Big Win For ERISA Plaintiffs

In an important win for plaintiffs in ERISA cases, the Third U.S. Circuit Court of Appeals has ruled that the “doctrine of ratification” cannot be used to justify retroactive application of a change to a pension plan if it would have the effect of reducing a worker's accrued benefits.

In its 10-page opinion in Depenbrock v. CIGNA Corp., a unanimous three-judge panel reversed Senior U.S. District Judge Robert F. Kelly's dismissal of claims under the Employee Retirement Income Security Act (ERISA) after finding that Kelly's reliance on the doctrine of ratification “is misplaced because ratification would effect a retroactive reduction of [the plaintiff's] accrued benefits.”

In his opening paragraph, Senior Third Circuit Judge Max Rosenn said John Depenbrock's lawsuit was “a by-product of corporate America's recent effort to curb costs by … scaling back the benefits provided under pension plans.”

Depenbrock began working at CIGNA in 1983 when the company provided its employees with a “generous traditional pension plan,” Rosenn noted.

But in late 1997, CIGNA proposed amendments to its pension plan under which younger, short-term employees were to be transferred to a more modest “cash balance” pension formula, while long-term employees such as Depenbrock would “grandfather” under the traditional plan and receive higher benefits.

In footnotes, Rosenn explained that a “traditional” pension plan “pays an annuity based on the retiree's earnings history, usually the most recent or highest paid years, and the number of completed years of service to the company.”

By contrast, “cash balance” plans “guarantee an employee a certain contribution level, usually an annual percentage of salary, plus a fixed percentage of interest.”

CIGNA's proposed changes to its pension plan also included a “rehire rule” which stated that long-term employees who left CIGNA and were rehired after Dec. 31, 1997, would not participate in the old plan upon return but instead would be transferred immediately into the new plan.

The changes were set to go into effect on Jan. 1, 1998.

But the Third Circuit found that pension plan changes must be “in writing,” and that CIGNA did not “formally adopt” the proposed changes until Dec. 21, 1998, when its CEO executed a written adoption of the amendments.

The facts of Depenbrock's case read like a law school hypothetical.

According to the suit, Depenbrock resigned from CIGNA on Jan. 2, 1998 ' just one day after the proposed changes were set to take effect ' but returned to CIGNA on Nov. 30, 1998, or 22 days before the CEO's formal, written adoption of the amendment. Depenbrock's lawyers argued that the old pension rule was in effect when he was rehired and therefore provided that he would immediately resume participation under the old plan since the changes had not yet been formally adopted.

CIGNA's lawyers insisted that even though the amendment was not formally adopted until Dec. 21, 1998, it should nonetheless be enforced against Depenbrock because the changes were first announced in November 1997, and the CEO's adoption of the amendment had the effect of retroactively ratifying it.

As a result, CIGNA's lawyers argued that the “effective date” of the amendment was Jan. 1, 1998.

Since Depenbrock resigned one day later, they said, the rehire rule was properly applied.

In a July 2003 opinion, Kelly sided with CIGNA, finding that CIGNA's amendment procedure complied with ERISA.

“While this court acknowledges that the conversion of Depenbrock's benefit plan … is not necessarily to his financial benefit, it does not change the outcome that the validly adopted rehire rule was correctly applied to Depenbrock upon his return to CIGNA,” Kelly wrote.

One of CIGNA's actuaries estimated that transferring Depenbrock from the old plan to the new plan would result in his losing $800,000 in benefits, assuming he continued to work for CIGNA until age 55.

On appeal, Depenbrock's lawyers ' Stephen R. Bruce, a solo practitioner in Washington, DC, and William M. O'Connell III of Barbin Lauffer & O'Connell in Rockledge, PA ' argued that Kelly erred in holding that the rehire rule was in effect when Depenbrock was rehired because the ruling was premised on the erroneous finding that the CEO's adoption of the amendment could be given retroactive effect.

Instead, they argued, the rehire rule cannot be applied to Depenbrock since the changes did not legally take effect until 22 days after he was rehired, when CIGNA finally executed revised formal plan documents.

CIGNA's lawyers argued that Kelly was correct in applying the doctrine of ratification and holding that the changes took effect one day before Depenbrock's resignation.

The CEO's formal adoption of the changes, they argued, effected a “retroactive ratification” of the plan amendment with an effective date of Jan. 1, 1998.

Now the Third Circuit has ruled that Kelly erred because application of the doctrine of ratification “is prohibited where the amendment retroactively reduces the intervening rights of third parties, such as plan participants.”

Rosenn, in an opinion joined by Third Circuit Judges Theodore A. McKee and Joseph F. Weis, found that “unfortunately for CIGNA, the district court's reliance on the doctrine of ratification is misplaced because ratification would effect a retroactive reduction of Depenbrock's accrued benefits under the old plan.”

Since the amendment was not “formally adopted” until Dec. 21, 1998, Rosenn found that Depenbrock “acquired rights in the interval before affirmance ' namely, the right to receive benefits under the old plan ' and retained his right to accrued benefits, instead of having to settle for the more modest benefits provided under the new plan.”

Rosenn concluded that “because ratification of the amendment … would unlawfully deprive Depenbrock of intervening substantial benefits, ratification is ineffective.”

In an important win for plaintiffs in ERISA cases, the Third U.S. Circuit Court of Appeals has ruled that the “doctrine of ratification” cannot be used to justify retroactive application of a change to a pension plan if it would have the effect of reducing a worker's accrued benefits.

In its 10-page opinion in Depenbrock v. CIGNA Corp., a unanimous three-judge panel reversed Senior U.S. District Judge Robert F. Kelly's dismissal of claims under the Employee Retirement Income Security Act (ERISA) after finding that Kelly's reliance on the doctrine of ratification “is misplaced because ratification would effect a retroactive reduction of [the plaintiff's] accrued benefits.”

In his opening paragraph, Senior Third Circuit Judge Max Rosenn said John Depenbrock's lawsuit was “a by-product of corporate America's recent effort to curb costs by … scaling back the benefits provided under pension plans.”

Depenbrock began working at CIGNA in 1983 when the company provided its employees with a “generous traditional pension plan,” Rosenn noted.

But in late 1997, CIGNA proposed amendments to its pension plan under which younger, short-term employees were to be transferred to a more modest “cash balance” pension formula, while long-term employees such as Depenbrock would “grandfather” under the traditional plan and receive higher benefits.

In footnotes, Rosenn explained that a “traditional” pension plan “pays an annuity based on the retiree's earnings history, usually the most recent or highest paid years, and the number of completed years of service to the company.”

By contrast, “cash balance” plans “guarantee an employee a certain contribution level, usually an annual percentage of salary, plus a fixed percentage of interest.”

CIGNA's proposed changes to its pension plan also included a “rehire rule” which stated that long-term employees who left CIGNA and were rehired after Dec. 31, 1997, would not participate in the old plan upon return but instead would be transferred immediately into the new plan.

The changes were set to go into effect on Jan. 1, 1998.

But the Third Circuit found that pension plan changes must be “in writing,” and that CIGNA did not “formally adopt” the proposed changes until Dec. 21, 1998, when its CEO executed a written adoption of the amendments.

The facts of Depenbrock's case read like a law school hypothetical.

According to the suit, Depenbrock resigned from CIGNA on Jan. 2, 1998 ' just one day after the proposed changes were set to take effect ' but returned to CIGNA on Nov. 30, 1998, or 22 days before the CEO's formal, written adoption of the amendment. Depenbrock's lawyers argued that the old pension rule was in effect when he was rehired and therefore provided that he would immediately resume participation under the old plan since the changes had not yet been formally adopted.

CIGNA's lawyers insisted that even though the amendment was not formally adopted until Dec. 21, 1998, it should nonetheless be enforced against Depenbrock because the changes were first announced in November 1997, and the CEO's adoption of the amendment had the effect of retroactively ratifying it.

As a result, CIGNA's lawyers argued that the “effective date” of the amendment was Jan. 1, 1998.

Since Depenbrock resigned one day later, they said, the rehire rule was properly applied.

In a July 2003 opinion, Kelly sided with CIGNA, finding that CIGNA's amendment procedure complied with ERISA.

“While this court acknowledges that the conversion of Depenbrock's benefit plan … is not necessarily to his financial benefit, it does not change the outcome that the validly adopted rehire rule was correctly applied to Depenbrock upon his return to CIGNA,” Kelly wrote.

One of CIGNA's actuaries estimated that transferring Depenbrock from the old plan to the new plan would result in his losing $800,000 in benefits, assuming he continued to work for CIGNA until age 55.

On appeal, Depenbrock's lawyers ' Stephen R. Bruce, a solo practitioner in Washington, DC, and William M. O'Connell III of Barbin Lauffer & O'Connell in Rockledge, PA ' argued that Kelly erred in holding that the rehire rule was in effect when Depenbrock was rehired because the ruling was premised on the erroneous finding that the CEO's adoption of the amendment could be given retroactive effect.

Instead, they argued, the rehire rule cannot be applied to Depenbrock since the changes did not legally take effect until 22 days after he was rehired, when CIGNA finally executed revised formal plan documents.

CIGNA's lawyers argued that Kelly was correct in applying the doctrine of ratification and holding that the changes took effect one day before Depenbrock's resignation.

The CEO's formal adoption of the changes, they argued, effected a “retroactive ratification” of the plan amendment with an effective date of Jan. 1, 1998.

Now the Third Circuit has ruled that Kelly erred because application of the doctrine of ratification “is prohibited where the amendment retroactively reduces the intervening rights of third parties, such as plan participants.”

Rosenn, in an opinion joined by Third Circuit Judges Theodore A. McKee and Joseph F. Weis, found that “unfortunately for CIGNA, the district court's reliance on the doctrine of ratification is misplaced because ratification would effect a retroactive reduction of Depenbrock's accrued benefits under the old plan.”

Since the amendment was not “formally adopted” until Dec. 21, 1998, Rosenn found that Depenbrock “acquired rights in the interval before affirmance ' namely, the right to receive benefits under the old plan ' and retained his right to accrued benefits, instead of having to settle for the more modest benefits provided under the new plan.”

Rosenn concluded that “because ratification of the amendment … would unlawfully deprive Depenbrock of intervening substantial benefits, ratification is ineffective.”