Hummell v. S. E. Rykoff & Co.
| Decision Date | 22 December 1980 |
| Docket Number | Nos. 79-3165,79-3178,s. 79-3165 |
| Citation | 634 F.2d 446 |
| Parties | 2 Employee Benefits Ca 1416 Burton H. HUMMELL, Plaintiff-Appellee, v. S. E. RYKOFF & CO., a corporation; D. M. Hansen, as Administrator of the S. E.Rykoff & Co. Profit-Sharing Trust Plan and S. E. Rykoff & Co. AmendedProfit-Sharing Plan; Roger W. Coleman, as a member of the Advisory Committee ofthe S. E. Rykoff& Co. Profit-Sharing Trust Plan and S. E. Rykoff & Co. Amended Profit-SharingPlan; and Samuel H. Maslon, as a member of the Advisory Committee of the S. E.Rykoff & Co. Profit-Sharing Trust Plan and S. E. Rykoff & Co. AmendedProfit-Sharing Plan,Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Arthur Grebow, Cruikshank, Antin & Grebow, Beverly Hills, Cal., for hummell.
Hyman Edelman, Maslon, Kaplan, Edelman, Borman, Brand & McNulty, Minneapolis, Minn., for Hansen.
On Appeal from the United States District Court of the Central District of California.
Before WRIGHT and ALARCON, Circuit Judges, and SPEARS, Senior District Judge. *
I. INTRODUCTION
Appellants S. E. Rykoff and Co., et al (Rykoff) appeal the district court's determination that the anticompetitive forfeiture clause in the S. E. Rykoff & Co. Profit-Sharing Trust Plan (Plan) violates the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq. (1975). Appellee Hummell cross-appeals for attorneys' fees. We affirm in part and remand in part.
II. FACTS
Rykoff established a profit-sharing plan for its employees in 1966. It contained a forfeiture or "bad boy" provision which required forfeiture of all of a participating employee's accrued benefits if he or she became a business competitor with Rykoff within two years after leaving Rykoff.
Congress passed ERISA in 1974. The Act provides minimum vesting standards for employee benefits and defines permissible forfeitures. 29 U.S.C. § 1053 (1975) (herein § 1053). One of the primary purposes of the Act is to insure that plan participants do not lose vested benefits because of "unduly restrictive" forfeiture provisions. 1 It applies to plan years effective January 1, 1976.
In 1976, Rykoff amended its plan to comply with ERISA. It narrowed the anticompetitive forfeiture provision to provide that if Rykoff learns that any former plan participant is employed by a competitor, the Plan Advisory Committee may direct the plan trustee to forfeit a percentage of the participant's benefits derived from company contributions. Section 9.10 Vested contributions by Rykoff and the participant's contributions are not forfeited.
The provision applies only to participants with less than 15 years experience with Rykoff. Those with 15 years or more are fully vested, regardless of any competitive activity.
Section 9.10 includes a vesting schedule to establish what percentage of a participant's interest derived from Rykoff's contribution is forfeited if he or she engages in competitive work.
Forfeited % of
Years of Service Interest from
With Employer Employer
---------------- --------------
5 75%
6 70
7 65
8 60
9 55
10 50
11 40
12 30
13 20
14 10
15 or more 0
A different vesting schedule applies to benefits of plan participants with less than 15 years of service who terminate but do not engage in competitive activity. Section 9.05. Their interests are 100% vested after 10 years.
Years of Service % of Nonforfeitable
with Employer Accrued Benefits
------------------------- -------------------
service less than 5 years 0
at least 5 50
at least 6 60
at least 7 70
at least 8 80
at least 9 90
at least 10 or more 100
On September 15, 1977, the Los Angeles Office of the Internal Revenue Service issued a determination letter granting Rykoff's plan qualified status.
Appellee Burton Hummell (Hummell) terminated his employment with Rykoff after 11 years of service on September 23, 1976. He left to work for a competitor.
On October 21, 1977, the Advisory Committee directed the plan trustee to forfeit 40% (or $28,982.74) of Hummell's accrued benefits because of his post-employment competitive activity. The Committee arrived at the 40% figure by reference to the vesting schedule in Section 9.10.
Hummell appealed the decision to the Advisory Committee and lost. He then sued in district court which granted him summary judgment, holding the forfeiture provision violated ERISA. It declined to award attorney's fees to Hummell.
III. DISCUSSION
A. The Validity of Limited Forfeiture Provisions Under ERISA
We are asked to decide whether Rykoff's forfeiture provision violates ERISA. The initial issue is whether ERISA permits limited forfeiture provisions, a question of first impression in this circuit.
ERISA requires private pension plans to provide that an employee's right to his or her normal retirement benefit is nonforfeitable upon the attainment of normal retirement age. § 1053(a). In addition, an employee's rights in his accrued benefit derived from his contributions must be nonforfeitable, § 1053(a)(1), and the plan must satisfy one of three minimum vesting schedules. § 1053(a)(2).
The first alternative vesting schedule provides that an employee with at least 10 years of service must have "a nonforfeitable right to 100% of his accrued benefit derived from employer contributions." § 1053(a)(2)(A). There is no requirement for vesting of any lesser percentage of benefits before the required 10 years of service.
The schedule in subparagraph (a)(2)(B) provides graduated vesting. An employee with at least 5 years of service must have
a nonforfeitable right to a percentage of his accrued benefit derived from employer contributions which percentage is not less than the percentage determined under the following table:
Years of Service Nonforfeitable %
---------------- -----------------
5 25
6 30
7 35
8 40
9 45
10 50
11 60
12 70
13 80
14 90
15 or more 100
Subparagraph (a)(2)(C) offers a vesting formula based on the sum of an employee's age and service. 2
Permitted forfeitures of accrued benefits from employer contributions are in paragraphs (A)-(D) of § 1053(a)(3). They do not include anticompetitive forfeiture provisions or refer to the forfeitability of benefits which exceed the minimum vesting requirements in § 1053(a)(2)(A)-(C).
The legislative history indicates that with these limited exceptions, vested employee rights cannot be forfeited for any reason. House Rep.No. 93-807, 93d Cong., 2d Sess., reprinted in (1974) U.S.Code Cong. & Ad.News, pp. 4725-26; Senate Rep.No. 93-127, 93d Cong., 2d Sess., reprinted in (1974) U.S.Code Cong. & Ad.News, pp. 4934-35; Conference Rep.No. 93-1280, 93d Cong., 2d Sess., reprinted in (1974) U.S.Code Cong. & Ad.News, p. 5052.
The district court construed the statute to prohibit any anticompetitive forfeiture provision. Recent decisions in other circuits and Treasury Reg. § 1.411(a)-4 suggest this interpretation is erroneous.
To the extent that rights are not required to be nonforfeitable to satisfy the minimum vesting standards, or the nondiscrimination requirements of Section 401(a)(4), they may be forfeited without regard to the limitations on forfeitability required by this section.
26 C.F.R. § 1.411(a)-4. 3
Hepple v. Roberts & Dybdahl, 622 F.2d 962 (8th Cir. 1980) and Fremont v. McGraw-Edison Co., 606 F.2d 752 (7th Cir. 1979), cert. denied, 445 U.S. 951, 100 S.Ct. 1599, 63 L.Ed.2d 786 (1980), offer the same interpretation. In Fremont, the Seventh Circuit considered whether a plan participant's theft of company property prior to his resignation rendered him ineligible to receive benefits under the company profit-sharing plan. 606 F.2d at 753. The employee had been with the company for six years. The profit-sharing plan contained a forfeiture clause providing that an employee with less than 10 years of service who steals company property forfeits his accrued benefits. Id. at 759 n. 11. The plan's vesting schedule complied with the 10 year 100% option in § 1053(a) (2)(A). Id. at 760. The court held the forfeiture provision did not violate ERISA because it did not
affect any nonforfeitable interests. Under § (1053) the interests of an employee who has been with the contributor employer less than 10 years may be forfeitable if the Plan complies with § (1053)(a)(2)(A).
In Hepple, the Eighth Circuit analyzed a similar forfeiture provision. The employer's plan provided for
forfeiture of employer contributions for the benefit of employees with less than ten years of service who later compete with the employer.
622 F.2d at 963. The vesting schedule tracked the requirements of § 1053(a)(2) (A). Id. at 965 n.1.
Hepple terminated his employment after six years of service and went to work for a competitor. Id. at 963. The balance in his Employer Contribution Account was declared forfeit. Id.
The court examined the statutory language and legislative history and concluded nothing in ERISA prohibits
a plan's providing for forfeiture of benefits when the affected benefits are in excess of the minimum vesting...
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