Osberg v. Foot Locker, Inc., 07 Civ. 1358(KBF).

• Citation: 138 F.Supp.3d 517
• Decision Date: 05 October 2015
• Docket Number: No. 07 Civ. 1358(KBF).,07 Civ. 1358(KBF).
• Parties: Geoffrey OSBERG, on behalf of himself and on behalf of all others similarly situated, Plaintiff, v. FOOT LOCKER, INC. and Foot Locker Retirement Plan, Defendants.
• Court: U.S. District Court — Southern District of New York

138 F.Supp.3d 517

Geoffrey OSBERG, on behalf of himself and on behalf of all others similarly situated, Plaintiff,

v.FOOT LOCKER, INC. and Foot Locker Retirement Plan, Defendants.

No. 07 Civ. 1358(KBF).

United States District Court, S.D. New York.

Signed Oct. 5, 2015.

Eli Gottesdiener, Albert Huang, Steven Dana Cohen, Gottesdiener Law Firm, PLLC, Brooklyn, NY, for Plaintiff.

Amy R. Covert, Joseph Emanuel Clark, Myron D. Rumeld, Proskauer Rose LLP, New York, NY, Howard Shapiro, Nicole A. Eichberger, Page Griffin, Robert W. Rachal, Proskauer Rose LLP, New Orleans, LA, for Defendants.

(CORRECTED¹ ) OPINION & ORDER

KATHERINE B. FORREST

, District Judge.

In this certified class action² , current and former employees of Foot Locker, Inc. ("Foot Locker" or the "Company")—formerly known as the Woolworth Corporation—seek reformation of their pension plan to conform to the benefits they understood Foot Locker had promised them. The Class's claims are brought under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq.

The Court held a bench trial from July 14, 2015 to July 27, 2015. Twenty-one fact witnesses testified—15 live³ and six by deposition. The parties also called three expert witnesses: actuarial expert Lawrence Deutsch, E.A. and financial economist Clark L. Maxam, Ph.D. testified for the Class, and actuarial expert Lawrence Sher, F.S.A. testified for the defendants. The Court also received several dozen documents into evidence. This Opinion & Order constitutes the Court's findings of fact and conclusions of law.

The Class's core claim is that the Company failed to inform its employees (the "Participants") that plan changes that went into effect as of January 1, 1996 implemented an effective freeze on growth of the employees' pension benefits—such that, for a period of time, additional periods of service did not result in additional benefits. The Class asserts that both class-wide and individual communications failed to clearly describe that the vast majority of Participants would be in a period of "wear-away" during which new accruals would not increase the benefit to which the Participant was already entitled. By contrast, while Foot Locker does not contest that the vast majority of Participants were in a period of wear-away, it claims that the Plan communications adequately disclosed the necessary details of changes to the Plan, including an adequate description of the actual benefit a Participant would receive. According to Foot Locker, Participants had the information necessary to inform them they were in a period of wear-away. The Company concedes that it did not describe wear-away explicitly because it believed it was too complicated and its variations and effects too unpredictable. According to Foot Locker, the additional disclosures might have had misled Participants into believing that they were entitled to a greater benefit than that to which they were entitled at termination.

Having considered all of the evidence, at long last the dust on this case has settled and the Court does not believe it presents a close call. The evidence is overwhelming that the changes in the Retirement Plan resulted in an effective freeze of pension benefit accruals—and that this freeze was not adequately disclosed to Participants. Some Participants were severely impacted, some moderately, and a few not at all. In this regard, the evidence is clear that (1) wear-away was an intended feature of the Plan, (2) Plan disclosures and other communications to Participants failed to disclose wear-away, (3) this lack of disclosure was intentional, (4) wear-away impacted thousands of employees—many, including the named plaintiff, terminated employment and were paid benefits while they were still in wear-away, (5) Participants did not understand that, as a result of wear-away, additional periods of service after January 1, 1996 would not and did not increase the benefit received, and (6) Appropriate disclosure would not have been too confusing and had it been given, Participants would have understood the consequences of wear-away.⁴

Both parties have compared this case to Amara v. CIGNA Corp., which the Court discusses below. This case presents a more egregious set of circumstances than Amara. In Amara, wear-away resulted, in large part, from fluctuations in interest rates; here, by contrast, the structure of plan conversion guaranteed that most Participants would experience severe wear-away and that this was the expected source of cost savings to Foot Locker.

I. FINDINGS OF FACTS

Pursuant to Federal Rules of Civil Procedure 52

, the Court's findings of fact and conclusions of law are set forth below.⁵

A. The January 1, 1996 Plan Amendment

Before 1996, benefits under Foot Locker's pension plan were defined as an annual benefit commencing at age 65 and continuing for life. (Expert Opening Report of Lawrence Deutsch, E.A. ("Deutsch Op. Report") at 5.)⁶ This benefit was calculated on the basis of a Participant's compensation and years of service. (See id. at 2.) Under the prior Plan, Participants who retired or terminated before age 65 generally could either wait to start receiving benefits at age 65 or commence early retirement distributions between ages 55 and 65, as further explained below. (Id. at 5.)⁷ Participants generally did not have the option to receive their benefits as a lump sum.⁸

Foot Locker converted the Plan to a cash balance plan as of January 1, 1996. Under the Amended Plan, Participants' age–65 annual benefit accrued as of December 31, 1995 (the "December 31, 1995 accrued benefit" or the "December 31, 1995 frozen accrued benefit") was converted into an initial account balance that would be used to calculate the benefit under the new formula. This conversion was effected in three steps:

1. First, the Plan calculated a lump sum value of the Participant's age–65 accrued benefit under the old Plan, as of December 31, 1995.

2. Second, the Plan discounted this age–65 lump sum to January 1, 1996, to reflect the time value of money.

3. Third, the Plan further discounted this January 1, 1996 present value by a mortality discount—to reflect the possibility that the Participant might not live until age 65.

(Deutsch Op. Report at 7.)

Critically, the conversion at steps 1 and 2 was accomplished using a 9% discount rate. Following the conversion, however, Participants' account balances were credited with pay credits and an interest credit at a fixed annual rate of 6%. (See id. at 7–8.) Thus, while Participants' growing account balances created the appearance of pension benefit growth, this appearance was deceptive: the initial conversion was accomplished using a 9% rate (and a mortality discount) but each Participant's account subsequently earned interest only at a 6% rate. As a result, the account balance under the new formula was—for a period of time (in many cases, years)—smaller than the December 31, 1995 accrued benefit. (See id. )

The disparity between the December 31, 1995 accrued benefit and the benefit under the new formula triggered ERISA's anti-cutback rule, which (with narrow exceptions inapplicable here) requires that a participant's benefit entitlement, once earned, never be reduced due to a plan amendment. (Id. at 3.) To comply with the anti-cutback rule, the new Plan calculated benefits based on a "greater of" formula. Under this formula, a Participant's actual pension benefit was the greater of the December 31, 1995 accrued benefit (the "A benefit") and the Participant's cash balance benefit (the "B benefit"). (Id. )⁹ Until the cash balance caught up to and surpassed the December 31, 1995 accrued benefit, the Participant was in a period of wear-away. That is, his or her pension benefit did not grow despite continued service. (Id. at 3–4.) As further explained below, the combined use of the 6% interest rate with the 9% discount rate mathematically guaranteed that most Participants would experience wear-away. This was understood by Foot Locker at the time and relied upon as a source of savings.

The "greater of" comparison between the A and B benefits was an annuity-to-annuity comparison that was accomplished via the following steps. First, the A benefit (the December 31, 1995 accrued benefit) was converted to an annuity. The B benefit (the Participant's cash balance benefit) was projected to age 65 with a fixed 6% interest rate, and converted to an annuity commencing at age 65. The last step was accomplished by using either the 6% rate or the applicable rate under Internal Revenue Code ("IRC") § 417(e)

and the applicable mortality table under § 417(e). (See Deutsch Op. Report at 4, 6.) For the vast majority of Participants, the A benefit exceeded the B benefit. This meant that growth in the B benefit—the hypothetical account balance—due to additional service and interest credits did not represent any growth in the actual benefit a Participant would receive. (See id. at 4.)

Under the new Plan, Participants could choose to receive their pension benefit as a lump sum or an annuity. Under ERISA, a lump sum cannot be less than the present value of a participant's age–65 benefit using the interest rate and mortality assumptions required by IRC § 417(e)

. "Lump

sum" wear-away is more difficult to estimate because the § 417(e)

rate—and thus the lump sum value of the December 31, 1995 frozen benefit—fluctuates from year to year. (Deutsch Op. Report at 16.)

The cash balance conversion was also accompanied by a new 401(k) plan.

Early Retirement Subsidy/Enhancement. The prior Plan included an early retirement subsidy, which worked as follows: Participants between age 55 and 65 had the option to receive early retirement benefits. For Participants with fewer than 15 years of service, early retirement benefits were equal to the Participant's age–65 benefit reduced by 6% per year for early commencement. (Deutsch Op. Report at 5; Deutsch Tr.¹⁰ 115:19–20.) For Participants with at least 15 years of service, early retirement...