The 5th U.S. Circuit Court of Appeals partly overturned the dismissal of claims against a Berkshire Hathaway subsidiary’s retirement plan, sending most of the ERISA-based complaint back to district court for reconsideration.
The move by the appellate court actually comes in three parts. The ruling first affirms the district court’s dismissal of certain claims against the Berkshire subsidiary Acme, which originally independently owned and operated the relevant pension plan prior to the Berkshire acquisition; second, it affirms the district court’s dismissal of the derivative breach of fiduciary duties claim against Berkshire; and finally, it reverses the district court’s dismissal of all other claims against Berkshire, sending the bulk of the case back to the district court for new consideration.
Case documents paint a complicated picture of the suit. Pulling out some key details, the initial complaint was filed by two present employees and one former employee in the U.S. District Court for the Northern District of Texas, challenging Berkshire’s top-down decision to freeze accruals to Acme’s defined benefit (DB) plan and reduce the company matching contribution rate in its 401(k) plan.
According to the plaintiffs, Berkshire had acquired Acme in approximately 2001, and subsequently in 2006 Berkshire executives allegedly contacted Acme about the possibility of imposing a hard freeze on the pension plan that would eliminate future accruals of benefits for plan participants and would preclude participation in the plan by new employees. After receiving advice from outside ERISA counsel, Acme advised Berkshire that a hard freeze would violate certain sections of the merger agreement and ERISA. Berkshire dropped the issue until the summer of 2012, plaintiffs claim, “when it informed Acme that it wanted to move forward with reducing retirement benefits.”
The plaintiffs contend that the acquisition agreement by which Berkshire Hathaway acquired Acme approximately 14 years ago requires the plan sponsor to permit participants to accrue additional defined benefits indefinitely, at the same rate that benefits were being accrued at the time of the acquisition, and to make additional 401(k) matches available indefinitely, at the same rate as the matches at the time of the acquisition. Participants filed the initial suit to attempt to protect these benefits.
NEXT: What the appellate court said
After its own consideration of the complicated facts at hand, the appellate court has allowed to stand the lower court’s ruling that Acme should not be held liable in the case, based on its limited cooperation/control with regard to Berkshires’ alleged ERISA violations.
Further, “Section 5.7 of the merger agreement expressly allows Acme to amend, modify or terminate any individual company plans in accordance with the terms of such plans and applicable law,” the appellate court finds. “[The plan provisions being disputed] do nothing to restrict Acme from amending, modifying, or terminating any of the plans. The provisos instead restrict Berkshire from causing Acme to reduce benefit accruals or employer contributions. Thus, plaintiffs’ prayers to enjoin Acme from amending the Pension Plan to reduce or eliminate future benefits and accruals and to enjoin Acme from failing to make such 50% contributions to the 401(k) Plan in the future are wholly inconsistent with a fair reading of Section 5.7 of the merger agreement.”
This ruling is based on a 2004 case, Habets v. Waste Mgmt., Inc., which according to the appellate court previously determined that in this context, “where the contract language is clear and unambiguous, the parties’ intent is ascertained by giving the language its ordinary and usual meaning.”
“Accordingly, plaintiffs have failed to plead a plausible claim to relief that Acme acted inconsistent with the plans when it adopted the amendment to the Pension Plan in August 2014 and did not retroactively increase its 401(k) matching contribution,” the appellate court explains. “Additionally, we agree with the district court that plaintiffs have failed to state plausible claims for breaches of fiduciary duties against Acme. Acme acted akin to a settlor of a trust, rather than in a fiduciary capacity, when it implemented the amendment in August 2014.”
NEXT: Additional findings from the appellate court
According to the appellate court, the district court “read plaintiffs’ complaint to seek unalterable, lifetime benefits.” It therefore rejected plaintiffs’ claims by relying on principles of contract law.
“Citing M & G Polymers USA, LLC v. Tackett, it noted that the parties’ agreement must unambiguously reflect their intent to vest lifetime benefits. Because section 5.7 of the merger agreement is silent regarding the duration of maintaining Pension Plan benefit accruals and the employer matching contributions, the district court held that the provision could not be read to vest benefits for life,” the appellate court explains. “Rather, the district court read the provisions to be operative for a reasonable time. And because plaintiffs’ complaint did not allege that fourteen years was an unreasonable amount of time, the district court dismissed plaintiffs’ claims.”
But, according to the new appellate court ruling, the district court erred in its construction of plaintiffs’ claims against Berkshire. “Plaintiffs’ complaint did not seek only lifetime, unalterable benefits. Alternatively, it sought to enforce a contractual commitment rather than a vested benefit under ERISA,” the ruling finds. “This is evident by plaintiffs seeking an order enjoining Berkshire Hathaway from causing Acme to reduce any benefits or benefit accruals to employees pursuant to the Pension Plan and an order enjoining Berkshire Hathaway from causing Acme to reduce any employer contribution to the 401(k) Plan.”
The appellate court concludes that “ERISA regulates pension benefits through statutory accrual and vesting requirements … An employer can impose extra-ERISA contractual obligations upon itself, and when it does so, these extra-ERISA obligations are rendered enforceable by contract law … Extra-ERISA commitments must be found in the plan documents and must be stated in clear and express language.”
As such, employers “generally are free under ERISA to modify or terminate plans, but if the plan sponsor cedes its right to do so, it will be bound by that contract … This court has recognized that a reservation-of-rights clause in a plan document, which allows a company to amend or terminate a plan at any time, cannot vitiate contractually vested or bargained-for rights. To conclude otherwise would allow the company to take away bargained-for rights unilaterally.”
The appellate court decision is here.