Amicus Curiae Brief — Hughes Aircraft Co. v. Jacobson

WOTION FILED

MAR 24 1998 No. 97-1287 _

! In The

Supreme Court of the United States

OCTOBER TERM, 1997

HUGHES AIRCRAFT COMPANY, et ai.

= Petitioners,

STANLEY I. JACOBSON, et ai.

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MOTION OF THE ERISA INDUSTRY COMMITTEE

FOR LEAVE TO FILE AMICUS CURIAE BRIEF

AND BRIEF AMICUS CURIAE IN SUPPORT

OF PETITION FOR WRIT OF CERTIORARI

Michael S. Horne

Counsel of Record

John M. Vine

Rebecca Stack Campbell

COVINGTON & BURLING

1201 Pennsylvania Avenue, N.W.

P.O. Box 7566

Washington, D.C. 20044-7566

(202) 662-6000

Counsel for Amicus Curiae

March 24, 1998 The ERISA Industry Committee

. a

oe er ee

In The

Supreme Court of the United States

OCTOBER TERM, 1997

No. 97 -1287

HUGHES AIRCRAFT, et al.

. Petitioners,

STANLEY I. JACOBSON, et ai.

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MOTION OF THE ERISA INDUSTRY COMMITTEE

FOR LEAVE TO FILE AMICUS CURIAE BRIEF

IN SUPPORT OF

PETITION FOR WRIT OF CERTIORARI

The ERISA Industry Committee ("ERIC") hereby moves,

pursuant to Rule 37.2.(b), for leave to file the attached brief

amicus curiae in support of the Petition for Writ of Certiorari.

Petitioners have consented to the filing of the attached brief.

A letter evidencing petitioners’ consent has been lodged with

the Clerk. Respondents, however, have declined to consent.

ERIC is a nonprofit organization representing over 130

major employers. It frequently participates as amicus curiae

2

in cases with the potential for far-reaching effects on employee

benefit plan design or administration. '

Virtually all of ERIC’s members maintain one or more

defined-benefit pension plans governed by the Employee

Retirement Income Security Act of 1974 ("ERISA"), 29

U.S.C. § 1001 et seg. A substantial number of those plans,

including some of the very largest pension plans in the United

States, accept or require employee contributions or have done

so in the past. The opinion of the court of appeals has

potential far-reaching effects for virtually all defined-benefit

pension plans that have or have had an employee contribution

feature, and quite possibly for many other employee benefit

plans with contributory features.

The court of appeals held that plan amendments that add

an early retirement feature and that create a new benefit

formula for plan participants who do not contribute to the plan

are subject to attack as breaches of fiduciary duties owed to

other plan participants. This conclusion is of great interest

and concern to the members of ERIC and numerous other

employers who maintain defined-benefit and other plans.

The conclusion by the court of appeals that a plan

amendment that adds a new benefit formula for some

participants can be found to constitute a “constructive

termination" of the plan for purposes of ERISA also is of

great concern to ERIC and its members. Since plan

amendments of this sort are quite common, and since the

termination of a plan has enormous consequences for both

' For example, ERIC participated as an amicus before this Court in

Lockheed Corp. v. Spink, 116 S. Ct. 1783 (1996), rev'g 60 F.3d 616 (9th

Cir. 1995). See also Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101

(1989); Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987).

3

employers and employees, the members of ERIC have a vital

interest in the appropriate resolution of this issue.

Because it represents numerous employers, ERIC is in a

position to provide a broader perspective than any party to this

litigation can provide. Because the issues posed by the court

of appeals’ decision are so far-reaching and significant, the

Court may benefit from having that broader perspective before

it when it considers whether to grant the Petition for Writ of

Certiorari. Accordingly, ERIC respectfully requests that its

motion for leave to file a brief amicus curiae in support of

that petition be granted.

Respectfully submitted,

Michael S. Horne

Counsel of Record

John M. Vine

Rebecca Stack Campbell

COVINGTON & BURLING

1201 Pennsylvania Ave., N.W.

P.O. Box 7566

Washington, D.C. 20044-7566

(202) 662-6000

Counsel for Amicus Curiae

March 24, 1998 The ERISA Industry Committee

TABLE OF CONTENTS

INTEREST OF AMICUS CURIAE .............

SUMMARY OF ARGUMENT ...............

I.

UNTIL IT IS REVERSED OR OVERRULED, THE

DECISION BELOW ON THE BREACH OF

FIDUCIARY DUTIES ISSUE WILL BE A SOURCE

OF CONSIDERABLE UNCERTAINTY AMONG

SPONSORS OF ERISA PLANS AND A

SUBSTANTIAL DETERRENT TO THE

ADOPTION OF PLAN AMENDMENTS

OFFERING NEW OR ENHANCED BENEFITS TO

EE 6 Chia Cie eo is.

THE HOLDING OF THE COURT OF APPEALS

THAT PARTICIPANTS IN A CONTRIBUTORY

DEFINED-BENEFIT PLAN HAVE A BROAD

BENEFICIAL OWNERSHIP INTEREST IN THE

PLAN’S SO-CALLED "SURPLUS" IS CONTRARY

TO THE HOLDINGS OF AT LEAST THREE

OTHER CIRCUITS AND IS BASED ON AN

ERRONEOUS EXTRAPOLATION FROM TWO

NARROWLY-FOCUSED STATUTORY

EEE + bide Mave 665-6 OA ob bs O'ck er

Iii. THE HOLDING OF THE COURT OF APPEALS,

THAT PLANS MAY BE DEEMED TO BE

TERMINATED WHENEVER A DISTRICT COURT

CONCLUDES AS A MATTER OF FACT, BASED

ON COMMON LAW TRUST CONCEPTS, THAT

TERMINATION HAS OCCURRED, IS ALSO

INCONSISTENT WITH THE RULINGS OF

OTHER CIRCUIT COURTS AND THREATENS

SERIOUSLY TO DISRUPT THE MANAGEMENT

OF NUMEROUS PENSION PLANS .........

TE Ty Pee

TABLE OF AUTHORITIES

Cases

Page

American Flint Glass Workers Union v. Beaumont

Glass Co., 62 F.3d 574 (3d Cir. 1995) ....... 11

Baum v. Nolan, 853 F.2d 1071 (2d Cir. 1988),

cert. denied, 489 U.S. 1053 (1989) .......... 12

Brillinger v. General Elec. Co., 130 F.3d 61

SPS SCL EG eer eee elie ck 6

Chait v. Bernstein, 835 F.2d 1017 (3d Cir. 1987) .... 12

Chiles v. Ceridian Corp., 95 F.3d 1505 (10th Cir.

DE SMe £0 Creat Ga et oe aa it ot 12

In re Esco Mfg. Co., 50 F.3d 315 (Sth Cir. ee

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

eR Se a Ae ee er 5

Hughes Salaried Retirees Action Committee v.

Administrator of Hughes Non-Bargaining

Retirement Plan, 72 F.3d 686 (9th Cir.

1995), cert. denied, 116 S. Ct. 1676 (1996) .... 10

Johnson v. Georgia-Pacific Corp., 19 F.3d 1184

oo ee oo ee 3, 6

Lockheed Corp. v. Spink, 116 S. Ct. 1783 (1996),

rev’g 60 F.3d 616 (9th Cir. 1995) ....... 2, 3,4

Malia v. General Elec. Co. , 23 F.3d 828

(3d Cir.), cert. denied, 513 U.S. 956 (1994) ... 3,6

Mertens v. Hewitt Assoc., 508 U.S. 248 (1993),

aff’g 948 F.2d 607 (9th Cir. 1991) .......... 14

Musto v. American Gen. Corp., 861 F.2d 897 (6th

Cir. 1988), cert. denied, 490 U.S. 1020 (1989) ... 3

Phillips v. Bebber, 914 F.2d 31 (4th Cir. 1990) ..... 11

Rodriguez v. United States, 480 U.S. 522 (1987) .... 14

iV

Salazar v. Sandia Corp., 656 F.2d 578 (10th Cir.

_— PERT Sk ee ree

Spink v. Lockheed Corp., 60 F.3d 616 (9th Cir.

enna oie ree 8. > eee nn ae aaa

United Steelworkers of America v. Harris & Sons

Steel Co., 706 F.2d 1289 (3d Cir. 1983)

Statutes

Employee Retirement Income Security Act of 1974

("ERISA"), 29 U.S.C. § 1001 ef seq. ......

ERISA §§ 203-04, 29 U.S.C. §§ 1053-54 (1994) ..

ERISA § 204(c)(2)(B)-(C), 29 U.S.C. § 1054(c)(2)

PD 6 bib sek + ae Cae be oe

ERISA § 502(e)(2), 29 U.S.C. § 1132(e)(2) .....

ERISA §§ 4041-48, 29 U.S.C. §§ 1341-48 (1994) _..

ERISA § 4041(a)(1), 29 U.S.C. § 1341(a)(1)(1994)

ERISA § 4043(c)(4), 29 U.S.C. § 1343(c)(4) (1994) : |

ERISA § 4044(d)(3)(A), 29 U.S.C. § 1344(d)(3)(A)

GD 3 oF WO ees bee tins ae

ries SEP hl eee Tee rere.

ao Ca § ERED ove 60a ob aso ees

Miscellaneous

Rev. Rul. 89-87, 1989-2 C.B.81............

U.S. Dep’t of Labor, Funding Status of Defined

Benefit Plans, Private Pension Plan Bulletin

umber © (Winter 1997)... ....0ccceees

In The

Supreme Court of the United States

OCTOBER TERM, 1997

No. 97 -1287

HUGHES AIRCRAFT COMPANY, et al

‘ Petitioners,

STANLEY I. JACOBSON, et ai. i

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF OF THE ERISA INDUSTRY COMMITTEE

AS AMICUS CURIAE IN SUPPORT OF

THE PETITION FOR WRIT OF CERTIORARI

The ERISA Industry Committee ("ERIC") submits this

brief amicus curiae in support of the Petition for Writ of

Certiorari.

INTEREST OF AMICUS CURL .£

ERIC’s interest is set forth in the foregoing Motion for

Leave to File.

SUMMARY OF ARGUMENT

The Court should grant the petition for the following

reasons:

2

The conflict on the breach of fiduciary duties issue

between the court of appeals’ decision and this Court’s

decision in Lockheed Corp. v. Spink, 116 S. Ct. 1783 (1996),

and between the court of appeals’ decision and the decisions

of other circuits, is particularly acute. As matters now stand,

a plan amendment that would be held to be clearly lawful in

several circuits could be held unlawful in the Ninth Circuit, so

that the legality of a plan amendment could turn on the

fortuitous circumstance of which of many possible

jurisdictions the litigation is filed in. The uncertainty

engendered by the court of appeals’ decision thus creates a

substantial deterrent to the adoption of plan amendments

offering new or enhanced benefits for participants.

The holding of the court of appeals that participants in a

contributory defined-benefit plan have a broad beneficial

ownership interest in the plan’s so-called "surplus" is contrary

to the holdings of at least three other circuits, is based on an

erroneous extrapolation from two narrowly-focused statutory

provisions, and is likely to have (until reversed) a serious

unsettling effect en the development and administration of

employee benefit plans.

The holding by the court of appeals that the question

whether a plan has been terminated, constructively or

otherwise, presents an issue of fact is inconsistent with the

holdings of other circuit courts to the effect that the Employee

Retirement Income Security Act of 1974 ("ERISA"), 29

U.S.C. § 1001 et seg. provides the exclusive means of

terminating a defined-benefit plan.

Pursuant to Supreme Court Rule 37.6,

ERIC states that this brief was not

prepared, written, funded or produced by any

person or entity other than ERIC or its

counsel.

BEST AVAILABLE COPY

ARGUMENT

I. UNTIL IT IS REVERSED OR OVERRULED, THE

DECISION BELOW ON THE BREACH OF

FIDUCIARY DUTIES ISSUE WILL BE A SOURCE

OF CONSIDERABLE UNCERTAINTY AMONG

SPONSORS OF ERISA PLANS AND A

SUBSTANTIAL DETERRENT TO THE ADOPTION

OF PLAN AMENDMENTS OFFERING NEW OR

ENHANCED BENEFITS TO PARTICIPANTS.

Less than four years ago, a unanimous panel of the

Seventh Circuit held that retiree-participants in a contributory

defined-benefit pension plan had no claim for breach of

fiduciary duty under ERISA with respect to a plan amendment

that eliminated the plan’s "surplus" by greatly increasing the

benefit obligations to existing employees (but not to retirees)

in the event of a hostile takeover. Johnson v. Georgia-Pacific

Corp., 19 F.3d 1184, 1188-90 (7th Cir. 1994) (Easterbrook.

J).!

Less than two years ago, this Court held, inter alia. that

plan amendments creating new benefit opportunities for

employees who, among other things, are willing to release all

their existing legal claims against the employer are not

“prohibited transaction{s]" and do not implicate any of the

fiduciary duties imposed by ERISA. Lockheed Corp. vy.

Spink, 116 S. Ct. 1783, 1790, 1792 (1996).

' Other circuits also have concluded that employer amendments to

ERISA plans do not implicate ERISA’s fiduciary duties. See, e. g., Malia

v. General Elec. Co., 23 F.3d 828, 833 (3d Cir.), cert. denied, 513 U.S.

956 (1994); Musto v. American Gen. Corp., 861 F.2d 897, 912 (6th Cir.

1988), cert. denied, 490 U.S. 1020 (1989); Salazar v. Sandia Corp. , 656

F.2d 578, 580 (10th Cir. 1981).

4

Now a two-member panel majority in the Ninth Circuit

has rendered perilous any reliance on Johnson and its

progeny,’ and any reliance on Lockheed if the plan has

accepted employee contributions. The panel majority's

decision squarely conflicts with Johnson and its progeny, and

purports to distinguish Lockheed in ways that are quite at odds

with the language and rationale of this Court.’

Today, employers that have added early retirement and

other benefit improvements to their contributory plans in

recent years, possibly in reliance on Lockheed, Johnson, and

similar decisions, face the prospect of defending costly

litigation predicated on the court of appeals’ decision.

Literally thousands of plans with cumulatively millions of

> The panel majority attempted to reconcile its decision with Johnson

on the ground that Johnson involved only an increase in benefits for active

employees who already were plan participants, while the plaintiffs in this

case alleged a transfer of plan assets for the benefit of yet-to-be hired

employees. See Pet'r App. 17a. However, the panel majority held that

petitioners may be liable for a breach of fiduciary duty because they used

plan assets to provide eligible employees with a new early retirement

opportunity. /d. at 25a. Since only current active employees can possibly

qualify for early retirement benefits, the court of appeals’ effort to

distinguish Johnson is baseless.

> The Ninth Circuit in Lockheed held that the addition of an early

retirement feature to a plan, at least where participation in that benefit was

conditioned on the employee executing a release of various legal claims

against the company, constituted an impermissible use of plan assets for the

benefit of the employer and thus a breach of the employer's fiduciary duty.

Spink v. Lockheed Corp., 60 F.3d 616, 622-24 (9th Cir. 1995). This

Court reversed, not as the Ninth Circuit now contends because Lockheed

employees made no contributions to the plan, but because the addition of

new benefits to a pension plan is a settlor function that does not implicate

ERISA’s fiduciary duties. Lockheed Corp. v. Spink, 116 S. Ct. 1783,

1790 (1996). That rationale does not support the distinction the Ninth

Circuit now seeks to draw between contributory and noncontributory plans.

5

participants and combined assets of billions of dollars are put

at risk by the court of appeals’ decision.‘ Moreover, because

ERISA contains very permissive jurisdiction and venue

provisions, see ERISA Section 502(e)(2), 29 U.S.C.

§ 1132(e)(2), it is often difficult if not impossible to predict

the circuit in which litigation will occur. For employers that

are contemplating adding new benefits to their contributory

plans and that could be sued in the Ninth Circuit, as would be

true for many larger employers, the prudent course may be to

defer adoption of any improvements in plan benefits until the

uncertainty caused by the decision below is clarified. While

such a wait-and-see approach might be a sound business

decision, it is contrary to one of the primary purposes of

ERISA: the creation of a uniform body of law that encourages

employers to adopt and upgrade employee benefits. See, e.g.,

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 8-11 (1987).

Thus, prompt review and resolution of the conflict by this

Court is highly desirable from the standpoint of millions of

employees throughout the country.

* In 1993, the latest year for which full data have been published,

there were 83,596 single-employer defined-benefit plans in the United

States, of which 59,372 reported complete actuarial data. U.S. Dep’t of

Labor, Funding Status of Defined Benefit Plans, Private Pension Plan

Bulletin Number 6 at 63-64 (Winter 1997). Among those reporting

complete actuarial data, 47,023 were “fully funded” plans, with total assets

of $827 billion, with “net excess assets" — or “surplus” — of nearly

$235 billion and with nearly 26 million participants. Jd. While it is

probable that substantially less than half of these plans accept or once

accepted employee contributions, clearly the court of appeals’ opinion has

potentially very serious far-reaching effects.

6

il. THE HOLDING OF THE COURT OF APPEALS

THAT PARTICIPANTS IN A CONTRIBUTORY

DEFINED-BENEFIT PLAN HAVE A BROAD

BENEFICIAL OWNERSHIP INTEREST IN THE

PLAN’S SO-CALLED "SURPLUS" IS CONTRARY

TO THE HOLDINGS OF AT LEAST THREE

OTHER CIRCUITS AND IS BASED ON AN

ERRONEOUS EXTRAPOLATION FROM TWO

NARROWLY-FOCUSED STATUTORY

PROVISIONS.

In rejecting the conclusions of at least three other circuit

courts,° the panel majority reasoned that the so-called

"surplus" in a defined-benefit plan that is attributable to

employee contributions is a distinct asset in which plan

participants enjoy something akin to an ownership interest.

"By statutory definition," the panel majority concluded,

“employees are vested in their own contributions and the

income generated therefrom." Pet’r App. 21a.

This is a serious misapprehension predicated on a

misreading of the statute. The essential difference between

defined-contribution plans, such as the popular 401(k) plans

offered by many private employers, and defined-benefit plans,

such as the pension plan at issue here, is that in the former

case all the risks and rewards of the investment of the funds

fall on the employee-participant. In defined-benefit plans,

these roles are reversed. If the investments go sour, the

employer must contribute whatever is required to deliver the

promised benefit to the employee at retirement. Conversely,

> See Johnson v. Georgia-Pacific Corp., 19 F.3d 1184, 1189-90 (7th

Cir. 1994); Brillinger v. General Elec. Co., 130 F.3d 61, 64 (2d Cir.

1997); Malia v. General Elec. Co., 23 F.3d 828, 831-33 (3d Cir.), cert.

denied, 513 U.S. 956 (1994).

ee ere

es

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:

:

:

7

a successful investment strategy might lighten and even

eliminate for varying periods of time the need for employer

contributions. As Judge Easterbrook explained in Johnson:

. . . the retirees do not own the assets of a defined-benefit

pension plan. Their contributions purchased not a pool of

assets (as would be the case with a defined-contribution

plan) but a promise of benefits. 29 U.S.C. § 1002(34).

Employees who contribute to a defined-benefit plan are in

this respect like persons who purchase annuity contracts

from insurance companies. They obtain a guaranteed

stream of payments; the insurer (or, with pension plans,

the employer) bears the investment risk.

19 F.3d at 1186.

Thus, when a retiree receiving benefits under a defined-

benefit plan dies, the retiree’s estate receives nothing from the

plan, unless the plan itself promises a death benefit. This

result cannot be reconciled with the court of appeals’ notion

of a “vested interest" in all the earnings generated within a

defined-benefit plan from an employee’s contributions.

The court of appeals’ conception of "plan surplus" is

irreconcilably in conflict with the view of other circuit courts.

Again, Johnson is instructive:

.. . the "surplus" of a defined-benefit plan is . . . not a

pile of assets stacked in the corner. It is instead an

accounting construct. The plan determines the value of

its assets ——- stocks, bonds, real property, cash, and so

on. It also estimates the cost of fulfilling all of the

promises to pay vested benefits. The former computation

yields the asset side of the balance sheet, the latter

computation the liability side. The difference between

these is the "surplus" or "deficit" (depending on whether

8

the number is positive or negative), which appears on the

debit side of the balance sheet to make the two columns

tally. Section 1002(21)(A)(i),_ in conjunction with

§§ 1104 and 1106, requires trustees and other persons to

deal with the assets of the plan in circumspect and

prudent ways. It has nothing at all to say about the debit

column on the balance sheet. . ..

Id. at 1189.°

The Ninth Circuit’s contrary conclusion rests on two

narrow statutory provisions that do not alter the general rule

that participants in defined-benefit plans have no protected

interest in plan assets beyond the right to receive payment of

their vested benefits.

The first of these exceptions is the minimum vesting or

nonforfeiture provisions of ERISA Sections 203-04, 29 U.S.C.

§§ 1053-54 (1994). Far from giving participants a vested

interest in all of the earnings attributable to their

contributions, these provisions provide only for

nonforfeitability of the benefits derived from the contributions

themselves plus specified levels of imputed annual interest on

employee contributions. See 29 U.S.C. § 1054(c)(2)(B)-

(C)(1994). The amount of interest imputed to the

contributions is fixed by law, and is wholly unrelated to the

successes or the failures of the plan’s investment strategies.

Thus, the minimum vesting requirements do not create a

vested interest in the earnings attributable to employee

contributions, but merely result in an increase in accrued plan

* Among other variables driving plan “surplus” is the accuracy of the

actuarial projections. If plan assets appreciate more rapidly than the

actuary predicted, “surplus” grows; if assets grow less quickly or shrink

more rapidly than predicted, “surplus” declines.

9

liabilities — what the Johnson court refers to as “the debit

column on the balance sheet" — and a corresponding

reduction in plan “surplus.”

The court of appeals also relied on ERISA

Section 4044(d)(3)(A), 29 U.S.C. § 1344(d)(3)(A)(1994),

which provides that, upon plan termination, if there are assets

that are attributable to employee contributions remaining after

satisfaction of all plan liabilities, those assets shall be

“equitably distributed" to the contributing participants or their

beneficiaries.

This highly contingent remainder interest was

bootstrapped by the panel majority into a general ownership

or beneficial interest in “surplus” no matter whether any

termination of the plan has occurred or is contemplated. See

Pet’r App. 9a. However, plan "surplus" may shrink to as

little as zero or become a deficit for any number of reasons,

including an unexpected increase in early retirements, retirees

living longer than the actuaries predicted, interest rate

fluctuations, and stock market corrections. When these events

occur, as the court of appeals conceded, the employer has no

obligation to make contributions in order to perpetuate the

plan's “surplus.” Jd. at 6a (citing Fetcher v. HMW Indus.,

Inc., 879 F.2d 1111, 1113 (3d Cir. 1989)). In short,

participants in a defined-benefit plan have no right under

ERISA to insist on perpetuation of a "surplus," even when

their contributions account in some measure for that "surplus."

That being so, reducing "surplus" by means of plan

amendments that provide additional benefits, whether to

existing or new participants, or that reduce employee funding

obligations, cannot violate ERISA.

Many retirees would no doubt like to have plan "surplus"

perpetuated, whether attributable to employee or employer

contributions, as that would give them an extra margin of

ee EE

10

protection against the possibility of the employer becoming

unable to fund the plan. Many other retirees, however, might

favor amending the plan to increase payments to retirees,

thereby reducing “surplus.” But many active employees

would no doubt regard a new benefit, such as a special early

retirement “window,” as a better use of plan assets.

Employers would prefer the freedom to add new benefits or

to increase existing benefits in whatever manner best serves

the employer's interests. An employer might be inclined, for

example, to eliminate required contributions by employees if

the employer thought that such a step would make the

company a more attractive place to work in the eyes of

prospective new employees.

As Lockheed teaches, on these issues Congress concluded

that employers acting in their capacities as plan settlors, not

as fiduciaries, can make the decision. And, as an en banc

Ninth Circuit decision in another case points out, resolution of

conflicting policies and interests is

best left to Congress — particularly when the conflicting

concerns and imterests arise in an area of the law

Congress has chosen to regulate with painstaking detail.

See Nachman Corp. v. Pension Benefit Guaranty Corp.,

446 U.S. 359, 361, 100 S. Ct. 1723, 1726, 64 L. Ed. 2d

354 (1980) (ERISA is a "comprehensive and reticulated

statute").

Hughes Salaried Retirees Action Comm. v. Administrator of

Hughes Non-Bargaining Retirement Plan, 72 F.3d 686, 695

(9th Cir. 1995), cert. denied, 116 S.Ct. 1676 (1996).

Because the opinion of the court of appeals ignored this

admonition, and created duties and obligations that are not

found in ERISA, certiorari should be granted.

oa

ll

Ill. THE HOLDING OF THE COURT OF APPEALS,

THAT PLANS MAY BE DEEMED TO BE

TERMINATED WHENEVER A_ DISTRICT

COURT CONCLUDES AS A MATTER OF

FACT, BASED ON COMMON LAW TRUST

CONCEPTS, THAT TERMINATION HAS

OCCURRED, IS ALSO INCONSISTENT WITH

THE RULINGS OF OTHER CIRCUIT COURTS

AND THREATENS SERIOUSLY TO DISRUPT

THE MANAGEMENT OF NUMEROUS

PENSION PLANS.

The court of appeals held that the district court could

conclude as a matter of fact, based on the common law of

trusts, that Hughes’ amendments to the plan had caused a

“termination” of the plan. See Pet’r App. 10a-12a, 22a-23a.

This holding is contrary to the law of the Third, Fourth, and

Fifth Circuits, where the concept that pension plans can be

terminated outside ERISA’s statutory framework has been

squarely rejected. See American Flint Glass Workers Union

v. Beaumont Glass Co., 62 F.3d 574, 579 (3d Cir. 1995);

Phillips v. Bebber, 914 F.2d 31, 34 (4th Cir. 1990); Jn re

Esco Mfg. Co., 50 F.3d 315, 316 (5th Cir. 1995) (citation

omitted).

Plan termination is a topic that Congress has addressed in

painstaking detail in ERISA. See ERISA Sections 4041-48,

29 U.S.C. §§ 1341-48 (1994). The key termination provision

in this highly detailed regulatory scheme reads:

(1) Exclusive means of plan termination

Except in the case of a termination for which proceedings

are otherwise instituted by the [Pension Benefit Guaranty

Corporation as provided in section 4042 of this title, a

single-employer plan may be terminated only in a

.

12

standard termination under subsection (b) of this section

Or a distress termination under subsection (c) of this

section.

ERISA Section 4041(a)(1), 29 U.S.C. § 1341(a)(1)(1994).

Ignoring all but section 4044 of the statutory scheme, and

relying on (1) a superseded tax regulation,’ see Pet’r App.

lla n.3, and (2) an aberrant district court decision from the

Fifth Circuit (which in turn relied on common law trust

principles), see id. at 9a, the court of appeals held that

Hughes may have "in effect, terminated" the plan or that its

conduct may have amounted to a “constructive termination" of

the plan, see id. at 10a, 1lan.3. As the court of appeals saw

it, whether amending a retirement plan to add a new benefit

formula amounts to “constructive” termination is a factual

issue to be resolved only after discovery. See id. at lla n.3,

22a-23a.

Yet there is nothing in the complaint or in the court of

appeals’ opinion to suggest that the Hughes amendment was

any different from the type of plan amendment that thousands

of employers routinely have adopted to alter, and typically to

improve, plan benefits for participants. There appears to be

* Compare 26 C.F.R. § 1.411(d)-2(c) with 26 C.F.R. § 1.401-6(b)(1);

see also Rev. Rul. 89-87, 1989-2 C.B. 81. The court of appeals’ reliance

on the tax-law concept of a “partial termination” is likewise badly

mistaken. Events or developments that will amount to a termination or a

“partial termination” for tax law purposes do not by themselves constitute

or require a termination for purposes of ERISA. See, e.g., ERISA Section

4043(c)(4), 29 U.S.C. § 1343(c)(4) (1994); Chiles v. Ceridian Corp., 95

F.3d 1505, 1516 (10th Cir. 1996); Chait v. Bernstein, 835 F.2d 1017,

1020-21 (3d Cir. 1987); United Steelworkers of America v. Harris & Sons

Stee! Co. , 706 F.2d 1289, 1299 (3d Cir. 1983); Baum v. Nolan, 853 F.2d

1071, 1076-77 (2d Cir. 1988), cert. denied, 489 U.S. 1053 (1989).

13

no dispute that many active employees elected to continue

making contributions in order to qualify for the older and

more generous benefit formula. There are only conclusory

allegations that "in effect" two plans were created and that the

amendment was “equivalent” to a termination. Such

allegations are simply artful pleading tactics designed to mask

as a factual issue what in reality is a legal claim.

Employers commonly improve pension benefits for their

employees by adding a separate benefit formula to the plan.

In many cases, benefits are calculated separately for each

employee under the several formulas in the plan, with the

employee receiving benefits under the formula that produces

the greatest benefit for that individual. But it is also a

common practice, as was done here, to extend to new or

future employees only the newly adopted benefit formula. If

employers must run the risk on a case-by-case basis of having

a court find as a factual matter that adoption of a new benefit

formula somehow terminates a plan, possibly with very

serious adverse tax consequences for both the employer and its

employees, a very substantial and quite unnecessary obstacle

will be placed in the path of improved employee benefits.

The court of appeals’ suggestion that when a plan

amendment limits a pre-existing benefit formula to current

participants and applies a new formula to future participants,

the amendment may amount to a "constructive termination" of

the plan, see Pet’r App. lla n.3, has very troubling

implications that extend well beyond the immediate context of

contributory defined-benefit plans. The notion that "freezing"

or limiting an existing benefit formula to current participants

is a “constructive” termination could mean, for example, that

the Pension Benefit Guaranty Corporation would be required

to assume many billions of dollars in additional termination

liabilities for underfunded plans. Cf. United Steelworkers of

America v. Harris & Sons Steel Co., 706 F.2d 1289 (3d Cir.

is

1983). These uncertainties and potential serious consequences

for plan beneficiaries, employers and the public generally are

the result of the court of appeals’ disregarding the specifics of

the statutory scheme and "borrowing" from tax and from

common law concepts to find support for its holdings.

This Coust repeatedly has cautioned that "(t]he authority

of the courts to develop a ‘federal common law’ under ERISA

. . . iS not the authority to revise the iext of the statute," and

that, particularly in the context of a very detailed and highly

complex statute such as ERISA, “vague notions of a statute’s

‘basic purpose’ are . . . inadequate to overcome the words of

its text. . ..". Mertens v. Hewitt Assoc., 508 U.S. 248, 259,

261 (1993), aff’g 948 F.2d 607 (9th Cir. 1991); see also

Rodriguez v. United States, 480 U.S. 522, 525-26 (1987).

Unfortunately, by its reliance on just such vague notions,

the court of appeals has reached a result that can only produce

great confusion and uncertainty unless and until it is

overturned.

15

CONCLUSION

For the foregoing reasons, ERIC urges the Court to grant

the Petition for Writ of Certiorari.

Respectfully submitted,

Michael S. Horne

Counsel of Record

John M. Vine

Rebecca Stack Campbell

COVINGTON & BURLING

1201 Pennsylvania Ave., N.W.

P.O. Box 7566

Washington, D.C. 20044-7566

(202) 662-6000

Counsel for Amicus Curiae

March 24, 1998 The ERISA Industry Committee