Jack Welsh's Red Sox Tickets, Devlin v. Empire Blue Cross And Vesting of Welfare Benefits

This article previously appeared in the Connecticut Bar Association Labor & employment Quarterly, Fall, 2002

Jack Welsh got everything from season box seats to the Yankees and Red Sox to dry cleaning and cable television as retiree benefits from GE. GE's board may be thinking about taking a few of the perquisites away, considering the outcry they have generated. The benefits aren't subject to ERISA, so any fight over them will be waged using traditional principles of contract law. Lawyers fighting over changes in retiree benefits under ERISA may also be fighting on a similar battlefield, rather than applying legal principles unique to ERISA, after the Second Circuit's decision in Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76 (2nd Cir. 2001) and its companion case, Abbruscato v. Empire Blue Cross, 274 F.3d 90 (2nd Cir. 2001). These cases show the Second Circuit's increasing willingness to apply more traditional principles of contract and trust law to ERISA rather than using legal principles unique to ERISA. The employer in these cases had reduced the amount of retiree life insurance coverage to existing retirees. The plaintiffs sued to get the benefits restored. The plaintiffs relied primarily on superseded summary plan descriptions and various non-plan communications to establish their right to the benefit. The Second Circuit overturned the trial court's grant of summary judgment to the employer, and allowed the participants to maintain a suit to force the employer to restore the benefits. In the course of deciding this issue, the Second Circuit addressed the following: • How definite a promise must be to result in vesting; • What language is a sufficient reservation of rights to change the plan; • When will the court consider evidence extrinsic to the plan; • What participants must show to establish promissory estoppel under ERISA; and, • What types of fiduciary claims can exist in a suit for benefits, and what relief is available for breach of fiduciary duty under ERISA. A Promise of Lifetime Benefits And No Effective Disclaimer Equals Vested, Unchangeable Benefits. "Vesting" of welfare benefits (i.e. non-pension benefits) under ERISA simply means that when a benefit is vested, the participant has a contractual right to receive the benefit. While courts do not use ordinary contract language in discussing vesting under ERISA, the court in Devlin applied a slight variation on the normal principles of contract law, including applying the principle, shared by Torosyan v. Boehringer Ingelheim Pharmaceuticals, Inc., 234 Conn. 1 (1995), that continued employment can be consideration for a change in the terms of employment that benefits the employee. In analyzing the vesting issue, the court first determined whether the language on which the plaintiffs claimed vesting was sufficiently definite to be a promise, in other words, that a definite offer had been made. Second, the court looked to when the benefit vested, in essence looking to when consideration changed hands, though the court did not use this language. Third, the court construed the effect of purported reservations of right to change or discontinue benefits, in essence, whether the existence of the reservations of right negated any intent on the part of the employer to contract for the claimed benefits. Vesting & What Evidence Can a Participant Use to Prove It? A Promise of Lifetime Benefits in an SPD Creates an Issue of Fact on Vesting The Second Circuit in Devlin rejected the holding of other circuits that benefits only vest if the plan explicitly says so. The Court said the language on which vesting is claimed need only be "reasonably susceptible to interpretation as a promise" for a vesting claim to survive summary judgment. Devlin, at 83. The Court explicitly rejected the holding of other circuits that benefits only vested if the plan contained "clear and express" language providing for vesting. Wise v. El Paso Natural Gas Co, 986 F.2d 929, 937 - 938 (5th Cir. 1993) (holding on facts similar to Devlin that there was no vesting). The Second Circuit's standard is much closer than the Wise court's standard to traditional contract law principles that ask whether the language evidences an intent to be bound. The plaintiffs in the Devlin case based their claim of vesting on language in summary plan descriptions or "SPDs" issued before 1987. The court held that the following language in the SPDs was enough to create an issue of fact regarding vesting (Devlin at 83): o Insurance coverage at the retiree's final salary "for the remainder of their lives" o "Life insurance benefits will remain at [the annual salary level] for the remainder of their lives." The pre-1987 SPDs contained no reservations of right to change benefits. Some of the plaintiffs in Abbruscato based their claim of vesting on the following language contained in early retirement incentive plan documents. The court held the language was sufficient to create an issue of fact regarding vesting (Abbruscato at 97 - 98): o The participants who satisfied the plan's requirements would be "eligible for lifetime" benefits; o Insurance benefits would be "extended to you for your lifetime." o Stating that participants would receive a "lifetime" benefit; The retirement incentive SPDs contained some disclaimers, but none explicitly reserving the right to change benefits. The disclaimers are discussed in the next section. Once An Issue Of Fact Regarding Vesting Arises, Extrinsic Evidence is Admissible to Prove Vesting Employees seem to rely more on general discussions with human resources representatives, statements by supervisors, and various letters and memos than the official plan documents like the SPD. If Jack Welsh and GE come to blows over his benefits, he's likely to present evidence of statements that were made to him and promises that were made in various letters, memo and e-mails. ERISA plan participants have not commonly been able to use such evidence. Plans and employers have generally been successful in branding all of this as extrinsic to the plan documents and having it all excluded from evidence. See, e.g. Perreca v. Gluck, 295 F.3d 215 (2nd Cir., July 9, 2002) (service commencement date contained in repeated benefit statements not binding on plan). Once the Court found that the language of the plan in Devlin and Abbruscato was ambiguous, however, the door was potentially opened for the participants to get all this "extrinsic evidence" admitted. Since the Court found that the plan was ambiguous regarding vesting, extrinsic evidence was admissible to resolve the ambiguity. As an example of the type of evidence that would now be admissible, the Court referred to exit letters sent to the retirees describing the life insurance benefit, which did not reserve the right to change benefits. Devlin at 85. The holding on the vesting language therefore opened the door to evidence that otherwise would not have been admissible. What Language Is Sufficient to Reserve the Right to Change Benefits, and When Is a Disclaimer Effective For Benefits Promised Before it Was Issued? In 1987, the employer reissued the SPD for the retiree life insurance benefit as part of a general benefits booklet. While the language describing the life insurance benefit set forth above was not changed, the book did contain a general disclaimer applicable to all benefits provided in the booklet, stating that [T]he company expects and intends to continue the Plans in your Benefits Program indefinitely, but reserves its right to end each of the Plans, if necessary. The company also reserves its right to amend each of the Plans at any time." All the plaintiffs retired at various times from 1989 to 1993, so all of them were still employed at the time this revised SPD was issued. The Court held that the language unambiguously reserved the employer's right to change benefits, including reducing the amount of retiree life insurance coverage. The question was how this disclaimer affected the different groups of participants. • Some of the plaintiffs in the Abbruscato case, like the Devlin plaintiffs, had retired under the normal retirement plan, and not under a retirement incentive plan. Both sets of plaintiffs had exactly the same facts and alleged the same causes of action. The Abbruscato normal retirement plan plaintiffs, though, based their claim on different documents. The Devlin plaintiffs based their claim on the pre-1987 SPDs. The Abbruscato plaintiffs unaccountably disclaimed reliance on the pre-1987 SPDs in oral argument, and stated that they relied on the 1987 SPD, which contained the same vesting language as the earlier SPDs but also reserved the right to change benefits. They also relied on various letters and informal communications. Abbrusacto at 100. The Court held that when vesting language is included in a document that also contains a general reservation of rights to change benefits, the general reservation trumps the vesting language. Id. Therefore, the language of the SPD "is not susceptible to an interpretation that promises vested lifetime life insurance benefits." The Court therefore affirmed the trial court's grant of summary judgment regarding these plaintiffs Abbruscato at 99. • The Court held, however, that the 1987 SPD did not defeat the claims of the plaintiffs in the Devlin case who based their claim on the pre-1987 SPDs that contained the vesting language, but not the reservation of right to change benefits. The Court held a question of fact was created whether the issuance of the pre-1987 SPDs created an offer of a unilateral contract that was accepted by the employees by continuing to work. Once the employees began "performance" of the bargain by continuing to work, the employer no longer had the right to revoke the contract by changing the benefits. The issuance of the SPDs, plus the employees' continued work, created a right to unchangeable welfare benefits, even though the participants had only started to satisfy the requirements to actually earn the benefit. This holding presents plan sponsors with exactly the same dilemma that employers in Connecticut have under Torosyan with an employee handbook that fails to disclaim intent to contract. Unless the employer gives the employees some sort of additional consideration, the employer can be stuck with a term of employment that it wants to do away with. • The participants who had retired pursuant to retirement incentive plans were not affected by the 1987 SPD since they based their claim on the early retirement plan's documents. The retirement incentive plan documents did contain some reservations of rights, but the Court found that none of them were effective to defeat vesting. The incentive plan SPDs reserved the right to amend or terminate the incentives prior to the participants' retirement, and to offer different or no plans in the future. Since the plans did not reserve the right to change benefits after the participants retired, the employer could not rely on the disclaimers to change the retiree life insurance benefit. Abbruscato at 97 - 98. Inducement to Hire Or Retire Constitutes the Type of "Extraordinary Circumstances" on Which an ERISA Promissory Estoppel Claim Can Be Based. The Second Circuit's treatment of promissory estoppel in Devlin, along with other recent cases on this issue, demonstrates that even if benefits don't vest, a participant may have an enforceable right to benefits. In addition to the standard four common-law elements of promissory estoppel (a promise, reliance, injury from reliance, and injustice if the promise is not enforced), the Second Circuit requires that the plaintiff must also show "extraordinary circumstances" to establish promissory estoppel. Devlin, 274 F.3d at 85. • In Devlin, the Court held that a question of fact existed regarding extraordinary circumstances when the CEO of the employer testified that it had to offer generous benefits to induce employees to stay and to attract new employees since it offered lower salaries than its competitors. Such inducement was sufficient to constitute "extraordinary circumstances." Devlin at 86-87. • Similarly, the Abbruscato plaintiffs who retired under a retirement incentive plan presented evidence of "extraordinary circumstances" to the extent they could prove that the retiree life insurance benefit was offered to induce them to retire early. Abbruscato at 101. • The Abbruscato plaintiffs who relied on the 1987 SPD were again out of luck. Since the 1987 SPD unambiguously reserved the right to change benefits, they could not reasonably rely on the SPD. The Court affirmed summary judgment on their promissory estoppel claims. Id. Trying to Change Vested Benefits Can Constitute a Breach of Fiduciary Duty The plaintiffs also brought breach of fiduciary duty claims under the following sections: ERISA §404(a)(1)(D) for failure to follow the plan documents; ERISA §404(a)(1)(A) and (B), which require the fiduciary to act for the exclusive purpose of providing benefits and to act with prudence in conducting the affairs of the plan; and ERISA §502(a)(3), which is the catch-all equitable relief section. One of the most basic freedoms plan sponsors have under ERISA is to make decisions about what benefits to offer free of any fiduciary obligation. Courts have always held that decisions regarding what benefits to offer and to whom is a matter of business judgment that does not implicate fiduciary duties. Siskind v. Sperry Retirement Program, Unisys, 47 F.3d 498, 505 (2nd Cir. 1995). This basic rule does not apply, however, if the employer attempts to change vested benefits. The Court in Devlin held that if the retiree life insurance benefits had vested, the decision to reduce the benefits would no longer be a non-fiduciary business decision, but instead, could be a fiduciary violation of the obligation under ERISA §404(a)(1)(D) to follow the plan documents. Devlin at 88. Even if the participants were unsuccessful in establishing that they had a vested right to receive the retiree life insurance benefits, the Court still allowed them to maintain a cause of action for breach of fiduciary duty under ERISA §404(a)(1)(A) and (B), the sections requiring that the fiduciaries act in the interest of the participants and require the fiduciary to act with prudence. The Court stated the employer could have violated these fiduciary duties by repeatedly assuring the participants that they had lifetime retiree life insurance benefits, which assurances would not be true if the benefits were not vested. Like the Court's holding on admissibility of extrinsic evidence to resolve the ambiguity regarding vesting, this holding again exposes employers to liability for extrinsic, non-plan document communications, demonstrating the importance of management keeping a firm grip on any communications to employees regarding benefits. Lastly, the Court permitted the participants to maintain a cause of action under the catchall equitable provision of ERISA, Section 502(a)(3). If the participants were unsuccessful in establishing benefits under ERISA §502(a)(1)(B) or any other section, subsection (a)(3) might be their only avenue of relief. Devlin at 89, citing Varity Corp. v. Howe, 516 U.S. 489, 515, 134 L.Ed.2d 130, 116 S.Ct. 1065 (1996). The court stated that while Varity stated that relief under 502(a)(3) in addition to relief under some other section of ERISA might be unavailable, this was an issue to address at the remedy stage of the litigation. Therefore, the participant would be permitted, prior to the remedy stage, to maintain possibly inconsistent causes of action under 502(a)(3) and other section of ERISA. Devlin at 90. Conclusion What Devlin Means to Participants: Lawyers representing plan participants should be able to creatively use the Devlin decision. The case provides guidance on different ways to enforce a plan participants' expectations regarding benefits, and to get around the road blocks presented by the courts' technical application of ERISA and the primacy of the plan documents. The cases also reinforce again the crucial importance under ERISA of precise pleading and proof. As the Abbruscato regular retirement plan participants learned, even with exactly the same facts and causes of action, the choice of a particular strategy can be fatal. What Devlin Means for Plans and Employers: For lawyers representing plans and employers, Devlin demonstrates the importance of precisely drafted reservations of right to change benefits. It also shows the many ways employers and fiduciaries get into trouble by making informal communications regarding benefits. Non-plan documents will never be enough to vest benefits in themselves. The non-plan communications, however, can cause lots of trouble, whether admitted as evidence to resolve an ambiguity regarding vesting, or to establish a breach of fiduciary duty for communicating untrue information to participants. To avoid marathon litigation like the Devlin case, employers have to exercise strong central control over any communications regarding benefits. Any fight over the benefits General Electric gave Jack Welsh will be fought applying everyday principles of contract law, since they are unlikely to be subject to ERISA. The Devlin case demonstrates that battles over ERISA benefits will increasingly be fought using more traditional legal principles. ERISA jurisprudence is still a unique area of law with its own requirements, rewards and pitfalls. With the Devlin decision and other decisions over the last few years, however, the Second Circuit has begun to make the ERISA area less strange by applying more general principles of law in deciding ERISA cases.