Hughes Aircraft v. Jacobson

• Decision Date: 25 January 1999
• Docket Number: 971287
• Citation: 525 U.S. 432,142 L.Ed.2d 881,119 S.Ct. 755
• Parties: HUGHES AIRCRAFT CO. v. JACOBSON (97-1287) 105 F.3d 1288 and 128 F.3d 1305, reversed. SUPREME COURT OF THE UNITED STATES 119 S.Ct. 755 142 L.Ed.2d 8811287 HUGHES AIRCRAFT COMPANY, et al., PETITIONERS v. STANLEY I. JACOBSON et al. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT [
• Court: U.S. Supreme Court

525 U.S. 432

119 S.Ct. 755

142 L.Ed.2d 881

HUGHES AIRCRAFT CO. v. JACOBSON

(97-1287)

105 F.3d 1288 and 128 F.3d 1305, reversed

SUPREME COURT OF THE UNITED STATES

No. 97 1287

HUGHES AIRCRAFT COMPANY, et al., PETITIONERS v. STANLEY I. JACOBSON et al.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

[January 25, 1999]

Justice Thomas delivered the opinion of the Court.

Five retired beneficiaries of a defined benefit plan, subject to the terms of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 832, as amended, 29 U.S.C. § 1001 et seq., filed a class action lawsuit against their former employer, Hughes Aircraft Company (Hughes), and the Hughes Non-Bargaining Retirement Plan (Plan). They claim that Hughes violated ERISA by amending the Plan to provide for an early retirement program and a noncontributory benefit structure. The Ninth Circuit held that ERISA may prohibit these amendments. We reverse.

I

According to the complaint, Hughes has provided the Plan for its employees since 1955. Prior to 1991, the Plan required mandatory contributions from all participating employees, in addition to any contributions made by Hughes.1 Section 3.1 of the Plan defines Hughes' funding obligations: "The cost of Benefits under the Plan, to the extent not provided by contributions of Participants shall be provided by contributions of [Hughes] not less than in such amounts, and at such times, as the Plan Enrolled Actuary shall certify to be necessary, to fund Benefits under the Plan ."

In addition, §3.2 provides that Hughes' contributions shall not fall below the "amount necessary to maintain the qualified status of the Plan and to comply with all applicable legal requirements." But §6.2 of the Plan gives Hughes "the right to suspend its contributions to the Plan at any time," so long as doing so does not "create an 'accumulated funding deficiency' " under ERISA.2

By 1986, as a result of employer and employee contributions and investment growth, the Plan's assets exceeded the actuarial or present value of accrued benefits by almost $1 billion. In light of this Plan surplus, Hughes suspended its contributions in 1987, which it has not resumed. Pursuant to the terms of the Plan, the employee contribution requirement remains operational.

Two amendments Hughes made to the Plan are the subject of the present litigation. In 1989, Hughes established an early retirement program that provided significant additional retirement benefits to certain eligible active employees. Subsequently, Hughes again amended the Plan to provide that, effective January 1, 1991, new participants could not contribute to the Plan, and would thereby receive fewer benefits. Existing members could continue to contribute or opt to be treated as new participants. The Plan obligations created by these amendments constitute the only use of the Plan's assets other than paying the pre-existing obligations under the original contributory benefit structure. The Plan's assets substantially exceed the minimum amount needed to fund all current and future defined benefits.

In January 1992, respondents filed this class action on behalf of all Plan participants who had contributed to the Plan and who are or may become eligible to receive benefits designated for contributing participants. The District Court granted Hughes' motion to dismiss the complaint for failure to state a claim. A divided panel of the Ninth Circuit reversed. 105 F.3d 1288 (1997), amended, 128 F.3d 1305 (1998). The majority concluded that the 1991 amendment may have terminated the Plan and created two plans: one consisting of pre-existing members and the other consisting of new participants. Distinguishing Lockheed Corp. v. Spink, 517 U.S. 882 (1996), as concerning a plan funded solely by employer contributions, the majority held that the act of amending the Plan triggered ERISA's fiduciary provisions. The majority also thought that the employees who were members of the contributory structure had a vested interest in the Plan's surplus.

Accordingly, the Court of Appeals concluded that respondents had alleged six causes of action in their complaint. Specifically, respondents claimed that Hughes had violated ERISA's prohibition against using employees' vested, nonforfeitable benefits to meet its obligations by depleting the surplus to fund the noncontributory structure. §203, 29 U.S.C. § 1053(a). They further argued that Hughes had violated ERISA's anti-inurement prohibition, §403(c)(1), 29 U.S.C. § 1103(c)(1), by benefiting itself at the expense of the Plan's surplus. Respondents also alleged that Hughes had breached its fiduciary duties under ERISA in three ways: amending the Plan in 1989 to fund a program outside of the Plan's purposes violated §404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D); amending the Plan in 1991 to create the noncontributory structure violated §406(a)(1)(D), 29 U.S.C. § 1106(a)(1)(D); and using the surplus assets to fund noncontributory benefits for those who had never contributed to the Plan violated §404, 29 U.S.C. § 1104. Finally, respondents claimed that the alleged termination of the Plan had violated §4044(d)(3)(A), 29 U.S.C. § 1344(d)(3)(A), which requires that residual assets in a terminated plan be distributed to its beneficiaries.

The dissenting judge concluded that the District Court properly dismissed the complaint. He reasoned that an amendment to a pre-existing plan does not affect the availability of the plan's pool of assets for funding pre-existing obligations and cannot be characterized as a termination; interpreted Spink to stand for the proposition that the act of amending a plan does not trigger fiduciary duties; and observed that employees who contribute to a defined benefit plan do not have an interest in that plan's surplus.

The majority's decision is in tension with our decision in Spink, where we held that "the act of amending a pension plan does not trigger ERISA's fiduciary provisions," 517 U.S., at 891, and with other Circuits' decisions. See, e.g., Brillinger v. General Elec. Co., 130 F.3d 61 (CA2 1997), cert. pending, No. 97 1834; American Flint Glass Workers Union v. Beaumont Glass Co., 62 F.3d 574 (CA3 1995); Malia v. General Elec. Co., 23 F.3d 828 (CA3), cert. denied, 513 U.S. 956 (1994); Johnson v. Georgia-Pacific Corp., 19 F.3d 1184 (CA7 1994); Phillips v. Bebber, 914 F.2d 31 (CA4 1990)(per curiam). We granted certiorari, 523 U.S. __ (1998), and now reverse.

II

Our review of the six claims recognized by the Ninth Circuit requires us to interpret a number of ERISA's provisions. As in any case of statutory construction, our analysis begins with "the language of the statute." Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475 (1992). And where the statutory language provides a clear answer, it ends there as well. See Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254 (1992).

A

Respondents' vested-benefits and anti-inurement claims proceed on the erroneous assumption that they had an interest in the Plan's surplus, which, with respect to the anti-inurement claim, was used exclusively to benefit Hughes. These claims fail because the 1991 amendment did not affect the rights of pre-existing Plan participants and Hughes did not use the surplus for its own benefit.

To understand why respondents have no interest in the Plan's surplus, it is essential to recognize the difference between defined contribution plans and defined benefit plans, such as Hughes'. A defined contribution plan is one where employees and employers may contribute to the plan, and " 'the employer's contribution is fixed and the employee receives whatever level of benefits the amount contributed on his behalf will provide.' " Nachman Corp. v. Pension Benefit Guaranty Corporation, 446 U.S. 359, 364, n. 5 (1980) (quoting Alabama Power Co. v. Davis, 431 U.S. 581, 593, n. 18 (1977)). A defined contribution plan "provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account." ERISA §3(34); 29 U.S.C. § 1002(34). "[U]nder such plans, by definition, there can never be an insufficiency of funds in the plan to cover promised benefits," Nachman, supra, at 364, n. 5, since each beneficiary is entitled to whatever assets are dedicated to his individual account.

A defined benefit plan, on the other hand, consists of a general pool of assets rather than individual dedicated accounts. Such a plan, "as its name implies, is one where the employee, upon retirement, is entitled to a fixed periodic payment." Commissioner v. Keystone Consol. Industries, Inc., 508 U.S. 152, 154 (1993); see also Mead Corp. v. Tilley, 490 U.S. 714, 717 (1989); ERISA §3(35), 29 U.S.C. § 1002(35). The asset pool may be funded by employer or employee contributions, or a combination of both. See ERISA §204(c); 29 U.S.C. § 1054(c). But the employer typically bears the entire investment risk and short of the consequences of plan termination must cover any underfunding as the result of a shortfall that may occur from the plan's investments. See Connolly v. Pension Benefit Guaranty Corporation, 475 U.S. 211, 232 (1986) (O'Connor, J., concurring); 2 J. Mamorsky, Employee Benefits Law §8.04 (1998). Conversely, if the defined benefit plan is overfunded, the employer may reduce or suspend his contributions. See Nachman, supra, at 363, n. 5 (quoting Alabama Power Co., supra, at 593, n. 18) (noting that " 'the employer's contribution is adjusted to whatever level is necessary' " to provide the defined benefits).

The structure of a defined benefit plan reflects the risk borne by the employer. Given the employer's obligation to make up any shortfall, no plan member has a claim to any particular asset that composes a part of the plan's general asset pool. Instead, members have a right to a certain defined level of benefits, known as "accrued benefits." That term, for purposes of a...