Goldstein v. Johnson & Johnson

Opinions of the United

2001 Decisions States Court of Appeals

for the Third Circuit

5-25-2001

Goldstein v. Johnson & Johnson

Precedential or Non-Precedential:

Docket 00-5149

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2001

Recommended Citation

"Goldstein v. Johnson & Johnson" (2001). 2001 Decisions. Paper 115.

http://digitalcommons.law.villanova.edu/thirdcircuit_2001/115

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2001 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Filed May 25, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 00-5149

GIDEON GOLDSTEIN, M.D., PH.D., Appellant

v.

JOHNSON & JOHNSON; RETIREMENT PLAN OF

JOHNSON & JOHNSON AND AFFILIATED COMPANIES;

CONSOLIDATED RETIREMENT PLAN OF

JOHNSON & JOHNSON; THE EXCESS BENEFIT PLAN OF

JOHNSON & JOHNSON

On Appeal From the United States District Court

For the District of New Jersey

(D.C. Civ. No. 96-cv-5643)

District Judge: Honorable Alfred M. Wolin

Argued: September 14, 2000

Before: BECKER, Chief Judge, NYGAARD and

AMBRO, Circuit Judges.

(Filed: May 25, 2001)

SHEPPARD A. GURYAN, ESQUIRE

(ARGUED)

BRUCE H. SNYDER, ESQUIRE

Lasser Hochman, L.L.C.

75 Eisenhower Parkway

Roseland, NJ 07068

Counsel for Appellant

FRANCIS X. DEE, ESQUIRE

(ARGUED)

STEPHEN F. PAYERLE, ESQUIRE

Carpenter, Bennett & Morrissey

Three Gateway Center

100 Mulberry Street

Newark, NJ 07102

Counsel for Appellees

OPINION OF THE COURT

BECKER, Chief Judge.

This is an appeal by Dr. Gideon Goldstein fr om the

adverse judgment of the District Court in favor of his

former employer, Johnson & Johnson (J&J), following a

bench trial. It requires us to addr ess again the question of

the proper scope of judicial review of the decision of a plan

administrator acting under the Employee Retir ement

Income Security Act of 1974 (ERISA), 29 U.S.C. S 1001 et

seq., to deny benefits to a participant. Although this topic

has been exhaustively examined in the context of benefits

denials generally, see Firestone T ire & Rubber Co. v. Bruch,

489 U.S. 101 (1989), and in the context of decisions made

by potentially self-interested administrators specifically, see

Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377 (3d

Cir. 2000), we now face a benefits-denial decision in a new

context: that of a "top hat" plan, i.e., a"plan which is

unfunded and is maintained by an employer primarily for

the purpose of providing deferred compensation for a select

group of management or highly trained employees." Miller v.

Eichleay Eng'rs, Inc., 886 F.2d 30, 34 n.8 (3d Cir. 1989)

(citations omitted).

In Firestone Tire, the Supreme Court explained that

because ERISA plans are analogous to "trusts" for

employees, with the plan administrator serving as trustee,

a reviewing court owes deference to the discretionary

decisions of the administrator just as the discr etionary

decisions of a trustee would receive defer ence. See Firestone

Tire, 489 U.S. at 111. In Pinto, we interpreted Firestone Tire

2

to mandate a more searching scrutiny of such discretionary

decisions in situations where the impartiality of the

administrator is called into question, either because the

structure of the plan itself inherently cr eates a conflict of

interest, or because the beneficiary has put forth specific

evidence of bias or bad faith in his or her particular case.

See Pinto, 214 F.3d at 383-87. However, both Firestone Tire

and Pinto are premised on the analogy of an ERISA plan to

a traditional trust.

In contrast, this Court has routinely tr eated top hat

plans differently from other kinds of plans. See, e.g., In re

New Valley Corp., 89 F.3d 143, 148-49 (3d Cir. 1996)

(explaining differences between top hat plans and other

ERISA plans). This is because top hat plans ar e expressly

exempted from most of the substantive ERISA r equirements

normally employed to protect workers' interests in their

plans. See 29 U.S.C. SS 1051(2), 1081(a)(3), 1101(a)(1). Top

hat plans are unfunded, they do not vest, and they are not

required to name fiduciaries. See id. Under such

circumstances, the analogy to trust law fails, and the plans

are more appropriately consider ed as unilateral contracts,

whereby neither party's interpretation is entitled to any

more "deference" than the other party's. See In re New

Valley, 89 F.3d at 149 (top hat plans are governed by the

federal common law of contract); Kemmerer v. ICI Americas

Inc., 70 F.3d 281, 287 (3d Cir. 1995) (same).

There appears to be no reason, however , why the

precondition that mandates deference in the context of the

more typical ERISA plan -- that is, a written clause

explicitly granting authority to the plan administrator to

interpret the terms of the plan, see Firestone Tire, 489 U.S.

at 111-12 -- should not be given effect as part of the

unilateral contract that constitutes a top hat plan. In

accordance with ordinary contract principles, we conclude

that, depending on the language used, such a clause has

the potential to grant the plan administrator discr etion to

construe the terms of the plan, subject to the implied duty

of good faith and fair dealing. See Restatement (Second) of

Contracts S 205. And, as with any other contract term,

courts retain the authority to review the administrator's

compliance with that duty to exercise discr etion in good

faith.

3

The dispute in this case centers around the pr oper

characterization of an unusual form of compensation that

Goldstein received during his tenure at J&J. The question

is whether this compensation, which involved paying to

Goldstein a specified percentage of the sales of products he

developed, should have been taken into account for the

purpose of determining his monthly pension under the

terms of J&J's retirement plans. Goldstein argues that

these payments should have been used to calculate his

pension; the plan administrator disagrees. Her e, the grant

of discretion to the plan administrator to interpret the

plan's terms was broad, in that the administrator was given

"sole authority" to "[i]nterpret the provisions" of the plan,

and the administrator's actions were to be"final and

conclusive for all persons." Moreover , the District Court's

factual conclusion that the administrator at all times acted

in good faith with respect to the employee's claim for

benefits is not clearly erroneous. Accor dingly, we will affirm

the judgment of the District Court denying Goldstein's

claim for additional benefits.

I. Facts

Goldstein is a physician who specializes in

immunobiology research, specifically AIDS research. In

1977, Goldstein, then employed by the Sloan-Kettering

Institute for Cancer Research, received a patent on the drug

thymopentin, which he assigned to his employer . Later that

year, he joined Ortho Pharmaceutical Corporation, a

subsidiary of J&J. Ortho licensed the thymopentin patent

from Sloan-Kettering to allow Goldstein to continue his

work, paying a royalty for the license based on sales, and

paying a "commission" to Goldstein equal to one percent of

the royalty.1

_________________________________________________________________

1. The employment contracts consistently r efer to these payments as

"commissions"; however, the parties dispute whether they were truly

"commissions" or were instead "r oyalties." For the purposes of this

opinion, we will follow the contractual language and refer to the

payments as "commissions," although our use of the term is not

intended to imply a legal conclusion as to the pr oper characterization of

the payments.

4

In 1987, J&J created the Immunobiology Resear ch

Institute, headed by Goldstein. At that time, Goldstein

entered into a new employment contract with J&J. This

new contract contained a section titled "Compensation,"

with three subheadings. The first subheading,"Salary,

Bonus and Employee Benefits" explained that Goldstein

would receive a "salary and cash bonus each year," and

would be "entitled to participate in all general employee

benefit plans . . . in accordance with their terms, including

. . . retirement plans." The second subheading,

"Commissions," provided that in addition to his salary,

Goldstein would receive a commission equal to one and

one-fourth percent of the sales of the pr oducts he

developed. The commissions would continue at a r educed

rate for five years after the expiration of the patents,

irrespective of Goldstein's continued employment with J&J.

The agreement also provided that J&J was under no

obligation to market Goldstein's products, and that the

salary and bonus payments were to be paid "in lieu of " that

obligation. The third subheading stated that Goldstein

would not participate in J&J's executive stock bonus plan,

a provision to which Goldstein had agreed in exchange for

the right to receive commissions. As it happened,

throughout Goldstein's relationship with J&J, the only

patent that was actually marketed -- and thus, the only

patent that generated income to Goldstein -- was the

thymopentin patent. Despite this fact, Goldstein's

commissions greatly exceeded his salary and bonus

payments, constituting almost 75% of his total

compensation.

Throughout Goldstein's tenure with J&J, the company

maintained a system of retirement benefits for its

employees, consisting of two interrelated plans (together,

"the Plan"). The first was an ordinary funded pension plan

(the Retirement Plan), subject to all of ERISA's substantive

requirements. Under this plan, retir ees would receive

monthly benefits in an amount determined by a formula

based on the average compensation earned by the employee

during his or her five highest consecutive ear ning years

with the company. The amount of these payments was

capped in order for the plan to maintain its qualified status

under the Internal Revenue Code. See 26 U.S.C. S 415. In

5

addition to its Retirement Plan, J&J also maintained what

it termed an "Excess Benefit Plan" (the Top Hat Plan)

designed to work in tandem with the Retirement Plan.2 The

Top Hat Plan paid out the benefits due an employee under

J&J's pension formula that, due to the cap, could not be

paid directly from the Retirement Plan.

Both plans were administered by a Pension Committee.

Under the terms of the Retirement Plan, the Pension

Committee was granted "sole authority" to"interpret" the

terms of the plan. Under the terms of the Top Hat Plan,

benefits would be calculated according to the terms of the

Retirement Plan, and the "decisions made by and the

actions taken by [the Pension Committee] in the

administration of this Excess Plan shall be final and

conclusive for all persons." By early 1995, the Committee

had delegated much of its authority to interpr et the Plan to

a subcommittee known as the Benefits Claims Committee

(BCC). The Pension Committee was the named fiduciary of

the Retirement Plan. However, the T op Hat Plan was, by

definition, unfunded (i.e., benefits wer e paid directly out of

J&J's operating revenues), and its administrator not only

had no fiduciary responsibilities, but was also explicitly

exempted from personal liability for actions taken with

respect to the plan. Obviously, both the lack of fiduciary

responsibility and the exemption from personal liability

would not have been possible had the excess benefit plan

been subject to ERISA's general requirements. See In re

New Valley Corp., 89 F.3d 143, 149 (3d Cir. 1996).

Because benefits under the Plan were deter mined by

reference to the employee's compensation during his or her

employment with J&J, it was necessary for the Plan to

define the types of compensation that would be included in

_________________________________________________________________

2. ERISA provides that plans designed solely to provide benefits in excess

of the statutory cap contained in 26 U.S.C. S 415 are "excess benefit

plans" that are not covered by ERISA at all. See 29 U.S.C. S 1002(36);

Gamble v. Group Hospitalization & Med. Servs., 38 F.3d 126, 128 (4th

Cir. 1994). However, despite the fact that J&J styled this an "Excess

Benefit Plan," we determined on a pr evious appeal that the plan was, in

fact, a top hat plan, and thus governed by ERISA. See Goldstein v.

Johnson & Johnson, No. 98-6065 & 98-6172, slip op. at 10 (3d Cir. Mar.

4, 1999).

6

the benefit calculation. Throughout Goldstein's employment

with J&J, the relevant Plan provisions explained that:

"Covered Compensation" means basic r emuneration

paid to an Employee including amounts deferr ed at the

Employee's election under the Johnson & Johnson

Savings Plan, during periods for which such Employee

receives Credited Service under this Plan. Covered

Compensation for a year includes straight time pay for

a regular workweek, prior year salesman's

commissions and other specified forms of incentive

compensation, and incentive or piecework ear nings,

but excludes premiums for overtime shift, Satur day

and Sunday (6th or 7th workday) or holiday work,

arbitrary bonuses, the value of gifts, management

incentive bonuses and certificates of extra

compensation.3

In addition, the Summary Plan Description explained that:

Included in your Plan earnings will be your straight

time pay for your regular workweek, sales-person's

commissions, overtime, shift differential, year-end cash

Christmas gift, and year-end executive cash bonus. All

other earnings, for example, Johnson & Johnson

Achievement Award and stock, not specifically

described above, are not included in Plan earnings.

In December 1994, J&J modified its plan, r etroactive to

1989. In this new version of the plan, the definition of

"compensation" was rewritten as:

"Covered Compensation" means basic r emuneration

paid to an Employee including amounts deferr ed at the

Employee's election under the Johnson & Johnson

Savings Plan and salary reduction amounts under a

plan that meets the requirements of Section 125 of the

Code, during periods for which such Employee r eceives

Credited Service under this Plan. Cover ed

Compensation for a year includes straight time pay for

a regular workweek, current year salesperson's paid

commissions, other specified forms of incentive

_________________________________________________________________

3. These Certificates of Extra Compensation, or CECs, were the

functional equivalent of a share of stock.

7

compensation and incentive or piecework earnings,

year-end cash Christmas gift, year-end cash executive

bonus, overtime, shift, Saturday and Sunday (6th or

7th workday), and holiday pay. . . . Covered

Compensation shall include the annual value of stock

contract awards and dividend equivalents paid on

unissued stock contract shares and, if applicable, non-

vested Certificates of Extra Compensation (CECs).

The new Summary Plan Description defined "Plan

Earnings" as:

Compensation used in determining Pension Plan

benefits, including consideration of straight-time pay

for your regular workweek, salesperson's commissions,

overtime, shift differential, year -end cash gift, year-end

executive cash bonus, the value of delivered r estricted

stock awards and dividend equivalents paid on

undelivered restricted stock awards, dividend

equivalents paid on non vested CEC units, and sales

management incentive compensation.

As the quote demonstrates, this new Summary Plan

Description no longer contained the sentence excluding

forms of compensation not otherwise specified.

Just before the changes to the 1994 Plan wer e enacted,

Goldstein retired from J&J and began to receive his

pension under the terms of the Retirement Plan and the

Top Hat Plan. At this time, J&J and Goldstein also began

to negotiate a severance. Discussions continued until April

1996, mostly focusing on the disposition of the intellectual

property rights to the research Goldstein had conducted

during his tenure. Eventually, an Agreement and Mutual

Release was signed by both parties (Release). The Release

provided that all claims by Goldstein r egarding "the

Employment Agreement, the termination of said agreement

. . . illegal discrimination, harassment or r etaliation based

on age, sex, race, religion, national origin, citizenship,

disability . . . breach of contract, br each of promise . . .

wrongful denial of benefits . . . ." wer e waived; however, the

Release expressly preserved "Goldstein's right to participate

in J&J's Retirement Plan . . . in accor dance with the terms

of said plan." Both provisions were added in response to a

8

request by Goldstein's attorney that Goldstein be permitted

to participate in the pension plans.

The day after the Release was signed, Goldstein

telephoned Efrem Dlugacz, a member of the Pension

Committee, to protest the calculation of his pension

benefits. Specifically, Goldstein objected to the fact that the

"compensation" used to compute his pension did not

include the commissions he had earned on the

thymopentin patent, but rather were based solely on his

salary and annual bonuses. Goldstein was then r eceiving a

pension of $7,606 per month; had his commissions been

included, his pension would have been $30,126 per month.

Goldstein admits that at the time he executed the Release,

he was aware of his intention to challenge the calculation

of his pension. All of the extra benefits claimed by Goldstein

would have been paid out of the Top Hat Plan.

On Dlugacz's suggestion, Goldstein lodged his objections

in writing. Garry Goldberg, Manager of Pension

Administration, having reviewed Goldstein's claim,

addressed a memo to the BCC taking the position that

Goldstein's commissions were not pensionable. Considering

only whether Goldstein's commissions fell into one of the

categories of specifically enumerated pensionable items,

Goldberg concluded that the only potentially r elevant

categories were "salesperson's commissions" and "sales

management incentive compensation," but that these items

only referred to the compensation r eceived by salespeople.

Under this interpretation, Goldstein's ear nings did not

qualify. Goldstein was not given a copy of this memo or

asked to respond.

With Goldstein's knowledge, the BCC met in May 1996 to

consider his claims. In June of that year, Michael J. Carey,

Chair of the BCC, wrote to Goldstein denying his claim, on

the ground that Goldstein was not a salesperson and that

the commissions were not "incentive compensation" as that

term was used in the definition of "Cover ed Compensation."

Letters were exchanged in which Goldstein ar gued that his

commissions were, in fact, covered under the Plan because

his commissions were "incentive or piecework earnings."

Carey maintained the position that the ter m "incentive or

piecework earnings" was intended to apply to production

9

employees who exceeded their quotas, and that any type of

earnings not explicitly mentioned in the 1994 definition of

"Covered Compensation" was not pensionable. Goldstein

began threatening to sue in September 1996, and shortly

thereafter, the Pension Committee met and an attorney in

the Tax Department, Robert Keefer,"presented" Goldstein's

claim. After considering the evidence and the

correspondence that had been exchanged, the Pension

Committee agreed that the BCC's determination that

Goldstein's commissions were not "cover ed compensation"

was "appropriate."

II. Procedural History

In October 1996, Goldstein filed suit against J&J in New

Jersey Superior Court for the additional benefits under 29

U.S.C. S 1132, ERISA's civil enforcement provisions. J&J

removed to the District Court for the District of New Jersey,

and that court granted summary judgment to J&J on the

ground that the Release included all claims Goldstein had

against J&J for further pension benefits. On appeal, we

vacated the judgment and remanded to the District Court,

holding that the Release was ambiguous as to its scope and

thus there could be no judgment as a matter of law based

upon it. See Goldstein v. Johnson & Johnson, No. 98-6065

& 98-6172 (3d Cir. Mar. 4, 1999).

The District Court then held a bench trial in which

Goldstein claimed that his commissions were covered under

the Plan, either as "salesperson's commissions" or "sales

management incentive compensation," or because the items

included on the list of pensionable compensation wer e

meant only as exemplars of the general category of"basic

remuneration," into which his commissions fell. J&J

defended on the ground that the Plan, by its terms, did not

cover Goldstein's commissions, and further that the

interpretation of the Plan offered by the Plan administrators

was deserving of deference under Firestone Tire.4 The case

_________________________________________________________________

4. J&J also argued that Goldstein had agr eed in the Release to waive

these claims against J&J, and that even if the Release did not cover

these particular claims, Goldstein's failure to mention his intention to

sue for greater benefits during the negotiations should estop him from

asserting his claims at this time. The District Court did not find it

necessary to reach these alternative ar guments, and, given our

disposition, neither do we.

10

was tried prior to our decision in Pinto v. Reliance Standard

Life Insurance Co., 214 F.3d 377 (3d Cir . 2000), and the

District Court reviewed the determination of the BCC de

novo, concluding that Goldstein's commissions wer e not

"Covered Compensation" as that phrase was used in the

Plan. Further, the court found that J&J had r eviewed

Goldstein's claim in good faith. See Goldstein v. Johnson &

Johnson, No. 96-5643, slip op. at 22-23 (D.N.J. Feb. 14,

2000) ("[T]he Court finds as a fact that the Johnson &

Johnson Benefits Claims Committee and the Pension

Committee . . . exerted their best efforts accurately to

interpret the plan and fairly to adjudicate Goldstein's claim,

uninfluenced by whether these benefits would have been

paid directly by Johnson & Johnson . . . .").5 Accordingly,

the court entered judgment for J&J. Goldstein now appeals.

The District Court had jurisdiction over this action

pursuant to 28 U.S.C. S 1331. We have jurisdiction

pursuant to 28 U.S.C. S 1291. We have plenary review over

a district court's conclusions of law, and we r eview its

factual conclusions for clear error.

III. Discussion

A. Standard of Review of a Plan Administrator's

Interpretations

ERISA was enacted to ensure that employer -provided

benefit plans are safeguarded and maintained so as to be

available to employees when they are due. The Act does not

mandate that an employer provide benefits, and has

nothing to say about how these plans are to be designed.

See Nazay v. Miller, 949 F.2d 1323, 1329 (3d Cir. 1991).

The Act does, however, ordinarily imposefiduciary duties

upon plan administrators once a plan has been

implemented. See Noorily v. Thomas & Betts Corp. , 188

F.3d 153, 158 (3d Cir. 1999).

Administrators of ERISA plans may have various degr ees

of responsibility, depending on the plan's design. Some may

_________________________________________________________________

5. We recognize that the court did not use the term of art "good faith" in

its opinion; however, we do not believe that the quoted statements can

be interpreted as anything other than a finding of good faith.

11

be charged simply with carrying out the plan according to

its terms; others may have more discr etionary authority to

interpret the terms of the Plan and make benefits

determinations. See Firestone T ire & Rubber Co. v. Bruch,

489 U.S. 101 (1989). For many years, in cases in which

beneficiaries sued administrators alleging that benefits had

been wrongly denied them, courts attempted to set

standards as to the degree to which they would defer to the

decisions of the administrators who, by the design of the

plan -- which the employer was completely fr ee to set --

were charged with implementing it.

In Firestone Tire, the issue finally reached the Supreme

Court. Firestone Tire had sold its plastics division to a new

company, and the former employees, who had been rehired

without interruption and at the same pay rates, sued

Firestone for the benefits they had accrued under

Firestone's termination pay plan. Fir estone, which was also

the administrator of the plan, denied the benefits on the

ground that the sale to the new company did not constitute

a triggering event within the terms of the plan requiring the

payment of benefits. See id. at 105-06. In determining the

appropriate standard of review to apply to Firestone's

interpretation of its plan, the Supreme Court began by

observing that "ERISA abounds with the language and

terminology of trust law." Id. at 110. The Court, particularly

noting that ERISA requires that benefits plans have named

fiduciaries and authorizes suits against them for breach of

fiduciary duty, see id., analogized ERISA administrators to

trustees, and explained that in setting a standar d of review

for an administrator's decision, it would follow or dinary

principles of trust law, see id. at 111.

In the Court's view, under ERISA, an administrator is a

fiduciary "to the extent he exercises any discretionary

authority or control." Id. at 113 (emphasis omitted). Under

ordinary trust principles, the decisions of trustees who are

granted discretionary authority to interpr et the trust's

terms receive only arbitrary and capricious review from

courts. See id. at 111. Extending these principles to ERISA,

the Court held that although the decisions of these

fiduciaries of ERISA plans would receive deferential review

from courts, administrators who were not granted

12

discretionary authority to construe a plan's terms would

receive no deference, and their decisions would be reviewed

in accordance with ordinary contract principles. See id. at

111-15. The Court also left open the possibility that ERISA

fiduciaries operating under a conflict of inter est would

receive less deferential review. See id. at 115. Under our

decision in Pinto v. Reliance Standard Life Insurance Co.,

214 F.3d 377 (3d Cir. 2000), a court will apply heightened

scrutiny to an administrator's determination either when

the plan, by its very design, creates a special danger of a

conflict of interest, or when the beneficiary can point to

evidence of specific facts calling the impartiality of the

administrator into question. See id. at 383-87; see also Bill

Gray Enters., Inc. Employee Health & Welfar e Benefit Plan v.

Gourley, Nos. 00-3412 & 00-1400, 2001 WL 427626, slip

op. at 15 (3d Cir. Apr. 26, 2001).

If J&J's Plan were an ordinary ERISA plan, then, given

the broad discretion granted to the Pension Committee, we

would apply the standards set forth in Fir estone Tire and

Pinto. We would first determine whether any conflict of

interest existed for the Plan administrators, and then we

would calibrate our standard of review for their benefits

decision accordingly. Because Goldstein's claim for benefits

would be paid entirely out of the Top Hat Plan and the

funds would come directly from J&J's operating revenues,

we perforce would consider these facts r elevant in choosing

our standard of review. See Pinto, 214 F.3d at 389.

However, a top hat plan is a unique animal under

ERISA's provisions. These plans are intended to

compensate only highly-paid executives, and the

Department of Labor has expressed the view that such

employees are in a strong bargaining position relative to

their employers and thus do not require the same

substantive protections that are necessary for other

employees. See DOL Opin. Letter 90-14 A, 1990 WL

123933, at *1 (May 8, 1990). We have held that such plans

are more akin to unilateral contracts than to the trust-like

structure normally found in ERISA plans. See In re New

Valley Corp., 89 F.3d 143, 149 (3d Cir. 1996); Kemmerer v.

ICI Americas Inc., 70 F.3d 281, 287 (3d Cir. 1995).

Accordingly, top hat plans are not subject to any of ERISA's

13

substantive provisions, including its r equirements for

vesting and funding. See 29 U.S.C. SS 1051(2); 1081(a)(3).

Not only are the administrators of these plans not subject

to ERISA's fiduciary requirements, see 29 U.S.C. S 1101(a),

but the top hat plan at issue in this case specifically

exempts its administrators from any personal liability for

actions taken with regard to the plan.

Given the unique nature of top hat plans, we believe the

holding of Firestone Tire requiring deferential review forthe

discretionary decisions of administrators to be inapplicable.

The deferential standard of review granted to plan

administrators exercising discretionary authority was

specifically an outgrowth of the Supr eme Court's analogy to

trust law, and particularly the fiduciary r esponsibilities

possessed by administrators with discretionary authority.

See Firestone Tire, 489 U.S. at 110-11. In contrast, a top

hat administrator has no fiduciary responsibilities. Top

hats are more analogous to the second scenario identified

by the Supreme Court, i.e., when a plan administrator has

no discretion to interpret the plan's ter ms (and thus is not

a fiduciary), in which case the plan is reviewed de novo,

according to the federal common law of contract. See id. at

112. That is, although, as was done in this case,

"discretion" may be explicitly written into a top hat plan

document, it does not act as a legal trigger altering the

standard of review. Thus, we believe that, in accordance

with our earlier precedent, top hat plans should be treated

as unilateral contracts, and neither party's interpr etation

should be given precedence over the other's, except in

accordance with ordinary contract principles.6

In reaching this conclusion, we reject J&J's contention

that, because ERISA's definitional section lists a"fiduciary"

as one who exercises discretion in interpr eting the terms of

_________________________________________________________________

6. We are aware that other courts have applied Firestone Tire's holding to

top hat plans. See, e.g., Olander v. Bucyrus-Erie Co., 187 F.3d 599, 604

(7th Cir. 1999); Schikore v. BankAmerica Supplemental Retirement Plan,

No. C 98-3857 SI, 1999 WL 605826 (N.D. Cal. Aug. 2, 1999). However,

these cases do not explicitly question whether Firestone Tire should be

so freely transferrable, and, in fact, in at least one instance, the court

specifically "deferred" to the administrator of a top hat plan on the

basis

that the administrator was a fiduciary. See Olander, 187 F.3d at 607.

14

a plan, see 29 U.S.C. S 1002(21)(a), administrators of top

hat plans are also fiduciaries. To begin with, ERISA

explicitly states that top hat plans are not subject to the

ERISA's fiduciary requirements. See 29 U.S.C. S 1101(a).

Further, it is well established in the caselaw that there is

no cause of action for breach of fiduciary duty involving a

top hat plan. See In re New Valley Corp., 89 F.3d at 153;

accord Demery v. Extebank Compensation Plan , 216 F.3d

283, 290 (2d Cir. 2000) (dismissing ERISA claims for

breach of fiduciary duty in a top hat plan on the ground

that top hat administrators are not bound byfiduciary

standards); Duggan v. Hobbs, 99 F .3d 307, 313 (9th Cir.

1996) (same). Finally, we find J&J's argument disingenuous

in light of the explicit terms of its own Plan absolving the

administrators of the Top Hat Plan from individual liability.

These terms, which designate the Pension Committee as

"administrator" (but not fiduciary), stand in marked

contrast to the parallel provisions of the Retirement Plan

that explicitly name the same committee both as

administrator and as fiduciary.

We acknowledge that our holding may appear to have the

potential to create anomalous results. T o begin with, many

plans may be structured as the one curr ently before us,

whereby benefits are calculated in a similar manner

whether they are to be paid from an or dinary retirement

plan or from a top hat plan. Differ ent standards of review

for each may result in different interpretations of a single

plan's terms, even though on paper the two halves are

designed to work in tandem and to yield identical r esults.

Our holding may also seem anomalous in that we appear to

be according the least deference to plan administrators

when they are determining benefits of highly-paid

employees, the very group that the Department of Labor

believes is best able to protect its own inter ests.

However, we believe that these potentially anomalous

results are not as severe as may appear at first blush. The

"deference" ordinarily due an ERISA plan administrator is

only available to the extent that the plan grants that

administrator discretion to interpret the terms of the plan.

See Firestone Tire, 489 U.S. at 111-13. In the absence of

such discretion, a court will review the terms of the plan de

15

novo. See id. Thus, the possibility for dif ferent standards of

review between top hat plans and other ERISA plans will

only arise when the plan has explicitly granted discretion to

the plan administrators. But in the case of a top hat plan,

even though an administrator may not receive"deference"

under Firestone Tire, any grant of discretion must be read

as part of the unilateral contract itself. As a ter m of the

contract, it must be given effect as or dinary contract

principles would require, thus minimizing the potential for

differing standards of review for identical plan terms.

Ordinary contract principles requir e that, where one

party is granted discretion under the ter ms of the contract,

that discretion must be exercised in good faith -- a

requirement that includes the duty to exer cise the

discretion reasonably. See Restatement (Second) of

Contracts S 205 & cmt a; see also Ber ger v. Edgewater Steel

Co., 911 F.2d 911, 919 (3d Cir. 1990) (term of an ERISA

retirement plan allowing early retir ement when "the

Company considers that such retirement would . . . be in

its interest" obligates the employer to r each its decision in

good faith). As with any other contract term, courts retain

the authority to conduct a de novo review as to whether a

party has complied with its good-faith obligations.

Goldstein argues that if the plan is a traditional contract,

the clause granting interpretive discretion to J&J

administrators should be voided as unconscionable for it is

the functional equivalent of designating an inter ested party

as an arbitrator. We do not agr ee. Contracts are often

considered to be enforceable even when particular parties

are able to specify terms in the course of dealing, subject

only to the duty of good faith. See, e.g., O.N. Jonas Co., Inc.

v. Badische Corp., 706 F.2d 1161 (11th Cir. 1983)

(interpreting the Uniform Commercial Code); TCP Indus.,

Inc. v. Uniroyal, Inc., 661 F.2d 542 (6th Cir. 1981) (same).

Goldstein has cited nothing to the contrary, and we do not

consider cases involving due process rights to impartial

arbitrators, such as United Retail & Wholesale Employees

Teamsters Union Local No. 115 Pension Plan v. Yahn &

McDonnell, Inc., 787 F.2d 128 (3d Cir . 1986), to be apposite

to the issue at hand. Thus, we see nothing impr oper in

Goldstein and J&J contracting to allow Goldstein to

16

participate in a pension plan under which J&J will have

responsibility to administer the plan and interpret

ambiguous terms, so long as its interpr etations are

reasonable and it exercises its responsibilities in good faith.

In fact, given that the Top Hat Plan was designed to work

in concert with a retirement plan that has designated the

same entity as the fiduciary (a perfectly legitimate design),

the Top Hat Plan could hardly be administered effectively

without granting J&J this discretion.

B. Interpreting the Ter ms of J&J's Top Hat Plan

The District Court concluded, and Goldstein has not

disputed, that under the language of the Plan documents

the Pension Committee was given broad authority to

interpret the terms of the Plan and to make final decisions

with regard to the payment of benefits. 7 Nonetheless,

Goldstein disputes the Committee's interpretation of

whether his commissions constituted pensionable

compensation, although, as we explained in the r ecitation

of facts, his argument as to how his commissions fall under

the definition of "Covered Compensation" has taken a

variety of forms over the course of this dispute.8 As it is

currently presented to us, Goldstein's claim is that,

although his commissions were not cover ed under the 1989

version of the Plan, the 1994 changes to the Plan, in

particular the deletion of the statement that "All other

earnings . . . not specifically described above, are not

_________________________________________________________________

7. As described above, the Retirement Plan stated that the Pension

Committee had "sole authority" to "interpr et" the plan's terms; the Top

Hat Plan incorporated this discretion by r eference when it explained that

benefits would be calculated in accordance with the terms of the

Retirement Plan. The Top Hat Plan also added a provision that the

Pension Committee's decisions in the administration of the Top Hat Plan

would be "final and conclusive."

8. Goldstein originally argued that his commissions were pensionable as

"incentive or piecework earnings." Later , he claimed that his

commissions were "salesperson's commissions" or "sales management

incentive compensation," or, in the alter native, that the commissions

were "basic remuneration," and that the items enumerated as "basic

remuneration" in the Plan were only meant as examples of the types of

payments that were pensionable.

17

included in Plan earnings," suggests that the phrase "basic

remuneration" was given a broader definition in 1994. In

Goldstein's view, the 1994 Plan's list of pensionable items

was intended merely to provide examples of the type of

compensation covered; because Goldstein's commissions

constituted 75% of his earnings, he maintains that the

commissions were, in fact, his "basic r emuneration," and

therefore are pensionable under the terms of the 1994 Plan.

J&J responds that the list of pensionable ear nings was

intended as an exclusive list of all covered items, and that

because Goldstein's commissions were not included in the

list, they are therefore not pensionable. As explained above,

the question presented to the Court is not whether J&J's

interpretation offers the best reading of the contract;

rather, given the discretion granted to the Pension

Committee, the question is whether the interpr etation

offered by J&J was reached in good faith. The District

Court, after listening to the testimony of the parties and

examining the documentary evidence, concluded that J&J's

interpretation of the terms of its Plan was reasonable, and

that J&J administrators had used their "best ef forts" to

interpret the Plan accurately and fairly to assess

Goldstein's claim. The District Court's findings are not

clearly erroneous.

In reaching its conclusions, the court first relied on its

assessment of the credibility of J&J's plan administrators,

and specifically found that the members of the Pension

Committee and the BCC were not biased in their decisions,

and had "exerted their best efforts accurately to interpret

the plan and fairly to adjudicate Goldstein's claim." It is

axiomatic that we defer to a district court's cr edibility

determinations.

Further, we find no fault with the District Court's

determination that the numerous "irr egularities" identified

by Goldstein in the process by which the administrators

interpreted the Plan do not give rise to an inference of bias

or bad faith. These alleged irregularities r elate first to the

manner by which the Pension Committee delegated its

responsibilities to the BCC, and second to what Goldstein

perceives as the lack of opportunities for him to present

arguments and evidence on his behalf.

18

Goldstein begins by submitting that the Pension

Committee never formally delegated authority to the BCC to

make benefits determinations, and ther efore its decision to

"rubber stamp" the BCC decision without r eaching its own

independent conclusions rendered its interpretation of the

Plan terms nugatory. It is true that courts have refused to

accord Firestone Tire deference to the decisions of

administrators who, in the courts' determination, have

failed to exercise the discretion granted to them under the

terms of an ERISA plan. See, e.g., Sharkey v. Ultramar

Energy Ltd., 70 F.3d 226 (2d Cir . 1995). As we have

explained, however, we review her e the decision of the

administrators not under Firestone T ire standards, but

rather to determine whether there has been a violation of

the terms of the contract. Therefor e, whatever weight

Goldstein's arguments on this score might carry in the

context of a more ordinary ERISA plan, these arguments

are only relevant in the context of a top hat plan to the

extent they bear upon compliance with the plan's

contractual provisions, including the implied duty of good

faith and fair dealing.

In this case, Goldstein's argument that discr etionary

power was never delegated to the BCC rests on the fact that

the formal resolution delegating the Pension Committee's

power to the BCC specifically granted the BCC only the

authority to "hear and decide claims and appeals." Whether

the power to "hear and decide claims and appeals"

necessarily carries with it a discretionary power to interpret

the terms of the Plan (and it is difficult to see why it would

not), any technical flaws in the Pension Committee's efforts

to delegate discretion to the BCC do not bear on the issue

of good faith. The Plan documents themselves granted the

Pension Committee the right to delegate its authority, and

the Committee declared its intention to do so in the

Summary Plan Description. Additionally, the final

disposition of Goldstein's claim was made by the Pension

Committee itself in September 1996. Thus, it cannot be

said that the delegation to the BCC, and the decision of the

Pension Committee to adopt its reasoning, somehow

violated the contractual provisions of the Plan granting the

Pension Committee the power to interpret the Plan terms,

or demonstrated any lack of good faith on the part of J&J.

19

As for Goldstein's second argument, that he was denied

an opportunity to make his case before the BCC, the facts

simply do not bear him out. He exchanged numer ous

letters with J&J employees, including the Chair of the BCC,

in which he was able to explain his interpretation of the

Plan. In fact, during cross-examination, Goldstein admitted

that he had, at one time or another, submitted to the BCC

all of the information he believed it needed to reach a

determination. Goldstein was informed of the initial BCC

meeting, but never asked to attend or to submit evidence.

Finally, as the District Court found, Goldstein's claim was

reviewed by J&J on at least three separate occasions:

during the initial meeting of the BCC, during the course of

Goldstein's exchange of correspondence with Car ey, and

during the Pension Committee's September 1996 meeting.

In the face of this evidence, we see no grounds for

concluding that the District Court's finding of good faith on

the part of J&J was clearly erroneous.9

_________________________________________________________________

9. In a related argument, Goldstein ar gues that no deference is due an

administrative interpretation of a Plan unless the claimant is given a

"full and fair review" as requir ed by 29 U.S.C. S 1133(2). Because he was

not given an opportunity to present evidence and make arguments before

the determination was reached, he ur ges us to review the terms of the

Plan de novo. Title 29 U.S.C. S 1133(2) is among those enforcement

provisions of ERISA from which top hat plans have not been explicitly

exempted. However, by its terms, S 1133(2) obligates only "named

fiduciaries" -- which are not required for top hat plans -- to conduct a

"full and fair review" of a benefits denial. We need not decide today

whether S 1133(2) applies to the administrators of top hat plans per se,

or whether a "full and fair review" as defined by S 1133(2) is itself a

component of good-faith plan administration, because we agree with the

District Court that such a review was pr ovided to Goldstein in this case.

J&J wrote to Goldstein with updates on his claim for benefits and fully

laid out its reasons for denying his claim. It responded to his letters

and

invited him to call if he had further questions. It identified the

specific

provisions of the Plan pursuant to which it was premising the denial of

benefits. And, as explained above, Goldstein has been unable to identify

any "evidence" that he could have submitted that the administrators

failed to consider. Thus, J&J fully complied with the strictures we

developed in Grossmuller v. Inter national Union, United Automobile

Aerospace & Agricultural Implement Workers of America, 715 F.2d 853,

857-58 (3d Cir. 1983), for a full and fair r eview as required by S

1133(2).

20

In addition to the propriety of the process by which J&J

reached its decision, there is no inher ent unreasonableness

in the substantive interpretation of the Plan terms offered

by J&J giving rise to an inference of bias or bad faith. As

written, Goldstein's contract discusses his salary and

bonuses in the same section as the discussion of his right

to participate in the Plan; his "commissions," in contrast,

are placed in a separate section, suggesting that the parties

construed these payments to be something other than

pensionable earnings.

Further, the contract specifically avers that the

commissions were intended to replace other forms of

executive compensation such as CECs. As the District

Court observed, these forms of executive compensation

were not pensionable at the time of the execution of

Goldstein's contract, and only some of them became

pensionable when they were explicitly added to the list of

pensionable earnings in 1994. Thus, it is clear that the

phrase "basic remuneration" did not encompass either

these alternative forms of compensation, or Goldstein's

commissions, in 1989, and the fact that these for ms of

executive compensation had to be explicitly added to the

list of pensionable earnings in 1994, while the phrase

"basic remuneration" remained intact, suggests that there

was no "implied" broadening of the definition of "basic

remuneration," but instead an expanded list of included

items.

Additionally, as the District Court concluded, the phrase

"Covered Compensation includes" is r easonably susceptible

of meaning either that the earnings listed ar e a "sample" of

the types of compensation to be included, or that the

phrase "Covered Compensation" is intended to encompass

only those forms of compensation explicitly mentioned in

the list.10 Thus, there is nothing unreasonable in J&J's

_________________________________________________________________

10. We cannot help but observe that Goldstein apparently began offering

his alternative construction of the phrase"Covered Compensation

includes" only at the time he filed suit in the District Court, and not

when he lodged his claim for additional benefits with the Pension

Committee. This fact alone suggests that J&J's interpretation is, at

minimum, a reasonable one.

21

interpretation of the Plan to cover only those forms of

compensation specifically enumerated. And although

Goldstein plausibly argues that the 1994 deletion from the

Summary Plan Description of the clause excluding for ms of

compensation not otherwise specified must be interpreted

as evincing an intent to alter the Plan from pr oviding an

exclusive list to providing only a "sample" listing, the

District Court credited testimony of J&J employees that the

phrase had been deleted as surplusage, because the intent

all along was to create a list of "cover ed compensation"

solely by listing the included items. Certainly, such an

interpretation of the motivation for the deletion is not

unreasonable either.

Goldstein's position is not an unsympathetic one, and we

can understand his anger that, notwithstanding the large

sums that his thymopentin patent yielded to J&J (and the

fact that he was brought into J&J for his expertise in

developing profitable drugs, a skill that might often be

rewarded by large royalty-like payments), he was

nonetheless given a pension based merely upon his salary.

Concomitantly, were we reviewing the plan's terms de novo,

we might reach a different r esult. After all, the fact that

Goldstein's employment contract specifies that the salary

and bonus payments were to be made in lieu of J&J's

obligation to market Goldstein's products suggests that it

was the commissions -- and not the salary -- that

constituted Goldstein's "basic remuneration." But, as the

Department of Labor has explained, highly-compensated

employees such as Goldstein are well-placed to form

employment contracts that protect their inter ests, and in

this case, the contract expressly grants the Pension

Committee the power to make final determinations as to

the types of compensation that are pensionable.

Therefore, we conclude that although courts need not

defer to the construction of disputed contract ter ms given

by the administrators of top hat plans, effect must be given

to all of the terms, including those conferring discretion on

the administrators (subject as always to the implied duty of

good faith). In this case, the discretion granted to the

administrators was quite broad, and ther e is nothing in the

process by which J&J reached its decision, or in the

22

decision itself, that would lead us to conclude that the

District Court's determination as to J&J's good faith was

clearly erroneous. Thus, we conclude that J&J did not

breach its contractual obligation to Goldstein. The

judgment of the District Court will be affir med.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

23