John Layaou, Paul J. Frommert, Intervenors v. Xerox Corporation, Peter Demauro, Individually and in His Capacity as an Employee of Xerox Corporation and the Retirement Income Guarantee Plan (Rigp)

Citations: 238 F.3d 205; 25 Employee Benefits Cas. (BNA) 1921; 2001 WL 1836173; 2001 U.S. App. LEXIS 669Docket: 2000

Court: Court of Appeals for the Second Circuit; January 17, 2001; Federal Appellate Court

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John Layaou appeals a summary judgment from the U.S. District Court for the Western District of New York favoring Xerox Corporation and The Retirement Income Guarantee Plan (RIGP), which dismissed his claim for additional benefits under the Employee Retirement Income Security Act (ERISA). The court found that the summary plan description violated ERISA's disclosure requirements, specifically 29 U.S.C. § 1022. As a result, the appellate court vacated the district court's judgment on Layaou's ERISA claim and remanded for further proceedings.

Layaou had worked at Xerox from 1972 to 1983, receiving a lump-sum retirement distribution of approximately $22,400 upon leaving. He was rehired in 1987 and remained until a layoff in 1994, during which he accrued additional retirement benefits. Xerox’s retirement plan allows benefits to be calculated using the highest of three methods: the RIGP Formula, which is based on years of service and average pay; the Cash Balance Retirement Account (CBRA), incorporating yearly salary contributions and interest; and for employees hired before 1990, a transferred balance from a Profit Sharing Retirement Account. The plan also stipulates that early retirees face a reduction in benefits based on the age at which they retire.

The third calculation method under the Plan involves the Transitional Retirement Account (TRA), applicable only to employees hired by Xerox before 1989. The TRA includes the transferred balance from the Profit Sharing Retirement Account as of December 31, 1989, which grows based on the investment performance of those funds. Xerox met its ERISA obligations by providing employees with a summary plan description (SPD) through an annual brochure and individual benefit estimates, although the full Plan was available only at the Human Resources office.

Layaou received his 1994 benefit estimate prior to his layoff, which indicated a RIGP Formula benefit of $924 per month, subject to reductions for early retirement or other distributions. Upon retiring on April 19, 1995, his benefits were recalculated, factoring in a "phantom account" offset that considers the original lump-sum distribution and hypothetical growth had the funds been invested.

The administrator calculated Layaou's benefits as follows: 
1. The RIGP Formula benefit was determined based on total service and highest average compensation, resulting in approximately $480 per month after age-related reductions.
2. For the TRA, the potential growth of his initial distribution was calculated alongside the actual TRA balance, totaling approximately $94,644 with the phantom account offset.
3. The CBRA benefit was similarly calculated, yielding approximately $98,212 with the phantom account offset.
4. Since the CBRA amount exceeded the TRA, it was converted into a monthly annuity of about $749 for comparison against the RIGP Formula benefit.
5. Ultimately, the larger CBRA annuity of $749 was selected as the payment method, which was then adjusted by subtracting the phantom account offset, resulting in a final monthly CBRA benefit of approximately $145.

Layaou was informed by the plan administrator that his retirement benefit would be $145 per month, significantly lower than amounts previously estimated by Xerox. He contested this decision, challenging the use of a "phantom account" offset, but Xerox denied his request and subsequent appeal. After exhausting administrative remedies, Layaou filed a lawsuit in federal court. His initial complaints were vague regarding the legal basis for his claim for additional benefits. The district court denied the defendants' motion for summary judgment, determining the claim fell under ERISA and allowed Layaou thirty days to amend his complaint.

Layaou then filed a second amended complaint under 29 U.S.C. § 1132 for additional benefits. The court granted the defendants' motion for summary judgment, identifying Layaou's claim specifically under § 1132(a)(1)(B) and not under other subsections for breach of fiduciary duty or equitable relief. The court reviewed the plan administrator's calculation of benefits under an abuse of discretion standard and found that the Summary Plan Description (SPD) was compliant with ERISA, not conflicting with the Plan, and clear enough to inform employees about potential benefit reductions.

Consequently, the court concluded Layaou did not provide grounds for a reasonable fact-finder to rule against the administrator's decision, which was deemed correct. Layaou appealed this summary judgment. Following his appeal, other employees (the "Frommert plaintiffs") sought to intervene, claiming that the outcome of Layaou's appeal could affect their ERISA claims against Xerox. The court granted their motion to intervene.

The appellate court reviews the summary judgment de novo, considering evidence favorably towards Layaou, and may only reverse if genuine factual disputes exist that require resolution by a jury.

ERISA mandates that employee benefit plans provide participants with a summary plan description (SPD) that is clear, comprehensive, and accessible, allowing participants to understand their rights and obligations. The SPD must avoid technical jargon and complex sentences, include a description of circumstances that may lead to disqualification or loss of benefits, and present exceptions or limitations with equal prominence to benefits. In the case of Chambless v. Masters, Mates, Pilots Pension Plan, the court emphasized the need for SPDs to clearly explain provisions affecting employees. In Layaou's claim against Xerox, the district court found that the SPD complied with ERISA requirements regarding benefit reductions. However, it was determined that the SPD failed to adequately inform Layaou and similarly situated employees that future benefits would be offset by the appreciated value of prior distributions. The SPD only vaguely referenced potential reductions related to prior distributions without explaining the "phantom account" concept or providing examples for calculating benefits, thus not meeting ERISA's disclosure standards.

The lack of clear notice regarding benefit calculations for rehired employees who previously received lump-sum distributions led to confusion, particularly for Layaou, whose 1994 benefit statement from Xerox provided estimated benefits but omitted critical details about the "phantom account" offset. His statement indicated a monthly benefit of $924 under the RIGP Formula and lump-sum benefits of $18,403 and $9,244 for CBRA and TRA, respectively, without addressing how prior distributions would impact these calculations. The only mention of reductions related to the RIGP Formula, which did not apply to the "phantom account." 

In Chambless v. Masters, Mates, Pilots Pension Plan, the court established that an SPD must adequately disclose how benefits are affected by employment changes, noting a failure to explain the implications of a plan amendment. Similarly, Xerox’s SPD did not comprehensively inform Layaou about the effects of his earlier lump-sum distribution on future retirement benefits, failing to clearly articulate the potential loss of benefits. The SPD's vague language did not prepare him for the necessary adjustments to his CBRA and TRA benefits. 

Consequently, the plan administrator's interpretation of the SPD allowing for the application of the "phantom account" offset was deemed unreasonable. The court clarified that it does not express a position on whether the deferential review standard applies to SPD interpretations when the SPD itself violates ERISA’s disclosure standards. Since the district court erroneously concluded that the SPD complied with ERISA requirements, its summary judgment favoring the defendants on Layaou's ERISA claim was vacated.

If a summary plan (SPD) fails to adequately inform an employee of their rights, ERISA allows plan participants to pursue civil actions against fiduciaries for resulting damages under 29 U.S.C. 1132(a)(1)(B). Circuit courts are divided on whether proof of actual detrimental reliance on a faulty SPD is necessary for recovery, with district courts in the same circuit reaching inconsistent conclusions. The specific requirement for Layaou to demonstrate reliance or prejudice regarding Xerox's faulty SPD was not fully briefed in the appeal, leaving it for the district court to decide.

The district court previously erred by granting summary judgment on the basis that the SPD sufficiently informed Layaou about offsets to his future benefits, neglecting to address critical issues. On remand, the district court must assess potential damages caused by the faulty SPD and whether Layaou would have acted differently if he had received proper notice of the benefit reductions. Additionally, the court should evaluate if Xerox is obligated to apply a benefit formula that aligns with the SPD’s language, particularly concerning how benefits were calculated using inflated values without disclosing the resulting lower payouts due to offsets.

The conclusion affirms the dismissal of Layaou's age discrimination claims while vacating the summary judgment on his ERISA claim, remanding for further proceedings aligned with this opinion.

Xerox's terminology of "offset" in their calculation method is misleading, as it involves manipulating the value of the phantom account through addition and subtraction. Layaou, who was 55 at his retirement in April 1995, had his age discrimination claims dismissed by the district court, which also noted that even if considered under equitable relief, the claims lacked merit. The court affirmed the dismissal of these claims in a separate order. During oral arguments, the Frommert plaintiffs introduced a new argument regarding potential ERISA violations due to the Plan's failure to allow rehired employees to repay prior distributions. Although this argument was raised for the first time on appeal, it will be considered by the district court upon remand, which is addressing Layaou's ERISA claim on different grounds. The Plan included a non-duplication of benefits rule and an offset for certain benefits, but lacked similar provisions for the RIGP Formula benefit. Xerox only provided the Summary Plan Description (SPD) to employees, not the full plan. The court found an error in granting summary judgment against Layaou regarding his benefits claim under 29 U.S.C. 1132(a)(1)(B) and did not need to explore claims for breach of fiduciary duty or equitable relief. While Layaou could not have relied on an annual benefit statement when making his distribution election, if he made investment decisions based on that statement afterward and incurred losses, the statement may be pertinent to his damage claim.