Systems Council Em-3 v. At & T, Civil Action No. 96-1117(GK).

• Decision Date: 12 August 1997
• Docket Number: Civil Action No. 96-1117(GK).
• Citation: Systems Council Em-3 v. At & T, 972 F.Supp. 21 (D. D.C. 1997)
• Court: U.S. District Court — District of Columbia
• Parties: SYSTEMS COUNCIL EM-3, INTERNATIONAL BROTHERHOOD of ELECTRICAL WORKERS, AFL-CIO, et al., Plaintiffs, v. AT & T CORP., et al., Defendants.

972 F.Supp. 21

SYSTEMS COUNCIL EM-3, INTERNATIONAL BROTHERHOOD of ELECTRICAL WORKERS, AFL-CIO, et al., Plaintiffs, v. AT & T CORP., et al., Defendants.

Civil Action No. 96-1117(GK).

United States District Court, District of Columbia.

August 12, 1997.

COPYRIGHT MATERIAL OMITTED

Richard B. Sigmond, Kent Cprek, Nancy A. Walker, Terrance E. Coles, Sagot, Jennings & Sigmond, Philadelphia, PA, David S. Barr, Barr, Peer & Camens, Washington, DC, for plaintiffs.

Joseph R. Guerra, Paul Zidlicky, Sidley & Austin, Washington, DC, Robert N. Ecccles, Karen M. Wahle, O'Melveny & Meyers, John J. Gallagher, Intra L. Germanis, Paul, Hastings, Janofsky & Walker, Washington, DC, Peter O. Shinevar, O'Melveny & Meyers, LLP, New York City, for defendants.

MEMORANDUM OPINION

KESSLER, District Judge.

This matter is before the Court upon the Motions of DefendantsAT & T Corporation, the AT & T Employees' Benefit Committee and the other AT & T employee benefit entities identified in the Complaint¹(collectively, "AT & T") and DefendantLucent Technologies, Inc.("Lucent") to Dismiss the Complaint [# 42, # 44].²Plaintiffs bring this action for violation of the Employee Retirement Income Security Act("ERISA"), 29 U.S.C. § 1001 et seq., and common law breach of contract.Upon consideration of the Defendants' Motions, the Plaintiffs' Opposition, Defendants' Replies, Plaintiffs' Surreply, the various supplemental pleadings filed by the parties, the arguments of counsel in open court on July 31, 1997, and the entire record herein, for the reasons discussed below, defendants' Motions to Dismiss are granted.

I.Background

Plaintiffs are current and retired employees of AT & T and Lucent, prospective retirees and spouses of both Defendants, and the unions that represent them (the "Unions").³Together, the Unions represent approximately 16,000 individuals.More than 300,000 individuals are entitled to receive benefits from the pension and welfare plans.Compl.¶ 1.

A.The Bell System Divestiture

AT & T is a successor to the American Telephone & Telegraph Company and Bell System.During the 1970's and 1980's the Bell System regional operating companies of the American Telephone and Telegraph Company were divested from AT & T.⁴That divestiture was carried out pursuant to a plan of reorganization approved by this Court.United States v. Western Elec. Co.,569 F.Supp. 1057(D.D.C.)(J. Greene), aff'd sub nom., California v. United States,464 U.S. 1013, 104 S.Ct. 542, 78 L.Ed.2d 719(1983).⁵

As part of the Bell System divestiture, pension assets and liabilities were transferred from AT & T to new pension plans "sponsored"⁶ by the regional holding companies.AT & T accomplished this transfer in compliance with the safe harbor assumptions and procedures set forth by the Pension Benefit Guarantee Corporation("PBGC") under 29 C.F.R. Part 2619 and related regulations in effect at the time of the divestiture.Under the divestiture, some employees of the American Telephone & Telegraph Co. and the Bell System were "assigned" to the new regional holding companies.

Before the divestiture, a practice known as "portability" allowed employees who transferred from one company to another company in the Bell System to carry with them their years of service with their prior Bell System employer for pension and seniority purposes.See generallyWestern Elec.,569 F.Supp. at 1091-94.At the time of the divestiture, AT & T and the regional holding companies entered into the Divestiture Interchange Agreement (the "DIA").The DIA provided for the continued portability of pension rights for most employees who transferred between the divested companies during calendar year 1984.Seeid. at 1094 n. 158.Judge Greene's decision and the accompanying DIA extended portability only through 1984.In 1984, Congress passed the Deficit Reduction Act of 1984, Pub.L. No. 98-369,98 Stat. 494, 900(1984), which codified, with some modifications, certain aspects of the DIA.It provides that:

[n]otwithstanding any provision of the [DIA] to the contrary, in the case of any change in employment on or after January 1, 1985, by a covered employee, the recognition of service credit, and enforcement of such recognition, shall be governed in the same manner and to [the] same extent as provided under the [DIA] for a change in employment by a covered employee during calendar year 1984.

Id.In response to the new statute, AT & T and the regional operating companies entered into the Mandatory Portability Agreement (the "MPA").Among other provisions, the MPA requires that when a "covered employee" moves from AT & T or one regional operating company to another, the former employer must transfer to the new employer assets sufficient to fund the pension obligations assumed by the latter company.

After the divestiture, AT & T also established its own welfare plan trusts for both union and non-union employees to fund welfare benefits⁷ for present and future retirees.⁸The trusts were financed, in part, by a transfer of assets from the AT & T Pension Plan and the AT & T Management Pension Plan.That transfer was accomplished in accordance with 26 U.S.C. § 420 and an agreement with the collective bargaining representatives for the union employees, including Plaintiff Systems Council EM-3.Once the welfare trusts were established and the corresponding assets had been transferred, employees of AT & T and its affiliates who retired did so in reliance on AT & T's promise of continued benefits.Compl.¶¶ 6(i)-(k), 17-18.

B.The Current Dispute

In 1995, Congress changed the regulation of the telecommunications industry.In response to these legislative changes, as well as other economic and business factors, AT & T announced in the fall of 1995 that it would undertake a strategic restructuring pursuant to which AT & T would separate into three publicly traded businesses: AT & T would focus on communications services; Lucent would focus on communications systems; and NCR Corporation would focus on transaction intensive computing.⁹Compl.¶ 19.

Lucent was incorporated on January 4, 1996.Although it is a publicly traded company, it is under the control of AT & T for the purposes of ERISA,section 29 U.S.C. § 1301(b).Thus, AT & T is considered a "single employer" of the employees of AT & T and Lucent.Compl.¶ 20.

A February 1, 1996, Employee Benefits Agreement ("EBA"), signed and delivered by Lucent, governs the employee benefit obligations of AT & T and Lucent with respect to the benefit plans already established by AT & T and similar employee benefit plans Lucent will establish.The EBA provides that employees and retirees assigned to Lucent in the reorganization will continue to participate in the AT & T benefit plans until all of the common stock of Lucent owned by AT & T is "spun-off" from AT & T and distributed to individual AT & T stockholders.¹⁰At the time of the distribution, Lucent will no longer be under the common control of AT & T, as that term is defined by ERISA,29 U.S.C. § 1301(b).Compl.¶ 21.

The EBA also governs Lucent's responsibility for payment of employee pension and welfare benefit obligations.After the distribution of Lucent stock from AT & T to individual AT & T stockholders, Lucent will be responsible for administering and paying all benefit obligations for its employees and retirees, that is, those employees and retirees assigned to Lucent in the restructuring.Lucent will be delegated benefit responsibilities for those employees who had been employed in the businesses transferred to Lucent or who are otherwise assigned for employee benefit allocation purposes to Lucent.Lucent will establish its own pension and other employee benefit plans, which will generally be the same in form as the AT & T plans.However, the EBA allows Lucent to discontinue or change its pension and welfare plans in the future without regard to the level of benefits being provided to AT & T employees and retirees at the time of such amendment.Compl.¶ 22-23.

The EBA provides for the distribution of the assets of the AT & T pension plans between those plans and plans Lucent will establish.The methodology for determining the division of assets between the AT & T and Lucent plans differs from that used to distribute benefit plan assets in the Bell System divestiture.However, the EBA provides that the actuarial assumptions used must be the same as those used by AT & T to determine the minimum funding requirements for its pension plans under § 302 of the ERISA,29 U.S.C. § 1082, and§ 412 of the Internal Revenue Code,26 U.S.C. § 412.EBA § 8.2(a).Those assumptions are required, by law, to be reasonable.See26 U.S.C. § 412(c)(3)(A)(i).Further, the EBA allocates any surplus pension assets equally between the AT & T and Lucent pension plans.EBA § 3.2.Plaintiffs contend that the methodology embodied in the EBA "may" unlawfully favor AT &T. Compl. ¶¶ 6(d)-(e), 24.

AT & T has also directed that those assets allocable to the retirees and employees assigned to Lucent which are held in AT & T's welfare plan trusts and other welfare plans are to be transferred to a corresponding trust or other funding vehicle established by Lucent.Plaintiffs contend that the liabilities being transferred to Lucent (i.e., the benefits that Lucent will be responsible for paying to employees and retirees) are disproportionate to those being retained by AT & T.They further contend that the actuarial assumptions being used to determine the allocation of assets in the division do not give priority to cash needs for present retirees.Compl.¶ 25.

Under the EBA, Lucent is to appoint a nominally independent fiduciary.The fiduciary's duty is limited to a review of the accuracy of data, computations and application of the methodology provided in the EBA.The fiduciary will not have the authority to challenge the EBA's methodology and, according to Plaintiffs, will not be provided with sufficient...