Dade v. North American Philips Corp.

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
11-1-1995
Dade v North American Philips
Precedential or Non-Precedential:
Docket 94-5546
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995
Recommended Citation
"Dade v North American Philips" (1995). 1995 Decisions. Paper 283.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/283
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
1
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
N0. 94-5546
JAMES F. DADE; JEROME A. BUDDE, JR.,
Individually and as the Class Representatives
of all Persons Similarly Situated
Appellants
v.
NORTH AMERICAN PHILIPS CORPORATION, as a Corporate Entity
and as Plan Administrator of the Co-Defendant Pension Plan;
PHILIPS ELECTRONICS NORTH AMERICAN CORPORATION;
THE NORTH AMERICAN PHILIPS CORPORATION PENSION PLAN FOR
SALARIED EMPLOYEES
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civil Action No. 93-cv-05016)
Argued June 13, 1995
BEFORE: STAPLETON, McKEE and SEITZ, Circuit Judges
(Opinion Filed November 1, 1995)
David Tykulsker
Ball, Livingston & Tykulsker
108 Washington Street
Newark, NJ 07102
and
John C. Theisen (Argued)
John T. Menzie
Gallucci, Hopkins & Theisen
229 West Berry Street, Suite 400
P.O. Box 12663
Fort Wayne, IN 46864-2663
Attorneys for Appellants
2
2
Michael J. Dell (Argued)
Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
919 Third Avenue
New York, NY 10022
Attorneys for Appellees
Fredric S. Singerman
Christopher A. Weals
Seyfarth, Shaw, Fairweather &
Geraldson
815 Connecticut Avenue, N.W.
Suite 500
Washington, D.C. 20006-4004
and
Of Counsel:
Stephen A. Bokat
Robin S. Conrad
Mona C. Zeiberg
National Chamber Litigation
Center, Inc.
1615 H. Street, N.W.
Washington, D.C. 20062
Attorneys for Amicus Curiae
Chamber of Commerce of the
United States of America
John M. Vine
Jay T. Smith
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044
Attorneys for Amicus Curiae
The ERISA Industry Committee
OPINION OF THE COURT
STAPLETON, Circuit Judge:
The issue presented is whether § 204(g) of the Employee
Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1054(g),
3
requires an employer that sells a business but retains the
pension plan covering the employees of that business to credit
service with the purchaser when determining the eligibility of
those employees for an early retirement benefit subsidy.
Plaintiffs James Dade, Jerome Budde, Jr., and the class they
purport to represent sued to force the North American Philips
Corporation ("Philips"), their former employer, to comply with
this alleged requirement. The district court held that ERISA
does not impose such a requirement and dismissed the claims of
plaintiffs for failure to state a claim under Fed. R. Civ. P.
12(b)(6). We will affirm.
I.
This dispute arises in connection with Philips' sale of
the assets of its Magnavox Electronic Systems Company
("Magnavox") division to MESC Electronics Systems, Inc.
("MESCESI"). The relevant facts are not in dispute. Plaintiffs
were employed by Magnavox on October 22, 1993, when the sale
closed. Until the sale, plaintiffs participated in the Philips
Electronics North America Corporation Pension Plan for Salaried
Employees (the "Philips Plan" or the "Plan").
Under the terms of the Plan, sixty-five is the normal
retirement age. However, participants who are at least fifty-
five years old can elect to retire earlier. Such early retirees
receive benefits reduced by 0.3% for each month their retirement
precedes the normal retirement age. Under the Plan's "Rule of
85," early retirement benefits will not be reduced if the sum of
4
the participant's age and years of eligible service at retirement
is at least eighty-five. The Plan defines eligible service as
service with Philips, an affiliate of Philips, or any other
company that has adopted the Plan.
Philips notified the plaintiffs of the impending sale
of Magnavox and of the sale's effects on their retirement
benefits. After the sale, Philips would remain the sponsor of
the Plan and there would be no transfer of Plan assets or
liabilities. While the plaintiffs would cease to be Philips'
employees at the time of the closing, they would retain their
rights under the Plan. Moreover, the Plan would be amended in
two respects. All participants' accrued retirement benefits
would become 100% vested when the sale closed and Magnavox
employees continuing with MESCESI would be entitled to credit for
up to one year of additional service with MESCESI towards the
Philips Plan's Rule of 85 requirements. No credit would be given
for any subsequent service with MESCESI.
After the sale, the plaintiffs continued to work for
MESCESI in the same jobs they held with Magnavox. They did not
satisfy the Rule of 85 requirements when the sale closed, nor
could they do so even with credit for an additional year of
service with MESCESI. Plaintiff Budde's age and eligible service
summed to eighty-five, but he was not yet fifty-five years old,
and would not turn fifty-five by October 1994. Plaintiff Dade
did not have sufficient eligible service.
II.
5
The district court had jurisdiction under 28 U.S.C.
§ 1331 and 29 U.S.C. § 1132. Our jurisdiction over this appeal
rests on 28 U.S.C. § 1291. We exercise plenary review over the
district court's order dismissing plaintiffs' complaint under
Fed. R. Civ. P. 12(b)(6). Moore v. Tartler, 986 F.2d 682, 685
(3d Cir. 1993).
III.
Plaintiffs' complaint asserts that both ERISA and the
terms of the Plan require Philips to give plaintiffs credit for
all of their service with MESCESI for the purpose of satisfying
the Rule of 85. The district court was correct in holding that
neither ERISA nor the terms of the Plan require that Philips give
this credit.
A. The Plan
While plaintiffs insist that Philips breached the Plan,
their supporting argument before us rests squarely on two
provisions of the Plan that incorporate the "applicable law":
Section 4.2.3, which requires the Plan to give credit for service
with a successor employer "to the extent required by law," and
Section 13.4, which authorizes amendments to the Plan in order to
"comply with any other provision of applicable law." Since the
"applicable law" to which plaintiffs point is § 204(g) of ERISA,
it necessarily follows that the sole issue presented in this
appeal is whether § 204(g) requires credit for the plaintiffs'
6
service with MESCESI. It is nevertheless important to view the
statutory issue in the context of the provisions of the Plan.
The unambiguous terms of the Plan do not require Rule
of 85 credit for service with MESCESI. Section 5.7 of the Plan
sets out the terms for early retirement subsidies. A
participant's right to an early retirement subsidy is based on
the participant's age and years of "Eligibility Service."
"Eligibility Service" is defined as the "number of years and
months of employees' Periods of Service." "Period of Service" is
in turn defined as the period running from an employee's
"Employment Commencement Date" (defined in Section 1.2.25 as the
day on which he performs his first hour of paid work for an
Employer or Affiliate) through an applicable "Severance Date."
Finally, "Severance Date" is defined for relevant purposes as the
"earliest of: the date on which an employee quits, retires, is
discharged or dies; or the first anniversary of the first date of
a period in which an employee remains absent from service (with
or without pay) with an Employer or Affiliate for any [other]
reason." Plan § 1.2.53 (A. 57). The Plan defines "Employer" as
Philips or any other entity that has adopted the Plan with the
approval of the Pension Committee, § 1.2.24 (A. 45), and
"Affiliate" as an entity owned by or part of the controlled group
of an Employer. § 1.2.3 (A. 38). MESCESI has not adopted the
Plan and is not an affiliate of Philips.
Section 4.2.3 expressly excludes from the definition of
"Period of Service" time spent working for any entity that is not
yet or is no longer an Employer or Affiliate:
7
In no event shall a Period of Service include
any period of service with a corporation or
other entity (a) prior to the date it became
an Employer (or the date it became an
Affiliate, if earlier) or (b) after it ceases
to be an Employer or Affiliate except to the
extent required by law, or to the extent
determined by the Pension Committee in its
discretion exercised in a manner that does
not discriminate in favor of highly paid
employees.
(A. 73.) Since the parties agree that the Pension Committee did
not exercise its discretion to credit service with MESCESI after
the first year, we turn to the effect of § 204(g) of ERISA.
B. The Requirements of ERISA
ERISA does not mandate the creation of pension plans.
Nor, with exceptions not here relevant, does it dictate the
benefits to be afforded once a decision is made to create one.
Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 283 (3d Cir.
1988); see also H.R. Rep. No. 807, 93d Cong., 2d Sess., reprinted
in 1974 U.S.C.C.A.N. 4670, 4677. "ERISA is not a direction to
employers as to what benefits to grant their employees." Hlinka,
863 F.2d at 283. Philips was thus at liberty to define the early
retirement benefit in any way it chose, including a stipulation
that only service to Philips or an affiliate would be credited
towards the Rule of 85 requirement. Plaintiffs do not contend
otherwise. Accordingly, we are required to enforce the Plan as
written unless we can find a provision of ERISA that contains a
contrary directive. The only candidate identified by the
plaintiffs is § 204(g).
8
Section 204(g) of ERISA prohibits an employer from
decreasing a participant's accrued benefits by plan amendment.
Prior to 1984, no protection was given to early retirement
benefits because they were not considered to be accrued benefits.
Bencivenga v. Western Pa. Teamsters and Employers Pension Fund,
763 F.2d 574, 577 (3d Cir. 1985). In 1984, however, Congress
amended ERISA § 204(g) to provide protection for early retirement
benefits. Retirement Equity Act of 1984 ("REA"), Pub. L. No. 98-
397, § 301(a)(2), 98 Stat. 1450-51. Section 204(g) as amended
provides in relevant part:
(1) The accrued benefit of a participant
under a plan may not be decreased by an
amendment of the plan . . . .
(2) For purposes of paragraph (1), a
plan amendment which has the effect of--
(A) eliminating or
reducing an early retirement
benefit or a retirement-type
subsidy (as defined in regulations)
. . .
with respect to benefits attributable to
service before the amendment shall be treated
as reducing accrued benefits. In the case of
a retirement-type subsidy, the preceding
sentence shall apply only with respect to a
participant who satisfies (either before or
after the amendment) the preamendment
conditions for the subsidy. . . .1
After 1984, a plan sponsor could prospectively eliminate an early
retirement benefit by amendment, but under § 204(g) the amendment
could not adversely affect the early retirement benefit of a plan
1
Rule of 85 benefits are considered early retirement subsidies
because "more is provided . . . than any reasonable actuarial
equivalent of the plan's normal retirement benefit." Stephen R.
Bruce, Pension Claims Rights and Obligations, 285 (1993); see
Ashenbaugh v. Crucible, Inc., 854 F.2d 1516, 1521 n.6, 1528 n.12
(3d Cir. 1988), cert. denied, 490 U.S. 1105 (1989).
9
participant who satisfied the pre-amendment conditions for the
benefit either before or after the amendment. Thus, if Philips
had adopted such an amendment, it would have had to allow those
employees who remained in its employ after the amendment to "grow
into" the benefit by providing post-amendment service to Philips
or an affiliate of Philips.
Section 204(g) is not applicable under the facts of
this case because there has been no amendment of the Plan that
reduced a benefit, accrued or otherwise. The only amendment to
the Plan was one increasing the early retirement benefit by
expanding the universe of participants who could qualify for it.
While plaintiffs insist that Philips' stated position, denying
early retirement benefits to Dade, Budde and the others is
"tantamount to an amendment of the plan," Appellants' brief at
19, that is simply not the case. Philips' stated position was
nothing more than an accurate recounting of the Plan's terms. The
denial resulted from the fact that plaintiffs could not satisfy
the preamendment, pre-sale conditions for the Rule of 85
retirement-type subsidy as originally written.
In arguing that § 204(g) requires Philips to credit
plaintiffs for service with MESCESI, plaintiffs ignore the fact
that the REA does not override the conditions originally imposed
by the Plan which defined the early retirement benefits when they
were created. As this court has explained, "the fact that
[amendments reducing early retirement benefits] will now be
'treated as reducing accrued benefits' does not mean that
Congress intends to foreclose employers from circumscribing the
10
availability of such optional benefits when they are being
created." Ashenbaugh, 854 F.2d at 1527. "Congress's chief
purpose in enacting [ERISA] was to ensure that workers receive
promised pension benefits upon retirement," Hoover, 756 F.2d at
985 (emphasis added). Thus, Congress sought "to protect
contractually defined benefits." Firestone Tire & Rubber Co.,
489 U.S. at 113 (emphasis added). The early retirement benefits
plaintiffs seek were neither promised nor contractually defined.
This case is not controlled by Gillis v. Hoechst
Celanese Corp., 4 F.3d 1137 (3d Cir. 1993), cert. denied, 114 S.
Ct. 1540 (1994), the principal authority relied upon by
plaintiffs. In Gillis, we held that §§ 208 and 204(g) required a
greater transfer of plan assets in a plan spin-off accompanying a
sale of a business than the selling sponsor had agreed to make.
Neither of those sections is applicable here.
The facts of Gillis were similar to those of the
present case in some respects: both cases involved the sale of a
business by the plan sponsor, both plans offered similar Rule of
85 early retirement benefits, the plaintiffs in both cases had
not satisfied the Rule of 85 at the time of the sales, and both
plans only credited service with the plan sponsor. Id. at 1140,
1143. Gillis, however, differs materially from the present case.
In Gillis, the original plan sponsor transferred all of the
plan's liabilities and assets to the purchaser. In the
vernacular of the trade, there was a plan spin-off. Moreover,
the purchaser agreed to provide all of the same early retirement
benefits as the previous plan. There was no dispute about
11
whether the plaintiffs, following the spin-off, would be entitled
to credit for service with the new employer. They would be. Id.
at 1149 (Alito, J., concurring).
The issue in Gillis was whether the original plan
sponsor had transferred sufficient assets to satisfy the
requirements of § 208. Gillis, 4 F.3d at 1143. Section 208
provides:
A pension plan may not merge or
consolidate with, or transfer its assets or
liabilities to, any other plan . . . , unless
each participant in the plan would (if the
plan then terminated) receive a benefit
immediately after the merger, consolidation,
or transfer which is equal to or greater than
the benefit he would have been entitled to
receive immediately before the merger,
consolidation, or transfer (if the plan had
then terminated) . . . .
29 U.S.C. § 1058. Thus, a plan spin-off is permissible only if
the participants would receive no less on a hypothetical
termination of the plan just after the spin-off than they would
have received on a hypothetical termination just before the spin-
off.
Accordingly, application of § 208 to the facts in
Gillis required the court to determine what benefits the
participants would have received in a termination at two points
in time. This necessarily implicated § 204(g) since a
termination of the plan would have had the same effect as an
amendment eliminating all benefits.2 The court held that the
2
Not surprisingly, the legislative history of the 1984
amendments indicates that Congress intended early retirement
benefits to have the same protection in a plan termination that
12
combined effect of §§ 208 and 204(g) in the context of a plan
spin-off like that before it was to require the transfer of an
amount of assets that would include sufficient funding for the
early retirement benefits for those who would qualify after the
transfer by service to the new employer.
Section 208 is not relevant here because this case does
not involve a plan spin-off. Section 204(g) is not applicable
here because this case does not involve anything that can fairly
be considered a plan amendment eliminating or reducing an early
retirement benefit. With the exception of the amendment
enhancing the early retirement benefit, the Philips Plan was
precisely the same before and after the sale. The holding in
Gillis is, accordingly, inapposite here.
While we acknowledge that portions of the opinion of
the court in Gillis can plausibly be read as inconsistent with
the conclusion that we here reach, we do not so read them. In
any case, we are required to harmonize the holding of Gillis with
the holdings of our prior opinions that a sponsoring employer,
with exceptions not here relevant, is free to define the benefits
they would have in an amendment. See, e.g., S. Rep. 575, 98th
Cong. 2d Sess., reprinted in 1984 U.S.C.C.A.N. 2547, 2575
("Terminated Plans: The bill does not provide an exception to
the prohibition against reduction of benefits or elimination of
benefit options in the case of a terminated plan. Accordingly, a
plan is not to be considered to have satisfied all of its
liabilities to participants and beneficiaries until it has
provided for the payment of contingent liabilities with respect
to a participant who, after the date of the termination of a
plan, meets the requirements for a subsidized benefit."). As
Judge Alito noted in his concurring opinion in Gillis, the
Internal Revenue Service has taken the position that the
protection of § 204(g) applies in a plan termination.
13
in its ERISA plan and that those definitions must be enforced as
written in the absence of a contrary statutory mandate. As we
have explained, the result in Gillis is attributable to the
requirements of §§ 208 and 204(g). Neither those sections nor
any other provision of ERISA authorizes us to depart from the
terms of Philips' Plan in the circumstances of this case.
The result that we here reach is consistent with that
reached in Hunger v. AB, et al., 12 F.3d 118 (8th Cir. 1993), on
virtually identical facts.
IV.
The judgment of the district court will be affirmed.
14