Beach, Randall A. v. Commonwealth Edison

In the

United States Court of Appeals

For the Seventh Circuit

____________

No. 03-3907

RANDALL A. BEACH,

Plaintiff-Appellee,

v.

COMMONWEALTH EDISON COMPANY,

Defendant-Appellant.

____________

Appeal from the United States District Court for

the Northern District of Illinois, Eastern Division.

No. 00 C 3357—Joan Humphrey Lefkow, Judge.

____________

ARGUED APRIL 16, 2004—DECIDED AUGUST 24, 2004

____________

Before EASTERBROOK, RIPPLE, and DIANE P. WOOD, Circuit

Judges.

EASTERBROOK, Circuit Judge. After 31 years on the job,

Randall Beach retired from Commonwealth Edison in June

1997 and moved to Idaho. He was 52 at the time. By leaving

before age 55, Beach gave up entitlement to future health

benefits, though he retained his vested pension. Before taking

this extra-early retirement, Beach asked his supervisor,

plus ComEd’s human resources staff, whether there was

any immediate prospect that the firm would offer a volun-

tary separation package in his department, the Transmission

2 No. 03-3907

and Distribution Organization. Beach knew that ComEd was

reorganizing department by department and that it some-

times offered sweeteners, such as severance pay and health

benefits, to those who agreed to depart. As Beach remembers

these conversations, “everybody said absolutely it’s not going

to happen. You’re not going to get the package. The company

is not going to offer your department a package. It just will

not happen. That was the essence of everything I got.” Six

weeks after Beach’s retirement, however, ComEd did offer

a separation package to 240 of the 4,700 employees in his

department. Had he been employed on August 7, 1997, Beach

would have been eligible for these benefits. When ComEd

declined to treat him as if he had departed in August or

September rather than May (when he gave notice and stopped

working) or June (when he left the payroll), Beach filed this

suit under the Employee Retirement Income Security Act.

After a bench trial on stipulated facts, the district judge

concluded that ComEd had violated its fiduciary duty to a

participant in an ERISA plan by giving incorrect advice.

Even though no one had intended to deceive Beach—ComEd’s

senior managers did not begin to consider separation bene-

fits for the Transmission and Distribution Organization

until after Beach’s retirement, and no one in the human re-

sources staff knew what was coming—the district judge

held that ComEd must treat Beach as if he had stayed

through August and qualified for all benefits then on offer.

2003 U.S. Dist. LEXIS 17675 (N.D. Ill. Oct. 2, 2003); see also

2002 U.S. Dist. LEXIS 14663 (N.D. Ill. Aug. 6, 2002).

The district court’s major premise is that ComEd owed

Beach a fiduciary duty with respect to future fringe-benefit

plans, because he was a participant in the firm’s pension

plan. The court’s minor premise is that any material inac-

curacy, even an unintentional error, violates that fiduciary

duty. The minor premise is problematic given this court’s

decisions in Vallone v. CNA Financial Corp., No. 03-2090

(7th Cir. July 15, 2004), slip op. 29-33; Frahm v. Equitable

No. 03-3907 3

Life Assurance Society, 137 F.3d 955 (7th Cir. 1998); and

Librizzi v. Children’s Memorial Medical Center, 134 F.3d

1302 (7th Cir. 1998), though it has some support elsewhere.

See Martinez v. Schlumberger, Ltd., 338 F.3d 407 (5th Cir.

2003); Bins v. Exxon Co., 220 F.3d 1042 (9th Cir. 2000) (en

banc). We need not consider the minor premise, however,

because the district court’s major premise is mistaken.

Duties under ERISA are plan-specific. See Diak v. Dwyer,

Costello & Knox, P.C., 33 F.3d 809, 811 (7th Cir. 1994);

James v. National Business Systems, Inc., 924 F.2d 718, 720

(7th Cir. 1991). The statute defines a “fiduciary” as a person

who exercises authority or discretion over the administra-

tion of a plan, but only when performing those functions. 29

U.S.C. §1002(21)(A). Thus an employer is not a fiduciary

when considering whether to establish a plan in the first

place, or what specific benefits to offer when creating or

amending a plan. See Hughes Aircraft Co. v. Jacobson, 525

U.S. 432 (1999); Lockheed Corp. v. Spink, 517 U.S. 882

(1996); Johnson v. Georgia-Pacific Corp., 19 F.3d 1184 (7th

Cir. 1994). Otherwise by adopting a pension plan an employer

would become its employees’ fiduciary for all purposes and

would be obliged, for example, to maximize its workers’ sal-

aries or to design plans that maximize fringe benefits. As

Hughes Aircraft and similar decisions show, that is not

ERISA’s command. Beach was (and is) a participant in

ComEd’s pension plan but does not contend that he has

received less than his due under it. He also was a partici-

pant in some welfare-benefit plans, such as ComEd’s health-

care plan; once again, however, he does not complain that

ComEd wrongfully denied him any of those benefits or

misled him in any way about them. He knew that if he left

before age 55 those benefits would end; that decision was

made with eyes open. What he wants—and what the district

court gave him—is benefits under a separate plan that was

not established until after he quit.

Throughout his briefs, Beach proceeds as if the separation

4 No. 03-3907

incentives were created by amendment of a plan in which

he was already a participant. That enables him to invoke

Varity Corp. v. Howe, 516 U.S. 489 (1996), which held that

ERISA prohibits a plan fiduciary from deceiving partici-

pants in an existing pension plan about the value of its

benefits compared with those under a successor or sub-

stitute plan. Yet the plan under which Beach wants (and

was awarded) benefits does not amend or modify any of

ComEd’s other plans—nor did Beach have to choose between

its benefits and those of the plans in which he was a par-

ticipant. The “Voluntary Separation Plan for Designated

Transmission and Distribution Management Employees of

Commonwealth Edison Company” dated August 7, 1997, is

in the record: it is a stand-alone welfare-benefit plan that

does not amend, supplement, or replace any other plan. As

it did not come into existence until after Beach’s retirement,

ComEd did not owe him any fiduciary duty concerning its

benefits.

Doubtless federal common law prohibits fraud with re-

spect to pension and welfare benefits, apart from any need

to invoke ERISA’s fiduciary duty. ERISA preempts state

law relating to pension plans, and federal courts regularly

create federal common law (based on contract and trust law,

see Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101

(1989)) to fill the gap. As we have emphasized, however,

Beach does not contend that anyone defrauded him. Fraud

requires knowledge of the truth and an intent to conceal or

mislead. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185

(1976). The people Beach consulted failed to foresee events,

which is understandable because no plan had been pro-

posed, let alone adopted, at the time. The district judge did

not find the advice to have been either malicious or reck-

less. Even in retrospect it does not look wildly inaccurate.

Beach worked in a division with 4,700 employees, only 240 of

whom received an offer of special voluntary-separation

benefits. By and large, employees in that division would

No. 03-3907 5

have done well to make plans on the assumption that the

pension and welfare systems already in place were the only

ones they need consider. It turns out that Beach would have

been among the fortunate 5% in his division, but just as

there can be no fraud by hindsight (see Denny v. Barber,

576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.)) so a predic-

tion that pans out for 95% of the concerned employees is

hard to condemn just because it misses the mark for the

rest. See United States ex rel. Garst v. Lockheed-Martin

Corp., 328 F.3d 374, 378 (7th Cir. 2003); Murray v. Abt

Associates Inc., 18 F.3d 1376, 1379 (7th Cir. 1994); DiLeo v.

Ernst & Young, 901 F.2d 624, 627-28 (7th Cir. 1990). The

staff should have let Beach know the limits of their infor-

mation. (Perhaps they did so; it is hard to reconstruct oral

advice after the fact, especially when one side does not

remember anything. Only Beach recollects the conversa-

tions, and he got only the gist; he does not remember the

precise words anyone used.) Negligent failure to add dis-

claimers and cautions is some distance from fraud, however.

A number of decisions address the question whether

ERISA requires plan sponsors to give accurate information

about potential amendments to existing plans. Varity shows

that candid and complete information is required if two

plans are in existence, and the sponsor tries to persuade

employees to give up benefits under one in exchange for ben-

efits under the other. These follow-on decisions conclude

that a similar approach governs when a single plan is in the

process of amendment. The majority view is that a duty of

accurate disclosure begins “when (1) a specific proposal (2)

is being discussed for purposes of implementation (3) by

senior management with the authority to implement the

change.” Fischer v. Philadelphia Electric Co., 96 F.3d 1533,

1539 (3d Cir. 1996). At that point details of the amendment

become material; until then there is only speculation.

Accord, Vartanian v. Monsanto Co., 131 F.3d 264, 272 (1st Cir.

1997); McAuley v. IBM Corp., 165 F.3d 1038, 1043 (6th Cir.

6 No. 03-3907

1999); Wilson v. Southwestern Bell Telephone Co., 55 F.3d

399, 405 (8th Cir. 1995); Bins, supra, 220 F.3d at 1048;

Mathews v. Chevron Corp., 362 F.3d 1172, 1180-82 (9th Cir.

2004); Hockett v. Sun Co., 109 F.3d 1515, 1522-23 (10th Cir.

1997); Barnes v. Lacey, 927 F.2d 539, 544 (11th Cir. 1991).

Two circuits conclude that the duty of disclosure arises

sometime before the change is under “serious consider-

ation”—though just what must be disclosed, and when,

these circuits have struggled to pin down. See Ballone v.

Eastman Kodak Co., 109 F.3d 117 (2d Cir. 1997); Martinez,

supra.

This debate mirrors (though the decisions do not ac-

knowledge) a controversy in corporate and securities law.

How soon must issuers of securities tell investors, or their

employees, that merger discussions or other potentially

substantial corporate transactions are afoot? We know from

Basic Inc. v. Levinson, 485 U.S. 224 (1988), that firms

cannot commit fraud about such transactions at any stage,

but the time at which the information becomes so important

that it must be disclosed accurately (if the issuer says

anything), even if there is no intent to deceive, has been

hard to determine. We have taken the view that accurate

disclosure is not required until the price and structure of

the deal have been resolved, see Flamm v. Eberstadt, 814

F.2d 1169 (7th Cir. 1987), though earlier disclosure may be

required in closely held corporations, see Jordan v. Duff &

Phelps, Inc., 815 F.2d 429 (7th Cir. 1987). No court has held,

however, that there is a duty in corporate or securities laws to

predict accurately events that lie ahead. There is no reason

why ERISA should require more.

The majority rule, reflected in Fischer, has the better of

this debate. Giving firms a duty to forecast accurately, if the

benefits staff says anything at all, could not help plan

participants. It would just induce employers to tell the

human resources staff to say nothing at all—to make no

predictions and to refer employees to the printed plan de-

No. 03-3907 7

scriptions. Yet chancy predictions may be better than

silence; think of the 95% of the employees in ComEd’s

Transmission and Distribution Organization who would

have received exactly the right advice, which could have

facilitated their retirement planning. The alternative to

enforced silence would be a declaration in the employee

handbook that no one should rely on any oral information

about the plans. That might or might not curtail legal

risks—some workers would be bound to ask why the firm

even had a benefits advisory staff, if it was insisting that

everything the staff said was worthless—but again would

do little to help people in Beach’s position. It does not take

familiarity with Bayes’s Theorem to see that even poten-

tially fallacious news may be better than no news. If the

benefits staff must clam up, then rumor and office scuttle-

butt come to the fore, and it is likely to be less accurate

than the staff’s educated guesses. So we are not persuaded

by Ballone or Martinez.

ComEd did not amend any of its plans. We need not decide

whether Fischer’s approach would apply to the establish-

ment of a new plan, because none was under consideration

when Beach resigned. There was no proposal at all, let alone

a specific proposal under review by senior managers. It is

undisputed that ComEd did not begin internal discussion of

the details about the Transmission and Distribution Organi-

zation’s reorganization until mid-June 1997, a month after

Beach had given notice (and about the same time as his last

day on the payroll). ComEd concluded that a small net

reduction in staff would be required—about 30 of the 4,700

positions were to be eliminated. At a meeting on July 22 or

23, 1997, managers began to discuss whether it would make

sense to use separation incentives, as opposed to other

means, to achieve this reduction. Sometime late in July or

early in August, Howard Nelson, ComEd’s “Strategic

Staffing Director,” drafted a separation-incentives plan

covering only 5% of the division’s staff (240 employees, in

8 No. 03-3907

the hope that 30 would take the bait). This plan was

approved by Paul McCoy, Vice President for the Transmis-

sion and Distribution Organization, on August 6, and was

announced to employees the next day. None of the circuits

following the Fischer approach would conclude that this plan

was under “serious consideration” before Beach retired. So

even if we were to apply this approach to new plans—a

question that we do not resolve today—Beach could not

benefit.

Beach was not the victim of fraud, and ComEd did not

have a duty of accurate disclosure in the period preceding

the plan’s adoption. The human relations staff might have

been careless, but it did not violate any duty of loyalty owed

to Beach. Accordingly, the judgment of the district court is

reversed.

RIPPLE, Circuit Judge, dissenting. A single principle con-

trols this case. “[A] fiduciary may not materially mislead

those to whom the duties of loyalty and prudence described

in 29 U.S.C. § 1104 are owed.” Berlin v. Michigan Bell Tel.

Co., 858 F.2d 1154, 1163 (6th Cir. 1988). Mr. Beach was a

participant in ComEd’s retirement pension plan and its

health-care plan; ComEd and Mr. Beach were in a fiduciary

relationship with respect to these plans. See supra at 3. The

Voluntary Severance Plan (“VSP”), in essence, supplemented

the retirement pension plan and the health-care plan.

Therefore, when ComEd misrepresented the status of the

VSP and its future plan-related benefits, it was “admin-

ister[ing]” these plans under the rationale of Varity Corpo-

ration v. Howe, 516 U.S. 489 (1996). Because, in its adminis-

tration, ComEd made material misrepresentations in

No. 03-3907 9

violation of its fiduciary duties, I would affirm the judgment

of the district court.

1.

My colleagues hold that ComEd’s misrepresentations

were not made in a fiduciary capacity and thus are not

actionable. Their view rests on the conclusion that ERISA’s

fiduciary duties are plan-specific. That proposition is un-

assailable, as far as it goes. ERISA requires plan “fiduci-

ar[ies]” to “discharge [their] duties with respect to a plan

solely in the interest of the participants and beneficiaries”

and “with the care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man acting in

a like capacity and familiar with such matters would use in

the conduct of an enterprise of a like character and with like

aims.” 29 U.S.C. § 1104(a)(1)(B). Section 1002(21)(A) of the

same title states that “a person is a fiduciary with respect

to a plan to the extent” he is involved in “management” or

“administration” of “such plan.” Sections 1002(1) and

1002(2)(A) define an applicable “plan” as one that is

“established or maintained.” Therefore, ERISA’s fiduciary

duties attach to an employer such as ComEd when it is a

“fiduciary” with respect to an “established” plan and “man-

age[s]” or “administ[ers]” that established plan. 29 U.S.C.

§§ 1002(1), (2)(A), (21)(A).

ComEd submits that ERISA’s plan-specific nature means

that an employer-administrator speaks as a fiduciary only

when it speaks about new benefits that come in the form of

an amendment to an established plan under which the em-

ployer and employee have a preexisting fiduciary rela-

tionship, as opposed to when that employer-administrator

speaks about benefits in a new plan. At times, the majority

appears inclined to that view. See supra at 3. Such a limited

review, however, is at odds with Varity Corporation, 516

U.S. 489. In Varity, officials deliberately misled Varity

10 No. 03-3907

employees, who were participants in an existing ERISA

plan and in a fiduciary relationship with Varity regarding

that plan (Plan 1), to transfer out of Plan 1 and into a new

plan (Plan 2); this new plan was established in an under-

capitalized subsidiary, which eventually went into receiver-

ship. Id. at 499-501. The Supreme Court held that Varity

was acting in a fiduciary status—specifically, it was “ad-

minister[ing]” Plan 1—when it made material misrepresen-

tations regarding the future of plan benefits, which were

found in Plan 2. Id. at 502-03. Turning to the common law

of trusts to inform ERISA’s plain language, the Court

explained:

The ordinary trust law understanding of fiduciary

“administration” of a trust is that to act as an ad-

ministrator is to perform the duties imposed, or

exercise the powers conferred, by the trust documents.

The law of trusts also understands a trust document

to implicitly confer “such powers as are necessary or

appropriate for the carrying out of the purposes” of

the trust. Conveying information about the likely

future of plan benefits, thereby permitting benefi-

ciaries to make an informed choice about continued

participation, would seem to be an exercise of a power

“appropriate” to carrying out an important plan pur-

pose. After all, ERISA itself specifically requires ad-

ministrators to give beneficiaries certain information

about the plan. And administrators, as part of their

administrative responsibilities, frequently offer

beneficiaries more than the minimum information

that the statute requires—for example, answering

beneficiaries’ questions about the meaning of the

terms of a plan so that those beneficiaries can more

easily obtain the plan’s benefits. To offer beneficia-

ries detailed plan information in order to help them

decide whether to remain with the plan is essen-

tially the same kind of plan-related activity.

No. 03-3907 11

Id. at 502-03 (citations omitted). At the least, Varity stands

for the proposition that, when a company such as ComEd

becomes a fiduciary to an employee as to an ERISA “plan”

(e.g., Plan 1), then its fiduciary duties of loyalty and care

can attach to representations made regarding new plans

under which the employer and employee do not have a pre-

existing fiduciary relationship (e.g., Plan 2). Varity gave no

hint, and neither have subsequent cases, that the critical

distinction a court must draw in determining whether an

employer-administrator spoke in a fiduciary status is

whether the employer spoke about an “amendment” to an

existing plan or to a “new” plan.

This interpretation also makes good sense. It would be

intolerable to allow an employer-administrator to avoid the

ramifications of its fiduciary status by simply attaching the

label “new plan”—as opposed to “plan amendment”—to the

subject of its misrepresentations. Furthermore, at least in

the situation in which an employer-administrator is offering

enhanced, sweetened benefits to induce early retirement or

separation, the line between a plan “amendment” and a

“new” plan is indeed blurry and easily distracts from the

critical issue. The enhanced benefits can form the basis of

a totally “new” plan; they can be added as “amendments” to

an existing plan; or they can be part of a plan that “supple-

ments” an existing plan. Regardless of the label, under Varity’s

reasoning, the critical factor is that there is a nexus be-

tween the new benefits about which the employer speaks

and the existing plan under which an employer-employee

fiduciary relationship already exists. When an employer

speaks about new benefits that are related to benefits in a

plan under which the employer and employee already have

a fiduciary relationship, under Varity and a slew of other

cases, the employer speaks about the future of plan-related

benefits and thus is speaking in a fiduciary capacity. See,

e.g., id. at 502 (intentional deceit regarding replacement

plan made in fiduciary capacity); Bins v. Exxon Co. U.S.A.,

12 No. 03-3907

220 F.3d 1042, 1046, 1048 (9th Cir. 2000) (en banc) (repre-

sentations about “a lump-sum retirement incentive under

the Special Program of Severance Allowances,” an “ERISA

welfare benefit plan” that was “in addition to regular re-

tirement benefits,” can be violation of ERISA fiduciary duty);

Berlin, 858 F.2d at 1157, 1163 (representations about a new

severance plan, under which employees “generally could

receive, in addition to any pension or other unrelated ben-

efit, a separation pay allowance” and “additional medical

insurance coverage” can be violation of ERISA fiduciary duty).

At times, my colleagues appear to agree that representa-

tions about new benefits that have a nexus to benefits in an

existing plan in which the employer and employee are in a

fiduciary relationship constitute fiduciary acts under Varity,

regardless of how one labels the form in which the new

benefits are found (e.g., amendments, new plan, supplement

plan). See supra at 5 (“Varity shows that candid and

complete information is required if two plans are in exis-

tence, and the sponsor tries to persuade employees to give

up benefits under one in exchange for benefits of the

other.”). However, they appear to envision an artificially

tight nexus between those new, future benefits and the

benefits in the existing plan. See supra at 3-4 (rejecting that

ComEd was operating as a fiduciary when it made misrep-

resentations to Mr. Beach because “the plan under which

Beach wants (and was awarded) benefits does not amend or

modify any of ComEd’s other plans—nor did Beach have to

choose between its benefits and those of the plans in which

he was a participant. . . . [The VSP] does not amend,

supplement, or replace any other plan.”). I cannot subscribe to

that limited view because it elevates form over substance.

It may produce a conceptual bright-line, but it does so at

the expense of limiting, as a practical matter, the effective-

ness of the Congressional policy choices embodied in the

statute. The facts of this case make the point starkly. At the

time of ComEd’s misstatements about the VSP, Mr. Beach

No. 03-3907 13

was a participant in ComEd’s retirement pension plan and

its health-care plan, although he was not eligible for

benefits under ComEd’s retirement medical plan. See supra

at 3. The benefits in the retirement plan and the health-

care plan cannot be untied from the VSP, which offered,

inter alia, severance pay that would supplement his pension

benefits and health benefits that would replace, upon

retirement, his benefits under the health-care plan. In this

circumstance, Varity fully supports the conclusion that

ComEd was “administer[ing]” the retirement pension plan

and health-care plan, and thus acting in a fiduciary capac-

ity, when it furnished Mr. Beach with misinformation about

the new VSP, which, in essence, supplemented or amended

his existing plans with further retirement benefits.1 See

Varity, 516 U.S. at 503 (“[T]he factual context in which the

statements were made, combined with the plan-related

nature of the activity, engaged in by those who had plan-

related authority to do so, together provide sufficient

support for the District Court’s legal conclusion that [the

employer-administrator] was acting as a fiduciary.”).

Before this court, ComEd also advances a temporal argu-

1

This is not to say that, once an employer becomes a fiduciary

with respect to one plan, it becomes a “fiduciary for all purposes.”

Supra at 3. Compare the situation in this case to the following

hypothetical. Imagine that an employer-administrator with re-

spect to a “pension plan,” 29 U.S.C. § 1002(2)(A), gathered employees,

who were also beneficiaries of that retirement plan, to discuss a

new “prepaid legal services” plan, id. § 1002(1). Imagine further

that, in that meeting, the employer-administrator made material

misrepresentations about the legal services plan. It would be dif-

ficult to say in that circumstance, that the employer’s fiduciary status

with respect to the retirement plan means that its statements re-

garding the unconnected legal services plan were made in a fiduciary

capacity. Again turning back to Varity, it would be quite difficult

to say that the employer was “administering” the “pension plan”

when it made the misrepresentations.

14 No. 03-3907

ment to cabin its fiduciary status. ComEd argues that, “as

a matter of law,” no fiduciary obligations should arise until

a new plan such as the VSP is under “serious consideration.”

Appellant’s Br. at 34. My colleagues appear to be inclined to

that argument, albeit in dicta. See supra at 6-7.

The “serious consideration” threshold arises from a group of

cases from other circuits that have held that “material mis-

representations about a future plan offering do not constitute

a breach of fiduciary duty unless the misrepresentations are

made after the employer has ‘seriously considered’ the

future offering.” Hockett v. Sun Co., 109 F.3d 1515, 1522 (10th

Cir. 1997). A plan is under “serious consideration” when “(1)

a specific proposal (2) is being discussed for purposes of im-

plementation (3) by senior management with the authority

to implement the change.” Fischer v. Philadelphia Elec. Co.,

96 F.3d 1533, 1539 (3d Cir. 1996) (“Fischer II”). If the “serious

consideration” litmus test were the appropriate one, Mr.

Beach’s claim would fail because at the time the relevant

misinformation was communicated ComEd did not have a

“specific proposal” for a severance package before senior

management.

The “serious consideration” test is simply a line drawn in

an attempt to balance “Congress’ competing desires, in

enacting ERISA, to safeguard employee benefit plans, and

yet not make such plans so burdensome or threatening that

employers would shy away from offering them.” Hockett,

109 F.3d at 1522. The Tenth Circuit has elaborated:

In our view, the [serious consideration test] appro-

priately narrows the range of instances in which an

employer must disclose, in response to employees’

inquiries, its tentative intentions regarding an

ERISA plan. Employers frequently review retirement

and benefit plans as part of ongoing efforts to succeed

in a competitive and volatile marketplace. If any dis-

cussion by management regarding possible change

No. 03-3907 15

to an ERISA plan triggered disclosure duties, the

employer could be burdened with providing a con-

stant, ever-changing stream of information to inquisi-

tive plan participants. And, most of such informa-

tion actually would be useless, if not misleading, to

employees, considering that many corporate ideas

and strategies never reach maturity, or else meta-

morphose so dramatically along the way, that early

disclosure would be of little value. Furthermore,

requiring employers to reveal too soon their internal

deliberations to inquiring beneficiaries could ser-

iously “impair the achievement of legitimate bus-

iness goals” by allowing competitors to know that the

employer is considering a labor reduction, a site-

change, a merger, or some other strategic move.

Even more importantly, we believe the [serious

consideration] standard protects employees’ access

to material information without discouraging em-

ployers from improving their ERISA plans in the

first place. As recognized by the Sixth Circuit,

“[c]hanging circumstances, such as the need to reduce

labor costs, might require an employer to sweeten

its severance package, and an employer should not

be forever deterred from giving its employees a better

deal merely because it did not clearly indicate to a

previous employee that a better deal might one day

be proposed.” Moreover, employers often decide to

“sweeten” an early retirement plan only after the

employer has determined that not enough employ-

ees are opting to retire under the existing one. “If

fiduciaries were required to disclose such a busi-

ness strategy, it would necessarily fail. Employees

simply would not leave if they were informed that

improved benefits were planned if workforce reduc-

tions were insufficient.” Thus, precipitous liability

could push employers in the direction of involuntary

16 No. 03-3907

lay-offs, a common alternative to early retirement

inducements. The [serious consideration] standard

minimizes this possibility.

Id. at 1522 (citations omitted).

The opposite view originated in the Second Circuit and

has come to be known as the “materiality test.” In Ballone

v. Eastman Kodak Co., 109 F.3d 117 (2d Cir. 1997), the

Second Circuit rejected that “serious consideration of a

future plan is a prerequisite to liability for misstatements

regarding the availability of future pension benefits.” Id. at

123-24. The key inquiry, that court explained, is whether

misrepresentations are “material,” and they are “material

if they would induce reasonable reliance”; “serious consider-

ation” is but one factor in that inquiry. Id. at 124-25. Courts

that have rejected the “serious consideration” prerequisite

for misrepresentations, and instead have adopted the “ma-

teriality” test, reflect the concern that the serious consider-

ation prerequisite would give an employer-administrator “a

free zone for lying” and misleading employees about the

availability of a future plan that is just around the corner

but not yet on senior management’s desk for approval.

Martinez v. Schlumberger, Ltd., 338 F.3d 407, 428 (5th Cir.

2003). Further, the courts note that this position is con-

sistent with common-law trust principles as interpreted

by Varity. Id. at 425 (“Varity does not suggest that the

obligation not to misrepresent materializes near the end of

a progression [of deliberations on a new plan], but rather

implies that whenever an employer exercises a fiduciary

function, it must speak truthfully.”).

In my view, cases that have adopted this latter view

reflect a far more profound appreciation of Congressional

concerns in this area and a more realistic understanding of

the practicalities of the situation. The circuits that have

subscribed to this materiality test have held that an em-

ployer-administrator does not have a duty affirmatively to

No. 03-3907 17

disclose deliberations regarding a new plan absent “serious

consideration” of that plan, but it cannot make material

affirmative misrepresentations regarding a plan in forma-

tion but not yet under “serious consideration.” See id. at

429-31; Wayne v. Pacific Bell, 238 F.3d 1048, 1055 (9th Cir.

2001). In short, these circuits hold that the employer-ad-

ministrator can choose not to speak until a plan is under

“serious consideration,” but if it does speak, it cannot mislead.

The Fifth Circuit’s opinion in Martinez convincingly ex-

plains that, among other reasons for this distinction, the

business practicalities arguments underlying the “serious

consideration” test have more force in the disclosure context

than they do in the affirmative misrepresentation context.

See Martinez, 338 F.3d at 429 (“Insisting on voluntary dis-

closure during the formulation of a plan and prior to its

adoption would . . . increase the likelihood of confusion on

the part of beneficiaries,” who would be bombarded with

notices, “and, at the same time, unduly burden management,

which would be faced with continuing uncertainty as to

what to disclose and when to disclose it.” (quoting Pocchia

v. NYNEX Corp., 81 F.3d 275, 278-79 (2d Cir. 1996))). How-

ever, this view also protects the employee by not giving the

employer “a free zone for lying” before a specific proposal is

presented for senior management’s approval. Id. at 428.

Finally, under this “materiality approach,” it is important

to remember that only material misrepresentations are

actionable, and whether a plan is under “serious consider-

ation” is a factor in the materiality inquiry. Thus, the sug-

gestion that every minor discussion of a new plan would

constitute a breach of a fiduciary duty and thus discourage

plan amendments is not convincing.

In sum, I

take the view that the proper course for an employer

to follow is not to affect the employee’s decision

whether to retire in any way—not by lying to them

18 No. 03-3907

to induce them to retire before implementation of

an enhanced early retirement program, nor by be-

ing forced to tip off the employees to its business

strategies to aid them in taking best advantage of

the company’s future plans. This middle road will

allow the company to make its business decisions

without hindrance while prohibiting it from tricking

its employees into retirement by making guaran-

tees it knows to be false.

We believe the two views we have promulgated—

that an employer has no affirmative duty to disclose

the status of its internal deliberations on future plan

changes even if it is seriously considering such

changes, but if it chooses in its discretion to speak

it must do so truthfully—coalesce to form a scheme

that accomplishes Congress’s dual purposes in

enacting ERISA of protecting employees’ rights to

their benefits and encouraging employers to create

benefit plans. As one commentator has explained:

[A] limited duty can reasonably be imposed on

fiduciaries to refrain from making, either in re-

sponse to participant inquiries or at fiduciaries’

own initiative, material misrepresentations. . . .

Under such a standard, a fiduciary would not

be prohibited from declining to comment on the

prospect of future changes, or from making

generalized statements to the effect that the

plan sponsor always retains the right to amend

a plan. [In this way,] businesses will not be un-

duly discouraged from adopting or amending

early retirement, severance or other types of

plans, and participants’ interests can be ade-

quately protected from material misrepresenta-

tions that are intended to induce conduct that

is contrary to their interests.

No. 03-3907 19

Id. at 430-31 (quoting Edward E. Bintz, Fiduciary

Responsibility Under ERISA: Is There Ever a Fiduciary

Duty to Disclose?, 54 U. Pitt. L. Rev. 979, 998 (1993)).

2.

ComEd made affirmative representations to Mr. Beach.

Employing the materiality test, I would uphold the district

court’s determination that the misrepresentations made to

Mr. Beach were material. “Where an ERISA fiduciary

makes guarantees regarding future benefits that misrepre-

sent present facts, the misrepresentations are material if

they would induce a reasonable person to rely upon them.”

Ballone, 109 F.3d at 122. In addition to considering the

“serious consideration” given to a plan, the following factors

are utilized in deciding materiality:

[1] how significantly the statement misrepresents

the present status of internal deliberations regarding

future plan changes, [2] the special relationship of

trust and confidence between the plan fiduciary and

beneficiary, [3] whether the employee was aware of

other information or statements from the company

tending to minimize the importance of the misrepre-

sentation or should have been so aware . . ., and [4]

the specificity of the assurance.

Id. at 125 (citations omitted).

Mr. Beach was repeatedly told that “absolutely” the com-

pany was not going to offer his department (Transmission

& Distribution or T&D) a package and even if ComEd were

considering a package, T&D would not be included. State-

ment of Uncontested Facts ¶ 70. Contrary to ComEd’s

assertions, these representations significantly “misrepre-

sent[ed] the [then-]present status of internal deliberations.”

Ballone, 109 F.3d at 125. There is no evidence in the record

that ComEd definitively had decided it would not, after

20 No. 03-3907

reorganization, offer a severance plan; indeed, there are not

even any facts that would suggest that conclusion. See id.

at 126 (explaining that misrepresentations are “statements

that the employer knows to be false, or that have no reason-

able basis in fact”). On the other hand, evidence supports

that there was a possibility that the reorganization study in

T&D would ultimately result in the offering of a severance

plan to some employees in T&D. For example, it is un-

disputed that documents in the record indicate that, as of

June 1997, the reorganization plan called for excess em-

ployees in T&D, and that between 1994 and 1997, ComEd

dealt with excess employees through involuntary and vol-

untary severance packages on twenty to thirty occasions. Of

course, the record supports that, at the time of the misrep-

resentations, there was a possibility that no severance plan

would be offered in T&D, but as Mr. Beach explained: “ComEd

does not explain how the possibility that a package might

not be offered could render a specific assurance that a pack-

age for his department was an impossibility a truthful and

complete statement of then existing fact.” Appellee’s Br. at

41.

Moreover, these misstatements were more than co-employee

“mispredictions.” Ballone, 109 F.3d at 125 (“Whereas mere

mispredictions are not actionable, false statements about

future benefits may be material if couched as a guarantee,

especially where, as alleged here, the guarantee is sup-

ported by specific statements of fact.” (citations omitted)).

Mr. Beach was not given mere unadorned speculation re-

garding the company and its future benefits; rather, he was

told specifically that his department would not, under any

circumstances, be receiving a severance plan. Cf. Martinez,

338 F.3d at 431-32 (holding personnel employee’s statement

that “ ‘he had not heard anything at this time’ ” about a new

package and “that ‘Schlumberger was doing too good right

now and they would not be offering any packages because

they’d lose too many good people’ ” not actionable misrepre-

No. 03-3907 21

sentation, reasoning that “any reasonable listener would

understand the statement to [the plaintiff] to have been no

more than the unsupported speculation of a fellow em-

ployee”). Given the numerous, concrete assurances from

several human resources staff, Mr. Beach understandably

believed that the staff had not given him their personal

opinions on the future, but that they had relayed to him the

fact that ComEd had made a corporate decision that T&D

would not be considered for a package. Further, the misrep-

resentations did not contain any indication of a lack of

finality or that the decision was subject to change, cf.

Mathews v. Chevron Corp., 362 F.3d 1172, 1183 (9th Cir. 2004)

(explaining that language such as “at this time” indicates a

lack of finality that cannot support materiality and indi-

cating the situation would be different if the employer-

administrator told the employees it had “ruled out plan

changes for the immediate future, when in fact it had not”

(citations omitted)), and the record is without any indication

that ComEd released “other information or statements” that

rebutted or “tend[ed] to minimize the importance of the mis-

representation[s].” Ballone, 109 F.3d at 125.

At the end of the day, in a case such as this, materiality

ultimately turns on whether the misrepresentations would

induce a reasonable person in Mr. Beach’s situation to rely

or, in the words of the Third Circuit, the likelihood that the

misrepresentations would mislead a reasonable employee

in Mr. Beach’s situation “in making an adequately informed

decision about if and when to retire.” Fischer v. Philadel-

phia Elec. Co., 994 F.2d 130, 135 (3d Cir. 1993) (“Fischer I”).

Although only a small percentage of T&D employees were

ultimately offered the VSP, the undisputed evidence is that

Mr. Beach left “his final commitment to retire open until the

last possible day, June 19, 1997, in case there [sic] the chance

for a possible VSP arose.” Statement of Uncontested Facts

¶ 74 (emphasis added). Moreover, it is important to remem-

ber that, due to his wife’s ailment, Mr. Beach had a special

22 No. 03-3907

need for the health benefits offered in the VSP. Finally, the

probability of a severance plan being offered in T&D—like

the twenty to thirty severance plans offered before by

ComEd—was not so small that it reasonably could not have

affected Mr. Beach’s retirement calculation. Given the

record in this case, the district court’s determination of

materiality should remain undisturbed. As the Second

Circuit said in language that speaks directly to this case:

Regardless of whether the employer is seriously

considering altering its retirement plan, the em-

ployer’s false assurance that future enhancements

have been ruled out for some specific period can be

decisive in inducing an employee to hasten retire-

ment, rather than delay in the hope of receiving

enhanced future benefits. This aspect of the assur-

ance can render it material regardless of whether

future changes are under consideration at the time

the misstatement is made.

Ballone, 109 F.3d at 124.

One final issue remains to be addressed. It is undisputed

that ComEd’s employees did not intend to deceive Mr.

Beach when they told him that no severance plan in T&D

would be offered. ComEd argued to this court that this lack

of scienter by ComEd’s human resources representatives

demands judgments in its favor, and the majority hints, in

dicta, ComEd is correct. See supra at 2. However, importing

the intent to deceive requirement—synonymous in tort law

with fraud or deceit—into this type of ERISA fiduciary duty

case lacks any grounding.

Although this court has cases that might be read to sup-

port such an intent requirement, see Frahm v. Equitable

Life Assurance Society, 137 F.3d 955, 961 (7th Cir. 1998),

and cases to refute it, see Bowerman v. Wal-Mart Stores,

Inc., 226 F.3d 574, 590-91 (7th Cir. 2000), none of them are

No. 03-3907 23

compelling in this case because they did not consider

specifically and definitively if and when an employee’s state

of mind is relevant to oral misrepresentations. See Frahm,

137 F.3d at 960. The courts that have considered the

question with any specificity have rejected the invitation to

graft onto ERISA’s fiduciary duty provision fraud’s scienter

requirement. See, e.g., Mathews, 362 F.3d at 1183; James v.

Pirelli Armstrong Tire Corp., 305 F.3d 439, 449 (6th Cir.

2002); Fischer I, 994 F.2d at 135. The plain language of

ERISA’s fiduciary duty provision points in the opposite

direction. 29 U.S.C. § 1104(a) is entitled “Prudent man

standard of care,” and its duty of care portion,

§ 1104(a)(1)(B), requires that the fiduciary discharge its

duties “with the care, skill, prudence, and diligence under

the circumstances then prevailing that a prudent man act-

ing in a like capacity and familiar with such matters . . . .”

Turning to the common law of trusts to inform that plain

language further weakens the suggestion that intent to

deceive is necessary in a breach of fiduciary duty action

under ERISA. See Varity, 516 U.S. at 496 (noting that

ERISA’s fiduciary duties “draw much of their content from

the common law of trusts”). As the Ninth Circuit recently

explained in rejecting a similar argument:

Trust law imposes a duty, when dealing with the

beneficiary on the trustee’s own account, “to com-

municate to the beneficiary all material facts in

connection with the transaction which the trustee

knows or should know.” RESTATEMENT (SECOND)

OF TRUSTS § 173 cmt. d (1959) (emphasis added);

see also Bixler v. Cent. Pa. Teamsters Health &

Welfare Fund, 12 F.3d 1292, 1300 (3rd Cir. 1993)

(looking to comment d of section 173 in stating that

ERISA section 404’s “duty to inform . . . entails . . .

a negative duty not to misinform”). Thus, by hold-

ing Steelman and Chevron liable for the “reason-

ably foreseeable consequences of their misinforma-

24 No. 03-3907

tion,” the district court accords with the common law

of trusts that attaches liability for information the

trustee “should have known.”

Mathews, 362 F.3d at 1183. Finally, the requirement of sub-

jective intent to deceive would effectively mean that

employers-administrators have a mere duty to avoid commit-

ting fraud. “As the Supreme Court noted in Varity, such

conduct can create liability even among strangers,” and

“ERISA requires more of a fiduciary in discharging such duties

that he or she simply refrain from outright lying.” Hudson v.

Gen. Dynamics Corp., 118 F. Supp. 2d 226, 246 (D. Conn.

2000).

To the extent ComEd’s argument for requiring intent focuses

only on the fiduciary plan administrator’s non-fiduciary agents

(i.e., the benefits representatives) and not the fiduciary itself,

that too is unconvincing. First, this and other courts have held

that an ERISA fiduciary can be liable for the misrepresenta-

tions of its non-fiduciary agents under the apparent authority

doctrine. See Bowerman, 226 F.3d at 589 & n.11. The apparent

authority doctrine focuses on the reasonable reliance of the

employee; it is irrelevant to the subjective intent of the agent.

See Restatement (Third) of Agency § 2.03 (T.D. No. 2 2001).

Moreover, shielding fiduciary/principals from liability because

their non-fiduciary agents were without knowledge or intent

would allow an employer-administrator to keep benefits repre-

sentatives “out of the loop” and then avoid liability by saying

their agents responded “ignorantly but truthfully.” Bins v.

Exxon Co. U.S.A., 220 F.3d 1042, 1049 n.6 (9th Cir. 2000) (en

banc) (“[I]t would not be a defense that supervisors were una-

ware of the status and thus responded ignorantly but truth-

fully to the employee’s inquiry.”); Fischer I, 994 F.2d at 135

(“These obligations cannot be circumvented by building a

‘Chinese wall’ around those employees on whom plan partici-

pants reasonably rely for important information and guidance

about retirement.”). Furthermore, in this circumstance, it is

not unreasonable to place the burden on the employer-admin-

No. 03-3907 25

istrator, the party with the information, to provide correct in-

formation to its front-line staff so that they do not mislead and

injure employee beneficiaries.

For these reasons, I would hold that when an employer-

administrator speaks—either directly or through its benefits

representatives—it violates its fiduciary duties when it af-

firmatively misinforms a beneficiary knowing its statement is

false, when it recklessly misinforms not knowing whether its

statement “is true or not,” and when it misinforms under cir-

cumstances indicating it should have known the falsity of its

statement. Wayne v. Pacific Bell, 238 F.3d 1048, 1055 (9th Cir.

2001). This is not a “duty of prevision” or a “standard of abso-

lute liability,” Frahm, 137 F.3d at 960; rather, it is a standard

which is consistent with the common law of trusts, consistent

with our fellow circuits, and, in my opinion, appropriately

balances the relative interests ERISA was intended to oblige.

In this case, this standard is easily satisfied: ComEd’s human

resources personnel had absolutely no basis for their misrepre-

sentations; at the least, they should have known better.

For all of these reasons, I would uphold the district court’s

conclusion that ComEd violated its fiduciary obligations to Mr.

Beach through its material misrepresentations. I respectfully

dissent.

26 No. 03-3907

A true Copy:

Teste:

________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA-02-C-0072—8-24-04