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1997 Term, Number 14 / April 27, 1998

Today the Court granted certiorari in one case of interest to the business community. Amicus briefs in support of the petitioners are due on June 11, 1998, and amicus briefs in support of the respondents are due on July 13 (because July 11 is a Saturday). In addition, on its April 6 and 20 Order Lists, the Court requested the views of the Solicitor General in two cases of interest to the business community. Any questions about these cases should be directed to Alan Untereiner (202-778-0656) or Evan Tager (202-778-0618) in our Washington office.

ERISA Use of Surplus Assets in Defined-Benefit Plan Plan Termination. A pension or welfare-benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1001, et seq., can be funded in part through employee contributions (a "contributory" plan) or solely through employer contributions (a "noncontributory" plan). The Supreme Court granted certiorari in Hughes Aircraft Co. v. Jacobson, No. 97-1287, to consider whether retired participants in a contributory ERISA pension plan who allege that their employer amended the plan to use surplus assets to establish a retirement incentive program and a new noncontributory retirement plan, both of which benefited the employer and employees who were not participants in the contributory plan, may state a claim for breach of fiduciary duty as well as for other violations of ERISA.

Since 1955, Hughes Aircraft Company (Hughes) has sponsored a pension plan for its workers. The plan was originally created as a "defined-benefit" plan, in which Hughes guaranteed participants a fixed level of benefits upon retirement, regardless of the plan's investment success or failure. Under ERISA, a defined-benefit plan is fundamentally different from a "defined-contribution" plan, in which contributions are fixed and participants receive whatever investment returns those contributions generate.

By the late 1980s, the assets of the Hughes plan vastly exceeded its accrued liabilities. Accordingly, in 1987 Hughes suspended its contributions to the plan. In 1989, the company amended the plan to provide incentives to certain employees to retire early. In 1991, Hughes again amended the plan. New participants were no longer allowed to contribute to the plan and were entitled to a correspondingly lower level of benefits upon retirement. Plan participants who retired prior to the 1991 amendment continued to receive the higher level of defined benefits, and participants who had not yet retired as of that date could choose between the contributory and noncontributory benefits structure.

In 1992, five retired Hughes employees, all plan participants under the original contributory plan, brought suit against Hughes alleging that they were entitled not only to their defined benefits under the plan but also to all "excess" assets in the plan. Plaintiffs contended that the creation of the noncontributory benefit plan operated to terminate the original plan, because it closed the old plan to new members. As a result, plaintiffs argued, Hughes was required to distribute the plan's "surplus" assets equitably among the plan participants.

Plaintiffs brought several other claims based on the 1989 and 1991 amendments. They contended that both amendments violated ERISA's anti-inurement provision, 29 U.S.C. 1103(c)(1), which provides that "assets of a plan shall never inure to the benefit of any employer." The amendments creating the early retirement package and noncontributory pension plan did so, according to plaintiffs, because Hughes reduced its labor costs through early retirement and was able essentially to increase new employees' wages by offering a noncontributory pension plan. Plaintiffs relied on essentially the same reasoning to support their claim that the amendments constituted a breach of Hughes' fiduciary duties under ERISA (see id. 1104, 1106). Finally, plaintiffs claimed that the 1991 amendment may have deprived plan participants of vested, nonforfeitable benefits, in violation of 29 U.S.C. 1053(a). This could occur if the amount of a plan participant's contribution plus "appropriate interest" (see id. 1054(c)(2)(C)), i.e., statutory interest, exceeds the participant's benefits under the plan.

In an unpublished opinion, the United States District Court for the Central District of California dismissed the complaint for failure to state a claim upon which relief could be granted. The district court ruled that participants in a defined-benefits plan are entitled to nothing more than those benefits until the plan is terminated. The plan had not been terminated here, the court reasoned, because that can be accomplished only through procedures specified in ERISA (see 29 U.S.C. 1341, 1342). The district court also rejected plaintiffs' breach of fiduciary duty claims, concluding that an employer's fiduciary duties are not implicated by plan amendments.

A divided panel of the Ninth Circuit reversed. 105 F.3d 1288 (1997). The majority concluded that the issue whether the plan was terminated was one of fact, improperly resolved by the district court in response to Hughes' motion to dismiss. The court also held that where, as here, a plan is funded by both employee and employer contributions, the anti-inurement provision is violated when an employer restructures the plan in a manner that benefits either itself or employees who have not yet participated in the plan. The court also found actionable plaintiffs' breach of fiduciary duty claims, distinguishing Lockheed Corp. v. Spink, 116 S. Ct. 1783, 1789 (1996), in which the Supreme Court held that "[p]lan sponsors who alter the terms of a plan do not fall into the category of fiduciaries." Finally, the majority reasoned that plan participants could have a vested right to income generated by their contributions if that income exceeds their defined benefits under the plan. For such participants, the majority reasoned, the 1991 amendment resulted in a violation of the vesting and nonforfeiture requirements of 29 U.S.C. 1053. Judge Norris dissented.

This case should be of great interest to businesses with ERISA plans that are partly funded through employee contributions, including pension plans, 401(k) plans, disability plans, and medical plans. In resolving this case, the Court may clarify when such plans are terminated, the duties owed by employers to participants in such plans, and the rights of plan participants to surplus plan assets.

* * * * *

The Court invited the Solicitor General to express the views of the United States in the following cases of interest to the business community:

1. Practice Management Information Corp. v. American Medical Association, No. 97-1254: The question presented is whether a coding system for identifying medical procedures that was authored and copyrighted by the AMA became an uncopyrightable law when the federal government adopted it for mandatory use in reporting physician services under the Medicare and Medicaid programs. Decision below: 121 F.3d 516 (9th Cir. 1997).

2. Cleveland v. Policy Management Systems Corp., No. 97-1008: The question presented is whether the application for or receipt of disability benefits under the Social Security Act creates a rebuttable presumption that the claimant or recipient is judicially estopped from asserting that he or she is a "qualified individual with a disability" under the Americans with Disabilities Act, 42 U.S.C. 12112(a). Decision below: 120 F.3d 513 (5th Cir. 1997).

Copyright 1998 Mayer, Brown & Platt. This Mayer, Brown & Platt publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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