Osberg v. Foot Locker, Inc., 070617 FED2, 15-3602-cv
| Opinion Judge | Gerard E. Lynch, Circuit Judge: |
| Party Name | Geoffrey Osberg, on behalf of himself and on behalf of all others similarly situated, Plaintiff-Appellee, v. Foot Locker, Inc., Foot Locker Retirement Plan, Defendants-Appellants. |
| Attorney | Julia Penny Clark, Bredhoff & Kaiser, PLLC, Washington, DC (Eli Gottesdiener, Gottesdiener Law Firm, PLLC, Brooklyn, NY, on the brief), for Plaintiff-Appellee Geoffrey Osberg. Myron D. Rumeld, Proskauer Rose LLP, New York, NY (Mark D. Harris, Proskauer Rose LLP, New York, NY; Robert Rachal, Prosk... |
| Judge Panel | Before: Winter, Cabranes, and Lynch, Circuit Judges. |
| Case Date | July 06, 2017 |
| Court | United States Courts of Appeals, U.S. Court of Appeals — Second Circuit |
Argued: January 25, 2017
Defendants-appellants Foot Locker, Inc. ("Foot Locker" or the "Company") and Foot Locker Retirement Plan (together with Foot Locker, "Defendants") appeal from a judgment entered by the United States District Court for the Southern District of New York (Katherine B. Forrest, Judge). Following a two-week bench trial, the district court held that Foot Locker violated §§ 102 and 404(a) of the Employee Retirement Income Security Act ("ERISA") by, inter alia, failing to disclose "wear-away" caused by the Company's introduction of a new employee pension plan - a phenomenon which effectively amounted to an undisclosed freeze in pension benefits. Drawing on its equitable power under § 502(a)(3) of ERISA, the district court ordered reformation of the plan to conform to plan participants' reasonably mistaken expectations, which the district court found to have resulted from Foot Locker's materially false, misleading, and incomplete disclosures.
On appeal, Defendants do not challenge the district court's determination that Foot Locker violated ERISA. Instead, they quarrel with the district court's award of equitable relief under § 502(a)(3), arguing that the district court erred by: (1) awarding relief to plan participants whose claims were barred by the applicable statute of limitations; (2) ordering class-wide relief on participants' § 404(a) claims without requiring individualized proof of detrimental reliance; (3) concluding that mistake, a prerequisite to the equitable remedy of reformation, had been shown by clear and convincing evidence as to all class members; and (4) using a formula for calculating relief that resulted in a windfall to certain plan participants. For the reasons that follow, we reject Defendants' challenges to the district court's award of equitable relief and AFFIRM the judgment of the district court.
Julia Penny Clark, Bredhoff & Kaiser, PLLC, Washington, DC (Eli Gottesdiener, Gottesdiener Law Firm, PLLC, Brooklyn, NY, on the brief), for Plaintiff-Appellee Geoffrey Osberg.
Myron D. Rumeld, Proskauer Rose LLP, New York, NY (Mark D. Harris, Proskauer Rose LLP, New York, NY; Robert Rachal, Proskauer Rose LLP, New Orleans, LA; John E. Roberts, Proskauer Rose LLP, Boston, MA; Amir C. Tayrani, Gibson, Dunn & Crutcher LLP, Washington, DC, on the brief), for Defendants-Appellants Foot Locker, Inc., Foot Locker Retirement Plan.
Eirik Cheverud, Trial Attorney (M. Patricia Smith, Solicitor of Labor; G. William Scott, Associate Solicitor; Elizabeth Hopkins, Counsel for Appellate and Special Litigation, on the brief) for Amicus Curiae Thomas E. Perez, Secretary of the United States Department of Labor, Washington, DC, in support of Plaintiff-Appellee.
Dara S. Smith, AARP Foundation Litigation, Washington, DC for Amicus Curiae AARP, in support of Plaintiff-Appellee.
Evan Miller, Jones Day, Washington, DC, Lauren P. Ruben, Jones Day, New York, NY for Amici Curiae the American Benefits Council, the ERISA Industry Committee, and the Chamber of Commerce of the United States of America, in support of Defendants-Appellants.
Before: Winter, Cabranes, and Lynch, Circuit Judges.
Gerard E. Lynch, Circuit Judge:
Defendants-appellants Foot Locker, Inc. ("Foot Locker" or the "Company") and Foot Locker Retirement Plan (together with Foot Locker, "Defendants") appeal from a judgment entered by the United States District Court for the Southern District of New York (Katherine B. Forrest, Judge). Following a two-week bench trial, the district court held that Foot Locker violated §§ 102 and 404(a) of the Employee Retirement Income Security Act ("ERISA") by, inter alia, failing to disclose "wear-away" caused by the Company's introduction of a new employee pension plan - a phenomenon which effectively amounted to an undisclosed freeze in pension benefits. Drawing on its equitable power under § 502(a)(3) of ERISA, the district court ordered reformation of the plan to conform to plan participants' reasonably mistaken expectations, which the district court found to have resulted from Foot Locker's materially false, misleading, and incomplete disclosures.
On appeal, Defendants do not challenge the district court's determination that Foot Locker violated ERISA. Instead, they quarrel with the district court's award of equitable relief under § 502(a)(3), arguing that the district court erred by: (1) awarding relief to plan participants whose claims were barred by the applicable statute of limitations; (2) ordering class-wide relief on participants' § 404(a) claims without requiring individualized proof of detrimental reliance; (3) concluding that mistake, a prerequisite to the equitable remedy of reformation, had been shown by clear and convincing evidence as to all class members; and (4) using a formula for calculating relief that resulted in a windfall to certain plan participants. For the reasons that follow, we reject Defendants' challenges to the district court's award of equitable relief and AFFIRM the judgment of the district court.
BACKGROUND
I.
Factual Background
The facts as found by the district court in ruling that Foot Locker violated §§ 102 and 404(a) of ERISA are not in dispute, see Osberg v. Foot Locker, Inc. ("Osberg II"), 138 F.Supp.3d 517 (S.D.N.Y. 2015), and we recite only those necessary to explain our resolution of this appeal. Effective January 1, 1996, Foot Locker converted its employee pension plan from a defined benefit plan to a cash balance plan. Under the defined benefit plan, participants had been entitled to an annual benefit beginning at age 65 that was calculated on the basis of their compensation level and years of service. The benefit took the form of an annuity, and, with exceptions not relevant here, employees were not given the option to receive its aggregate value as a lump sum. In contrast, under the newly-introduced cash balance plan, participants held a hypothetical account balance that, upon retirement, could be paid out as a lump sum or used to purchase an annuity.
The switch to a cash balance plan required Foot Locker to convert participants' existing accrued benefits into a figure that would be used to calculate their initial account balances under the new plan. For that conversion, Foot Locker used a formula that guaranteed that the vast majority of participants' initial account balances would be worth less than the value of their accrued pension benefits under the old plan.1 Specifically, the formula proceeded by: (1) calculating the aggregate value as of December 31, 1995 of the annuity that a participant would have received at age 65 under the old plan; (2) discounting that aggregate value to its value as of January 1, 1996 to reflect the time value of money; and (3) applying a mortality discount to the January 1, 1996 present value to reflect the possibility that the participant might not live to age 65. At steps one and two of the conversion, a nine-percent discount rate was used, but following conversion, participants received pay credits and an interest credit at only six percent under the new plan. The district court found that the disparity meant that most participants' account balances would lag behind the value of their old benefits for some period of time - in many cases, for years.
To address that problem, the cash balance plan included a stopgap measure that defined a participant's actual benefits as the greater of: (1) the participant's benefits under the defined benefit plan as of December 31, 1995; and (2) the participant's benefits under the new cash balance plan. The "greater of" provision had the benefit of ensuring that participants would not lose money due to Foot Locker's switch to a cash balance plan, consistent with ERISA's ban on plan amendments that reduce a participant's "accrued benefit, " which is known as the "anti-cutback" rule, 29 U.S.C. § 1054(g). But it also meant that participants' actual benefits would remain effectively frozen for some period of time following conversion. That is, until participants earned enough pay and interest credits to close the gap between the value of their cash balance account and their old benefits, their actual benefits would remain frozen at the value of their old benefits due to the operation of the "greater of" provision. During that period, any pay and interest credits earned by a participant would not increase his or her actual benefits, but merely reduce the gap between the value of the participant's cash balance account and the participant's old benefits. That phenomenon - the fact that a participant's actual pension benefits did not increase despite continued employment - is known in the benefits industry as "wear-away." See, e.g., Amara v. CIGNA Corp. ("Amara II"), 775 F.3d 510, 516 (2d Cir. 2014).
The history of the adoption of the cash balance plan makes clear that Foot Locker's management recognized that conversion to the new plan would cause wear-away for most of its employees, but embraced the phenomenon as a cost-cutting measure. In late 1994 or early 1995, following a request from Foot Locker's then-chief executive officer, Roger N. Farah, a task force of four employees had been formed to investigate cost savings that could be generated from changes to Foot Locker's employee pension plan. All four members of the task force testified at trial, including its leader, Patricia Peck, who was ultimately responsible for deciding which changes to propose to management. Peck, whom the district court found...
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