Fremont v. McGraw-Edison Co.

• Decision Date: 31 October 1979
• Docket Number: Nos. 78-2630,GRAW-EDISON,78-2631,s. 78-2630
• Citation: 606 F.2d 752
• Parties: 1 Employee Benefits Ca 2072 Robert S. FREMONT and Henry W. Dybal, Plaintiffs-Appellants, v. McCOMPANY et al., Defendants-Appellees. Robert S. FREMONT, Ronald L. McCarthy and Henry W. Dybal, Plaintiffs-Appellees, v. McCOMPANY et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 752

606 F.2d 752

1 Employee Benefits Ca 2072

Robert S. FREMONT and Henry W. Dybal, Plaintiffs-Appellants, v. McGRAW-EDISON COMPANY et al., Defendants-Appellees.

Robert S. FREMONT, Ronald L. McCarthy and Henry W. Dybal, Plaintiffs-Appellees, v. McGRAW-EDISON COMPANY et al., Defendants-Appellants.

Nos. 78-2630, 78-2631.

United States Court of Appeals, Seventh Circuit.

Argued May 30, 1979.

Decided Sept. 27, 1979.

Rehearing Denied Oct. 31, 1979.

George V. Bobrinskoy, Jr., Mayer, Brown & Platt, Chicago, Ill., for plaintiffs-appellants.

Byron L. Gregory, Chicago, Ill., for defendants-appellees.

Before PELL, Circuit Judge, GEWIN, Senior Circuit Judge, ^* and WOOD, Circuit Judge.

PELL, Circuit Judge.

The three plaintiffs, Robert Fremont, Ronald McCarthy, and Henry Dybal, brought this action against their former employer, the Halo Lighting Division of McGraw-Edison Company (Company), to recover benefits allegedly due them under the Company's Profit Sharing and Retirement Trust (the Plan). ¹ The Company had denied them the Plan benefits on the ground that their theft of Company property made them ineligible under the Plan for the benefits. The plaintiffs asserted that Section 203 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1053, prohibited forfeiture of their benefits regardless of their thefts. The applicability of § 203 to the plaintiffs was disputed by the Company on various theories. The district court granted summary judgment in favor of McCarthy and against Fremont and Dybal. Both sides appealed.

I.

The facts preceding the dispute in this case are as follows. In June 1959, a profit sharing plan was established for executives and employees of Halo Lighting Products, Inc. In June 1967, Halo was acquired by McGraw-Edison Co. Halo thereafter operated as a division of McGraw-Edison and the Halo profit-sharing plan continued as a separate entity. Halo employed Fremont in 1956, McCarthy in 1961, and Dybal in 1970.

Fremont, who was a Plan trustee for 16 years, left the Company in late 1975 to form his own business. Although the actual date of his resignation is an important issue in this appeal which we will discuss Infra, it is undisputed that during November 1975, he negotiated a voluntary termination of his employment under which the Company paid him $130,000 and agreed to continue to employ him and pay him a salary at least through the end of 1975.

During October and November of 1975, Fremont and McCarthy, unknown to the Company, stole, among other things, computer printouts, microfilm cards, customer lists, and price lists from the Company, some of which included valuable trade secrets and confidential information. Dybal, who sometime in 1976 also stole Company property, resigned on March 19, 1976, and joined Fremont. McCarthy followed on May 3, 1976. The Company was unaware of the thefts until after all three had resigned.

In July 1976, the Company filed suit in Illinois state court against Fremont and his new company to enjoin them, Inter alia, from using trade secrets and from raiding Company employees. During the course of that litigation, Fremont for the first time admitted the thefts. After he made these admissions, the parties settled on August 19, 1976, and Fremont repaid to the Company everything he received under the termination agreement, including the salary he received for the period after November 11, 1975, the date of the termination agreement. The settlement expressly left unresolved the question of the plaintiff's profit-sharing benefits under the Plan.

On September 23, 1976, the plaintiffs made written claims for their benefits. These claims were denied by the Company. This action followed. Because the rights of the three plaintiffs are somewhat different under ERISA as a result of different resignation dates, years of service, etc., we will address their claims separately.

II.

The cornerstone of Fremont's claim for the benefits is § 203(a) of ERISA which provides in relevant part:

(a) Each pension plan shall provide that an employee's right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age and in addition shall satisfy the requirements of paragraphs (1) and (2) of this subsection.

(2) A plan satisfies the requirements of this paragraph if it satisfies the requirements of subparagraph (A), (B), or (C).

(A) A plan satisfies the requirements of this subparagraph if an employee who has at least 10 years of service has a nonforfeitable right to 100 percent of his accrued benefit derived from employer contributions.

29 U.S.C. § 1053(a)(2)(A). This provision, Fremont argues, renders invalid Section III(D) of the Plan which states in relevant part:

Dismissal for Cause and Termination of Employment. No part of the share of any of the following participants shall become vested in them: (i) a participant who is discharged by reason of dishonesty, theft, embezzlement, or disclosure of trade secrets or who voluntarily terminates his employment with the Company after having committed such acts.

Clearly, § 203 renders invalid "bad boy" clauses such as § III(D), and the parties before us do not dispute that. The dispute arises over whether Fremont lost his rights to benefits before the effective date of § 203. That section became effective on January 1, 1976. ²

Fremont offers two alternative theories by which § 203 would apply to prohibit forfeiture of his benefits under the Plan. First, he argues that § 203 prohibits any forfeiture of benefits after January 1, 1976 and that the forfeiture of his benefits occurred approximately 10 months later when the Company officially denied his claim for the benefits. We cannot agree that the date a former employee is denied his request for benefits is the relevant date for determining the applicability of § 203 if the former employee was not employed after the effective date of § 203. The language of the statute belies such an interpretation. It merely says that effective January 1, 1976, each pension plan shall provide that an Employee's right to benefits is nonforfeitable. We agree with the district court that § 203 only protects against forfeiture the benefits of those who are in an employee status on January 1, 1976, or thereafter. ³ Fremont nevertheless offers four cases in support of his theory that the date of forfeiture is critical. Winer v. Edison Bros. Stores Pension Plan, 593 F.2d 307 (8th Cir. 1979); Fox v. Abrams, No. CV 77-881-ALS (C.D.Cal.1978); Morgan v. Laborers Pension Trust, 433 F.Supp. 518 (N.D.Cal.1977); Amory v. Boyden Associates, Inc., 434 F.Supp. 671 (S.D.N.Y.1976).

Winer is not persuasive because the plaintiffs-employees denied benefits in that case were not terminated from employment until May 10, 1976, well after § 203 had become effective. For this reason, the court does not address the problem of the application of § 203 to employees who resign or are terminated before the effective date of § 203. Morgan v. Laborers Pension Trust, supra, is also inapposite because it does not involve construction of § 203, the language of which is critical to our conclusion.

Amory v. Boyden Associates, supra, also does not directly address the issue which we find dispositive of Fremont's claim, the inapplicability of § 203 to one whose employee status ends before the effective date of § 203. Fremont cites dicta in Amory which suggests that the date of forfeiture is the relevant date for determining the applicability of § 203. The court stated:

Several provisions of the Act are here relevant: § 1144, effective as of January 1, 1975, which preempts State law concerning employee benefit plans; and § 1053 (ERISA § 203), effective January 1, 1976, which provides detailed specifications which every employee benefit plan must meet and as of the 1976 effective date renders void any forfeiture provision such as the one here at issue.

It is at once obvious that nothing in the Act expressly deals with a forfeiture declared in the period between January 1, 1975 (when State law was replaced by Federal) and January 1, 1976 (when forfeiture of this nature became outlawed).

434 F.Supp. at 672 (emphasis added). Although the plaintiff in Amory resigned in July 1975, before § 203's effective date, the court did not address, nor apparently did the defendant raise, the theory which we find dispositive. The court denied the company's motion for summary judgment on another theory. The court reasoned that a forfeiture "declared in the period between January 1, 1975 (when State law was replaced by Federal) and January 1, 1976 (when forfeiture of this nature became outlawed)" must be governed by federal common law. Without the aid of any relevant precedent, the court declared the common law to require that forfeiture of vested pension rights be subject to a rigorous reasonableness test which creates a presumption of unreasonableness. Id. at 672-73. Even if we assume without deciding that the Amory court's analysis is correct, it would not alter our result in the present case because we are of the opinion that § III(D) would withstand a rigorous reasonableness test as applied to the plaintiffs. It is not unreasonable for a company to deny profit-sharing benefits to high level executives who in violation of the Plan admittedly stole valuable customer lists, trade secrets, and other Company property and resigned to establish a competing business. Thus, we are not persuaded by Amory because it failed to address the theory we find dispositive and because our result is not inconsistent with the analysis it used.

In Fox v. Abrams, supra, the plan year began on June 1, so § 203 became effective as to that plan on June 1, 1976. The plaintiffs resigned on May 6, 1976, and June 1, 1976. The court, in an alternative holding, held the forfeitures invalid because they occurred after June 1, 1976, the effective date of § 203. The court did not address the theory which we find persuasive in ...