The 2nd U.S. Circuit Court of Appeals agreed to take up the case on appeal from plaintiff Geoffrey Osberg who claimed his employer, Foot Locker, issued false and misleading summary plan descriptions (SPDs) in violation of the Employee Retirement Income Security Act’s (ERISA) disclosure requirements, especially ERISA section 102(a) and 29 U.S.C. 1104(a), when it converted from a traditional defined benefit plan to a cash balance plan. Osberg also appealed the summary dismissal of his claim that Foot Locker failed to provide plan participants with notice, as required by ERISA section 204(h) and 29 U.S.C. 1054(h), that the cash balance arrangement could potentially reduce future benefit accruals.

As to his disclosure claims, Osberg contended on appeal that a district court erred in holding his 102(a) claim time-barred, and in finding that he failed to raise a genuine issue of material fact entitling him to surcharge and contract reformation on either 102(a) or 404(a) claims. The 2nd Circuit agreed with Osberg that the district court erroneously applied an “actual harm” requirement. Foot Locker argued that, as a former employee, Osberg lacks standing to pursue contract reformation and cannot show fraud or mutual mistake entitling him to reformation.

The appellate court noted that in CIGNA Corp. v. Amara (see “Court Makes Repeat Decision in Amara v. Cigna”), the Supreme Court held that, with respect to the equitable remedies under § 502(a)(3), “any requirement of harm must come from the law of equity.”  To obtain contract reformation, equity does not demand a showing of actual harm.

“We disagree. Foot Locker construes Amara to hold that monetary relief is only available in ERISA cases via surcharge; therefore, absent a viable surcharge claim, the only beneficiaries with standing to pursue reformation are those that can prospectively benefit from a modification of plan terms, which does not include former employees. This interpretation is supported by neither Amara,… nor equity,” the court says in its opinion, remanding the case back to the district court for further review.

The court also concluded that because reformation of the plan would afford Osberg the total relief sought, there is no need for it to decide whether he would also be entitled to recovery under surcharge.

On this point the Circuit court disagreed with Foot Locker and the lower court, and proceeded to remand the determination of whether Osberg can satisfy the true requirements for obtaining contract reformation back to the district court for further consideration in light of the fact that he need not prove actual harm to obtain relief through reformation or surcharge.

The U.S. District Court for the Southern District of New York had issued a summary judgment of all charges in favor of Foot Locker Inc. and the Foot Locker Retirement Plan.

The case alleged that Foot Locker management proffered misleading explanations of the plan’s conversion from a traditional pension formula to a cash balance formula, which more closely resembles a defined contribution (DC) arrangement by defining a future benefit in terms of a stated account balance, rather than a particular level of lifetime benefit. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5% of compensation from the employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants, so like in DB plans, the investment risks are borne by the employer.

Additionally, plan participants claimed that Foot Locker was required to inform employees about the possible period of “wear-away” after the traditional DB plan was converted to a cash balance plan (see “ERIC Supports Dismissal of SPD-Related Case”). The participants also claimed that the plan sponsor’s alleged failure to do so was a breach of the fiduciary duty rules for SPDs and that the plan should be reformed or the sponsor surcharged for a monetary reward, effectively granting damages to participants over lost benefits.

On Osberg’s claim that Foot Locker violated ERISA section 204(h) by summarizing only part of the new formula for calculating benefits—and therefore that it did not properly inform participants that it effectively reduced the rate of future benefit accruals—the 2nd Circuit agreed with the defendant that the version of ERISA in effect at the time of the challenged notice did not require such disclosures, and that any deficiency was remedied by subsequent SPDs.

The 2nd Circuit also found Osberg’s reliance on 204(h) is inappropriate for the remedy he seeks, because insufficient notice in violation of 204(h) does not, as he contends, invalidate only the undisclosed portion of the plan amendment, but rather voids the entire amendment. Because Osberg does not seek to void the entire amendment, the 2nd Circuit affirmed the district court’s dismissal of his 204(h) claim.

A full copy of the 2nd Circuit decision is available here.