Osberg v. Foot Locker, Inc.

Citations: 138 F. Supp. 3d 517; 2015 WL 5786523Docket: No. 07 Civ. 1358(KBF)

Court: District Court, S.D. New York; October 5, 2015; Federal District Court

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In the certified class action involving current and former employees of Foot Locker, Inc., the Court addressed claims under the Employee Retirement Income Security Act (ERISA) regarding the reformation of the pension plan. The core issue was that Foot Locker allegedly failed to adequately inform employees about changes to the pension plan that took effect on January 1, 1996, which resulted in a freeze on the growth of pension benefits. This freeze meant that additional service time did not equate to increased benefits for most participants, leading to a period of "wear-away."

The Court conducted a bench trial, during which 21 fact witnesses and three expert witnesses provided testimony. The evidence indicated that although Foot Locker acknowledged the existence of wear-away, it asserted that its communications sufficiently disclosed the details of the plan changes. However, Foot Locker did not explicitly mention "wear-away," believing the concept too complex to explain clearly, and feared that detailed disclosures might mislead participants about their entitlements.

The Court found overwhelming evidence that the pension plan changes effectively froze benefit accruals and that this freeze was not adequately disclosed to participants. Key findings included: the intentional nature of the wear-away feature, the lack of disclosure in communications, the significant impact on thousands of employees, and the conclusion that clearer disclosures would not have been overly confusing. This situation was deemed more severe than in the Amara v. CIGNA Corp. case, as the plan's structure inherently led to widespread and predictable wear-away rather than fluctuations in interest rates.

The Court's findings of fact outline the significant changes to Foot Locker's pension plan following the January 1, 1996 amendment, which transitioned from a defined benefit plan to a cash balance plan. Prior to this amendment, benefits were calculated based on a participant's compensation and years of service, providing an annual benefit at age 65, with options for early retirement distributions. The amendment converted the accrued benefits as of December 31, 1995, into an initial account balance under a new formula through a three-step process: calculating a lump sum value of the age-65 benefit, discounting it to present value using a 9% discount rate, and applying a mortality discount. 

Post-conversion, participants’ account balances could earn pay credits and interest at a fixed annual rate of 6%, which created a misleading impression of benefit growth since the initial conversion utilized a higher discount rate. This discrepancy led to many participants experiencing a "wear-away" period, where their pension benefits did not grow despite continued service. To adhere to ERISA’s anti-cutback rule, benefits were calculated using a "greater of" formula, ensuring that participants received the higher value between their December 31, 1995 accrued benefit (the A benefit) and their cash balance benefit (the B benefit). The comparison between these benefits involved converting both to annuities, typically resulting in the A benefit exceeding the B benefit for most participants. Consequently, the growth in the B benefit due to additional service and interest credits did not translate into an increase in the actual benefits received.

Participants in the new Plan can opt to receive their pension benefits either as a lump sum or an annuity. ERISA mandates that lump sums must not be less than the present value of a Participant’s age-65 benefit, calculated using specific interest and mortality assumptions from IRC 417(e). Estimating lump sum wear-away is complex due to annual fluctuations in the 417(e) rate, which affects the lump sum value of frozen benefits as of December 31, 1995. The cash balance conversion coincided with the introduction of a new 401(k) plan.

The previous Plan featured an early retirement subsidy allowing Participants aged 55 to 65 to take early benefits. For those with less than 15 years of service, the benefit was reduced by 6% per year for early commencement, while those with at least 15 years of service faced a 4% reduction per year. A Participant under 55 with 15 years of service could receive 60% of their accrued benefit as an annuity, although they could not collect until age 55. Benefits decreased annually for those working past age 55, reaching no additional value at age 65. The early retirement subsidy was costly, and to benefit from it under the new Plan, Participants had to choose an annuity, though approximately 97% opted for lump sums.

Participants aged 50 or older with at least 15 years of service on December 31, 1995, received an enhancement to their account balance, with a maximum increase of 66.67% for those aged 50 to 55, tapering down until disappearing at age 65.

Internal communications revealed that Foot Locker initiated the Plan amendment in late 1994 or early 1995 due to financial difficulties and a need to reduce costs, including retirement benefits. CEO Roger N. Farah sought recommendations for cost savings, leading to the formation of a task force comprising key employees from the corporate benefits department. Pat Peck, the Vice President of Human Resources, led the team to propose Plan changes and communicate them to Participants, emphasizing the need for cost-cutting. Peck collaborated with the actuarial advisor, William M. Mercer Inc., and, based on their guidance, recommended converting to a cash-balance plan alongside the introduction of a 401(k) plan.

In February 1995, Peck discovered that a proposed cash balance plan would pause the accrual of new benefits for employees due to the interaction between the discount rate and the GATT rate. Her notes from a meeting with Mercer indicated that this change would not be classified as a partial plan termination but merely an amendment, and she recognized a potential positive impact on P.L. contributions. Peck understood the concept of "wear-away," acknowledging that it was not a mandatory aspect of the plan design; the Company could select rates that either caused or did not cause wear-away. She noted that the chosen rates resulted in wear-away, which was essential for her role.

Peck was aware that the conversion to the plan would yield cost savings for the Company, contingent on the suspension of benefits for participants during wear-away. She recognized that a decline in the GATT rate would exacerbate the wear-away effect, meaning participants would not see increases in their cash balance accounts, effectively reducing their total compensation. Prior to May 1995, she had not finalized recommendations for management regarding the plan changes but recognized that a lump sum option could have been incorporated.

On May 1, 1995, Peck presented her recommendations to management, highlighting the cash balance plan's savings and its suitability for the Company’s demographic changes. She acknowledged that while the plan could reduce future costs, it would also result in a permanent loss of retirement benefits, although the Company was concerned that announcing a temporary freeze could negatively affect morale. Peck noted that wear-away functioned similarly to a freeze but was not presented as such to avoid adverse publicity and impacts on employee retention.

On July 20, 1995, Peck presented the proposed pension changes to senior management, indicating that wear-away would significantly contribute to expected cost savings. She testified that senior management was actively involved in the decision-making process. Subsequently, on August 8, 1995, a presentation including a comparison of various defined benefit alternatives and benefit illustrations for the selected cash balance plan was made to the Company’s Retirement Investment Committee.

On August 22, 1995, Peck provided the Board with a summary of a presentation from August 8 to facilitate review before a scheduled meeting on September 13, 1995. During this meeting, Thomson presented recommendations that the Board adopted, leading to a company-wide announcement on September 15, 1995, regarding changes to the retirement Plan. By September 1996, Peck discovered that the wear-away period for employees would last four to five years, significantly longer than the original two to three years anticipated. On September 11, 1996, Mercer informed Foot Locker that the annual cost under the new Plan would rise from approximately $4 million to $10 million by the year 2000, coinciding with the end of the wear-away period. This letter, which mentioned wear-away and indicated potential short-term savings, was reviewed by top executives, including Farah, who requested a meeting regarding the interest crediting rate associated with cash account balances.

Peck communicated to at least one senior executive that wear-away was an integral part of the Plan design affecting all employees. The Summary Plan Description (SPD) was not printed and distributed until December 1996, after the extended wear-away period became apparent. In November 1996, Peck made a presentation highlighting that the Plan changes, approved in July 1995 and implemented in January 1996, had saved the company $6 million from 1995 to 1996.

Foot Locker's communications to employees regarding the retirement plan changes were misleading, failing to explain wear-away and the disparity between accrued benefits under the old Plan and cash balances under the new one. The September 15, 1995, announcement letter misleadingly framed the changes as positive, despite management's awareness that the alterations included a temporary freeze on benefit accruals, a negative aspect. Peck, involved in drafting this letter, deemed it a "good news" communication, omitting negative information on the grounds that it did not apply to everyone, despite evidence indicating most employees faced adverse impacts from the changes.

On September 15, 1995, Foot Locker announced changes to The Woolworth Retirement Plan designed to enhance participant flexibility and monitoring of benefits through individual accounts. Contributions to these accounts would be based on a new formula considering percentage of pay and years of service. However, Foot Locker was aware that the claim that participants could see their account balance grow was misleading for those in a "wear-away" period, as their account balances held no real value unless explicitly communicated. At trial, Peck acknowledged the lack of clarity regarding the wear-away status, which was omitted from subsequent communications, including a November 17, 1995 memo she helped draft. This memo misled participants by stating they could take a lump sum equal to their account balance upon termination, concealing the fact that their accrued benefits were the only true value during wear-away.

Additional statements in the communications and the Summary Plan Description (SPD), distributed in December 1996, falsely indicated that participants' actual retirement benefits were fully represented in their account balances. The SPD inaccurately described how benefits were determined, including claims of annual interest and compensation credits, without disclosing that many participants would default to the lesser accrued benefit under the "greater of" formula. Testimonies from employees involved in pension design confirmed the intentional omission of wear-away effects in employee communications, leading to a misconception that account balance growth equated to an increase in actual benefits.

Annuity payments are determined by first increasing the account balance with interest credits until the normal retirement date, after which the total is converted into an annuity based on federal law and IRS regulations. The payout to participants is the greater of their account balance or the calculated annuity. Benefits manager Marion Derham acknowledged that the "greater of" clause did not clarify the concept of wear-away. The Summary Plan Description (SPD) outlines the "Initial Account Balance," stating that the accrued benefit at employment termination is the greater of two values: one based on the Plan as amended in 1996 and another from December 31, 1995. However, this language inaccurately implies that the account balance, rather than the final benefit, is the basis for comparison. The term "initial account balance" refers to the actuarial equivalent lump sum value of the accrued benefit as of December 31, 1995, calculated using a 9% interest rate and specific IRS mortality tables, but the SPD does not explain these technical terms, making them inaccessible to most participants. Interest credits, which are stated to grow account balances at 6% annually, do not reflect actual growth in pension benefits for many participants. Peck, who approved the SPD, was aware that wear-away would continue for several years and that previous communications contained inaccuracies but did not take corrective action in the SPD.

Peck testified that the Summary Plan Description (SPD) falsely represented that Plan benefits were based on account balances for Participants in wear-away, a status not disclosed in the SPD. The SPD primarily focused on account balance benefits, irrelevant to those in wear-away until they exited this status. Peck acknowledged the expected attrition would lead many employees to leave without ever getting out of wear-away. She made a conscious choice to communicate only "good news" to Participants, omitting information about the temporary cessation of benefit accrual. Peck and her team were aware that wear-away facilitated cost savings for the Company. She recognized that most Participants would not read the entire SPD, focusing instead on the Highlights section, which also failed to mention wear-away. Misstatements were recurring, with annual compensation booklets and pension statements misleadingly promoting the account balance as a measure of benefit value. The "Amended Plan" column inaccurately suggested that the account balance as of January 1, 1996, would be the expected payment, disregarding the December 31, 1995 accrued benefit, which was often significantly higher. Other materials sent to Participants similarly did not clarify the impact of wear-away, and while some received statements indicating higher lump sums, these did not explain the misleading nature of the initial account balance. Overall, the communications reinforced the misconception that account size equated to benefit size.

Foot Locker claimed that its communications with employees were aligned with legal advice received, but evidence indicates that both internal and external counsel lacked complete information regarding the impact of "wear-away" on participants. Specifically, Peck failed to inform outside counsel that wear-away could persist for years, and although outside counsel recommended revisions to annual statements to clarify benefits, inside counsel provided no feedback before the statements were disseminated. A follow-up communication in March 1996 also went out unchanged.

Foot Locker argued that plan changes offered benefits such as lump-sum retirement options and a 401(k) plan, but evidence suggests these could have been provided without implementing a cash balance plan that included wear-away. The lack of clear communication regarding the actual retirement benefits and the effects of wear-away contributed to employees' misunderstanding; notably, no employees complained about wear-away, likely due to misleading communications.

Testimonies from employees, including Ada Cardona, Ralph Campuzano, and Doris Albright, revealed a general lack of understanding about the plan changes. Cardona, who worked for Foot Locker for 40 years, believed the pension plan would continue without realizing the implications of the conversion. Similarly, Campuzano, who saved all plan communications, thought his benefits would continue to grow, unaware that he was always in a state of wear-away. Albright, an administrative manager, interacted with employees regarding benefits but also indicated that the communications did not clarify the issues at hand. Overall, the employee experiences underscore the ineffectiveness of Foot Locker's communications regarding the pension plan and its changes.

Several class members, including Richard Schaeffer, Russell Howard, and Michael Steven, provided credible testimony regarding their misunderstandings of the pension Plan changes. Schaeffer, who worked at Woolworth from 1975 to 1997, believed his benefits would continue to grow based on communications from Foot Locker, but he did not comprehend that his pension had not been increasing during 1996 and 1997. His reliance on Foot Locker's information led him to focus solely on the bottom line figure, overlooking the calculations that indicated no growth in his pension benefits.

Russell Howard, employed from 1967 to 2003, also testified that he understood his pension benefits to be growing throughout his tenure, based on the communications he received. He believed that his initial account balance reflected the total value of his earned benefits until December 31, 1995, and was under the impression that continued employment would further increase this amount. He explicitly stated that he did not suspect his pension had stopped growing.

Michael Steven, former Chief Financial Officer of the Woolworth division, shared similar misconceptions. He thought his previous benefits were incorporated into a cash balance account as a result of the Plan changes but did not realize that this conversion led to a reduced amount compared to what he was entitled to as of December 31, 1995. He sought an estimate of his pension's value from Foot Locker prior to the changes and received a statement that did not clarify the actual implications of the conversion on his benefits.

Steven compared his estimated lump sum pension benefit to his initial account balance and concluded the lump sum was larger, attributing the difference to actuarial calculations. He believed his pension would increase with additional service, which was not the case. Steven's reliance on this information was established, and despite making a second inquiry in 1996 that revealed discrepancies, he did not recognize that he had not earned additional benefits during his employment. He misunderstood the calculation details, particularly the discount rate used, and during trial, while Foot Locker's counsel attempted to clarify these calculations, it became evident that Steven still lacked a true understanding of the concept of wear-away. 

Geoffrey Osberg, a named plaintiff and former Foot Locker employee, testified that he also did not understand his pension benefit was not increasing with additional years of service. He recalled receiving a communication in 1995 about changes to the pension plan, interpreting it as positive. The evidence presented at trial indicated that the company intended for participants to rely on their communications, which failed to disclose the wear-away phenomenon, effectively concealing critical information. Osberg and other class members, regardless of their roles, testified credibly that they were unaware they had ceased accruing pension benefits, a misunderstanding that extended even to employees responsible for pension calculations, as evidenced by Ellen Glickfield's testimony.

The claimant believed her accrued benefit as of December 31, 1995, became her opening cash account balance. Despite receiving a larger minimum lump sum (MLS) than her cash balance, she did not comprehend the reason for the discrepancy, attributing it to governmental regulations. She viewed the MLS as a potential extra amount due to IRS calculation requirements based on interest rates. Similarly, Sherry Flesses from the HR Department thought she was earning more pension benefits and was unaware that her benefits had been frozen. She was surprised to learn she had not accrued new benefits and believed that one always continued to earn more after their initial benefits.

The plan administrator was identified as an ERISA fiduciary, with Foot Locker serving as the administrator of the Foot Locker Retirement Plan. Despite this, the company adhered to a "caveat emptor" approach regarding pension communications. An employee named Peck, a fiduciary and plan administrator, exhibited a poor understanding of her fiduciary duties, failing to recognize her obligations when issuing communications about plan changes. Roger Farah, Woolworth's CEO during the plan change, demonstrated annoyance during trial and denied understanding his fiduciary responsibilities regarding plan participants.

Expert testimony from actuary Deutsch was presented, with the court finding him credible. He explained that the “actuarial equivalent lump sum value” of a future payment is calculated based on an assumed interest rate. He opined that this value for the December 31, 1995, accrued benefit could be reasonably calculated using one of two methods: either assuming the lump sum would be immediately cashed out and invested at a 6.06% interest rate or assuming it would remain in the Plan and earn a fixed 6% interest.

Foot Locker's application of a 9% discount rate and an additional mortality discount led to opening account balances that were not actuarially equivalent to the accrued benefit as of December 31, 1995. Testimony from Kiley confirmed that this discount rate did not produce an actuarially equivalent value, supporting the Court's finding that communications about converting to an actuarial equivalent lump sum were false and misleading. Deutsch testified that any mortality discount should have been paired with "survivorship" credits, which were absent in this case. He explained that a company's pension contributions consist of unfunded liabilities (the gap between earned liabilities and assets) and annual normal costs, with the unfunded liability being fixed. Under the unit credit funding method used by the Plan, Foot Locker's decision to implement a 9% conversion rate resulted in a temporary suspension of future benefit accruals for most employees. Deutsch disagreed with Foot Locker’s assertion that employees only earned the right to a lump sum upon payment, asserting that employees had the right to a lump sum from January 1, 1996, when the Plan was amended. Deutsch characterized "wear-away" as equivalent to a temporary freeze, analyzing it through both annuity and lump sum comparisons. He noted that, while a small number of participants had initial account balances exceeding the lump sum value of their frozen accrued benefits, 98.6% had lower initial balances compared to the lump sum value. Sher, another actuary, provided insights that clarified the Class's position but did not undermine it, emphasizing that the rationale for the plan conversion was irrelevant to the core issue following the amendment.

The Company met its fiduciary duties to Participants by effectively communicating changes regarding the cash balance plan. Expert Sher acknowledged various design options for cash balance plans that can be tailored to achieve specific cost savings, including the possibility of none. He indicated that while "wear-away" is not essential in these plans, it was anticipated for some Participants during the Foot Locker Retirement Plan's design, predicting a two- to three-year wear-away period upon conversion. Sher explained that "actuarial equivalence" entails converting pension benefits using actuarial factors, ideally without cost implications for the Plan.

The conversion on January 1, 1996, had dual cost effects: wear-away provided normal cost savings since employees in wear-away would incur zero normal costs until exiting that period, and these savings contributed to reduced out-of-pocket expenses for the Company. However, a significant number of Participants opting for lump sum distributions post-conversion led to increased costs for the Plan, although these were covered by existing Plan assets and did not necessitate additional cash from the Company. The Company also benefitted from lower payroll costs as employees left and chose lump sums.

Sher confirmed that the Company did not need to increase its cash contributions to the Plan in 1996, as it assumed all Participants would select annuities. Consequently, while the Company experienced short-term cash savings from wear-away without incurring costs for lump sums, the implications of these decisions did not affect the Court's assessment of Foot Locker's compliance with its legal obligations. Sher's survey of other companies undergoing similar cash balance conversions revealed that most highlighted the cash balance benefit in their statements, often omitting information about the frozen protected benefit, and did not inform Participants that additional employment would not increase their frozen accrued benefits.

Sher’s analysis contained significant flaws in evaluating other companies' communications regarding retirement plan conversions. He failed to differentiate between companies with conversion formulas that resulted in no wear-away or nominal wear-away and those that did create wear-away. Additionally, he did not consider companies whose formulas initially did not cause wear-away but did so later. Sher lacked data on the educational level and sophistication of the audiences receiving these communications, which is crucial for understanding the effectiveness of the messaging in relation to the class members involved. This lack of information undermines the relevance of Sher's testimony about industry practices.

Sher also addressed the volatility of interest rates, noting that post-conversion 30-year Treasury rates were extremely unstable, which complicated predictions about the frozen accrued benefits. He illustrated this with an analysis of the plaintiff Osberg's frozen benefit, which fluctuated significantly between 1999 and 2000. Sher acknowledged that even with a notable interest rate change, a participant without enhancements would still experience wear-away, indicating a higher frozen accrued benefit than their initial account balance.

Moreover, the downward trend of interest rates extended the wear-away period for certain participants, and there was no indication that Foot Locker or Mercer anticipated a return to previous rate levels. As informed business entities, both should have been aware of the potential variability in interest rates, making it a breach of fiduciary duty for Foot Locker to transfer the risk of this variability onto the participants. Sher further detailed the enhancement for participants aged 50 and above with at least 15 years of service, explaining that qualifying participants could receive significant increases in their account balances, particularly those aged 50-55, who could see a 66% enhancement.

Sher testified that certain Participants avoided lump sum wear-away due to enhancements, with a few hundred such cases identified. For example, Participant 004, who received a distribution on November 1, 1997, had an account balance exceeding the sum of their frozen accrued benefit and associated credits, indicating they received the full value of their benefits. Although Participant 004 was in wear-away in 1996, they were out of it by January 1, 1997, thus not experiencing the wear-away effect. Conversely, if the enhancement was included in the B benefit, Participant 004 would have faced wear-away.

Another example involved a Participant who took a distribution on November 1, 1996. Initially, her account balance, including enhancements, was below the lump sum of her frozen accrued benefit but later exceeded it due to additional credits. While she was out of wear-away at the time of distribution, she had previously experienced the wear-away effect, which could have been avoided had she delayed her distribution by two months.

Regarding remedies, experts disagreed on the appropriate solution if reformation is necessary. Deutsch proposed converting the frozen accrued benefit into an initial account balance as of January 1, 1996, applying a 6% interest rate without pre-retirement mortality discounts, and adjusting for enhancements and subsequent credits. Sher acknowledged that Deutsch's method would eliminate wear-away but referred to it as an "opening balance approach," distinct from the "A plus B" method, which he described as involving a frozen accrued benefit and subsequent credits. The A plus B approach was utilized in the Amara case, where benefits were ordered to be provided in both annuity and lump sum forms.

The appropriate remedy involves calculating the present value of a Participant’s frozen accrued benefit as of December 31, 1995, using the 417(e) rate in effect at termination and adding in pay and interest credits. The Court has determined that Deutsch’s method, whether termed an A plus B or “opening balance” approach, is suitable as it aligns with what was promised to Participants, despite using a 9% interest rate at that time. Sher acknowledged that this method was standard in the 1980s and 1990s and confirmed that it would fulfill Foot Locker’s promise to employees regarding their opening account balances. The Court also agrees with Deutsch’s calculation of the opening balance at a 6% interest rate without pre-retirement mortality discounts. Sher noted that determining the interest rate involves substantial analysis, considering factors like prevailing corporate bond and Treasury rates. The 417(e) rate during the Plan conversion was 6.06%, making the 6% rate chosen reasonable. Sher also indicated that any calculation yielding lower opening account balances than Deutsch’s could lead to a risk of “wear-away.” There is a dispute regarding the inclusion of an enhancement for employees of certain ages and service years; the Class argues it must be included as it was promised, while Foot Locker contends it should not be included since the enhancement was contingent on a 9% discount rate. The Court concludes that the enhancement is rightfully part of the B benefit, as it was explicitly promised in the Summary Plan Description (SPD).

Page 12 of the Summary Plan Description (SPD) states that participants aged 50 or older with at least 15 years of service as of December 31, 1995 received a one-time enhancement to their account balances. This enhancement involved increasing the initial account balance by a specific factor, calculated as 1 minus one-third of one percent for each month from either the participant's age on December 31, 1995 or the nearest month to age 55 up to the normal retirement date. Foot Locker made a dual promise to these senior participants: to provide the same initial account balance calculation as other participants and to apply a multiplier to the full initial balance, which would then be deposited into their accounts. This promise is enforceable regardless of Foot Locker's original intent, as established in Amara v. CIGNA Corp., where beneficiaries' reasonable perceptions take precedence over employer intentions.

Evidence contradicts the argument that the enhancement was linked to a 9% discount rate used in account balance calculations. Testimonies indicated that the enhancement aimed to replace an early retirement subsidy that was eliminated. Concerns were expressed that participants close to early retirement eligibility might experience a decrease in benefits due to the transition to a cash balance plan, leading to the addition of a subsidy.

The excerpt also addresses the entitlement to "whipsaw" payments, which ensure that a terminated employee's cash balance account reflects interest credits until normal retirement age. This calculation increases the account balance based on the plan's interest rate (6% in this case) over the time until normal retirement, discounted back to present value. The whipsaw calculation benefits employees whenever the 417(e) rate is lower than the plan's interest rate. Prior to 2006, ERISA mandated whipsaw payments, but the Pension Protection Act that year removed this requirement, stating that plans were not required to provide actuarial equivalence for participants who terminated before normal retirement age. The class claims that whipsaw payments were inherently part of the benefits promised by Foot Locker in the SPD.

Foot Locker contends that the elimination of whipsaw requirements under the Pension Protection Act (PPA) means the Plan is no longer obligated to make whipsaw payments. However, the Court determines that whipsaw payments are integral to the benefits promised to participants, as indicated in the Summary Plan Description (SPD), which allows for lump sums exceeding account balances per federal law and IRS regulations. Testimony from Sher supports that the SPD encompasses whipsaw payments, despite initial ambiguity regarding participants' expectations about such payments. Importantly, the PPA, which abolished mandatory whipsaw payments in 2006, does not apply retroactively; thus, participants who signed distribution paperwork before the PPA's enactment remain entitled to whipsaw payments. The plaintiffs filed their suit in 2006, before the PPA took effect, and both parties acknowledge that the Act does not pertain to this case.

Under ERISA § 502(a)(3), plan participants can seek "appropriate equitable relief" for violations of ERISA provisions. The Class alleges that Foot Locker breached sections 404(a) and 102(a) of ERISA by disseminating materially misleading information in the December 1996 SPD and various Summaries of Material Modifications (SMMs). To secure reformation, plaintiffs must demonstrate: (1) violations of ERISA sections 404(a) and 102(a) by a preponderance of the evidence; (2a) employee ignorance of their retirement benefits based on clear and convincing evidence; and (2b) fraud or inequitable conduct by plan fiduciaries, also based on clear and convincing evidence. The Class has successfully established these elements, warranting reformation of the Plan. The Court then references the Amara litigation, which serves as a significant context for the current issues, involving the transition of CIGNA's defined benefit plan to a cash balance plan, which altered the benefits structure for participants.

Employees enrolled in the Part B plan received a hypothetical opening account balance calculated from their annual benefit at normal retirement age (65), using a 6.05% or 5.05% interest rate and a GATT mortality table. This balance was later increased with pay and interest credits, the latter being tied to five-year Treasury bond yields, which fluctuated annually. Upon retirement, employees could opt for a lump sum or annuity of their account balance. CIGNA's new plan guaranteed that employees would receive at least the value of their accrued Part A benefits. However, the opening account balances under Part B often did not match the value of Part A benefits, causing a "wear-away" effect for many employees. This discrepancy was attributed to variable interest rates and certain benefits, such as Social Security supplements, being excluded from the Part B calculations. CIGNA provided communications that assured employees their new Part B balances reflected their full earned benefits up to December 31, 1997, but these assurances were misleading as internal projections indicated a cost savings of approximately $10 million from the conversion, contradicting CIGNA's claims. 

In 2001, participants filed a class action against CIGNA for violations of ERISA regarding inadequate notice and misleading information about their benefits. The district court granted class certification and later found that CIGNA indeed violated ERISA by failing to disclose the wear-away possibility, which was both predictable and a structural issue rooted in the design of the Part B opening account balances. The court determined that CIGNA's decisions in structuring these balances made wear-away likely if interest rates decreased, regardless of whether this outcome was intentional. Evidence suggested that CIGNA was aware of the potential for wear-away.

The district court dismissed CIGNA's claim that it was not obligated to notify employees about potential "wear-away" effects due to the limited number of affected employees. In a separate decision, the court declined the plaintiffs' request to declare Part B void and return to Part A, instead granting "A plus B" relief under ERISA § 502(a)(1)(B), which required CIGNA to provide class members with benefits accrued under both Part A and Part B. The Second Circuit affirmed this decision, and both parties sought certiorari. The Supreme Court granted CIGNA's petition, ruling on May 16, 2011, that the "A plus B" remedy was inappropriate under ERISA § 502(a)(1)(B), as plan documents could not define the plan's terms for that section. The Court remanded the case for the district court to assess potential relief under ERISA § 502(a)(3), which allows for equitable relief for ERISA violations. Upon remand, the district court upheld the class certification and again mandated CIGNA provide A plus B benefits and corrected notices under § 502(a)(3). The Second Circuit later affirmed this decision, emphasizing that reformation of the contract should be based on the beneficiaries' reasonable perceptions, rather than CIGNA's intentions. The court stated that reformation could result from mutual mistakes or fraud by one party, and it highlighted that plaintiffs needed to demonstrate CIGNA's fraudulent conduct that misled them regarding the pension plan terms. The Second Circuit noted findings from the district court that CIGNA employees lacked accurate information about the new plan and that CIGNA was aware of this misinformation, which was intended to facilitate a transition to a less favorable retirement program.

The district court's finding that defendants gained undue advantage by preventing adverse employee reactions was upheld. The Second Circuit highlighted that CIGNA concealed the wear-away possibility from employees and misled them regarding the conversion of their accrued benefits into the Part B plan. This concealment inhibited employees from expressing dissatisfaction, sharing information with others at risk, or planning their retirements. The court rejected CIGNA's argument that determining mistake required individualized assessments, stating that generalized circumstantial evidence suffices, particularly when uniform misrepresentations and concealment efforts are present. CIGNA's misrepresentations about the retirement plan's contents were deemed uniform, supported by multiple documents, and indicated that employees were unaware of the truth regarding their benefits. The court noted CIGNA failed to provide evidence that any employee understood the plan change or its implications, reinforcing the inference that informed employees would have reacted against the changes. Additionally, CIGNA was criticized for withholding comparative benefit details. The document then transitions to discussing ERISA's fiduciary duty and disclosure standards, specifically Section 404, which mandates fiduciaries act solely in the interest of plan participants, exercising care, skill, and prudence in managing the plan. A fiduciary is defined under ERISA based on discretionary authority or responsibility in the plan's management or administration.

Fiduciary status applies to individuals granted discretionary authority, regardless of exercise, and to those exercising such authority without formal grant. The Supreme Court established that employers communicating with plan participants can be deemed fiduciaries under ERISA if employees reasonably perceive these communications as coming from both an employer and plan administrator. In this case, Foot Locker is identified as the plan administrator with discretionary authority, as outlined in the Summary Plan Description (SPD). The Retirement Investment Committee (RIC) selects plan investments, while the Retirement Administration Committee (RAC) manages overall plan administration, holding exclusive rights to administer and interpret the Plan. Thus, Foot Locker is a fiduciary due to its administrative role and discretionary authority.

Additionally, Foot Locker's communication regarding plan changes further establishes its fiduciary duty, as employees would reasonably believe these communications were made in both capacities. The SPD emphasizes fiduciaries’ responsibilities under ERISA to operate the plan prudently and in the best interest of participants and beneficiaries, prohibiting discrimination against individuals exercising their rights under ERISA. ERISA imposes the highest fiduciary standards, requiring a duty of loyalty to act solely in the interest of the plan's participants. Engaging in deception to benefit the employer at the expense of beneficiaries contravenes this duty.

ERISA § 404(a) establishes a fiduciary's "duty of care," requiring fiduciaries to act with the prudence, skill, and diligence that a prudent individual in a similar position would exercise. Fiduciaries must prioritize the interests of plan participants and beneficiaries exclusively, without balancing these interests against those of the plan's sponsor. Breaches of fiduciary duties occur when fiduciaries prioritize their own interests over those of participants, as evidenced by Foot Locker's actions.

Central to a fiduciary's duty is the accurate and complete disclosure of benefits to participants. Failure to provide necessary information or making false statements about future benefits can lead to liability, especially if such omissions hinder participants' informed decision-making regarding retirement. A fiduciary's responsibility includes not only refraining from misinformation but also actively providing critical information when silence could be harmful. 

The court found that Foot Locker provided inaccurate and incomplete benefit explanations and knowingly made false statements, which harmed employees who relied on this information. The disparity in knowledge and experience between fiduciaries and plan participants underscores that fiduciaries cannot escape liability by claiming that participants failed to understand complex aspects of the plan. Consequently, the court should determine that Foot Locker acted imprudently, violating ERISA provisions.

404(a)(1)(B) emphasizes that decisions should be evaluated based on the circumstances at the time they were made rather than through hindsight, as established in DiFelice v. U.S. Airways, Inc. A prudent person standard applies to assess whether Foot Locker acted appropriately when it implemented a plan conversion aimed at cost savings, which resulted in a "wear-away" effect on benefits. This wear-away was intentional and not due to unforeseen economic changes. While Foot Locker sought advice from Mercer, it is ultimately responsible for its decisions as the plan fiduciary, including the failure to disclose the wear-away effect.

ERISA mandates that a Summary Plan Description (SPD) must be provided to plan participants, outlining eligibility, benefits, and potential disqualifications in a clear and comprehensive manner. The SPD is crucial for informing participants of their rights and obligations under the plan. Similarly, a Summary of Material Modifications (SMM) must be issued when there are significant changes to the plan, ensuring participants are adequately informed. Both documents must work together to clearly articulate the circumstances that could lead to disqualification or denial of benefits, adhering to ERISA's requirements and Department of Labor regulations.

SPDs (Summary Plan Documents) and SMMs (Summary Material Modifications) serve a crucial function in educating participants about the workings of their plans, as mandated by ERISA regulations. Fiduciaries are required to exercise careful judgment, considering participants' comprehension levels and the complexity of the plan's terms, which necessitates avoiding technical jargon and including clarifying examples. Participants must be made clearly aware of circumstances that could lead to disqualification or denial of expected benefits, with the SPD needing to explicitly outline any such conditions. The regulations emphasize that descriptions of exceptions or limitations must be as prominent as the descriptions of benefits, ensuring that negative aspects are not minimized or obscured. The presentation of both advantages and disadvantages must be balanced and neither exaggerated nor downplayed. The SPD must convey the full implications of the plan's material terms and explain benefit calculation mechanics comprehensively. A failure to mention relevant policies or adequately clarify how different plan provisions interact can result in non-compliance with the standards for clarity and completeness expected of SPDs.

The SPD lacked clarity, resulting in confusion among participants, including those at the CFO level, regarding benefit calculations. The term "actuarial equivalence" was not understood by the average Plan Participant, and Foot Locker could not reasonably expect them to grasp its significance. Testimony indicated that the conversion methodology did not achieve actuarial equivalence. Evidence demonstrated that Foot Locker, as plan administrator, violated ERISA sections 404(a) and 102 by providing participants with materially false, misleading, and incomplete information about the amended Plan. Foot Locker was aware that the January 1, 1996 Plan amendment effectively froze pension earnings for most participants due to the wear-away effect, which was a significant fact that needed to be disclosed in an understandable manner as required under ERISA. Foot Locker's disclosures, including the SPD and other communications, failed to meet statutory requirements and created widespread misrepresentation. Individual communications further reinforced the misconception that growing account balances indicated increasing benefits, without clarifying the wear-away effect. Testimonies confirmed that employees mistakenly believed their benefits were growing, while Foot Locker knowingly omitted the explanation of wear-away. The Court ruled that class-wide misrepresentation does not necessitate proof of individualized reliance, and overwhelming trial evidence supports a reasonable inference of class-wide reliance among participants.

The Court finds substantial evidence supporting the plaintiffs' claims of generalized reliance on misleading information regarding their retirement benefits from Foot Locker. Participants were unaware that their benefits were frozen, which Foot Locker intentionally concealed to avoid negative publicity and employee dissatisfaction. Testimonies indicated that Class members believed their benefits were increasing based on the company’s communications and annual account statements, which portrayed growth linked to service credits. This miscommunication led to a lack of employee complaints about Foot Locker.

The concept of mistake for reformation under ERISA requires showing that participants entered into the plan under a misunderstanding of material facts. The Court emphasizes that ERISA aims to protect employees' reasonable expectations regarding promised benefits. The Class demonstrated that misleading plan descriptions left employees unaware of the actual terms of their retirement benefits. Participants mistakenly believed that their cash balance growth corresponded with pension growth, based on the structure of the benefit formulas outlined by Foot Locker.

To seek plan reformation under ERISA, the Class must prove that Foot Locker acted with fraud or inequitable conduct. The definition of equitable fraud involves gaining an undue advantage through acts or omissions that violate good faith. The evidence presented collectively supports the assertion that Foot Locker's actions misled employees regarding their retirement benefits.

Fraud in equity encompasses acts, omissions, and concealments that breach legal or equitable duties, resulting in harm to another party or enabling one party to gain an unfair advantage. Unlike legal fraud, equitable fraud does not require proof of intent to deceive. Courts recognize that retaining benefits obtained through misrepresentations, regardless of intent, constitutes a form of fraud. There are two types of fraud: actual fraud (intentional) and constructive fraud (breaches of fiduciary duties without intent to deceive). In equity, relief can be sought for the suppression of material facts without needing to prove fraudulent intent. The doctrine of equitable fraud requires showing that one party obtained a benefit while the other party was misled, but it is not equivalent to strict liability due to the need for demonstrating undue advantage. A case involving an insurance company illustrated that equitable fraud was found when the insurer made undisclosed changes that benefited itself, contrasting with another case where inadequate disclosure did not yield an advantage. In the context of Foot Locker, the company engaged in equitable fraud by altering a plan and failing to disclose the full impact of these changes. Inequitable conduct can arise from deception or awareness of the other party’s mistake coupled with superior knowledge. Under New York law, rescission due to unilateral mistake requires proof of a material fact mistake by one party and that the other party either knew or should have known of this mistake.

New York courts can rescind contracts and void releases in cases of unilateral mistake if the mistake is known or should be known by the other party, as established in Middle E. Banking Co. v. State St. Bank Int’l. The Second Circuit's application of the “inequitable conduct” doctrine was illustrated in Tokio Marine Fire Ins. Co. v. Nat’l Union Fire Ins. Co., where the reinsurer sought reformation of a policy due to unilateral mistake and inequitable conduct. The reinsurer's mistake arose from a change in the policy that was not noticed, despite a customary practice of being alerted to important changes. The district court ordered reformation, which the Second Circuit affirmed, noting the silent acceptance of the altered agreement implied knowledge of the mistake by the appellant.

In relation to a class action against Foot Locker concerning a 1996 Plan amendment, the Class demonstrated clear and convincing evidence of equitable fraud or inequitable conduct by Foot Locker. Foot Locker contended that class members whose claims were outside the statute of limitations should be excluded. The court previously ruled that a Summary Plan Description (SPD) claim is subject to a three-year statute of limitations, which accrues when sufficient information is available for a plaintiff to understand the basis of the claim. A breach of fiduciary duty claim must be filed within six years of the breach or three years if the plaintiff has actual knowledge of the breach, with exceptions for cases of fraud or concealment. The court determined that the fraud or concealment exception applies in this case, allowing the limitations period to extend based on the evidence presented at trial.

Class members demonstrated a lack of understanding regarding the wear-away effect due to Foot Locker's misrepresentations and omissions, even after they began receiving Plan benefits. Their claims surfaced in 2005 when they learned about the wear-away through counsel. No evidence exists indicating any Class member was aware of the wear-away outside the statute of limitations. Foot Locker contends that class relief should not extend to members who terminated employment more than three or six years prior to the lawsuit, citing individualized issues of notice. However, the court previously ruled that receiving benefits did not provide adequate information for participants to be aware of their claims. Communications from Foot Locker were deemed insufficiently clear to inform participants about the wear-away, thus not triggering the statute of limitations.

The Class conclusively demonstrated that Foot Locker violated ERISA provisions by distributing false and misleading Plan descriptions. Employees reasonably believed that their cash balance benefit growth corresponded with pension benefit growth, thereby giving Foot Locker an unfair advantage. To rectify these misrepresentations, the Plan must be amended to deliver the promised benefits. Specifically, the Plan must establish an initial account balance for participants as of January 1, 1996, reflective of their accrued benefits as of December 31, 1995, adjusted to present value at a 6% rate, without pre-mortality reductions. Additionally, the Plan must include any one-time enhancements and promised compensation credits in calculating the total benefits for each participant.

Interest credits will be applied at an annual rate of 6% as stipulated in the Plan, alongside necessary adjustments required by federal law and IRS regulations at the time of payment. Retirees and former employees are entitled to receive the difference in value between the full A plus B benefits and the benefits they received, as well as prejudgment interest at a rate of 6% per annum, as their situation is akin to an unpaid account balance. Past-due benefits will be disbursed in the form originally elected by the participant. For those who chose an annuity, the full value is defined as the greater of the protected or converted A benefit and the B benefit under post-amendment terms. The Foot Locker Retirement Plan is to be reformed accordingly, with the court enjoining Foot Locker to enforce the reformed Plan. All remedies are stayed to allow for potential appeals. 

The court has found in favor of the Class on all claims, affirming the reformation of the Plan. A class was certified for individuals who were participants in the Foot Locker Retirement Plan as of December 31, 1995, and who had service hours thereafter, including beneficiaries and estates. Foot Locker's motion for reconsideration was denied, and the court confirmed its initial class certification. The court determined that evidence presented at trial overwhelmingly supports the Class's claims, rejecting Foot Locker's arguments regarding reliance and statute of limitations as unfounded. Testimonies from named plaintiffs and class members indicated that participants were not adequately informed about "wear-away" provisions, contradicting Foot Locker's claims of confusion. The court's findings are based on a preponderance of the evidence.

The Court evaluated evidentiary objections from the parties, determining that those not specifically addressed in the Opinion lacked merit. Expert reports and declarations were accepted as direct testimony, with the opportunity for cross-examination. Defendants' objections to the Deutsch expert report were previously resolved during pretrial conferences, and any remaining objections pertained to the evidence's weight, which the Court has considered.

A "de minimis" exception applies where a Participant's pension benefit, upon termination, is under $5,000 (or $3,500 before July 1, 1998), resulting in a lump sum payout. The terms "A" and "B" benefits are uniquely defined in this case, with "A" representing the old benefit and "B" the new, and Foot Locker did not intend for these benefits to be combined.

The Court found Patricia Peck credible, noting her honesty despite significant health challenges. In contrast, Tom Kiley was deemed substantially lacking in credibility due to evasiveness and poor document recall. Other witnesses, Carol Kanowicz and Marion Derham, were also found credible with varying recall levels. Class member witnesses consistently testified about their misunderstanding regarding pension growth after January 1, 1996. Kiley claimed he originated the cash balance plan idea; however, the Court discredited this claim, favoring the testimonies of Derham and Peck, who attributed the idea to Mercer. Kanowicz, a defense witness, provided forthright testimony that supported the Class's position. Italicized terms in the document are defined in the "Definition of Terms" section of the SPD.

Cardona currently works for a different company, while Sher expressed uncertainty about whether the Company had made a 100% annuity assumption. However, the 5500 filings for 1996, 1997, and 1998 confirm a 100% annuity election, which Kanowicz, as plan administrator, endorsed. In 1999, the assumption shifted to a 100% immediate lump sum. Deutsch contends that all Participants experienced annuity wear-away, despite some not being in lump sum wear-away due to enhancements. 

Whipsaw calculations determine the disparity between a cash balance plan's hypothetical account value and its annuity value at retirement age. This involves projecting a participant's account to retirement age, converting it to an annuity, and calculating its present value based on specific interest rates and mortality tables. Deutsch asserts this calculation is unrelated to benefits frozen as of December 31, 1995. 

Sher's A plus B plan would have preserved frozen benefits and added new credits to the overall Plan liability, while Foot Locker's approach created an opening balance below the frozen accrued benefit, resulting in wear-away and no increase in Plan liability. Sher acknowledged that if distributions occurred before the Pension Protection Act (PPA), the Plan would need to comply with whipsaw calculations. The dispute centers on Participants who signed distribution paperwork before the PPA but received distributions afterward. The Court acknowledges these Participants are entitled to whipsaw payments, as signing the paperwork constituted a commitment to the distribution amount under current federal law. Some employees are "grandfathered" under the old Part A plan. ERISA § 502(a)(1)(B) permits participants or beneficiaries to seek recovery of benefits due under their plan terms.

On May 23, 2011, the Supreme Court granted certiorari in Amara v. CIGNA Corp. to review the Second Circuit's affirmation of a district court decision requiring A plus B benefits instead of a return to the Part A plan. The Second Circuit concluded that traditional equitable principles do not necessitate a separate harm showing for reformation. It also upheld the district court's denial of CIGNA’s motion to decertify the class and determined that limiting relief to A plus B benefits was not an abuse of discretion. Class members were misled by communications regarding minimum lump sum payments, which were presented as exceeding their account balance, while they were actually equivalent to entitlements under the old plan. Testimonies indicated class members believed these payments were based on account balances and federal actuarial calculations. The court found that the class demonstrated detrimental reliance on Foot Locker's misrepresentations, emphasizing that retirement benefits are integral to overall employee compensation. Although Foot Locker had previously spoliated documents, the court did not apply an adverse inference in its determinations. The Second Circuit did not address the statute of limitations for an SPD claim. Foot Locker argued that Ada Cardona should not be considered a class member because she sought clarification on her benefits in 2003, six years post-employment. However, Cardona credibly stated that she did not understand the 2003 explanation. Foot Locker's argument to exclude class members who left before the SPD distribution was rejected, as other misleading communications also entitled them to relief.