White, William v. Sundstrand Corp

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 00-2613, 00-4075 & 01-1126
William R. White, et al., on behalf
of themselves and a class of others
similarly situated,
Plaintiffs-Appellants,
v.
Sundstrand Corporation, et al.,
Defendants-Appellees.
Appeals from the United States District Court
for the Northern District of Illinois, Western Division.
No. 98 C 50070--Philip G. Reinhard, Judge.
Argued May 18, 2001--Decided July 3, 2001
Before Easterbrook, Manion, and Evans,
Circuit Judges.
Easterbrook, Circuit Judge. Until it
became a subsidiary of Sundstrand in
1984, Sullair Corporation had a floor-
offset pension plan. Distinctive features
of that plan still apply to persons who
worked at Sullair before the acquisition.
A floor-offset plan uses a defined-
benefit structure (with pension payments
linked to years of work and high salary)
to buffer the uncertainty of a defined-
contribution system (where pension
payments depend on the performance of
investments in each employee’s account).
See Brengettsy v. LTV Steel (Republic)
Hourly Pension Plan, 241 F.3d 609 (7th
Cir. 2001); Regina T. Jefferson,
Rethinking the Risk of Defined
Contribution Plans, 4 Fla. Tax Rev. 607,
668-71 (2000). Sullair’s pre-acquisition
defined-contribution plan was an Employee
Stock Ownership Plan. Employees were
entitled to buy Sullair stock, which the
esop would hold for their account. An esop
is a high-risk investment: employees’
retirement wealth is undiversified, so if
something happens to the firm a retiree
can end up with little beyond Social
Security benefits, while if the firm
prospers he may live in the lap of
luxury. A defined-benefit component
ensures that retirees have some
supplement to Social Security even if the
employer (or the stock market) goes
south. The principal question in this
class action is how the plans interact
when an employee quits Sullair after
pension benefits have vested, but before
retirement age.
Sullair’s floor-offset plan gives
retirees the greater of the defined-
benefit amount and the value of an
annuity that could be purchased with the
stock held for the retiree’s benefit by
the esop. If the annuity that could be
purchased with the esop stock is less than
the defined-benefit amount, then the
defined-benefit plan pays the difference,
topping up the employee’s pension. Two
aspects of this arrangement give rise to
the question at hand. First, the employee
does not surrender the esop units in order
to receive a supplemental payment from
the defined-benefit plan; the employee is
free to cash out the esop and buy an
annuity but also is free to keep the
stock and continue to bear the risk. Sec
ond, and essential in light of the first,
the coordination between plans is done
with a hypothetical annuity, which
presents the question how the monthly
annuity benefit will be calculated.
An example shows how the floor-offset
arrangement works. Suppose that a given
employee who retires at age 65 would be
entitled to a $2,000 monthly pension from
the defined-benefit plan. This serves as
the floor. If this employee has a
$100,000 balance in the esop, the plan
administrator determines how large an
annuity the $100,000 could purchase. That
would be about $900 per month (assuming
7% annual interest and a 15-year life
expectancy). Sundstrand then would offset
the $900 hypothetical annuity and pay the
retiree $1,100 per month; the esop balance
is the retiree’s to annuitize, hold, or
invest as he pleases. If, however, the
employee has a $300,000 esop balance on
retirement, an amount that could purchase
an annuity of about $2,700 monthly, then
the payment from the defined-benefit plan
would be zero. Again the retiree retains
the ability to draw down or invest the
esop balance. Everything works smoothly
when the employee starts receiving
pension benefits immediately on leaving
Sullair.
What happens when there is a gap between
leaving Sullair and retiring? The plan’s
administrative committee calculates the
monthly defined-benefit amount based on
the employee’s length of service and
terminal salary. That much is
uncontroversial. What about the defined-
contribution offset? The plan takes the
value of the employee’s esop account on
the day he left Sullair’s employ and
places that amount in a hypothetical
savings account, at the same interest
rate used in the annuity calculations,
until the day the employee becomes
eligible for retirement; at that point
the balance is annuitized, and the
resulting monthly benefit subtracted from
the defined-benefit amount. So if an
employee quits at age 45, with $100,000
in the esop account, and plans to retire
at age 65, the plan assumes that this
balance will compound for 20 years at the
going rate (7% in our example), producing
a kitty of almost $390,000 by retirement.
This sum, when annuitized, is about
$3,500 per month, so the monthly defined-
benefit is zero (but, as always, the
employee can do what he pleases with the
esop balance from age 45 onward). This
process is equivalent to asking what
monthly annuity an employee could buy
with $100,000 today, when payments on the
annuity would be deferred for 20 years.
The parties call this approach the
"deferred rate" calculation. The other
approach, which the plaintiffs favor and
call the "immediate rate" calculation,
asks how large an annuity a 45-year-old
could buy with $100,000 for immediate
commencement. That would be about $640
monthly--less than the $900 calculated in
our first example because payments would
be expected to last 35 years instead of
15. Under the immediate-rate calculation,
then, the retiree’s benefit from the
pension plan would be $1,360 monthly,
starting at age 65. Meanwhile the esop
balance is likely to grow to $390,000 by
age 65, so this person’s total monthly
benefit will be about $4,900 (the $1,360
from the plan, plus the $3,500 monthly
that could be obtained by using the esop
balance at age 65 to purchase an
annuity). The difference between deferred
and immediate calculation can be
substantial (though there will be no
difference if even the immediate-rate
calculation exceeds the monthly pension
generated by the defined-benefit
component). The functional question is:
Who gets the benefit of interest between
quitting and retirement age, the employee
or the plan?
Any pension plan giving retirees the
greater of two amounts, as opposed to the
sum of these amounts, can be described as
confiscating the difference. That’s the
nature of a floor-offset plan: the
retiree always "loses" the defined-
contribution balance (principal and
interest) up to the floor in the defined-
benefit plan. What the employee loses,
the plan receives. Using the esop to fund
part of the defined-benefit promise makes
any given level of promised benefits
cheaper to the employer and so may
increase the fallback pension. But under
erisa that is neither here nor there. The
Employee Retirement Income Security Act
does not require employers to establish
plans that are particularly favorable to
employees. There is no fiduciary duty to
employees when establishing plans’
provisions. See Hughes Aircraft Co. v.
Jacobson, 525 U.S. 432 (1999); Lockheed
Corp. v. Spink, 517 U.S. 882 (1996). The
employer’s fiduciary duty, as plan
administrator, is to implement faithfully
the provisions of the plan as written.
Thus we arrive at the critical language
of the Sullair plan (we quote the 1981
version, which has not been altered
substantively):
The amount of monthly pension which
could be provided on a straight life
annuity basis by application of an
amount equal to the fair market
value as of such specified date of
the Participant’s vested interest in
the balance credited to his account
under the Sullair Corporation
Employee Stock Ownership Plan, and,
for this purpose, such amount of
monthly pension shall be determined
on the basis of the annuity purchase
rates in effect as of such specified
date under and as set forth in the
Group Contract.
So the hypothetical calculation uses the
"annuity purchase rates"--whatever they
are. In 1981 and for many subsequent
years they were set by Bankers Life (now
Principal Mutual Life Insurance Co.),
which underwrote the plan with a group
annuity contract. The first time the
issue came up, Bankers Life used an
immediate-rate approach, but it reversed
itself before any benefits were paid and
told the Plan Benefit Committee in May
1985 that a deferred-rate approach should
be used. The Committee agreed, and a
deferred-rate approach has been in force
ever since.
Plaintiffs observe that immediate-rate
calculations are used for persons still
on Sullair’s payroll at retirement, and
they demand the same for themselves.
Moreover, when the plan uses a deferred-
rate calculation for persons who leave
Sullair before retirement age, the floor-
offset system loses some or all of its
risk-buffering function. The deferred-
rate calculation assumes that the balance
in the esop will grow at some steady rate
to retirement age. If it grows less (or
even shrinks), the employee bears the
whole loss, without any assistance from
the defined-benefit component, although
an employee who works at Sullair through
retirement receives the assurance that if
the esop’s value collapses at the last
moment, the defined-benefit floor still
is there. (A person who leaves Sullair
before retirement does have the option,
however, of rolling the esop balance over
into a more diversified fund, thus
protecting against firm-specific risks.)
If immediate-rate calculations are used,
however, then employees who leave Sullair
before retirement age obtain a big
advantage over those who stay--for the
floor-offset plan assuredly deprives
lifetime employees of some or all value
of growth in the esop account. Think again
about our hypothetical employee, who
accumulates a value of $100,000 in the
esop by age 45. If the employee quits and
retires 20 years later, an immediate-rate
calculation provides that person with the
full value of the esop plus $1,360 per
month at age 65. Now suppose that the
person decides to stay at Sullair through
retirement and does not make further
investments in the esop. If the value of
the esop account grows at the assumed 7%
rate, it will be worth $390,000 at age
65, and the monthly kicker from the
defined-benefit component of the plan
will be zero. Exactly the same investment
strategy--accumulate $100,000 by age 45,
invest nothing for the next 20 years--has
substantially different effects, under
plaintiffs’ preferred approach, depending
on whether the person leaves Sullair or
stays to retirement. What sense does that
make? Perhaps more to the point, unless
it is trying to encourage early
retirement (which it isn’t) why would
Sullair want a pension plan that rewards
employees for quitting? Cf. McNab v.
General Motors Corp., 162 F.3d 959 (7th
Cir. 1998). Employers can structure their
plans to make it worthwhile for employees
to leave, but firms usually want to
encourage employees who have developed
valuable skills and knowledge to remain--
and, not incidentally, encourage them to
develop such firm-specific skills in the
first place. Back-loading of compensation
(through salary that generally increases
with age as well as through defined-
benefit pension plans) is a principal way
to do this. See Edward P. Lazear & Robert
Moore, Pensions and Turnover, in Pensions
in the U.S. Economy 163-87 (Zvi Brodie,
et al., eds. 1988); Edward P. Lazear &
Sherwin Rosen, Pension Inequality, in
Issues in Pension Economics 341 (Zvi
Brodie, et al., eds. 1987). Plaintiffs’
approach, by contrast, would produce a
plan that treated workers staying through
retirement age as suckers.
The need to use a different calculation
strategy (immediate-rate for those who
retire immediately, deferred-rate for
those who retire later) in order to
achieve an economically identical outcome
offers very strong support for the plan’s
decision. Any remaining doubt is resolved
by the fact that the plan contains a
strong grant of discretion--in both
interpretation and application. Section
8.01 of the 1981 plan provides:
The Plan Administrator will have
complete control of the
administration of the Plan, subject
to the provisions hereof, with all
powers necessary to enable it
properly to carry out its duties in
that respect. Not in limitation, but
in amplification of the foregoing,
it will have the power to construe
the Plan and to determine all
questions that may arise hereunder,
including all questions relating to
the eligibility of Employees to
participate in the Plan and the
amount of benefit to which any
Participant, Beneficiary, spouse or
Contingent Annuitant may become
entitled hereunder. Its decisions
upon all matters within the scope of
its authority will be final.
This meets the requirements of
Herzberger v. Standard Insurance Co., 205
F.3d 327, 331 (7th Cir. 2000), for
discretion in the plan’s interpretation.
It was on the basis of the
administrator’s discretion that the
district judge granted summary judgment
on defendants’ favor. 2000 U.S. Dist.
Lexis 7273 (N.D. Ill. May 23, 2000). We
agree with the district court’s
conclusion that the Committee’s decision
was not arbitrary or capricious (the
right standard when the administrator has
interpretive discretion)--and we would
have reached the same construction as an
independent matter if review were
plenary.
Plaintiffs protest that deference is due
to one of their number, rather than to
the plan’s administrator. According to
plaintiffs, William R. White, the lead
plaintiff, drafted the plan. Surely he is
best suited to interpret it, plaintiffs
insist. Not so. Self-interest would be
disqualifying (White can’t demand a right
to calculate his own benefits), but we do
not get that far. Section 8.01 gives
interpretive discretion to the Plan
Administrator, not to William R. White.
The power goes with the office. A
Secretary of Labor who drafts and
promulgates a rule will have leeway to
interpret its language only as long as
she remains in office; when a new
Secretary is confirmed, interpretive
discretion comes with the job. The ex-
Secretary may write op-ed pieces trying
to influence the rule’s application, but
the elbow room that goes with delegated
authority belongs to the incumbent, not
to the author. Senator Wagner may have
written the National Labor Relations Act,
but the current members of the National
Labor Relations Board (and sitting
federal judges) hold the power of
interpretation. For the same reason, it
matters not whether the interpretation
changed in 1985, after Sundstrand
acquired Sullair. Whoever sits on the
Plan Committee today may change matters
yet again; the discretion created by
sec.8.01 was not abolished in 1984 but
passed to new holders.
Plaintiffs raised several arguments in
addition to the immediate-rate claim, but
several of these washed out before the
suit began when the plan’s administrative
committee took a fresh look at its
calculations, agreed with the plaintiffs’
position, and raised their retirement
benefits (and those of other Sullair
employees) accordingly. Other claims
survived and became the subject of this
suit, though it is hard to see why. For
example, plaintiffs contend that the
value of phantom stock benefits (bonuses
calculated by changes in the value of
Sullair’s stock) count as compensation
for the purpose of calculating the
defined-benefit component. Defendants
responded that this may or may not be so,
but that because none of the plaintiffs
received phantom-stock compensation there
was no reason to adjust their pensions.
Plaintiffs ignore that problem on appeal.
Plaintiffs did receive some profit-
sharing payments and contend that these
should be included in the base used to
calculate the defined-benefit amount, but
the plan documents explicitly exclude
this possibility, as the district court
correctly held. And the court was
entirely right to deny plaintiffs’ post-
judgment motion, under Fed. R. Civ. P.
60(b)(3), accusing the defendants of
fraud during discovery. Of this there is
no evidence--and as this opinion
demonstrates the outcome of the case
depends on the plan’s terms and the
administrator’s discretion, not on who
said (or wrote) what to whom many years
ago.
After entering its judgment on the
merits, the district court ordered
plaintiffs to pay about $18,000 in costs
under Fed. R. Civ. P. 54(d)(1). 2000 U.S.
Dist. Lexis 15335 (N.D. Ill. Oct. 19,
2000). The district court made the eight
representatives jointly and severally
liable for this amount. Plaintiffs do not
contest the amount (a substantial
reduction from the bill of costs
defendants submitted) but say that
liability should be individual rather
than joint--and that the right
denominator is the number of members in
the class, rather than the number of
representative plaintiffs. This class has
a few more than 160 members, which
implies a costs award of approximately
$110 against each of the representatives.
Any award against the absent class
members would not be collectable--not
only because the defendants have said
that they would not try to do so, but
also because execution would not be
lawful. Class members were not given
notice and an opportunity to opt out of
the case, and it is impossible to see how
conscripts who did not even know of the
case’s existence, let alone have an
opportunity to distance themselves from
it, could be required to pony up. Neither
the federal rules nor the due process
clause of the fifth amendment would
tolerate such a judicial order. So the
upshot of plaintiffs’ rule would be that
the defendants must bear most of their
own costs: the larger the class, the
greater the proportion of costs that
prevailing defendants must bear.
Yet Rule 54 says that the prevailing
party recovers costs, and nothing in Rule
23 suggests that cost-shifting is
inapplicable to class actions. What
justification could there be for leaving
prevailing defendants out of pocket? Our
eight representative plaintiffs observe
that they do not want to bear the high
expenses of litigation, and that
protestation is easy to believe--but
Sundstrand does not want to bear it
either, and there is no justification for
shifting the costs to the pension plan
and forcing fellow retirees to bear the
costs of the eight plaintiffs’ mistaken
litigation choices. Eight persons caused
this litigation to be brought, caused the
costs to be incurred, and should make the
prevailing party whole. Now it’s true, as
the plaintiffs stress--and as we
recognized in Rand v. Monsanto Co., 926
F.2d 596 (7th Cir. 1991)--that class
actions are designed to aggregate claims
of many persons with small stakes, and
that a representative who has himself
only (say) $1,000 to gain from success
will be unwilling to carry the load for
the rest of the class. Even if the odds
of winning are favorable, few people
would start a case where their maximum
gain is $1,000 yet they could be hit with
a bill for $20,000 or $50,000 in costs if
the defendants prevail. Demanding that
representative plaintiffs personally
cover all costs could be the demise of
consumer class actions. The stakes in
this case are considerably larger than
$1,000 per person (indeed, each represen
tative plaintiff had a stake exceeding
the whole bill of costs), but the
principle is general: The absent class
members are free riders on the
representative plaintiffs’ legwork, and
making the representatives’ position
financially risky would discourage class
actions across the board.
It does not follow from this, however,
that the prevailing defendant must bear
the costs. Entrepreneurial attorneys
already supply risk-bearing services in
class actions. They invest legal time on
contingent fee, taking the risk of
failure in exchange for a premium award
if the class prevails. A suit such as
this, designed to generate a substantial
financial return, induces lawyers to
compete for the opportunity to represent
the class. What we held in Rand is that,
without violating ethical standards,
attorneys may agree to bear the risk of a
costs award, as well as the risk that
their time will go uncompensated. By
moving the risk of loss from the
representative plaintiffs to the lawyers
(who spread that risk across many cases
and thus furnish a form of insurance)
counsel can eliminate the financial
disincentive that costs awards otherwise
would create. In this case, however, the
representative plaintiffs filed suit
without securing from their lawyers any
undertaking to pick up the tab; the
lawyers have not volunteered to do so now
that the plaintiffs have lost. The eight
pensioners may view this as churlish--and
other would-be plaintiffs may take this
into account when deciding whether to
sign on with these lawyers--but a
decision by the representatives and their
lawyers not to strike the bargain
approved in Rand is a poor reason to drop
the costs back in defendants’ laps. If
this tactic succeeded, no sane class-
action lawyer would again make the
promise that the plaintiffs’ lawyers made
in Rand.
Plaintiffs have not cited, and we have
not found, any case holding that
responsibility for costs must be parceled
out so that no member of a class pays
more than a pro rata share. A few cases
hold that costs awards should be several,
rather than joint, when different groups
of plaintiffs raise distinct issues that
give rise to segregable costs of
litigation. See, e.g., In re Paoli
Railroad Yard PCB Litigation, 221 F.3d
449, 468-71 (3d Cir. 2000); Davis v.
Parkman, 71 F. 961, 964 (1st Cir. 1895).
Plaintiffs do not contend, however, that
a subset of their number was responsible
for a discrete portion of defendants’
costs in this case. There is no basis for
an award on other than the normal joint
and several terms of liability.
Affirmed