International Brotherhood of Teamsters, Chauffeurs Warehousemen and Helpers of America v. Daniel Local 705, International Brotherhood of Teamsters, Chauffeurs Warehousemen and Helpers of America v. Daniel

• Decision Date: 16 January 1979
• Docket Number: Nos. 77-753,77-754,s. 77-753
• Parties: INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA, Petitioner, v. John DANIEL. LOCAL 705, INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA, et al., Petitioners, v. John DANIEL
• Court: U.S. Supreme Court

439 U.S. 551

99 S.Ct. 790

58 L.Ed.2d 808

INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA, Petitioner,

v John DANIEL.

LOCAL 705, INTERNATIONAL BROTHERHOOD OF TEAMSTERS,

CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA, et

al., Petitioners,

v. John DANIEL.

Nos. 77-753, 77-754.

Argued Oct. 31, 1978.

Decided Jan. 16, 1979.

Syllabus

A pension plan entered into under a collective-bargaining agreement between petitioner local labor union and employer trucking firms required all employees to participate in the plan but not to pay anything into it. All contributions to the plan were to be made by the employers at a specified amount per week for each man-week of covered employment. To be eligible for a pension, an employee was required to have 20 years of continuous service. Respondent employee, who had over 20 years' service, was denied a pension upon retirement because of a break in service. He then brought suit in Federal District Court, alleging, inter alia, that the union and petitioner trustee of the pension fund had misrepresented and omitted to state material facts with respect to the value of a covered employee's interest in the pension plan, and that such misstatements and omissions constituted a fraud in connection with the sale of a security in violation of § 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5, and also violated § 17(a) of the Securities Act of 1933. Denying petitioners' motion to dismiss, the District Court held that respondent's interest in the pension fund constituted a "security" within the meaning of § 2(1) of the Securities Act and § 3(a)(10) of the Securities Exchange Act because the plan created an "investment contract," and also that there had been a "sale" of this interest to respondent within the meaning of § 2(3) of the Securities Act and § 3(a)(14) of the Securities Exchange Act. The Court of Appeals affirmed. Held:

The Securities Act and the Securities Exchange Act do not apply to a noncontributory, compulsory pension plan. Pp. 558-570.

(a) To determine whether a particular financial relationship constitutes an investment contract, "[t]he test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." SEC v. W. J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244. Looking separately at each element of this test, it is apparent that an employee's participation in a noncontributory, compulsory pension plan such as the one in question here does not comport with the commonly held understanding of an investment contract. With respect to the investment-of-money element, in such a pension plan the purported investment is a relatively insignificant part of the total and indivisible compensation package of an employee, who, from the standpoint of the economic realities, is selling his labor to obtain a livelihood, not making an investment for the future. And with respect to the expectation-of-profits element, while the pension fund depends to some extent on earnings from its assets, the possibility of participating in asset earnings is too insubstantial to bring the entire transaction within the Securities Acts. Pp. 558-562.

(b) There is no evidence that Congress at any time thought noncontributory plans were subject to federal regulation as securities. Nor until the instant litigation arose is there any evidence that the SEC had ever considered the Securities Act and Securities Exchange Act to be applicable to such plans. Accordingly, there is no justification for deference to the SEC's present interpretation. Pp. 563-569.

(c) The Employee Retirement Income Security Act of 1974, which comprehensively governs the use and terms of employee pension plans, severely undercuts all argument for extending the Securities Act and Securities Exchange Act to noncontributory, compulsory pension plans, and whatever benefits employees might derive from the effect of these latter Acts are now provided in more definite form through ERISA. Pp. 569-570.

7 Cir., 561 F.2d 1223, reversed.

Sherman Carmell, Chicago, Ill., for petitioner in No. 77-754.

Sidney Dickstein, Washington, D. C., for petitioner in No. 77-753.

Jacob H. Stillman, Washington, D. C., for the Securities and Exchange Commission, as amicus curiae, by special leave of Court.

Lawrence Walner and Peter J. Barack, Chicago, Ill., for respondent in both cases.

Mr. Justice POWELL delivered the opinion of the Court.

This case presents the question whether a noncontributory, compulsory pension plan constitutes a "security" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 (Securities Acts).

I

In 1954 multiemployer collective bargaining between Local 705 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America and Chicago trucking firms produced a pension plan for employees represented by the Local. The plan was compulsory and noncontributory. Employees had no choice as to participation in the plan, and did not have the option of demanding that the employer's contribution be paid directly to them as a substitute for pension eligibility. The employees paid nothing to the plan themselves.¹

The collective-bargaining agreement initially set employer contributions to the Pension Trust Fund at $2 a week for each man-week of covered employment.² The Board of Trustees of the Fund, a body composed of an equal number of employer and union representatives, was given sole authority to set the level of benefits but had no control over the amount of required employer contributions. Initially, eligible employees received $75 a month in benefits upon retirement. Subsequent collective-bargaining agreements called for greater employer contributions, which in turn led to higher benefit payments for retirees. At the time respondent brought suit, employers contributed $21.50 per employee man-week and pension payments ranged from $425 to $525 a month depending on age at retirement.³ In order to receive a pension an employee was required to have 20 years of continuous service, including time worked before the start of the plan.

The meaning of "continuous service" is at the center of this dispute. Respondent began working as a truckdriver in the Chicago area in 1950, and joined Local 705 the following year. When the plan first went into effect, respondent automatically received 5 years' credit toward the 20-year service requirement because of his earlier work experience. He retired in 1973 and applied to the plan's administrator for a pension. The administrator determined that respondent was ineligible because of a break in service between December 1960 and July 1961.⁴ Respondent appealed the decision to the trustees, who affirmed. Respondent then asked the trustees to waive the continuous-service rule as it applied to him. After the trustees refused to waive the rule, respondent brought suit in federal court against the International Union (Teamsters), Local 705 (Local), and Louis Peick, a trustee of the Fund.

Respondent's complaint alleged that the Teamsters, the Local, and Peick misrepresented and omitted to state material facts with respect to the value of a covered employee's interest in the pension plan. Count I of the complaint charged that these misstatements and omissions constituted a fraud in connection with the sale of a security in violation of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240.10b-5 (1978). Count II charged that the same conduct amounted to a violation of § 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U.S.C. § 77q. Other counts alleged violations of various labor law and common-law duties.⁵ Respondent sought to proceed on behalf of all prospective beneficiaries of Teamsters pension plans and against all Teamsters pension funds.⁶

The petitioners moved to dismiss the first two counts of the complaint on the ground that respondent had no cause of action under the Securities Acts. The District Court denied the motion. 410 F.Supp. 541 (ND Ill.1976). It held that respondent's interest in the Pension Fund constituted a security within the meaning of § 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and § 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10),⁷ because the plan created an "investment contract" as that term had been interpreted in SEC v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). It also determined that there had been a "sale" of this interest to respondent within the meaning of § 2(3) of the Securities Act, as amended, 15 U.S.C. § 77b(3), and § 3(a)(14) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(14).⁸ It believed respondent voluntarily gave value for his interest in the plan, because he had voted on collective-bargaining agreements that chose employer contributions to the Fund instead of other wages or benefits.

The order denying the motion to dismiss was certified for appeal pursuant to 28 U.S.C. § 1292(b), and the Court of Appeals for the Seventh Circuit affirmed. 561 F.2d 1223 (1977). Relying on its perception of the economic realities of pension plans and various actions of Congress and the SEC with respect to such plans, the court ruled that respondent's interest in the Pension Fund was a "security." According to the court, a "sale" took place either when respondent ratified a collective-bargaining agreement embodying the Fund or when he accepted or retained covered employment instead of seeking other work.⁹ The court did not believe the subsequent enactment of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, 29 U.S.C. § 1001 et seq., affected the application of the Securities Acts to pension plans, as the requirements and purposes of ERISA were perceived to be...