Beach, Randall A. v. Commonwealth Edison ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-3907
RANDALL A. BEACH,
Plaintiff-Appellee,
v.
COMMONWEALTH EDISON COMPANY,
Defendant-Appellant.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 00 C 3357—Joan Humphrey Lefkow, Judge.
____________
Petition for Rehearing and
Rehearing En Banc
____________
DECIDED—NOVEMBER 17, 2004
____________
Before POSNER, EASTERBROOK, RIPPLE, MANION, KANNE,
ROVNER, WOOD, EVANS, WILLIAMS, and SYKES, Circuit
Judges.
Plaintiff-appellee filed a petition for rehearing and
rehearing en banc on September 7, 2004. A majority of the
judges on the panel voted to deny rehearing. A judge called
for a vote on the petition for rehearing en banc, but a
majority of the active judges did not favor rehearing en
2 No. 03-3907
banc.ΠAccordingly, the petition is denied.
RIPPLE, Circuit Judge, with whom EVANS, Circuit Judge,
joins, dissenting from the denial of rehearing en banc. This
decision merits the attention of the full court in an en banc
proceeding. Under the panel’s holding an employer-adminis-
trator speaks as an ERISA fiduciary only when it speaks
about new benefits created by an amendment to an estab-
lished benefit plan under which the employer and employee
have a preexisting fiduciary relationship, as opposed to
when that employer-administrator speaks about benefits in
a new plan. Such a narrow view cannot exist comfortably
with the rationale of Varity Corporation v. Howe, 516 U.S.
489 (1996). Moreover, as noted later in this opinion, there
is a division among the circuits that frustrates the even-
handed enforcement of the statute and, consequently, the
intent of the Congress in ensuring protection for employees’
benefits plans.
Varity stands at least for the proposition that, when a
company such as ComEd becomes a fiduciary to an em-
ployee with respect to an ERISA “plan,” then its fiduciary
duties of loyalty and care can attach to representations
made regarding new plans under which the employer and
employee do not have a preexisting fiduciary relationship.
Varity gave no hint, and neither have subsequent cases,
that the critical distinction a court must draw in determin-
ing whether an employer-administrator spoke in a fiduciary
Œ
Chief Judge Flaum did not participate in the consideration of
the petition for rehearing en banc.
No. 03-3907 3
status is whether that employer spoke about an “amend-
ment” to an existing plan or about a “new” plan.
It would be intolerable to allow an employer-administra-
tor to avoid the ramifications of its fiduciary status by
simply attaching the label “new plan”—as opposed to “plan
amendment”—to the subject of its misrepresentations.
Furthermore, at least in the situation in which an em-
ployer-administrator is offering enhanced, sweetened
benefits to induce early retirement or separation, the line
between a plan “amendment” and a “new” plan is indeed
blurry and easily distracts from the critical issue. The
enhanced benefits can form the basis of a totally “new” plan;
they can be added as “amendments” to an existing plan; or
they can be part of a plan that “supplements” an existing
plan. Regardless of the label, under Varity’s reasoning, the
critical factor is that there is a nexus between the new
benefits about which the employer speaks and the existing
plan under which an employer-employee fiduciary relation-
ship already exists.
In the present case, Mr. Beach participated in ComEd’s
retirement pension plan and its health-care plan; he and
ComEd had a fiduciary relationship with respect to these
plans. The Voluntary Separation Plan (“VSP”) at issue, in
essence, supplemented or amended these existing plans
with further retirement benefits. Importantly, the bene-
fits in the retirement plan and the health-care plan cannot
be untied from the VSP, which offered, inter alia, severance
pay that would supplement his pension benefits and health
benefits that would replace, upon retirement, his benefits
under the health-care plan. Thus, Varity fully supports the
conclusion that when ComEd misrepresented the status of
the VSP and its future plan-related benefits, it was
“administer[ing]” the retirement plan and the health-care
4 No. 03-3907
plan, and thus acting in a fiduciary capacity.1
The panel opinion, in dicta, expresses the view that an
employer’s duty of accurate disclosure does not begin until
it has “seriously considered” the future offering. See slip op.
at 6-7.2 Some courts of appeals early developed this litmus
test in an attempt to balance the competing Congressional
goals embodied in the ERISA statute of safeguarding
employee benefits plans, without making those plans so
1
My colleagues seem to agree that representations about
new benefits that have a nexus to benefits in an existing plan
which the employer and employee have a fiduciary relationship
constitute fiduciary acts under Varity, regardless of the label
attached to the new benefit (e.g., amendments, new plan or
supplement plan). See slip op. at 5 (“Varity shows that candid and
complete information is required if two plans are in existence, and
the sponsor tries to persuade employees to give up benefits under
one in exchange for benefits of the other.”). They appear, however,
to elevate form over substance by drawing an artificially tight
nexus between those new, future benefits and the benefits in the
existing plan. See id. at 3-4 (rejecting that ComEd operated as a
fiduciary when it misrepresented to Mr. Beach the VSP’s status,
because “the plan under which Beach wants (and was awarded)
benefits does not amend or modify any of ComEd’s other
plans—nor did Beach have to choose between its benefits and
those of the plans in which he was a participant. . . . [The VSP]
does not amend, supplement, or replace any other plan.”).
2
A plan is under “serious consideration” when “(1) a specific
proposal (2) is being discussed for purposes of implementation
(3) by senior management with the authority to implement
the change.” Fischer v. Philadelphia Elec. Co., 96 F.3d 1533, 1539
(3d Cir. 1996). The majority of circuits have employed this
approach. See slip op. at 5-6.
If “serious consideration” were the appropriate threshold, Mr.
Beach’s claim fails because at the time ComEd communicated
the misinformation, ComEd had no “specific proposal” for a sev-
erance package before senior management.
No. 03-3907 5
burdensome that employers would be discouraged from
offering them. See Hockett v. Sun Co., 109 F.3d 1515, 1522-
23 (10th Cir. 1997).
Other courts of appeals have rejected the “serious consid-
eration” prerequisite because it creates a “free zone for
lying” to employees about the availability of a future plan
while that plan is being formed but has not yet become a
specific proposal presented for senior management’s
approval. See Martinez v. Schlumberger, Ltd., 338 F.3d 407(5th Cir. 2003) (adopting the approach of Ballone v. East-
man Kodak Co., 109 F.3d 117 (2d Cir. 1997)). Instead, these
courts employ a “materiality test,” under which only
material misrepresentations (those that would induce
reasonable reliance) are actionable, and whether a plan is
under “serious consideration” is a factor in the materiality
inquiry. See Ballone, 109 F.3d at 124-25.
Under the “materiality test” an employer-administrator
does not have a duty affirmatively to disclose delibera-
tions regarding a new plan absent “serious consideration”
of that plan, but it cannot make material misrepresenta-
tions regarding a plan in formation but not yet under
“serious consideration.” See Martinez, 338 F.3d at 429-31;
Wayne v. Pacific Bell, 238 F.3d 1048, 1055 (9th Cir. 2001).
Martinez offers the most mature synthesis of earlier
courts of appeals efforts and we should adopt its ap-
proach. Moreover, the materiality test better accomplishes
Congress’ dual purposes of protecting employees’ right
to their benefits and encouraging employers to provide
benefit plans. See Martinez, 338 F.3d at 430-31.3
3
In this case, ComEd’s human resources staff assured Mr. Beach
that “absolutely” the company would not offer his department
a severance package. Statement of Uncontested Facts ¶ 70. The
evidence, in contrast, reflects that at the time a severance plan to
certain department employees was a possibility. Moreover,
(continued...)
6 No. 03-3907
A final matter requires the full court’s consideration. The
panel majority, in dicta, seems to favor ComEd’s argument
that ERISA fiduciary liability arises only from deliberate
deceit. See slip op. at 2. The plain language of the ERISA
statute and the common law of trusts disapprove any
scienter requirement in this context. See Mathews v.
Chevron Corp., 362 F.3d 1172, 1183 (9th Cir. 2004). Other-
wise, employers-administrators have a mere duty to avoid
committing fraud, which is at odds with Varity. See Hudson
v. Gen. Dynamics Corp., 118 F. Supp. 2d 226, 246 (D. Conn.
2000) (“As the Supreme Court noted in Varity, such conduct
can create liability even among strangers,” and “ERISA
requires more of a fiduciary in discharging such duties than
that he or she simply refrain from outright lying.”). In sum,
Varity, the common law of trusts, our fellow circuits, and
the purposes of ERISA inform us that when an employer-
administrator speaks—either directly or through its
benefits representatives—it violates its fiduciary duties
when it (1) misinforms a beneficiary knowing its statement
is false, or (2) recklessly misinforms not knowing whether
the statement is true or not, or (3) misinforms when it
should have known the falsity of its statement. See Wayne,
238 F.3d at 1055.
This case presents an issue of exceptional importance. As
the United States workforce ages and as companies con-
tinue to downsize through methods such as early retirement
and voluntary separation programs, the role of ERISA has
become more important. Litigation about the existence and
scope of employer fiduciary duties under ERISA inevitably
3
(...continued)
the staffs’ statements were not mere personal opinion nor
unadorned speculation—they relayed the fact that ComEd had
made a corporate decision not to consider his department for a
severance plan. As such, ComEd would be liable under the
“materiality test.”
No. 03-3907 7
will continue to grow as well. Congress has a right to expect
that the judiciary will take the necessary steps to ensure
that the Congressional will is not frustrated by judicial
interpretations that frustrate the purpose of the statute. We
need to hear this matter en banc and engage in thoughtful
collegial deliberation.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—11-17-04