Osberg v. Foot Locker, Inc.

15-3602-cv
Osberg v. Foot Locker, Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2016
(Argued: January 25, 2017 Decided: July 6, 2017)
Docket No. 15-3602-cv
GEOFFREY OSBERG, on behalf of himself
and on behalf of all others similarly situated,
Plaintiff-Appellee,
— v. —
FOOT LOCKER, INC., FOOT LOCKER RETIREMENT PLAN,
Defendants-Appellants.
B e f o r e:
WINTER, CABRANES, and LYNCH, Circuit Judges.
Defendants-appellants Foot Locker, Inc. (“Foot Locker” or the “Company”)
and Foot Locker Retirement Plan (together with Foot Locker, “Defendants”)
appeal from a judgment entered by the United States District Court for the
Southern District of New York (Katherine B. Forrest, Judge). Following a two-
week bench trial, the district court held that Foot Locker violated §§ 102 and
404(a) of the Employee Retirement Income Security Act (“ERISA”) by, inter alia,
failing to disclose “wear-away” caused by the Company’s introduction of a new
employee pension plan – a phenomenon which effectively amounted to an
undisclosed freeze in pension benefits. Drawing on its equitable power under
§ 502(a)(3) of ERISA, the district court ordered reformation of the plan to conform
to plan participants’ reasonably mistaken expectations, which the district court
found to have resulted from Foot Locker’s materially false, misleading, and
incomplete disclosures.
On appeal, Defendants do not challenge the district court’s determination
that Foot Locker violated ERISA. Instead, they quarrel with the district court’s
award of equitable relief under § 502(a)(3), arguing that the district court erred
by: (1) awarding relief to plan participants whose claims were barred by the
applicable statute of limitations; (2) ordering class-wide relief on participants’
§ 404(a) claims without requiring individualized proof of detrimental reliance; (3)
concluding that mistake, a prerequisite to the equitable remedy of reformation,
had been shown by clear and convincing evidence as to all class members; and
(4) using a formula for calculating relief that resulted in a windfall to certain plan
participants. For the reasons that follow, we reject Defendants’ challenges to the
district court’s award of equitable relief and AFFIRM the judgment of the district
court.
JULIA PENNY CLARK, Bredhoff & Kaiser, PLLC, Washington,
DC (Eli Gottesdiener, Gottesdiener Law Firm, PLLC,
Brooklyn, NY, on the brief), for Plaintiff-Appellee
Geoffrey Osberg.
MYRON D. RUMELD, Proskauer Rose LLP, New York, NY
(Mark D. Harris, Proskauer Rose LLP, New York, NY;
Robert Rachal, Proskauer Rose LLP, New Orleans, LA;
John E. Roberts, Proskauer Rose LLP, Boston, MA; Amir
C. Tayrani, Gibson, Dunn & Crutcher LLP, Washington,
DC, on the brief), for Defendants-Appellants Foot Locker,
Inc., Foot Locker Retirement Plan.
2
EIRIK CHEVERUD, Trial Attorney (M. Patricia Smith, Solicitor of
Labor; G. William Scott, Associate Solicitor; Elizabeth
Hopkins, Counsel for Appellate and Special Litigation,
on the brief) for Amicus Curiae Thomas E. Perez,
Secretary of the United States Department of Labor,
Washington, DC, in support of Plaintiff-Appellee.
Dara S. Smith, AARP Foundation Litigation, Washington, DC
for Amicus Curiae AARP, in support of Plaintiff-
Appellee.
Evan Miller, Jones Day, Washington, DC, Lauren P. Ruben,
Jones Day, New York, NY for Amici Curiae the
American Benefits Council, the ERISA Industry
Committee, and the Chamber of Commerce of the
United States of America, in support of Defendants-
Appellants.
GERARD E. LYNCH, Circuit Judge:
Defendants-appellants Foot Locker, Inc. (“Foot Locker” or the “Company”)
and Foot Locker Retirement Plan (together with Foot Locker, “Defendants”)
appeal from a judgment entered by the United States District Court for the
Southern District of New York (Katherine B. Forrest, Judge). Following a two-
week bench trial, the district court held that Foot Locker violated §§ 102 and
404(a) of the Employee Retirement Income Security Act (“ERISA”) by, inter alia,
failing to disclose “wear-away” caused by the Company’s introduction of a new
3
employee pension plan – a phenomenon which effectively amounted to an
undisclosed freeze in pension benefits. Drawing on its equitable power under
§ 502(a)(3) of ERISA, the district court ordered reformation of the plan to conform
to plan participants’ reasonably mistaken expectations, which the district court
found to have resulted from Foot Locker’s materially false, misleading, and
incomplete disclosures.
On appeal, Defendants do not challenge the district court’s determination
that Foot Locker violated ERISA. Instead, they quarrel with the district court’s
award of equitable relief under § 502(a)(3), arguing that the district court erred
by: (1) awarding relief to plan participants whose claims were barred by the
applicable statute of limitations; (2) ordering class-wide relief on participants’
§ 404(a) claims without requiring individualized proof of detrimental reliance; (3)
concluding that mistake, a prerequisite to the equitable remedy of reformation,
had been shown by clear and convincing evidence as to all class members; and
(4) using a formula for calculating relief that resulted in a windfall to certain plan
participants. For the reasons that follow, we reject Defendants’ challenges to the
district court’s award of equitable relief and AFFIRM the judgment of the district
court.
4
BACKGROUND
I. Factual Background
The facts as found by the district court in ruling that Foot Locker violated
§§ 102 and 404(a) of ERISA are not in dispute, see Osberg v. Foot Locker, Inc.
(“Osberg II”), 138 F. Supp. 3d 517 (S.D.N.Y. 2015), and we recite only those
necessary to explain our resolution of this appeal. Effective January 1, 1996, Foot
Locker converted its employee pension plan from a defined benefit plan to a cash
balance plan. Under the defined benefit plan, participants had been entitled to an
annual benefit beginning at age 65 that was calculated on the basis of their
compensation level and years of service. The benefit took the form of an annuity,
and, with exceptions not relevant here, employees were not given the option to
receive its aggregate value as a lump sum. In contrast, under the newly-
introduced cash balance plan, participants held a hypothetical account balance
that, upon retirement, could be paid out as a lump sum or used to purchase an
annuity.
The switch to a cash balance plan required Foot Locker to convert
participants’ existing accrued benefits into a figure that would be used to
calculate their initial account balances under the new plan. For that conversion,
5
Foot Locker used a formula that guaranteed that the vast majority of participants’
initial account balances would be worth less than the value of their accrued
pension benefits under the old plan.1 Specifically, the formula proceeded by: (1)
calculating the aggregate value as of December 31, 1995 of the annuity that a
participant would have received at age 65 under the old plan; (2) discounting that
aggregate value to its value as of January 1, 1996 to reflect the time value of
money; and (3) applying a mortality discount to the January 1, 1996 present value
to reflect the possibility that the participant might not live to age 65. At steps one
and two of the conversion, a nine-percent discount rate was used, but following
conversion, participants received pay credits and an interest credit at only six
percent under the new plan. The district court found that the disparity meant
that most participants’ account balances would lag behind the value of their old
benefits for some period of time – in many cases, for years.
To address that problem, the cash balance plan included a stopgap
measure that defined a participant’s actual benefits as the greater of: (1) the
1
As explained in more detail below, approximately 1.4 percent of participants did not
suffer from wear-away, at least as measured on a lump sum rather than annuity basis,
due to their receipt of seniority enhancements that made their initial account balances
under the new plan higher than the value of their accrued benefits under the defined
benefit plan. See infra Part IV.
6
participant’s benefits under the defined benefit plan as of December 31, 1995; and
(2) the participant’s benefits under the new cash balance plan. The “greater of”
provision had the benefit of ensuring that participants would not lose money due
to Foot Locker’s switch to a cash balance plan, consistent with ERISA’s ban on
plan amendments that reduce a participant’s “accrued benefit,” which is known
as the “anti-cutback” rule, 29 U.S.C. § 1054(g). But it also meant that participants’
actual benefits would remain effectively frozen for some period of time following
conversion. That is, until participants earned enough pay and interest credits to
close the gap between the value of their cash balance account and their old
benefits, their actual benefits would remain frozen at the value of their old
benefits due to the operation of the “greater of” provision. During that period,
any pay and interest credits earned by a participant would not increase his or her
actual benefits, but merely reduce the gap between the value of the participant’s
cash balance account and the participant’s old benefits. That phenomenon – the
fact that a participant’s actual pension benefits did not increase despite continued
employment – is known in the benefits industry as “wear-away.” See, e.g., Amara
v. CIGNA Corp. (“Amara II”), 775 F.3d 510, 516 (2d Cir. 2014).
7
The history of the adoption of the cash balance plan makes clear that Foot
Locker’s management recognized that conversion to the new plan would cause
wear-away for most of its employees, but embraced the phenomenon as a cost-
cutting measure. In late 1994 or early 1995, following a request from Foot
Locker’s then-chief executive officer, Roger N. Farah, a task force of four
employees had been formed to investigate cost savings that could be generated
from changes to Foot Locker’s employee pension plan. All four members of the
task force testified at trial, including its leader, Patricia Peck, who was ultimately
responsible for deciding which changes to propose to management. Peck, whom
the district court found “particularly credible,” Osberg II, 138 F. Supp. 3d at 526
n.11, testified that she understood that her mission was to cut costs rather than to
improve plan benefits, and that the changes she proposed to senior management
would result in cost savings by causing a freeze in pension benefits. Peck’s
presentations to senior management expressly stated that the proposed changes
would lead to “decreases in future company costs” at the expense of a
“permanent loss of retirement benefits.” Id. at 528 (brackets and internal
quotation marks omitted). As the district court found, Foot Locker viewed
announcing a benefits freeze as a “morale killer,” and “[c]onversion to a cash
8
balance plan had the advantage of being able to obscure what was an effective
freeze, without the accompanying negative publicity, loss of morale, and
decreased ability to hire and retain workers.” Id. (internal quotation marks
omitted). The changes were approved by Foot Locker’s senior management and
board of directors in July and September 1995, respectively.
Foot Locker introduced the new cash balance plan to its employees in a
series of written communications, all of which the district court found to have
“failed to describe wear-away,” to have “failed to clearly discuss the reasons for
the difference” between the value of a participant’s old and new benefits, and to
have been “intentionally false and misleading.” Osberg II, 138 F. Supp. 3d at 529.
For example, in a letter dated September 15, 1995, the Company’s senior
management announced that it was “excited” to introduce “important changes”
to Foot Locker’s employee pension plan that would give participants “a more
competitive retirement benefits package” and “more flexibility and a better
ability to monitor their benefits.” J.A. 2137. The letter also stated that participants
would be able “to see their individual account balance grow each year, and know
its value.” Id. Peck acknowledged in her testimony that the September 1995 letter
was designed to be a “good news letter” even though she and senior
9
management understood that the conversion would result in an effective freeze
of pension benefits for most participants, and that she made an “affirmative
decision,” consistent with senior management’s wishes, not to include the “bad
news” of wear-away in the letter. J.A. 1936.
The fact of wear-away was also deliberately left out of later
communications sent to participants, including the December 1996 summary
plan description (“SPD”) – a document that “ERISA contemplates . . . will be an
employee’s primary source of information regarding employment benefits,”
Layaou v. Xerox Corp., 238 F.3d 205, 209 (2d Cir. 2001) (brackets and internal
quotation marks omitted). While the SPD provided a general description of the
methodology by which participants’ account balances would be calculated under
the cash balance plan,2 it lacked any description of wear-away or any indication
2
Specifically, the SPD explained, inter alia, that a participant’s “account balance” under
the cash balance plan would be based on an “initial account balance . . . equal to the
actuarial equivalent lump sum value of your accrued benefit under the Plan as of
December 31, 1995” plus “interest” and “compensation credits, which are based on
years of service and a percentage of compensation.” J.A. 2155-56 (emphases omitted).
The SPD’s definitions section elaborated on the conversion formula, stating that the
initial account balance “is determined actuarially based upon a 9% rate of interest and
the mortality table set forth in IRS rulings.” Id. at 2150 (emphases omitted). The SPD
also summarized the “greater of” provision, stating that a participant’s “accrued benefit
at the time . . . employment terminates is the greater of the amount determined under
the Plan as amended on January 1, 1996 or your accrued benefit as of December 31,
1995.” Id. at 2156 (emphases omitted).
10
that the conversion would cause a benefits freeze for most participants. In fact,
the district court found that the SPD and other Foot Locker communications not
only failed to disclose wear-away, but “were designed to conceal that
information.” Osberg II, 138 F. Supp. 3d at 537. The SPD, for example, “falsely
indicated to [p]articipants that their actual retirement benefits were fully
reflected in the[] account balances” to which their pay and interest credits would
apply, id. at 531, when in fact any participant whose account was in wear-away
would instead receive the frozen value of the benefits they had accrued under the
old plan for a period of time that could extend for years. Similarly, the Highlights
Memo distributed in November 1995 stated that participants would, upon
retirement, “have the option of taking the lump sum payment equal to your
account balance,” which the district court found to “obscure[] the fact that the
accrued benefit was the sole true benefit for anyone in wear-away.” Id. at 530
(internal quotation marks omitted). That false impression was further reinforced
by “total compensation” statements that participants began receiving annually
and which showed participants’ account balances increasing each year due to the
receipt of pay and interest credits.
11
Foot Locker’s efforts to conceal wear-away were apparently successful. The
district court found that “not a single employee ever complained about [wear-
away],” id. at 535, and numerous class members – including Michael Steven, the
former chief financial officer of the Company’s Woolworth division, as well as
Foot Locker employees whose job responsibilities involved calculating pension
benefits – testified at trial that they did not understand that the conversion to a
new pension plan had effectively frozen their retirement benefits. Steven
testified, for example, that while he requested and received an individualized
statement showing the calculations underlying his account balance and the lump
sum payment that he could receive upon retirement, he did not realize – even
upon seeing the difference between those two numbers – that his actual
retirement benefits had remained frozen despite his continued employment. In
the words of the district court, “[f]rom the CFO of Woolworth stores to a cashier,
no one understood what was going on.” Id. at 537.
II. Procedural History
In 2007, plaintiff-appellee Geoffrey Osberg (“Plaintiff”) brought suit
against Defendants on behalf of a proposed class of plan participants and
beneficiaries claiming, inter alia, that Foot Locker violated §§ 102 and 404(a) of
12
ERISA by failing to disclose that conversion to the cash balance plan would cause
wear-away, and sought relief under § 502(a) of ERISA. In 2012, the district court
granted summary judgment to Defendants, basing that ruling in part on
Plaintiff’s failure to show “actual harm,” which the district court held was a
prerequisite to the equitable remedies of reformation and surcharge. On appeal,
we ruled that the district court erred in requiring proof of actual harm for the
equitable remedy of reformation and declined to reach the question of whether
such proof was required for the equitable remedy of surcharge. Osberg v. Foot
Locker, Inc. (“Osberg I”), 555 F. App’x 77, 80-81 (2d Cir. 2014). We also declined to
determine whether Plaintiff’s § 102 claim was subject to a three- or six-year
statute of limitations, and affirmed the district court’s dismissal of Plaintiff’s
claim under § 204(h) of ERISA. Id. at 79-80.
Upon remand, the district court certified a class of plan participants and
their beneficiaries under Federal Rule of Civil Procedure 23(a) and 23(b)(3), and
held a two-week bench trial in July 2015 at which twenty-one fact witnesses and
three expert witnesses testified, some by deposition. In October 2015, the district
court ruled that Foot Locker had violated §§ 102 and 404(a) of ERISA and ordered
that the plan be reformed pursuant to § 502(a)(3) to conform to participants’
13
mistaken but reasonable beliefs. Osberg II, 138 F. Supp. 3d at 560. Specifically, the
district court found that participants believed that they would receive the full
value of the benefits that they had earned under the defined benefit plan for their
service through December 31, 1995 plus the benefits that Foot Locker told
participants that they would earn beginning on January 1, 1996 under the cash
balance plan – that is, credits for continued service and interest, as well as a one-
time seniority enhancement available to those who were at least age 50 and had
at least 15 years of service on December 31, 1995. Id. at 560-61. Accordingly, the
district court ordered that participants receive: (1) an “A benefit,” consisting of an
initial account balance as of January 1, 1996 equivalent to the value of their
benefits under the defined benefit plan as of December 31, 1995, discounted to
present value using a six-percent rate and without the application of a mortality
discount; and (2) a “B benefit,” consisting of continued service and interest
credits, a one-time seniority enhancement for those eligible that would be applied
to the initial account balance as calculated in the “A benefit,” and certain
adjustments required under federal law.3 Id.
3
The district court specifically used the terminology “A benefit” to refer to the benefits
available under the defined benefit plan, and “B benefit” to refer to the benefits
available under the cash balance plan. Osberg II, 138 F. Supp. 3d at 525 n.9. For
14
The district court entered final judgment on October 5, 2015. This timely
appeal followed.
DISCUSSION
We reverse a district court’s award of equitable relief “only for an abuse of
discretion or for a clear error of law.” Amara II, 775 F.3d at 519, quoting Malarkey
v. Texaco, Inc., 983 F.2d 1204, 1214 (2d Cir. 1993). Where the award of equitable
relief is supported by findings of fact, such findings are reviewed for clear error.
Amara II, 775 F.3d at 519. Where the award relies on conclusions of law, those
legal conclusions are reviewed de novo. Id.
I. Statute of Limitations
In challenging the district court’s award of equitable relief, Defendants first
contend that the district court erred when it granted relief to participants whose
claims under §§ 102 and 404(a) were time-barred.4 “We review the question of the
application of the relevant statute of limitations – as we do all questions of law –
de novo.” Novella v. Westchester Cty., 661 F.3d 128, 143 (2d Cir. 2011).
consistency, we adopt the same terminology, though we note, as discussed in more
detail below, that the relief ordered by the district court here differs in certain respects
from the “A+B benefits” approved in Amara II. See infra n.16.
4
During oral argument, Defendants clarified that, in advancing their statute of
limitations arguments, they did not intend to challenge the district court’s class
certification rulings.
15
A. Timeliness of § 102 Claims
Section 102 of ERISA requires, inter alia, that a summary plan description
be “written in a manner calculated to be understood by the average plan
participant” and be “sufficiently accurate and comprehensive to reasonably
apprise such participants and beneficiaries of their rights and obligations under
the plan.” 29 U.S.C. § 1022(a). Defendants argue that participants were put on
constructive notice of wear-away (and thus on notice of their claims under § 102
for the SPD’s failure to disclose wear-away) when they received lump sum
payments upon retirement that exceeded, for reasons explained below, their
account balances under the new pension plan. Defendants argue, accordingly,
that the clock on participants’ § 102 claims began running upon retirement,
rendering untimely the claims of participants who left Foot Locker more than
three years before this suit was brought.5
5
In our prior summary order affirming in part and vacating in part the district court’s
summary judgment ruling, we declined to determine whether Plaintiff’s § 102 claim was
subject to a three- or six-year statute of limitations. Osberg I, 555 F. App’x at 80.
Following remand, the district court adhered to its decision that a three-year statute of
limitations applied to class members’ § 102 claims. Osberg II, 138 F. Supp. 3d at 559.
Because our rejection of Defendants’ constructive notice argument makes it unnecessary
to determine the limitations period applicable to a § 102 claim, we do not resolve that
question here.
16
In determining when the statute of limitations begins to run in the
analogous context of an ERISA miscalculation claim, we have applied a
“reasonableness approach” that looks to “when there is enough information
available to the pensioner to assure that he knows or reasonably should know of
the miscalculation.” Novella, 661 F.3d at 147 & n.22. That approach does not
require a participant to “confirm the correctness of his pension award
immediately upon the first payment of benefits.” Id. at 146. Where, however, the
miscalculation is “apparent from the face of a payment check” or “readily . . .
discoverable from information furnished to pensioners by the pension plan,” a
court may conclude that the participant had enough information at the time of
the first payment of benefits to assure that he reasonably should have known of
the miscalculation. Id. at 147 n.22.
In analyzing the accrual of the § 102 claims at issue here, we adopt the
Novella framework, which is an elaboration of the federal discovery rule
generally applicable to ERISA claims. See Novella, 661 F.3d at 144; see also Guilbert
v. Gardner, 480 F.3d 140, 149 (2d Cir. 2007); Carey v. Int’l Bhd. of Elec. Workers Local
363 Pension Plan, 201 F.3d 44, 48 (2d Cir. 1999). Accordingly, we ask in this case
whether a participant would have had “enough information . . . to assure that he
17
kn[ew] or reasonably should [have] know[n]” of the existence of wear-away at
the time that the participant received the lump sum payment. Novella, 661 F.3d at
147.
Defendants’ constructive notice argument proceeds as follows. Upon
retirement, participants were each sent a statement that showed their account
balance and asked whether the participant wished to receive his or her pension
benefits in the form of a lump sum payment or an annuity. For participants
whose accounts were experiencing wear-away at the time of retirement, the value
of the lump sum payment exceeded the value of their cash balance account.
Osberg, for example, received a “Pension Options Form” upon retirement that
showed his “[a]ccount [b]alance” to be $20,093.78, but stated that he could “select
one of the following forms of benefits available to [him]”: a lump sum payment
of $25,695.96 or an annuity of $138.41. J.A. 2563. At that point, Defendants argue,
participants should have realized that something was amiss and consulted the
plan communications that they had received over the years to piece together the
fact that their accounts had been suffering from wear-away.
But arriving at that realization was far from straightforward. As a
threshold matter, participants would have had not only to notice the disparity
18
between the lump sum payment and account balance, but also to recognize that
the disparity had some significance worth further investigation. For participants
who had been assured by Foot Locker that they were receiving “a more
competitive retirement benefits package” in which their account balance would
“grow each year,” id. at 2137, the fact that they were receiving the larger of two
numbers on a page would not necessarily make “apparent” to them that their
benefits had in fact been frozen for months or years, Novella, 661 F.3d at 147 n.22;
cf. Young v. Verizon’s Bell Atl. Cash Balance Plan, 615 F.3d 808, 816 (7th Cir. 2010)
(rejecting the argument that a lump sum payment served as a “red flag” that the
participant had been underpaid where the payment was not “so inconsistent”
with the participant’s understanding of her benefits “as to serve as a clear
repudiation”).
Even assuming that participants picked up on the disparity, in order to
discover wear-away, participants would still have had to make a sophisticated
chain of deductions about the meaning of the information on their statements
and the mechanics underlying their benefits, with the opaque guidance contained
in the SPD as their guide. Specifically, a participant would have had to deduce at
the very least that: (1) the “account balance” on the pension options form
19
represented the value of his cash balance account, whereas the lump sum
payment represented the value of the benefits he had earned under the old plan;
(2) the actual value of his benefits was determined on the basis of a “greater of”
provision that set a participant’s benefits at the greater of the value of his account
balance and old plan benefits; (3) the pay and interest credits he had earned since
January 1, 1996 applied only to his account balance; and (4) because of the
operation of the “greater of” provision, his benefit had not increased since
January 1, 1996, despite his receipt of pay and interest credits, since his actual
benefits had remained frozen at the value of his old benefit.6
That is a heroic chain of deductions to expect the average plan participant
to make, particularly on the basis of materials that were designed by Foot Locker
to conceal from participants the very phenomenon that Defendants now argue
should have been “readily . . . discoverable.” Novella, 661 F.3d at 147 n.22. Indeed,
6
Participants would have also had to avoid drawing the conclusion from the SPD that
the difference between their account balance and the lump sum payment was due to the
operation of federal law and IRS regulations. See, e.g., J.A. 2156 (“The lump sum payable
to you is the greater of your account balance or the amount determined by multiplying
the annuity payable to you by factors required by federal law and IRS regulations.”
(emphasis omitted)); id. at 2158 (“The lump sum payable to you is the greater of your
account balance or the amount determined under federal law and IRS regulations.”
(emphasis omitted)).
20
as discussed above, even after noticing the disparity identified by Defendants
and having the benefit of an individualized explanation of the calculations used
to arrive at his account balance and expected lump sum payment, the CFO of the
Company’s Woolworth division was not able to divine that his account was
suffering from wear-away. To expect the average plan participant, who the
district court found had a high-school level of education, to do so on the basis of
the opaque guidance in the SPD would be unreasonable. Accepting Foot Locker’s
argument, moreover, would effectively impose upon participants an obligation to
identify problems such as wear-away “immediately upon the first payment of
benefits, regardless of the complexity of the calculations, or of the adequacy of
the defendants’ explanation of the basis for the calculation” – a rule that we
rejected in Novella as “too harsh.” Id. at 146. Such a rule, we reasoned, would
place the burden on the party “less likely to have a clear understanding of the
terms of the pension plan.” Id. In this case, it is not merely “likely,” but indeed
certain, that plan participants would have a muddled understanding of wear-
away, given that Foot Locker took steps to conceal the phenomenon from
participants.
21
Defendants and their amici fall back on the argument that failing to start
the clock on participants’ § 102 claims at the time of the payment of the lump sum
would “eviscerate[] the constructive-notice standard” and result in a statute of
limitations that does not run “until a lawyer approaches a potential plaintiff with
a detailed roadmap for impending litigation.” Br. for Amici Curiae Am. Benefits
Council et al. 24. In many circumstances, such concerns are not entirely without
merit. In Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., 651
F.3d 600 (7th Cir. 2011), the Seventh Circuit embraced an accrual rule that would
start the clock on an ERISA claim when a lump sum payment of benefits was
made, noting that to hold otherwise would allow plaintiffs “to slip by with no
accrual date” and effectively “nullif[y] . . . the statute of limitations.” Id. at 607.
But those concerns have significantly less purchase where a plan fiduciary
intentionally makes misstatements and omissions to conceal an injury from plan
participants, as Thompson recognized by expressly stating that its ruling did not
contemplate a scenario where “the injury was somehow concealed” from plan
participants. Id. at 607 n.9. In this case, participants faced obstacles to the
discovery of their injury placed in their path by the very party charged with
disclosing to participants “in a manner calculated to be understood by the
22
average plan participant” all “circumstances which may result in . . . loss of
benefits.” 29 U.S.C. § 1022(a), (b). Foot Locker failed plan participants not only by
failing to disclose the fact of wear-away, but also by suggesting to participants
that they had introduced a more competitive benefits package in which they
would see their account balance grow each year. Under such circumstances, the
assertion that participants “bur[ied] [their] head[s] in the sand” and “closed their
eyes to evident and objective facts” in failing to discover wear-away is not
persuasive. Br. for Amici Curiae Am. Benefits Council et al. 22, 24. Accordingly,
for all the foregoing reasons, we hold that the district court did not err in
rejecting Defendants’ challenge to the timeliness of participants’ § 102 claims.7
7
In challenging the timeliness of participants’ § 102 claims, Defendants also argue that
certain “individualized” communications received by some participants provided
constructive notice of wear-away. Those communications primarily consist of (1)
written materials distributed to participants during meetings held by Foot Locker’s
corporate benefits department, and (2) written responses provided to participants
inquiring about various aspects of the new employee pension plan. None of the
communications identified by Defendants expressly discussed wear-away, and while
they, like the SPD, provided some explanation of the calculations underlying
participants’ pension benefits, none supply “enough information . . . to the [participant]
to assure that he . . . reasonably should [have] know[n]” that his account was suffering
from wear-away, even when combined with the class-wide and other individualized
communications. Novella, 661 F.3d at 147. Accordingly, for substantially the same
reasons that we reject Defendants’ arguments concerning the constructive notice
provided by the lump sum payment, we reject Defendants’ contention that
individualized communications provided constructive notice to participants of their
§ 102 claims.
23
B. Timeliness of § 404(a) Claims
Defendants also challenge the district court’s ruling that participants’
breach of fiduciary duty claims under § 404(a) were not time-barred. The
limitations period for such claims is governed by § 413 of ERISA, which applies a
discovery rule “in the case of fraud or concealment” that allows a § 404(a) claim
to be brought “not later than six years after the date of discovery of such breach or
violation.” 29 U.S.C. § 1113 (emphasis added). In this Circuit, “fraud or
concealment” is read disjunctively, such that the exception applies in cases of
fraud or concealment. Caputo v. Pfizer, Inc., 267 F.3d 181, 190 (2d Cir. 2001); cf. id.
at 188-89 (cataloguing circuits adopting the contrary view that the exception
should be read conjunctively and applied only in cases of “fraudulent
concealment”). The question before us on appeal is whether the concealment
exception applies in this case,8 such that the district court correctly ruled that
participants’ § 404(a) claims were timely because they were brought within six
8
It is unclear which prong of the exception the district court intended to rely on in
finding that the “fraud or concealment” exception applied. Because Plaintiff does not
specifically contest that the “fraud” prong of the exception was inapplicable in this case,
we analyze only the applicability of the “concealment” prong of the exception.
24
years of their discovery in 2005.9
The crux of Defendants’ argument is that because we have referred to
§ 413’s concealment exception as a “[fraudulent] concealment” exception, Caputo,
267 F.3d at 190 (brackets in original), the district court was required to find that
the elements of common law fraud, including fraudulent intent, were satisfied in
order to apply the exception, which it did not expressly do.10 Defendants’
argument rests on a misunderstanding of the meaning of “fraudulent
concealment” as used in Caputo. In defining “concealment” for the purposes of §
413, we drew in Caputo on “the federal concealment rule, also known as the
9
Specifically, the district court ruled that participants did not “discover” their § 404(a)
claims until they were informed by counsel in 2005 of the fact of wear-away. We reject
Defendants’ arguments that wear-away could have been discovered at an earlier date
for substantially the same reasons that we reject Defendants’ constructive notice
arguments as to participants’ § 102 claims. We also note that while we do not reach the
question of the limitations period applicable to a § 102 claim in this opinion, see supra
n.5, the applicable limitations period for a § 404(a) claim is set, as discussed above, by
statute, see 29 U.S.C. § 1113.
10
In determining whether the prerequisites for the equitable remedy of reformation had
been shown, the district court ruled that Foot Locker had committed equitable fraud,
which does not require a finding of fraudulent intent. See Amara II, 775 F.3d at 526
(noting that equitable fraud “generally consists of ‘obtaining an undue advantage by
means of some act or omission which is unconscientious or a violation of good faith’”);
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 193 (1963) (“Fraud has a broader
meaning in equity (than at law) and intention to defraud or to misrepresent is not a
necessary element.” (internal quotation marks omitted)).
25
‘fraudulent concealment’ doctrine.” Id. at 188. As we explained, that rule “grew
from the soil of equitable estoppel” and “provides that when a defendant’s
wrongdoing ‘has been concealed, or is of such character as to conceal itself, the
statute of limitations does not begin to run until the wrongdoing is discovered’
by the plaintiff.” Id. at 189 (brackets omitted), quoting Bailey v. Glover, 88 U.S. (21
Wall.) 342, 349-50 (1874).11 While the fraudulent concealment doctrine was
initially applied in equitable actions sounding in fraud, federal courts have since
applied the doctrine to federal claims other than fraud at both law and equity.
Pearl v. City of Long Beach, 296 F.3d 76, 80 n.3 (2d Cir. 2002). In Caputo, we
interpreted § 413’s “concealment” exception to incorporate the fraudulent
concealment doctrine, and therefore defined the exception as applying “to cases
in which a fiduciary . . . engaged in acts to hinder the discovery of a breach of
fiduciary duty.” 267 F.3d at 190. In so defining the concealment exception, we
noted that the § 413 exception could, accordingly, be described as applying in
11
As we have noted, fraudulent concealment “must not be confused with efforts by a
defendant in a fraud case to conceal the fraud.” Pearl v. City of Long Beach, 296 F.3d 76, 81
(2d Cir. 2002) (emphasis in original), quoting Cada v. Baxter Healthcare Corp., 920 F.2d
446, 451 (7th Cir. 1990); see also Brass v. Am. Film Techs., 987 F.2d 142, 146, 152 (2d Cir.
1993) (stating that common law fraud claim of fraudulent concealment requires proof of
failure to discharge a duty to disclose, intent to defraud or scienter, reliance, and
damages).
26
cases of “fraud or [fraudulent] concealment.” Id. (brackets in original). Thus,
properly understood, Caputo’s reference to “[fraudulent] concealment” does not
impose a requirement that a plaintiff, in order to receive the benefit of § 413’s
concealment exception, prove the elements of common law fraud. Nor does the
fraudulent concealment doctrine contain any such requirement. See, e.g., State of
New York v. Hendrickson Bros., Inc., 840 F.2d 1065, 1083 (2d Cir. 1988). We
therefore reject Defendants’ argument that the district court was required to find
fraudulent intent before applying § 413’s concealment exception.
With that understanding of the concealment exception, we have little
trouble concluding that “concealment” was shown on the factual record before
the district court. As we noted in Caputo, application of the concealment
exception requires that “in addition to alleging a breach of fiduciary duty (be it
fraud or any other act or omission), the plaintiff . . . also allege that the defendant
committed either: (1) a ‘self-concealing act’ – an act committed during the course
of the breach that has the effect of concealing the breach from the plaintiff; or (2)
‘active concealment’ – an act distinct from and subsequent to the breach intended
to conceal it.” 267 F.3d at 189; see also id. at 190 n.3. Here, in ruling that Foot
Locker breached its fiduciary duties under § 404(a), the district court found not
27
only that the Company failed to disclose wear-away, but also that it made
misstatements to participants that suggested that the value of their benefits was
fully reflected in their account balances and would increase in value with
continued employment. Such “affirmative misrepresentations of a material fact
are self-concealing acts” and “hinder[ed] the discovery of [Foot Locker’s] breach
of fiduciary duty.” Caputo, 267 F.3d at 190 & n.3. Accordingly, we reject
Defendants’ challenge to the district court’s application of § 413’s concealment
exception in determining that participants’ § 404(a) claims were timely.
II. Detrimental Reliance
Defendants argue next that detrimental reliance was a necessary element
of participants’ § 404(a) claims, and that the district court erred when it awarded
class-wide relief on those claims without requiring individualized evidence that
participants relied to their detriment on Foot Locker’s misstatements and
omissions. Defendants’ arguments are foreclosed by the Supreme Court’s
reasoning in CIGNA Corp. v. Amara (“Amara I”), 563 U.S. 421 (2011).
In Amara I, the Supreme Court had occasion, under circumstances similar
to those here, to clarify the standard of harm that a plaintiff must show to receive
equitable relief pursuant to § 502(a)(3). CIGNA, like Foot Locker, converted its
28
employee pension plan from a defined benefit plan to a cash balance plan, but
failed to adequately disclose the possibility of wear-away to plan participants.
Following a bench trial, the district court held that CIGNA had violated §§ 102(a),
104(b) and 204(h) of ERISA and ordered that the plan be reformed pursuant to
§ 502(a)(1)(B) of ERISA, id. at 424-25, 431-32, 434, which permits a participant or
beneficiary to bring a civil action to, inter alia, “recover benefits due to him under
the terms of his plan [or] to enforce his rights under the terms of the plan.” 29
U.S.C. § 1132(a)(1)(B).
On writ of certiorari, the Supreme Court vacated the district court’s
judgment, concluding that the remedy of plan reformation was not available
under § 502(a)(1)(B) because the relevant statutory text “speaks of ‘enforc[ing]’ the
‘terms of the plan,’ not of ‘changing’ them.” Amara I, 563 U.S. at 436 (emphasis in
original), quoting 29 U.S.C. § 1132(a)(1)(B). The Court stated, however, that the
district court could have instead granted such relief under § 502(a)(3) of ERISA,
which allows a participant “to obtain other appropriate equitable relief” to
redress ERISA violations. Amara I, 563 U.S. at 438 (emphasis omitted), quoting 29
U.S.C. § 1132(a)(3). In so stating, the Supreme Court rejected the argument that a
showing of detrimental reliance was always required for relief under § 502(a)(3).
29
Specifically, the Court reasoned as follows:
The relevant substantive provisions of ERISA [i.e., §§
102(a), 104(b) and 204(h)] do not set forth any particular
standard for determining harm. . . . Hence, any
requirement of harm must come from the law of equity.
Looking to the law of equity, there is no general
principle that “detrimental reliance” must be proved
before a remedy is decreed. To the extent any such
requirement arises, it is because the specific remedy
being contemplated imposes such a requirement.
Amara I, 563 U.S. at 443.
Application of Amara I’s reasoning mandates the conclusion that
detrimental reliance need not be shown where, as here, a plaintiff alleging a
violation of § 404(a) seeks plan reformation under § 502(a)(3). In determining the
applicable standard of harm, Amara I asks: (1) whether the substantive ERISA
provision in question sets forth a standard for determining harm; and (2)
whether the specific remedy being contemplated imposes such a requirement. See
id.; see also Frommert v. Conkright, 738 F.3d 522, 534 (2d Cir. 2013) (applying Amara
I framework); Amara II, 775 F.3d at 525 n.12 (same). Because the statutory text of
§ 404(a) does not articulate any standard for determining harm, see 29 U.S.C.
§ 1104(a), any requirement of detrimental reliance in this case must arise because
of the “specific remedy being contemplated.” Amara I, 563 U.S. at 443. Here, that
30
remedy is plan reformation, which Amara I itself stated does not require a
showing of detrimental reliance. Id. Specifically, looking to the practice of courts
at equity, Amara I stated that while the imposition of a remedy equivalent to
estoppel under § 502(a)(3) requires a showing of detrimental reliance, such a
showing “is not always necessary for other equitable remedies.” Id. In the case of
reformation, Amara I deemed a showing of detrimental reliance unnecessary
because equity courts required only that fraudulent statements or omissions
“materially . . . affected the substance of the contract,” and that the mistaken
party not be so grossly negligent such that its conduct “f[e]ll below a standard of
reasonable prudence” in ordering such relief. Id. (brackets, citations and internal
quotation marks omitted); see also Amara II, 775 F.3d at 525 n.12 (further
elaborating the standard of harm required for the equitable remedy of
reformation under § 502(a)(3)).
Accordingly, because neither the statutory text of § 404(a) nor the equitable
remedy of reformation requires a showing of detrimental reliance,12 we hold that
12
Defendants cite our decision in Bell v. Pfizer, Inc., 626 F.3d 66 (2d Cir. 2010) for the
proposition that “where a plaintiff asserts a breach of fiduciary claim based on a
material misrepresentation or omission, the plaintiff must establish detrimental
reliance,” id. at 75, regardless of the equitable remedy sought. But Bell pre-dates the
Supreme Court’s decision in Amara I. See Frommert, 738 F.3d at 534 (reconsidering
31
the district court correctly declined to require such a showing in this case before
granting class-wide relief on participants’ § 404(a) claims.
III. Mistake
Defendants also contend that the district court erred in concluding that
mistake, a prerequisite to the equitable remedy of contract reformation, was
proven by clear and convincing evidence. A contract may be reformed in the
ERISA context where, inter alia, one party is mistaken and the other commits
fraud or engages in inequitable conduct. Amara II, 775 F.3d at 525. Because
Defendants do not challenge the district court’s ruling that Foot Locker
committed equitable fraud and engaged in inequitable conduct, the only question
before us is whether the district court erred in concluding that participants
suffered from a mistaken understanding of Foot Locker’s employee pension plan.
As we stated in Amara II, to prove mistake for the purposes of the remedy
of reformation under § 502(a)(3), a plaintiff must show by clear and convincing
evidence that “a party entered a contract ‘in ignorance or mistake of facts
applicable standard of harm for ERISA notice violations in light of Amara). Moreover,
the portion of Bell cited by Defendants is dictum since the panel ultimately affirmed the
district court’s dismissal of the fiduciary duty claim on the independent ground that
ERISA liability does not extend to “unintentional misstatements regarding collateral,
non-ERISA plan consequences of a retirement decision.” 626 F.3d at 77.
32
material to its operation.’” Id. at 529, quoting Ivinson v. Hutton, 98 U.S. 79, 82
(1878). That evidence need not be individualized. A plaintiff “can prove
ignorance of a contract’s terms through generalized circumstantial evidence in
appropriate cases,” and such proof “may be more than sufficient, moreover, in
certain cases where . . . defendants have made uniform misrepresentations about
an agreement’s contents and have undertaken efforts to conceal its effect.” Amara
II, 775 F.3d at 529. That is precisely the case here, where the district court found
that class-wide communications uniformly failed to describe wear-away and, in
fact, concealed the phenomenon by giving participants the false impression that
their benefits would be fully reflected in growing account balances. The district
court also based its ruling on the testimony of class members who did not
understand that their accounts were suffering from wear-away,13 and the fact that
13
In challenging the district court’s finding of class-wide mistake, Defendants note the
testimony of a senior human resources manager, Linda Ine, who testified at trial that
while she did not understand at the time of conversion that her pension would suffer
from wear-away, she eventually, prior to leaving the Company in 1999, realized after
performing her own calculations that she had not accrued additional benefits since the
plan conversion. That testimony contradicted Ine’s account during a 2012 deposition, in
which she testified that she had not realized until informed at the deposition that her
account had been in wear-away. The district court did not specifically address the
testimony in its findings of fact or make any credibility determination as to Ine. In light
of the substantial evidence relied upon by the district court in finding class-wide
mistake, however, the fact of Ine’s internally inconsistent testimony is not sufficient on
its own to establish clear error.
33
not a single plan participant ever complained about wear-away, from which the
district court drew the reasonable inference that participants were ignorant of the
phenomenon. See Amara II, 775 F.3d at 530 (“We can discern no error, moreover,
in the district court’s inference that informed employees, aware that their pension
benefits were less valuable, would have protested the change . . . .”).
Defendants do not challenge the district court’s reliance on that evidence,
arguing instead that individualized communications received by plan
participants who had inquired about various aspects of their benefits dispelled
any mistake for those participants. The district court rejected that interpretation
of the factual record, and we discern no clear error in the district court’s finding.
While the individualized communications in question provided an explanation of
some of the calculations used to determine participants’ benefits, they did not
disclose the existence of wear-away or the fact that participants’ benefits were not
increasing despite the accumulation of pay and interest credits.
In sum, having considered Foot Locker’s arguments and reviewed the
record as a whole, we conclude that the district court did not err, much less
clearly err, in concluding that class-wide mistake was demonstrated by clear and
convincing evidence.
34
IV. The District Court’s Remedy
Finally, Defendants argue that the district court’s award of equitable relief
should have been tailored to account for the fact that certain participants
experienced little to no wear-away. Defendants focus, in particular, on
participants who received seniority enhancements under the cash balance plan.
Those participants, Defendants contend, experienced little to no wear-away, but
in fact received more relief than other participants because they benefitted from a
windfall created by the cumulative effect of the “A benefit” and “B benefit”
ordered by the district court.
As explained above, the A benefit converts a participant’s benefits under
the old plan into an initial account balance under the new plan, using a six-
percent discount rate and no mortality discount. That formula remedies wear-
away because – unlike the original conversion formula, which applied a nine-
percent discount rate and mortality discount – the district court’s formula yields
an initial account balance equivalent to a participant’s benefits under the old
plan. With that adjusted initial account balance, the pay and interest credits
awarded as part of the B benefit are no longer rendered worthless by wear-away,
but result in actual increases to the value of a participant’s benefits.
35
That much of the relief Defendants do not seriously challenge.14 They do
argue, however, that the district court erred when, in fashioning the B benefit, it
failed to account for the fact that participants who received seniority
enhancements under the cash balance plan experienced less wear-away and had
already, in Defendants’ view, been made whole by receipt of the A benefit.
Under the plan as originally designed, Defendants contend, the seniority
enhancement closed the initial gap between a participant’s account balance and
the value of the participant’s old plan benefits, thus reducing the amount of time
14
Defendants suggest that the district court’s formula for converting a participant’s
accrued benefits under the old plan to his or her initial account balance violates 29
U.S.C. § 1055(g)(3)(A), but that ERISA provision is inapplicable here for at least two
reasons. First, it establishes requirements that pension plans must follow when they
distribute the present value of certain types of annuities; the provision does not purport
to constrict a district court’s authority to order equitable relief under § 502(a)(3) of
ERISA. See Esden v. Bank of Boston, 229 F.3d 154, 164-65 & n.13 (2d Cir. 2000); see also
generally Bd. Tr. Equity League Pension Tr. Fd. v. Royce, 238 F.3d 177 (2d Cir. 2001)
(discussing the rights conferred by § 1055 upon surviving spouses). Second, even
assuming arguendo that § 1055(g)(3)(A) would bear on the appropriateness of the district
court’s conversion formula, the provision sets only a floor for the calculation of the
lump sum value of an annuity; it would not bar a plan from using a formula that
resulted in a higher lump sum value, which was the effect of the district court’s formula
here. See Esden, 229 F.3d at 165 (“These ‘present value requirements’ require that any
lump sum distribution be at least the present value of the normal retirement benefit.”
(emphasis added)).
36
that the account would otherwise have spent in wear-away.15 Defendants argue
that those participants should thus have received proportionately less relief from
the district court, but in fact received more – that is, those participants received
not only the A benefit that all participants received, but also a seniority
enhancement as part of the B benefit.
Defendants’ arguments are not completely without theoretical appeal, but
we review a district court’s award of equitable relief “only for an abuse of
discretion or for a clear error of law,” Amara II, 775 F.3d at 519 (internal quotation
15
Defendants also contend that some participants did not suffer any wear-away because
the size of their seniority enhancements put their initial account balances in excess of the
value of the benefits they accrued under the defined benefit plan. That argument is
made only in the course of Defendants’ challenge to the district court’s purported
failure to tailor its relief to account for the lessened wear-away experienced by some
participants. Defendants do not argue that those participants did not suffer any injury
and should therefore be excluded from class relief – an argument that we have
previously rejected under similar factual circumstances. See Amara II, 775 F.3d at 527
(concluding that district court did not err in determining that employer committed
fraud or inequitable conduct against participants who arguably did not suffer from
wear-away because “[b]y hiding the truth about the plan, CIGNA prevented all of its
employees from becoming disaffected, spreading knowledge regarding the plan to
others who stood to lose more from the benefit conversion, and from planning for their
retirement” (emphasis in original)). In any event, we note that the district court found,
and Defendants do not challenge on appeal, that all participants suffered from wear-
away as measured on an “annuity” basis (measured by comparing a participant’s
account balance and the benefits earned under the old plan on an annuity-to-annuity
basis), even if approximately 1.4 percent of participants did not experience wear-away
as measured on a lump sum basis.
37
marks omitted), and we detect none here. As we stated in Amara II, the equitable
remedy of reformation is governed by contract principles, and a district court
may “properly reform[] [a pension] plan to reflect the representations that the
defendants made to the plaintiffs.” Id. at 525. Here, the district court awarded the
seniority enhancement as part of the B benefit because the SPD expressly
promised to eligible participants that they would receive the enhancement as part
of their benefit under the cash balance plan. Accordingly, we conclude that the
district court’s award of an “A benefit” and “B benefit” to all participants did not
fall outside the “range of permissible decisions” available under an abuse of
discretion standard. In re Sims, 534 F.3d 117, 132 (2d Cir. 2008).16
CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the district court.
16
Defendants identify a number of differences between the relief ordered here and that
approved in Amara II – including, for example, that the district court in Amara chose to
award the value of participants’ benefits under the defined benefit plan in annuity form,
rather than converting that annuity, as here, to an actuarially equivalent lump sum
value that would form the basis for a participant’s initial account balance under the cash
balance plan. Compare Amara II, 775 F.3d at 518-19, with Osberg, 138 F. Supp. 3d at
560-61. But the mere fact that the relief ordered by the district court here may differ in
some respects from the relief approved in Amara II does not mandate a ruling that the
district court abused its discretion. Our ruling in Amara II did not set a required
template for the award of equitable relief in ERISA cases concerning wear-away; it
simply found that the district court’s chosen remedy fell within its considerable
discretion in fashioning equitable relief. See Amara II, 775 F.3d at 531-32.
38