Randall A. Beach v. Commonwealth Edison Company

382 F.3d 656, 33 Employee Benefits Cas. (BNA) 1577, 2004 U.S. App. LEXIS 17956, 2004 WL 1879210

• Court: Court of Appeals for the Seventh Circuit
• Decided: August 24, 2004
• Docket: 03-3907
• Status: Published

Opinions

EASTERBROOK, Circuit Judge.

After 31 years on the job, Randall Beach retired from Commonwealth Edison in June 1997 and moved to Idaho. He was 52 at the time. By leaving before age 55, Beach gave up entitlement to future health benefits, though he retained his vested pension. Before taking this extra-early retirement, Beach asked his supervisor, plus ComEd’s human resources staff, whether there was any immediate prospect that the firm would offer a voluntary separation package in his department, the Transmission and Distribution Organization. Beach knew that ComEd was reorganizing department by department and that it sometimes offered sweeteners, such as severance pay and health benefits, to those who agreed to depart. As Beach remembers these conversations, “everybody said absolutely it’s not going to happen. You’re not going to get the package. The company is not going to offer your department a package. It just will not happen. That was the essence of everything I got.” Six weeks after Beach’s retirement, however, ComEd did offer a separation package to 240 of the 4,700 employees in his department. Had he been employed on August 7, 1997, Beach would have been eligible for these benefits. When ComEd declined to treat him as if he had departed in August or September rather than May (when he gave notice and stopped working) or June (when he left the payroll), Beach filed this suit under the Employee Retirement Income Security Act. After a bench trial on stipulated facts, the district judge concluded that ComEd had violated its fiduciary duty to a participant in an ERISA plan by giving incorrect advice. Even though no one had intended to deceive Beach — ComEd’s senior managers did not begin to consider separation benefits for the Transmission and Distribution Organization until after Beach’s retirement, and no one in the human resources staff knew what was coming — the district judge held that ComEd must treat Beach as if he had stayed through August and qualified for all benefits then on offer. 2003 WL 22287353, 2003 U.S. Dist. LEXIS 17675 (N.D.I11. Oct. 2, 2003); see also 2002 U.S. Dist. LEXIS 14663, 2002 WL 1827627 (N.D.I11. Aug. 6, 2002).

The district court’s major premise is that ComEd owed Beach a fiduciary duty with respect to future fringe-benefit plans, because he was a participant in the firm’s pension plan. The court’s minor premise is that any material inaccuracy, even an unintentional error, violates that fiduciary duty. The minor premise is problematic given this court’s decisions in Vallone v. CNA Financial Corp., 375 F.3d 623, 640-43 (7th Cir.2004); Frahm v. Equitable Life Assurance Society, 137 F.3d 955 (7th Cir.1998); and Librizzi v. Children’s Memorial Medical Center, 134 F.3d 1302 (7th Cir.1998), though it has some support elsewhere. See Martinez v. Schlumberger, Ltd., 338 F.3d 407 (5th Cir.2003); Bins v. Exxon Co., 220 F.3d 1042 (9th Cir.2000) (en banc). We need not consider the minor premise, however, because the district court’s major premise is mistaken.

Duties under ERISA are plan-specific. See Diak v. Dwyer; Costello & Knox, P.C., 33 F.3d 809, 811 (7th Cir.1994); James v. National Business Systems, Inc., 924 F.2d 718, 720 (7th Cir.1991). The statute defines a “fiduciary” as a person who exercises authority or discretion over the administration of a plan, but only when performing those functions. 29 U.S.C. § 1002(21)(A). Thus an employer is not a fiduciary when considering whether to establish a plan in the first place, or what specific benefits to offer when creating or amending a plan. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 119 S.Ct. 755, 142 L.Ed.2d 881 (1999); Lockheed Corp. v. Spink, 517 U.S. 882, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996); Johnson v. Georgia-Pacific Corp., 19 F.3d 1184 (7th Cir.1994). Otherwise by adopting a pension plan an employer would become its employees’ fiduciary for all purposes and would be obliged, for example, to maximize its workers’ salaries or to design plans that maximize fringe benefits. As Hughes Aircraft and similar decisions show, that is not ERISA’s command. Beach was (and is) a participant in ComEd’s pension plan but does not contend that he has received less than his due under it. He also was a participant in some welfare-benefit plans, such as ComEd’s health-care plan; once again, however, he does not complain that ComEd wrongfully denied him any of those benefits or misled him in any way about them. He knew that if he left before age 55 those benefits would end; that decision was made with eyes open. What he wants- — and what the district court gave him — is benefits under a separate plan that was not established until after he quit.

Throughout his briefs, Beach proceeds as if the separation incentives were created by amendment of a plan in which he was already a participant. That enables him to invoke Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), which held that ERISA prohibits a plan fiduciary from deceiving participants in an existing pension plan about the value of its benefits compared with those under a successor or substitute plan. Yet the plan under which Beach wants (and was awarded) benefits does not amend or modify any of ComEd’s other plans — nor did Beach have to choose between its benefits and those of the plans in which he was a participant. The “Voluntary Separation Plan for Designated Transmission and Distribution Management Employees of Commonwealth Edison Company” dated August 7, 1997, is in the record: it is a standalone welfare-benefit plan that does not amend, supplement, or replace any other plan. As it did not come into existence until after Beach’s retirement, ComEd did not owe him any fiduciary duty concerning its benefits.

Doubtless federal common law prohibits fraud with respect to pension and welfare benefits, apart from any need to invoke ERISA’s fiduciary duty. ERISA preempts state law relating to pension plans, and federal courts regularly create federal common law (based on contract and trust law, see Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989)) to fill the gap. As we have emphasized, however, Beach does not contend that anyone defrauded him. Fraud requires knowledge of the truth and an intent to conceal or mislead. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The people Beach consulted failed to foresee events, which is understandable because no plan had been proposed, let alone adopted, at the time. The district judge did not find the advice to have been either malicious or reckless. Even in retrospect it does not look wildly inaccurate. Beach worked in a division with 4,700 employees, only 240 of whom received an offer of special voluntary-separation benefits. By and large, employees in that division would have done well to make plans on the assumption that the pension and welfare systems already in place were the only ones they need consider. It turns out that Beach would have been among the fortunate 5% in his division, but just as there can be no fraud by hindsight (see Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978) (Friendly, J.)) so a prediction that pans out for 95% of the concerned employees is hard to condemn just because it misses the mark for the rest. See United States ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 378 (7th Cir.2003); Murray v. Abt Associates Inc., 18 F.3d 1376, 1379 (7th Cir.1994); DiLeo v. Ernst & Young, 901 F.2d 624, 627-28 (7th Cir.1990). The staff should have let Beach know the limits of their information. (Perhaps they did so; it is hard to reconstruct oral advice after the fact, especially when one side does not remember anything. Only Beach recollects the conversations, and he got only the gist; he does not remember the precise words anyone used.) Negligent failure to add disclaimers and cautions is some distance from fraud, however.

A number of decisions address the question whether ERISA requires plan sponsors to give accurate information about potential amendments to existing plans. Varity shows that candid and complete information is required if two plans are in existence, and the sponsor tries to persuade employees to give up benefits under one in exchange for benefits under the other. These follow-on decisions conclude that a similar approach governs when a single plan is in the process of amendment. The majority view is that a duty of accurate disclosure begins “when (1) a specific proposal (2) is being discussed for purposes of implementation (3) by senior management with the authority to implement the change.” Fischer v. Philadelphia Electric Co., 96 F.3d 1533, 1539 (3d Cir.1996). At that point details of the amendment become material; until then there is only speculation. Accord, Vartanian v. Monsanto Co., 131 F.3d 264, 272 (1st Cir.1997); McAuley v. IBM Corp., 165 F.3d 1038, 1043 (6th Cir.1999); Wilson v. Southwestern Bell Telephone Co., 55 F.3d 399, 405 (8th Cir.1995); Bins, supra, 220 F.3d at 1048; Mathews v. Chevron Corp., 362 F.3d 1172, 1180-82 (9th Cir.2004); Rockett v. Sun Co., 109 F.3d 1515, 1522-23 (10th Cir.1997); Barnes v. Lacy, 927 F.2d 539, 544 (11th Cir.1991). Two circuits conclude that the duty of disclosure arises sometime before the change is under “serious consideration” — though just what must be disclosed, and when, these circuits have struggled to pin down. See Ballone v. Eastman Kodak Co., 109 F.3d 117 (2d Cir.1997); Martinez, supra.

This debate mirrors (though the decisions do not acknowledge) a controversy in corporate and securities law. How soon must issuers of securities tell investors, or their employees, that merger discussions or other potentially substantial corporate transactions are afoot? We know from Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), that firms cannot commit fraud about such transactions at any stage, but the time at which the information becomes so important that it must be disclosed accurately (if the issuer says anything), even if there is no intent to deceive, has been hard to determine. We have taken the view that accurate disclosure is not required until the price and structure of the deal have been resolved, see Flamm v. Eberstadt, 814 F.2d 1169 (7th Cir.1987), though earlier disclosure may be required in closely held corporations, see Jordan v. Duff & Phelps, Inc., 815 F.2d 429 (7th Cir.1987). No court has held, however, that there is a duty in corporate or securities laws to predict accurately events that lie ahead. There is no reason why ERISA should require more.

The majority rule, reflected in Fischer, has the better of this debate. Giving firms a duty to forecast accurately, if the benefits staff says anything at all, could not help plan participants. It would just induce employers to tell the human resources staff to say nothing at all — to make no predictions and to refer employees to the printed plan descriptions. Yet chancy predictions may be better than silence; think of the 95% of the employees in ComEd’s Transmission and Distribution Organization who would have received exactly the right advice, which could have facilitated their retirement planning. The alternative to enforced silence would be a declaration in the employee handbook that no one should rely on any oral information about the plans. That might or might not curtail legal risks — some workers would be bound to ask why the firm even had a benefits advisory staff, if it was insisting that everything the staff said was worthless — but again would do little to help people in Beach’s position. It does not take familiarity with Bayes’s Theorem to see that even potentially fallacious news may be better than no news. If the benefits staff must clam up, then rumor and office scuttlebutt come to the fore, and it is likely to be less, accurate than the staffs educated guesses. So we are not persuaded by Ballone or Martinez.

ComEd did not amend any of its plans. We need not decide whether Fischer’s approach would apply to the establishment of a new plan, because none was under consideration when Beach resigned. There was no proposal at all, let alone a specific proposal under review by senior managers. It is undisputed that ComEd did not begin internal discussion of the details about the Transmission and Distribution Organization’s reorganization until mid-June 1997, a month after Beach had given notice (and about the same time as his last day on the payroll). ComEd concluded that a small net reduction in staff would be required— about 30 of the 4,700 positions were to be eliminated. At a meeting on July 22 or 23, 1997, managers began to discuss whether it would make sense to use separation incentives, as opposed to other means, to achieve this reduction. Sometime late in July or early in August, Howard Nelson, ComEd’s “Strategic Staffing Director,” drafted a separation-incentives plan covering only 5% of the division’s staff (240 employees, in the hope that 30 would take the bait). This plan was approved by Paul McCoy, Vice President for the Transmission and Distribution Organization, on August 6, and was announced to employees the next day. None of the circuits following the Fischer approach would conclude that this plan was under “serious consideration” before Beach retired. So even if we were to apply this approach to new plans — a question that we do not resolve today — Beach could not benefit.

Beach was not the victim of fraud, and ComEd did not have a duty of accurate disclosure in the period preceding the plan’s adoption. The human relations staff might have been careless, but it did not violate any duty of loyalty owed to Beach. Accordingly, the judgment of the district court is reversed.