The Tarnished Parachute

Legal Options

Retirees and older workers are frequently ill-prepared for the economic impact of a sudden ' and unexpected ' reduction or elimination of their retiree health benefit coverage. Unlike pension benefits, which are insured by the Pension Benefit Guarantee Cor-poration, no such protections are afforded to retirees who lose their health and welfare benefits. As a result, retirees and older workers facing the loss of health benefits are increasingly considering their legal options.

Even though the Employee Retirement Income Security Act of 1974 (ERISA), the federal law governing welfare and pension plan benefits, purports to vest plan participants only in pension benefits, attorneys for retirees have been successful in framing legal theories for challenging the elimination of health and other welfare benefits based on written and oral communications that may have led employees to the mistaken belief that they would receive such benefits for life. These theories gained force in the early 1990s when, in the wake of changes in accounting rules that required employers to report the projected costs of retiree welfare benefits and other economic conditions, many employers began to eliminate such benefits. Today, with more companies reducing their retiree health benefit obligations, these legal theories are being revisited and refined by a new, more powerful breed of class action ERISA plaintiffs' counsel.

This article reviews the panoply of claims typically resorted to by retirees faced with the reduction or elimination of their health and welfare benefits. Employers are well-advised to consider these potential claims before implementing any strategy aimed at reducing or eliminating retiree benefit obligations. Depending on the availability and potential strength of these claims, strategies to reduce retiree benefit costs may serve as either the vehicle for restoring a company's financial competitiveness, or the pathway to its financial destruction.

Claims Based on Contractual Vesting Principles

Unlike pension benefits, welfare benefits (including health) do not vest automatically under ERISA. Nevertheless, plan participants may seek to challenge the amendment or elimination of their welfare benefit rights under a 'contractual vesting' theory. Under this theory, employees' rights to retiree benefits become guaranteed, or 'vested,' if at the time of their retirement the plan purports to provide for such benefits. Because of ERISA's requirement that plans be memorialized in written form, a plan participant must identify plan language demonstrating an intent to provide lifetime benefits in order to state a contractual vesting claim. However, if the governing plan document contains an express reservation of the right to amend or terminate the plan, the participant's contractual vesting claim will in all likelihood fail ' even if there is language elsewhere in the plan purporting to promise lifetime benefits. Furthermore, even in the absence of a reservation of rights clause, some courts have found that there is a presumption against the vesting of welfare benefits.

Sometimes it is not clear from the plan language whether an employer has reserved its right to terminate retiree benefits. In these instances, courts may employ the doctrine of contra proferentem, meaning that ambiguous terms are construed against the drafter. Alternatively, extrinsic evidence (evidence outside of the terms of the contract) may be considered to determine the parties' intentions. This evidence may consist of written and oral communications to employees and evidence of past practice. Extrinsic evidence may be considered, however, only for purposes of construing ambiguous plan language, not to modify the terms of the plan.

Employers may also face exposure to contractual vesting claims when the plan terms do not coincide with the Summary Plan Description (SPD), the document distributed to participants and generally relied on by them to determine their benefit rights. For instance, an SPD could imply that retirement benefit provisions will not be amended, yet the actual plan document might contain a reservation of rights clause. When presented with such a conflict, some courts have held that the SPD should govern. In the absence of an explicit reservation of rights clause in the plan documents, courts are even more inclined to be guided by the SPD. The Sixth Circuit has held, for example, in Helwig v. Kelsey-Hayes Co., 93 F.3d 243, 250 (6^th Cir. 1996), that the SPD controls because SPDs are 'produced under a statutory obligation of comprehensiveness and accuracy' and because employers 'may not construct SPDs in such a manner that they mislead employees into thinking they have a right to benefits when other documents obliquely negate those rights.' Some circuit courts hold, however, that where the terms of the plan document and SPD conflict, the SPD controls only if the claimant has detrimentally relied upon, or has otherwise been prejudiced by, the SPD terms.

Unique issues arise in connection with contractual vesting claims brought against employers who sponsor benefit programs pursuant to collective bargaining agreements. In this context, retiree benefit claims are generally asserted under Section 301 of the Labor Management Relations Act of 1947 (LMRA), and typically allege claims for breach of contract or breach of a collective bargaining agreement (CBA). The courts are divided as to whether different rules should apply to these claims than to claims arising outside the collective bargaining context. As was true in connection with claims based on plan language, courts usually hold that retiree benefits may be terminated if the unambiguous terms of the underlying CBA permit such termination, or if the CBA contains a reservation of rights clause, and extrinsic evidence will not be considered to prove otherwise. However, where language in the CBA concerning the duration of benefits is ambiguous, extrinsic evidence will be considered to determine the intent of the parties.

The circuits have split as to whether a presumption or inference should be applied in favor of contractual vesting where the contractual language in a collective bargaining agreement is ambiguous. Courts applying an inference or presumption in favor of vesting find that it is unlikely for employees to have forgone wage increases for retirement benefits absent assurances that the benefits would continue for the duration of their retirement. Other courts, however, take a different approach and apply a rebuttable presumption against the vesting of health and welfare benefits unless the collective bargaining agreement explicitly provides otherwise.

Whether or not the plans are the product of collective bargaining, the safest course for employers is to ensure that all documents describing health and welfare plan benefits unequivocally confirm the employer's right to terminate or amend the plan at any time and for any reason. To the extent that employers are already locked into pre-existing plans for their current retirees, the decision whether to eliminate benefits should be influenced by the existence or absence of such reservation of rights clauses, and if those clauses are not present, by the existence or absence of plan language that could be construed to promise lifetime benefits.

Equitable Estoppel Claims

Retirees have also challenged unilateral modifications of health and welfare benefits by invoking an equitable (sometimes called 'promissory') estoppel theory. This type of claim is asserted where retirees have relied to their detriment on oral statements or informal representations to the effect that their benefits would not be removed or reduced. Under this theory, the plan is 'estopped' from relying on plan language that would otherwise preclude recovery of the benefits in question. Because of the individualized nature of these types of claims, they are usually considered inappropriate for class action treatment, but they still pose serious threats to employers who are contemplating the elimination or reduction of retiree benefits.

Most courts recognize a claim for equitable estoppel only under limited circumstances. Generally, they require that the participant demonstrate: 1) a material misrepresentation; 2) reliance on the misrepresentation; and 3) damage or prejudice. To establish detrimental reliance, courts have required a showing, not only that the participant detrimentally changed his or her position, but also that the adverse change was induced by the employer's misrepresentations. The Third Circuit, in Jordan v. Fed. Express Co., 116 F.3d 1005, 1115 (3d Cir. 1997), stated that a misrepresentation or omission 'rises to a material level if 'there is a substantial likelihood that it would mislead a reasonable employee in making an adequately informed retirement decision.”

Several courts have added 'extraordinary circumstances' to the elements required to establish an estoppel claim. Mere negligence, mistake, and violations of ERISA's disclosure rules have been held insufficient to satisfy this requirement. Some courts have required a showing of intent to mislead, bad faith, or fraud. Other courts, such as the Second Circuit in Abbruscato v. Empire Blue Cross & Blue Shield, 274 F.3d 90, 101 (2d Cir. 2001), have rejected this interpretation in favor of a slightly more lenient one that recognizes extraordinary circumstances in situations 'where an employer promised benefits to an employee in good faith in an intentional effort to induce the employee to take some action, and the employer later reneged on its promise.'

An estoppel claim generally cannot succeed where the misrepresentation relied upon conflicts with unambiguous written plan terms. Some courts have reasoned that reliance on a misrepresentation that is contrary to the plan document is per se unreasonable. Consistent with these rulings, courts have routinely held that reliance will be deemed unreasonable where the plan document includes an express reservation of rights provision. Thus, careful plan draftsmanship can help to avert, not only contractual vesting claims, but equitable estoppel claims as well.

Retiree Claims for Breach of Fiduciary Duty

The most significant evolution in the law with respect to retiree benefits has occurred in connection with breach of fiduciary duty claims based on plan communications. These claims are significant because, unlike contractual vesting and equitable estoppel claims, they may be viable even in the face of plan documents confirming the employer's right to terminate retiree benefits. Thus, notwithstanding even the most carefully drafted reservation of rights clause, an employer that eliminates or reduces retiree health and welfare benefits could still face exposure to liability for a breach of fiduciary duty claim based on erroneous or misleading communications to participants.

The Supreme Court's decision in Varity Corp. v. Howe, 516 U.S. 489 (1996) served as the juggernaut for fiduciary breach claims associated with employer communications. Varity held that an employer acts as a plan fiduciary when it communicates information to plan participants about the future of plan benefits, and that it breaches its fiduciary responsibilities if such communications contain material misstatements. It also held that plan participants who prevail on claims for breach of fiduciary duty may recover individualized equitable relief, thus debunking the belief that fiduciary breach claims could seek relief only on behalf of the plan as a whole.

The Court's legal pronouncements in Varity were likely influenced by the case's underlying unique and rather egregious factual allegations. Varity controlled a subsidiary called Massey Ferguson (MF), which was experiencing serious financial difficulties. To resolve these difficulties, Varity adopted a plan called 'Project Sunshine,' under which the money-losing operations of MF, together with its corporate debts, would be transferred to a newly created subsidiary called Massey Combines (MCC). In order to induce employees to transfer from MF to MCC, Varity represented to the employees that MCC 'had a bright future' and that 'benefit programs will remain unchanged.' In fact, however, MCC was 'essentially bankrupt' the day it was formed and, according to the Court, had 'little or no chance of survival.' After its second year of operations, MCC went into receivership, and its employees lost their non-pension benefits.

A class of these employees brought suit against Varity to recover the benefits they would have received under their old MF plan had they not been induced to transfer to MCC. In upholding the lower court decision in favor of the participants, the Supreme Court ruled that misleading communications by a plan fiduciary ' or in this case, a corporate plan sponsor that had acted in a fiduciary capacity ' were actionable as a breach of fiduciary duty.

Varity effectively validated prior rulings, and paved the way for subsequent rulings, that recognized claims for fiduciary breach where participants relied to their detriment on misleading plan communications, and it established a duty on the part of plan administrators to 'speak truthfully' about the availability of plan benefits. In ruling in favor of the participants on this issue, the Supreme Court rejected Varity's argument that its misstatements were made by representatives of the
company acting in their capacity as plan sponsor, and hence were not actionable as breaches of fiduciary duty. Employers frequently seize on the distinction between plan sponsorship and plan administration as a basis for limiting their exposure under ERISA, since plan sponsorship functions ' such as amending or terminating a plan ' ordinarily will not give rise to a claim under ERISA. But the Court in Varity held that, '[w]hile it may be true that amending or terminating a plan ' cannot be an action of plan 'management' or 'administration' ' it does not follow that making statements about the likely future of the plan is also beyond the scope of plan administration. ' [P]lan administrators often have, and commonly exercise, discretionary authority to communicate with beneficiaries about the future of plan benefits.'

Varity thus established that corporate personnel who wrongly advise employees about their benefit rights can be the targets of fiduciary breach claims under ERISA, even if they are not plan officials. Subsequent decisions have widened the fiduciary net further by holding that misstatements about plan benefits made by non-administrative personnel can also give rise to fiduciary breach claims if these personnel were acting as agents of the plan administrator.

In light of the recognition of claims based on communications, employers contemplating changes in retiree benefits must now not only review the applicable plan documents, but investigate carefully whatever evidence of past communications concerning their plans could conceivably give rise to an effective challenge to these changes.

Retiree Benefits and Bankruptcy

In those instances when an employer has not reserved the right terminate retiree benefits, it may nevertheless seek to achieve that end in connection with a bankruptcy filing. An employer that has filed for bankruptcy protection under Chapter 11 cannot, however, unilaterally terminate or modify retiree benefits that it is legally obligated to provide. Once a petition is filed, benefits may not be terminated until there is an order by the court imposing an amendment to the plan of benefits, or an agreement by the parties to such an amendment. A court may also order an adverse change to retirees' benefits pursuant to an application for modification if: 1) the bankruptcy trustee has made a proposal for modification to the retirees' representative; 2) the retirees' authorized representative has refused to accept the proposal without good cause; and 3) such a change is required for the reorganization and ensures that all parties are treated fairly and equitably.

Similarly, court approval is required before an employer that has filed for bankruptcy protection rejects or modifies a CBA. However, such restrictions will apply to a debtor in possession only if that debtor is otherwise responsible for retiree benefits obligations under the CBA. Several courts have held that where a debtor has expressly reserved the right to unilaterally terminate retiree benefits, the debtor may exercise that right despite the Act's restrictions.

Conclusion

Although the evolution of the law with respect to retiree benefit claims has certainly provided some clarity with respect to the respective rights of employer plan sponsors and their employee participants, the application of the law to any particular case still depends on the unique facts and circumstances pertaining to the plan in question, including the proper construction of ambiguous plan language and the various written or oral communications that participants may identify as relevant to their understanding of their rights. Furthermore, as the number of large and well-publicized terminations of benefits increases, it is reasonable to anticipate that the plaintiffs' bar will fashion new legal theories for seeking recovery of lost retirement benefits. In this uncertain environment, employers are well advised to investigate carefully the potential claims they face before acting on any proposal to reduce or eliminate retiree benefits, no matter how tempting the economic incentives may be.

Myron D. Rumeld is a Partner in Proskauer Rose LLP's Labor and Employment Department in New York, and is in charge of that office's ERISA litigation group. Jeremy M. Mittman is an Associate in the same department. Beth McManus, who is also an Associate in the Firm's Labor and Employment Department in New York, assisted with the research for this article.

As American companies struggle to compete in a global market, they are increasingly considering the merits of eliminating or reducing costly retiree benefits. For many companies, the costs of these benefits have become staggering. For example, before recently announcing plans to freeze health benefits for tens of thousands of its white-collar retirees, Ford Motor Co. was facing health-care expenses of more than $3.5 billion. Its rival, General Motors, which according to recent reports owes a projected $89 billion in welfare and pension benefits to its current and future retirees, just announced that it will offer workers with 10 years' experience a payment of $140,000 and a pension, if in return these workers will leave their employment and forgo health care benefits.

These large retiree benefit obligations date back to times when, in an effort to attract employees who would remain with them for their entire careers, and sometimes in order to maintain labor peace, companies promised 'cradle-to-grave' benefits that would enable these employees to live comfortably in retirement. Today, however, these same companies face increased competitive pressures from both start-up companies, which typically do not offer retiree health benefits to their younger workforce, and companies located in foreign countries like Japan, which assumes responsibility for retiree benefits.

The results of these competitive pressures are understandable, if not inevitable. Because companies are unable to reduce vested pension benefits, they have targeted retiree health benefits for reduction or elimination. A recent survey of over 700 large private employees by the human resources consulting firm Hewitt Associates and the Kaiser Family Foundation revealed that 71% of them had recently required their retirees to pay higher premiums, and 20% said that they planned to eliminate health-care coverage for future retirees within the next 3 years. In the words of one expert, 'The money's just not there. Employers are having a difficult time just grappling with premiums for employees. The idea of taking care of people who aren't even with you anymore is just way beyond employers' financial ability.'

Legal Options

Retirees and older workers are frequently ill-prepared for the economic impact of a sudden ' and unexpected ' reduction or elimination of their retiree health benefit coverage. Unlike pension benefits, which are insured by the Pension Benefit Guarantee Cor-poration, no such protections are afforded to retirees who lose their health and welfare benefits. As a result, retirees and older workers facing the loss of health benefits are increasingly considering their legal options.

Even though the Employee Retirement Income Security Act of 1974 (ERISA), the federal law governing welfare and pension plan benefits, purports to vest plan participants only in pension benefits, attorneys for retirees have been successful in framing legal theories for challenging the elimination of health and other welfare benefits based on written and oral communications that may have led employees to the mistaken belief that they would receive such benefits for life. These theories gained force in the early 1990s when, in the wake of changes in accounting rules that required employers to report the projected costs of retiree welfare benefits and other economic conditions, many employers began to eliminate such benefits. Today, with more companies reducing their retiree health benefit obligations, these legal theories are being revisited and refined by a new, more powerful breed of class action ERISA plaintiffs' counsel.

This article reviews the panoply of claims typically resorted to by retirees faced with the reduction or elimination of their health and welfare benefits. Employers are well-advised to consider these potential claims before implementing any strategy aimed at reducing or eliminating retiree benefit obligations. Depending on the availability and potential strength of these claims, strategies to reduce retiree benefit costs may serve as either the vehicle for restoring a company's financial competitiveness, or the pathway to its financial destruction.

Claims Based on Contractual Vesting Principles

Unlike pension benefits, welfare benefits (including health) do not vest automatically under ERISA. Nevertheless, plan participants may seek to challenge the amendment or elimination of their welfare benefit rights under a 'contractual vesting' theory. Under this theory, employees' rights to retiree benefits become guaranteed, or 'vested,' if at the time of their retirement the plan purports to provide for such benefits. Because of ERISA's requirement that plans be memorialized in written form, a plan participant must identify plan language demonstrating an intent to provide lifetime benefits in order to state a contractual vesting claim. However, if the governing plan document contains an express reservation of the right to amend or terminate the plan, the participant's contractual vesting claim will in all likelihood fail ' even if there is language elsewhere in the plan purporting to promise lifetime benefits. Furthermore, even in the absence of a reservation of rights clause, some courts have found that there is a presumption against the vesting of welfare benefits.

Sometimes it is not clear from the plan language whether an employer has reserved its right to terminate retiree benefits. In these instances, courts may employ the doctrine of contra proferentem, meaning that ambiguous terms are construed against the drafter. Alternatively, extrinsic evidence (evidence outside of the terms of the contract) may be considered to determine the parties' intentions. This evidence may consist of written and oral communications to employees and evidence of past practice. Extrinsic evidence may be considered, however, only for purposes of construing ambiguous plan language, not to modify the terms of the plan.

Employers may also face exposure to contractual vesting claims when the plan terms do not coincide with the Summary Plan Description (SPD), the document distributed to participants and generally relied on by them to determine their benefit rights. For instance, an SPD could imply that retirement benefit provisions will not be amended, yet the actual plan document might contain a reservation of rights clause. When presented with such a conflict, some courts have held that the SPD should govern. In the absence of an explicit reservation of rights clause in the plan documents, courts are even more inclined to be guided by the SPD. The Sixth Circuit has held, for example, in Helwig v. Kelsey-Hayes Co. , 93 F.3d 243, 250 (6 th Cir. 1996), that the SPD controls because SPDs are 'produced under a statutory obligation of comprehensiveness and accuracy' and because employers 'may not construct SPDs in such a manner that they mislead employees into thinking they have a right to benefits when other documents obliquely negate those rights.' Some circuit courts hold, however, that where the terms of the plan document and SPD conflict, the SPD controls only if the claimant has detrimentally relied upon, or has otherwise been prejudiced by, the SPD terms.

Unique issues arise in connection with contractual vesting claims brought against employers who sponsor benefit programs pursuant to collective bargaining agreements. In this context, retiree benefit claims are generally asserted under Section 301 of the Labor Management Relations Act of 1947 (LMRA), and typically allege claims for breach of contract or breach of a collective bargaining agreement (CBA). The courts are divided as to whether different rules should apply to these claims than to claims arising outside the collective bargaining context. As was true in connection with claims based on plan language, courts usually hold that retiree benefits may be terminated if the unambiguous terms of the underlying CBA permit such termination, or if the CBA contains a reservation of rights clause, and extrinsic evidence will not be considered to prove otherwise. However, where language in the CBA concerning the duration of benefits is ambiguous, extrinsic evidence will be considered to determine the intent of the parties.

The circuits have split as to whether a presumption or inference should be applied in favor of contractual vesting where the contractual language in a collective bargaining agreement is ambiguous. Courts applying an inference or presumption in favor of vesting find that it is unlikely for employees to have forgone wage increases for retirement benefits absent assurances that the benefits would continue for the duration of their retirement. Other courts, however, take a different approach and apply a rebuttable presumption against the vesting of health and welfare benefits unless the collective bargaining agreement explicitly provides otherwise.

Whether or not the plans are the product of collective bargaining, the safest course for employers is to ensure that all documents describing health and welfare plan benefits unequivocally confirm the employer's right to terminate or amend the plan at any time and for any reason. To the extent that employers are already locked into pre-existing plans for their current retirees, the decision whether to eliminate benefits should be influenced by the existence or absence of such reservation of rights clauses, and if those clauses are not present, by the existence or absence of plan language that could be construed to promise lifetime benefits.

Equitable Estoppel Claims

Retirees have also challenged unilateral modifications of health and welfare benefits by invoking an equitable (sometimes called 'promissory') estoppel theory. This type of claim is asserted where retirees have relied to their detriment on oral statements or informal representations to the effect that their benefits would not be removed or reduced. Under this theory, the plan is 'estopped' from relying on plan language that would otherwise preclude recovery of the benefits in question. Because of the individualized nature of these types of claims, they are usually considered inappropriate for class action treatment, but they still pose serious threats to employers who are contemplating the elimination or reduction of retiree benefits.

Most courts recognize a claim for equitable estoppel only under limited circumstances. Generally, they require that the participant demonstrate: 1) a material misrepresentation; 2) reliance on the misrepresentation; and 3) damage or prejudice. To establish detrimental reliance, courts have required a showing, not only that the participant detrimentally changed his or her position, but also that the adverse change was induced by the employer's misrepresentations. The Third Circuit, in Jordan v. Fed. Express Co. , 116 F.3d 1005, 1115 (3d Cir. 1997), stated that a misrepresentation or omission 'rises to a material level if 'there is a substantial likelihood that it would mislead a reasonable employee in making an adequately informed retirement decision.”

Several courts have added 'extraordinary circumstances' to the elements required to establish an estoppel claim. Mere negligence, mistake, and violations of ERISA's disclosure rules have been held insufficient to satisfy this requirement. Some courts have required a showing of intent to mislead, bad faith, or fraud. Other courts, such as the Second Circuit in Abbruscato v. Empire Blue Cross & Blue Shield , 274 F.3d 90, 101 (2d Cir. 2001), have rejected this interpretation in favor of a slightly more lenient one that recognizes extraordinary circumstances in situations 'where an employer promised benefits to an employee in good faith in an intentional effort to induce the employee to take some action, and the employer later reneged on its promise.'

An estoppel claim generally cannot succeed where the misrepresentation relied upon conflicts with unambiguous written plan terms. Some courts have reasoned that reliance on a misrepresentation that is contrary to the plan document is per se unreasonable. Consistent with these rulings, courts have routinely held that reliance will be deemed unreasonable where the plan document includes an express reservation of rights provision. Thus, careful plan draftsmanship can help to avert, not only contractual vesting claims, but equitable estoppel claims as well.

Retiree Claims for Breach of Fiduciary Duty

The most significant evolution in the law with respect to retiree benefits has occurred in connection with breach of fiduciary duty claims based on plan communications. These claims are significant because, unlike contractual vesting and equitable estoppel claims, they may be viable even in the face of plan documents confirming the employer's right to terminate retiree benefits. Thus, notwithstanding even the most carefully drafted reservation of rights clause, an employer that eliminates or reduces retiree health and welfare benefits could still face exposure to liability for a breach of fiduciary duty claim based on erroneous or misleading communications to participants.

The Supreme Court's decision in Varity Corp. v. Howe , 516 U.S. 489 (1996) served as the juggernaut for fiduciary breach claims associated with employer communications. Varity held that an employer acts as a plan fiduciary when it communicates information to plan participants about the future of plan benefits, and that it breaches its fiduciary responsibilities if such communications contain material misstatements. It also held that plan participants who prevail on claims for breach of fiduciary duty may recover individualized equitable relief, thus debunking the belief that fiduciary breach claims could seek relief only on behalf of the plan as a whole.

The Court's legal pronouncements in Varity were likely influenced by the case's underlying unique and rather egregious factual allegations. Varity controlled a subsidiary called Massey Ferguson (MF), which was experiencing serious financial difficulties. To resolve these difficulties, Varity adopted a plan called 'Project Sunshine,' under which the money-losing operations of MF, together with its corporate debts, would be transferred to a newly created subsidiary called Massey Combines (MCC). In order to induce employees to transfer from MF to MCC, Varity represented to the employees that MCC 'had a bright future' and that 'benefit programs will remain unchanged.' In fact, however, MCC was 'essentially bankrupt' the day it was formed and, according to the Court, had 'little or no chance of survival.' After its second year of operations, MCC went into receivership, and its employees lost their non-pension benefits.

A class of these employees brought suit against Varity to recover the benefits they would have received under their old MF plan had they not been induced to transfer to MCC. In upholding the lower court decision in favor of the participants, the Supreme Court ruled that misleading communications by a plan fiduciary ' or in this case, a corporate plan sponsor that had acted in a fiduciary capacity ' were actionable as a breach of fiduciary duty.

Varity effectively validated prior rulings, and paved the way for subsequent rulings, that recognized claims for fiduciary breach where participants relied to their detriment on misleading plan communications, and it established a duty on the part of plan administrators to 'speak truthfully' about the availability of plan benefits. In ruling in favor of the participants on this issue, the Supreme Court rejected Varity's argument that its misstatements were made by representatives of the
company acting in their capacity as plan sponsor, and hence were not actionable as breaches of fiduciary duty. Employers frequently seize on the distinction between plan sponsorship and plan administration as a basis for limiting their exposure under ERISA, since plan sponsorship functions ' such as amending or terminating a plan ' ordinarily will not give rise to a claim under ERISA. But the Court in Varity held that, '[w]hile it may be true that amending or terminating a plan ' cannot be an action of plan 'management' or 'administration' ' it does not follow that making statements about the likely future of the plan is also beyond the scope of plan administration. ' [P]lan administrators often have, and commonly exercise, discretionary authority to communicate with beneficiaries about the future of plan benefits.'

Varity thus established that corporate personnel who wrongly advise employees about their benefit rights can be the targets of fiduciary breach claims under ERISA, even if they are not plan officials. Subsequent decisions have widened the fiduciary net further by holding that misstatements about plan benefits made by non-administrative personnel can also give rise to fiduciary breach claims if these personnel were acting as agents of the plan administrator.

In light of the recognition of claims based on communications, employers contemplating changes in retiree benefits must now not only review the applicable plan documents, but investigate carefully whatever evidence of past communications concerning their plans could conceivably give rise to an effective challenge to these changes.

Retiree Benefits and Bankruptcy

In those instances when an employer has not reserved the right terminate retiree benefits, it may nevertheless seek to achieve that end in connection with a bankruptcy filing. An employer that has filed for bankruptcy protection under Chapter 11 cannot, however, unilaterally terminate or modify retiree benefits that it is legally obligated to provide. Once a petition is filed, benefits may not be terminated until there is an order by the court imposing an amendment to the plan of benefits, or an agreement by the parties to such an amendment. A court may also order an adverse change to retirees' benefits pursuant to an application for modification if: 1) the bankruptcy trustee has made a proposal for modification to the retirees' representative; 2) the retirees' authorized representative has refused to accept the proposal without good cause; and 3) such a change is required for the reorganization and ensures that all parties are treated fairly and equitably.

Similarly, court approval is required before an employer that has filed for bankruptcy protection rejects or modifies a CBA. However, such restrictions will apply to a debtor in possession only if that debtor is otherwise responsible for retiree benefits obligations under the CBA. Several courts have held that where a debtor has expressly reserved the right to unilaterally terminate retiree benefits, the debtor may exercise that right despite the Act's restrictions.

Conclusion

Although the evolution of the law with respect to retiree benefit claims has certainly provided some clarity with respect to the respective rights of employer plan sponsors and their employee participants, the application of the law to any particular case still depends on the unique facts and circumstances pertaining to the plan in question, including the proper construction of ambiguous plan language and the various written or oral communications that participants may identify as relevant to their understanding of their rights. Furthermore, as the number of large and well-publicized terminations of benefits increases, it is reasonable to anticipate that the plaintiffs' bar will fashion new legal theories for seeking recovery of lost retirement benefits. In this uncertain environment, employers are well advised to investigate carefully the potential claims they face before acting on any proposal to reduce or eliminate retiree benefits, no matter how tempting the economic incentives may be.

Myron D. Rumeld is a Partner in Proskauer Rose LLP's Labor and Employment Department in New York, and is in charge of that office's ERISA litigation group. Jeremy M. Mittman is an Associate in the same department. Beth McManus, who is also an Associate in the Firm's Labor and Employment Department in New York, assisted with the research for this article.