Appeals Court Upholds ERISA Decision Against ‘Peeps’ Candy Company

On appeal, the candy company contended that the district court misapplied the federal statute governing multiemployer pension funds in critical status and, second, that the court erred in holding that it had failed to plead adequately its affirmative defenses.

The United States Court of Appeals for the 4th Circuit has ruled against Just Born II, Inc., a food manufacturer known for producing Peeps marshmallow candy, in a complex case involving the company’s participation in a financially stressed union pension.

The decision comes on an appeal out of the United States District Court for the District of Maryland. Just Born II had appealed the district court’s judgment requiring it to pay delinquent contributions into the Bakery and Confectionary Union and Industry International Pension Fund, a multiemployer pension fund, as well as interest, statutory damages, and attorneys’ fees.

On appeal, the candy company contended that the district court misapplied the federal statute governing multiemployer pension funds in critical status and, second, that the court erred in holding that it had failed to plead adequately its affirmative defenses. For reasons laid out in a 20-page decision, the circuit court fully confirms the district court’s judgement.

Background information provided in the text of the appellate decision shows Just Born and the Bakery, Confectionary and Tobacco Workers International Union, Local Union 6, were both parties to a collective bargaining agreement governing employment at Just Born’s Philadelphia, Pennsylvania, confectionary plant from March 1, 2012, to February 28, 2015. The collective bargaining agreement, the decision states, required Just Born to contribute to the pension fund, which is an employee benefit plan and multiemployer pension fund governed by the Employee Retirement Income Security Act of 1974 (ERISA). According to the decision, these contributions were to be “paid from the first day the employee begins working in a job classification covered by” the collective bargaining agreement.

While the collective bargaining agreement (CBA) was still in effect, the pension fund’s actuaries certified it to be in critical status, a designation based on statutory guidelines indicating the potential that the pension fund’s assets and expected contributions would be insufficient to meet its projected future obligations. A critical-status designation triggers statutory safeguards, including the requirement that the plan sponsor “adopt and implement a rehabilitation plan” designed to return the plan to financial stability and bring it out of critical status.

As the plan sponsor, the Pension Fund’s Board of Trustees developed a rehabilitation plan as required for multiemployer plans that are in critical status. In late 2012, Just Born and the Union selected “a revised contribution schedule that, like the CBA, required Just Born to contribute for every hour or portion of an hour, beginning on the first day of employment, that a person works in a job classification that is covered by the CBA.” In addition, the revised schedule required Just Born to increase its contributions to the Pension Fund by 5% each year. The appellate decision points out that, as a practical matter, “because the CBA required Just Born to participate in the pension fund, the fund’s critical-status designation altered the nature of Just Born’s obligations not only under its agreement with the pension fund, but also under its CBA with the union.”

According to the text of the decision, Just Born contributed to the pension fund under the revised schedule “without incident” until negotiations for a new CBA with the union fell through.

“As part of the negotiations for a new agreement, Just Born demanded the new CBA not require it to contribute to the pension fund for newly hired employees. Citing concerns about the pension fund’s solvency and management, Just Born proposed to contribute to a separate 401(k) plan for such new employees, but to continue contributing to the pension fund—which was still operating under the rehabilitation plan schedules—for existing employees,” the decision explains. “The union would not agree to those terms, and, as a result, Just Born declared a good-faith impasse. Relying on the principle from federal labor law that permits an employer to act upon a good-faith impasse, Just Born unilaterally implemented the terms of its last, best offer to the union.”

Thus, while it continued to contribute to the pension fund under the rehabilitation plan for existing employees, Just Born contributed nothing to the fund for newly hired employees. Instead, Just Born contributed to a separate 401(k) plan for any employee who began working after November 2, 2015.

This impasse lead to the initial challenge and decision in the Maryland district court. In its amended answer to the underlying complaint, Just Born denied the applicability of the contribution provisions and raised several affirmative defenses. Relevant to the appeal, Just Born contended that, once the CBA expired and the impasse occurred, it was not a “bargaining party” as defined by 29 U.S.C. § 1085(j)(1) and, thus, that the provisions cited did not apply to it. Further, Just Born asserted a series of affirmative defenses including “fraudulent and fraudulently induced material misrepresentation; fraudulent and intentional material misrepresentation; unjust enrichment; unclean hands; and an unspecified defense of legally defective and unlawfully imposed critical-status determination, rehabilitation plan, and revised schedule.”

According to the appellate decision, these defenses all “centered on the theory that the pension fund defrauded and deceived Just Born into accepting the critical-status designation and its consequences.”

With these arguments on the table, the pension fund moved for judgment on the pleadings on the issue of liability, and Just Born filed a cross-motion for judgment on the pleadings as to the entire case. The district court ultimately held in favor of the pension fund, concluding that Just Born was liable for contributions to the pension fund for its newly hired employees. Relying on a plain reading of the provisions in question, the district court concluded it requires bargaining parties to an expired collective bargaining agreement to continue making payments consistent with the previously adopted rehabilitation plan and schedule. The court rejected Just Born’s contention that the term “bargaining party” did not apply to it because the company was no longer a party to an operative collective bargaining agreement. Turning to the affirmative defenses, the district court held that Just Born had failed to plead any of them with the particularity required for fraud-based allegations under Federal Rule of Civil Procedure 9(b).

Even on a de novo review, the candy company has not met any more success pleading its case in front of the appellate court. While the appellate court sides strongly with the district court’s plain language conclusions, it does make an important caveat regarding Just Born’s actions: “Our interpretation of the provisions in no way limits the application of other ERISA provisions governing when and how an employer may withdraw partially or completely from an ERISA-qualified plan. See Borden, Inc. v. Bakery & Confectionary Union & Indus. Int’l Pension. Instead, our decision centers on what is required of employers who have not sought to withdraw, and who instead remain participants in the plan by virtue of an expired collective bargaining agreement. Here, Just Born has never sought to withdraw from the pension fund and our interpretation of the Provision does not limit its ability to do so. … Just Born is attempting a de facto partial withdrawal from the pension fund by not covering new employees, which could lead to a complete withdrawal eventually over time through the attrition of its older employees. In so doing, Just Born is seeking to circumvent both the critical status contributions for an expired collective bargaining agreement under the provisions and the withdrawal penalty under § 1381.”

On the affirmative defenses matter, the appellate court again sides strongly with the decision of the district court: “We agree with the district court’s reasoning that the Rule 9(b) standard applies to Just Born’s affirmative defenses and that Just Born’s allegations did not satisfy this standard. … Just Born’s amended answer failed to plead its allegations of fraud to support its defenses with sufficient particularity. … In addition, Just Born’s allegations do not explain why the complained-of changes were false or misleading. Put another way, Just Born failed to allege particularized facts demonstrating the requisite misrepresentations and deception to support its defenses. The mere fact of a change in actuarial assumptions or the motive for moving the pension fund into critical status does not suffice; instead, Just Born had to allege specific facts demonstrating that the alleged conduct causing the change was unreasonable.”

The full text of the opinion is available here.