Sys Cncl EM 3 v. AT&T Corp ( 1998 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 24, 1998 Decided November 24, 1998
No. 97-7155
Systems Council EM-3,
International Brotherhood of Electrical Workers,
AFL-CIO, et al.,
Appellants
v.
AT&T Corporation, et al.,
Appellees
Appeal from the United States District Court
for the District of Columbia
(No. 96cv01117)
Kent Cprek argued the cause for appellants. With him on
the briefs were Richard B. Sigmond and Thomas H. Kohn.
Joseph R. Guerra argued the cause for appellees. With
him on the brief were Paul J. Zidlicky, Laura A. Kaster, T.
Jay Thompson, Robert N. Eccles, Peter O. Shinevar and
Karen M. Wahle.
Michael S. Horne, John M. Vine and Caroline M. Brown
were on the brief for amicus curiae Erisa Industry Commit-
tee.
Before: Edwards, Chief Judge, Rogers and Tatel, Circuit
Judges.
Opinion for the Court filed by Chief Judge Edwards.
Edwards, Chief Judge: In 1995, pursuant to a corporate
reorganization, AT&T Corporation ("AT&T") transferred its
equipment business to Lucent Technologies, Inc. ("Lucent").
AT&T and Lucent subsequently entered into arrangements to
separate their businesses; one such arrangement was embod-
ied in an Employee Benefits Agreement ("EBA"). Under the
EBA, AT&T amended its pension and welfare plans to divide
the assets and liabilities of AT&T's defined plans and to
provide for the continuation of existing defined benefits for
both AT&T and Lucent retirees and employees. The appel-
lants in this case--beneficiaries of the plans and their un-
ions--seek to overturn AT&T's amendments of the pension
and welfare plans. In broad terms, appellants contend that
AT&T rigged the allocation procedures so that by the time
Lucent becomes responsible for the retirement benefits owed
to its former AT&T employees, it might not have enough
money to provide for them. Appellants claim that AT&T's
actions violated the Employee Retirement Income Security
Act ("ERISA"), 29 U.S.C. ss 1001-1461, and also resulted in
a breach of contract.
We agree with the District Court that AT&T is not subject
to ERISA's strict fiduciary standards, because it was not
acting in a fiduciary capacity when it allocated pension and
welfare plan assets and liabilities between AT&T and Lucent.
We also agree that appellants have failed to state a claim
under s 208 of ERISA, which protects the beneficiaries of
spun-off plans. See 29 U.S.C. s 1058 (1994). Finally, it is
clear that appellants' contract claims are not ripe for review.
Accordingly, we affirm.
I. Background
The facts of this case have been comprehensively detailed
in an excellent opinion by the District Court, see Systems
Council EM-3 v. AT&T Corp., 972 F. Supp. 21, 24-26 (D.D.C.
1997), and bear no repetition here. Therefore, this Back-
ground section is quite brief and will serve only to provide a
context for our analysis.
In 1995, AT&T decided to reorganize its corporate struc-
ture by spinning off operations into separate, publicly-traded
businesses, one of which was Lucent. This case primarily
concerns the EBA between AT&T and Lucent, which governs
the allocation of employee pension and welfare plan assets
and liabilities between AT&T and Lucent. See id. at 25-26.
The EBA, which was signed on February 1, 1996, requires
AT&T to calculate, for each AT&T and Lucent plan, an
amount based on the funding policy historically used by
AT&T to ensure adequate funding of employee benefit plans,
employing the same actuarial assumptions used to determine
minimum funding under ERISA and the Internal Revenue
Code. Once the calculation is made, appropriate amounts are
allocated to each fund. The EBA then allocates any residual
(surplus) plan assets equally between AT&T and Lucent. See
id. at 26.
Appellants filed the instant lawsuit on May 17, 1996, before
AT&T had actually allocated any assets to Lucent. Although
they had no data to support their claims, appellants' com-
plaint in District Court was premised on the assumption that
the EBA's prescribed methodology for the asset distribution
unjustly favored AT&T. Alleging that AT&T acted in a
fiduciary capacity with respect to the plan assets, appellants
claimed that AT&T unlawfully favored itself in the allocation
of those assets, in violation of the ERISA provisions that
govern fiduciary responsibilities. See 29 U.S.C. ss 1104,
1106(b) (1994 & Supp. II 1996). Appellants further alleged
four separate violations of s 208, ERISA's non-fiduciary pro-
vision for the transfer of pension plan assets in a spin-off
situation. First, appellants asserted that s 208 requires that
the EBA provide for the division of any residual pension plan
assets on a pro rata basis, rather than equally between the
two entities. Second, appellants contended that the EBA's
actuarial assumptions are not "reasonable," as required by
the applicable Treasury regulations. Third, appellants pro-
tested that the EBA does not guarantee appellants the bene-
fit of any market earnings on the plan assets during the
interim period between AT&T's divestment of Lucent stock
and the actual segregation of AT&T's assets. Finally, appel-
lants alleged that the EBA does not account for possible
future adverse business experiences that Lucent may suffer,
rendering the company unable to meet its employee benefit
obligations. Appellants also claimed that AT&T's signing of
the EBA amounts to a breach of AT&T's agreement to
provide pension and welfare plan benefits to its employees,
because the EBA assigns to Lucent the obligation to provide
those benefits.
The District Court granted AT&T's motion to dismiss.
Emphasizing that "[r]hetorical or emotional arguments voic-
ing fears about the future ... simply cannot substitute for
rigorous analysis of the pertinent statutory provisions," the
District Court held that appellants had failed to state any
claim upon which relief could be granted. See Systems
Council, 972 F. Supp. at 27. This appeal followed.
II. Analysis
A.Standard of Review
We review de novo the District Court's dismissal of appel-
lants' claims under Rule 12(b)(6). See Taylor v. FDIC, 132
F.3d 753, 761 (D.C. Cir. 1997). "Dismissal under Rule
12(b)(6) is proper when, taking the material allegations of the
complaint as admitted and construing them in plaintiffs' favor,
the court finds that the plaintiffs have failed to allege all the
material elements of their cause of action." Id. (citations
omitted).
B.Union Standing
We need not decide whether the union appellants have
standing to bring these ERISA claims. See Systems Council,
972 F. Supp. at 27-28 (holding that unions do not have
standing to bring civil actions under ERISA). It is undisput-
ed that the named plan beneficiaries have standing, see 29
U.S.C. s 1132(a)(1) (1994), and we may therefore reach the
merits of their claims regardless of whether the unions have
standing. Cf. Craig v. Boren, 429 U.S. 190, 192-93 (1976)
(deciding case on merits where one appellant had standing
but the other did not).
C.Fiduciary Claims
ERISA s 3(21)(A) defines fiduciary, in relevant part, as
follows:
[A] person is a fiduciary with respect to a plan to the
extent (i) he exercises any discretionary authority or
discretionary control respecting management of such
plan or exercises any authority or control respecting
management or disposition of its assets, ... or (iii) he
has any discretionary authority or discretionary responsi-
bility in the administration of such plan.
29 U.S.C. s 1002(21)(A) (1994). This definition applies to the
entire subchapter, including the ERISA provisions on which
appellants' claims are based. See 29 U.S.C. s 1002.
It cannot be seriously disputed that, under ERISA, AT&T,
as an employer and a plan administrator, is subject to
ERISA's fiduciary standards only when it acts in a fiduciary
capacity. See, e.g., Maniace v. Commerce Bank, 40 F.3d 264,
267 (8th Cir. 1994). The issue in this case is whether AT&T
acted in a fiduciary capacity when it amended its pension and
welfare plans and allocated the assets and liabilities of those
plans between AT&T and Lucent. The District Court found,
and we agree, that appellants have failed to state a legally
cognizable claim under ERISA's fiduciary provisions, because
there has been no showing that AT&T acted in a fiduciary
capacity in taking the actions at issue in this case.
In Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78
(1995), the Court held that when employers "adopt, modify, or
terminate welfare plans," they are not acting in a fiduciary
capacity. The Court subsequently expanded the rule of
Curtiss-Wright in Lockheed Corp. v. Spink, 517 U.S. 882(1996). In Lockheed, the employer, Lockheed, amended its
pension plan to provide financial incentives for employees to
retire early and release all employment-related claims against
the company. These increased pension benefits were to be
paid out of the plan's surplus assets. See id. at 885. The
employees brought suit, alleging that Lockheed had violated
its fiduciary duties under ERISA because it was using plan
assets--the surplus--to purchase a benefit for itself--early
retirement and the release of claims. See id. at 886. The
Court foreclosed the employees' fiduciary claims, however,
holding that "the act of amending a pension plan does not
trigger ERISA's fiduciary provisions." Id. at 891. The
Court noted that when employers amend or modify any type
of employee benefit plan, even pension plans, "they do not act
as fiduciaries but [rather] are analogous to the settlors of a
trust." Id. at 890 (citation omitted). In other words, chang-
ing the design of a trust does not involve the kind of
discretionary administration that typically triggers fiduciary
responsibilities. See Sengpiel v. B.F. Goodrich Co., 156 F.3d
660, 666-67 (6th Cir. 1998). This rule, according to the Court,
"is rooted in the text of [s 3(21)(A)]." Lockheed, 517 U.S. at
890. Although appellants urge us to consider the extensive
common law of trusts in determining whether AT&T acted as
a settlor or as a fiduciary when it amended its pension plans,
the Lockheed Court's interpretation of s 3(21)(A) is disposi-
tive.
Appellants further argue that Lockheed stands only for the
unremarkable proposition that the power to name the benefi-
ciaries and define the benefits and liabilities of a trust is a
settlor, not a fiduciary, power. We disagree. The plan
design at issue in Lockheed involved far more than simply
defining the trust; it involved the actual allocation of a
portion of the trust corpus in a manner that presumably
benefitted Lockheed. Indeed, it was the contention of the
employees in Lockheed that the amendments to the pension
plan "constituted a use of Plan assets to 'purchase' a signifi-
cant benefit for Lockheed." Id. at 886 (quoting Spink v.
Lockheed Corp., 60 F.3d 616, 624 (9th Cir. 1995)) (emphasis
added). Thus, contrary to appellants' narrow reading of
Lockheed, the District Court was correct in stating that the
case clarifies the "distinction between those actions creating,
altering or terminating a trust, which are deemed settlor
functions, and those actions managing and administering the
investment and use of the trust assets, which are deemed
fiduciary functions." Systems Council, 972 F. Supp. at 30.
Under Lockheed, it is clear that AT&T was not acting as a
fiduciary when it amended its pension and welfare plans
under the EBA. Appellants' complaint in this case is quite
similar to that of the employees in Lockheed: the employer
has allocated the assets of its pension and welfare plans in a
manner that allegedly benefits the employer to the employ-
ees' detriment. While such an allocation might in some
circumstances violate certain ERISA provisions--such as
s 208, discussed below--under Lockheed, it does not impli-
cate the statute's fiduciary provisions.
D. Section 208 Claims
Congress provided for the protection of spun-off employees
in s 208, which mandates that plan assets may not be trans-
ferred to another plan "unless each participant in the plan
would (if the plan then terminated) receive a benefit immedi-
ately after the ... transfer which is equal to or greater than
the benefit he would have been entitled to receive immediate-
ly before the ... transfer (if the plan had then terminated)."
29 U.S.C. s 1058. Appellants have alleged four distinct
violations of s 208.
1.Residual Assets
Section 208 essentially requires the employer to contem-
plate a hypothetical plan termination, take a "snapshot" of the
benefits each participant of the plan would receive in the
event of a termination, and then provide the aggregate pres-
ent value of these benefits to the spun-off plan. Section 4044
governs the allocation of any residual plan assets in the event
of actual termination of a plan. See 29 U.S.C. s 1344(d)(3)
(1994).
Appellants point out that, under s 4044 and applicable
regulations, if the pension plans at issue had actually termi-
nated immediately prior to the spin-off, appellants would have
been entitled to a pro rata share of any residual assets. See
29 C.F.R. s 2618.32(a) (1995). The EBA, on the other hand,
provides for the equal division--between AT&T and Lucent--
of any residual assets. See Systems Council, 972 F. Supp. at
26. Appellants claim that, in giving Lucent "only" an equal
share of any residual assets, the EBA violates s 208 because
the Lucent plans are entitled to a pro rata share of such
assets under s 4044.
Appellants' position finds no support in the case law. Sec-
tion 208 requires only that benefits payable upon hypothetical
termination be no less after than before the spin-off, and
creates no entitlement to residual assets that might be avail-
able upon actual termination of a plan. See, e.g., Brillinger v.
General Elec. Co., 130 F.3d 61 (2d Cir. 1997), petition for cert.
filed, 66 U.S.L.W. 3758 (U.S. May 13, 1998) (No. 97-1834);
Malia v. General Elec. Co., 23 F.3d 828 (3d Cir. 1994). The
District Court cited with approval the Third Circuit's opinion
in Malia, which, after examining s 4044 and the accompany-
ing regulations, concluded that, because both explicitly distin-
guished "benefits" from "assets," appellants were wrong to
equate the two terms for the purposes of s 208. See Malia,
23 F.3d at 832 ("[The] language of [s 4044] demonstrates
clearly that 'benefits' are elements that are conceptualized
and treated differently in a plan termination than are the
'assets' of that plan."); Brillinger, 130 F.3d at 63 ("Since
[s 208] deals with the level of benefits, the reasonable inter-
pretation of that section is that it refers to those portions of
[s 4044] regarding the level of benefits, rather than the part
about distributing residual assets."). We join these courts in
holding that s 208, by its plain language, ensures only that
plan beneficiaries receive the same level of benefits after the
spin-off that they would have received prior to the spin-off,
and does not create an entitlement to the residual assets that
might be available upon actual termination of the plan. See
Brillinger, 130 F.3d at 63 ("The fact that upon actual liqui-
dation a participant may be entitled to receive some distribu-
tion of residual assets does not change the amount to be
received as a 'benefit' [under s 208].").
We also note that the plans at issue in this case are defined
benefit plans, as opposed to defined contribution plans. Un-
der a defined contribution plan, each participant has an
individual account; the level of benefits that he or she
receives depends upon the performance of the assets retained
in that individual account. See Von Aulock v. Smith, 720
F.2d 176, 177-78 (D.C. Cir. 1983). In contrast, under a
defined benefit plan, the employee is entitled to a fixed period
payment upon retirement regardless of the performance of
the underlying assets. See id. at 178. If the assets do not
perform well, the employer must make up the difference. If
they perform better than expected, however, the employees
still may claim no more than the promised pension benefits
under the plan. See Johnson v. Georgia-Pacific Corp., 19
F.3d 1184, 1186 (7th Cir. 1994). Thus, "[p]articipants in a
defined benefit plan are not entitled to increases in benefits
because successful investment causes assets to grow to be
greater than liabilities. There is nothing in [ERISA] to the
effect that such growth in assets will cause an increase in
benefits payable to participants at the time of a [spin-off]."
Brillinger, 130 F.3d at 64. In short, AT&T must transfer to
Lucent only those assets that are necessary to fulfill the new
plans' defined benefit obligations.
2.Actuarial Assumptions
In order to determine the level of funding necessary to
provide for benefits pursuant to s 208, employers use actuari-
al assumptions. The applicable Treasury regulation man-
dates that these assumptions be "reasonable," and provides
that "[t]he assumptions used by the Pension Benefit Guaranty
Corporation [PBGC] ... are deemed reasonable for this
purpose." 26 C.F.R. s 1.414(l)-(1)(b)(5)(ii) (1998). As the
District Court correctly observed, this regulation does not
mandate the use of the PBGC assumptions, but rather cites
them as a "safe harbor." Systems Council, 972 F. Supp. at
35; cf. Securities Indus. Ass'n v. Board of Governors, 807
F.2d 1052, 1064 (D.C. Cir. 1986) (noncompliance with optional
"safe harbor" securities regulation does not foreclose compli-
ance with the statute).
The EBA does not employ the PBGC assumptions. Rath-
er, it provides that AT&T must use the actuarial assumptions
that it currently uses to determine the minimum funding
requirements for its plans under ERISA. See Systems Coun-
cil, 972 F. Supp. at 26. By law, these assumptions are
required to be reasonable. See 26 U.S.C. s 412(c)(3)(A)(i)
(1994). Before the District Court, appellants complained that
"[t]here is no indication" that the assumptions provided for in
the EBA are reasonable. Complaint p 43(d), reprinted in
Joint Appendix ("J.A.") 1041. On appeal, appellants argue
that, in order to comply with the reasonableness requirement,
an employer must either use the "standardized PBGC as-
sumptions" or "obtain an actual commercial annuity quote at
the relevant calculation date." Brief of Appellants at 30; see
also Complaint p 40, reprinted in J.A. 1039.
The District Court correctly dismissed appellants' claims.
See Systems Council, 972 F. Supp. at 35-36. For one thing,
appellants cite no case or Treasury regulation supporting the
propositions they advance. Moreover, considering the rea-
sonableness of an actuarial assumption in a different context,
the Supreme Court has noted that the "nature of the beast" is
such that there may be several "equally correct approaches"
to actuarial practice. Concrete Pipe & Prods., Inc. v. Con-
struction Laborers Pension Trust, 508 U.S. 602, 635-36
(1993) (citation and internal quotation marks omitted). Ap-
pellants' complaint never explains why they think the EBA's
prescribed approach is unreasonable. See Complaint pp 40-
43, reprinted in J.A. 1039-41.
The salient point here is that, because they filed their
lawsuit before they had any idea how much of AT&T's plan
assets would be transferred to Lucent, appellants were in no
position even to claim that the EBA's actuarial assumptions
were unreasonable. See Systems Council, 972 F. Supp. at 36
n.24 (noting that without any knowledge of the specifics of the
proposed allocation, appellants could not allege unreasonable-
ness without risking Rule 11 sanctions). Subsequent to the
commencement of this litigation, AT&T actually allocated its
assets to Lucent and the specific details of the allocation are
now publicly available. AT&T and Lucent employees now
know how much money was transferred to the Lucent plans,
how many employees were transferred to Lucent, and the
demographics of those employees. Knowledge of each of
these factors is crucial in determining whether the actuarial
assumptions used in the allocation were reasonable. If plan
beneficiaries now have a good faith basis for challenging
AT&T's actuarial assumptions, they may consider filing suit
under s 208. However, prior to the actual allocation, when
they knew only that the EBA did not provide for the use of
the PBGC assumptions or a commercial annuity quote, appel-
lants were in no position to state a viable claim under s 208.
3.Asset Valuation During the "Interim" Period
Under the EBA, Lucent was to remain under the control of
AT&T until all of the common stock of Lucent owned by
AT&T was distributed to individual AT&T stockholders. See
Systems Council, 972 F. Supp. at 25-26. Because the actual
segregation of AT&T's assets did not occur on the exact date
that the Lucent stock was distributed to the individual stock-
holders, the EBA provided for an adjustment "as of the date
of the actual segregation by AT&T to the extent necessary or
appropriate to reasonably and appropriately reflect addition-
al" gains made by the pension assets during the interim
period between the stock distribution and the actual segrega-
tion. EBA s 3.2(b)(iii), reprinted in J.A. 2027. Appellants
allege that this provision does not guarantee them the "bene-
fit of actual market earnings" on the assets during the
interim period. Brief of Appellants at 24.
Because the plans at issue are defined benefit plans, howev-
er, the participants are not entitled under ERISA to the
benefit of any interim increase in the value of the assets. As
discussed above, participants in a defined benefit plan are
entitled only to the level of benefits promised them under the
plan. Thus, the District Court was correct in holding that
appellants "have no ownership interest in the assets of the
plan, and the amount transferred must only be sufficient to
provide 'benefit equivalence' after the transfer." Systems
Council, 972 F. Supp. at 37 (quoting John Blair Communica-
tions, Inc. v. Telemundo Group, Inc., 26 F.3d 360, 367 (2d
Cir. 1994)). This conclusion is in accord with decisions from
other circuits that have considered the issue. See, e.g., John
Blair, 26 F.3d at 366-67; Bigger v. American Commercial
Lines, Inc., 862 F.2d 1341, 1348 (8th Cir. 1988). Indeed,
under a defined benefit plan, it is virtually irrelevant whether
the interim gains are transferred to Lucent; as the Second
Circuit explained in John Blair, "it would matter little to the
individual [participants] whether the plan lost out on [the
interim gains] as long as those members were guaranteed
their promised benefits at retirement." John Blair, 26 F.3d
at 366.
4.Future Benefits
Appellants' final claim under s 208 merits little attention.
Appellants contend that the EBA violates ERISA because
future adverse business experiences may render Lucent un-
able to fund its plans as well as AT&T has been funding
them. But by its plain language, s 208 mandates transfer of
assets sufficient to provide, "immediately after" the spin-off,
the level of benefits each participant would receive "immedi-
ately before" the spin-off. 29 U.S.C. s 1058. Nothing in
ERISA compels the original employer to fund the non-vested,
future benefits of spun-off employees. See Bigger, 862 F.2d
at 1345 ("A sponsor of an original defined benefit plan ... has
no duty to guarantee that the sponsor of a spunoff plan will
pay spunoff employee benefits earned in the future."). Ac-
cordingly, the District Court properly dismissed this claim.
See Systems Council, 972 F. Supp. at 38.
E.Contract Claims
Appellants also raised common law contract claims. Spe-
cifically, they allege that they relied upon AT&T's promises to
provide them pension and welfare plan benefits, and that
Lucent might not be able to make good on those promises.
The District Court properly dismissed these claims as unripe.
See Systems Council, 972 F. Supp. at 38-40.
First, appellants contend that the EBA absolves AT&T of
liability "in the event that Lucent is unable to provide [the
welfare] benefits now or in the future." Complaint p 58,
reprinted in J.A. 1046. This claim is hardly fit for review,
however, given that no participant in the welfare plan has
alleged that Lucent has been unwilling or unable to provide
the benefits it is obligated to provide. The District Court
correctly determined that a declaratory judgment stating the
extent of AT&T's liability in the event of a Lucent breach
would violate Article III's requirement that a current case or
controversy between the parties exist. See Systems Council,
972 F. Supp. at 39; Duke Power Co. v. Carolina Envtl. Study
Group, Inc., 438 U.S. 59, 81 (1978); United Steelworkers of
America, Local 2116 v. Cyclops Corp., 860 F.2d 189, 194-96
(6th Cir. 1988) (holding, in a virtually identical situation, that
claims of pension plan participants were unripe).
Second, appellants rely on a misguided application of a
fundamental contract law doctrine. They claim that their
contract claims are ripe because AT&T, in assigning its
welfare plan obligations to Lucent, "clearly has disclaimed
and repudiated" those obligations. Brief of Appellants at 38.
It is true that, if a performing party unequivocally signifies its
intent to breach a contract, the other party may seek dam-
ages immediately under the doctrine of anticipatory repudia-
tion. See Jankins v. TDC Management Corp., 21 F.3d 436,
443 (D.C. Cir. 1994). However, AT&T has not repudiated
anything; it has simply assigned its welfare plan obligations
to Lucent. Absent a provision in the plans prohibiting such
assignment, the action does not constitute an anticipatory
breach.
III. Conclusion
For the reasons stated above, we affirm the judgment of
the District Court.
So ordered.