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Employee Benefits Developments March 2005

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CASES

Directed Trustee Granted Summary Judgment in WorldCom ERISA Action. The U.S. District Court for the Southern District of New York granted summary judgment for Merrill Lynch Trust Co. FSB in an action brought by WorldCom’s Internal Revenue Code (IRC) § 401(k) plan participants for breach of fiduciary duty. Under the terms of plan documents and the trust agreement between Merrill Lynch and WorldCom, the court held Merrill Lynch was a directed trustee under § 403(a) of ERISA that was required to invest funds as directed, was not obligated to review the soundness of any investment or direction it received, and was explicitly relieved of liability for following directions. Relying on guidance provided in Internal Revenue Service (IRS) Field Assistance Bulletin 2004-03 (see our January 2005 Employee Benefit Developments) on the duty of a directed trustee to inquire into the prudence of investment decisions, the court held Merrill Lynch did not violate its duty not to comply with a direction from a named fiduciary that it knows or ought to know is a breach of that named fiduciary’s duties. The court held “a directed trustee has a fiduciary duty of inquiry under ERISA when it knows or should know of reliable public information that calls into serious question the company’s short-term viability as a going concern.” The court held the plan participants had not shown questions of fact as to whether reliable public information existed that called into serious question the short-term viability of WorldCom as a going concern. In re WorldCom Inc. ERISA Litigation (S.D.N.Y. 2005)

Severance Benefits Described in E-mail Are Not Covered Under ERISA. After a period of employment negotiations with Bay Capital Corporation, James Emery received an employment offer in an e-mail setting out the terms of employment that included reimbursement for business travel and severance payment equal to six months salary. Mr. Emery subsequently worked for Bay Capital for a year before his position was terminated for reasons unrelated to his performance or conduct. After being terminated, Mr. Emery submitted a request to Bay Capital for reimbursement of his business travel expenses and severance pay in accordance with his employment agreement. After Bay Capital refused, Mr. Emery filed suit against Bay Capital in state court in Tennessee claiming breach of contract and violations of state wage law. Bay Capital removed the action to federal district court, asserting preemption under ERISA and moved to dismiss the case. To establish the existence of “an ongoing administrative scheme”, Bay Capital argued the e-mail containing the severance benefits could reasonably be interpreted as allowing periodic payments over six months. The U.S. District Court for the District of Maryland held “[s]imply continuing to pay Plaintiff’s salary for six months after his termination, presumably out of Defendant’s general fund, does not require the establishment of a separate, ongoing administrative scheme to administer these severance benefits.” The federal district court held Bay Capital’s promise (via e-mail) to Mr. Emery to provide severance pay did not create a “benefit plan” that is subject to ERISA and thus is not preempted by ERISA. Emery v. Bay Capital Corp. (D. Md. 2005)

Outsourcing Did Not Violate ERISA. Honeywell Federal Manufacturing and Technologies LLC was a government contractor operating a Kansas City, Missouri, plant for the U.S. Department of Energy. In 2000, Honeywell submitted a bid to the Energy Department to retain its status as plant manager. Honeywell decided to outsource the facilities and engineering groups to Burns and McDonald. Dallas Register ceased to be a Honeywell employee in January 2001 when he accepted an offer of employment at a subsidiary of Burns and McDonald as part of the outsourcing. Burns and McDonald’s benefit package did not provide a defined benefit plan like Honeywell, but provided a defined contribution plan. Mr. Register claimed he and others lost their right to future benefit accruals and retiree medical benefits as a result of the outsourcing. Mr. Register’s claims were denied by the federal district court, and he appealed to the 8th Circuit claiming interference with his pension rights under § 510 of ERISA. Section 510 makes it unlawful to discharge a plan participant for the purpose of interfering with the obtainment of a right to which such participant may become entitled under the plan. The federal appellate court ruled in favor of Honeywell and held Honeywell provided legitimate nondiscriminatory reasons for its outsourcing decision, having presented evidence that it was unhappy with management of the facilities and utilities engineering group and that it was advised by a consultant that outsourcing the groups would increase the company’s chances of retaining the Department of Energy contract. Register v. Honeywell Federal Manufacturing & Technologies LLC (8th Cir., 2005)

Related Claims Not Subject to Plan’s Arbitration Clause. Joseph Simon was employed from 1989 to 2002 by Warner-Lambert Company, which was acquired by Pfizer, Inc. Warner-Lambert maintained a severance plan following the acquisition that would pay enhanced benefits if an employee was constructively discharged based on a change in job duties. The plan would not pay enhanced benefits to an employee who was discharged for just cause. Mr. Simon’s employment was terminated for accessing information contained in his manager’s computer without authorization. Mr. Simon claimed the information he accessed would have informed him whether or not he was entitled to enhanced severance benefits based on a change in his job duties. Pfizer, Inc. denied enhanced severance benefits to Mr. Simon. The severance plan contained a provision under which a dispute of a finding of a termination for just cause requires a participant to follow a process that includes arbitration. Before going through this process, Mr. Simon brought an action in federal district court alleging that he was retaliated against for attempting to determine his rights and benefits under an ERISA plan in violation of § 510 of ERISA and that he failed to receive his proper COBRA notice. The federal district court ruled Mr. Simon did not need to exhaust his administrative remedies on the basis of futility and that his
§ 510 claim is not subject to the arbitration provision of the severance plan. On appeal, Pfizer, Inc. argued Simon’s claims must be dismissed because the severance plan arbitration provision should be enforced because his § 510 retaliation claim is just a recharacterization of a claim for benefits under the plan. The 6th Circuit ruled against Pfizer, Inc., finding Mr. Simon’s claims were not claims under the plan that had been recharacterized merely to avoid arbitration and because the plan arbitration provision did not refer to ERISA or COBRA, these claims were not within the scope of the severance plan’s arbitration provision. Simon v. Pfizer Inc. (6th Cir. 2005)

Denial Based on Lack of Objective Test for Pain Held to Be Arbitrary. Crystal Stith was an employee of a major national law firm from 1981 through 1998. She stopped working and applied for disability benefits due to the effects of interstitial cystitis, a condition for which there is no cure. In support of her position, she provided numerous medical records from several physicians documenting her condition. She was taking several prescription pain medications to try to alleviate the pain she suffered as a result of her condition. Ms. Stith was determined to be disabled by the Social Security Administration and was receiving disability benefits. The insurance company which served as plan administrator initially approved her claim for disability benefits, but later engaged an independent specialist in urology to review the medical records submitted by Ms. Stith and to review surveillance video tapes of her activities. The specialist indicated Ms. Stith had been suffering from a medical condition for some time and had been receiving a combination of pain relievers and other drugs that did not seem to relieve her symptoms. The specialist found Ms. Stith’s pain was not disabling, stating “since pain is a totally subjective finding, the medical records, tests and exam performed do not provide objective evidence for the pain syndrome.” Based on this statement that there is no objective test for pain, the plan administrator terminated Ms. Stith’s disability benefits. The federal district court reviewed the plan administrator’s decision under a “heightened arbitrary and capricious” standard because a conflict of interest is presumed to exist where an insurance company both determines eligibility for benefits and pays out those benefits from its own funds. Based on the medical records, which were consistent in finding Ms. Stith suffered from a medical condition, and that the only reason for denial of disability benefits was the specialist’s determination that pain is subjective and can not be measured, the court held the plan administrator acted unreasonably in its denial of benefits. Stith v. Prudential Insurance Co. of America (D. N.J. 2005)