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Osberg v. Foot Locker, Inc.

United States Court of Appeals, Second Circuit

July 6, 2017

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.

          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 "particularly credible, " Osberg II, 138 F.Supp.3d at 526 n.11, testified that she understood that her mission was to cut costs rather than to improve plan benefits, and that the changes she proposed to senior management would result in cost savings by causing a freeze in pension benefits. Peck's presentations to senior management expressly stated that the proposed changes would lead to "decreases in future company costs" at the expense of a "permanent loss of retirement benefits." Id. at 528 (brackets and internal quotation marks omitted). As the district court found, Foot Locker viewed announcing a benefits freeze as a "morale killer, " and "[c]onversion to a cash balance plan had the advantage of being able to obscure what was an effective freeze, without the accompanying negative publicity, loss of morale, and decreased ability to hire and retain workers." Id. (internal quotation marks omitted). The changes were approved by Foot Locker's senior management and board of directors in July and September 1995, respectively.

         Foot Locker introduced the new cash balance plan to its employees in a series of written communications, all of which the district court found to have "failed to describe wear-away, " to have "failed to clearly discuss the reasons for the difference" between the value of a participant's old and new benefits, and to have been "intentionally false and misleading." Osberg II, 138 F.Supp.3d at 529. For example, in a letter dated September 15, 1995, the Company's senior management announced that it was "excited" to introduce "important changes" to Foot Locker's employee pension plan that would give participants "a more competitive retirement benefits package" and "more flexibility and a better ability to monitor their benefits." J.A. 2137. The letter also stated that participants would be able "to see their individual account balance grow each year, and know its value." Id. Peck acknowledged in her testimony that the September 1995 letter was designed to be a "good news letter" even though she and senior management understood that the conversion would result in an effective freeze of pension benefits for most participants, and that she made an "affirmative decision, " consistent with senior management's wishes, not to include the "bad news" of wear-away in the letter. J.A. 1936.

         The fact of wear-away was also deliberately left out of later communications sent to participants, including the December 1996 summary plan description ("SPD") - a document that "ERISA contemplates . . . will be an employee's primary source of information regarding employment benefits, " Layaou v. Xerox Corp., 238 F.3d 205, 209 (2d Cir. 2001) (brackets and internal quotation marks omitted). While the SPD provided a general description of the methodology by which participants' account balances would be calculated under the cash balance plan, [2] it lacked any description of wear-away or any indication that the conversion would cause a benefits freeze for most participants. In fact, the district court found that the SPD and other Foot Locker communications not only failed to disclose wear-away, but "were designed to conceal that information." Osberg II, 138 F.Supp.3d at 537. The SPD, for example, "falsely indicated to [p]articipants that their actual retirement benefits were fully reflected in the[] account balances" to which their pay and interest credits would apply, id. at 531, when in fact any participant whose account was in wear-away would instead receive the frozen value of the benefits they had accrued under the old plan for a period of time that could extend for years. Similarly, the Highlights Memo distributed in November 1995 stated that participants would, upon retirement, "have the option of taking the lump sum payment equal to your account balance, " which the district court found to "obscure[] the fact that the accrued benefit was the sole true benefit for anyone in wear-away." Id. at 530 (internal quotation marks omitted). That false impression was further reinforced by "total compensation" statements that participants began receiving annually and which showed participants' account balances increasing each year due to the receipt of pay and interest credits.

         Foot Locker's efforts to conceal wear-away were apparently successful. The district court found that "not a single employee ever complained about [wear-away], " id. at 535, and numerous class members - including Michael Steven, the former chief financial officer of the Company's Woolworth division, as well as Foot Locker employees whose job responsibilities involved calculating pension benefits - testified at trial that they did not understand that the conversion to a new pension plan had effectively frozen their retirement benefits. Steven testified, for example, that while he requested and received an individualized statement showing the calculations underlying his account balance and the lump sum payment that he could receive upon retirement, he did not realize - even upon seeing the difference between those two numbers - that his actual retirement benefits had remained frozen despite his continued employment. In the words of the district court, "[f]rom the CFO of Woolworth stores to a cashier, no one understood what was going on." Id. at 537.

         II. Procedural History

         In 2007, plaintiff-appellee Geoffrey Osberg ("Plaintiff") brought suit against Defendants on behalf of a proposed class of plan participants and beneficiaries claiming, inter alia, that Foot Locker violated §§ 102 and 404(a) of ERISA by failing to disclose that conversion to the cash balance plan would cause wear-away, and sought relief under § 502(a) of ERISA. In 2012, the district court granted summary judgment to Defendants, basing that ruling in part on Plaintiff's failure to show "actual harm, " which the district court held was a prerequisite to the equitable remedies of reformation and surcharge. On appeal, we ruled that the district court erred in requiring proof of actual harm for the equitable remedy of reformation and declined to reach the question of whether such proof was required for the equitable remedy of surcharge. Osberg v. Foot Locker, Inc. ("Osberg I"), 555 F.App'x 77, 80-81 (2d Cir. 2014). We also declined to determine whether Plaintiff's § 102 claim was subject to a three- or six-year statute of limitations, and affirmed the district court's dismissal of Plaintiff's claim under § 204(h) of ERISA. Id. at 79-80.

         Upon remand, the district court certified a class of plan participants and their beneficiaries under Federal Rule of Civil Procedure 23(a) and 23(b)(3), and held a two-week bench trial in July 2015 at which twenty-one fact witnesses and three expert witnesses testified, some by deposition. In October 2015, the district court ruled that Foot Locker had violated §§ 102 and 404(a) of ERISA and ordered that the plan be reformed pursuant to § 502(a)(3) to conform to participants' mistaken but reasonable beliefs. Osberg II, 138 F.Supp.3d at 560. Specifically, the district court found that participants believed that they would receive the full value of the benefits that they had earned under the defined benefit plan for their service through December 31, 1995 plus the benefits that Foot Locker told participants that they would earn beginning on January 1, 1996 under the cash balance plan - that is, credits for continued service and interest, as well as a onetime seniority enhancement available to those who were at least age 50 and had at least 15 years of service on December 31, 1995. Id. at 560-61. Accordingly, the district court ordered that participants receive: (1) an "A benefit, " consisting of an initial account balance as of January 1, 1996 equivalent to the value of their benefits under the defined benefit plan as of December 31, 1995, discounted to present value using a ...


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