John D. Craig v. Pillsbury ( 2006 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 05-2211
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John D. Craig, *
*
Appellee, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
The Pillsbury Non-Qualified Pension *
Plan; General Mills, Inc., *
*
Appellants. *
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Submitted: January 11, 2006
Filed: August 14, 2006
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Before BYE and COLLOTON, Circuit Judges, and BOGUE,1 District Judge.
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BYE, Circuit Judge.
The Pillsbury Non-Qualified Pension Plan (Plan) appeals the district court's2
grant of summary judgment in favor of John Craig. The district court determined the
1
The Honorable Andrew W. Bogue, United States District Judge for the District
of South Dakota, sitting by designation.
2
The Honorable Michael J. Davis, United States District Judge for the District
of Minnesota, adopting the Report and Recommendation of the Honorable Janie S.
Mayeron, United States Magistrate Judge for the District of Minnesota.
Plan abused its discretion when it calculated Craig's pension benefits without
including certain bonuses he received in 2001. We affirm.
I
John Craig began working for Pillsbury in 1989 when a subsidiary of his
employer, Grand Metropolitan, Inc. (GMI), acquired Pillsbury. He moved from New
Jersey to Minnesota to work in Pillsbury's tax department, performing tax services for
both GMI and Pillsbury. He later became a Pillsbury vice president, and hence – in
addition to being covered by Pillsbury's standard pension plan (which is not at issue
in this case) – he was covered by Pillsbury's "top hat" plan, the Plan at issue in this
case. A top hat plan is so called because it provides "deferred compensation for a
select group of management or highly compensated employees," 29 U.S.C. § 1051(c),
without being subject to the Internal Revenue Code's maximum annual benefit and
compensation limits.
Craig retired in 2001, requiring the Plan to calculate his monthly pension
benefit, a task complicated by a change of employment which occurred that year and
which requires some background explanation. In 1998, GMI changed its name to
Diageo. In 2000, Diageo announced Pillsbury would merge with General Mills. Craig
worked on the merger, receiving offers from both Diageo and General Mills for
employment after the merger's completion. Craig declined the offers. When the
merger did not occur on its expected completion date, Diageo reclassified certain
employees, including Craig. Effective January 1, 2001, employees staying with
General Mills after the merger remained on Pillsbury's payroll, while those leaving
were transferred to the payroll of Guinness United Distillers and Vintners North
America (Guinness), a company owned by Diageo. Because Craig was not staying
with General Mills after the completion of the merger, he became a Guinness
employee on January 1, 2001. The merger was completed on November 1, 2001, and
he retired soon after on December 31, 2001.
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Craig's reclassification as a Guinness employee did not end his participation in
the Plan. As a Diageo company, Guinness was an "affiliate" under the Plan. But
unlike some affiliates, Guinness had not adopted Pillsbury's pension plans as its own,
so it was considered a "non-adopting affiliate." Both the Plan and the Summary Plan
Description (SPD) issued to Craig explained how a transfer to a non-adopting affiliate
affected an employee's continuing participation in and entitlement to benefits under
the Plan.
The SPD provided in relevant part:
If you are transferred to another Pillsbury location or affiliate that is not
covered by this Plan [i.e., a non-adopting affiliate], you will become an
inactive participant in this Plan. During the time you are inactive, you
will continue to earn continuous service, but not credited service. When
your pension benefit is calculated, it will be based on your continuous
service before and after the transfer, your credited service prior to your
transfer, and the Plan benefit formula and your final average pay when
you actually retire.
Appellant's App. at 102.
Section 3.5(b) of the Plan provided in relevant part:
Any Participant who transfers into employment with an Employer or an
Affiliate where such Participant becomes an Inactive Participant [i.e.,
employed by a non-adopting affiliate] shall continue to accrue
Continuous Service (but not Credited Service) during the period of such
employment. Any benefit such Participant may become entitled to shall
be determined on the basis of Continuous Service before and after the
date of such transfer, on the Credited Service before the date of such
transfer, and on the Employee's Final Average Compensation and the
applicable benefit formula under the Plan in effect at the Employee's
termination of Continuous Service. Continuous Service for such
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Employee will terminate and benefits under this Plan shall commence
only after employment for an Employer or Affiliate terminates.
The Pillsbury Retirement Plan (Plan), Art. 3, § 3.5(b); App. at 16.
In 2001, Craig received $160,340 in regular pay and $185,383 in performance
bonuses for a total of $345,723 which both Guinness and Pillsbury considered
"pensionable pay," that is, earnings used to calculate a pension benefit. Craig also
received two retention bonuses totaling $166,2043 which Pillsbury would have
considered pensionable pay if he had still been a Pillsbury employee at the time of
retirement, but which Guinness did not consider pensionable pay. Thus, when the
Plan asked Guinness to provide his 2001 compensation for the purpose of calculating
his pension benefit, Guinness did not include the two retention bonuses, and the Plan
calculated Craig's final average compensation using the $345,723 amount reported by
Guinness.
Craig submitted a request for review contending the two retention bonuses
should have been included. Inclusion of the two bonuses would increase his pension
benefit by $546 per month for the three-year period from February 2005 through
January 2008, and by $601 per month thereafter when he reached the age of 65. The
Plan stood by its exclusion of the retention bonuses, indicating its practice "has
consistently been to include compensation as determined by the last affiliate employer
for use in the calculation of Final Average Compensation." App. at 133.
Craig appealed the Plan's decision administratively. The General Mills Minor
Amendment Committee (Committee) responded to his appeal, explaining its use of
the compensation figure reported by Guinness. According to the Committee, a literal
3
Although the two retention bonuses – one for $118,102 and a second "close of
sale" bonus for $48,102 – were paid by Guinness, they reflected promises Pillsbury
made to Craig to induce him to stay through the completion of the merger.
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reading of the Plan would not allow any compensation Craig received from a non-
adopting affiliate in the calculation of his final average pay. 4 However, because a
literal interpretation of the Plan would cause some vested pensions to, in effect,
disappear (or be significantly reduced) for an employee who transferred to a non-
adopting affiliate for an extended period of time prior to retiring,5 the Plan indicated
it was using its discretion to use the amount of compensation reported by a non-
adopting affiliate rather than no compensation at all.
After the Plan made a final decision denying Craig's appeal, he filed an action
against the Plan in federal district court. Cross-motions for summary judgment were
referred to a magistrate judge for a report and recommendation to the district court.
4
The Plan's argument can be summarized as follows: 1) the Plan's definition of
"Compensation" limits the term to compensation paid by an "Employer;" 2) the term
"Employer" includes only affiliates who adopt the Pillsbury plan, and thus excludes
non-adopting affiliates; and 3) the phrase "Final Average Compensation" incorporates
the term "Compensation," and therefore does not include compensation paid by a non-
adopting affiliate.
5
The Plan requires final average compensation to be calculated using 1) the five
highest compensated years out of the last ten years of continuous service, or 2) the
average monthly compensation for the last sixty months of continuous service, but
also requires years after transfer to an affiliate to count as years of continuous service.
Plan, Art. 3, § 3.5(b); App. at 16. Thus, if the Plan excludes compensation from a
non-adopting affiliate, a longstanding employee who transfers to such an affiliate for
an extended period of time prior to retiring may not receive any monthly pension
benefit at all. For example, consider an employee who built up a sizeable pension
with Pillsbury over twenty years, but then transferred to a non-adopting affiliate for
the last ten years of employment. During the last ten years, the employee's
compensation would be $0 each year if the Plan excluded compensation from a non-
adopting affiliate. The Pillsbury pension would be calculated using the top five of
those last ten years of continuous service, or five times $0 for a total of $0 (or the
average monthly compensation for the last sixty months, which would still be $0).
Thus, the ten years of service for a non-adopting affiliate would effectively eliminate
the sizeable pension the employee acquired before leaving Pillsbury.
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Concluding the plain language of the Plan, as well as the SPD, required all bonuses
to be included in the calculation of Final Average Compensation, the magistrate judge
recommended Craig's motion for summary judgment be granted and the Plan's motion
be denied. The district court adopted the magistrate judge's report and
recommendation. This timely appeal followed.
II
We review the district court's grant of summary judgment de novo, applying the
same standards as the district court. Fuller v. Hartford Life Ins.Co., 281 F.3d 704,
706 (8th Cir. 2002). The parties disagree about whether the district court should have
reviewed the Plan's decision de novo or for an abuse of discretion. The Plan contends
its decision should be reviewed under an abuse-of-discretion standard because 1) the
Plan gives its administrator discretion to interpret the Plan document and 2) the
circumstances required to trigger less deferential review under Woo v. Deluxe Corp.,
144 F.3d 1157, 1160 (8th Cir. 1998), are not present. Craig claims de novo review
applies because this case involves a top hat plan. The district court did not determine
which standard applies to a top hat plan, concluding the outcome would be the same
under either standard.
The Third Circuit has concluded de novo review applies to top hat plans even
when they give their administrators interpretive discretion because "a top hat
administrator has no fiduciary responsibilities" under ERISA. Goldstein v. Johnson
& Johnson, 251 F.3d 433, 443 (3d Cir. 2001). We agree. "[T]op hat plans should be
treated as unilateral contracts" and reviewed "in accordance with ordinary contract
principles" because the policy considerations relied upon in Firestone Tire & Rubber
Co. v. Bruch, 489 U.S. 101 (1989), to trigger abuse-of-discretion review (i.e., "the
Supreme Court's analogy to trust law, and particularly the fiduciary responsibilities
possessed by administrators with discretionary authority") are simply not present in
the case of a top hat plan. Id.
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The fact that we conduct a de novo review does not, however, alter our analysis
as much as it might appear at first blush. As noted, the Plan grants its administrator
discretion to interpret its terms. This "grant of discretion must be read as part of the
unilateral contract itself. As a term of the contract, it must be given effect as ordinary
contract principles would require[.]" Id. at 444. "Ordinary contract principles require
that, where one party is granted discretion under the terms of the contract, that
discretion must be exercised in good faith – a requirement that includes the duty to
exercise the discretion reasonably." Id.; see also Scribner v. Worldcom, Inc., 249 F.3d
902, 909 (9th Cir. 2001) ("The duty of good faith and fair dealing applies when one
party has discretion to determine certain terms of the contract.") (quoting Goodyear
Tire & Rubber Co. v. Whiteman Tire, Inc., 935 F.2d 628, 632-33 (Wash. Ct. App.
1997)). Thus, ultimately, we must determine whether the Plan's decision was
reasonable. We conclude it was not.
As the district court noted, the Plan unambiguously provided "Compensation"
included bonuses: "'Compensation' means the following amounts paid to an Employee
by an Employer: salary, including pay for time not worked, overtime, bonuses, and
commissions received as cash, plus accrued incentive earnings earned by and credited
to the Employee under an Employer incentive plan[.]" Plan, Art. 2, § 2.1(k)(2); App.
at 8 (emphasis added). The definition of "Final Average Compensation" then
incorporated the term "Compensation" by providing "Final Average Compensation"
means:
[A]n amount equal to the larger of –
(1) an amount equal to the average monthly Compensation
during the five consecutive calendar years of Continuous
Service (or all such years, if fewer than five), out of the last
ten (or fewer) calendar years of Continuous Service, for
which such average is highest; or
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(2) the average monthly Compensation during the last 60
months (or all such months, if fewer than 60) of Continuous
Service.
Id. at Art. 2, § 2.1(x); App at 12 (emphasis added).
The SPD was even more straightforward in indicating bonuses were included
in the computation of final average compensation:
Your final average pay is equal to the greater of your average monthly
earnings for the five consecutive highest-paid years out of the last 10
years or your average monthly earnings for the last 60 months before
leaving the Company. In the case of an acquisition, we will include
necessary years of pay from your prior employer to obtain 60 months of
pay.
Your pay includes your salary, any pretax payroll deductions, paid
incentive earnings, bonuses, overtime and commissions, in addition to
paid time away from work due to illness, vacation or holidays.
App. at 102 (emphasis added). The SPD further established for employees who
"transferred to another Pillsbury location or affiliate that is not covered by this Plan
. . . your pension benefit [will be] calculated . . . based on . . . your final average pay
when you actually retire." Id.
The Plan contends the "Continuous Service" provisions of Section 3.5(b)
introduced an ambiguity into the Plan by creating the possibility of a vanishing
pension when an employee transferred to a non-adopting affiliate for an extended
period of time prior to retirement. On one hand, the Plan contemplates employees
who participate in the top hat plan will receive a pension benefit upon retirement. The
Plan also provides that employees who transfer to affiliates, including affiliates who
have not adopted the Pillsbury plans, will continue to accrue continuous service for
the purpose of calculating their pension benefit. On the other hand, the Plan defines
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final average compensation based on the continuous service years closest to
retirement, which could be served with either an "Employer" or a non-adopting
affiliate, while limiting the compensation used to calculate benefits to compensation
paid by an "Employer." As the Plan contends, this creates the absurd potential for a
disappearing pension, because a participant's continuous service for a non-adopting
affiliate could eliminate the pension he or she had before leaving Pillsbury.
We acknowledge the "Continuous Service" provisions of Section 3.5(b) create
an ambiguity, which the Committee had discretion to resolve. We also acknowledge
it was reasonable for the Committee to resolve this ambiguity so as to avoid the
possibility of vanishing pensions, by including compensation paid by non-adopting
affiliates when calculating final average compensation. The Plan contends, however,
when computing the pension benefits in such situations, the Plan's grant of discretion
allowed the use of a different definition of compensation than the one provided for in
the Plan. We disagree.
We believe the ambiguity in the Plan about whether compensation from a non-
adopting affiliate should be considered did not render the definition of compensation
itself ambiguous. In other words, once the Plan resolved whether a given year's
compensation would count, its exercise of discretion was complete. We are unaware
of any contract principles under which the resolution of one ambiguity in a contract
permits a party to adopt an entirely different meaning for other parts of the contract
that are otherwise unambiguous. Cf. Verlo v. Equitable Life Assurance Soc'y of
United States, 562 F.2d 1034, 1036 (8th Cir. 1977) ("[W]e will not read an ambiguity
into an otherwise unambiguous document in order to be able to alter or vary its
terms.").
The Ninth Circuit's decision in Scribner is instructive on this point. Like this
case, Scribner involved the interpretation of a contract which gave one party discretion
to interpret its terms, specifically, a stock option plan between an employer and
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employee. 249 F.3d at 905. When Worldcom sold one of its divisions to another
company, it promised the purchaser it would terminate Scribner and other key
employees who ran the division so the purchaser could offer them jobs. The issue was
whether Scribner's termination under these circumstances was "with cause" or
"without cause" for stock options purposes. Id. The word "cause" was not defined in
the stock option plan. Worldcom contended the broad interpretive discretion given
to the plan's administrator gave Worldcom the right to define "cause" in a way that
included terminations made in conjunction with the sale of a division. Scribner
claimed Worldcom was required to give the word "cause" its ordinary meaning, i.e.,
he was terminated as a result of inadequacy of performance or some shortcoming on
his part. Id. at 906-07.
The Ninth Circuit concluded the discretion granted in the plan did not give
Worldcom the right to define "cause" however it chose:
[T]he term "cause" is ordinarily a performance-related concept. Unless
WorldCom can point to something in the Plan, the contracts, or the
context in which they were drafted that would define "cause" otherwise,
we must give the word its ordinary meaning. We cannot allow one
party's "double-secret" interpretation of a word to undermine the other
party's justified expectations as to what that word means.
...
We therefore conclude that the discretion retained by the Committee was
the discretion to determine whether Scribner had in fact been terminated
for deficient performance. The Committee did not retain the power to
redefine the term "cause" in a way that would undermine Scribner's
justified expectations as to what that word meant. Although the
Committee had broad discretion to interpret the contract, it did not have
the authority to redefine its terms. The contract and the context in which
it was drafted indicate that "cause" can only mean termination for
performance-related reasons. The discretion retained by the Committee
allowed it to determine, as a factual matter, whether Scribner had been
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terminated for performance-related reasons, but did not authorize it to
change the ordinary meaning of words after the fact and without notice.
Id. at 908, 911 (internal citation omitted).
Similarly, here, the Plan did not retain the discretion to change the meaning of
the word "Compensation." The term was already specifically defined in the Plan and
the SPD. The discretion retained by the Plan was the discretion to determine whether
"Compensation" from a non-adopting affiliate would be included in the calculation
of pension benefits. The Plan did not have discretion to redefine "Compensation" in
a way that would undermine Craig's justified expectations – based on the Plan and the
SPD – as to what that word meant. The Plan could not give "Compensation" a
"double-secret" meaning after the fact and without notice. Because bonuses are
considered "Compensation," the Plan was required to include the two retention
bonuses Craig received in 2001 in the calculation of his pension benefits.
III
For the reasons stated, we affirm the judgment of the district court.
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