at a minimum, the plan document and the documents the plan administrator used to calculate the overpayment. To the extent that the plan administrator based its decision on a review of merger transaction documents, those documents may be relevant as well. In short, by taking advantage of ERISA’s claims procedures, retirees may be able to obtain the documentation necessary to prove that there was no overpayment.

Pension Plan Overpayments

This is the opening post of "For Your Benefit", a blog dedicated to following and commenting on litigation of employee benefit issues.

On Wednesday, the Wall Street Journal featured a front page article on retirees whose pension plans were suffled from employer to employer as a result of various corporate transactions over the years. Now, many retirees are receiving letters from the pension plan administrator demanding payment of "overpaid" pension benefits. It seems that employers are now enlisting the services of third parties to audit plans to determine whether retirees are receiving the correct benefit. While an audit is not inherently anti-participant (it can uncover underpayments as well as overpayments), the results can leave retirees bewildered and scared, having come to rely on a certain benefit payment in ordering their financial affairs.