ERISA Obligations Related to Promised Pension and Health Benefits

Chapter 4 Cite as 22 Energy & Min. L. Inst. ch. 4 (2002) ERISA Obligations Related to Promised Pension and Health Benefits Ronald E. Meisburg Meikka A. Cutlip Heenan, Althen & Roles, LLP Washington, D.C. Allison S. Williams Heenan, Althen & Roles, LLP Charleston, WV Synopsis 4.01. Introduction... 97 4.02. Summary of Pertinent ERISA Provisions... 98 4.03. ERISA Fiduciary Duties... 99 4.04. When Is an Employer also an ERISA Fiduciary?...101 4.05. When Do Health Care Benefits Vest Under the Terms of an ERISA Plan?...104 4.06. What If the Employer Creates a New Employee Welfare Plan?...109 4.07. When Is There a Duty to Disclose Future Changes to a Benefits Plan?... 110 4.08. What If the Claim for Retiree Medical Benefits Is Based on a Plan Adopted Prior to ERISA?... 114 4.09. Conclusion... 114 4.01. Introduction. The Employee Retirement Income Security Act 1 (ERISA) was enacted to provide standards related to the formation, funding, and administration of employee benefit plans. For the most part, ERISA preempts state laws and any causes of action arising under state law that relate to employee benefit plans. There has been, however, a veritable explosion of federal court litigation and legal developments under ERISA since it was signed into law in 1974. One of the most frequently litigated issues involves alleged promises by employers to provide lifetime health care benefits to employees who 1 29 U.S.C. 1001 et seq.

4.02 ENERGY & MINERAL LAW INSTITUTE retire (and their dependents). Employers typically sponsor several different types of employee benefit plans. These benefits may include retiree pension and health benefit plans. In administering such plans, employers occupy the role of a fiduciary under ERISA. When an employer misapprehends its status as a fiduciary, or fails to conform its conduct to its fiduciary obligations, then it may face substantial liability for breach of fiduciary duty to the beneficiaries. This article will focus on selected cases presenting various theories under which retirees have pursued claims for health benefits and the legal issues presented by and disposition of those claims. 4.02. Summary of Pertinent ERISA Provisions. In order to better comprehend the basis for such claims, it is necessary to be aware of some of the key provisions of ERISA and its implementing of regulations. 2 There are two general types of employee benefit plans governed by this statute pension benefit plans and welfare benefit plans: ERISA distinguishes between pension plans and welfare plans. A pension plan provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of... employment or beyond.... 29 U.S.C. 1002(2). Welfare plans, in contrast, include plans established or... maintained for the purpose of providing... medical, surgical, or hospital care or benefits.... Id. 1002(1). 3 ERISA plans are required to be in writing and must be available to beneficiaries for review upon request. 4 In addition, a summary of the ERISA plan, known as a Summary Plan Description (SPD), must be distributed to each plan participant. 5 ERISA requires that an SPD shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the 2 Id. 3 Sprague v. General Motors Corp., 133 F.3d 388, 400 (6th Cir.), cert. denied, 524 U.S. 923 (1998). 4 29 U.S.C. 1102(a). 5 Id. 98

ERISA OBLIGATIONS 4.03 plan. 6 The SPD must also explain in a manner calculated to be understood by the average plan participant.... the circumstances which may result in disqualification, ineligibility, or denial or loss of benefits. 7 A summary plan description must not have the effect [of] misleading, misinforming or failing to inform participants and beneficiaries. 8 ERISA s compliance obligations apply to any person determined to be a fiduciary of an ERISA plan. Under ERISA, the term fiduciary is defined as: [A] person... with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. 9 4.03. ERISA Fiduciary Duties. Among other duties imposed on fiduciaries is that of loyalty, i.e., acting solely in the interest of the participants and beneficiaries of the plan. 10 An ERISA fiduciary also has the obligation to provide accurate and timely information to beneficiaries of ERISA covered benefit plans. 11 In addition, though not specifically enumerated in ERISA s statutory text as fiduciary duties, a number of obligations have been placed on fiduciaries by the courts based on the language of ERISA. Among them is the duty to communicate truthfully with participants and beneficiaries 6 29 U.S.C. 1022(a). 7 Id. 1022. 8 29 C.F.R. 2520.102-2(b). 9 29 U.S.C. 1002(21)(A). 10 Id. 1104(a)(1). 11 See id. 1102. 99

4.03 ENERGY & MINERAL LAW INSTITUTE and to disclose certain facts that, if known, could have an effect on the participant s decisions relating to the provision of future plan benefits to participants. 12 Individual plaintiffs have the right to seek equitable relief for a breach of fiduciary duty under 29 U.S.C. Section 1132(a)(3). 13 In order to bring a successful breach of fiduciary duty claim, a plaintiff must show the following: 1. That the employer s representative was acting in a fiduciary capacity when making the challenged misrepresentations; 2. That these statements by the employer constituted material misrepresentations; and 3. That plan participants relied on these misrepresentations to their detriment. Generally, ERISA cases brought by beneficiaries alleging a breach of fiduciary duty by an employer make a number of allegations: (1) that the plaintiffs employer acted as a fiduciary when offering advice or information about a plan s benefit terms and about the company s future intentions with regard to the plan; (2) that the employer or its agents, acting in a fiduciary capacity, breached their fiduciary duty by either making affirmative material misrepresentations about the company s intentions or by knowingly failing to clarify the employee s misunderstanding of the plan s terms; and (3) that, as a result, the plan failed to deliver promised benefits to plan participants. Most of the cases discussed in this chapter involve some variation on the following threshold questions: Is the employer s representative in this situation acting as a fiduciary? If so, is there a duty under ERISA to disclose the employer s contemplated changes to the plan? 12 See, e.g., Varity Corp. v. Howe, 516 U.S. 489 (1996). 13 See id. at 507; McMunn v. Pirelli Tire, LLC, 2001 U.S. Dist. LEXIS 14386, at *55 (D. Conn. July 19, 2001). 100

ERISA OBLIGATIONS 4.04 Does any such duty to disclose apply to all employees or does it only apply upon specific inquiry by an individual employee? If there is a duty to disclose, did the employer knowingly fail to clarify what it knew to be a currently held misunderstanding by its employees? Alternatively, did the representative make a material misrepresentation on the part of the employer with regard to the terms of the plan or the employer s intentions regarding the plan? Factually, the cases tend to center around circumstances where there is ambiguity in the language of either the benefits plan or the Summary Plan Description (SPD), where the benefits plan language and the SPD language are facially conflicting or inconsistent, or where a plan fiduciary has breached its fiduciary duties by either actively misleading or failing to disclose information to the beneficiaries of the plan. 4.04. When Is an Employer Also an ERISA Fiduciary? In Varity Corp. v. Howe, 14 the U.S. Supreme Court addressed a number of issues, including the issue of when an employer who sponsors or offers an ERISA benefit plan to its business subsidiary also becomes an ERISA fiduciary with respect to that plan. In Varity, a parent corporation (Varity) created a subsidiary (Massey Combines), to which it transferred its less financially viable business lines of another subsidiary (Massey-Ferguson). Massey Combines also assumed Massey-Ferguson s liability to provide health care and other non-pension benefits to various Massey-Ferguson employees and retirees. Employees transferred voluntarily to Massey Combines, having been induced by misleading and false statements of Varity and Massey-Ferguson representatives that Massey Combines was financially secure. 14 Varity Corp. v. Howe, 516 U.S. 489 (1996). 101

4.04 ENERGY & MINERAL LAW INSTITUTE When Massey Combines went into receivership two years later, its employees and retirees lost their benefits. Massey Combines employees and retirees sued Varity and Massey-Ferguson seeking benefits they would have received had they remained under Massey-Ferguson s plan. The plaintiffs sued under Section 502(a)(3) of ERISA, 29 U.S.C. Section 1132(a)(3), which provides that a civil action may be brought: by a participant, beneficiary or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan. 15 Essentially, plaintiffs claimed that Varity and Massey-Ferguson were acting not only as employers, but as ERISA fiduciaries, when they induced the plaintiffs to join Massey Combines. The plaintiffs prevailed in the lower federal courts and the Supreme Court granted certiorari on the following issues: 1. Was Varity/Massey-Ferguson acting as a fiduciary or as an employer in its statements to employees? 2. If it were acting as a fiduciary, did Varity/Massey-Ferguson breach its fiduciary duties under ERISA? 3. Did Section 502(c)(3), 29 U.S.C. Section 1132(c)(3) allow plaintiffs to sue for relief for themselves as opposed to an ERISA plan? 16 The Supreme Court held that Varity/Massey-Ferguson was acting in a fiduciary capacity, and not merely as an employer, in its communications with the plaintiffs. The statements of Varity/Massey Ferguson about the 15 29 U.S.C. 1132(a)(3). 16 The court held that plaintiffs were entitled to sue under ERISA 502(a)(3), 29 U.S.C. 1132(a)(3) for individual relief, as opposed to seeking relief solely for the plan. Section 502(a)(3), 29 U.S.C. 1132(a)(3) is a catchall provision to allow participants to obtain appropriate relief from all ERISA Title I violations. 102

ERISA OBLIGATIONS 4.04 financial soundness of Massey Combines were intentionally closely linked with statements about the employee benefits to be offered by Massey Combines and were intended to convey the false impression that those benefits were secure. Varity intentionally connected its statements... so that its intended communication about the security of benefits was rendered misleading.... [W]e hold that making intentional representations about the future of plan benefits in that context is an act of plan administration. 17 Conveying information about the likely future of plan benefits is an appropriate fiduciary administrative function under ERISA. Such communications were made by persons in Varity/Massey-Ferguson who had authority to make such statements. Plaintiffs therefore reasonably relied on such statements as being communicated to them by Varity/ Massey-Ferguson in both its employer and fiduciary capacities. Having decided that Varity/Massey-Ferguson was acting in a fiduciary capacity, the Court then held that Varity/Massey-Ferguson violated its fiduciary duties under ERISA: ERISA requires a fiduciary to discharge his duties... solely in the interest of the participants and beneficiaries. To participate knowingly and significantly in deceiving a plan s beneficiaries in order to save the employer money at the beneficiaries expense is not to act solely in the interest of participants and beneficiaries. On its face, the language of 502(a)(3), 29 U.S.C. 1132(a)(3) is broad enough to allow individual relief for breach of a fiduciary obligation. Further, allowing plaintiffs to seek individual relief is consistent with other provisions of ERISA (e.g., 502(l), 29 U.S.C. 1132(l), which calculates certain civil penalties on the basis of sums ordered by a court to be paid by such fiduciary... to a plan or its participants and beneficiaries under materially identical language of 502(c)(5), 29 U.S.C. 1132(c)(5) (authorizing Secretary of Labor to seek such relief)). If plaintiffs could not sue under 502(c)(5), 29 U.S.C. 1132(c)(5), they would be without a remedy, since ERISA generally preempts any analogous state cause of action. We are not aware of any ERISA-related purpose that denial of a remedy would serve. 516 U.S. at 515. 17 516 U.S. at 505 (citation omitted). 103

4.05 ENERGY & MINERAL LAW INSTITUTE As other courts have held, [l]ying is inconsistent with the duty of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA. 18 In Varity, the Court specifically reserved ruling on the issue of whether ERISA fiduciaries have any fiduciary duty to disclose truthful information on their own initiative, or in response to employee inquiries. 19 Further, Varity did not address the situation where the breach of fiduciary duty arises from a good faith difference in interpretation of plan language because of latent ambiguities therein, or because of conflicts or inconsistencies between a plan document and the Summary Plan Description (SPD). However, these issues have been addressed in a growing body of case law by the lower federal courts. 4.05. When Do Health Care Benefits Vest Under the Terms of an ERISA Plan? The first claim typically made by plan participants is that their benefits vested under the terms of the plan and the employer s failure to provide those benefits results in a breach of ERISA. 20 Under ERISA, however, employee welfare plans unlike pension plans are not required to vest. Absent any promise within the plan that creates a legally vested interest in health care benefits, the employer is free to amend or terminate them unilaterally at any time. That said, nothing within the terms of ERISA specifically prohibits an employer from vesting its employee health benefits. 21 Therefore, if the employer promises to provide vested medical benefits, such a promise will be enforced by ERISA as a plan term. 22 18 Id. at 506 (citations omitted). 19 Id. 20 29 U.S.C. 1132 (improper withholding of benefits due participants). 21 Schonholz v. Long Island Jewish Med. Ctr., 87 F.3d 72, 77 (2d Cir.), cert. denied, 519 U.S. 1008 (1996). 22 See id., American Fed n of Grain Millers v. Int l Multifoods Corp., 116 F.3d 976, 980 (2d Cir. 1997). 104

ERISA OBLIGATIONS 4.05 In International Union, UAW v. Skinner Engine Co., 23 the plaintiffs claimed that they were told habitually and consistently over a course of some 20 years... that lifetime postretirement medical and life insurance benefits would be provided, 24 such that both hourly and management employees believed this to be true. The contract at issue was a series of collective bargaining agreements, each of which contained language promising, in various forms, that the company will continue to provide certain health care benefits and that life insurance shall remain at a given amount. 25 Each agreement also contained a provision limiting the term of the agreement and its clauses. In rejecting this contract interpretation claim, the Court of Appeals for the Third Circuit expressly disapproved the position taken by some circuit courts that there is a presumption, known as the Yard-Man inference, that the company and the employees intended for health care benefits to continue for life, even beyond the term of the collective bargaining agreement initially creating the benefit plan. 26 The court in Skinner recognized that if the parties members had indeed intended to vest health care benefits, as presumed under Yard-Man, they could simply have insisted on including that as a requirement in their bargaining negotiations. Instead, the court adopted the reasoning of the Court of Appeals for the Eighth Circuit, which found that it is not at all inconsistent with labor policy to require plaintiffs to prove their case without the aid of gratuitous inferences. 27 The Third Circuit determined that the employer was not liable as a plan representative where there was no evidence that it had ever given an 23 International Union, UAW v. Skinner Engine Co., 188 F.3d 130 (3d Cir. 1999). 24 Id. at 150. 25 Id. at 135-36. Collective bargaining agreements, controlled by federal law, are generally interpreted through traditional rules of contract law where such rules are not inconsistent with applicable federal labor law. See id. at 138. 26 Id. at 140; see also International Union, UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), cert. denied, 465 U.S. 1007 (1984). 27 188 F.3d at 141(quoting Anderson v. Alpha Portland Indus., Inc., 836 F.2d 1512, 1517 (8th Cir. 1988), cert. denied, 489 U.S. 1051 (1989)). 105

4.05 ENERGY & MINERAL LAW INSTITUTE employee a material misrepresentation about the duration of the plan s benefits, or that it had ever knowingly failed to correct employees mistaken assumption about the terms of the plan. Noting that a decision permitting a beneficiary to bring a successful claim for breach of fiduciary duty would not weaken the bar against using informal communications as a way to amend a formal ERISA plan, the court in Skinner went on to reject the plaintiffs claim that their employer was under some obligation to inform them that their health care benefits could change. The plaintiffs also based their breach of contract claim on the use of the terms will continue and shall remain throughout plan documents. The plaintiffs essentially argued that the language was an indication of the company s intent to vest its retirees health care benefits. The Skinner court rejected the argument, stating as follows: It cannot be said that the phrases clearly and expressly indicate vesting since there is simply no durational language to qualify these phrases. That is, the CBAs do not state that retiree benefits will continue for the life of the retiree, or that they shall remain unalterable for the life of the retiree. An equally reasonable interpretation is that the benefits will continue until the CBA expires, or that they shall remain... until the CBA expires. Indeed, the latter interpretation appears to be the more reasonable in light of the durational provisions in all of the CBAs. 28 Finally, the Skinner court rejected the plaintiffs claim that informal communications with representatives of the plan should be held as an informal amendment to the ERISA plan documents. 29 In support of their claim, plaintiffs offered the testimony of a former chief operating officer for the company, in which he stated his belief, based on actual past practices and conditions of negotiations, that the collective bargaining agreements created a vested right to health care benefits. 30 Nevertheless, 28 188 F.3d at 141. 29 See id. at 146. 30 Id. at 145. 106

ERISA OBLIGATIONS 4.05 the Third Circuit rejected this claim on the basis of the strong precedent which precludes informal amendments to ERISA plan benefit plans. 31 In addition, the court noted with approval a Seventh Circuit case (in which the testimony of union employees was rejected as subjective and self-serving ) for the proposition that the testimonies of union members as to their understanding or belief of the duration of their retirement benefits cannot as a matter of law create an ambiguity in this case. 32 Similarly, the retirees in American Fed n of Grain Millers v. Int l Multifoods Corp. 33 alleged that their employer had promised lifetime medical benefits through expired collective bargaining agreements and under the terms of the ERISA plan. The terms of the collective bargaining agreements required the company to provide its retirees with medical insurance at no cost to the retirees. The company provided the coverage during the effective dates of the collective bargaining agreements. After the agreements expired, the company did not amend its ERISA plan and continued to provide the benefits at no cost to the retirees. However, in 1992, the company amended its ERISA plan, fixing the premium it would pay at its current rate, plus an annual increase of either four percent or the percentage increase in the U.S. Medical Consumer Price Index, whichever was lower. Thus, under the amendment, if premiums increased at a rate faster than the lower of the two percentages, the retirees had to pay the difference in order to maintain medical coverage. The retirees claimed that the amendment violated the collective bargaining agreements and ERISA. 34 The Court of Appeals for the Second Circuit reiterated the general rule that an employer is generally free to modify or terminate any retiree medical benefits that were provided pursuant to a collective bargaining agreement after the expiration of the agreement. Likewise, an employer 31 Id. at 146. 32 Id. (citing Murphy v. Keystone Steel & Wire Co., 61 F.3d 560, 565 (7 th Cir. 1995)). 33 American Fed n of Grain Millers v. Int l Multifoods Corp., 116 F.3d 976 (2d Cir. 1997). 34 See id. at 978. 107

4.05 ENERGY & MINERAL LAW INSTITUTE may amend or terminate a plan providing retiree welfare benefits so long as they are not vested. Finding, however, that it would enforce promises of vested benefits, the Second Circuit had to examine the particular documents at issue in the case. 35 In examining the specific documents at issue in the case, the Second Circuit found that the collective bargaining agreements stated that retiree medical benefits could not be reduced during the term of this Agreement. 36 Thus, the promise to provide the benefits expired at the same time as the collective bargaining agreements. 37 The retirees further claimed that the benefits had vested under the ERISA plan. Upon examination of the plan, the court in International Multifoods found the plan provided that it could be amended at any time, without the consent of the insured Employees or any other person having a beneficial interest in it. 38 The retirees then claimed, however, that the Summary Plan Description (SPD) could be reasonably interpreted as promising vested benefits. Under Second Circuit law, the SPD controls when there are inconsistencies between the plan and the SPD. Therefore, the International Multifoods court was required to examine whether the Summary Plan Description promised benefits contrary to the plan. 39 Upon examination, the Second Circuit found the Summary Plan Description stated that the the entire cost of the coverage is paid by Multifoods 40 and, in a subsequent location, stated PLAN COSTS Paid by Employer. 41 The Second Circuit concluded that these statements simply indicated who would pay the costs of the plan at the time the SPD was published and that the statements could not reasonably be interpreted as promising vested benefits. Therefore, in International Multifoods, the 35 See id. at 979-80. 36 Id. at 981. 37 Id. 38 Id. at 982. 39 See id. 40 Id. 41 Id. 108

ERISA OBLIGATIONS 4.06 Second Circuit determined that the retirees had not been promised lifetime medical benefits. 42 4.06. What If the Employer Creates a New Employee Welfare Plan? In DeBoard v. Sunshine Mining & Ref. Co., 43 the Tenth Circuit found that the employer had promised health insurance benefits to a specific group of retirees through the creation of a new employee welfare plan. In DeBoard, the employer (Woods) had sent letters promising lifetime health insurance benefits to employees as an inducement for participating in a voluntary early retirement program. Several years later, the employer terminated the coverage. The Tenth Circuit decided that the employer could not revoke its promise to provide medical insurance to that specific group of retirees. The Tenth Circuit s decision, however, rested on the court s conclusions that the letters satisfied the minimum requirements for establishing an ERISA plan and that the employer had intended to create a new employee welfare benefit plan for a specific group of employees, i.e., those who agreed to participate in the early retirement plan. Even though the employer had provided the letters for informational purposes only, the Tenth Circuit determined: Not only did the letter specify a funding mechanism for the plan (i.e., that Woods would pay the health insurance premiums), they also allocated ongoing operational and administrative responsibilities to the employer. In particular, Woods was required under the plan to regularly pay the health, dental, and life insurance premiums for plaintiffs, and was further required to allocate company resources to do so.... In addition to the periodic demands on Woods assets, the plan also required Woods to keep track of when each retiree died because the plan expressly provided for more limited survival benefits for surviving spouses 42 See id. 43 DeBoard v. Sunshine Mining & Ref. Co., 208 F.3d 1228 (10th Cir. 2000). 109

4.07 ENERGY & MINERAL LAW INSTITUTE of retirees. Aside from establishing an administrative scheme, the documents sufficiently described the intended benefits (lifetime health insurance benefits, etc.), the intended class of beneficiaries (persons participating in the voluntary early retirement subsidy), and the procedures for receiving benefits. Finally, in light of all the surrounding facts and circumstances, a reasonable employee would [have] perceived an ongoing commitment by the employer to provide employee benefits. 44 Therefore, while the Tenth Circuit upheld the promise of lifetime medical benefits to the retirees, it did so only because the employer had created a new, separate ERISA plan to cover these employees. 4.07. When Is There a Duty to Disclose Future Changes to a Benefits Plan? In Sprague v. General Motors Corp., 45 the Sixth Circuit held that an employer has no obligation to forecast the future. In Sprague, roughly half of the plaintiffs were early retirees who were offered, and accepted, an early retirement package from General Motors (GM), their employer. When GM later altered the benefits provided, the early retirees sued under seven different theories, among them, that GM had breached its fiduciary duty to them and that GM had breached the contract granting them benefits. 46 With regard to the breach of fiduciary duty, the court noted that most, but not all, of the Summary Plan Descriptions (SPDs) unambiguously reserved GM s right to amend or alter the terms of the plan and, more importantly, that the plan documents themselves clearly reserved this right. 47 The court rejected the plaintiffs argument that internal inconsistencies within the Summary Plan Description created an ambiguity that must be resolved through the use of extrinsic evidence. 48 For 44 Id. at 1238-39 (internal citations omitted). 45 Sprague v. General Motors Corp., 133 F.3d 388 (6th Cir.), cert. denied, 524 U.S. 923 (1998). 46 Id. at 395. 47 Id. at 401. 48 Id. 110

ERISA OBLIGATIONS 4.07 example, plaintiffs argued that the summaries indicated that health care would be provided by the company at no cost to the participants for [their] lifetime : We have rejected this argument in the past, and we reject it again now. We see no ambiguity in a summary plan description that tells participants both that the terms of the current plan entitle them to health insurance at no cost throughout retirement and that the terms of the current plan are subject to change. 49 The decision not to include a statement about the amendment or termination of benefits in the SPD does not trump the clear plan statement reserving that right. 50 Further, ERISA does not require employers to include an express statement in the plan documents that health care benefits do not vest. 51 Although the facts of Sprague bear a passing similarity to those of the Varity case, in which the employer actively misled its employees in order to induce them into transferring their retirement benefits rights into a newly created subsidiary that Varity knew would likely fail, the Sprague court distinguished the two situations. There was no evidence that GM had actively misled its employees. Instead, it had instructed them that, under the terms of the then-current plan, benefits would continue for their lifetimes at GM s expense: GM s failure, if it may properly be called such, amounted to this: the company did not tell the early retirees at every possible opportunity that which it had told them many times before namely, that the terms of the plan were subject to change. There is, in our view, a world of difference between the employer s deliberate misleading of employees in Varity Corp. and GM s failure to begin every communication to plan participants with a caveat. 52 49 Id. 50 Id. 51 Id. at 401-02. 52 Id. at 405. 111

4.07 ENERGY & MINERAL LAW INSTITUTE In sum, the Sixth Circuit, through the Sprague decision and its progeny, has upheld the position that any oral assurances of free life-time health benefits are not effective to change the written plan documents, which specifically reserve the right to terminate suspend, withdraw, amend, or modify the Plan in whole or in part at any time. 53 In the frequently cited opinion of In Re: Unisys Corp., 54 the Third Circuit held that equitable relief is available under 29 U.S.C. Section 1132(a)(3)(B) where the plaintiffs successfully show a breach of fiduciary duty. 55 In the Unisys Corp. case, the plaintiffs had brought separate claims for breach of contract, equitable estoppel, and breach of fiduciary duty, after the company made a dramatic change to their post-retirement benefits by reducing benefits and premium payments that were offered under prior plans. The company knew that employees were accelerating their retirement plans because of their belief that by doing so they could lock-in, or vest, their health care benefits. Further, not only did the company fail to mention the reservation of rights clause in response to the specific inquiries of individual plaintiffs (about whether their benefit rights would continue), virtually the entire company management had consistently misrepresented the plan, not just on one occasion or to one employee, but over a period of many years and both orally (in group meetings) and in writing (in newsletters) as well. 56 The Third Circuit stated: [T]he company had the foresight to draft and incorporate reservation of rights clauses into its retiree medical plans, which expressly gave the company the right to terminate the plans if they became onerous. Unisys was aware of the retirees confusion regarding the applicability of these clauses to their benefits and the retirees mistaken belief that their benefits could not be 53 Voyk v. Bhd. of Local Eng rs, 198 F.3d 599, 603 (6th Cir. 1999). 54 In Re: Unisys Corp., 57 F.3d 1255 (3d Cir. 1995), cert. denied, 517 U.S. 1103 (1996). 55 See id. at 1257. 56 Id. at 1265. 112

ERISA OBLIGATIONS 4.07 terminated once an employee retired. Under these circumstances, we find a duty to convey complete and accurate information arose. 57 In McMunn v. Pirelli Tires, LLC, 58 a district court accepted the common ruling that there is no liability for an employer that gives informal communications to its employees, if those communications are not an affirmative material misrepresentation. 59 However, where the informal communication conflicts with the terms of the plan or creates an ambiguity, a breach of fiduciary duty may arise if the employee is given misleading information in response to a specific inquiry by a person acting in a fiduciary capacity. The district court stated: Even under the narrowest reading of the relevant case law, any employees who were expressly told by a person acting in a fiduciary capacity that their retirement benefits could not be changed during retirement received affirmative misrepresentations. In contrast, the simple statement by a fiduciary that benefits will continue in retirement without any durational limit is not a material misrepresentation because the statement is neither untrue or [sic] misleading, and could not create a reasonable expectation that benefits had vested. 60 If the employee subsequently relies on this misinformation to his or her detriment, a breach of fiduciary duty claim may stand, notwithstanding ERISA s historical position that an employer s informal communications may not change the plan terms. 61 The balancing test focused on by the Pirelli court weighed the employees need for accurate, truthful information from their fiduciary against the employers interest in predictability as to its obligations. 62 57 Id. at 1265 n.15. 58 McMunn v. Pirelli Tires, LLC, 2001 U.S. Dist. LEXIS (JBA) (D. Conn. July 19, 2001). 59 Id. 60 Id. at *67. 61 Id. at *65. 62 Id. at *63-64. 113

4.08 ENERGY & MINERAL LAW INSTITUTE 4.08. What If the Claim for Retiree Medical Benefits Is Based on a Plan Adopted Prior to ERISA? While federal courts have relied on compliance with ERISA to determine whether an employer promised lifetime retiree medical benefits, there is the question of what happens when the employees allege that their substantive rights to retirement benefits, including retiree health benefits, were created before ERISA existed. In Burks v. American Cast Iron Pipe Co., 63 the Court of Appeals for the Eleventh Circuit addressed the issue. In Burks, the retirees claimed that the employer had promised them health benefits, including prescription drugs, for life. The retirees based their claims on oral representations of the company s former president and a written plan description from 1973 promising lifetime health benefits without reserving the right to amend the plan. Each of the retirees retired prior to the date on which ERISA was enacted, and the company continued to pay for medical care and medications until 1993. Then, in 1993, the company amended its benefits plan to require the retirees to pay 25 percent of the cost of their drugs and medicines. The Eleventh Circuit determined that the retiree s substantive rights were created before ERISA existed. When the participant s rights form before ERISA s effective date, the court as a matter of federal common law must interpret the plan in light of a worker s pre-erisa state law rights. 64 Therefore, the Eleventh Circuit ordered the district court, on remand, to examine state law to determine whether the employees retired, before ERISA s effective date, under a promise to pay lifetime prescription drug benefits that could not be amended. 65 4.09. Conclusion. The actions of an employer who offers a health benefits plan to its employees and retirees may constitute the acts of a fiduciary under ERISA. Thus, failure to adhere to the duties of ERISA fiduciaries may serve as 63 Burks v. American Cast Iron Pipe Co., 212 F.3d 1333 (11th Cir. 2000), rehearing en banc denied, 2000 U.S. App. LEXIS 27923, cert. denied, 2001 U.S. LEXIS 179 (2001). 64 Id. at 1337 (internal citation omitted). 65 Id. at 1338. 114

ERISA OBLIGATIONS 4.09 the basis for claims by plan beneficiaries. Where the employer makes changes, therefore, it must be aware of ERISA s fiduciary duties, and assure compliance with them as required by the plan s provisions and the federal courts. 115