Goldstein v. Johnson & Johnson

• Decision Date: 25 May 2001
• Docket Number: No. 00-5149,00-5149
• Citation: 251 F.3d 433
• Parties: (3rd Cir. 2001) GIDEON GOLDSTEIN, M.D., PH.D., Appellant v. JOHNSON & JOHNSON; RETIREMENT PLAN OF JOHNSON & JOHNSON AND AFFILIATED COMPANIES; CONSOLIDATED RETIREMENT PLAN OF JOHNSON & JOHNSON; THE EXCESS BENEFIT PLAN OF JOHNSON & JOHNSON
• Court: U.S. Court of Appeals — Third Circuit

Page 433

251 F.3d 433 (3rd Cir. 2001)

GIDEON GOLDSTEIN, M.D., PH.D., Appellant v. JOHNSON & JOHNSON; RETIREMENT PLAN OF JOHNSON & JOHNSON AND AFFILIATED COMPANIES; CONSOLIDATED RETIREMENT PLAN OF JOHNSON & JOHNSON; THE EXCESS BENEFIT PLAN OF JOHNSON & JOHNSON

No. 00-5149

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued September 14, 2000

May 25, 2001

[Copyrighted Material Omitted]

SHEPPARD A. GURYAN, ESQUIRE (ARGUED), BRUCE H. SNYDER, ESQUIRE, Lasser Hochman, L.L.C., Roseland, NJ, Counsel for Appellant.

FRANCIS X. DEE, ESQUIRE (ARGUED), STEPHEN F. PAYERLE, ESQUIRE, Carpenter, Bennett & Morrissey, Newark, NJ, Counsel for Appellees.

Before: BECKER, Chief Judge, NYGAARD and AMBRO, Circuit Judges.

OPINION OF THE COURT

BECKER, Chief Judge.

This is an appeal by Dr. Gideon Goldstein from the adverse judgment of the District Court in favor of his former employer, Johnson & Johnson (J&J), following a bench trial. It requires us to address again the question of the proper scope of judicial review of the decision of a plan administrator acting under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq., to deny benefits to a participant. Although this topic has been exhaustively examined in the context of benefits denials generally, see Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989), and in the context of decisions made by potentially self-interested administrators specifically, see Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377 (3d Cir. 2000), we now face a benefits-denial decision in a new context: that of a "top hat" plan, i.e., a "plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly trained employees." Miller v. Eichleay Eng'rs, Inc., 886 F.2d 30, 34 n.8 (3d Cir. 1989) (citations omitted).

In Firestone Tire, the Supreme Court explained that because ERISA plans are analogous to "trusts" for employees, with the plan administrator serving as trustee, a reviewing court owes deference to the discretionary decisions of the administrator just as the discretionary decisions of a trustee would receive deference. See Firestone Tire, 489 U.S. at 111. In Pinto, we interpreted Firestone Tire to mandate a more searching scrutiny of such discretionary decisions in situations where the impartiality of the administrator is called into question, either because the structure of the plan itself inherently creates a conflict of interest, or because the beneficiary has put forth specific evidence of bias or bad faith in his or her particular case. See Pinto, 214 F.3d at 383-87. However, both Firestone Tire and Pinto are premised on the analogy of an ERISA plan to a traditional trust.

In contrast, this Court has routinely treated top hat plans differently from other kinds of plans. See, e.g., In re New Valley Corp., 89 F.3d 143, 148-49 (3d Cir. 1996) (explaining differences between top hat plans and other ERISA plans). This is because top hat plans are expressly exempted from most of the substantive ERISA requirements normally employed to protect workers' interests in their plans. See 29 U.S.C. 1051(2), 1081(a)(3), 1101(a)(1). Top hat plans are unfunded, they do not vest, and they are not required to name fiduciaries. See id. Under such circumstances, the analogy to trust law fails, and the plans are more appropriately considered as unilateral contracts, whereby neither party's interpretation is entitled to any more "deference" than the other party's. See In re New Valley, 89 F.3d at 149 (top hat plans are governed by the federal common law of contract); Kemmerer v. ICI Americas Inc., 70 F.3d 281, 287 (3d Cir. 1995) (same).

There appears to be no reason, however, why the precondition that mandates deference in the context of the more typical ERISA plan -- that is, a written clause explicitly granting authority to the plan administrator to interpret the terms of the plan, see Firestone Tire, 489 U.S. at 111-12 -- should not be given effect as part of the unilateral contract that constitutes a top hat plan. In accordance with ordinary contract principles, we conclude that, depending on the language used, such a clause has the potential to grant the plan administrator discretion to construe the terms of the plan, subject to the implied duty of good faith and fair dealing. See Restatement (Second) of Contracts 205. And, as with any other contract term, courts retain the authority to review the administrator's compliance with that duty to exercise discretion in good faith.

The dispute in this case centers around the proper characterization of an unusual form of compensation that Goldstein received during his tenure at J&J. The question is whether this compensation, which involved paying to Goldstein a specified percentage of the sales of products he developed, should have been taken into account for the purpose of determining his monthly pension under the terms of J&J's retirement plans. Goldstein argues that these payments should have been used to calculate his pension; the plan administrator disagrees. Here, the grant of discretion to the plan administrator to interpret the plan's terms was broad, in that the administrator was given "sole authority" to "interpret the provisions" of the plan, and the administrator's actions were to be "final and conclusive for all persons." Moreover, the District Court's factual conclusion that the administrator at all times acted in good faith with respect to the employee's claim for benefits is not clearly erroneous. Accordingly, we will affirm the judgment of the District Court denying Goldstein's claim for additional benefits.

I. Facts

Goldstein is a physician who specializes in immunobiology research, specifically AIDS research. In 1977, Goldstein, then employed by the Sloan-Kettering Institute for Cancer Research, received a patent on the drug thymopentin, which he assigned to his employer. Later that year, he joined Ortho Pharmaceutical Corporation, a subsidiary of J&J. Ortho licensed the thymopentin patent from Sloan-Kettering to allow Goldstein to continue his work, paying a royalty for the license based on sales, and paying a "commission" to Goldstein equal to one percent of the royalty.¹

In 1987, J&J created the Immunobiology Research Institute, headed by Goldstein. At that time, Goldstein entered into a new employment contract with J&J. This new contract contained a section titled "Compensation," with three subheadings. The first subheading, "Salary, Bonus and Employee Benefits" explained that Goldstein would receive a "salary and cash bonus each year," and would be "entitled to participate in all general employee benefit plans . . . in accordance with their terms, including . . . retirement plans." The second subheading, "Commissions," provided that in addition to his salary, Goldstein would receive a commission equal to one and one-fourth percent of the sales of the products he developed. The commissions would continue at a reduced rate for five years after the expiration of the patents, irrespective of Goldstein's continued employment with J&J. The agreement also provided that J&J was under no obligation to market Goldstein's products, and that the salary and bonus payments were to be paid "in lieu of " that obligation. The third subheading stated that Goldstein would not participate in J&J's executive stock bonus plan, a provision to which Goldstein had agreed in exchange for the right to receive commissions. As it happened, throughout Goldstein's relationship with J&J, the only patent that was actually marketed -- and thus, the only patent that generated income to Goldstein -- was the thymopentin patent. Despite this fact, Goldstein's commissions greatly exceeded his salary and bonus payments, constituting almost 75% of his total compensation.

Throughout Goldstein's tenure with J&J, the company maintained a system of retirement benefits for its employees, consisting of two interrelated plans (together, "the Plan"). The first was an ordinary funded pension plan (the Retirement Plan), subject to all of ERISA's substantive requirements. Under this plan, retirees would receive monthly benefits in an amount determined by a formula based on the average compensation earned by the employee during his or her five highest consecutive earning years with the company. The amount of these payments was capped in order for the plan to maintain its qualified status under the Internal Revenue Code. See 26 U.S.C. 415. In addition to its Retirement Plan, J&J also maintained what it termed an "Excess Benefit Plan" (the Top Hat Plan) designed to work in tandem with the Retirement Plan.² The Top Hat Plan paid out the benefits due an employee under J&J's pension formula that, due to the cap, could not be paid directly from the Retirement Plan.

Both plans were administered by a Pension Committee. Under the terms of the Retirement Plan, the Pension Committee was granted "sole authority" to "interpret" the terms of the plan. Under the terms of the Top Hat Plan, benefits would be calculated according to the terms of the Retirement Plan, and the "decisions made by and the actions taken by [the Pension Committee] in the administration of this Excess Plan shall be final and conclusive for all persons." By early 1995, the Committee had delegated much of its authority to interpret the Plan to a subcommittee known as the Benefits Claims Committee (BCC). The Pension Committee was the named fiduciary of the Retirement Plan. However, the Top Hat Plan was, by definition, unfunded (i.e., benefits were paid directly out of J&J's operating revenues), and its administrator not only had no fiduciary responsibilities, but was also explicitly exempted from personal liability for actions taken with respect to the plan. Obviously, both the lack of fiduciary responsibility and the exemption from personal liability...