Goldstein v. Johnson & Johnson , 251 F.3d 433 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
5-25-2001
Goldstein v. Johnson & Johnson
Precedential or Non-Precedential:
Docket 00-5149
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Filed May 25, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-5149
GIDEON GOLDSTEIN, M.D., PH.D., Appellant
v.
JOHNSON & JOHNSON; RETIREMENT PLAN OF
JOHNSON & JOHNSON AND AFFILIATED COMPANIES;
CONSOLIDATED RETIREMENT PLAN OF
JOHNSON & JOHNSON; THE EXCESS BENEFIT PLAN OF
JOHNSON & JOHNSON
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civ. No. 96-cv-5643)
District Judge: Honorable Alfred M. Wolin
Argued: September 14, 2000
Before: BECKER, Chief Judge, NYGAARD and
AMBRO, Circuit Judges.
(Filed: May 25, 2001)
SHEPPARD A. GURYAN, ESQUIRE
(ARGUED)
BRUCE H. SNYDER, ESQUIRE
Lasser Hochman, L.L.C.
75 Eisenhower Parkway
Roseland, NJ 07068
Counsel for Appellant
FRANCIS X. DEE, ESQUIRE
(ARGUED)
STEPHEN F. PAYERLE, ESQUIRE
Carpenter, Bennett & Morrissey
Three Gateway Center
100 Mulberry Street
Newark, NJ 07102
Counsel for Appellees
OPINION OF THE COURT
BECKER, Chief Judge.
This is an appeal by Dr. Gideon Goldstein fr om the
adverse judgment of the District Court in favor of his
former employer, Johnson & Johnson (J&J), following a
bench trial. It requires us to addr ess again the question of
the proper scope of judicial review of the decision of a plan
administrator acting under the Employee Retir ement
Income Security Act of 1974 (ERISA), 29 U.S.C. S 1001 et
seq., to deny benefits to a participant. Although this topic
has been exhaustively examined in the context of benefits
denials generally, see Firestone T ire & Rubber Co. v. Bruch,
489 U.S. 101 (1989), and in the context of decisions made
by potentially self-interested administrators specifically, see
Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377 (3d
Cir. 2000), we now face a benefits-denial decision in a new
context: that of a "top hat" plan, i.e., a"plan which is
unfunded and is maintained by an employer primarily for
the purpose of providing deferred compensation for a select
group of management or highly trained employees." Miller v.
Eichleay Eng'rs, Inc., 886 F.2d 30, 34 n.8 (3d Cir. 1989)
(citations omitted).
In Firestone Tire, the Supreme Court explained that
because ERISA plans are analogous to "trusts" for
employees, with the plan administrator serving as trustee,
a reviewing court owes deference to the discretionary
decisions of the administrator just as the discr etionary
decisions of a trustee would receive defer ence. See Firestone
Tire, 489 U.S. at 111. In Pinto, we interpreted Firestone Tire
2
to mandate a more searching scrutiny of such discretionary
decisions in situations where the impartiality of the
administrator is called into question, either because the
structure of the plan itself inherently cr eates a conflict of
interest, or because the beneficiary has put forth specific
evidence of bias or bad faith in his or her particular case.
See Pinto, 214 F.3d at 383-87. However, both Firestone Tire
and Pinto are premised on the analogy of an ERISA plan to
a traditional trust.
In contrast, this Court has routinely tr eated top hat
plans differently from other kinds of plans. See, e.g., In re
New Valley Corp., 89 F.3d 143, 148-49 (3d Cir. 1996)
(explaining differences between top hat plans and other
ERISA plans). This is because top hat plans ar e expressly
exempted from most of the substantive ERISA r equirements
normally employed to protect workers' interests in their
plans. See 29 U.S.C. SS 1051(2), 1081(a)(3), 1101(a)(1). Top
hat plans are unfunded, they do not vest, and they are not
required to name fiduciaries. See id. Under such
circumstances, the analogy to trust law fails, and the plans
are more appropriately consider ed as unilateral contracts,
whereby neither party's interpretation is entitled to any
more "deference" than the other party's. See In re New
Valley, 89 F.3d at 149 (top hat plans are governed by the
federal common law of contract); Kemmerer v. ICI Americas
Inc., 70 F.3d 281, 287 (3d Cir. 1995) (same).
There appears to be no reason, however , why the
precondition that mandates deference in the context of the
more typical ERISA plan -- that is, a written clause
explicitly granting authority to the plan administrator to
interpret the terms of the plan, see Firestone Tire, 489 U.S.
at 111-12 -- should not be given effect as part of the
unilateral contract that constitutes a top hat plan. In
accordance with ordinary contract principles, we conclude
that, depending on the language used, such a clause has
the potential to grant the plan administrator discr etion to
construe the terms of the plan, subject to the implied duty
of good faith and fair dealing. See Restatement (Second) of
Contracts S 205. And, as with any other contract term,
courts retain the authority to review the administrator's
compliance with that duty to exercise discr etion in good
faith.
3
The dispute in this case centers around the pr oper
characterization of an unusual form of compensation that
Goldstein received during his tenure at J&J. The question
is whether this compensation, which involved paying to
Goldstein a specified percentage of the sales of products he
developed, should have been taken into account for the
purpose of determining his monthly pension under the
terms of J&J's retirement plans. Goldstein argues that
these payments should have been used to calculate his
pension; the plan administrator disagrees. Her e, the grant
of discretion to the plan administrator to interpret the
plan's terms was broad, in that the administrator was given
"sole authority" to "[i]nterpret the provisions" of the plan,
and the administrator's actions were to be"final and
conclusive for all persons." Moreover , the District Court's
factual conclusion that the administrator at all times acted
in good faith with respect to the employee's claim for
benefits is not clearly erroneous. Accor dingly, we will affirm
the judgment of the District Court denying Goldstein's
claim for additional benefits.
I. Facts
Goldstein is a physician who specializes in
immunobiology research, specifically AIDS research. In
1977, Goldstein, then employed by the Sloan-Kettering
Institute for Cancer Research, received a patent on the drug
thymopentin, which he assigned to his employer . Later that
year, he joined Ortho Pharmaceutical Corporation, a
subsidiary of J&J. Ortho licensed the thymopentin patent
from Sloan-Kettering to allow Goldstein to continue his
work, paying a royalty for the license based on sales, and
paying a "commission" to Goldstein equal to one percent of
the royalty.1
_________________________________________________________________
1. The employment contracts consistently r efer to these payments as
"commissions"; however, the parties dispute whether they were truly
"commissions" or were instead "r oyalties." For the purposes of this
opinion, we will follow the contractual language and refer to the
payments as "commissions," although our use of the term is not
intended to imply a legal conclusion as to the pr oper characterization of
the payments.
4
In 1987, J&J created the Immunobiology Resear ch
Institute, headed by Goldstein. At that time, Goldstein
entered into a new employment contract with J&J. This
new contract contained a section titled "Compensation,"
with three subheadings. The first subheading,"Salary,
Bonus and Employee Benefits" explained that Goldstein
would receive a "salary and cash bonus each year," and
would be "entitled to participate in all general employee
benefit plans . . . in accordance with their terms, including
. . . retirement plans." The second subheading,
"Commissions," provided that in addition to his salary,
Goldstein would receive a commission equal to one and
one-fourth percent of the sales of the pr oducts he
developed. The commissions would continue at a r educed
rate for five years after the expiration of the patents,
irrespective of Goldstein's continued employment with J&J.
The agreement also provided that J&J was under no
obligation to market Goldstein's products, and that the
salary and bonus payments were to be paid "in lieu of " that
obligation. The third subheading stated that Goldstein
would not participate in J&J's executive stock bonus plan,
a provision to which Goldstein had agreed in exchange for
the right to receive commissions. As it happened,
throughout Goldstein's relationship with J&J, the only
patent that was actually marketed -- and thus, the only
patent that generated income to Goldstein -- was the
thymopentin patent. Despite this fact, Goldstein's
commissions greatly exceeded his salary and bonus
payments, constituting almost 75% of his total
compensation.
Throughout Goldstein's tenure with J&J, the company
maintained a system of retirement benefits for its
employees, consisting of two interrelated plans (together,
"the Plan"). The first was an ordinary funded pension plan
(the Retirement Plan), subject to all of ERISA's substantive
requirements. Under this plan, retir ees would receive
monthly benefits in an amount determined by a formula
based on the average compensation earned by the employee
during his or her five highest consecutive ear ning years
with the company. The amount of these payments was
capped in order for the plan to maintain its qualified status
under the Internal Revenue Code. See 26 U.S.C. S 415. In
5
addition to its Retirement Plan, J&J also maintained what
it termed an "Excess Benefit Plan" (the Top Hat Plan)
designed to work in tandem with the Retirement Plan.2 The
Top Hat Plan paid out the benefits due an employee under
J&J's pension formula that, due to the cap, could not be
paid directly from the Retirement Plan.
Both plans were administered by a Pension Committee.
Under the terms of the Retirement Plan, the Pension
Committee was granted "sole authority" to"interpret" the
terms of the plan. Under the terms of the Top Hat Plan,
benefits would be calculated according to the terms of the
Retirement Plan, and the "decisions made by and the
actions taken by [the Pension Committee] in the
administration of this Excess Plan shall be final and
conclusive for all persons." By early 1995, the Committee
had delegated much of its authority to interpr et the Plan to
a subcommittee known as the Benefits Claims Committee
(BCC). The Pension Committee was the named fiduciary of
the Retirement Plan. However, the T op Hat Plan was, by
definition, unfunded (i.e., benefits wer e paid directly out of
J&J's operating revenues), and its administrator not only
had no fiduciary responsibilities, but was also explicitly
exempted from personal liability for actions taken with
respect to the plan. Obviously, both the lack of fiduciary
responsibility and the exemption from personal liability
would not have been possible had the excess benefit plan
been subject to ERISA's general requirements. See In re
New Valley Corp., 89 F.3d 143, 149 (3d Cir. 1996).
Because benefits under the Plan were deter mined by
reference to the employee's compensation during his or her
employment with J&J, it was necessary for the Plan to
define the types of compensation that would be included in
_________________________________________________________________
2. ERISA provides that plans designed solely to provide benefits in excess
of the statutory cap contained in 26 U.S.C. S 415 are "excess benefit
plans" that are not covered by ERISA at all. See 29 U.S.C. S 1002(36);
Gamble v. Group Hospitalization & Med. Servs., 38 F.3d 126, 128 (4th
Cir. 1994). However, despite the fact that J&J styled this an "Excess
Benefit Plan," we determined on a pr evious appeal that the plan was, in
fact, a top hat plan, and thus governed by ERISA. See Goldstein v.
Johnson & Johnson, No. 98-6065 & 98-6172, slip op. at 10 (3d Cir. Mar.
4, 1999).
6
the benefit calculation. Throughout Goldstein's employment
with J&J, the relevant Plan provisions explained that:
"Covered Compensation" means basic r emuneration
paid to an Employee including amounts deferr ed at the
Employee's election under the Johnson & Johnson
Savings Plan, during periods for which such Employee
receives Credited Service under this Plan. Covered
Compensation for a year includes straight time pay for
a regular workweek, prior year salesman's
commissions and other specified forms of incentive
compensation, and incentive or piecework ear nings,
but excludes premiums for overtime shift, Satur day
and Sunday (6th or 7th workday) or holiday work,
arbitrary bonuses, the value of gifts, management
incentive bonuses and certificates of extra
compensation.3
In addition, the Summary Plan Description explained that:
Included in your Plan earnings will be your straight
time pay for your regular workweek, sales-person's
commissions, overtime, shift differential, year-end cash
Christmas gift, and year-end executive cash bonus. All
other earnings, for example, Johnson & Johnson
Achievement Award and stock, not specifically
described above, are not included in Plan earnings.
In December 1994, J&J modified its plan, r etroactive to
1989. In this new version of the plan, the definition of
"compensation" was rewritten as:
"Covered Compensation" means basic r emuneration
paid to an Employee including amounts deferr ed at the
Employee's election under the Johnson & Johnson
Savings Plan and salary reduction amounts under a
plan that meets the requirements of Section 125 of the
Code, during periods for which such Employee r eceives
Credited Service under this Plan. Cover ed
Compensation for a year includes straight time pay for
a regular workweek, current year salesperson's paid
commissions, other specified forms of incentive
_________________________________________________________________
3. These Certificates of Extra Compensation, or CECs, were the
functional equivalent of a share of stock.
7
compensation and incentive or piecework earnings,
year-end cash Christmas gift, year-end cash executive
bonus, overtime, shift, Saturday and Sunday (6th or
7th workday), and holiday pay. . . . Covered
Compensation shall include the annual value of stock
contract awards and dividend equivalents paid on
unissued stock contract shares and, if applicable, non-
vested Certificates of Extra Compensation (CECs).
The new Summary Plan Description defined "Plan
Earnings" as:
Compensation used in determining Pension Plan
benefits, including consideration of straight-time pay
for your regular workweek, salesperson's commissions,
overtime, shift differential, year -end cash gift, year-end
executive cash bonus, the value of delivered r estricted
stock awards and dividend equivalents paid on
undelivered restricted stock awards, dividend
equivalents paid on non vested CEC units, and sales
management incentive compensation.
As the quote demonstrates, this new Summary Plan
Description no longer contained the sentence excluding
forms of compensation not otherwise specified.
Just before the changes to the 1994 Plan wer e enacted,
Goldstein retired from J&J and began to receive his
pension under the terms of the Retirement Plan and the
Top Hat Plan. At this time, J&J and Goldstein also began
to negotiate a severance. Discussions continued until April
1996, mostly focusing on the disposition of the intellectual
property rights to the research Goldstein had conducted
during his tenure. Eventually, an Agreement and Mutual
Release was signed by both parties (Release). The Release
provided that all claims by Goldstein r egarding "the
Employment Agreement, the termination of said agreement
. . . illegal discrimination, harassment or r etaliation based
on age, sex, race, religion, national origin, citizenship,
disability . . . breach of contract, br each of promise . . .
wrongful denial of benefits . . . ." wer e waived; however, the
Release expressly preserved "Goldstein's right to participate
in J&J's Retirement Plan . . . in accor dance with the terms
of said plan." Both provisions were added in response to a
8
request by Goldstein's attorney that Goldstein be permitted
to participate in the pension plans.
The day after the Release was signed, Goldstein
telephoned Efrem Dlugacz, a member of the Pension
Committee, to protest the calculation of his pension
benefits. Specifically, Goldstein objected to the fact that the
"compensation" used to compute his pension did not
include the commissions he had earned on the
thymopentin patent, but rather were based solely on his
salary and annual bonuses. Goldstein was then r eceiving a
pension of $7,606 per month; had his commissions been
included, his pension would have been $30,126 per month.
Goldstein admits that at the time he executed the Release,
he was aware of his intention to challenge the calculation
of his pension. All of the extra benefits claimed by Goldstein
would have been paid out of the Top Hat Plan.
On Dlugacz's suggestion, Goldstein lodged his objections
in writing. Garry Goldberg, Manager of Pension
Administration, having reviewed Goldstein's claim,
addressed a memo to the BCC taking the position that
Goldstein's commissions were not pensionable. Considering
only whether Goldstein's commissions fell into one of the
categories of specifically enumerated pensionable items,
Goldberg concluded that the only potentially r elevant
categories were "salesperson's commissions" and "sales
management incentive compensation," but that these items
only referred to the compensation r eceived by salespeople.
Under this interpretation, Goldstein's ear nings did not
qualify. Goldstein was not given a copy of this memo or
asked to respond.
With Goldstein's knowledge, the BCC met in May 1996 to
consider his claims. In June of that year, Michael J. Carey,
Chair of the BCC, wrote to Goldstein denying his claim, on
the ground that Goldstein was not a salesperson and that
the commissions were not "incentive compensation" as that
term was used in the definition of "Cover ed Compensation."
Letters were exchanged in which Goldstein ar gued that his
commissions were, in fact, covered under the Plan because
his commissions were "incentive or piecework earnings."
Carey maintained the position that the ter m "incentive or
piecework earnings" was intended to apply to production
9
employees who exceeded their quotas, and that any type of
earnings not explicitly mentioned in the 1994 definition of
"Covered Compensation" was not pensionable. Goldstein
began threatening to sue in September 1996, and shortly
thereafter, the Pension Committee met and an attorney in
the Tax Department, Robert Keefer,"presented" Goldstein's
claim. After considering the evidence and the
correspondence that had been exchanged, the Pension
Committee agreed that the BCC's determination that
Goldstein's commissions were not "cover ed compensation"
was "appropriate."
II. Procedural History
In October 1996, Goldstein filed suit against J&J in New
Jersey Superior Court for the additional benefits under 29
U.S.C. S 1132, ERISA's civil enforcement provisions. J&J
removed to the District Court for the District of New Jersey,
and that court granted summary judgment to J&J on the
ground that the Release included all claims Goldstein had
against J&J for further pension benefits. On appeal, we
vacated the judgment and remanded to the District Court,
holding that the Release was ambiguous as to its scope and
thus there could be no judgment as a matter of law based
upon it. See Goldstein v. Johnson & Johnson, No. 98-6065
& 98-6172 (3d Cir. Mar. 4, 1999).
The District Court then held a bench trial in which
Goldstein claimed that his commissions were covered under
the Plan, either as "salesperson's commissions" or "sales
management incentive compensation," or because the items
included on the list of pensionable compensation wer e
meant only as exemplars of the general category of"basic
remuneration," into which his commissions fell. J&J
defended on the ground that the Plan, by its terms, did not
cover Goldstein's commissions, and further that the
interpretation of the Plan offered by the Plan administrators
was deserving of deference under Firestone Tire.4 The case
_________________________________________________________________
4. J&J also argued that Goldstein had agr eed in the Release to waive
these claims against J&J, and that even if the Release did not cover
these particular claims, Goldstein's failure to mention his intention to
sue for greater benefits during the negotiations should estop him from
asserting his claims at this time. The District Court did not find it
necessary to reach these alternative ar guments, and, given our
disposition, neither do we.
10
was tried prior to our decision in Pinto v. Reliance Standard
Life Insurance Co., 214 F.3d 377 (3d Cir . 2000), and the
District Court reviewed the determination of the BCC de
novo, concluding that Goldstein's commissions wer e not
"Covered Compensation" as that phrase was used in the
Plan. Further, the court found that J&J had r eviewed
Goldstein's claim in good faith. See Goldstein v. Johnson &
Johnson, No. 96-5643, slip op. at 22-23 (D.N.J. Feb. 14,
2000) ("[T]he Court finds as a fact that the Johnson &
Johnson Benefits Claims Committee and the Pension
Committee . . . exerted their best efforts accurately to
interpret the plan and fairly to adjudicate Goldstein's claim,
uninfluenced by whether these benefits would have been
paid directly by Johnson & Johnson . . . .").5 Accordingly,
the court entered judgment for J&J. Goldstein now appeals.
The District Court had jurisdiction over this action
pursuant to 28 U.S.C. S 1331. We have jurisdiction
pursuant to 28 U.S.C. S 1291. We have plenary review over
a district court's conclusions of law, and we r eview its
factual conclusions for clear error.
III. Discussion
A. Standard of Review of a Plan Administrator's
Interpretations
ERISA was enacted to ensure that employer -provided
benefit plans are safeguarded and maintained so as to be
available to employees when they are due. The Act does not
mandate that an employer provide benefits, and has
nothing to say about how these plans are to be designed.
See Nazay v. Miller, 949 F.2d 1323, 1329 (3d Cir. 1991).
The Act does, however, ordinarily imposefiduciary duties
upon plan administrators once a plan has been
implemented. See Noorily v. Thomas & Betts Corp. , 188
F.3d 153, 158 (3d Cir. 1999).
Administrators of ERISA plans may have various degr ees
of responsibility, depending on the plan's design. Some may
_________________________________________________________________
5. We recognize that the court did not use the term of art "good faith" in
its opinion; however, we do not believe that the quoted statements can
be interpreted as anything other than a finding of good faith.
11
be charged simply with carrying out the plan according to
its terms; others may have more discr etionary authority to
interpret the terms of the Plan and make benefits
determinations. See Firestone T ire & Rubber Co. v. Bruch,
489 U.S. 101 (1989). For many years, in cases in which
beneficiaries sued administrators alleging that benefits had
been wrongly denied them, courts attempted to set
standards as to the degree to which they would defer to the
decisions of the administrators who, by the design of the
plan -- which the employer was completely fr ee to set --
were charged with implementing it.
In Firestone Tire, the issue finally reached the Supreme
Court. Firestone Tire had sold its plastics division to a new
company, and the former employees, who had been rehired
without interruption and at the same pay rates, sued
Firestone for the benefits they had accrued under
Firestone's termination pay plan. Fir estone, which was also
the administrator of the plan, denied the benefits on the
ground that the sale to the new company did not constitute
a triggering event within the terms of the plan requiring the
payment of benefits. See id. at 105-06. In determining the
appropriate standard of review to apply to Firestone's
interpretation of its plan, the Supreme Court began by
observing that "ERISA abounds with the language and
terminology of trust law." Id. at 110. The Court, particularly
noting that ERISA requires that benefits plans have named
fiduciaries and authorizes suits against them for breach of
fiduciary duty, see id., analogized ERISA administrators to
trustees, and explained that in setting a standar d of review
for an administrator's decision, it would follow or dinary
principles of trust law, see id. at 111.
In the Court's view, under ERISA, an administrator is a
fiduciary "to the extent he exercises any discretionary
authority or control." Id. at 113 (emphasis omitted). Under
ordinary trust principles, the decisions of trustees who are
granted discretionary authority to interpr et the trust's
terms receive only arbitrary and capricious review from
courts. See id. at 111. Extending these principles to ERISA,
the Court held that although the decisions of these
fiduciaries of ERISA plans would receive deferential review
from courts, administrators who were not granted
12
discretionary authority to construe a plan's terms would
receive no deference, and their decisions would be reviewed
in accordance with ordinary contract principles. See id. at
111-15. The Court also left open the possibility that ERISA
fiduciaries operating under a conflict of inter est would
receive less deferential review. See id. at 115. Under our
decision in Pinto v. Reliance Standard Life Insurance Co.,
214 F.3d 377 (3d Cir. 2000), a court will apply heightened
scrutiny to an administrator's determination either when
the plan, by its very design, creates a special danger of a
conflict of interest, or when the beneficiary can point to
evidence of specific facts calling the impartiality of the
administrator into question. See id. at 383-87; see also Bill
Gray Enters., Inc. Employee Health & Welfar e Benefit Plan v.
Gourley, Nos. 00-3412 & 00-1400, 2001 WL 427626, slip
op. at 15 (3d Cir. Apr. 26, 2001).
If J&J's Plan were an ordinary ERISA plan, then, given
the broad discretion granted to the Pension Committee, we
would apply the standards set forth in Fir estone Tire and
Pinto. We would first determine whether any conflict of
interest existed for the Plan administrators, and then we
would calibrate our standard of review for their benefits
decision accordingly. Because Goldstein's claim for benefits
would be paid entirely out of the Top Hat Plan and the
funds would come directly from J&J's operating revenues,
we perforce would consider these facts r elevant in choosing
our standard of review. See Pinto, 214 F.3d at 389.
However, a top hat plan is a unique animal under
ERISA's provisions. These plans are intended to
compensate only highly-paid executives, and the
Department of Labor has expressed the view that such
employees are in a strong bargaining position relative to
their employers and thus do not require the same
substantive protections that are necessary for other
employees. See DOL Opin. Letter 90-14 A, 1990 WL
123933, at *1 (May 8, 1990). We have held that such plans
are more akin to unilateral contracts than to the trust-like
structure normally found in ERISA plans. See In re New
Valley Corp., 89 F.3d 143, 149 (3d Cir. 1996); Kemmerer v.
ICI Americas Inc., 70 F.3d 281, 287 (3d Cir. 1995).
Accordingly, top hat plans are not subject to any of ERISA's
13
substantive provisions, including its r equirements for
vesting and funding. See 29 U.S.C. SS 1051(2); 1081(a)(3).
Not only are the administrators of these plans not subject
to ERISA's fiduciary requirements, see 29 U.S.C. S 1101(a),
but the top hat plan at issue in this case specifically
exempts its administrators from any personal liability for
actions taken with regard to the plan.
Given the unique nature of top hat plans, we believe the
holding of Firestone Tire requiring deferential review forthe
discretionary decisions of administrators to be inapplicable.
The deferential standard of review granted to plan
administrators exercising discretionary authority was
specifically an outgrowth of the Supr eme Court's analogy to
trust law, and particularly the fiduciary r esponsibilities
possessed by administrators with discretionary authority.
See Firestone Tire, 489 U.S. at 110-11. In contrast, a top
hat administrator has no fiduciary responsibilities. Top
hats are more analogous to the second scenario identified
by the Supreme Court, i.e., when a plan administrator has
no discretion to interpret the plan's ter ms (and thus is not
a fiduciary), in which case the plan is reviewed de novo,
according to the federal common law of contract. See id. at
112. That is, although, as was done in this case,
"discretion" may be explicitly written into a top hat plan
document, it does not act as a legal trigger altering the
standard of review. Thus, we believe that, in accordance
with our earlier precedent, top hat plans should be treated
as unilateral contracts, and neither party's interpr etation
should be given precedence over the other's, except in
accordance with ordinary contract principles.6
In reaching this conclusion, we reject J&J's contention
that, because ERISA's definitional section lists a"fiduciary"
as one who exercises discretion in interpr eting the terms of
_________________________________________________________________
6. We are aware that other courts have applied Firestone Tire's holding to
top hat plans. See, e.g., Olander v. Bucyrus-Erie Co., 187 F.3d 599, 604
(7th Cir. 1999); Schikore v. BankAmerica Supplemental Retirement Plan,
No. C 98-3857 SI, 1999 WL 605826 (N.D. Cal. Aug. 2, 1999). However,
these cases do not explicitly question whether Firestone Tire should be
so freely transferrable, and, in fact, in at least one instance, the court
specifically "deferred" to the administrator of a top hat plan on the
basis
that the administrator was a fiduciary. See Olander, 187 F.3d at 607.
14
a plan, see 29 U.S.C. S 1002(21)(a), administrators of top
hat plans are also fiduciaries. To begin with, ERISA
explicitly states that top hat plans are not subject to the
ERISA's fiduciary requirements. See 29 U.S.C. S 1101(a).
Further, it is well established in the caselaw that there is
no cause of action for breach of fiduciary duty involving a
top hat plan. See In re New Valley Corp., 89 F.3d at 153;
accord Demery v. Extebank Compensation Plan , 216 F.3d
283, 290 (2d Cir. 2000) (dismissing ERISA claims for
breach of fiduciary duty in a top hat plan on the ground
that top hat administrators are not bound byfiduciary
standards); Duggan v. Hobbs, 99 F .3d 307, 313 (9th Cir.
1996) (same). Finally, we find J&J's argument disingenuous
in light of the explicit terms of its own Plan absolving the
administrators of the Top Hat Plan from individual liability.
These terms, which designate the Pension Committee as
"administrator" (but not fiduciary), stand in marked
contrast to the parallel provisions of the Retirement Plan
that explicitly name the same committee both as
administrator and as fiduciary.
We acknowledge that our holding may appear to have the
potential to create anomalous results. T o begin with, many
plans may be structured as the one curr ently before us,
whereby benefits are calculated in a similar manner
whether they are to be paid from an or dinary retirement
plan or from a top hat plan. Differ ent standards of review
for each may result in different interpretations of a single
plan's terms, even though on paper the two halves are
designed to work in tandem and to yield identical r esults.
Our holding may also seem anomalous in that we appear to
be according the least deference to plan administrators
when they are determining benefits of highly-paid
employees, the very group that the Department of Labor
believes is best able to protect its own inter ests.
However, we believe that these potentially anomalous
results are not as severe as may appear at first blush. The
"deference" ordinarily due an ERISA plan administrator is
only available to the extent that the plan grants that
administrator discretion to interpret the terms of the plan.
See Firestone Tire, 489 U.S. at 111-13. In the absence of
such discretion, a court will review the terms of the plan de
15
novo. See id. Thus, the possibility for dif ferent standards of
review between top hat plans and other ERISA plans will
only arise when the plan has explicitly granted discretion to
the plan administrators. But in the case of a top hat plan,
even though an administrator may not receive"deference"
under Firestone Tire, any grant of discretion must be read
as part of the unilateral contract itself. As a ter m of the
contract, it must be given effect as or dinary contract
principles would require, thus minimizing the potential for
differing standards of review for identical plan terms.
Ordinary contract principles requir e that, where one
party is granted discretion under the ter ms of the contract,
that discretion must be exercised in good faith -- a
requirement that includes the duty to exer cise the
discretion reasonably. See Restatement (Second) of
Contracts S 205 & cmt a; see also Ber ger v. Edgewater Steel
Co., 911 F.2d 911, 919 (3d Cir. 1990) (term of an ERISA
retirement plan allowing early retir ement when "the
Company considers that such retirement would . . . be in
its interest" obligates the employer to r each its decision in
good faith). As with any other contract term, courts retain
the authority to conduct a de novo review as to whether a
party has complied with its good-faith obligations.
Goldstein argues that if the plan is a traditional contract,
the clause granting interpretive discretion to J&J
administrators should be voided as unconscionable for it is
the functional equivalent of designating an inter ested party
as an arbitrator. We do not agr ee. Contracts are often
considered to be enforceable even when particular parties
are able to specify terms in the course of dealing, subject
only to the duty of good faith. See, e.g., O.N. Jonas Co., Inc.
v. Badische Corp., 706 F.2d 1161 (11th Cir. 1983)
(interpreting the Uniform Commercial Code); TCP Indus.,
Inc. v. Uniroyal, Inc., 661 F.2d 542 (6th Cir. 1981) (same).
Goldstein has cited nothing to the contrary, and we do not
consider cases involving due process rights to impartial
arbitrators, such as United Retail & Wholesale Employees
Teamsters Union Local No. 115 Pension Plan v. Yahn &
McDonnell, Inc., 787 F.2d 128 (3d Cir . 1986), to be apposite
to the issue at hand. Thus, we see nothing impr oper in
Goldstein and J&J contracting to allow Goldstein to
16
participate in a pension plan under which J&J will have
responsibility to administer the plan and interpret
ambiguous terms, so long as its interpr etations are
reasonable and it exercises its responsibilities in good faith.
In fact, given that the Top Hat Plan was designed to work
in concert with a retirement plan that has designated the
same entity as the fiduciary (a perfectly legitimate design),
the Top Hat Plan could hardly be administered effectively
without granting J&J this discretion.
B. Interpreting the Ter ms of J&J's Top Hat Plan
The District Court concluded, and Goldstein has not
disputed, that under the language of the Plan documents
the Pension Committee was given broad authority to
interpret the terms of the Plan and to make final decisions
with regard to the payment of benefits. 7 Nonetheless,
Goldstein disputes the Committee's interpretation of
whether his commissions constituted pensionable
compensation, although, as we explained in the r ecitation
of facts, his argument as to how his commissions fall under
the definition of "Covered Compensation" has taken a
variety of forms over the course of this dispute.8 As it is
currently presented to us, Goldstein's claim is that,
although his commissions were not cover ed under the 1989
version of the Plan, the 1994 changes to the Plan, in
particular the deletion of the statement that "All other
earnings . . . not specifically described above, are not
_________________________________________________________________
7. As described above, the Retirement Plan stated that the Pension
Committee had "sole authority" to "interpr et" the plan's terms; the Top
Hat Plan incorporated this discretion by r eference when it explained that
benefits would be calculated in accordance with the terms of the
Retirement Plan. The Top Hat Plan also added a provision that the
Pension Committee's decisions in the administration of the Top Hat Plan
would be "final and conclusive."
8. Goldstein originally argued that his commissions were pensionable as
"incentive or piecework earnings." Later , he claimed that his
commissions were "salesperson's commissions" or "sales management
incentive compensation," or, in the alter native, that the commissions
were "basic remuneration," and that the items enumerated as "basic
remuneration" in the Plan were only meant as examples of the types of
payments that were pensionable.
17
included in Plan earnings," suggests that the phrase "basic
remuneration" was given a broader definition in 1994. In
Goldstein's view, the 1994 Plan's list of pensionable items
was intended merely to provide examples of the type of
compensation covered; because Goldstein's commissions
constituted 75% of his earnings, he maintains that the
commissions were, in fact, his "basic r emuneration," and
therefore are pensionable under the terms of the 1994 Plan.
J&J responds that the list of pensionable ear nings was
intended as an exclusive list of all covered items, and that
because Goldstein's commissions were not included in the
list, they are therefore not pensionable. As explained above,
the question presented to the Court is not whether J&J's
interpretation offers the best reading of the contract;
rather, given the discretion granted to the Pension
Committee, the question is whether the interpr etation
offered by J&J was reached in good faith. The District
Court, after listening to the testimony of the parties and
examining the documentary evidence, concluded that J&J's
interpretation of the terms of its Plan was reasonable, and
that J&J administrators had used their "best ef forts" to
interpret the Plan accurately and fairly to assess
Goldstein's claim. The District Court's findings are not
clearly erroneous.
In reaching its conclusions, the court first relied on its
assessment of the credibility of J&J's plan administrators,
and specifically found that the members of the Pension
Committee and the BCC were not biased in their decisions,
and had "exerted their best efforts accurately to interpret
the plan and fairly to adjudicate Goldstein's claim." It is
axiomatic that we defer to a district court's cr edibility
determinations.
Further, we find no fault with the District Court's
determination that the numerous "irr egularities" identified
by Goldstein in the process by which the administrators
interpreted the Plan do not give rise to an inference of bias
or bad faith. These alleged irregularities r elate first to the
manner by which the Pension Committee delegated its
responsibilities to the BCC, and second to what Goldstein
perceives as the lack of opportunities for him to present
arguments and evidence on his behalf.
18
Goldstein begins by submitting that the Pension
Committee never formally delegated authority to the BCC to
make benefits determinations, and ther efore its decision to
"rubber stamp" the BCC decision without r eaching its own
independent conclusions rendered its interpretation of the
Plan terms nugatory. It is true that courts have refused to
accord Firestone Tire deference to the decisions of
administrators who, in the courts' determination, have
failed to exercise the discretion granted to them under the
terms of an ERISA plan. See, e.g., Sharkey v. Ultramar
Energy Ltd., 70 F.3d 226 (2d Cir . 1995). As we have
explained, however, we review her e the decision of the
administrators not under Firestone T ire standards, but
rather to determine whether there has been a violation of
the terms of the contract. Therefor e, whatever weight
Goldstein's arguments on this score might carry in the
context of a more ordinary ERISA plan, these arguments
are only relevant in the context of a top hat plan to the
extent they bear upon compliance with the plan's
contractual provisions, including the implied duty of good
faith and fair dealing.
In this case, Goldstein's argument that discr etionary
power was never delegated to the BCC rests on the fact that
the formal resolution delegating the Pension Committee's
power to the BCC specifically granted the BCC only the
authority to "hear and decide claims and appeals." Whether
the power to "hear and decide claims and appeals"
necessarily carries with it a discretionary power to interpret
the terms of the Plan (and it is difficult to see why it would
not), any technical flaws in the Pension Committee's efforts
to delegate discretion to the BCC do not bear on the issue
of good faith. The Plan documents themselves granted the
Pension Committee the right to delegate its authority, and
the Committee declared its intention to do so in the
Summary Plan Description. Additionally, the final
disposition of Goldstein's claim was made by the Pension
Committee itself in September 1996. Thus, it cannot be
said that the delegation to the BCC, and the decision of the
Pension Committee to adopt its reasoning, somehow
violated the contractual provisions of the Plan granting the
Pension Committee the power to interpret the Plan terms,
or demonstrated any lack of good faith on the part of J&J.
19
As for Goldstein's second argument, that he was denied
an opportunity to make his case before the BCC, the facts
simply do not bear him out. He exchanged numer ous
letters with J&J employees, including the Chair of the BCC,
in which he was able to explain his interpretation of the
Plan. In fact, during cross-examination, Goldstein admitted
that he had, at one time or another, submitted to the BCC
all of the information he believed it needed to reach a
determination. Goldstein was informed of the initial BCC
meeting, but never asked to attend or to submit evidence.
Finally, as the District Court found, Goldstein's claim was
reviewed by J&J on at least three separate occasions:
during the initial meeting of the BCC, during the course of
Goldstein's exchange of correspondence with Car ey, and
during the Pension Committee's September 1996 meeting.
In the face of this evidence, we see no grounds for
concluding that the District Court's finding of good faith on
the part of J&J was clearly erroneous.9
_________________________________________________________________
9. In a related argument, Goldstein ar gues that no deference is due an
administrative interpretation of a Plan unless the claimant is given a
"full and fair review" as requir ed by 29 U.S.C. S 1133(2). Because he was
not given an opportunity to present evidence and make arguments before
the determination was reached, he ur ges us to review the terms of the
Plan de novo. Title 29 U.S.C. S 1133(2) is among those enforcement
provisions of ERISA from which top hat plans have not been explicitly
exempted. However, by its terms, S 1133(2) obligates only "named
fiduciaries" -- which are not required for top hat plans -- to conduct a
"full and fair review" of a benefits denial. We need not decide today
whether S 1133(2) applies to the administrators of top hat plans per se,
or whether a "full and fair review" as defined by S 1133(2) is itself a
component of good-faith plan administration, because we agree with the
District Court that such a review was pr ovided to Goldstein in this case.
J&J wrote to Goldstein with updates on his claim for benefits and fully
laid out its reasons for denying his claim. It responded to his letters
and
invited him to call if he had further questions. It identified the
specific
provisions of the Plan pursuant to which it was premising the denial of
benefits. And, as explained above, Goldstein has been unable to identify
any "evidence" that he could have submitted that the administrators
failed to consider. Thus, J&J fully complied with the strictures we
developed in Grossmuller v. Inter national Union, United Automobile
Aerospace & Agricultural Implement Workers of America, 715 F.2d 853,
857-58 (3d Cir. 1983), for a full and fair r eview as required by S
1133(2).
20
In addition to the propriety of the process by which J&J
reached its decision, there is no inher ent unreasonableness
in the substantive interpretation of the Plan terms offered
by J&J giving rise to an inference of bias or bad faith. As
written, Goldstein's contract discusses his salary and
bonuses in the same section as the discussion of his right
to participate in the Plan; his "commissions," in contrast,
are placed in a separate section, suggesting that the parties
construed these payments to be something other than
pensionable earnings.
Further, the contract specifically avers that the
commissions were intended to replace other forms of
executive compensation such as CECs. As the District
Court observed, these forms of executive compensation
were not pensionable at the time of the execution of
Goldstein's contract, and only some of them became
pensionable when they were explicitly added to the list of
pensionable earnings in 1994. Thus, it is clear that the
phrase "basic remuneration" did not encompass either
these alternative forms of compensation, or Goldstein's
commissions, in 1989, and the fact that these for ms of
executive compensation had to be explicitly added to the
list of pensionable earnings in 1994, while the phrase
"basic remuneration" remained intact, suggests that there
was no "implied" broadening of the definition of "basic
remuneration," but instead an expanded list of included
items.
Additionally, as the District Court concluded, the phrase
"Covered Compensation includes" is r easonably susceptible
of meaning either that the earnings listed ar e a "sample" of
the types of compensation to be included, or that the
phrase "Covered Compensation" is intended to encompass
only those forms of compensation explicitly mentioned in
the list.10 Thus, there is nothing unreasonable in J&J's
_________________________________________________________________
10. We cannot help but observe that Goldstein apparently began offering
his alternative construction of the phrase"Covered Compensation
includes" only at the time he filed suit in the District Court, and not
when he lodged his claim for additional benefits with the Pension
Committee. This fact alone suggests that J&J's interpretation is, at
minimum, a reasonable one.
21
interpretation of the Plan to cover only those forms of
compensation specifically enumerated. And although
Goldstein plausibly argues that the 1994 deletion from the
Summary Plan Description of the clause excluding for ms of
compensation not otherwise specified must be interpreted
as evincing an intent to alter the Plan from pr oviding an
exclusive list to providing only a "sample" listing, the
District Court credited testimony of J&J employees that the
phrase had been deleted as surplusage, because the intent
all along was to create a list of "cover ed compensation"
solely by listing the included items. Certainly, such an
interpretation of the motivation for the deletion is not
unreasonable either.
Goldstein's position is not an unsympathetic one, and we
can understand his anger that, notwithstanding the large
sums that his thymopentin patent yielded to J&J (and the
fact that he was brought into J&J for his expertise in
developing profitable drugs, a skill that might often be
rewarded by large royalty-like payments), he was
nonetheless given a pension based merely upon his salary.
Concomitantly, were we reviewing the plan's terms de novo,
we might reach a different r esult. After all, the fact that
Goldstein's employment contract specifies that the salary
and bonus payments were to be made in lieu of J&J's
obligation to market Goldstein's products suggests that it
was the commissions -- and not the salary -- that
constituted Goldstein's "basic remuneration." But, as the
Department of Labor has explained, highly-compensated
employees such as Goldstein are well-placed to form
employment contracts that protect their inter ests, and in
this case, the contract expressly grants the Pension
Committee the power to make final determinations as to
the types of compensation that are pensionable.
Therefore, we conclude that although courts need not
defer to the construction of disputed contract ter ms given
by the administrators of top hat plans, effect must be given
to all of the terms, including those conferring discretion on
the administrators (subject as always to the implied duty of
good faith). In this case, the discretion granted to the
administrators was quite broad, and ther e is nothing in the
process by which J&J reached its decision, or in the
22
decision itself, that would lead us to conclude that the
District Court's determination as to J&J's good faith was
clearly erroneous. Thus, we conclude that J&J did not
breach its contractual obligation to Goldstein. The
judgment of the District Court will be affir med.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
23