Illusory Promise of Comparable Employment Doesn’t Bar Plan’s Post-Employment Benefits

New Jersey Law Journal

U.S. Third Circuit – LABOR LAW – Pensions

Howley v. Mellon Financial Corporation, No. 08-1748; Third Circuit; opinion
by McKee, U.S.C.J.; filed August 31, 2010. Before Judges McKee, Chagares and Nygaard. On appeal from the District of New Jersey. [Sat below: Judge Hochberg.]
DDS No. 25-8-9391 [32 pp.]

The program administrator’s reading of defendant’s displacement program, which nullified the temporal requirement of the sale-of-business exception, was an abuse of discretion.

Robert Howley was employed for many years by Buck Consultants, a subsidiary of Mellon Financial Corporation (MFC). He participated in MFC’s Displacement Program (DP), a welfare benefit plan subject to the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-461. It provides benefits to an employee of MFC or its subsidiaries whose employment ceases due to technological change or other business reason not related to individual performance. The benefits include continued eligibility to receive benefits under other MFC benefit plans, including pension plans. However, under the “sale of business” exception, a subsidiary’s employee is ineligible for DP benefits if his employment ends due to MFC’s sale of the subsidiary to a company that “initially” provides comparable employment.

MFC sold Buck to Affiliated Computer Systems Inc. (ACS). The contract of sale provided that ACS would continue to employ Buck employees, including Howley, and that this employment would initially not involve a significant change in job location, duties or compensation, However, at 10:00 a.m. on the day after the sale, ACS informed Howley and 99 other former Buck employees that it was terminating their employment.

Howley filed a claim for DP benefits, which was denied by the program manager and affirmed by the program administrator.  Using a “snap shot” approach, she concluded that the sale-of-business exception applied because the contract of sale said his job duties, pay and location would be unchanged immediately after the closing.

Howley brought suit, asserting claims for, inter alia, benefits and for unlawful discrimination under ERISA.  During discovery, it came to light that Buck managers had given ACS the names of 100 employees, including Howley, whom they believed could be terminated effective immediately after the closing without causing harm to the business.

After discovery, Howley moved for partial summary judgment on his claim for benefits.  Applying a heightened arbitrary and capricious standard of review because MFC operated under a conflict of interest since it sponsored and administered the DP, and relying heavily on the evidence that Buck had helped plan Howley’s termination before the sale, the court held that preplanned immediate termination was not a job offer that satisfied the requirements of the exception and granted his motion.

Defendants appeal.

Held: The administrator’s conclusion that the sale-of-business exception was applicable and barred DP benefits for plaintiff nullified the exception’s temporal requirement and rendered the term “initially” meaningless and therefore was an abuse of discretion. The district court’s order granting Howley summary judgment on his claim is affirmed.

The Circuit Court says the district court erred by applying a heightened standard of review. After Metropolitan Life Ins. Co. vs. Glenn, 128 S. Ct. 2343 (2008), courts reviewing ERISA plan administrators’ decisions in civil enforcement actions under 29 U.S.C. § 1132(a)(1)(B) should apply a deferential abuse-of-discretion standard and any conflict of interest is only one of the factors in considering if there was an abuse of discretion.

The court also agrees with defendants that when reviewing an administrator’s decision, a court may only consider the evidence that was before the administrator when it made the contested decision.

However, it says this rule is not without exceptions.  A court may consider evidence of potential conflicts of interest that is not in the administrator’s record.  The extra-record evidence of Buck’s help in planning the immediate terminations was relevant to assessing the extent of MFC’s conflict of interest and, by inference, the effect of that conflict on its decision-making process.

Nonetheless, the court says the district court gave more weight to this evidence than was appropriate.  Where it is not clear why Buck’s managers colluded with ACS or at whose behest, and MFC denied any knowledge of its subsidiary’s actions, there is a genuine issue of material fact regarding MFC’s role in the duplicity.

The court declines to remand the matter, however, because it says the denial of Howley’s claim for benefits clearly was an abuse of discretion.

MFC’s DP was designed to help displaced employees bridge the gap between periods of employment or retirement income.  The crux of the language in the sale-of-business exception is the word “initially.”  The court says it connotes some temporal requirement.  Therefore, employment satisfies the exception only if it continues for some amount of time that is reasonable in light of the purpose of the DP.

The program administrator said she evaluated the applicability of the exception based solely on the buyer’s representations in the sale agreement.  However, in concluding that ACS’s entirely undefined commitment was sufficient to make the exception applicable, she nullified the exception’s temporal requirement.  Under her approach, so long as a contract of sale includes a promise, no matter how illusory, to continue an employee’s employment, that employee is ineligible for DP benefits.

Use of  a “snap shot” approach does not relieve the administrator of her duty to ascertain whether the temporal requirement of the sale-of-business exception is satisfied. She must take into account the reality of what the buyer has actually committed to do.

The court finds that the keystone of ERISA’s protections is that when employers choose to offer benefits, they must administer those benefits reasonably.  Administering benefits in a way that controverts a plan’s stated purpose, rendering plan language meaningless and creating benefits that can only exist on paper, is unreasonable.

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