DOL Agrees Foot Locker Should Reform Cash Balance Plan

In a case before the 2nd U.S. Circuit Court of Appeals in which Geoffrey Osberg claims his employer, Foot Locker, issued false and misleading summary plan descriptions (SPDs) in violation of the Employee Retirement Income Security Act’s (ERISA) disclosure requirements when it converted from a traditional defined benefit plan to a cash balance plan, the U.S. Department of Labor (DOL) has filed a brief in support of a district court’s decision that plan reformation is justified.

Osberg said Foot Locker failed to provide plan participants with notice, as required by ERISA, that the cash balance arrangement could potentially reduce future benefit accruals.

The DOL says the district court properly concluded that plaintiffs timely filed their complaint asserting fiduciary breach claims under ERISA’s provision allowing suit within six years of discovery of a statutory breach or violation in cases involving “fraud or concealment.” Contrary to Foot Locker’s assertion, plaintiffs were not required to establish the elements of common law fraud, including intentionality and reliance, to show concealment for purposes of this statutory provision.

According to the DOL, “Foot Locker likewise errs in arguing that each member of the class must demonstrate that he or she detrimentally relied on Foot Locker’s misrepresentations in order to establish that Foot Locker breached its duties as a fiduciary and to obtain equitable relief in the form of reformation.” The brief says this argument ignores the 2nd Circuit’s own precedent in Amara where, after remand from the Supreme Court, it soundly rejected the argument that plan participants and beneficiaries need to show detrimental reliance to obtain reformation under ERISA Section 502(a)(3) as relief for fiduciary misrepresentations and omissions.

The DOL adds that no pre-Amara case from the 2nd actually holds that each member of a class of plan participants must establish detrimental reliance to prove a fiduciary breach based on misrepresentations or to obtain reformation as relief, nor does any other case cited by Foot Locker so hold.

Just as each class member need not establish detrimental reliance, each and every member need not show mistake in order to obtain plan reformation, the brief says. “Again, in arguing to the contrary, Foot Locker ignores this Court’s decision in Amara, which concluded that plan participants can prove mistake for purposes of reformation ‘through generalized circumstantial evidence in appropriate cases,’ such as where ‘defendants have made uniform misrepresentations about an agreement’s contents and have undertaken efforts to conceal its effect.’”

When the case was first filed, the U.S. District Court for the Southern District of New York granted defendant's motion for summary judgment in its entirety, thereby dismissing the case.

On appeal, however, the 2nd Circuit reversed the district court's decision, first determining that plaintiff's Employee Retirement Income Security Act (ERISA) Section 404(a) claim was timely. The appellate court also noted that in CIGNA Corp. v. Amara, to obtain contract reformation, equity does not demand a showing of actual harm.

“We disagree Foot Locker construes Amara to hold that monetary relief is only available in ERISA cases via surcharge; therefore, absent a viable surcharge claim, the only beneficiaries with standing to pursue reformation are those that can prospectively benefit from a modification of plan terms, which does not include former employees. This interpretation is supported by neither Amara,… nor equity,” the court said in its opinion, remanding the case back to the District Court for further review.

Upon review, U.S. District Judge Katherine B. Forrest found from testimony of plan participants that the communications to them led them to believe their pension benefits were growing with their years of service. In her opinion, Forrest said all of the communications share core common characteristics: all failed to describe wear-away, and all failed to clearly discuss the reasons for the difference between a participant’s accrued benefit under the old plan and his or her balance under the new plan. She determined that all the statements were intentionally false and misleading, and that the summary plan description (SPD) contained a number of intentionally false misstatements.

“Here, there is no doubt that Foot Locker committed equitable fraud,” Forrest wrote. “It sought and obtained cost savings by altering the Participants’ Plan, but not disclosing the full extent or impact of those changes.”

Comparing the case to that of Amara, but calling Foot Locker’s violations “more egregious,” Forrest said to remedy Foot Locker’s misrepresentations, the plan must be reformed to actually provide the benefit that the misrepresentations caused participants to reasonably expect. With respect to class members who have already retired, the court ordered that retirees and former employees shall be entitled to receive the difference in value between the reformed plan calculation and the benefit they received, in addition to prejudgment interest at a rate of 6% per annum.

Foot Locker appealed to the 2nd Circuit.