Oatway v. American International Group, Inc.

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
4-14-2003
Oatway v. Amer Intl Grp Inc
Precedential or Non-Precedential: Precedential
Docket 02-1699
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PRECEDENTIAL
Filed April 14, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 02-1699
DEREK J. OATWAY
Appellant
v.
AMERICAN INTERNATIONAL GROUP, INC., Plan
Administrator of Stock Option Plan; AMERICAN
INTERNATIONAL GROUP, INC., a Delaware Corporation;
1987 EMPLOYEE STOCK OPTION PLAN, an employee
welfare benefit plan
On Appeal From the United States District Court
For the District of Delaware
(D.C. No. 01-cv-00033)
District Judge: Honorable Gregory M. Sleet
Submitted pursuant to Third Circuit LAR 34.1(a)
November 4, 2002
Before: BECKER, Chief Judge,
McKEE and HILL,*Circuit Judges.
* Honorable James C. Hill, United States Circuit Judge for the Eleventh
Circuit, sitting by designation.
2
(Filed: April 14, 2003)
JOHN M. STULL, ESQUIRE
1300 North Market Street
P.O. Box 1947
Wilmington, DE 19899
RICHARD R. WIER, JR.
1220 Market Street
Wilmington, DE 19801
Attorneys for the Appellant
STEPHEN E. JENKINS
REGINA A. IORII
CAROLYN S. HAKE
Ashby & Geddes
222 Delaware Avenue, 17th Floor
P.O. Box 1150
Wilmington, DE 19899
Attorneys for the Appellees
OPINION OF THE COURT
HILL, Circuit Judge:
Appellant Derek J. Oatway appeals the district court
order granting appellees’, American International Group,
Inc., American International Group, Inc., Plan
Administrator, and 1987 Employee Stock Option Plan
(collectively, AIG), motion to dismiss his amended complaint
pursuant to Fed. R. Civ. Proc. 12(b)(6) on the ground that
it fails to state a claim under the Employee Retirement
Income Security Act of 1974 (ERISA), as amended, 29
U.S.C. § 1001 et seq.1 Based upon the following, we affirm
the judgment of the district court.
1. We accept all factual allegations in the amended complaint as true
and view them in a light most favorable to the plaintiff. Fed. R. Civ. Proc.
12(b)(6). On a motion to dismiss for failure to state a claim under Rule
12(b)(6), “a court can consider a ‘document integral to or explicitly relied
upon in the complaint.’ ” In re Rockefeller Ctr. Props., Inc. Sec. Litig., 184
F.3d 280, 287 (3d Cir. 1999).
3
I. FACTUAL AND PROCEDURAL BACKGROUND
Oatway was a full-time employee of AIG from 1983 to
1992. During his employment, in consideration of his
performance as a key employee, Oatway and AIG entered
into two written incentive stock option agreements2 giving
Oatway the right to purchase a set number of AIG common
stock shares at a set price per share as provided for in
AIG’s 1987 Employee Stock Option Plan (1987 Plan). The
first was the January 18, 1990 Incentive Stock Option,
giving Oatway the option to purchase 200 shares at $96 per
share under the 1987 Plan. The second was the October
11, 1990 Incentive Stock Option, giving him the option to
purchase 200 shares at $58.625 per share under the 1987
Plan.3 The agreements were identical in nature. Blank
spaces in the agreements were filled in by the parties to
reflect the particular date of execution, the number of
shares subject to the stock option grant, and the set price
per share.
The stated purpose of the 1987 Plan was:
[T]o advance the interest of [AIG] by providing certain
of the key employees of AIG and of any parent or
subsidiary corporation of AIG, upon whose judgment,
initiative and efforts the successful conduct of the
business of AIG largely depends, with an additional
incentive to continue their efforts on behalf of such
corporations, as well as to attract to such corporations
people of training, experience and ability.
2. In general, an incentive stock option enables an executive to delay
exercise of the option while the stock appreciates in value. Executive
Compensation: A 1987 Roadmap for the Corporate Advisor, 43 Bus. Law.
185, 291 (Nov. 1987). The executive can then purchase the stock at what
is, at the time of purchase, a bargain price. In the interim, the executive
has not been at risk if the value of the stock declines. Id. If the value of
the stock does decline, without making any cash outlay, the executive
forgoes the exercise of the option. Id. An incentive stock option
accomplishes its goals by affording the executive the potential for an
equity interest in the corporation, thereby encouraging him to use his
greatest efforts to promote the growth of that corporation. Id.
3. By referring to these documents in his amended complaint, Oatway
has incorporated these documents by reference into his pleading. See
note 1 supra.
4
(Emphasis added.)
Under the Plan, each stock option granted to key AIG
employees by its board of directors expired ten (10) years
from the date of its issuance. An option could not be
exercised by an AIG employee until one year after its date
of issuance, and then only in predetermined installments.
Unexercised options rolled over into subsequent years
remaining within the ten-year term. If an employee
terminated his or her employment with AIG prior to
“normal retirement age,” or age 65, then he or she had
ninety days within which to exercise his or her remaining
AIG stock options.
Oatway retired prior to normal retirement age in 1992.
AIG advised him that he had ninety days, or until
November 1992, within which to exercise all his options.
Oatway alleges that, after he complained to the company
about the short duration of time, AIG relented and
reinstated the original ten year term.
Eight years passed. Oatway discovered, on or about
January 25, 2000, that his option exercise date under the
January 18, 1990, incentive stock agreement had expired
one week earlier. He claims that he notified AIG by
facsimile of his intent and desire to exercise his January
18, 1990 option, but the company refused to honor his
request.
Ten more months passed. On October 1, 2000, Oatway
attempted to exercise his options, both under the January
18, 1990, and the October 11, 1990, incentive stock option
agreements. AIG refused his attempt. Oatway appealed the
denial to AIG as “Plan Administrator.”
AIG rejected his appeal and Oatway filed suit in district
court. The district court granted AIG’s motion to dismiss
Oatway’s amended complaint on the grounds that it lacked
subject matter jurisdiction as none of the three AIG
incentive stock option agreements were ERISA plans.
This appeal follows.
II. STANDARD OF REVIEW
In reviewing the dismissal of a complaint by a district
court pursuant to Rule 12(b)(6) for failure to state a claim
5
upon which relief may be granted, our review is plenary
and we apply the same test as the district court. Maio v.
Aetna, Inc., 221 F.3d 472, 481-82 (3d Cir. 2000). “A motion
to dismiss pursuant to Rule 12(b)(6) may be granted only if,
accepting all well-pleaded allegations in the complaint as
true, and viewing them in the light most favorable to the
plaintiff, plaintiff is not entitled to relief.” In re Burlington
Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir.
1997). The issue is not whether a plaintiff will ultimately
prevail but whether he or she is entitled to offer evidence to
support the claims. Id.III. DISCUSSION
A. Introduction
Whether or not the stock options granted to Oatway, as
a key employee, were given as incentive bonuses to
continue employment with AIG, or as deferred
compensation arrangements subject to ERISA, is the issue
that controls the outcome of this appeal.4
Although this issue, whether or not an incentive stock
option plan is an employee benefit plan within the meaning
of ERISA, is not a novel or particularly new issue, it
appears to be an issue of first impression in this circuit. As
will be discussed, most courts have uniformly held that an
incentive stock option plan is not an ERISA plan.
Interestingly enough, the majority of these courts so
holding have been district courts. Not many other circuit
courts of appeal have addressed the issue, perhaps relying
on the leading case of Murphy v. Inexco Oil Co., 611 F.2d
570 (5th Cir. 1980), addressing bonus programs in general
under ERISA, and its progeny that have followed.
B. Murphy and Other Circuit Court Cases
In Murphy, the company gave bonuses to certain key
employees, including Murphy, the president of Inexco, by
assigning a specific royalty interest in a drilling prospect it
planned to develop. Each employee was given participation
4. We affirm all other remaining issues addressed by the district court
without discussion.
6
units, or rights to receive a fractional portion of any
proceeds that might thereafter accrue from the designated
project. Murphy, 611 F.2d at 572.
Murphy claimed that this bonus plan violated ERISA. His
complaint was dismissed by the district court for lack of
subject matter jurisdiction on the grounds that the bonus
plan was not subject to ERISA. Id. at 570. The Fifth Circuit
agreed.
Relying upon 29 U.S.C. § 1002(1), for the ERISA
definition of employee welfare benefit plan,5 29 U.S.C.
§ 1002(2), for the ERISA definition of employee pension
benefit plan,6 and the regulations promulgated thereunder,
29 C.F.R. § 2510.3-2(c),7 the Fifth Circuit reasoned that the
5. ERISA defines an “employee welfare benefit plan” as:
[A]ny plan, fund, or program which was heretofore or is hereafter
established or maintained by an employer or by an employee
organization, or by both, to the extent that such plan, or program
was established or is maintained for the purpose of providing for its
participants or their beneficiaries, through the purchase of
insurance or otherwise, (A) medical, surgical, or hospital care, or
benefits, or benefits in the event of sickness, accident, disability,
death or unemployment, or vacation benefits, apprenticeship or
other training programs, or day care centers, scholarship funds, or
prepaid legal services or (B) any benefit described in section 186(c)
of this title (other than pensions on retirement or death, and
insurance to provide such pensions).
29 U.S.C. § 1002(1).
Section 186(c) includes within the definition of “employee welfare
benefit plan” those plans that provide holiday and severance benefits,
and benefits that are similar. See 29 C.F.R. § 2510.3-1(a)(3).
6. ERISA defines an “employee pension benefit plan” as any plan
established or maintained by an employer that, by its express terms,
“results in a deferral of income by employees for periods extending to the
termination of covered employment or beyond, regardless of the method
of calculating the contributions made to the plan, the method of
calculating the benefits under the plan or the method of distributing
benefits from the plan.” 29 C.F.R. § 1002(2).
7. The Department of Labor, in its regulations, has interpreted ERISA
employee pension benefit plans to exclude “payments made by an
employer to some or all of its employees as bonuses for work performed,
unless such payments are systematically deferred to the termination of
covered employment or beyond, or so as to provide retirement income to
employees.” 28 C.F.R. § 2510.3-2(c).
7
Murphy bonus program was not an ERISA plan because it
“was evidently designed to provide current rather than
retirement income to Inexco’s employees.” Id. at 575-76. In
addition, the Murphy court considered it significant that
contributions were discretionary, given in recognition of
special service, awarded in addition to regular
compensation, and did not result in the deferral of income.
Id.The Murphy court reasoned that an ERISA plan is only a
plan “designed for the purpose of paying retirement income
whether as a result of [its] express terms or surrounding
circumstances.” Id. It concluded that the mere fact that
some payments under a plan may be made after an
employee has retired or has left the company does not
result in ERISA coverage by statutory definition. Id. at 576.
See Williams v. Wright, 927 F.2d 1540 (11th Cir. 1991)
(relying on Murphy, where a letter agreement between an
employee and an employer providing $500 per month on
the first of each month was not considered to be an ERISA
plan); Whitt v. Sherman Int’l Corp., 147 F.3d 1325 (11th Cir.
1998) (where a long term incentive plan for senior
executives was not considered to be an ERISA plan);
Mauldin v. Worldcom, Inc., 263 F.3d 1205 (10th Cir. 2001)
(where the court noted its surprise that neither party
argued that the stock option agreements were subject to
ERISA); Kerkhof v. MCI Worldcom, Inc., 282 F.3d 44 (1st
Cir. 2002) (where neither party argued that the MFS plan or
the stock option agreement were governed by ERISA).
C. The District Court Here
Using a Murphy analysis, the district court in this case
first determined that the AIG stock option incentive plan
was not an employee welfare benefit plan under ERISA
because its purpose was to operate as an incentive and
bonus program, and not as a means to defer compensation
or provide retirement benefits. Oatway v. American Int’l
Group, Inc., 2002 WL 187512 *3-4 (D. Del. Feb. 05, 2002).
In short, the AIG plan was not designed specifically to
provide employees with medical, unemployment, disability,
death, vacation, or other specified benefits or to provide
income following retirement in order to come within the
purview of ERISA. Id. We agree. See Murphy, 611 F.2d at
8
574; Hagel v. United Land Co., 759 F. Supp. 1199 (E.D. Va.
1991); Long v. Excel Telecoms. Corp., 2000 WL 1562808(N.D. Tex. Oct. 18, 2000); Hahn v. National Westminster
Bank, N.A., 99 F. Supp. 2d 275 (E.D.N.Y. 2000); Goodrich
v. CML Fiberoptics, 990 F. Supp. 48 (D. Mass. 1998);
Fludgate v. Management Technologies, 885 F. Supp. 645(S.D.N.Y. 1995).
The district court went on, also using a Murphy analysis,
to find that the AIG plan was also not an employee pension
benefit plan under ERISA because it was not created for the
purpose of providing retirement income, but rather was an
incentive plan designed to provide a financial incentive for
employees to remain with AIG and improve their
performance there. Oatway, 2002 WL 187512 at *5. We
agree. See Murphy, 611 F.2d at 574. Oatway’s post-
retirement payments were only incidental to the goal of
providing current compensation. See Hahn, 99 F. Supp. 2d
at 279; Lafian v. Electronic Data Sys. Corp., 856 F. Supp.
339 (E.D. Mich. 1994); Raskin v. Cynet, Inc. 131 F. Supp.
2d 906 (S.D. Tex. 2001); Chambless v. Excel
Communications, Inc., 2002 WL 31990311 (N.D. Tex. July
15, 2002); Kaelin v. Tenneco, Inc., 28 F. Supp. 2d 478 (N.D.
Ill. 1998).
We agree with the legal analysis of Murphy, as applied by
the district court in this case, and the unbroken line of
cases that have followed Murphy’s reasoning. Here,
Oatway’s stock options were discretionary, given in
recognition of special service, and awarded in addition to
his regular compensation. See Murphy, 611 F.2d at 575-76.
They did not result in the deferral of income even though
they could be exercised after he retired. Id. In short, the
AIG stock option agreements were not ERISA plans.
IV. CONCLUSION
The order of the district court dismissing Oatway’s
amended complaint is affirmed.
9
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit