Petition for Writ of Certiorari — Microsoft Corp. v. Vizcaino
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OFFICE OF THE CLERK
IN THE
Supreme Court of the Anited States
OCTOBER TERM, 1997
>
MICROSOFT CORPORATION, et al.,
Petitioners,
—vVvV.—
DONNA VIZCAINO, et al.,
Respondents.
ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE NINTH CIRCUIT
PETITION FOR WRIT OF CERTIORARI
Steven L. Holley
Richard C. Pepperman, II
SULLIVAN & CROMWELL
William H. Song
James D. Oswald
Timothy S. Smith
DAVIES, ROBERTS & REID, L.L.P.
William H. Neukom
Thomas W. Burt
Linda Norman
MICROSOFT CORPORATION
Of Counsel
November 24, 1997
JOHN L. WARDEN
Counsel of Record
125 Broad Street,
New York, New York 10004.
(212) 558-4000
Questions Presented
Respondents, who worked at petitioner Microsoft Corpora-
tion (“Microsoft”) as “freelancers,” each signed agreements
providing that they were not eligible for employee benefits. The
Internal Revenue Service (“IRS”) subsequently took the posi-
tion, however, that certain freelancers were “employees” for
federal employment tax purposes, a status that depends on
common-law tests of employment without regard to particular
contract terms. Microsoft accepted the IRS’s position for
employment tax purposes only. Respondents then filed this
action Claiming that, despite the explicit agreements they had
entered into, they were entitled to employee benefits.
This petition seeks review as to respondents’ claim for one
benefit—participation in Microsoft’s Employee Stock Purchase
Plan (“ESPP”). Although that claim is indisputably governed by
Washington contract law, a divided United States Court of
Appeals for the Ninth Circuit, sitting en banc, held that respond-
ents were entitled to ESPP benefits under principles applicable
in cases governed by the Employee Retirement Income Security
Act (“ERISA”). As the dissent noted, the Ninth Circuit failed
even to acknowledge state decisional law that is directly on point
and that rejects the reasoning adopted by the Ninth Circuit.
The questions presented for review, which can be dealt with
summarily, are:
Did the court of appeals contravene this Court’s decisions
in Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938),
Fidelity Union Trust Co. v. Field, 311 U.S. 169 (1940),
and West v. AT&T, 311 US. 223 (1940), by following
decisional law under inapplicable federal statutes and
disregarding state decisional law in Getermining a question
concededly governed by state law?
Should the controlling state-law question be certified to the
Supreme Court of Washington for an authoritative answer?
il
List of Parties and Rule 29.6 Statement
The parties to the proceedings before the United States Court
of Appeals for the Ninth Circuit were petitioner Microsoft
Corporation and its pension plan and respondents Donna Viz-
caino, Jon R. Waite, Mark Stout, Geoffrey Culbert, Lesley
Stuart, Thomas Morgan, Elizabeth Spokoiny and Larry
Spokoiny.
Petitioner Microsoft Corporation has no parent companies or
nonwholly owned subsidiaries.
iii
Table of Contents
Page
I ge 0 a ee hoes io ous iv
ee i oe a oe) es ee Fs Vili
Sn I OO oe cc ce ee, ]
I te ee hae 2
Constitutional and Statutory Provisions Involved ........ 2
I ee eee oes 2
er I, Ce a es pe he 3
B. The Magistrate Judge’s Report
Wis MMOCIRATION eee. 6
i. > cee eet COMM Sted... ek. 7
D. The Ninth Circuit’s Panel Decision............. 8
E. The Ninth Circuit’s En Banc Decision ......... 10
pensous for Granting the Writ .............5..04.5. 13
I. The Ninth Circuit Refused to Follow the Governing
Rule of Law Announced by the Court of
Oe POO i ee ee ke. 13
Ii. Ata Minimum, the Question Should Be Certified
to the Supreme Court of Washington ............ 18
I he an ere oN alr SS ek 21
iv
Table of Authorities
Page(s)
Cases
Arizonans for Official English v. Arizona,
AEE A We CAPES ho as ook Se ie tae 19
Bellotti v. Baird,
a Rs CA IT hss sa os sce ae 19
Bowles v. Washington Dep't of Retirement Sys.,
BAT P20 WO CO, FOO 5 oe SR ee EE 17
Culinary Workers & Bartenders Union No. 596
Health & Welfare Trust v. Gateway Cafe, Inc.,
Se Oak BO, RTE ik ie ov ee ha bee ees 17
Daniel v. Pacific Northwest Tel. Co.,
580 P.2d 652 (Wash. Ct. App.), review denied,
TG Vee, ae Se ee) ee Ae. passim
Daughtrey v. Honeywell, Inc.,
re Se te Fe ie ee ea eee 10
Dorward v. ILWU-PMA Pension Plan,
M52 F.2AZse CA SD 6 ON BEER 16
Elkins v. Moreno,
oe Ue RF ARTE ois a Ce eI 19
Erie R.R. Co. v. Tompkins,
SOR TED. GO CUED oon ee 2 13
Page(s)
Exxon Co., U.S.A., a Div. of Exxon Corp. v.
Banque De Paris Et Des Pays-Bas,
889 F.2d 674 (Sth Cir.), cert. denied.
Pe Se RU ee oe ee 17
Fidelity Union Trust Co. v. Field,
aN Ste SOPRA, ic. 15-16, 16, 17
Fioretti v. Massachusetts General Life Ins. Co..,
53 F.3d 1228 (11th Cir. 1995),
OP Gee, WIGS. CLOG 22 oo 17
Guaranty Trust Co. v. York,
PAA Pe IO ko oe ees 13, 14
Jacoby v. Grays Harbor Chair & Mfg. Co.,
nF MEANT eo ee ee 17
King v. Order of United Commercial Travelers of Am.,
Pad VE. SOR Gas ee oes 16
Kurczi v. Eli Lilly & Co.,
bag 2am eee Cn Oy. 1997). 17
Leavitt v. Jane L..,
FOG AD PUR IO oe eee 3, 14, 18
Lehman Bros. v. Schein,
Wat Ee a ie 19
Northern Ins. Co. of New York vy.
Aardvark Assocs., Inc.,
Wee P ae rite. 991)... Se 17
vi
Page(s)
Six Companies of Cal. v. Joint Highway Dist.
No. 13 of Cal.,
PRE Ses Be EEE i a Rw aie hc ON LN LY See BOR 16
Sooner v. New York Life Jns. Co.,
Ek We ee EO cS Kees 53 obs ONS VL RRRS Gans 16
Virginia v. American Booksellers Ass'n, Inc.,
MN I i eh eee BO 19
Vizcaino v. Microsoft Corp.,
Oe ee FET CP, FP coe ee cae passim
Vizcaino v. Microsoft Corp.,
120 ©.36 1000 Gm Cir. 1997)... ee a eee passim
West v. AT&T,
PEW RA ET IE oS he Fe oo 15, 16
Constitutional and Statutory Provisions
SEE EE Os OU, ES Boy. oss Wa eS a ee ee Oe g
ee a ik ee eating cues 2
ee Rs, REED i kk ohn ea ee ibys eur Oke 6
ee RR OEE © 6c ns ss viv vue eer ety boiees tee 2
ET OOS oa oi voc wk wn Os UREN LAS 6
MEI TE RI PUID 5 io eis gens no vee RAE es 6
Ses. EE es vs on Kae Ca wed We Hel i ewa eae 2
ee
Vii
Page(s)
RN CEM Co se ah ec eee 8
Pe en SORES. Ss PC Pe aly. 6
WASH. REV. CODE ANN. § 2.60.010................ 18
WASH. REV. CODE ANN. § 2.60.020.............. 19, 21
WASH. REV. CODE ANN. § 2.60.030................. 19
Rules and Regulations
Re ee ANS yO Lk DONG a! cine ee ac 18
One, We CR ee hey Pe So Ph eee 3, 19
Pere ee ey baa 1a) 19, 21
MICE MS 9t SUOUEPR MD oe 5
Miscellaneous
17A CHARLES A. WRIGHT, ARTHUR R. MILLER &
EDWARD H. COOPER, FEDERAL PRACTICE
AND PROCEDURE (2d ed. 1988) ................ 18, 20
Charles McCoy & David Black. Microsoft
Loses Appeal in Worker-Benefits Case,
WALL ST.J., July25,1997,atA3 .............. ao
Temps Win Full-Time Benefits at Microsoft
in Business Setback, WALL ST. J es
J ME | Be RE UM en te eee EN 20
viil
Index to Appendix
Page
Opinion of the United States Court of Appeals for the |
Ninth Circuit, Sitting Em Banc, dated July 24, 1997 ..... Al )
Opinion of the United States Court of Appeals for the
Ninth Circuit, dated October 3, 1996 ............... A37
Order of the United States District Court for the
Western District of Washington, dated June 20, 1994 .. A73
Report and Recommendation of Magistrate Judge
David E. Wilson on Plaintiffs’ Motion for Partial
Summary Judgment, dated April 15,1994 ........... A78
Order of the United States Court of Appeals for the
Ninth Circuit Denying Petition for Partial Rehearing,
OU CRE A APO ies hace eae A A110
IN THE
Supreme Court of the United States
OCTOBER TERM, 1997
MICROSOFT CORPORATION, ef al,
Petitioners,
v.
DONNA VIZCAINO, et ai.,
Respondents.
PETITION FOR WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Petitioner Microsoft Corporation respectfully petitions for a
writ of certiorari to review the judgment of the United States
Court of Appeais for the Ninth Circuit entered in this case.
Opinions and Order Below
The en banc opinion of the court of appeals is reported at 120
F.3d 1006 and is reprinted in the appendix hereto at pages Al
through A36. The original panel opinion is reported at 97 F.3d
1187 and is reprinted in the appendix hereto at pages A37
through A72.
The order of the United States District Court for the
Western District of Washington is unreported and is reprinted in
the appendix hereto at pages A73 through A77. The report and
recommendation of the United States Magistrate Judge is
unreported and is reprinted in the appendix hereto at pages A78
through A109.
2
Jurisdiction
The judgment of the court of appeals was entered on July 24,
1997, and respondents’ timely petition for partial rehearing was
denied on August 26, 1997. The jurisdiction of this Court is
invoked under 28 U.S.C. § 1254(1).
Constitutional and
Statutory Provisions Involved
Article III, section 2 of the United States Constitution
provides, in pertinent part: “The judicial Power shall extend in
all Cases, in Law and Equity, . . . between citizens of different
States ....”
The Rules of Decision Act, Section 1652 of Title 28, United
States Code, provides: “The laws of the several states, except
where the Constitution or treaties of the United States or Acts
of Congress otherwise require or provide, shall be regarded as
rules of decision in civil actions in the courts of the United
States, in cases where they apply.”
Statement of the Case
This case is appropriate for summary disposition by the Court.
In a suit seeking participation in a stock purchase plan brought
by eight individuals on behalf of themselves and a putative class
against a company that had engaged them as independent
contractors, the court of appeals (in a divided en banc decision)
failed to apply governing state contract law, instead choosing to
apply principles derived from ERISA that operate without
regard to the parties’ undisputed mutual intent—in violation of
Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), and its
progeny. Indeed, the court of appeals majority not only failed to
follow settled principles of state contract law, but refused even
to acknowledge an intermediate state appellate court decision
that—as the dissent explained—is directly on point and
“reject[s]” the reasoning adopted by the Ninth Circuit majority.
Although this Court may not normally grant petitions for
3
certiorari to review purported applications of state law, the
Court recently stated that it “undoubtedly should do so where
the alternative is,” as in tinis case, allowing a “blatant federal-
court nullification of state law.” Leavitt v. Jane £., 116 8: &e.
2068, 2072 (1996).
Moreover, in disregarding state contract law in favor of
inapposite reasoning developed in ERISA cases, the court of
appeals’ decision threatens to have profound implications far
beyond Microsoft and the State of Washington, casting in doubt
the enforceability of similar agreements between companies and
independent contractors throughout the country Given the
increasingly prevalent use of independent contractors by United
States businesses (see infra n.10), the court of appeals’ decision
raises ar issue of considerable importance, as the court of
appeals itself implicitly acknowledged in deciding to rehear the
matter en banc. See FED. R. APP. P. 35(a) (en banc review
appropriate “when the proceeding involves a question of
exceptional importance”).
For these reasons and others discussed below, this is one of
those “extraordinary” cases warranting this Court’s “summary
review.” Leavitt, 116 S. Ct. at 2072. This Court therefore should
exercise its supervisory power and either summarily reverse the
judgment below or vacate that judgment and remand with
instructions to certify the controlling state-law question to the
Supreme Court of Washington for an authoritative answer.
A. Background
Microsoft develops and markets computer software. During
the period relevant to this litigation, Microsoft supplemented its
employee work force with individuals engaged as independent
contractors, generally referred to as “freelancers.” Unlike
Microsoft’s employees, such freelancers were not eligible for
employee benefits such as paid vacations and holidays, overtime
pay, sick leave, disability benefits and health insurance.
4
Respondents worked for Microsoft as freelancers between
1987 and 1990, performing a variety of jobs such as production
editor, proofreader, formatter, indexer and software tester.
(A80) Throughout that period, instead of providing freelancers
with employee benefits, Microsoft generally paid them a higher
hourly rate than it paid its regular employees. (A27) In addition,
freelancers were not paid through Microsoft’s payroll depart-
ment. (A85) Rather, like other independent contractors, they
submitted invoices for their services, which documented their
hours and the projects on which they worked, and those invoices
were paid through Microsoft’s accounts payable department.
(A85)
Microsoft expressly told all freelancers, including respondents,
when they were engaged that they were not eligible for any
Microsoft employee benefits. (A83-83) Indeed, all of the
respondents voluntarily entered into agreements expressly
stating that they would be responsible for providing their own
benefits. In particular, each respondent signed an Independent
Contractor Agreement, which provided:
CONTRACTOR is an independent contractor for MS
[Microsoft]. Nothing in this Agreement shall be construed
to create an employer-employee relationship, or guarantee
of a future offer of employment. CONTRACTOR further
agrees to be responsible for all federal and state taxes,
withholding, social security, insurance and other benefits.
(A27) Respondents also signed a one-page companion document
entitled Independent Contractor/Freelancer Information, which
similarly stated: “[A]s an Independent Contractor to Microsoft,
you are self employed and are responsible to pay all your own
insurance and benefits.” (A83)
Moreover, the evidence in this case established that
respondents had no expectation of receiving any Microsoft
employee benefits as a part of their compensation for any
services they performed for Microsoft. (A82-83) According to
Pe ae ee ore
5
the evidence, to the extent that any of the respondents saw any
company materials that mentioned employee benefits, they did
not consider themselves eligible for such benefits. (A103) Those
company materials uniformly stated that only “regular
employees,” as that term was defined at Microsoft, were eligible
for benefits. (A70) Respondents understood that they were not
“regular employees” under that definition and accordingly were
not eligible for benefits, including stock purchase rights. (A79-
80)
In the fall of 1989, the IRS took the position in several letter
rulings that certain Microsoft freelancers were “employees” for
federal employment tax purposes. The IRS’s position was based
on a regulation (26 C.F.R. § 31.3401(c)-1(b)) that classifies per-
sons as employees based on fixed common-law factors without
regard to any agreements they may have signed with the com-
pany for which they were providing services. In view of that
determination, the IRS stated that Microsoft would thereafter be
required to withhold income taxes and pay the employer’s
portion of the Federal Insurance Contribution Act tax for those
specific freelancers. In response to that ruling, Microsoft hired
some freelancers as employees, and others chose to become
employees of temporary employment agencies that had contracts
with Microsoft and other companies.
After the IRS ruling, respondents requested that Microsoft
provide them retroactively with various employee benefits,
including the benefit at issue in this petition—i.e., participation
in Microsoft’s Employee Stock Purchase Plan (“ESPP”).!
Microsoft rejected respondents’ request on the ground that, as
a matter of Washington contract law, respondents had agreed
that they would not receive any employee benefits. Respondents
' Established in 1986, the ESPP permits employees of Microsoft to
purchase the company’s stock at 85% of the lower of the fair market
value on the first or the last day of each six-month offering period
through payroll deductions of between two and ten percent.
6
then brought this class action challenging Microsoft’s refusal to
provide them with such benefits.’
B. The Magistrate Judge’s Report
and Recommendation
Following cross-motions for summary judgment, the district
court referred the matter, including respondents’ ESPP claim, to
a magistrate judge.
The magistrate judge noted that the ESPP “is not one of those
types of employee stock option plans governed by ERISA,” but
rather “is governed by state contract law.” (A102 (emphasis in
original)) He also emphasized that the “uncontested evidence”
is that “Microsoft never expressly offered the ESPP benefit to
[respondents]” and that “no [respondent] had any expectation of
receiving it as a portion of his/her compensation.” (A103) The
magistrate judge instead found that respondents “understood
that they would not receive the benefit.” (A103 (emphasis in
original)) “[T]o the extent that any of [respondents] knew about
the plan or saw any company materials concerning the plan,” the
magistrate judge added, “they did not consider themselves
eligible to participate in the ESPP.” (A103)
Despite these findings, which should have been dispositive of
respondents’ claim under Washington contract law, the magis-
trate judge went on to hold that respondents were entitled to
participate in the ESPP, and therefore recommended that they be
granted summary judgment on their ESPP claim. As the sole
basis for that ruling, the magistrate judge noted that the ESPP
incorporates by reference Section 423 of the Internal Revenue
Code, which provides that such plans must extend participation
to all “common-law employees” to qualify for favorable tax
treatment. See 26 U.S.C. § 423(b)(4). Ignoring the requisites of
? The district court had jurisdiction pursuant to 29 U.S.C. § 1132(e)(1)
and 28 U.S.C. §§ 1331 and 1367(a).
7
contract formation—i.e., oifer, acceptance and considera-
tion—the magistrate judge stated:
Since Microsoft expressly created an ESPP intended to
comply with § 423, and in fact expressly embraced the
coverage extended by § 423, and since § 423 permits a
company to exclude common law employees only by
reason of factors not applicable to [respondents],
[respondents] were entitled to participate in the ESPP.
(A107)
C. The District Court’s Order
The district court rejected the magistrate judge’s recom-
mendation and instead granted Microsoft summary judgment on
respondents’ ESPP claim. The district court explained:
First, the contract between Microsoft and [respondents]
specifically stated that no benefits were provided by
Microsoft. Second, because the terms of the plan were not
communicated to [respondents], they could not have
become part of the contract between them and Microsoft.
Thus, [respondents] had no expectation of receiving any
benefits, including ESPP benefits. Finally, as Microsoft
asserts, I.R.C. § 423 does not create a right of action by
[respondents] against Microsoft. Section 423 does not
require Microsoft to open its plan to all employees; rather,
Section 423 conditions beneficial tax treatment of
employees who are participants upon the plan allowing
participation of all employees. Accordingly, Section 423
may not be used to create a right of action by
[respondents].
(A 76-77 (citations omitted))
Respondents appealed the dismissal of, inter alia, their claim
for participation in the ESPP.
8
D. The Ninth Circuit’s Panel Decision
Over a vigorous dissent by Judge Trott, a panel of the court
of appeals reversed the district court’s grant of summary judg-
ment on respondents’ ESPP claim. Vizcaino v. Microsoft Corp.,
97 F.3d 1187 (9th Cir. 1996).* At the outset of its opinion, the
majority acknowledged that the ESPP is “not subject to ERISA”
but rather is “governed by Washington state law.” 97 F.3d at
1196 (A54). Nevertheless, the majority failed to examine
whether Microsoft and respondents had entered into a contract
entitling respondents to participate in the ESPP.
The majority instead analyzed the ESPP exactly as if it were
an ERISA plan. Under ERISA—unlike state contract law—em-
ployees generally may enforce the terms of certain employee
benefit plans without regard to whether they have a contractual
right to do so. See 29 U.S.C. § 1132(a). Consistent with treating
the ESPP as if it were a plan governed by ERISA, the majority
stated that this case is “about the construction of the terms of a
plan.” 97 F.3d at 1197 (AS6) The majority then went on to hold
that respondents “are covered by [the] specific provisions” of the
ESPP, without ever examining the terms of respondents’ actual
contracts with Microsoft:
[W]e find that the ESPP, through its incorporation of
§ 423, expressly extends eligibility for participation to
[respondents] and affords them the same options to acquire
stock in the corporation as all other employees.
97 F.3d at 1197 (A55-56). In so doing, the majority expressly
acknowledged that its approach is “similar” to that which applies
> In the very first sentence of its opinion, written by Judge Reinhardt, the
majority revealed its philosophical bent on the question before it, stating,
without reference to or support in the record: “Large corporations have
increasingly adopted the practice of hiring temporary employees or
independent contractors as a means of avoiding payment of employee
benefits, and thereby increasing their profits.” 97 F.3d at 1189 (A38).
|
——————
9
“to plans that require compliance with the provisions of
ERISA.” 97 F.3d at 1197 n.12 (A56-57) (citing two ERISA
cases). :
In his dissent, Judge Trott criticized the majority for ignoring
fundamental requirements of contract law:
[T]he majority engages in analytical gymnastics to find a
contractual right where none exists. No one disputes that
the offer made by Microsoft and accepted by [respondents]
explicitly excluded the ESPP benefits now sought . . . .
Microsoft never offered the benefits to [respondents],
either bilaterally or unilaterally, [respondents] never
accepted them, and [respondents] never relied on them in
any way whatsoever as part of their compensation package.
97 F.3d at 1203 (A70). As Judge Trott put it, “without offer,
without acceptance, without consideration, and without a
meeting of the minds, the majority creates by operation of law
a contractual right on behalf of [respondents] that they never
even contemplated until this lawsuit began.” 97 F.3d at 1203
(A70).
Indeed, Judge Trott expressed dismay at the majority’s total
disregard of Washington contract law. See 97 F.3d at 1203
(A71). “Because we are bound to apply state law to this
dispute,” Judge Trott stated, “we have no authority to impair the
obligation of these contracts.” 97 F.3d at 1204 (A71-72) (citing
U.S. CONST. art. I, § 10, cl. 1). “To do so,” noted Judge Trott,
“is tantamount to depriving Microsoft of property without due
process of law.” 97 F.3d at 1204 (A72).
10
E. The Ninth Circuit’s En Banc Decision
The court of appeals thereafter agreed to rehear the appeal en
banc.* Once again over a vigorous dissent—this time by Judge
O’Scannlain (joined by Judge Hall and Judge T.G. Nelson)}—the
en banc majority held that respondents were entitled to partici-
pate in the ESPP. Vizcaino v. Microsoft Corp., 120 F.3d 1006
(9th Cir. 1997).
The en banc majority began by emphasizing that the IRS had
already determined (albeit for employment tax purposes and only
for such purposes) that respondents “were employees of Micro-
soft, and not independent contractors.” 120 F.3d at 1009 (A6).
It then trivialized respondents’ written contracts with Microsoft,
which expressly provide that respondents are not eligible for
employee benefits, as “simply a helpful disclos-:re” with no inde-
pendent legal significance. 120 F.3d at 1011 (Ay). Relying on an
ERISA case from the Eleventh Circuit, the en banc majority
concluded that respondents “are entitled to the benefits of all
other employees, or, at least, they are not excluded simply
because of the contractual terms.” 120 F.3d at 1012 (A11-12)
(citing Daughtrey v. Honeywell, Inc., 3 F.3d 1488 (11th Cir.
1993)).
* In its petition for rehearing, Microsoft noted that if the court concluded
that Washington law was unclear, “the question could have been
certified to the State Supreme Court for resolution.” After the court of
appeals had already decided to rehear the matter en banc, and a mere 13
days before oral argument, respondents filed a motion to certify state law
issues to the Washington Supreme Court. In their motion papers,
respondents noted that the court of appeals’ decision to rehear the matter
demonstrated that the case involves “important issues” and that “there
is no decision on point from the Washington Supreme Court.” Microsoft
opposed respondents’ motion to certify because, in its view, the “law in
Washington is clear and well settled.” Microsoft reiterated, however, that
“if the Court should determine that Washington law is unclear on
dispositive issues, it should certify those questions to the Washington
Supreme Court.”
1]
“Having thus burned off the brumes which threatened to
obscure [its] view”—i.e., respondents’ written contracts with
Microsoft—the en banc majority turned to the ESPP itself. 120
F.3d at 1013 (A13). Like the original panel majority, the en banc
majority treated the ESPP as if it were an ERISA plan, and thus
accorded no significance to the fact that Microsoft and
respondents had not formed a contract for participation in the
ESPP. The en banc majority concluded:
The ESPP was created and offered to all employees,
[respondents] knew of it, even if they were not aware of its
precise terms, and their labor gave them a right to
participate in it.
120 F.3d at 1014 (A17). The en banc majority then simply
asserted, without explanation and ignoring a decision of the
Washington Court of Appeals holding to the contrary (see infra
12-13, 14-15), that it was “confident” that the Washington
Supreme Court “would apply the same reasoning to this
employee benefit.” 120 F.3d at 1014 (A17).
Applying the correct analytical framework, Judge
O’Scannilain, joined by Judges Hall and T.G. Nelson, concluded
in his dissent that respondents had not entered into a valid
contract for participation in the ESPP under Washington law for
three reasons. First, to the extent that Microsoft offered the
opportunity to participate in the ESPP to employees generally,
Judge O’Scanniain found that Microsoft revoked that offer vis-
a-vis respondents by giving them specific notice that they would
not receive such employee benefits. As Judge O’Scannlain put
it, “Microsoft’s board offered the ESPP to employees generally,
and then Microsoft told [respondents]: ‘We aren’t offering the
ESPP to you; ESPP benefits are not included in your contract.’”
120 F.3d at 1020 (A29). Second, Judge O’ Scannlain found that
“there was no mutual assent (or ‘meeting of the minds’)”
because “Microsoft did not think it was offering ESPP benefits
to [respondents] and [respondents] did not think they were
accepting an offer of ESPP benefits.” 120 F.3d at 1020 (A30).
12
Third, Judge O’ Scanniain found a lack of consideration because
“Tt]here was no detrimental reliance on the ESPP by [respond-
ents].”. 120 F.3d at 1020 (A30). “If anything,” Judge
O’Scannlain noted, respondents “received consideration (a
higher hourly rate) for their agreement that they would not get
ESPP benefits.” 120 F.3d at 1020 (A30). Thus, to hold, as the
en banc majority did, that respondents are also entitled to
receive ESPP benefits—something they never expected to
receive—is to give them an undeserved financial windfall.
Judge O’Scanniain also took the en banc majority to task for
dismissing the relevant statements in respondents’ written
contracts with Microsoft as “simply a helpful disclosure”:
When one sets the ESPP side-by-side with the agreements
signed by [respondents], one realizes that no brumes
obscure the court’s view . . . . Microsoft drafted the ESPP
and the agreements using the same _ terminology
(“employee”) to ensure there could be no mistaking that
ESPP benefits were not part of the bargain... . By
“burning off’ this inconvenient contract language, the court
may as well have set fire to the contracts themselves.
120 F.3d at 1020 (A30-31).
Finally, Judge O’Scanniain pointed out that the en banc
majority (while professing “confidence” that the Washington
Supreme Court would reach the same result) ignored the rule of
law announced by the Court of Appeals of Washington in Daniel
v. Pacific Northwest Bell Telephone Co., 580 P.2d 652 (Wash.
Ct. App.), review denied, 90 Wash. 2d 1025 (1978). 120 F.3d
at 1020-21 (A31). As Judge O’Scannlain explained, the plaintiff
in Daniel signed a written agreement with the defendant
telephone company stating that he was an independent
contractor, even though—had his position been determined by
common-law standards—he may have been an employee. 120
F.3d at 1021 (A31). In such circumstances, Judge O’Scannlain
noted, the Washington Court of Appeals held that “the charac-
ee ae ee ee
13
terization of [plaintiff's] employment as that of an independent
contractor is binding between [plaintiff] and the telephone com-
pany.” 580 P.2d at 654. Following state law, Judge O’ Scannlain
thus reasoned that “[rJegardless of whether Microsoft and
[respondents] were mistaken about [respondents’] employment
status” at common law for employment tax purposes, their expli-
cit agreement that respondents were independent contractors
and not eligible for benefits “stands on its own and ought to be
enforced according to its terms.” 120 F.3d at 1020-21 (A372).
Reasons for Granting the Writ
1.
The Ninth Circuit Refused to Follow the Governing
Rule of Law Announced by the Court of
Appeals of Washington.
The Ninth Circuit en banc majority acknowledged that “the
law of the State of Washington . . . applies here,” 120 F.3d at
1014 (A16), yet failed to follow the controlling rule of law
announced by the Court of Appeals of Washington, an inter-
mediate Washington appellate court, in Daniel v. Pacific
Nortnwest Telephone Co., 580 P.2d 652 (Wash. Ct. App.),
review denied, 90 Wash. 2d 1025 (Wash. 1978). In fact, the en
banc majority did not even acknowledge that decision, let alone
attempt to distinguish it, even though, as Judge O’Scannlain
pointed out in his dissent, it is directly on point.
In ignoring the Washington Court of Appeals’ decision in
Daniel—and instead applying inapposite reasoning developed in
ERISA cases—the en banc majority failed to apply state law as
required by this Court’s decision in Erie Railroad Co. v.
Tompkins, 304 U.S. 64 (1938). In Guaranty Trust Co. v. York,
326 U.S. 99 (1945), the Court explained the rule of Erie as
follows:
14
[I]n all cases where a federal court is exercising jurisdiction
solely because of diversity of citizenship of the parties, the
outcome of the litigation in the federal court should be
substantially the same . . . as it would be if tried in a State
court.
Id. at 109. That the en banc majority attempted to cloak its
disregard of the rule of Evie by citing inapposite state court
decisions does not make this Court’s review any less necessary.
As this Court recently noted, although it does not “normally
grant petitions for certiorari solely to review what purports to be
an application of state laws,” this Court “undoubtedly should do
so where the alternative is allowing blatant federal-court
nullification of state law.” Leavitt v. Jane L., 116 S. Ct. 2068,
2072 (1996) (summarily reversing court of appeals decision
misapplying Utah law). The court of appeals’ decision in this
case is just such a “blatant federal-court nullification of state
law,” making this one of those “extraordinary” cases warranting
this Court’s “summary review.” /d.
As Judge O’Scannlain recognized in dissent, “Washington
courts have already rejected [the Ninth Circuit en banc major-
ity’s] reasoning.” 120 F.3d at 1020 (A31). In Daniel, the
plaintiff sued the company for which he had worked, claiming
that he was entitled to employee benefits despite the fact that,
like respondents, he had signed written agreements with the
company expressly providing that he was an independent con-
tractor, not an employee. As in this case, the “basic question
presented” in Daniel was “whether the parties’ characterization
of [plaintiff's] relationship with [the company] contained in their
written employment agreement is binding as between them” for
purposes of determining plaintiffs entitlement to certain
benefits. 580 P.2d at 653. In seeking such benefits, plaintiff
argued that “the agreements signed by the parties [did] not
foreclose him from showing that in actuality he was an
employee, and not an independent contractor.” /d. “The trial
court held that the agreement unambiguously established
15
[plaintiff's] status to be that of an independent contractor,” and
that, “[a]s a consequence, [plaintiff] was not entitled to the
benefits of an employee.” Jd.
Noting that “[i]t is well settled that one is bound by the
contract which he voluntarily and knowingly signs,” id. at 654,
the Washington Court of Appeals rejected plaintiff's attempt to
show that he was actually an employee. The court stated that
“(t]he provision defining [plaintiff's] status is clear and unam-
biguous” and “was contained in every agreement signed by the
parties.” The court also determined that plaintiff “was fully
aware that the contract did not intend to cover the benefits that
he now seeks.” /d. “In these circumstances,” the court held, “the
characterization of [plaintiff's] employment as that of an inde-
pendent contractor is binding as between [plaintiff] and the tele-
phone company.” Jd.
By the same reasoning, the agreements that respondents
voluntarily signed—which provided that they were independent
contractors for, not employees of, Microsoft and that they
would not receive Microsoft employee benefits—should be
binding as a matter of contract between them and Microsoft,
irrespective of respondents’ status for federal tax purposes. In
short, the Washington Court of Appeals’ decision in Daniel
teaches that, under Washington contract law, respondents’
voluntary agreement to forgo benefits bars their claim for such
benefits, whether or not they were employees under common-
law standards.
There is, to be sure, no decision directly on point from the
Supreme Court of Washington, as respondents themselves have
acknowledged. (See supra n.4.) This Court has recognized,
however, that “[a] state is not without law save as its highest
court has declared it.” West v. AT&T, 311 U.S. 223, 236 (1940).
Instead, “whether the question is one of statute or common
law,” the decision of an intermediate appellate court like the
Washington Court of Appeals is “entitied to like respect as an-
nouncing the law of the State.” Fidelity Union Trust Co. v.
16
Field, 311 U.S. 169, 178, 79 (1940). As this Court explained,
“Tajn intermediate state court in declaring and applying the state
law is acting as an organ of the State and its determination, in
the absence of more convincing evidence of what the state law
is, should be followed by a federal court in deciding a state
question.” Jd. at 177-78.°
A federal court is thus not free to reject, as the court of
appeals did here, a rule of law announced by an intermediate
state court “merely because it has not received the sanction of
the highest state court, even though [the federal court] thinks the
rule is unsound in principle or that another is preferable.” West,
311 US. at 236-37; accord Fidelity Union, 311 U.S. at 179. A
federal court is likewise not free to reject, as the court of appeals
also did here, a decision of an intermediate state court that is
directly on point in favor of a decision or decisions of the highest
state court that only tangentially relate to the question presented.
See West, 311 U.S. at 235.° This rule is “of great importance to
° Accord, e.g., King v. Order of United Commercial Travelers of Am. , 333
U.S. 153, 158 (1948) (“federal courts are bound by decisions of a state’s
intermediate appellate courts unless there is persuasive evidence that the
highest state court would rule otherwise”); Sooner v. New York Life Ins.
Co., 311 U.S. 464, 467 (1940) (federal courts “must follow the decisions
of intermediate state courts in the absence of convincing evidence that
the highest court of the state would decide differently”); Six Companies
of Cal. v. Joint Highway District No. 13 of Cal., 311 U.S. 180, 188
(1940) (same).
° The Washington Supreme Court decisions cited by the Ninth Circuit en
banc majority (120 F.3d at 1014 (A16-17)), which dealt with pension
plans—not enhancements to current income, such as stock purchase
plans—are not on point. For example, Dorward v. ILWU-PMA Pension
Plan, 452 P.2d 258, 261 (Wash. 1969)}—the Washington Supreme Court
decision on which the en banc majority principally relies—holds only
that all employees covered by a collective bargaining agreement are
entitled to participate in a pension plan established by that agreement,
hardly an analogous situation. More fundamentally, none of the cases
(continued...)
17
the proper administration of justice in the federal courts”
because, as this Court explained, it is unacceptable that “there
should be one rule of state law for litigants in the state courts
and another rule for litigants who bring the same question before
the federal courts .. . .” Fidelity Union, 311 U.S. at 179-80.’
In disregarding controlling state decisional law and instead
applying the ESPP as if it were governed by federal ERISA law,
the court of appeals contravened its Erie duty and, to reach its
startling result, all but re-wrote the parties’ contracts. As Judge
Trott noted in his dissent from the panel decision, the court of
appeals’ “radical” decision “creates by operation of law a con-
tractual right on behalf of [respondents] that they never even
contemplated until this lawsuit began.” 97 F.3d at 1203 (A70).
The “proper administration of justice” requires that federal
courts faithfully apply state law in cases such as this. Moreover,
*(...continued)
cited by the en banc majority involved a situation where, as in this case,
the company entered into specific individual agreements with plaintiffs
expressly providing that plaintiffs would nor receive the benefit in
question and later issued publications that expressly notified plaintiffs
that they were not entitled to the benefit. See Bowles v. Washington
Dep't of Retirement Sys., 847 P.2d 440 (Wash. 1993); Culinary Workers
& Bartenders Union No. 596 Health & Welfare Trust v. Gateway Cafe,
Inc., 588 P.2d 1334 (Wash. 1979); Jacoby v. Grays Harbor Chair &
Mfg. Co., 468 P.2d 666 (1970). In short, as respondents have already
conceded (see supra n.4), “there is no decision on point from the
Washington Supreme Court.”
’ Other courts of appeals continue to recognize that they are bound under
Erie to adhere to the decisions of a state’s intermediate appellate courts
absent convincing evidence that the state’s highest court would decide
the issue otherwise. See, e.g., Kurczi v. Eli Lilly & Co., 113 F.3d 1426,
1429 (6th Cir. 1997); Fioretti v. Massachusetts General Life Ins. Co., 53
F.3d 1228, 1236 n.28 (11th Cir. 1995), cert. denied, 116 S. Ct. 708
(1996); Northern Ins. Co. of New York y. Aardvark Assocs., Inc., 942
F.2d 189, 193 (3d Cir. 1991); Exxon Co., U.S.A., a Div. of Exxon Corp.
v. Banque De Paris Et Des Pays-Bas, 889 F.2d 674, 675 (5th Cir.), cert.
denied, 496 U.S. 943 (1990).
18
the court of appeals’ decision casts doubt on the enforceability
of similar agreements between companies and independent
contractors throughout the country. As a result, the decision
below “call{s] for an exercise of this Court’s supervisory
power.” Rule 10(a).
Accordingly, pursuant to Rule 16.1, this Court should grant
certiorari and summarily reverse the judgment of the court of
appeals for failure to follow the rule of law announced by the
Washington Court of Appeals in Daniel, as the alternative is to
allow a “blatant federal-court nullification of state law.” Leavitt,
116 S. Ct. at 2072.
Il.
At a Minimum, the Question Should Be
Certified to the Supreme Court of Washington.
Like many States, Washington has adopted a certification
procedure pursuant to which any federal court, including this
Court, can submit a question of Washington law to the Supreme
Court of Washington for an authoritative answer. See WASH.
REV. CODE ANN. § 2.60.010(1) & (2).* The Washington certifi-
cation statute provides:
When in the opinion of any federal court before whom a
proceeding is pending, it is necessary to ascertain the local
law of this state in order to dispose of such proceeding and
the local law has not been clearly determined, such federal
court may certify to the supreme court for answer the
question of local law involved and the supreme court shall
render its opinion in answer thereto.
8 See 17A CHARLES A. WRIGHT, ARTHUR R. MILLER & EDWARD H.
COOPER, FEDERAL PRACTICE AND PROCEDURE § 4248 (2d ed. 1988)
(citing other States’ certification procedures).
19
Id. § 2.60.020; accord WASH. R. App. P. 16.16(a) (“The
Supreme Court may entertain a petition to determine a question
of law certified to it . . . if the question of state law is one which
has not been clearly determined and does not involve a question
determined by reference to the United States Constitution.”).
This procedure “may be invoked by a federal court upon its own
motion or upon the motion of any interested party in the
litigation involved if the federal court grants such motion.”
WASH. REV. CODE ANN. § 2.60.030(1).
In Lehman Brothers v. Schein, 416 U.S. 386, 391-92 (1974),
this Court vacated a judgment of a court of appeals and
remanded the case with instructions to “reconsider whether the
controlling issue of Florida law should be certified to the Florida
Supreme Court.” In so ruling, the Court emphasized that
certification “helps build a cooperative judicial federalism,”
explaining that when federal judges attempt to predict uncertain
state law, they act “as ‘outsiders’ lacking the common exposure
to local law which comes from sitting in the jurisdiction.” /d. at
391?
If the controlling question of Washington contract law in this
case was not clearly determined by the Washington Court of
Appeals in Daniel, then it should be certified to the Supreme
Court of Washington for an authoritative answer. The control-
ling question of law here is obviously important, as respondents
acknowledged in their motion to certify the question pursuant to
Rule 16.16(a) of the Washington Rules of Appellate Procedure.
(See supra n.4.) Not only did the court of appeals decide to
rehear this matter en banc, see FED. R. APP. P. 35(a), but nine
* This Court has similarly endorsed the use of certification procedures to
obtain authoritative answers to unsettled questions of state law from a
state's highest court in a number of other cases. See, e.g., Arizonans for
Official English v. Arizona, 117 §. Ct. 1055, 1072-75 (1997); Virginia
v. American Booksellers Ass'n, 484 U.S. 383, 395-98 (1988); Elkins v.
Moreno, 435 U.S. 647, 662, 668-69 (1978); Bellotti v. Baird, 428 U.S.
132, 150-52 (1976).
20
different amici curiae filed briefs that stress the importance of
the question presented.'° Moreover, given the increasing use of
independent contractors by United States companies,
particularly in the high tech sector (see supra n.10), the question
presented here is likely to recur frequently, making certification
all the more appropriate. See WRIGHT, MILLER & COOPER, supra
§ 4248, at 173-74 (“Questions that recur frequently are more
likely candidates for certification than those that are
uncommon.”). Finally, there are few, if any, disputed factual
issues in this case that would make “it difficult or impossible to
agree on what the legal questions are”—-yet another factor
favoring certification. Jd. § 4248, at 174.
Microsoft opposed respondents’ motion in the court of
appeals to certify state-law issues to the Washington Supreme
Court solely because Microsoft believed that the relevant issue
had already been clearly determined. Although Microsoft con-
tinues to believe that the issue here involves a straight-forward
application of basic contract law principles—an issue that was
definitively resolved by the Washington Court of Appeals in
'° Further attesting to the importance of the issue, the day after the Ninth
Circuit handed down its en banc decision, the Wall Street Journal
reported that the ruling “could have significant implications for
employers across the country, who have increasingly turned to contract
employees to better manage global employment demands and to cut
costs.” Charles McCoy & David Bank, Microsoft Loses Appeal in
Worker-Benefits Case, WALL ST. J., July 25, 1997, at A3. The Wall
Street Journal predicted that the implications would be greatest for high-
tech companies, which “use squadrons of contract workers, many of
them white-collar code writers and software designers.” Jd. An earlier
Wall Street Journal article, written after the original Ninth Circuit panel
decision, similarly stated that the decision “has cast a cloud over how
U.S. industry uses one of its most crucial competitive weapons: the
temporary worker.” Zemps Win Full-Time Benefits at Microsoft in
Business Setback, WALL ST. J., Oct. 14, 1996, at B7. That earlier article
also cited a study by a labor-advocacy group, which found that “a quarter
or more of the work force in tech wellspring Silicon Valley comprises
temporary workers or other so-called contingent workers.” /d.
21
Daniel—should there be any doubt of the correctness of that
position, Daniel and the spirited dissents below show beyond
question that the law of Washington “has not been clearly
determined” to be what was declared by the court of appeals
majority. WASH. REV. CODE ANN. § 2.60.020.
Thus, if this Court does not summarily reverse the judgment
below, the Court should, as an exercise of its supervisory power,
grant certiorari, vacate the judgment and remand the case with
instructions to certify the following question to the Supreme
Court of Washington pursuant to Rule 16.16(a) of the
Washington Rules of Appellate Procedure:
Are respondents and Microsoft bound among themselves
by the terms of their written contracts providing that
respondents were independent contractors of Microsoft and
that they were not entitled to employee benefits, regardless
of whether respondents had the status of employees of
Microsoft under common-law standards?
Conclusion
For the foregoing reasons, the Court should grant certiorari
and summarily reverse the judgment of the court of appeals for
refusing to apply the rule of law announced by the Court of
Appeals of Washington in Daniel v. Pacific Northwest
Telephone Co., 580 P.2d 652 (Wash. Ct. App.), review denied,
90 Wash. 2d 1025 (Wash. 1978). In the alternative, the Court
should grant certiorari, vacate the judgment of the court of
appeals and remand the case with instructions to certify the
22
dispositive question of Washington law to the Supreme Court of
Washington.
Respectfully submitted,
Steven L. Holley John L. Warden
Richard C. Pepperman, II Counsel for Record
SULLIVAN & CROMWELL 125 Broad Street,
New York, New York 10004.
William H. Song (212) 558-4000
James D. Oswald
Timothy S. Smith
DAVIES, ROBERTS & REID, L.L.P.
William H. Neukom
Thomas W. Burt
Linda Norman
MICROSOFT CORPORATION
Of Counsel November 24, 1997
APPENDIX
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DONNA VIZCAINO; JONR. WAITE; +)
MARK STOUT; GEOFFREY CULBERT; )
LESLEY STUART; THOMAS MORGAN; )
ELIZABETH SPOKOINY; LARRY )
SPOKOINY, ) No. 94-35770
)
Plaintiffs-Appellants, ) D.C. No.
) CV-93-00178-CRD
V. ) OPINION
)
MICROSOFT CORPORATION, and its)
pension and welfare benefit plans, _—)
et al., )
Defendants-Appellees. )
)
Appeal from the United States District Court
for the Western District of Washington
Carolyn R. Dimmick, District Judge, Presiding
Argued and Submitted
March 27, 1997
Decided July 24, 1997
Before: HUG, Chief Judge, and Browning, Fletcher,
Pregerson, Hall, O’Scannlain, Fernandez, T.G. Nelson,
Hawkins, Tashima, and Thomas, Circuit Judges
Opinion by Judge Fernandez; Partial Concurrence and Partial
Dissent by Judge Fletcher; Partial Concurrence and Partial
Dissent by Judge O’Scannlain
Al
COUNSEL
Stephen K. Strong, David F. Stobaugh, Bendich, Stobaugh
& Strong, Seattle, WA, and Charles K. Wiggins, Bainbridge
Island, WA, for plaintiffs-appellants.
James D. Oswald and Timothy St. Clair Smith, Davies,
Roberts & Reid, Seattle, WA, for defendants-appellees.
Ethan Lipsig, Paul, Hastings, Janofsky & Walker, Los
Angeles, CA, for amici curiae American Electronics
Association, California Chamber of Commerce, California
Employment Law Council, and The Employers Group.
Steven Cherensky, Weil, Gotshal & Manges, Menlo Park,
CA, for amici curiae American Payroll Association, Association
of Private Pension and Welfare Plans.
Linda J. Dunn, Office of the Attorney General, Seattle,
WA, for amicus Washington State Department of Labor and
Industries.
OPINION
FERNANDEZ, Circuit Judge.
Donna Vizcaino, Jon R. Waite, Mark Stout, Geoffrey
Culbert, Lesley Stuart, Thomas Morgan, Elizabeth Spokoiny,
and Larry Spokoiny brought this action on behalf of themselves
and a court-certified class (all are hereafter collectively referred
to as “the Workers”). They sued Microsoft Corporation and its
various pension and welfare plans, including its Savings Plus
Plan (SPP), and sought a determination that they were entitled
to participate in the plan benefits because those benefits were
available to Microsoft’s common law employees. The district
A2
court granted summary judgment against the Workers, and they
appealed the determinations that they were not entitled to
participate in the SPP or in the Employee Stock Purchase Plan
(ESPP). We reversed the district court because we decided that
the Workers were common law employees who were not
properly excluded from participation in those plans. See
Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir.1996)
(Vizcaino I ). However, we then decided to rehear the matter en
banc, and we now agree with much of the panel’s conclusion
and reverse the district court.
BACKGROUND
At various times before 1990, Microsoft hired the Workers
to perform services for it. They did perform those services over
a continuous period, often exceeding two years. They were hired
to work on specific projects and performed a number of
different functions, such as production editing, proofreading,
formatting, indexing, and testing. “Microsoft fully integrated
{the Workers] into its workforce: they often worked on teams
along with regular employees, sharing the same supervisors,
performing identical functions, and working the same core
hours. Because Microsoft required that they work on site, they
received admittance card keys, office equipment and supplies
from the company.” /d. at 1190. However, they were not paid
for their services through the payroll department, but rather
submitted invoices to and were paid through the accounts
payable department.
Microsoft did not withhold income or Federal Insurance
Contribution Act taxes from the Workers’ wages, and did not
pay the employer’s share of the FICA taxes. Moreover,
Microsoft did not allow the Workers to participate in the SPP or
the ESPP. The Workers did not complain about those
arrangements at that time.
A3
However, in 1989 and 1990 the Internal Revenue Service
examined Microsoft’s records and decided that it should have
been withholding and paying over taxes because, as a matter of
law, the Workers were employees rather than independent
contractors. It made that determination by applying common
law principles. Microsoft agreed with the IRS and made the
necessary corrections for the past by issuing W-2 forms to the
Workers and by paying the employer’s share of FICA taxes to
the government.
Microsoft also realized that, because the Workers were
employees, at least for tax purposes, it had to change its system.
It made no sense to have employees paid through the accounts
payable department, so those who remained in essentially the
same relationship as before were tendered offers to become
acknowledge employees. Others had to discontinue working for
Microsoft, but did have the opportunity to go to work for a
temporary employment agency, which could then supply
temporary Workers to Microsoft on an as-needed basis. Some
took advantage of that opportunity, some—like Vizcaino—did
not.
The Workers then asserted that they were employees of
Microsoft and should have had the opportunity of participating
in the SPP and the ESPP because those plans were available to
all employees who met certain other participation qualifications,
which are not relevant to the issues before us. Microsoft
disagreed, and the Workers asked the SPP plan administrator to
exercise his authority to declare that they were eligible for the
benefits. A panel was convened; it ruled that the Workers were
not entitled to any benefits from ERISA plans' —for example,
the SPP—or, for that matter, from non-ERISA plans—for
example, the ESPP. That, the administrative panel seemed to
' See Employee Retirement Income Security Act of 1974, Pub.L. No. 93-
406, 88 Stat. 829 (1974).
A4
say, was because the Workers had agreed that they were
independent contractors and because they had waived the right
to participate in benefit plans. This action followed.
JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction pursuant to 29 U.S.C.
§ 1132(e)(1) and 28 U.S.C. §§ 1331 and 1367(a). We have
jurisdiction pursuant to 28 U.S.C. § 1291.
We review the district court’s grant of summary judgment
de novo. See Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th
Cir.1996). However, when reviewing the decision of a plan
administrator who has discretion, “the exercise of that discretion
is reviewed under the arbitrary or capricious standard, or for
abuse of discretion, which comes to the same thing.” Snow v.
Standard Ins. Co., 87 F.3d 327, 330 (9th Cir.1996); see also
Saffle v. Sierra Pac. Power Co. Bargaining Unit Long Term
Disability Income Plan, 85 F.3d 455, 458 (9th Cir.1996).
DISCUSSION
Although the Workers challenge both their exclusion from
the SPP and their exclusion from the ESPP, the two plans are
subject to rather different legal regimes. The former is a 26
U.S.C. § 401(k) plan, which is governed by ERISA; the latter is
a 26 U.S.C. § 423 plan, which is not governed by ERISA. It,
instead, is governed, at least in large part, by principles arising
out of the law of the State of Washington. Nevertheless, certain
issues, perhaps the most critical ones, cut across both regimes,
and we will address them first.
AS
I. GENERAL CONSIDERATIONS.
A. The Workers’ Status.
It is important to recognize that there is no longer any
question that the Workers were employees of Microsoft, and not
independent contractors. The IRS clearly determined that they
were. In theory one could argue that what the IRS said was fine
for withholding and FICA purposes, but that is as far as it goes.
However, the IRS made its determination based upon the
list of factors which is generally used to decide whether a
person is an independent contractor or an employee. See 26
C.F.R. § 31.340(c)-1(b). The same essential definition is used
for § 401(k) plans, see 26 C.F.R. § 1.4010(b)-9, and for § 423
plans, see 26 C.F.R. §§ 1.423-2(e)(2), 1.421-7(h). That there
should be a congruence of approaches is not surprising. As the
Supreme Court has pointed out, when Congress uses the work
“employee,” courts “ ‘must infer, unless the statute otherwise
dictates, that Congress means to incorporate the established
meaning’ ” of that word. Nationwide Mut. Ins. Co. v. Darden,
503 U.S. 318, 322, 112 S.Ct. 1344, 1348, 117 L.Ed.2d 581
(1992). The Court then went on to scrutinize the various typical
factors that go into a determination of whether a person is an
employee. See id. at 323-24, 112 S.Ct. at 1348. Those were the
usual common law factors. But, again, we recognize that one
could still question the IRS’s application of those factors in a
particular case.
That question is obviated here for, perhaps more to the
purpose, both Microsoft and the SPP have conceded for
purposes of this appeal that the Workers were common law
employees. In fact, they have asserted that the Workers’ status
is a “nonissue” because they concede that the Workers were
common law employees. That is to say, they were employees of
Microsoft.
A6
.
B. The Employment Agreements.
The concession that the Workers were employees would, at
first blush, appear to dispose of this case. It means that for legal
purposes they, along with the other employees of Microsoft,
were subject to Microsoft’s control as to both “the manner and
means” of accomplishing their job, that they worked for a
substantial period, that they were furnished a workplace and
equipment, that they were subject to discharge, and the like. See
id.; see also 26 C.F.R. § 31.3401(c)-1(b). If that were all, this
would be an exceedingly easy case. Of course, it is not all.
Microsoft also entered into special agreements with the
Workers, and it is those which complicate matters to some
extent. Each of the Workers and Microsoft signed agreements
which stated, among other things not relevant here, that the
worker was “an Independent Contractor for [Microsoft],” and
nothing in the agreement should be construed as creating an
“employer-employee relationship.” As a result, the worker
agreed “to be responsible for all of [his] federal and state taxes,
withholding, social security, insurance, and other benefits.” At
the same time, Microsoft had the Workers sign an information
form, which explained: “[A]s an Independent Contractor to
Microsoft, you are self employed and are responsible to pay all
your own insurance and benefits... Microsoft ... will not subject
your payments to any withholding.... You are not either an
employee of Microsoft, or a temporary employee of Microsoft.”
We now know beyond peradventure that most of this was not,
in fact, true because the Workers actually were employees rather
than independent contractors. What are we to make of that?
We now know that as a matter of law Microsoft hired the
Workers to perform their services as employees and that the
Workers performed those services. Yet we are also obligated to
construe the agreements. See Republic of Nicaragua v. Standard
Frutie Co., 937 F.2d 469, 474 (9th Cir.1991); Swanson v.
A7
Liquid Air Corp., 118 Wash.2d 512, 521, 826 P.2d 664, 669
(1992). In doing so, we could take either a negative or a positive
view of Microsoft’s intent and motives. We could decide that
Microsoft knew that the Workers were employees, but chose to
paste the independent contractor label upon them after making
a rather amazing series of decisions to violate the law. Or we
could decide that Microsoft mistakenly thought that the
Workers were independent contractors and that all else simply
seemed to flow from that status.
Were we to take the former approach, we would have to
determine that Microsoft, with the knowledge that the Workers
were simply a group of employees, decided to engage in the
following maneuvers:
(1) Despite the requirements of federal law that amounts
be withheld from employee wages, Microsoft decided it would
not withhold. See 26 U.S.C.§§ 3102, 3401-3406.
(2) Despite the fact that the SPP states that “employee”
means “any common law employee ... who is on the United
States payroll of the employer,” Microsoft decided to
manipulate the availability of that benefit by routing the wages
of these employees through the accounts payable department, so
that it could argue that they were not on the United States
payroll. Beyond that, it also determined that it would tell the
IRS in its “Application for Determination for Defined
Contribution Plan,” that Microsoft did, indeed, basically include
all employees, a category that it knew included the Workers,
even thought it had contrived to exclude them. Beyond even
that, Microsoft excluded these employees when it filed its tax
returns for the SPP, even though it knew better.
(3) Despite the fact that the ESPP must, essentially, be
made available to all employees, Microsoft excluded these
employees and thereby intentionally risked the possibility that
A8
the plan would not qualify for favorable tax treatment. It did
that, even though the plan itself stated that it covered all regular
employees and that it was to be construed to comply with 26
U.S.C. § 423, a law which basically requires that all employees
be covered. The officers of Microsoft also decided to eliminate
one group of common law employees from the benefits, even
though the board of directors and the shareholders had already
made the benefits of the ESPP available to those employees. In
doing that, the officers intentionally violated the corporate law
of Delaware, to which Microsoft was subject, because the terms
of coverage of stock option plans are not in the hands of
corporate officers; they are in the hands of the board itself. See
Del. Code Ann. tit. 8 § 157; see also Michelson v. Duncan, 386
A.2d 1144, 1150-51 (Del.Ch.1978), aff'd in part and rev'd in
part on other grounds, 407 A.2d 211 (Del.1979).
On the other hand, in construing the agreements we can
view the label as a simple mistake. That is, Microsoft honestly
thought that the Workers were independent contractors and took
its various actions and inactions based upon that
misapprehension. Its actions and the conclusions conveyed to
the Workers in the agreements and in the explanation in the
information form, which accompanied the agreements, were
simply an explication of what the effect of independent
contractor status would be and had no separate purpose or effect
aside from that explanatory function. That is to say, of course
there could neither be withholding from wages nor participation
in the benefit plans because those keyed on common law
employment status. If the Workers were independent
contractors, those would be the inevitable results, even if
nothing were said about them in the agreement or the
information form. Explaining the meaning of independent
contractor status was simply a helpful disclosure.
Absent evidence that the officers of Microsoft used their
daedalian talents to follow the first route we have just outlined,
A9
we must decide that the second route is a more accurate
portrayal of what occurred here. In other words, we should, and
we do, consider what the parties did in the best light. In so
doing, we do not believe that we are being panglossian; we are
merely acting in accordance with the ancient maxim which
assumes that “the law has been obeyed.” See, e.g., Cal.
Civ.Code § 3548.
The evidence does not undercut our approach; it supports
it. As soon as Microsoft realized that the IRS, at least, thought
that the Workers were employees, it took steps to correct its
error. It put some of them on its United States payroll forthwith.
It also gave the Workers retroactive pay for overtime hours. If
Microsoft had been withholding taxes while failing to provide
benefits, that would have suggested that it knew that the
Workers were a species of employee. However, its failure to
withhold indicates that it did not think that the Workers were a
special breed of employee; it simply thought that they were not
employees at all. That was underscored when Microsoft told its
managers about the status of the Workers. See Microsoft
Manager’s Handbook 4.7-4.8 (1988). It distinguished the
Workers from other employees, both regular full-time and
temporary. If did not say that the Workers were employees in
some special category; rather, it said that they were not
employees at all. See id.
But they were employees, which returns us to the contracts
themselves. Viewed in the proper light, it can be seen that the
Workers were indeed hired by Microsoft to perform services for
it. We know that their services were rendered in their capacities
as employees. The contracts indicate, however, that they are
independent contractors, which they were not. The other terms
of the contracts do not add or subtract from their status or,
indeed, impose separate agreements upon them. In effect, the
other terms merely warn the Workers about what happens to
them if they are independent contractors. Again, those are
Al0
simply results which hinge on the status determination itself;
they are not separate freestanding agreements. Therefore, the
Workers were employees, who did not give up or waive their
rights to be treated like all other employees under the plans. The
Workers performed services for Microsoft under conditions
which made them employees. They did sign agreements, which
declared that they were independent contractors, but at best that
declaration was due to a mutual mistake, and we know that even
Microsoft does not now seek to assert that the label made them
independent contractors.
On the contrary, Microsoft intended that the Workers
perform services under the conditions in question, and they
agreed to do so. The parties’ intentions were in perfect accord
in that respect, and the independent contractor label was a mere
error. We see no reason to embrace and perpetuate that error.
It could be argued that we would have to reform the contracts in
order to elide the mutual mistake. Reformation is a concept
available under the law of Washington, as it is elsewhere. See
Wilson v. Westinghouse Elec. Corp., 85 Wash.2d 78, 84-85, 530
P.2d 298, 301-02 (1975); Denny's Restaurants, Inc. v. Security
Union Title Ins. Co., 71 Wash.App. 194, 212, 859 P.2d 619,
629-30 (1993); cf Scott v. Petett, 63 Wash.App. 50, 57-58, 816
P.2d 1229, 1234-35 (1991). But Microsoft saved us and the
Workers the trouble of applying reformation doctrine when it
agreed that the Workers were, in fact, non independent
contractors. Thus, the label became meaningless, as did the
explication of what would follow from that label—no
withholding, no benefits.
A similar case from the Eleventh Circuit lends support to
our conclusion. See Daughtrey v. Honeywell, Inc., 3 F.3d 1488
(11th Cir.1993). In Daughtrey, the plaintiff had gone to work for
Honeywell and had signed an agreement which stated that she
was an independent contractor, that she was not an employee,
and that she was not “entitled to any benefits or privileges
All
provided by HONEYWELL to its employees.” Jd. at 1490. She
later claimed that was entitled to certain ERISA benefits
because she was, in fact, an employee. The district court granted
summary judgment against her on the theory that she was
actually an independent contractor, but the Eleventh Circuit
reversed. It did so because it found the facts to be in dispute on
that status issue. It seems apparent that what made her status an
issue of material fact was that she would be entitled to
“employee benefits for the period during which she performed
services as a consultant,” if she was an employee. /d. at 1493.
Similarly, in this case, other things remaining equal, it would
appear that the Workers are entitled to the benefits of all other
employees, or, at least, they are not excluded simply because of
the contractual terms.
One additional matter must detain us for a moment. It
could, perhaps, be argued that the statements about benefits,
unlike statements about withholding, stand on their own footing
as a waiver of benefits, regardless of the Workers’ true status as
employees. As we have said, we think that would be an
incorrect interpretation of these agreements, and Microsoft
assured us at argument that this is not a waiver case. Were it
one, we would have to consider whether the waivers based, as
they would have been, on the mistaken premise of independent
contractor status were knowing and voluntary under ERISA and
Washington law. See, e.g., Laniok v. Advisory Comm., 935 F.2d
1360, 1367 (2d Cir.1991) (ERISA); Yakima County (West
Valley) Fire Protection Dist. No. 12 v. City of Yakima, 122
Wash.2d 371, 384, 858 P.2d 245, 252 (1993) (Washington law).
Moreover, at least as far as the SPP is concerned, we would
have to consider whether the mistaken waiver must and would
withstand special scrutiny designed to prevent potential
employer or fiduciary abuse. See, e.g., Sharkey v. Ultramar
Energy Ltd., 70 F.3d 226, 230-31 (2d Cir. 1995) (close scrutiny
used); Smart v. Gillette Co. Long-Term Disability Plan, 70 F.3d
173, 181-82 (1st Cir.1995) (careful scrutiny used); Leavitt v.
Al2
Northwestern Beil Tel. Co., 921 F.2d 160, 162 (8th Cir.1990)
(release reviewed to assure no breach of fiduciary duty); cf
Holt v. Winpisinger, 811 F.2d 1532, 1541 (D.C. Cir.1987)
(ERISA vesting provisions cannot be waived); Amaro v.
Continental Can Co., 724 F.2d 747, 752 (9th Cir.1984)
(ERISA’s minimum standards cannot be waived). However,
these issues need not even be mooted once it is recognized that
there was no separate waiver at all. Moreover, we need not
consider what the result would be if the agreements were of a
different form or character.
In short, Microsoft has already recognized that the Workers
were employees and that the “no withholding” consequence of
the independent contractor label has fallen: we now hold that
the “benefit” consequence has fallen also. Having thus burned
off the brumes which threatened to obscure our view, we will
now turn to the plans themselves.
Il. THE PLANS
A. The SPP.
The SPP is an ERISA plan. See 29 U.S.C. § 1002(2)(A)(ii);
26 U.S.C. § 401(k); Jn re Dunn, 988 F.2d 45, 46 (7th Cir. 1933).
The Workers seek enforcement of the terms of that plan. That
is, they seek to have us review the determination of the plan
administrator and to require that the plan make its benefits
available to them. See 29 U.S.C. § 1132(a)(1)(B). As we have
already pointed out, the administrative panel of the SPP
determined that the Workers are not entitled to benefits. The
reasons appear to have been that the Workers were independent
contractors and that they waived the benefits. We must review
those determinations to see if they were arbitrary or capricious.
See Snow, 87 F.3d at 330. Based upon what we have already
said, it is pellucid that they were. To the extent that the decision
was based upon the supposed independent contractor status of
Al3
the Workers, the plan conceded that the decision was wrong
when it conceded that the Workers were, in fact, employees. To
the extent that the decision was based upon a supposed waiver
of benefits, the plan administrator purported to construe the
agreements rather than the plan itself. But, as we have pointed
out, our construction is the opposite. We, therefore, determine
that the reasons given for denying benefits were arbitrary and
capricious because they were based upon legal errors which
“misconstrued the Plan and applied a wrong standard to a
benefits determination.” Saffle, 85 F.3d at 461.
The SPP now concedes as much, but it and the Workers
asked the district court, and ask us, to decide a different issue of
plan construction, one on which the administrator has not
opined. The district court accepted that invitation, so did the
panel. See Vizcaino I, 97 F.3d at 1193. We are tempted to do the
same, but upon reflection we have determined that we should
not allow ourselves to be seduced into making a decision which
belongs to the plan administrator in the first instance.
We are asked to decide what is meant by the SPP’s
restriction of benefits to common law employees who are “on
the United States payroll of the employer.” The panel explored
some of the reasonably possible meanings of that phrase and
construed the apparent ambiguity in favor of the Workers. See
id. at 1193-96. No doubt the plan administrator should pay
careful attention to what was said there. We have also pointed
out that we are dubious about the proposition that Microsoft
would manipulate plan coverage by assigning recognized
common law employees to its accounts payable department or
to its payroll department, as it saw fit. We have our doubts that
it could properly do so. But it is the terms of the SPP which
control, and the plan is separate from Microsoft itself. Thus, we
cannot, and will not, predict how the plan administrator, who
has the primary duty of construction, will construe terms of the
SPP.
Al4
i
We do not know whether he will rely upon an “is
construction—you must actually be on the payroll—or upon an
“ought” construction—you must be a person who should be on
the payroll. Nor do we know if he will accept the domestic
versus foreign gloss on the provision in question. What we do
know is that the decision is his in the first instance. We would
set a poor precedent were we to intrude upon that exercise of
discretion before he has even considered and ruled upon the
issue. We would encourage the dumping of difficult and
discretionary decisions into the laps of the courts, although one
of the very purposes of ERISA is to avoid that kind of
complication and delay. Of course, should he rule in favor of the
Workers’ position, he must then go on to determine what
benefits they are entitled to and under what conditions, but that,
too, is exactly the kind of decision that he should be making for
each of the Workers in the first instance.
We are aware of and do not resile from our decision in
Nelson v. EG &G Energy Measurements Group, Inc., 37 F.3d
1384 (9th Cir.1994). However, that case presented us with a
somewhat unusual set of facts. In Nelson the Administrative
Committee had not construed the particular provision, but, more
than that, an attempt had been made to induce the Committee to
rule on the claims, and that request was rejected out of hand.
See id. at 1388. Moreover, while the litigation was in progress,
the plaintiffs again attempted to induce the Administrative
Committee to rule, but that approach was also rebuffed. See id
at 1388-89. Given that recalcitrance, we decided that we would
determine the issue ourselves and would decide it de novo
because there was no exercise of discretion to defer to. See id
at 1389. That is not this case; this is simply a case where a
wholly new issue, which was never put to the SPP
administrator, has been raised. He has both the right and the
duty to decide it, and we must then review his ultimate decision
regarding the Workers by the usual standard. “‘It is not the
court’s function ab initio to apply the correct standard to [the
Al5
participant’s] claim. That function, under the Plan, is reserved
to the Plan administrator.’” Saffle, 85 F.3d at 461 (citation
omitted).
B. The ESPP.
The ESPP was a plan adopted for the purpose of taking
advantage of the benefits conferred under 26 U.S.C. § 423. It
was approved by the board of directors and by the shareholders
of Microsoft. Their action was an offer to employees, as that
term is defined in § 423. As we have already suggested, we
doubt that the corporate officers set out to withdraw the offer
from some employees, even if they could have done that. The
Workers knew about the fact of that offer, even if they were not
aware of its precise terms. Under the law of the State of
Washington, which all agree applies here, a contract can be
accepted, even when the employee does not know its precise
terms. See Dorward v. ILWU-PMA Pension Plan, 75 Wash.2d
478, 452 P.2d 258 (1969). In Dorward the court pointed out that
a pension is not a gratuity, but “rather is deferred compensation
for services rendered.” Jd. at 483, 452 P.2d at 261. We think
that that same form of reasoning applies to all employee
benefits. Few of them are mere gratuities or a result of
unadulterated altruism. Most are for services rendered or for the
purpose of inducing the further rendering of services. They help
to guarantee a competent and happy labor force. The
Washington Supreme Court went on to say:
The consideration rendered for the promise in the
pension contract of the employer to pay a pension is
established when the employee is shown to have
knowledge of the pension plan and continues his
employment. An enforceable contract will arise in
such instances even though the pensioner does not
know the precise terms of the pension agreement.
Al6
|
|
|
|
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Id. Again, we are confident that the court would apply the same
reasoning to this employee benefit. Other of its decisions
confirm us in our opinion, for it has adopted a protective view
toward employees’ rights. See Bowles v. Washington Dep't of
Retirement Sys., 121 Wash.2d 52, 67-68, 847 P.2d 440, 448
(1993) (pension benefit rights enforced for public employees,
even in the absence of specific expectations); Culinary Workers
& Bartenders Union No. 596 Health & Welfare Trust v.
Gateway Cafe, Inc., 91 Wash.2d 353, 368, 588 P.2d 1334, 1344
(1979) (pension and welfare benefit promises enforced for
employees as third-party beneficiaries); Jacoby v. Grays Harbor
Chair & Mfg. Co., 77 Wash.2d 911, 915, 468 P.2d 666, 669
(1970) (where employee knows that a pension plan exists,
continued employment is consideration).
The ESPP was created and offered to all employees, the
Workers knew of it, even if they were not aware of its precise
terms, and their labor gave them a right to participate in it. Of
course, Microsoft’s officers would not allow that participation
because they were under the misapprehension that the board and
the shareholders had not extended the offer to the Workers. That
error on the officers’ part does not change the fact that there was
an offer, which was accepted by the Workers’ labor. Of course,
the ESPP provides for a somewhat unusual benefit. An
employee, who chooses to participate, must pay for any
purchase of stock, and the Workers never did that. We,
however, leave the determination of an appropriate remedy to
the district court.’
> We fully agree with the panel’s disposition of Microsoft’s asthenic claim
that the Workers are attempting to remedy a violation of § 423 itself; we
need not repeat the panel’s discussion here. See Vizcaino I, 97 F.3d at
1197.
Al7
CONCLUSION
Microsoft, like other advanced employers, makes certain
benefits available to all of its employees, who meet minimum
conditions of eligibility. For some time, it did not believe that
the Workers could partake of certain of those benefits because
it thought that they were independent contractors. In that it was
mistaken, as it now knows and concedes.
The mistake brought Microsoft difficulties with the IRS,
but it has resolved those difficulties by making certain payments
and by taking other actions. The mistake has also brought it
difficulties with the Workers, and the time has come to resolve
those.
Therefore, we now determine that the reasons for rejecting
the Workers’ participation in the SPP and the ESPP were
invalid. Any remaining issues regarding the rights of a particular
worker in the ESPP and his available remedies must be decided
by the district court upon remand. However, any remaining
issues regarding the right of any or all of the Workers to
participate in the SPP must be decided by the plan administrator
upon remand.
REVERSED and REMANDED to the district court as to
the ESPP. REVERSED and REMANDED to the district court
for further remand to the plan administrator as to the SPP.
FLETCHER, Circuit Judge, with whom HUG, Chief Judge,
and PREGERSON, HAWKINS and THOMAS, Circuit Judges,
join, concurring in part and dissenting in part:
We concur in the substance of Judge Fernandez’ opinion
except that we would not remand the issue of eligibility to
participate in the SPP to the Plan Administrator and would hold
Al8
that the Workers are eligible to participate. Remand is
inappropriate and further unnecessary in that we conclude that
interpretation of the phrase “on the United States payroll of the
employer” is not required.
In its denial of the Workers’ claim, the administrative panel
convened by the Plan Administrator stated:
The denial is affirmed for the reasons that:
(1) claimants had agreed and/or acknowledged upon
first working for Microsoft that they would not receive
employee benefits; (2) claimants specifically waived
(by contract) any rights to benefits and (3) even if
claimants had been employees and had not “waived
rights to benefits,” they were not “regular, full-time
employees” in an approved headcount position.
We agree with Judge Fernandez that these determinations were
arbitrary and capricious. On appeal, as Judge Fernandez has also
properly noted, the Plan abandoned all of its prior positions in
favor of a new tack: that the Workers are not eligible for SPP
benefits based on a construction of the phrase “on the United
States payroll of the employer.” Our disagreement with Judge
Fernandez, therefor, concerns (1) whether the Plan can properly
raise a theory on judicial review not raised in the administrative
process, and (2) if a new theory can be raised, whether the
appropriate course is for the court to remand to the Plan
Administrator to interpret the phrase in the first instance or for
the court to decide the issue de novo. We would hold that the
Plan waived any arguments not raised in the administrative
process. Second, we conclude that because of their conduct in
this litigation the defendants should be estopped from asserting
that remand is appropriate. Third, were we to reach the U.S.
payroll question, we would conclude that the issue was resolved
by the administrative panel’s factual determinations. F inally,
Al9
were we required to interpret the phrase, we would affirm the
interpretation of the original three-judge panel of our court.
Remand to the Plan Administrator to determine the
meaning of the phrase “on the United States payroll of the
employer” is improper because a plan should not be permitted
to assert on judicial review reasons for denial that were not
contained in the plan administrator’s decision. Because it was
raised for the first time before the district court, the Plan
Administrator waived this argument.
An ERISA plan is required to:
provide to every claimant who is denied a claim for
benefits written notice setting forth in a manner
calculated to be understood by the claimant: (1) The
specific reason or reasons for the denial; (2) Specific
reference to pertinent plan provisions on which the
denial is based; (3) A description of any additional
material or information necessary for the claimant to
perfect the claim and an explanation of why such
material or information is necessary; and
(4) Appropriate information as to the steps to be taken
if the participant or beneficiary wishes to submit his or
her claim for review. 29 C.F.R. § 2560.503-1(f).
We recently construed this requirement:
In simple English, what this regulation calls for is a
meaningful -dialogue between ERISA plan
administrators and their beneficiaries. If benefits are
denied in whole or in part, the reason for the denial
must be stated in reasonably clear language, with
specific reference to the plan provisions that form the
A20
Ce
basis for the denial; if the plan administrators believe
that more information is needed to make a reasoned
decision, they must ask for it. There is nothing
extraordinary about this; it’s how civilized people
communicate with each other regarding important
matters.
Booton v. Lockheed Med. Benefit Plan, 110 F.3d 1461, 1463
(9th Cir.1997).
These regulations “are designed to afford the beneficiary an
explanation of the denial of benefits that is adequate to ensure
meaningful review of that denial.” Halpin v. W.W. Grainger,
Inc., 962 F.2d 685, 689 (7th Cir.1992). The requirements
“enable the claimant to prepare adequately for any further
administrative review, as well as appeal to the federal courts.”
/d. (internal quotation marks omitted).
In concluding that “no plan can provide discretion to deny
benefits for reasons identified only years after the fact,” the
Seventh Circuit noted that “[t]his Court would emasculate
ERISA’s disclosure requirement if it were to defer to reasons
that the Board first identified on appeal in the District Court,
years after the decision at issue.” Matuszak v. Ti orrington Co.,
927 F.2d 320, 322-23 (7th Cir.1991).
This reasoning is sound. One of the fundamental precepts
of appellate analysis is review based on a closed record. To
allow a plan to raise new reasons for denial on judicial review
could subject the plan participant to a cycle of multiple appeals.
It would also effectively eviscerate the requirements of ERISA
regulations.
In a similar context, we have held that administrative
agencies are bound by the reasons stated in their FOIA denial
letter and cannot conjure up new reasons on judicial review.
A2]
Friends of the Coast Fork v. United States Dep't of the Interior,
110 F.3d 53, 55 (9th Cir.1997). Because the Plan may not
properly raise the U.S. payroll issue for the first time on judicial
review, that issue has been waived and it is improper to remand
to the Plan Administrator. Accordingly, because the Plan
abandoned its other reasons for denying eligibility, the Workers
should be entitled to participate in the SPP.
Il.
Even if the U.S. payroll issue can be raised on judicial
review, the court should decide the issue de novo rather than
remanding to the Plan Administrator. We conclude that through
their conduct in the litigation the defendants should be estopped
from asserting that the issue is properly before the
Administrator in the first instance. The defendants raised their
argument that the Workers were not eligible because they were
not on the “United States payroll of the employer” for the first
time before the district court and urged that court, initially over
the objections of the Workers, to decide the issue. The district
court obliged. The defendants not only did not object to the
district court deciding the question but affirmatively urged it to
do so, and the Workers withdrew their objection. The Workers
appealed the decision of the district court to this court. Once
again, the defendants urged the court to interpret the phrase and
to affirm the district court. The original panel did so but
reversed the ruling of the district court and held for the
Workers. Only then, after losing on the merits on appeal, in
their petition for rehearing and suggestion for rehearing en banc,
do the defendants for the first time argue that we should remand
the question of the interpretation of the phrase “on the United
States payroll of the employer” to the Plan Administrator if we
are unwilling to affirm the district court. The defendants make
this argument despite their failure to raise the issue during the
administrative process, despite their sua sponte raising the issue
and urging that it be decided by the district court, and despite
A22
their urging that this court reach the issue on appeal. After
proceeding through four years of litigation urging at every turn
that the issue be decided by the court, the defendants should be
estopped from asserting otherwise. See Voliva v. Seafarers
Pension Plan, 858 F.2d 195, 197 (4th Cir. 1988) (“the party
who introduced new evidence in the district court ... cannot
argue that the district court was foreclosed from considering the
Plan’s alternative argument”).
Even today the defendants are willing to have us interpret
the phrase, but only if we defer to the Administrator. The
defendants contend that their willingness to have the court
decide the issue all along was contingent upon the court giving
deference to their interpretation of the phrase because they
represent the Plan. This argument is specious. Although we
defer to the reasonable interpretations of a plan administrator
when the plan grants the administrator discretion to construe its
provisions, see Firestone Tire & Rubber Co. v. Bruch, 489 U.S.
101, 111, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989), we do not
grant the same discretion to the position taken by a plan as
litigant. Where a plan administrator has not exercised his
discretion to construe a provision in a plan, our review is de
novo. Nelson v. EG & G Energy Measurements Group, Inc., 37
F.3d 1384, 1389 (9th Cir. 1994) (de novo interpretation of plan
is appropriate when, although administrative committee had
discretion to do so, it failed to interpret the plan after repeated
requests from participants). When conducting de novo review
we “construe [the terms of a plan] without deferring to either
party’s interpretation.” Firestone, 489 U.S. at 112.
Il.
Were we to reach the U.S. payroll issue on de novo review,
we would hold that the Workers are eligible to participate in the
SPP. The case can be resolved without interpreting the Plan
language. A careful review of the record before the
A23
administrative panel convened by the Plan Administrator
reveals that while the administrative panel had no occasion to
construe the U.S. payroll language, it did find that the Workers
had been “recharacterized, for payroll purposes only, ... as
‘employee[s].”” (Emphasis added.) The administrative panel
described this recharacterization as follows: “The effect of the
IRS’s recharacterization is that individuals who had worked in
recharacterized positions were issued W-2 forms and they
became eligible to refile their income tax returns for the relevant
years as “ ‘employees’ rather than as ‘independent contractors.”
Because the administrative panel’s determination is
supported by ample evidence in the record, we should accept its
factual determination that the Workers were placed on the
payroll of the employer, albeit retroactively, for the relevant
period. Snow v. Standard Ins. Co., 87 F.3d 327, 331 (9th Cir.
1996) (reviewing courts must accept the factual determinations
of the administrator unless they are clearly erroneous). In light
of the administrative panel’s finding of fact that the Workers
were on the payroll, they are eligible under the SPP regardless
of how the “on the United States payroll!” phrase is construed.
If, as the Workers suggest, the phrase refers to those employees
who are United States residents paid from United States
sources, then the Workers would be eligible to participate in the
Plan. Alternatively, if the defendants’ construction is correct and
the phrase limits benefits to those employees who were “on the
payroll,” then the Workers also prevail. The pleadings establish
that the Workers were all United States residents and worked in
the United States, and the administrative decision established
that they were reclassified as employees on the payroll of the
employer. Therefore, under either interpretation the Workers are
eligible to participate in the SPP.
A24
6 cat Veins ttt a eal ale
IV.
Finally, were we called upon to interpret the phrase we
would agree with the conclusion of the original three-judge
panel of our court that the Workers are “on the United States
payroll of the employer” for substantially the same reasons
advanced by the panel. Vizcaino v. Microsoft, 97 F.3d 1187,
1196 (9th Cir.1996).
Accordingly, we respectfully dissent from the decision to
remand this aspect of the appeal back to the Plan Administrator.
O’SCANNLAIN, Circuit Judge, joined by HALL and T.G.
NELSON, Circuit Judges, concurring in part and dissenting in
part:
I respectfully dissent from all but Part II-A of the court’s
opinion because Microsoft and the plaintiffs never formed a
valid contract under Washington law for the benefits now
claimed. I concur in the result of Part II-A of the court’s opinion
but not in its analysis.
I.
I do not disagree with the court’s statement of facts, but it
has failed to mention some and may leave a mistaken
impression of others. Thus, I Suggest that the following
additional facts from the record be taken into account.
The plaintiffs were temporary “freelancers” for Microsoft.
Instead of calling them by this label — which was ubiquitously
used within the Microsoft community and by the plaintiffs
themselves — the court styles the plaintiffs as “workers.” It then
engages in a long discussion of why they were in fact “common
law employees” of Microsoft. Both labels may be true — the
A25
plaintiffs did work, and Microsoft has conceded that the
plaintiffs satisfy the definition of common law employees for
some purposes. Neither of these labels are relevant to the
question before us, however, and both are potentially
misleading. Both labels imply that the plaintiffs were just like
any other regular Microsoft employees, and hence should be
eligible for the same benefits as regular staff. The evidence in
the record, however, points to the contrary. I will refer to the
plaintiffs by the same term the plaintiffs themselves use:
“freelancers”.
Before going further, it is also important that the statement
of facts identify precisely what period of activity is at issue in
this case. All plaintiffs were hired before 1989. In the fall of that
year, the IRS determined, for employment tax purposes, that the
freelancers were common law employees. After that, in late
1989 and during 1990, Microsoft directly hired some of the
freelancers as “staff”! (with Microsoft benefits) and arranged
for the remainder to become employees of unrelated
employment agencies (without Microsoft benefits) who had
contracts with Microsoft.” For the sake of clarity, I note that all
we decide today is whether the freelancers should have been
allowed to participate in the ESPP and the SPP during the
period leading up to the 1989-90 conversion. All agree that
those freelancers who were converted into employees of outside
employment agencies have no valid claim for participation in
the ESPP and SPP after the date of their conversion.
When the freelancers were originally retained by contract
with Microsoft, they were expressly told that they were not
' “Staff” was the term Microsoft and the plaintiffs use for regular
employees.
? As the court’s opinion notes, a few of the freelancers refused to accept
jobs with outside employment agencies. As a result, their relationship
with Microsoft ceased altogether.
A26
eligible for any Microsoft employee benefits, and that they
would have to provide their own benefits. Indeed, the named
plaintiffs admit that they did not think they were entitled to
benefits, and did not think benefits were a part of their
compensation package.
Moreover, the freelancers each signed contractual
documents which expressly stated that they would not receive
any benefits, and would have to pay their own taxes and
benefits. Specifically, Microsoft required that each plaintiff sign
an “Independent Contractor Agreement” (“ICA”). I think it is
appropriate to set out the complete text of the relevant ICA
provision:
CONTRACTOR is an independent contractor for MS
[Microsoft]. Nothing in this Agreement shall be
construed as creating an employer-employee
relationship, or as a guarantee of a future offer of
employment. CONTRACTOR further agrees to be
responsible for all federal and state taxes, withholding,
social security, insurance and other benefits.
Attached to the ICA was a one-page document entitled
“independent contractor/freelancer information,” which the
freelancers also signed. It stated:
[A]s an Independent Contractor to Microsoft, you are
self-employed and are responsible to pay all your own
insurance and benefits.
In the district court, Microsoft’s uncontested extrinsic
evidence established that the plaintiffs were told, and knew, that
benefits were not a part of their compensation. Instead of
providing benefits, Microsoft paid the freelancers at a higher
hourly rate than Microsoft’s regular employees. The freelancers
were also treated differently in a host of other ways. They had
A27
different color employee badges, different e-mail addresses, and
were not invited to company parties and functions. Instead of
receiving a regular paycheck from Méicrosoft’s Payroll
department (like Microsoft’s regular employees), freelancers
submitted invoices for their services to the Accounts Payable
department.
With these additional relevant facts in mind, we may
consider the merits.
Il.
As I see it, this is a simple case. The Washington law of
contracts governs the freelancers’ claim of entitlement to
benefits under the Employee Stock Purchase Plan (“ESPP”). No
law, state or federal, mandates that Microsoft provide such
benefits even to its employees. Plaintiffs are eligible to
participate in the ESPP only to the extent that they entered into
a valid contract with Microsoft for such participation.
Offer, acceptance, and consideration are requisites to
contract formation under Washington law. Thompson v. St.
Regis Paper Co., 102 Wash.2d 219, 685 P.2d 1081, 1087
(Wash. 1984). In order to be entitled to benefits under the ESPP,
therefore, Microsoft must have offered the benefits to the
freelancers, and the freelancers must have accepted that offer.
The court claims that Microsoft’s board of directors offered
ESPP benefits to the freelancers when they promulgated the
ESPP, reasoning that an offer of benefits in a pension plan
extends to and may be accepted by employees who do not know
its existence, citing Dorward v. ILWU-PMA Pension Plan, 75
Wash.2d 478, 452 P.2d 258, 261 (Wash. 1969). The ESPP is
not a pension plan, however, and, therefore, standard principles
of contract law govern. Even so, as a matter of contract law,
Dorward might have supported the result in this case if
A28
* ae er saree nme ene
aa
Microsoft’s board had merely promulgated the ESPP and the
freelancers, knowing of its existence, satisfied the ESPP’s
eligibility requirements. But in a line of general employment
law cases apparently ignored by the court’s opinion,
Washington courts have held that an employer revokes a
generally promulgated offer when it enters into a specific
agreement with an employee which is inconsistent with the
offer. Thompson v. St. Regis Paper Co., 102 Wash.2d 219, 685
P.2d 1081, 1087 (Wash. 1984); Hill v. JC Penney, Inc., 70
Wash.App. 225, 852 P.2d 1111, 1117 (Wash. Ct. App. 1993);
Grimes v. Allied Stores Corp., 53 Wash.App. 554, 768 P.2d
528, 529-30 (Wash. Ct. App. 1989); see also Swanson v. Liquid
Air Corp., 118 Wash.2d 512, 826 P.2d 664, 672 (Wash. 1992)
(“It is generally recognized that an employer can disclaim what
might otherwise appear to be enforceable promises in
handbooks or manuals or similar documents.”). As a matter of
standard contract law, that principle is unassailable: an offer can
be revoked by giving specific notice to the offeree at any time
prior to acceptance or substantial performance. Collins y.
Morgan Grain Co., 16 F.2d 253, 255 (9th Cir. 1926), cited with
approval in | Arthur L. Corbin & Joseph M. Perillo, Corbin on
Contracts, § 2.18, at 217 n. 7 (rev. ed. 1993). And, after all, the
Washington Supreme Court has clearly proclaimed that the
traditional requisites of contract formation apply with full force
to modern, unilateral employment contracts. 7; hompson, 685
P.2d at 1087.
Exactly such a revocation occurred here. Microsoft’s board
offered the ESPP to employees generally, and then Microsoft
told the freelancers: “We aren’t offering the ESPP to you; ESPP
benefits are not included in your contract.” Knowing that they
2 wouldn’t get ESPP benefits, the freelancers nevertheless agreed
to work for Microsoft. Their contract therefore does not include
ESPP benefits because the offer of those benefits was revoked.
A29
Likewise, there was no mutual assent (or “meeting of the
minds”) as is required for the formation of a unilateral contract.
See Muiticare Medical Center v. State, 114 Wash.2d 572, 790
P.2d 124, 132-33 (Wash. 1990). Microsoft did not think it was
offering ESPP benefits to the freelancers, and the freelancers did
not think they were accepting an offer of ESPP benefits. Had the
parties known that a court would force them to include ESPP
benefits in their contract, the bargain undoubtedly would have
been different.
If this is not enough, the court’s alleged contract suffers
from another defect: a lack of consideration. There was no
detrimental reliance on the ESPP by the freelancers — they did
not think they would get ESPP benefits, and they still chose to
work for Microsoft on Microsoft’s terms. Indeed, it is hard to
imagine what consideration the freelancers could have given for
the ESPP benefits since they chose to work for Microsoft for
several years without benefits. If anything, the freelancers
received consideration (a higher hourly rate) for their agreement
that they would not get ESPP benefits.
The court conjures up two reasons to disregard the express
and unambiguous revocation of the offer of benefits to the
workers, and to find a contract for benefits where none exists.
First, the court says, the statements in the employment contracts
were the result of a mistake since Microsoft’s officers
incorrectly thought the freelancers were independent
contractors. The statements were not meant to have independent
legal significance, but were “simply a helpful disclosure”
explaining the meaning of independent contractor status-a
status, it later turns out, that the freelancers did not have. I am
unpersuaded.
The court makes this simple contracts case unnecessarily
complicated, obfuscating the obvious meaning of the
agreements. When one sets the ESPP side-by-side with the
A30
agreement signed by the freelancers, one realizes that no brumes
obscure the court’s view of a solution to its manufactured
mistake; it vainly scans the horizon for a solution which is
sitting right under its nose. Microsoft drafted the ESPP and the
agreements using the same terminology (“employee”) to ensure
there could be no mistaking that ESPP benefits were not part of
the bargain. The signed agreements say: “Nothing in this
Agreement shall be construed as creating an employer-employee
relationship.... CONTRACTOR further agrees to be responsible
for all ... benefits.” These provisions are not simply a “helpful
disclosure.” Quite the contrary, the agreement says
“CONTRACTOR further agrees ...” How much clearer could it
be that this is an independent, legally binding part of the
bargain? By “burning off” this inconvenient contract language,
the court may as well have set fire to the contracts themselves.
To top it off, Washington courts have already rejected the
court’s reasoning. In Daniel y. Pacific Northwest Bell
Telephone Co., 20 Wash.App. 444, 580 P.2d 652, 654
(Wash.Ct.App. 1978), a worker signed a written agreement with
the telephone company Stating that he was an independent
contractor, although under the common law definition, the
worker was in fact an employee. The Washington court niled
that the common law definition was inapposite:
It is well settled that one is bound by the contract
which he voluntarily and knowingly signs. It has been
said that “the whole panoply of contract law rests on ...
[that] principle ...” National Bank of Washington vy.
Equity Investors, 81 Wash.2d 886, 912-13, 506 P.2d
20 (1973). For 18 years, the contract under which
Mr. Daniel performed his work declared that he was an
independent contractor. He does not claim that he did
not understand the meaning of that term, nor does he
contend that the contracts were the result of
overreaching or fraud by the telephone company. In
A3]
these circumstances, the characterization of Mr.
Daniel’s employment as that of an independent
contractor is binding as between Mr. Daniel and the
telephone company. /d.
This court’s discussion of common law employees and mutual
mistakes should be seen for what it is—a smokescreen which
both confuses and conceals. Regardless of whether Microsoft
and the freelancers were mistaken about the freelancers’
employment status, their agreement stands on its own and ought
to be enforced according to its terms.
The court’s second argument, albeit not fully developed, is
that under Delaware’s corporations law, Microsoft's officers did
not have authority to modify or to revoke the offer of the ESPP
made by Microsoft’s board of directors. There are two problems
with this analysis.
First, as an entity without a physical existence, Microsoft
can only act through its agents. Conklin Bros., Inc. v. United
States, 986 F.2d 315, 318 (9th Cir. 1993). Under Delaware’s
corporations law, however, the board of directors directs the
affairs of the business but is not an agent of the corporation.
Arnold v. Society for Savings Bancorp, Inc., 678 A.2d 533, 539-
40 (Del. 1996); see also Restatement (Second) of Agency § 14C
(1958) (“Neither the board of directors nor an individual
director of a business is, as such, an agent of the corporation or
of its members.”). The only way to enter into a contract with
Microsoft, therefore, was through Microsoft’s officers and
employees as agents of the corporation. It may be that the
officers and employees did not have the actual authority to make
a “no ESPP benefits” offer to the freelancers. They certainly had
the apparent authority to strike such a bargain, however. In any
event, under standard principles of agency law, if the principal
ratifies unauthorized acts of its agent, the ratification relates
back to the time of the acts and is equivalent to original
A32
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authority. Hannigan v. Italo Petroleum Corp., 47 A.2d 169, 172
(Del. 1945). By accepting the freelancers’ performance under
the contract, and by choosing to defend against the freelancers’
claim from 1990 until now, Microsoft’s board of directors, and
Microsoft itself, has impliedly ratified the “no ESPP benefits”
offer. See id. Delaware law is therefore no obstacle to a contract
for no ESPP benefits.
Second, even if the officers did not have the actual
authority under Delaware corporations law to make a “no ESPP
benefits” offer to the freelancers, the contract formed by the
freelancers’ acceptance of the offer exists nonetheless. The “no
benefits” provision is an important term of the overal] contract
and should not be treated apart from the bargain as a whole. The
freelancers cannot, with perfect hindsight, pick and choose
among the parts of the contract they want to enforce while
discarding the provisions they don’t like, premised upon the
notion that the officers lacked authority to form the contract.
Furthermore, a contrary ruling undermines Delaware’s carefully
crafted rule that only the corporation (or a shareholder suing
derivatively) can seek a remedy for unauthorized acts of
corporate officers. See Dieter v. Prime Computer, Inc., 681
A.2d 1068, 1072 (Del.Ch. 1996).
Ill.
The freelancers also claim that Microsoft should have
allowed them to participate in its Savings Plus Plan (“SPP”),
which is governed by ERISA. The SPP provides that “[eJach
employee who is 18 years of age or older and who has been
employed for six months shall be eligible to Participate in this
* Similarly, that the board’s ratification might have adverse tax
consequences for the ESPP does not allow us to ignore the overwhelming
evidence that the officers and the board did not offer ESPP participation
to the freelancers.
A33
Plan.” It then defines “employee” as “any common law
employee who receives remuneration for personal services
rendered to the employer and who is on the United States
payroll of the employer.” The freelancers argue that they fit this
definition of employee; Microsoft retorts that the freelancers
were not “on the United States payroll of the employer.” Our
first task, therefore, is ascertaining what that phrase means.
We cannot immediately set about this task, however,
because the SPP grants discretion to the plan administrator to
construe the plan. The Supreme Court has instructed us that
when the plan vests discretion in the administrator, principles of
trust law require that we leave the plan administrator’s
interpretation undisturbed if reasonable. Firestone Tire &
Rubber Co. v. Bruch, 489 U.S. 101, 111, 109 S.Ct. 948, 103
L.Ed.2d 80 (1989). Indeed, ERISA encourages plan fiduciaries
to exercise properly the discretion they have been granted;
courts should not be second-guessing the discretionary decisions
of fiduciaries without a very good reason. Thus, we are not to
impose our view of a provision on the plan, but are confined to
reviewing the administrator’s instruction to determine whether
it is reasonable.
In order for this rule protecting a plan administrator’s
discretion to be meaningful, however, the administrator must be
given an opportunity to interpret the meaning of plan provisions
before the court rules. In this case, the plan administrator did not
overly construe the phrase “on the United States payroll of the
employer,” at least so far as I can tell from the record. The
district court believed that the administrator impliedly rested its
decision on a particular interpretation of that phrase. Although
there is a colorable argument in support of the district court’s
belief, I believe that the judicially stated preference that the plan
administrator interpret the plan, subject to a limited review by
courts, requires us to remand to the plan administrator explicitly
A34
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to construe the meaning of that phrase. I agree with the court’s
conclusion on this point.‘
I write separately to clarify that I do not concur in the
court’s analysis of the meaning and implications of “on the
United States payroll of the employer,” and, as dicta, the court’s
statements do not bind the plan administrator in any way. In my
view, that phrase is a term of art with significance within the
Microsoft community. Further, I do not agree with the ill-
advised suggestion that Microsoft might not have been able
Properly to classify employees for participation or non-
participation in an ERISA plan based on whether the employees
were regular hires paid through the Payroll department or
“freelancers” paid through the Accounts Payable department.
* Judge Fletcher contends that a remand is inappropriate because (1) the
Plan has waived any claim that the provision might bar benefits for the
freelancers by not interpreting the Plan provision in the first instance, and
(2) the Plan is estopped from arguing for a remand.
the Administrator rendered the Provision a nullity. Moreover, Judge
Fletcher reads this concurrence and dissent too broadly; it does not hold
that the Plan or Microsoft should prevail on the merits of an argument
never raised before, but only that the Plan Administrator should be given
an Opportunity to construe a phrase it thought unnecessary to reach.
Judge Fletcher’s second argument misapprehends, in my view, the nature
of our review in this case. It is not a question of whether the Plan or
Microsoft wishes us to decide the question or to remand it: a party
cannot, by waiver or estoppel, change the applicable standard of review.
Principles of trust law and ERISA limit our review of the Plan
Administrator's discretion. We must give the Administrator an
Opportunity to exercise that discretion by remanding the case. Our
conclusion has nothing to do with whether Microsoft urges us to decide
the merits.
A35
Microsoft could choose to offer the SPP to whichever classes of
employees it wishes. It is certainly free to decide not to offer
positions satisfying the SPP’s criteria to these plaintiffs.
I respectfully concur in the result of Part II-A of the court’s
opinion but otherwise dissent.
A36
|
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
DONNA VIZCAINO; JON R. WAITE; )
MARK STOUT; GEOFFREY CULBERT; )
LESLEY STUART; THOMAS MORGAN; )
ELIZABETH SPOKOINY; LARRY )
SPOKOINY, ) No. 94-35770
)
Plaintiffs-Appellants, ) D.C. No.
) CV-93-00178-CRD
V. ) OPINION
)
MICROSOFT CORPORATION, and its )
pension and welfare benefit plans, et )
al., )
Defendants-Appellees. )
)
Appeal from the United States District Court
for the Western District of Washington
Carolyn R. Dimmick, District Judge, Presiding
Argued and Submitted
October 18, 1995—Seattle, Washington
Filed October 3, 1996
Before: Stephen Reinhardt and Stephen S. Trott,
Circuit Judges, and William W. Schwarzer, District Judge.”
Opinion by Judge Reinhardt:
Dissent by Judge Trott
* The Honorable William W. Schwarzer, Senior United States District
Judge for the Northern District of California. sitting by designation.
A37
COUNSEL
Stephen K. Strong and David F. Stobaugh, Bendich,
Stobaugh & Strong, Seattle, Washington, for the plaintiffs-
appellants.
James D. Oswald and Timothy St. Clair Smith, Davies,
Roberts & Reid, Seattle, Washington, for the defendants-
appellees.
OPINION
REINHARDT, Circuit Judge:
Large corporations have increasingly adopted the practice
of hiring temporary employees or independent contractors as a
means of avoiding payment of employee benefits, and thereby
increasing their profits. This practice has understandably led to
a number of problems, legal and otherwise. One of the legal
issues that sometimes arises is exemplified by this lawsuit. The
named plaintiffs, who were classified by Microsoft as
independent contractors, seek to strip that label of its protective
covering and to obtain for themselves certain benefits that the
company provided to all of its regular or permanent employees.
After certifying the named plaintiffs as representatives of a class
of “common-law employees,” the district court granted
summary judgment to Microsoft on all counts. The named
plaintiffs and the class they represent now appeal as to two of
their claims: a) the claim, made pursuant to section 502(a) of
the Employee Retirement Income Security Act (ERISA), 29
U.S.C. § 1132(a), that they are entitled to savings benefits under
Microsoft’s Savings Plus Plan (SPP); and b) the claim, made
pursuant to Washington state law, that they are entitled to stock-
option benefits under Microsoft’s Employee Stock Purchase
A38
Taicecsieseeeeeseeeeneeetsitiiiiaieiiiaaiiiitiaiai tai as
Plan (ESPP). In both cases, the claims are based on their
contention that they are common-law employees.
I
Microsoft, one of the country’s fastest growing and most
Successful corporations and the world’s largest software
company, produces and sells computer software internationally.
It employs a core staff of permanent employees. It categorizes
them as “regular employees” and offers them a wide variety of
benefits, including paid vacations, sick leave, holidays, short-
term disability, group health and life insurance, and pensions, as
well as the two benefits involved in this appeal. Microsoft
supplements its staff of employees with a pool of individuals to
whom it refused to pay fringe benefits. It previously classified
these individuals as “independent contractors” or “freelancers,”
but prior to the filing of the action began classifying them as
“temporary agency employees.” Freelancers were hired when
Microsoft needed to expand its workforce to meet the demands
of new product schedules. The company did not provide them
with any of the employee benefits regular employees receive.
The named plaintiffs worked for Microsoft in the United
States between 1987 and 1990 as freelancers in the company’s
international division.’ Some were still working for the
' The district court certified a class comprising
{a]ll persons employed by Microsoft Corporation in the United
States who are denied employee benefits because they are
considered independent contractors or employees of third-party
employment agencies, but who meet the definition of Microsoft
Corporation under the common law.
Microsoft did not object to the classification or contest the determination
that freelancers or independent contractors are proper class members but
sought to reserve the question as to whether certain specific individuals
(continued...)
A39
company when the suit was filed in 1993, and may still be doing
so today. Although hired to work on specific projects, seven of
the eight named plaintiffs had worked on successive projects for
a minimum of two years prior to the time the action was filed
while the eighth had worked for more than a year. During that
time, they performed services as software testers, production
editors, proofreaders, formatters and indexers. Microsoft fully
integrated the plaintiffs into its workforce: they often worked
on teams along with regular employees, sharing the same
supervisors, performing identical functions, and working the
same core hours. Because Microsoft required that they work on
site, they received admittance card keys, office equipment and
supplies from the company.
Freelancers and regular employees, however, were not
without their obvious distinctions. Freelancers wore badges of
a different color, had different electronic-mail addresses, and
attended a less formal orientation than that provided to regular
employees. They were not permitted to assign their work to
others, invited to office company functions, or paid overtime
wages. In addition, they were not paid through Microsoft’s
payroll department. Instead, they submitted invoices for their
services, documenting their hours and the projects on which
they worked, and were paid through the accounts receivable
department.
The plaintiffs were told when they were hired that, as
freelancers, they would not be eligible for benefits. None has
contended that Microsoft ever promised them any benefits
individually. All eight named plaintiffs signed “Microsoft
Corporation Independent Contractor Copyright Assignment and
(...continued)
fell within the class as weil as the question of the amount due class
members by way of benefits or damages. See ER at 27. See also infra
n.4.
A40
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Non-Disclosure Agreements” (non-disclosure agreements) as
well as companion documents entitled “Independent
Contractor/Freelancer Information” (information documents)
when first hired by Microsoft or soon thereafter. The non-
disclosure agreement, a three-page document primarily
concerned with confidentiality, included a provision that states
that the undersigned “agrees to be responsible for all federal and
State taxes, withholding, social security, insurance and other
benefits.” The information document likewise states that “as an
Independent Contractor to Microsoft, you are self-employed and
are responsible to pay all your own insurance and benefits.”
Eventually, the plaintiffs learned of the various benefits being
provided to regular employees from speaking with them or
reading various Microsoft publications concerning employee
benefits.
In 1989 and 1990, the Internal Revenue Service (IRS)
examined Microsoft’s employment records to determine
whether the company was in compliance with the tax laws.
Applying common-law principles defining the employer-
employee relationship, it concluded that Microsoft’s freelancers
were not independent contractors but employees for withholding
and employment tax Purposes, and that Microsoft would
thereafter be required ito pay withholding taxes and the
employer’s portion of Federal Insurance Contribution Act
(FICA) tax.? Microsoft agreed to pay overdue employer
withholding taxes and issue retroactive W-2 forms to allow the
* “[BJased on information received from Microsoft and on information
received from a representative sampling of the workers in that job
position,” the IRS concluded in one of several letter rulings that because
“Microsoft either exercised, or retained the right to exercise, direction
over the services performed,” those persons employed as testers were
employees of Microsoft “for Purposes of the Federal Insurance
Contribution Act, the Federal Unemployment Tax Act, and for Collection
of Income Tax at the Source on Wages.” The IRS issued similar findings
regarding formatters, proofreaders, and production editors.
A4l
freelancers to recover Microsoft’s share of FICA taxes, which
they had been required to pay. It apparently also agreed to pay
freelancers retroactively for any overtime they may have
worked.
In response to the IRS rulings, Microsoft began
“converting” its freelancers. That is, it tendered offers to some
freelancers to become permanent employees; it gave other
freelancers the option of terminating their employment
relationship with Microsoft completely or continuing to work at
the company but in the capacity of employees of a new
temporary employment agency, which would provide payroll
services, withhold federal taxes, and pay the employer’s portion
of FICA taxes. Most of the plaintiffs who were not given the
opportunity to become permanent employees decided to become
“temporary agency employees” rather than to be fired. However,
Donna Vizcaino refused that option and was discharged. Those
who elected “temporary employee status” noticed little change
in the terms or conditions of their employment; they continued
working the same hours on the same projects and under the
same supervisors.
After learning of the IRS rulings, the plaintiffs sought
various employee benefits, including those now at issue: the
ESPP and SPP benefits. The SPP, which became effective
January 1, 1987, is a cash or deferred salary arrangement under
§ 401k of the Internal Revenue Code that permits Microsoft’s
employees to save and invest up to fifteen percent of their
income through tax-deferred payroll deductions. Under the plan,
Microsoft matches fifty percent of the employee’s contribution
in any year, with a maximum matching contribution of three
percent of the employee’s yearly compensation. The ESPP,
established in January, 1986, permits employees to purchase
company stock at eighty-five percent of the lower of the fair
market value on the first or on the last day of each six-month
offering period through payroll deductions of from two to ten
A42
percent. Employees may purchase shares having a value not
exceeding ten percent of their gross compensation for the
offering period.
Microsoft rejected the plaintiffs’ claims for benefits,
maintaining that they were independent contractors who were
personally responsible for all their own benefits. The plaintiffs
sought review of the denial of benefits from the Microsoft plan
administrator, who determined that the plaintiffs were ineligible
because they contractually waived any rights to benefits and, in
any event, they were not “‘regular, full-time employees’ in
approved headcount positions.” Although ruling “technically”
only on the denial of ERISA benefits, the plan administrator
concluded, for the same reasons, that the plaintiffs were
ineligible to receive non-ERISA benefits.
The named plaintiffs brought this action, challenging the
denial of benefits. Following cross-motions for summary
judgment, the district court referred the matter to Magistrate
Judge David E. Wilson, who recommended that an award be
made in favor of the plaintiffs on both their SPP and ESPP
claims. First, he concluded that the SPP was ambiguous with
respect to whether it afforded coverage to the plaintiffs and that
because the ambiguity could not be conclusively resolved by
resort to extrinsic evidence, the doctrine of contra proferentum
was applicable. Accordingly, he determined that the plan
instruments should be construed in the plaintiffs’ favor and
recommended that the district court find that the plan afforded
them coverage. Second, he concluded that by expressly adopting
the conditions of the Internal Revenue Code, which permit tax
qualification only to those plans that extend participation to all
common-law employees, Microsoft had extended an offer of
participation in the ESPP to all common-law employees, and
that the plaintiffs fell into that category. Further, he found that
although Microsoft had intended to exclude freelancers from
participation in the ESPP, it had made the plaintiffs an offer in
A43
that plan and could not rely on their failure to accept it because
it had incorrectly told them that they were ineligible to
participate. Again, the magistrate judge recommended that the
district court find that the plaintiffs were eligible for benefits.
The magistrate judge also made recommendations on
several motions relating to benefits other than the SPP and
ESPP. Specifically, he recommended denying the plaintiffs’
motion for summary judgment in relation to vacation, sick
leave, holidays, short-term disability, group health and life
insurance, and granting Microsoft’s motion for summary
judgment on all claims governed by ERISA, except the SPP
claim, and on all claims governed by state law, except the ESPP
claim.
The district court adopted the magistrate judge’s
recommendations on all issues other than the SPP and ESPP
claims. It rejected his recommendations as to those two claims
and denied the plaintiffs’ motion for summary judgment as to
them, while granting Microsoft’s. The district court first
concluded that the SPP “clearly restricts participation to those
individuals on Microsoft’s payroll,” that even if Microsoft could
waive the argument that only employees paid through the
payroll were eligible it had not done so, and that because the
intent of the parties was to deny the plaintiffs participation, the
terms of the plan were susceptible to only one reasonable inter-
pretation. Thus, it said, the doctrine of contra proferentum was
not applicable. Then, addressing the plaintiffs’ eligibility to
participate in the ESPP, the district court concluded:
First, the contract between Microsoft and the plaintiffs
specifically stated that no benefits were provided by
Microsoft. Second, because the terms of the plan were
not communicated to the plaintiffs, they could not
have become part of the contract between them and
Microsoft. Thus, the plaintiffs had no expectation of
A44
receiving any benefits. Finally, as Microsoft asserts,
I.R.C. § 423 does not create a private right of action by
the plaintiffs against Microsoft.
The named plaintiffs and the class they represent appeal,
but only with respect to the SPP and ESPP Claims.
Il
ERISA is a remedial statute designed to protect the interests
of employees in pension and welfare benefit plans. Scott v. Gulf
Oil Corp., 754 F.2d 1499, 1501 (9th Cir. 1985). It creates a
federal cause of action for recovery of benefits due under the
terms of pension and welfare plans. 29 U.S.C. § 1132(a)(1)(B).
Congress intended the courts to fashion a body of federal
common law to govern ERISA suits. Richardson y Pension
Plan of Bethlehem Steel, 67 F.3d 1462, 1465 (9th Cir. 1995);
Scott, 754 F.2d at 1501-02. Courts, therefore, may borrow from
State law where appropriate, but must be guided by the policies
expressed in ERISA and other federal labor laws. Richardson,
67 F.3d at 1465; Scott, 754 F.2d at 1502.
The parties agree that the SPP is a welfare benefits plan
governed by ERISA. See 29 U.S.C. § 1002(1)(A). They
disagree, however, on the question whether the plaintiffs qualify
for benefits under the terms of the plan. The SPP provides that
“[e]Jach employee who is 18 years of age or older and who has
been employed for six months shall be eligible to participate in
this Plan,” and defines “employee” to mean “any common-law
employee who receives remuneration for personal services
rendered to the employer and who is on the United States
payroll of the employer.” (Emphasis added). Because the named
* Section 1132(a\1)(B) provides, in pertinent part, that a “civil action may
be brought . . . by a participant or beneficiary . . . to recover benefits due
to him under the terms of the plan... .” (Emphasis added).
A45
plaintiffs were indisputably over eighteen years of age and were
employed for more than six months, and because, as Microsoft
concedes, they were generally common-law employees who
rendered personal services to Microsoft,* the issue before us is
only whether they were “on the United States payroll of the
employer.” Microsoft contends that the phrase, which is not
defined in the plan, refers to employees paid through its payroll
department, and that the named plaintiffs were ineligible to
participate in the SPP because they were paid through the
accounts receivable department. The plaintiffs assert that the
phrase refers to “Microsoft employees who are paid from
United States sources,” excluding “nonresident alien employees
of foreign subsidiaries whose pensions are generally governed
by foreign law.”
In the usual case, we review a denial of benefits challenged
under section 1132(a)(1)(B) de novo “unless the benefit plan
gives the administrator or fiduciary discretionary authority to
determine eligibility for benefits or to construe the terms of the
plan.” Nelson v. EG & G Energy Measurements Group, Inc., 37
F.3d 1384, 1388 (9th Cir. 1994).° Where such discretion is
* As the magistrate judge stated in his Report and Recommendations,
Microsoft conceded the fact that the named plaintiffs and the class they
represent generally were common-law employees. ER at 144, 147-48. See
also supra n.|. Microsoft reserved only the right to object to the
employment status of particular plaintiffs during certain periods of their
tenure with Microsoft and to contest the amount of damages or benefits
to be awarded. CR Vol. 12, Document 152, at 9 n.5. For example,
Microsoft stated that “for some period of time, Plaintiff Morgan
performed proofreading services from his home, with an uncertain
amount of supervision.” /d Questions raising legitimate disputes
regarding specific individuals’ eligibility are left to the district court for
resolution following remand.
When the plan does not grant the plan administrator discretion to
construe its provisions, the district court reviews de novo, and our review
is also de novo. Mongeluzo v. Baxter Travenol Long Term Disability
(continued...)
A46
ne ge ee ee ee ee |
afforded, the standard of review may vary with the type or
nature of the plan. Taft v. Equitable Life Assurance Soc y, 9
F.3d 1469, 1474 (9th Cir. 1993) (stating that we review
decisions of administrators who are also employers of plan
beneficiaries under “‘a more stringent version of the abuse of
discretion standard’ ”) (citation omitted).
In the case before us, the administrator is a Microsoft
officer. We need not, however, determine what standard would
ordinarily be applicable to review of a denial of benefits under
the SPP. For, while the plan gives the administrator discretion
to construe its provisions, in denying the plaintiffs’ claims the
administrator did not construe the phrase “on the United States
payroll of the employer,” the phrase in the plan on which
eligibility depends. Oddly, Microsoft did not raise its “United
States payroll” theory before the plan administrator but argued
it for the first time to the magistrate judge in the course of its
motion for summary judgement.’ The plaintiffs initially
objected to consideration of the “United States payroll”
argument because it did not appear in the administrative record,
but then waived the objection and, like Microsoft, urged the
magistrate judge and the district judge to address it. Both parties
have consistently maintained that a remand to the plan
administrator would serve no useful purpose. See CR Vol. 12,
Document 152, at 22-23: CR. Vol. 12, Document 169, at 12 nll.
Because both parties urged the district court, and now this court,
to determine the meaning of the disputed provision, they have
waived any possible objection to the failure to remand.
Accordingly, we are free to decide Microsoft’s latest argument
in the normal course, :s if the plan administrator had no
5
(...continued)
Benefit Plan, 46 F.3d 938, 942 (9th Cir. 1995).
* Microsoft prevailed before the plan administrator on the theory that the
plaintiffs were not “regular, full-time employees” in “approved headcount
positions,” a theory that it has since abandoned.
A47
discretion to construe the plan. Cf Nelson, 37 F.3d at 1389
(holding that our review is de novo where the plan
administrator, although having discretion to construe the plan,
has not done so).’
We interpret the provisions of a plan by looking to its terms
and to other manifestations of intent. Ne/son, 37 F.3d at 1389.
We interpret terms in ERISA plans “‘in an ordinary and popular
sense as would a [person] of average intelligence and
experience.’ ” Richardson, 67 F.3d at 1465 (quoting Evans v.
Safeco Life Ins. Co., 916 F.2d 1437, 1441 (9th Cir. 1990));
Babikian v. Paul Revere Life Ins. Co., 63 F.3d 837, 840 (9th
Cir. 1995); accord Meredith v. Allsteel Incorp., 11 F.3d 1354,
1358 (7th Cir. 1993). “*We will not artificially create ambiguity
where none exists. If a reasonable interpretation favors the
insurer and any other interpretation would be strained, no
compulsion exists to torture or twist the language of the
policy.”” Babikian, 63 F.3d at 840 (quoting Evans, 916 F.2d at
1441 (quoting Allstate Ins. Co. v. Ellison, 757 F.2d 1042, 1044
(9th Cir. 1985))). We find “[a] term is ambiguous if it is subject
to reasonable alternative interpretations.” Hickey v. A.E. Staley
Mfg., 995 F.2d 1385, 1389 (9th Cir. 1993) (citation and internal
quotation marks omitted); see Babikian, 63 F.3d at 840.
When a plan is ambiguous on its face, we may, and
typically do, consider extrinsic evidence to interpret it.
’ This case is not controlled by Saffle v. Sierra Pacific Power Company,
85 F.3d 455 (9th Cir. 1996). There, we held that where a plan
administrator misconstrues a plan, the court should not determine
whether benefits are to be awarded under a proper construction; instead,
it should remand to the plan administrator for it to make a determination
under the plan, properly construed. Here, the term that determines the
plaintiff's eligibility was not construed at all by the plan administrator.
More important, both parties have agreed that a remand would be
inappropriate. The parties are, of course, free to waive any right they may
have to a construction by a plan administrator.
A48
Richardson, 67 F.3d at 1466; Hickey, 995 F.2d at 1389. If the
ambiguity persists even after resort to extrinsic evidence, we
generally apply the rule of contra proferentum and construe the
ambiguity against the drafter. See Barnes vy. Independent Auto.
Dealers of Cal., 64 F.3d 1389, 1393 (9th Cir. 1995) (“We must
construe ambiguities in an ERISA plan against the drafter and
in favor of the insured.”); Babikian, 63 F.3d at 840; Mongeluzo
v. Baxter Travenol Long Term Disability Benefit Plan, 46 F.3d
938, 942 (9th Cir. 1995) (noting that Kunin v. Benefit Trust Life
Ins. Co., 910 F.2d 534, 539-4] (9th Cir.), cert. denied, 498 U.S.
1013 (1990), adopted the well-established doctrine of contra
proferentum as federal common law).
Accordingly, our first task is to determine whether the
phrase “on the United States payroll of the employer” is
susceptible to more than one reasonable interpretation. In doing
SO, we must examine the phrase in light of any relevant
circumstances that may shed light on its meaning. Here, the
phrase is used in connection with a company that is engaged in
a constantly expanding business venture of major proportions
on a world-wide basis. Because “payroll” means “a list of
persons to be paid, with the amount due each,” or “the total
number of people employed by a business firm or organization,”
Random House College Dictionary 976 (1980), the phrase “on
the United States payroll of the employer,” when accorded its
ordinary meaning, may plausibly refer to those persons who are
on the list of, or are among the total number of, persons
employed by Microsoft and paid from its United States
accounts, as opposed to those paid by its foreign subsidiaries or
out of its foreign accounts. Thus, we believe that the plan,
consistent with the ordinary meaning of its terms, reasonably
can be read to extend eligibility to the plaintifts.*
* There may be a slight variation on the interpretation set forth above that
is equally plausible and would similarly serve to extend eligibility to the
(continued...)
A49
While an argument could well be made that the plaintiffs’
is the only plausible reading of the plan, we choose not to rely
on that assertion. Instead, we assume that Microsoft’s
interpretation is also a reasonable one, and accept its contention
that the phrase could reasonably be construed to refer only to
those employees paid through the payroll department.
Assuming, then, that the terms of the SPP are susceptible to two
reasonable interpretations and therefore are ambiguous, our next
step is to determine whether the ambiguity can be resolved by
resort to extrinsic evidence.
Microsoft contends that the extrinsic evidence, including
the non-disclosure agreements and the information documents,
demonstrates its intent not to provide freelancers or independent
contractors with employee benefits and that this intent
necessitates adoption of its interpretation of the disputed phrase.
We have no doubt that the company did not intend to provide
freelancers or independent contractors with employee benefits,
and that if the plaintiffs had in fact been freelancers or
independent contractors, they would not be eligible under the
plan. The plaintiffs, however, were not freelancers or
independent contractors. They were common-law employees,’
and the question is what, if anything, Microsoft intended with
respect to persons who were actually common-law employees
* (...continued)
plaintiffs. Under that variation, the disputed phrase would be construed
as referring to all persons employed by Microsoft in the United States.
However, we need not examine that possibility here.
* The instruments signed by the plaintiffs label them as independent
contractors. Those instruments, however, do not control the plaintiffs’
employment status. See Daughtrey v. Honeywell, 3 F.3d 1488, 1492 (1 Ith
Cir. 1993) (“The employment status of an individual for the purpose of
ERISA is not determined by the label used in the contract between the
parties.”). Accordingly, the label used here does not determine whether
the plaintiffs are or are not common-law employees. The record does, and
as Microsoft has conceded, the named plaintiffs and those they represent
are generally common-law employees.
A50
but were not known to Microsoft to be such. The fact that
Microsoft did not intend to provide benefits to persons who it
thought were freelancers or independent contractors sheds little
or no light on that question. To the extent that we may glean any
evidence of an intent as to the more pertinent theoretical
question, that evidence is highly speculative and would be
insufficient to resolve in Microsoft’s favor the ambiguity that it
created when it chose to define eligibility in terms of common-
law employees “on the United States payroll of the employer.”
Microsoft also contends that extrinsic evidence establishes
its intent to restrict eligibility to those common-law employees
who were paid through the payroll department. It argues that
compliance with relevant tax code provisions (I.R.C.
§§ 401(k) & (m)) required computation of compensation,
deferral, and matching contribution data, and that the necessary
computations could practically be made only through its
automated payroll department. It maintains that employees who
were paid through the accounts receivable department, as
opposed to the payroll department, could not be paid in a
manner that would comply with IRS requirements and that.
accordingly, it is clear that those employees were not intended
to be covered in the plan.
Microsoft’s argument, drawing a distinction between
common-law employees on the basis of the manner in which
they were paid, is subject to the same vice as its more general
argument. Microsoft regarded the plaintiffs as independent
contractors during the relevant period and learned of their
common-law employee status only after the IRS examination.
They were paid through the accounts receivable department
rather than the payroll department because of Microsoft’s
mistaken view as to their legal status. Accordingly, Microsoft
cannot now contend that the fact that they were paid through the
accounts receivable department demonstrates that the company
intended to deny them the benefits received by all common-law
AS]
employees regardless of their actual employment status. Indeed,
Microsoft has pointed to no evidence suggesting that it ever
denied eligibility to any employees, whom it understood to be
common-law employees, by paying them through the accounts
receivable department or otherwise.
In any event, to interpret the SPP as distinguishing between
common-law employees who were paid through the payroll
department and those who were not would impute to Microsoft
an unlawful purpose: to pay some common-law employees
without making the requisite payroll deductions and
contributions, the very tax violation that subsequently
engendered this litigation. We should not, if at all possible,
favor an interpretation that has such an unlawful effect, and we
see no reason to do so here. See Meredith v. Allsteel, Inc., 11
F.3d 1354, 1358 (7th Cir. 1993) (“[A]n interpretation which
gives a reasonable, lawful, and effective meaning to all the
terms is preferred to an interpretation which leaves a part
unreasonable, unlawful, or of no effect[.]’”) (citation and internal
quotation marks omitted). Thus, the extrinsic evidence on which
Microsoft relies does nor resolve the ambiguity in its favor.
In light of the rule of contra proferentum, the plaintiffs
would prevail whether the extrinsic evidence supported their
interpretation of the disputed phrase or whether the extrinsic
evidence on which they rely was also deemed immaterial. For
purposes of our disposition, we may assume the latter to be the
case. With that assumption in mind, we find, as did the
magistrate judge, that “the correct meaning of the terms in
question, given the record and the agreed upon facts in this case,
cannot be determined by resort to the extrinsic evidence,” and
that, therefore, the rule of contra proferentum is applicable.
Microsoft contends that the rule of contra proferentum
should not be applied in this case because it has been applied
generally in ERISA cases only for the purpose of granting
A52
benefits under insurance contracts Microsoft is incorrect. It is
true that the rule of contra proferentum, which is strictly applied
in the interpretation of insurance contracts, is not automatically
applied to ail other contracts. Eley v. Boeing Co., 945 F.2d 276,
280 (9th Cir. 1991). We have declined to apply the rule to
“ERISA plans that are the product of collective bargaining
agreements reached after arms-length bargaining between
parties of equal power.” Patterson v. Hughes Aircraft Co., 11
F.3d 948, 950 n.3 (9th Cir. 1993); see Eley, 945 F.2d at 280
(distinguishing Kunin because the plan was the result of a
collective bargaining agreement); see also Kunin, 910 F.2d at
540. This case does not involve such a plan, and we see no
reason to create a new exception to the rule we generally follow
in ERISA cases. See Barnes, 64 F.3d at 1393.
We have also held that when an administrator has exercised
his discretion to construe a plan pursuant to discretionary
authority vested in him by the plan, we will not apply the rule of
contra proferentum in our review of his discretionary ruling.
Winters v. Costco Wholesale Corporation, 49 F.3d 550, 554
(9th Cir. 1995). Microsoft argues that this case falls within this
exception. Clearly, it would be inconsistent to review under an
abuse of discretion standard and then to apply the rule of contra
proferentum. However, as we explained earlier, the
administrator did not construe the disputed terms of the plan,
and therefore our review is de novo. When we review under a de
novo standard, there is no similar inconsistency, and thus no
reason not to apply the rule of contra Proferentum.
Accordingly, we agree with the magistrate judge, who
concluded that Microsoft, “[a]s the drafter of the plan, . . . could
easily have accomplished the limitation it now urges through the
use of more explicit language. . . .” We therefore construe the
ambiguity in the plan against Microsoft and hold that the
plaintiffs are eligible to participate under the terms of the SPP.
We note that in doing so, we construe the phrase “on the United
A53
States payroll of the employer” in the manner we believe to be
the most plausible anyway. Put more directly, were we not to
apply the rule of contra proferentum, but simply to select the
more reasonable of the competing interpretations, we would
read the disputed phrase as do the plaintiffs. Thus, we would
conclude in any event that the plan must be construed as
extending participation to all persons employed by Microsoft
and paid from its United State accounts, and not as excluding
from participation those employees who are paid through the
accounts receivable department rather than the payroll
departm ent.
Il
The parties agree that the plaintiffs’ claims for stock-option
benefits under the ESPP are not subject to ERISA but rather are
governed by Washington state law. The plaintiffs contend that
the ESPP, through its incorporation of § 423 of the Internal
Revenue Code, extended eligibility to participant in the plan to
all common-law employees, including themselves, and that they
were therefore entitled to exercise the options. Microsoft
contends that the plaintiffs are not enticed to ESPP benefits
because: (1) the plaintiffs have no right to enforce § 423;
(2) the plaintiffs signed instruments stating that they would
receive no benefits; and (3) the ESPP was never communicated
to the plaintiffs, and they therefore did not rely on the offer in
continuing their employment. We address these contentions in
turn.
First, we hold that the named plaintiffs and the class they
represent are covered by the specific provisions of the ESPP.
We apply the “objective manifestation theory of contracts,”
which requires us to “impute an intention corresponding to the
reasonable meaning of a person’s words and acts.” Multicare
Medical Ctr. v. D.S.H.S., 790 P.2d 124, 133 (Wash. 1990).
Through its incorporation of the tax code provision into the
A54
plan, Microsoft manifested an objective intent to make all
common-law employees, and hence the plaintiffs, eligible for
participation. The ESPP specifically provides:
It is the intention of the Company to have the Plan
qualify as an “employee stock purchase plan” under
Section 423 of the Internal Revenue Code of 1954.
The provisions of the Plan shall accordingly, be
construed so as to extend and limit Participation in a
manner consistent with the requirements of that
Section of the Code.
(Emphasis added). The requirements of § 423 dictate that
“options are to be granted to all employees of any corporation
whose employees are granted any of such options by reason of
their employment by such corporation.” 26 U.S.C. § 423(b)(4).
Because the term “employees” in § 423 is construed to refer to
“common-law employees,” the ESPP, when construed ina
manner consistent with the requirements of § 423, extends
participation to all common-law employees not covered by one
of the express exceptions set forth in the plan.'' Accordingly, we
'° Treasury Regulation § 1.423-1(b) cross-references § 1.421-7(h) for rules
relating to the employment relationship. That subsection, in turn, provides
that the determination whether an optionee is ar employee will be made
in accordance with § 3401(c)-1(a), which states that the term “employee”
includes every individual performing services for another where the legal
relationship between the two is that of employer and employee. Section
31.3401(c)-I(b) summarizes the common-law test of employee, and
§ 31.3401(c)-1(c) provides that where the legal relationship exists, the
labels used by the parties to describe the relationship are of no
consequence.
'' Section 423(b)(4) sets forth four express exceptions. The ESPP
incorporates two of them, as follows:
[aJny employee of the Company or any of its subsidiaries who
is in the employ of the Company at one of the offering dates is
(continued...)
A55
find that the ESPP, through its incorporation of § 423, expressly
extends eligibility for participation to the plaintiff class and
affords them the same options to acquire stock in the
corporation as all other employees.
Microsoft argues that § 423 does not grant the plaintiffs a
private right of enforcement. We conclude, as did the magistrate
judge, that Microsoft’s argument is without merit. This case is
not about a private right of action. It is about the construction of
the terms of a plan. As the magistrate judge cogently stated,
Plaintiffs do not contend that § 423, per se, provides
them with a private right of enforcement. What they do
contend is that Microsoft expressly incorporated
§ 423’s terms into its ESPP, thereby making an offer
to its employees, including its “common law
employees,” a classification in which they belonged.
Because the plan, properly construed, extends participation to
all common-law employees, the plaintiffs may enforce the plan
in the same manner as would any of Microsoft’s other
employees. They may, and did, assert a cause of action for
breach of contract, not for violation of the Internal Revenue
Code."
'' (...continued)
eligible to participate in the Plan, except (a) employees whose
customary employment is 20 hours or less per week, and
(b) employees whose customary employment is for not more
than five months in the calendar year.
The plaintiffs fit neither of these exceptions.
A similar approach obtains with respect to plans that require compliance
with the provisions of ERISA. While Internal Revenue Code provisions
and Treasury regulations do not create substantive rights under ERISA,
if an ERISA plan explicitly provides that it is to be construed to meet
such provisions, courts look to them in determining employee eligibility
(continued...)
A56
Microsoft next contends that the non-disclosure agreements
and the information documents signed by the plaintiffs render
them ineligible to participate in the ESPP. F irst, the label used
in the instruments signed by the plaintiffs does not control their
employment status.'? Second, the employment instruments, if
construed to exclude the plaintiffs from receiving ESPP
benefits, would conflict with the plan’s express incorporation of
§ 423. Although Microsoft may have generally intended to
exclude individuals who were in fact independent contractors,
it could not, consistent with its express intention to extend
participation in the ESPP to all common-law employees, have
excluded the plaintiffs. Indeed, such an exclusion would defeat
the purpose of including § 423 in the plan, because the
? (...continued)
for participation in the plan. See Crouch v. Mo-Kan Iron Workers
Welfare Fund, 740 F.2d 805, 809 (10th Cir. 1984) (“Because the pension
plan states that it is to be construed to meet the requirements of ERISA,
[the participating and vesting rules require the inclusion of a person in
plaintiff's position in the plan,] and there are obvious and significant
benefits to meeting those requirements, we conclude that we must
construe the plan as including plaintiff as a participant.”); see also
Abraham v. Exxon Corp., 85 F.3d 1126, 1131 (Sth Cir. 1996) (finding
that court could not look to Treasury regulations to determine employee
eligibility for participation in an ERISA plan when it did not contain an
explicit provision “declaring that it was to be construed to meet the
requirements of an ERISA plan”).
"The pertinent Treasury Department regulation provides that
[i]f the relationship of employer and employee exists, the
designation or description of the relationship by the parties as
anything other than that of employer and employee is
-mmaterial. Thus, if such relationship exists, it is of no
consequence that the employee is designated as a partner,
coadventurer, agent, independent contractor, or the like.
Treas. Reg. § 31.3401(c)-1(e) (emphasis added). Accordingly, that the
instruments describe the plaintiffs as independent contractors and provide
that as such they are not entitled to benefits is not controlling.
A57
exclusion of common-law employees not otherwise excepted
would result in the loss of the plan’s tax qualification.
Moreover, we find nothing inconsistent between the
employment instruments signed by the plaintiffs, and an offer
of participation in the ESPP. The statements in those
instruments that speak in terms of the employee being
“responsible for . . . other benefits” or “responsible to pay all
[his] own insurance and benefits” apply most naturally to health
and welfare benefits, or similar employee protection policies,
which an employee would have to pay on his own if the
employer did not provide the benefits. In fact, we find the
instruments fully consistent with the plaintiffs’ participation in
the ESPP, because, under the terms of the plan, it is the
employee who makes the stock option payment, not Microsoft.
Thus, it is the employee who is “responsible” for paying for the
benefit. Accordingly, even if the incorporation of § 423 did not
override the instruments signed by the plaintiffs, we would
conclude that nothing in those instruments serves to waive or
otherwise foreclose the plaintiffs’ eligibility for participation in
the ESPP."*
Finally, Microsoft maintains that the plaintiffs are not
entitled to ESPP benefits because the terms of the plan were
never communicated to them and they were therefore unaware
of its provisions when they performed their employment
services. As a preliminary matter, we find Microsoft’s reliance
on policy manual cases such as Kimbro vy. Atlantic Richfield
Company, 889 F.2d 869, 879 (9th Cir. 1989), to be misplaced.
In Kimbro, we stated that under Washington precedent, an
employer may be contractually bound by promises in employee
‘ For this reason, Microsoft’s reliance on Grimes v. Allied Stores
Corporation, 768 P.2d 528, 529 (Wash. Ct. App. 1989), in which the
court considered a conflict between an employment contract and an
employment manual, is inapposite.
A58
handbooks or manuals to provide specific treatment in specific
situations only if an employee can show that the promise
induced his reliance—that is, “that the promise induced him to
remain on the job or not seek other employment.” 889 F.2d at
879 (quoting Thompson v. St. Regis Paper Co., 685 P.2d 1081.
1088 (Wash. 1984)). However, many policy manuals are
primarily designed for internal guidance and such manuals are
far different in nature and legal effect than tax-qualified benefit
plans that fix the rights of their beneficiaries."
In any event, to the extent that knowledge of an offer of
benefits is a prerequisite, it is probably sufficient that Microsoft
publicly promulgated the plan. In Dangott v. ASG Industries,
Inc., 558 P.2d 379, 382 (Okla. 1976), the plaintiff was unaware
of the company’s severance plan until shortly before his
termination. The Oklahoma Supreme Court concluded
nonetheless that publication of the plan was “the equivalent of
constructive knowledge on the part of all employees not
specifically excluded.” Jd. at 383 (emphasis added).'* Here, the
plaintiffs knew of the plan but were wrongly told by Microsoft
that it did not apply to them. We are not aware of any
Washington case involving a similar set of circumstances, but
think it likely that if presented with the question, the
'* Washington case law regarding pension plans, for example, holds that
“[a]n enforceable contract will arise . . . even though the [employee] does
not know the precise terms of the pension agreement. “Dorward y.
ILWU-PMA Pension Plan, 452 P.2d 258, 260 (Wash. 1969).
'* See Woolley y. Hoffman-LaRoche, Inc., 491 A.2d 1257, 1268 n.10
(N.J. 1985) (“The implication of the presumption of reliance is that the
- - . provisions became binding the moment the [plan] was distributed.
Anyone employed before or after became one of the beneficiaries of
those provisions. And ir [Toussaint v. Blue Cross & Blue Shield, 292
N.W.2d 880 (Mich. 1980)) is followed, employees neither had to read it,
know of its existence, or rely on it to benefit from its provisions... .”):
see also A. Corbin, Contracts § 59 (1963) (suggesting that knowledge of
an offer is not necessary to establish acceptance).
AS9
Washington Supreme Court would adopt the Dangott approach,
at least under the circumstances presented in this case.
Microsoft itself recognizes “the key distinction between
offers actually made to a class of employees, as to which some
courts enforce the offer on behalf of any class member,
regardless of individual knowledge of the offer, and plans as to
which no offer is made to the class, and the class is expressly
notified no offer is being made.” (Emphasis added). Here, the
plan was distributed to Microsoft employees generally. By its
terms, the plan extends participation to the class of common-law
employees, and hence offers ESPP benefits to all members of
that class.'’ Thus, applying the “key” distinction recognized by
Microsoft, an offer was actually made to a class of employees
of which the plaintiffs were a part, and it may be enforced on
their behalf regardless of their individual knowledge regarding
the offer.
We are not required to rely, ho
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