Darden v. Nationwide Mut. Ins. Co.

• Decision Date: 30 June 1989
• Docket Number: No. 83-96-CIV-3.,83-96-CIV-3.
• Citation: 717 F. Supp. 388
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: Robert T. DARDEN, Plaintiff, v. NATIONWIDE MUTUAL INSURANCE COMPANY, et al., Defendants.

717 F. Supp. 388

Robert T. DARDEN, Plaintiff, v. NATIONWIDE MUTUAL INSURANCE COMPANY, et al., Defendants.

No. 83-96-CIV-3.

United States District Court, E.D. North Carolina, Fayetteville Division.

June 30, 1989.

Marion G. Follin III, Smith, Patterson, Follin, Curtis, James & Harkavy, Greensboro, N.C., for plaintiff.

George R. Ragsdale, LeBoeuf, Lamb, Leiby & MacRae, Raleigh, N.C., for defendants.

MEMORANDUM OPINION

TERRENCE WILLIAM BOYLE, District Judge.

Robert T. Darden, a former insurance agent for Nationwide Mutual Insurance Company, brought this action against Nationwide on November 8, 1983, seeking to recover retirement benefits pursuant to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. This court initially granted Nationwide's motion for summary judgment on the ground that Darden did not qualify as an employee within the scope of ERISA and therefore had no enforceable rights against Nationwide under the Act. This decision was vacated on appeal to the Fourth Circuit, which held that the traditional common law test applied by this court for identifying the relationship of master and servant was "not the appropriate standard for application here." See Darden v. Nationwide Mutual Insurance Company, 796 F.2d 701, 706 (4th Cir.1986). The Court of Appeals set forth a three-part test for determining whether an individual who does not fit within the traditional concept of employee status should nonetheless be considered an employee in the context of ERISA. The case was remanded for further factual development in light of the new standard, and the parties subsequently filed cross-motions for summary judgment which were denied. A two-day bench trial was held, and the court is now prepared to enter its findings.

I. BACKGROUND

The facts of this case were summarized by the Fourth Circuit as follows:

From 1962 until November 1980, Darden acted as an insurance agent for Nationwide Insurance Company in Fayetteville, North Carolina. During that period, Darden represented Nationwide exclusively. While Darden enjoyed a substantial degree of freedom to operate his agency as he chose, his freedom was limited by a number of requirements imposed by Nationwide. Darden was compensated through commissions, rather than through a fixed salary.

The relationship between Darden and Nationwide was governed by a series of eight successive agency contracts. Each of the agency contracts provided for Darden's participation in a retirement and deferred compensation plan for insurance agents referred to as the "Agent's Security Compensation Plan." The Agent's Security Compensation Plan consisted of two programs known as the "Deferred Compensation Incentive Credit Plan" and the "Extended Earnings Plan." Under the Deferred Compensation Incentive Credit Plan, Nationwide maintained a retirement account for Darden and annually credited to that account a sum based on Darden's earnings from original and renewal fees for insurance policies. Under the Extended Earnings Plan, Nationwide agreed to pay Darden, upon his retirement, termination, death or disability, a sum equal to his earnings from renewal fees over the prior twelve months. The agency agreements also provided that Nationwide's obligation to pay benefits under the Agent's Security Compensation Plan would terminate if a former agent engaged in the fire, casualty, health, or life insurance business, in competition with Nationwide, within one year of the cancellation of the agent's agreement with Nationwide and within a twenty-five mile radius of the former business location of the agent. Nationwide's obligation would also cease if the former agent, at any time after the cancellation of his agency agreement with Nationwide, induced a Nationwide policyholder to cancel an insurance contract with Nationwide. The agency agreements between Nationwide and Darden provided further that either party had the right to cancel the agreement at any time after written notice.

Nationwide exercised its right to terminate the agreement on November 20, 1980. One month following the termination of the agreement, Darden opened a new business as an independent insurance agent, representing various competitors of Nationwide. He operated the new business at the same location he had previously used as a Nationwide agent. Nationwide then notified Darden that it would not pay him any of the benefits to which he otherwise would have been entitled under the Agent's Security Compensation Plan.

* * * * * *

Darden filed the present action on November 8, 1983, seeking to benefit from the terms of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. Under ERISA, an employee's right to receive retirement benefits from an employer-sponsored retirement plan must vest, thereby becoming nonforfeitable, after a period of time to be determined according to one of three alternative methods. 29 U.S.C. § 1053(a). footnote omitted Darden based his claim to relief on § 502(a) of the Act, 29 U.S.C. § 1132(a), which provides that a participant in or a beneficiary of an employee retirement income security plan may bring a civil action to enforce the provisions of the Act and to recover benefits due to him. Darden accordingly sought to enforce the Act's nonforfeitability requirements and to recover the benefits claimed to be due to him under the provision of Nationwide's Agent's Security Compensation Plan.

796 F.2d at 702-04.

The Court of Appeals identified three factors to be considered in determining whether an individual is an employee within the meaning of ERISA: (1) Whether the "employer" or sponsor of the pension plan took some action that created a reasonable expectation on the "employees'" part that benefits would be paid to them in the future; (2) whether persons within the protected class relied on that expectation by (a) remaining for "long years," or a substantial period of time, in the "employer's" service, and (b) by foregoing other significant means of retirement; and (3) whether the persons to be aided by the statute lacked sufficient economic bargaining power to obtain contractual rights to nonforfeitable benefits. 796 F.2d at 706-07.

The Court found that the first prong of this test had been satisfied: "By establishing a comprehensive retirement benefits program for its insurance agents, Nationwide created a reasonable expectation on Darden's part that benefits would ultimately be paid to him." 796 F.2d at 707. The record was found to be incomplete, however, with respect to the second two prongs concerning reliance and bargaining power.

Nationwide argued on appeal that, even if Darden is assumed to be an employee for purposes of ERISA, its plan is not subject to the vesting and nonforfeitability requirements of § 1053(a) by virtue of § 1051(2), which exempts from those requirements any plan "which is unfunded and which is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees." The Court found that disputed questions of fact prevented summary judgment disposition of this issue.

Upon remand, further discovery was conducted, and the parties filed cross-motions for summary judgment. This court, applying the reasoning of Fraver v. North Carolina Farm Bureau, 801 F.2d 675 (4th Cir.1986), found that the Extended Earnings component of the Agent's Security Compensation Plan is not a "pension plan" within the meaning of ERISA. However, this court declined to summarily judge whether the Deferred Compensation component is a "pension plan" or whether Darden was an "employee" under ERISA. A two-day bench trial was held to resolve the factual questions underlying these two issues and also the issue of whether the Deferred Compensation Plan qualifies for the "top-hat" exemption under § 1051(2).

II. IS DARDEN AN "EMPLOYEE" WITHIN THE MEANING OF ERISA?

The employment issue is to be resolved by applying the three criteria devised by the Fourth Circuit for determining whether an individual is an employee under ERISA. The Court of Appeals found that the first prong concerning whether Darden had a reasonable expectation of retirement benefits was satisfied, based on the comprehensive retirement benefits program created by Nationwide for its insurance agents. This court therefore need only address the second and third prongs of the ERISA employment test dealing with reliance and bargaining power.

A. Reliance

Darden must have relied on the expectation of retirement benefits by (1) remaining as a Nationwide agent for a substantial period of time and by (2) foregoing other significant means of providing for his retirement. See Darden, 796 F.2d at 706. His eighteen years of service, which the Court of Appeals noted exceeds the time required for the vesting of benefits under any of the three methods described in 29 U.S.C. § 1053(a), is clearly a substantial period. With respect to the loss of retirement opportunities, the Court found that "Darden was obliged to forego at least one alternative method of providing for his retirement that would normally have been available to an independent contractor: because much of the value of a Nationwide agency reverted to Nationwide upon the agent's termination, Darden was not able to build up equity in his business which could have eventually been transformed into cash through the sale of the business." Id. at 707. However, the Court also found that "there is no indication in the record as to whether Darden pursued other methods of providing for his retirement which would have significantly reduced his reliance on the Nationwide benefit plan. Nor is there any evidence as to whether a failure to make such alternative provisions would have been reasonable in light of the common practices of other Nationwide insurance agents." Id. These two questions—whether Darden made alternative provisions for his retirement and, if not, whether the...