Gavalik v. Continental Can Co.

Decision Date19 February 1987
Docket Number85-3615,Nos. 85-3597,s. 85-3597
Parties, 8 Employee Benefits Ca 1047 Robert GAVALIK, Frank Grelo, Joseph Urban, Anthony Ulyan, Donald A. Berger, Ronald Clarke, Henry Foster, George Patterson, Joseph Kellerman, Robert Pavlik, Phillip Farley, Thomas Riley, Thomas Warren and Francis Humenik v. CONTINENTAL CAN COMPANY. Albert J. JAKUB, Fred Cipriana, Jr., Anthony J. Bernardo, Thomas A. Mulligan, William T. Tarr, Donald W. Roberts, Ernest Wirbecki and George W. Stepanic on behalf of themselves and others similarly situated Alfred Borrelli, Jr., Michael Di Iorio, Anthony Folino, Thomas E. Johston, Robert Kapolka, John C. Kincel, Peter A. Rumain, Harry H. Smith, Melvin J. Smith, Jack A. Stull and Ernest B. Taddeo, on behalf of themselves and others similarly situated v. CONTINENTAL CAN COMPANY, a member of Continental Group, Inc. Appeal of Robert GAVALIK, et al. and Albert J. Jakub, et al. Appeal of CONTINENTAL CAN COMPANY, U.S.A., a member of the Continental Group, Inc.
CourtU.S. Court of Appeals — Third Circuit

Michael H. Gottesman, (Argued), Bredhoff and Kaiser, Washington, D.C., Roslyn M. Litman, Litman, Litman, Harris & Brown, P.A., Pittsburgh, Pa., for Robert Gavalik, et al. and Albert J. Jakub, et al.

Samuel W. Braver, James D. Morton, (Argued), Buchanan Ingersoll, Professional Corp., Pittsburgh, Pa., Eugene L. Stewart, (Argued), Stewart and Stewart, Washington, D.C., for Continental Can.

Before ADAMS, * WEIS and HIGGINBOTHAM, Circuit Judges.



This litigation originated in two separate class actions, Gavalik, et al. v. Continental Can Co., C.A. No. 81-1519, filed September 18, 1981, and Jakub, et al. v. Continental Can Co., C.A. No. 82-1995, filed September 27, 1982, alleging that the institution and implementation of a "liability avoidance" scheme by Continental Can ("Continental") operated to prevent employees from attaining eligibility for employee benefits in violation of Sec. 510 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. Sec. 1140 (1982). 1 The cases were consolidated on January 17, 1984, and a single class action was certified. The trial of the consolidated action was bifurcated on the issues of liability and damages. The liability phase of the litigation commenced on July 22, 1985, and concluded on August 8, 1985. On September 24, 1985, the district court entered judgment for the defendant, and the plaintiffs appealed to this Court. Continental has cross-appealed asserting that plaintiffs' claims before the district court were barred by the applicable statute of limitations and/or plaintiffs' failure to exhaust their administrative remedies. We reject the contentions of the cross-appeal, and because we find that the district court misallocated the burdens of proof, we will reverse and remand for proceedings consistent with this opinion. 2


Continental Can is a corporation principally engaged in the business of manufacturing cans. Appellants and the class they represent 3 are former employees of Continental's Pittsburgh plant, which is the focus of this litigation. During the relevant period, appellants were all members of Local 4337 of the United Steelworkers of America, AFL-CIO ("USW"), which was their recognized collective bargaining agent.

In 1977, Continental and the USW negotiated a collective bargaining agreement under which Continental was to provide a comprehensive employee benefit plan. As part of this benefit package, Continental agreed to provide two pension plans for employees who experience a break in continuous service of at least two years. 4 Under the "70/75 pension," an employee could qualify for pension benefits before reaching age sixty-two, if s/he either (a) had at least fifteen years of continuous service, 5 In addition to the break-in-service pension benefits, USW and Continental in 1977 negotiated a change in the seniority system. Prior to the negotiations, the Pittsburgh plant had operated under a departmental seniority system. 9 In April of 1977, Continental officials had initiated meetings with USW officials to discuss the possibility of implementing plant-wide seniority 10 at the Pittsburgh plant. That summer, local union representatives at the Pittsburgh plant met with Continental officials to negotiate the plant-wide seniority system. USW favored the change over to plant-wide seniority for two reasons: the departmental seniority system had elicited charges of discrimination by the Equal Employment Opportunity Commission (EEOC), and the plant-wide seniority system would provide maximum job security for its most senior employees. See FF 73. Continental favored plant-wide seniority because it would enable the company (1) to retain its most senior and skilled employees; (2) to retain

                was fifty years of age or older and had combined age and service equal to or more than seventy years;  or (b) had at least fifteen years of continuous service and combined age and service equal to or more than seventy-five. 6   The "Rule of 65" pension 7 was paid to employees with at least twenty years of continuous service on the last day worked, whose combined age and years of service was equal to sixty-five or more but less than seventy-five.  Although the 70/75 pension plan had been in effect since 1971, the Rule of 65 was first formally proposed by the USW during the 1977 negotiations. 8   Continental's obligation to pay 70/75 and Rule of 65 benefits under the agreement arose when employees, after attaining the requisite eligibility, experienced at least a two-year break in service as the result of a plant shutdown, involuntary layoff or absence due to physical disability.  For the purposes of entitlement to these benefits, years of service included the first two years following a layoff.  This method of calculation was known as the "creep."    Under the creep, recall of a laid off employee for even one day commenced a new two-year continuous service period.  See FF 20, 38.  Under the 70/75 pension plan, an employee could creep into the necessary age and service requirement.  Under the Rule of 65 plan, an employee could creep only into the age requirement.  See FF 21-22
                employees with vested 70/75 and Rule of 65 pension benefits;  and (3) to lay off junior employees whose benefits had not yet vested.  See FF 74.  Ultimately, on October 28, 1977, Continental and the local union formally agreed to institute a plant-wide seniority system at the Pittsburgh plant effective November 1, 1977.  See FF 112-13, 118, 122

A. The "Liability Avoidance" Program

In the mid-1970s, Continental began experiencing a steady decline in business. This decline was principally a result of new manufacturing processes that required fewer plants, the increasing use by the can industry of composite materials and aluminum instead of steel to produce cans, and a growing trend among Continental's customers to begin to manufacture their own cans. See FF 31-32. Continental, as part of an effort to control and reduce its anticipated costs in light of its declining business, 11 in 1976 devised a "liability avoidance" program. 12 In order to implement effectively this program, Continental developed an intricate system called the Bell System. The concept component of the Bell System, Bell I, had two complementary objectives: to identify Continental's unfunded pension liabilities so as to avoid triggering future vesting by placing employees who had not yet become eligible for break-in-service on layoff, and to retain those employees whose benefits had already vested. See FF 53, 59, 68.

Under Bell I, Continental developed a "cap and shrink" program. It defined a "cap" as a workforce reduction designed to reduce unfunded liabilities; a "shrink" was a workforce reduction resulting from market or manufacturing conditions. See FF 54. The decision whether to cap a particular plant was made on the basis of a variety of economic factors at the plant, including its potential employee benefits costs. The determination of an actual cap level was based on Continental's assessment of the needed level of production to meet projected sales. 13 The cap-line limited employment to a specific name on the seniority roster 14 and was effective for five years. Employees below the cap-line, whether then at work or on temporary layoff, were designated as "permanently laid off," and could not be recalled for five years 15 except under extreme circumstances, and then only with prior approval from the highest level of Continental's management. See FF 54-57. These employees were not informed by Continental that they would not be recalled.

To further effectuate the goals of the Bell System, Bell II instructed plant managers to adjust their business volume to the desired level of employment. In accordance with this plan, plant managers were authorized to shift business to plants that either had low unfunded pension liability or plants that needed the work in order to retain employees with vested 70/75 benefits. See FF 61, 63; Jt.App. at 1367. In addition, Bell II produced and employed Finally, in April of 1977, a "liability avoidance tracking system"--the "Red Flag" System--was instituted in order to prevent inadvertent recalls of employees designated as permanently laid off. Red Flag was tied to Continental's payroll system and was designed to generate automatically a red flag report to alert top Continental officials whenever a permanently laid off employee received a pay check either for actual hours worked or vacation. See FF 69-70.

                scattergraphs--computerized charts that listed the age and service of Continental employees at a given time--to identify the unfunded 70/75 and Rule of 65 liabilities and to ascertain when payments under those plans would be triggered.  By looking at a scattergraph, a plant

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