Kendall v. Employees Retirement Plan of Avon Prod.

• Decision Date: 25 March 2009
• Docket Number: No. 07-4203-cv.,07-4203-cv.
• Citation: 561 F.3d 112
• Parties: Irene M. KENDALL, personally and on behalf of all similarly situated, Plaintiff-Appellant, v. EMPLOYEES RETIREMENT PLAN OF AVON PRODUCTS, Retirement Board, as Plan Administrator, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

561 F.3d 112

Irene M. KENDALL, personally and on behalf of all similarly situated, Plaintiff-Appellant, v. EMPLOYEES RETIREMENT PLAN OF AVON PRODUCTS, Retirement Board, as Plan Administrator, Defendants-Appellees.

No. 07-4203-cv.

United States Court of Appeals, Second Circuit.

Argued: September 23, 2008.

Decided: March 25, 2009.

Edgar Pauk, New York, NY, for Plaintiff-Appellant.

Caitlin J. Halligan, Weil, Gotshal & Manges LLP, New York, N.Y. (Jeffrey S. Klein, Nicholas J. Pappas, on the brief), for Defendants-Appellees.

Before: WESLEY, HALL, GIBSON,¹ Circuit Judges.

WESLEY, Circuit Judge.

Background

Irene Kendall began working for Avon Products, Inc. ("Avon") in 1967 at age thirty. In 1980, she became disabled and collected disability benefits from Avon. Although she became eligible for early retirement in 1995 under Avon's retirement plan (the "Plan"), she continued to collect disability benefits, and to accrue years of service under the Plan, until 1999.

The Plan provides for an accrued benefit² within the meaning of the relevant provision of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1461, at the statutory "normal retirement age" of sixty-five³ pursuant to a formula: 1.75% of the Plan participant's average final compensation for the first ten years of service + 1.5% of the average final compensation of years the Plan participant worked in excess of ten-1.25% of the Plan participant's Social Security benefits multiplied by years of service completed after the month the Plan participant turns age twenty-five up to a maximum of fifty years.⁴ The latter figure is known as the Social Security offset ("Offset").

Under the Plan, the Plan participant can elect to retire early and receive benefits when the sum of the Plan participant's years of employment and the Plan participant's age equal eighty-five (the "Rule of 85" or the "Rule"). The accrued benefit calculation for Plan participants who opt to retire under the Rule of 85 is the same as the calculation for those that retire at age sixty-five, but the Offset deducted from the Rule of 85 Plan participant's accrued benefit calculation is reduced until age sixty-five.⁵ Therefore, Plan participants who retire before the age of sixty-five under the Rule of 85 provision could theoretically receive higher benefits per year than those employees that retire at age sixty-five who have the identical salary, position, and have served the same amount of time. By the time the retired Plan participants reach age sixty-five, the Offset is no longer discounted.

A. Kendall's Claim for Relief

Kendall filed a class action complaint on behalf of "[a]ll Plan participants ... with one hour of service on or after January 1, 1976, who[ have] accrued benefits" under the Plan. She alleges that the Plan violates various provisions of ERISA and seeks revision of the Plan.

1. Claims I and IV: Plan Violates 29 U.S.C. § 1054(b)(1)(B)

In Claims I and IV of her complaint, Kendall alleges that the Rule of 85 portion of the Plan violates 29 U.S.C. § 1054(b)(1)(B).⁶ Under that section, a plan must meet two requirements: (1) the accrued benefit payable at normal retirement age must be equal to the normal retirement benefit; and (2) the rate of accrual at normal retirement age cannot exceed 133 1/3% of the accrual rate from the prior year.

The "normal retirement benefit" referred to in the first § 1054(b)(1)(B) requirement is the greater of: (1) the early retirement benefit under the plan; or (2) the benefit under the plan commencing at normal retirement age. 29 U.S.C. § 1002(22); see also 26 C.F.R. § 1.411(a)-7(c)(2)(ii).⁷ Because § 1054(b)(1)(B) requires the normal retirement benefit and the benefit accrued at normal retirement age to be equal, the early retirement benefit cannot be greater than the benefit accrued at normal retirement age. In Claim IV, Kendall contends that the Rule of 85 violates the first requirement because, in her view, the early retirement benefit conferred by the Rule of 85 would be greater than that benefit under the Plan commencing at normal retirement age.

Regarding the second requirement, the annual accrual rate of a plan must not increase by more than 133 1/3% from one year to the next. For example, if under a retirement plan, a plan participant's rate of accrual in 2008 is $100 per year, the plan participant's rate of accrual in 2009 could not exceed $133.33 per year, that figure being 133 1/3% of the 2008 accrual rate. Cf. Joint Appendix at 16-17 (providing an example of a situation in which the Rule of 85 as applied to a hypothetical Plan participant would violate the second requirement of § 1054(b)(1)(B)). In Claim I, Kendall alleges that due to the reduction in Offset under the Rule of 85, the Rule violates § 1054(b)(1)(B); she seeks to revise the Plan to retroactively reduce rates of accrual to be no "smaller than 75% of the rate of accrual in effect at the earliest possible Rule of 85 Retirement Date."

2. Claim II: Offset Termination Changed Base for Benefit Computation

In Claim II of her complaint, Kendall asserts that the Plan's general Offset provision violates § 1054(b)(1)(B) by discontinuing the Offset after fifty years of employment. She argued at the district court that discontinuing the Offset changed the base of computing the normal retirement benefit after the fiftieth year of employment. According to Treasury Department regulations, "a base for computation of retirement benefits [may not] change[] solely by reason of an increase in the number of years in participation." 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F). Kendall claims that the discontinuance of the Offset after fifty years of service effectively increased the benefits a plan participant receives based solely on increased years of service; she seeks elimination of the Offset for all Plan participants.

3. Claim III: Withholding Offset Until Age Twenty-Five Reduces Benefits Based on Age

Kendall also challenges the provision withholding the Offset until an employee reached age twenty-five, claiming that it effectively reduces the employee's accrued benefit upon reaching age twenty-five. She asserts that this violates § 1054(b)(1)(H)(i), which bars a reduction in accrued benefits "because of the attainment of any age." She seeks to eliminate the Offset for all Plan participants.

4. Claims V and VI: Plan Amendment Decreases Benefits

Kendall does not appeal the district court's dismissal of these claims.

5. Claim VII: Method of Annualizing Partial Payment Violates Regulations

Kendall contends that the calculation used to determine Average Final Compensation ("AFC") — the dollar amount upon which benefits calculations are based — under section 1.5 of the 1994 Plan violates IRS Regulation 26 C.F.R. 1.411(a)-7(c)(5). Under 26 C.F.R. 1.411(a)-7(c)(5), if a plan bases its normal retirement benefits on compensation, the compensation must reflect the compensation which would have been paid for a full year of participation in the plan. Under the 1994 Plan, the AFC is the employee's five highest years of compensation within the last ten years of employment. All partial-year compensation is annualized. If the annualized compensation is one of the five highest years of compensation, the annualized compensation year will be replaced by the sixth highest compensation year. Kendall claims that this replacement reduces the AFC and therefore the benefit that has accrued under the Plan. 26 C.F.R. 1.411(a)-7(c)(5) requires that compensation used to calculate benefits must reflect what would have been paid for a full year of participation in a plan. Kendall argued in the district court that substituting a theoretical higher earning year, the annualized year, for the lower earning year, violated the regulation.

6. Claims VIII and IX: Amendments Reduces Benefits and Failure to Notify Violates ERISA

Kendall claims that the use of the 1994 Plan to calculate benefits prior to the effective date of the 1994 Plan violated § 1054(g) (Claim VIII), and that the Plan administrator violated § 1054(h) by failing to give timely notice prior to the effective date (Claim IX).

7. Relief Sought at the District Court

Kendall requested that the district court: (1) "Declare that the challenged Plan provisions violate ERISA"; (2) "Enjoin the Plan from enforcing said provisions"; (3) "Order [Avon,] to reform the Plan to bring it into compliance with ERISA"; (4) "Order [Avon] to recalculate the accrued benefits or pensions of all Class members under the terms of the reformed Plan"; (5) "Order [Avon] to pay to the members of the Class who are pensioners or beneficiaries receiving benefits, the difference between the amounts paid to them and the amounts due under the reformed Plan"; (6) "Order [Avon] to account for all the ill-gotten gains and earnings that resulted from the violations of ERISA"; (7) "Order [Avon] to disgorge and pay to the Class their ill-gotten gains and earnings"; and (8) order Avon to pay costs and attorney's fees.

B. District Court Decision

In response to the complaint, Avon filed a motion to dismiss Kendall's complaint for lack of standing and for failure to state a claim upon which relief could be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). The district court granted the motion. The court dismissed Claims II, III, VII, VIII, and IX for lack of standing and Claims I, IV, V, and VI for failure to state a claim upon which relief could be granted.⁸

C. Kendall's Appeal

Kendall appeals to this Court with respect to all claims except V and VI. Kendall contests she has standing to bring her claims because: (1) 29 U.S.C. § 1132(a)(3) confers standing to bring claims of ERISA violations regardless of whether she was personally injured; or, alternatively, (2) she was directly injured by the ERISA violations because "once the terms of the Plan are brought into compliance with ERISA, the amount of her pension will be higher. Exactly how much...