Court: Court of Appeals for the Fifth Circuit; August 30, 2006; Federal Appellate Court
This class action, initiated under the Employee Retirement Income Security Act of 1974, stems from the 1998 merger of Dresser Industries, Inc. into Halliburton N.C. Inc., a wholly owned subsidiary of Halliburton Company. Under the merger agreement, Halliburton committed to maintain the Dresser Retiree Medical Program for eligible participants, with the allowance for modifications consistent with changes made to Halliburton's medical plans for similarly situated active employees.
In November 2003, Halliburton amended three subplans of the Dresser Retiree Medical Program to align benefits more closely with those provided to Halliburton retirees but did not apply similar changes to its active employee plans. Following complaints from affected Dresser retirees regarding these amendments, Halliburton sought class certification for all participants in the Dresser program, aiming to declare the amendments valid and assert that the merger agreement did not restrict its right to alter or terminate the Dresser retiree program.
The district court ruled in December 2004, granting partial summary judgment favoring the retirees, concluding that the merger agreement required Halliburton to maintain the Dresser program and that any amendments must also be applied to active employees' plans. The court's decision was certified for appeal under 28 U.S.C. 1292(b) on June 26, 2006. Halliburton's petition for permission to appeal was granted, and the appellate court affirmed the district court's ruling.
Prior to the merger, both companies had distinct welfare benefit programs, with the Halliburton Plan offering limited medical benefits. Dresser's program provided substantially better benefits and was governed by its own welfare benefits plan. At the time of the merger, around 5,500 participants were enrolled in the Dresser Retiree Medical Program.
The excerpt highlights the decline in the number of grandfathered employees, who are members of the defendant class, following the merger between Halliburton and Dresser. Dresser Plan 750 retained the right to amend or terminate welfare benefit plans, including the Dresser Retiree Medical Program. Key meetings took place from February 20-22, 1998, where representatives from both companies, including Mark Vogel from Weil, Gotshal & Manges, discussed the merger terms, particularly concerning retiree medical benefits. Notably, David Lesar of Halliburton agreed to ensure that grandfathered Dresser salaried employees would receive benefits no less than those of active employees. The merger agreement was executed on February 25, 1998, and officially took effect on September 29, 1998, resulting in Halliburton N.C.'s dissolution and Dresser becoming the Surviving Corporation, inheriting all assets and liabilities. Dresser shareholders received shares of newly issued Halliburton common stock in exchange for their Dresser shares. The agreement was approved by the boards of both companies and shareholders on June 25, 1998, and is governed by Delaware General Corporation Law. The appeal focuses on three provisions in the merger agreement related to employee benefit plans, specifically sections 7.09(g)(i) and 7.09(h). Section 7.09(g)(i) mandates Halliburton and its subsidiaries to maintain the Dresser retiree medical plan for eligible participants as of the merger date, with modifications aligned with Halliburton's active employee plans. Section 7.09(h) ensures that for three years post-merger, Dresser employees will receive employee benefits and compensation comparable to those of similarly situated Halliburton employees. The agreement also addresses the parties in interest involved in the merger.
Section 10.07 establishes that the agreement is intended solely for the benefit of the parties involved, explicitly denying any rights, benefits, or remedies to third parties. An exception allows a majority of directors designated by Dresser to enforce provisions related to the company’s officers, directors, and employees during a three-year period post-merger. Their rights under this exception are cumulative and do not impose additional duties on them.
Post-merger, the Halliburton Plan and Dresser Plan 750 were maintained separately, creating administrative challenges due to their differences. Paul Bryant, the former Dresser Vice President of Human Resources who became Halliburton’s Shared Services Vice President of Human Resources, was partially responsible for overseeing the Dresser Plan 750. On May 14, 1999, Bryant provided a memorandum and a notebook to senior management, prepared to assist in compliance with the merger agreement. He highlighted his involvement in the merger negotiations regarding employee pay and benefits and noted the intention to keep the Dresser Retiree Medical Program aligned with the active employee plan, allowing Halliburton to make equivalent changes to both plans as necessary.
Halliburton did not dispute Bryant's interpretation of the Dresser Retiree Medical Program, as indicated by their communications, which showed awareness of obligations to Dresser retirees following the merger. In a February 16, 1999 letter, Colgan responded to retiree Clint Abies, providing a 1997 handbook that outlined benefits for "grandfathered" retirees and reaffirming Halliburton's commitment to maintaining the Dresser retiree medical plan, subject to consistent modifications with Halliburton’s plans for active employees.
Following the merger, Halliburton took steps to amend Dresser's employee benefit plans, including adopting Dresser Plan 750 on July 16, 1999, and assuming all associated obligations. This agreement vested plan administration in the Halliburton Company Benefits Committee and granted the CEO power to amend or terminate plans, retroactively effective January 1, 1999. On December 31, 2002, Halliburton combined its welfare benefit plans with Dresser Plan 750, renaming it the Halliburton Energy Services, Inc. Welfare Benefits Plan (HESI Plan).
On January 1, 2003, Halliburton amended the HESI Plan to include various subplans of Dresser Plan 750, including the Dresser Retiree Medical Program. Halliburton retained the right to amend any part of the Plan. In November 2003, over five years post-merger, Halliburton made amendments to the Dresser Retiree Medical Program, aiming for parity between Halliburton and Dresser retirees. Changes effective January 1, 2004, froze Halliburton's contributions at 2003 levels, shifting cost increases to participants. From January 1, 2005, Dresser retirees aged sixty-five and Medicare-eligible would only receive prescription drug coverage, as other medical benefits would be discontinued; the prescription drug coverage provided a monthly subsidy of $22 per adult, identical to that for Halliburton retirees.
In its 2003 annual report, Halliburton projected a $93 million reduction in future medical benefit obligations due to plan amendments. On December 8, 2003, retired employee Bryant requested Halliburton's CEO, Lesar, to revoke these amendments, arguing they breached section 7.09(g) of the merger agreement since no similar changes were made for active employees. Lesar referred Bryant's letter to the Halliburton Company Benefits Committee, which, on January 21, 2004, denied the request, asserting the amendments aligned with the merger agreement's terms. The Committee interpreted section 7.09(g)(i) as restricting Halliburton's ability to amend the Dresser Retiree Medical Program only for three years post-merger, thereby allowing the amendments. On the same day, the Committee filed a declaratory action in district court against Bryant and others, seeking class certification for participants in the Dresser Retiree Medical Program and declarations affirming the legality of the November 2003 amendments under the merger agreement and ERISA. In response, the Retirees filed counterclaims for declaratory and injunctive relief against Halliburton, aiming to prevent modifications inconsistent with benefits for active employees. The district court certified the class on August 18, 2004, and cross-motions for summary judgment were filed on September 10, 2004, with Retirees seeking a legal determination that the merger agreement mandated adherence to section 7.09(g).
Halliburton's motion for summary judgment requested the district court to declare that: (1) the no-third-party-beneficiary clause in the merger agreement prevents the Retirees from enforcing its terms; (2) only the parties and designated directors could enforce the merger agreement, and the three-year enforcement window for the directors had expired; and (3) Halliburton has no restrictions on amending or terminating the Dresser Retiree Medical Program. Halliburton sought dismissal of the Retirees' counterclaims with prejudice. On December 20, 2004, the district court granted partial summary judgment favoring the Retirees, determining that the merger agreement modified the Dresser Retiree Medical Program, supported by the signatures of company officers and board approvals. The court noted that Halliburton's delay in changing the plans indicated acknowledgment of the validity of the retiree program amendments post-merger. It ordered Halliburton to maintain the Dresser Retiree Medical Program for eligible participants and allowed benefit adjustments only if similarly applied to active employees. On December 23, 2004, Halliburton requested a final judgment on the partial ruling, which was granted. Halliburton then filed a notice of appeal on January 24, 2005. However, on June 21, 2006, this court dismissed the appeal for lack of jurisdiction, finding the partial summary judgment not final under 28 U.S.C. § 1291 as it did not dispose of specific claims. Subsequently, the Retirees requested the district court to amend its order to include certification for immediate appellate review, which the court did on June 26, 2006. Halliburton then filed an unopposed petition for permission to appeal, which was granted. On appeal, Halliburton argued that section 7.09(g)(i) of the merger agreement does not restrict its rights regarding the Dresser Retiree Medical Program, asserting that the merger agreement did not constitute a plan amendment due to the absence of Dresser's Vice President of Human Resources' signature, thereby violating the amendment procedure in Dresser Plan 750.
Halliburton contends that the no-third-party-beneficiary clause in section 10.07 of the merger agreement prevents the Retirees from enforcing any provision of the agreement, including section 7.09(g)(i). Halliburton claims that even if the merger agreement amended the Dresser Retiree Medical Program, only the parties to the agreement and designated directors could enforce section 7.09(g), and their three-year window to do so has lapsed. Additionally, Halliburton argues that a district court order mandating Halliburton to maintain the program constitutes an improper vesting of the Retirees' benefits since it imposes an indefinite obligation on Halliburton.
In contrast, the Retirees assert that section 7.09(g) limits Halliburton's ability to amend the retiree program, providing them with a 'right of nondiscrimination' that requires Halliburton to implement any changes uniformly for both retirees and similarly situated active employees. They maintain that the merger agreement complied with the procedural requirements for amending the Dresser Retiree Medical Program and that Halliburton effectively ratified the amendment through its post-merger actions. Furthermore, the Retirees argue that the no-third-party-beneficiary clause does not preclude their right to seek judicial clarification of the program's terms as this right is granted by ERISA, not the merger agreement.
The Retirees dispute Halliburton's assertion that any amendments created a three-year obligation enforceable solely by the agreement's parties and certain directors, arguing that section 7.09(g) does not impose a temporal limitation on the amendment or exclude enforcement by plan participants. They also clarify that interpreting section 7.09(g) as a plan amendment does not equate to a vesting of benefits, since Halliburton retains the right to modify or terminate benefits for retirees as long as similar changes are made for active employees.
The discussion will evaluate these arguments, beginning with the implications of the merger agreement on the Dresser Retiree Medical Program, acknowledging that under Delaware General Corporation Law, the surviving corporation inherits both rights and obligations of the merged entity, including those related to employee benefit plans, which typically encompass the right to amend or terminate such plans. Dresser Plan 750 specifically reserved the right to amend or terminate its welfare benefit programs, including the retiree medical program.
Halliburton did not inherit Dresser's ability to amend or terminate its welfare plans through the merger agreement or Delaware law. The merger agreement established that Dresser would continue as the surviving corporation, inheriting all assets, rights, and obligations from both companies. Halliburton obtained Dresser's rights and obligations concerning employee benefit plans three months post-merger, specifically through a separate agreement dated July 16, 1999, where Halliburton agreed to assume Dresser's employee benefit plans, including the right to amend or terminate them.
The central issue revolves around whether section 7.09(g)(i) of the merger agreement effectively limits Halliburton's ability to amend or terminate the Dresser Retiree Medical Program, requiring any changes to align with modifications made to the active employee plans. To amend a welfare benefit plan under ERISA, an employer must establish a procedure for amendments and identify authorized personnel. ERISA does not necessitate formal labeling for amendments; actions directed at a plan provision can suffice as amendments.
Section 7.09(g) was deemed to amend the Dresser Retiree Medical Program, mandating Halliburton to maintain the program for eligible participants except when changes were consistent with those made for similarly situated active employees. This section was signed by Dresser's CEO and approved by its Board of Directors, granting them the authority to amend the program. Halliburton's argument that the merger agreement's validity is compromised due to the lack of a signature from Dresser's Vice President of Human Resources is contested, as they assert that a board-approved action is sufficient.
Halliburton incorrectly interprets Dresser's amendment provision, which grants the company itself the authority to amend or terminate benefit programs, rather than solely designating the Vice President of Human Resources as the decision-maker. The reference to the Vice President indicates a possible delegation, but it is not the exclusive method for amending the plan. Dresser retains the ability under corporate law to revoke this delegation and amend the plan through other means. Specifically, Section 6.14 outlines that any company action must be evidenced by a resolution from the Board of Directors or through written direction from the Chairman. The plan allows for amendments to be executed by any person authorized by the Board, including the possibility of revoking the Vice President's authority. Therefore, the Board's approval and the Chairman's signature on the merger agreement were sufficient to amend the plan. Halliburton's claim that amendments require a signed writing from the Vice President is inconsistent, given that it itself amended Dresser Plan 750 on two occasions without such a signature, first on July 16, 1999, and again on December 31, 2002.
Halliburton has acknowledged that the Dresser welfare plans can be amended through procedures other than requiring a written signature from the Vice President of Human Resources, as outlined in Dresser Plan 750. Even if a signature was necessary for amending the retiree program under section 7.09(g)(i), Halliburton's subsequent actions effectively ratified the amendment. This is supported by the doctrine of ratification, which allows a corporation to validate unauthorized acts by its officers through subsequent actions, as illustrated in case law.
Halliburton ratified section 7.09(g)(i) in two significant ways: first, the shareholders of Halliburton and Dresser approved the merger agreement four months after it was executed, thus retroactively validating any unauthorized amendments. Second, Halliburton consistently administered the Dresser Retiree Medical Program in alignment with section 7.09(g)(i) over five years following the merger, acknowledging its obligations to maintain the retiree medical plan. Correspondence from Halliburton indicated awareness of these obligations, reinforcing the validity of the amendment.
Additionally, Halliburton contends that under the no-third-party-beneficiary clause in section 10.07 of the merger agreement, the Retirees lack standing to enforce any provisions of the agreement, including section 7.09(g), asserting that only the parties to the merger and designated directors can enforce these terms.
The three-year period during which Halliburton's directors could enforce certain provisions has expired, but it is argued that the Retirees are not barred from asserting their rights under ERISA. Halliburton incorrectly conflates the Retirees' right to enforce a plan provision with a third-party breach of contract claim. The Retirees are seeking clarification of their rights to future benefits under the retiree program, not a contract claim, which ERISA preempts according to Metro. Life Ins. Co. v. Taylor. ERISA's civil enforcement scheme, outlined in 29 U.S.C. § 1132(a)(1)(B), is designed to be exclusive for enforcing rights under employee benefit plans. It is emphasized that Halliburton's argument that a no-third-party-beneficiary clause could override ERISA rights contradicts the statutory framework established by Congress.
Additionally, Halliburton's assertion that only specific parties could enforce section 7.09(g)(i) for three years lacks support from the merger agreement's language. Section 10.07 allows certain directors to enforce sections 7.09 and 7.13 on behalf of Dresser’s employees, but section 7.09(g)(i) does not impose a time limitation on enforcement or exclude plan participants from enforcement. It mandates Halliburton to ensure the Dresser Retiree Medical Program is maintained, barring modifications consistent with Halliburton's active employee medical plans. The contrast with section 7.09(h), which does impose a time limit for benefits for Dresser employees, further underscores that the parties did not intend to limit enforcement of the retiree program. The careful drafting reflects a distinction between the rights of employees and retirees in the agreement.
Interpreting "employees" in section 10.07 to include "retirees" and imposing a three-year limitation on retiree program obligations would undermine section 7.09(g)(i) and render it superfluous when considered alongside section 7.09(h). The court rejects the notion of a three-year requirement in section 7.09(g)(i). Halliburton's interpretation of section 7.09(g)(i) as conferring "permanent benefits" is incorrect, as it misrepresents the merger agreement's prohibition on vested benefits. The section mandates Halliburton to maintain the Dresser Retiree Medical Program, subject to modifications consistent with changes affecting similarly situated active employees. However, this does not imply a vested right under ERISA, which requires clear intent and express language for benefits to be considered irrevocable. Because section 7.09(g) allows Halliburton to amend or terminate the retiree program as it sees fit, the benefits do not vest. Although section 7.09(g) limits amendments or terminations, it does not eliminate Halliburton’s ability to modify the plan unless bound by a specific contract. The court emphasizes that an employer can unilaterally amend or terminate welfare benefits unless there is a contractual obligation preventing such action. Consequently, Halliburton cannot unilaterally eliminate the negotiated rights concerning the retiree program established in the merger agreement.
Parties involved in the Dresser Retiree Medical Program established contractual constraints on the ability to amend or terminate the program, which Halliburton must adhere to as outlined in section 7.09(g). The most current version of Dresser Plan 750 is from 1995, with the applicable summary plan description being "Your Benefits Handbook 1997" for non-union employees and retirees, effective January 1, 1997. This plan also regulates other welfare benefit programs associated with Dresser, including the Executive Deferred Compensation Plan and the Supplemental Executive Retirement Plan. While retirees referenced provisions in the merger agreement that may impact these other programs, the court's jurisdiction is confined to the Dresser Retiree Medical Program as specified in the certified order. Three categories of "grandfathered" employees are recognized: existing retirees with coverage, active employees meeting age and service requirements as of January 1, 1993, and certain specified active employees who could qualify for retiree benefits. As of May 3, 2006, there were an estimated 3,000 to 4,000 participants in the program. Following the merger, Halliburton could automatically assume the role of plan sponsor under Dresser Plan 750, which includes a provision allowing for the substitution of any successor entity as the employer.
The merger agreement designated Dresser as the surviving corporation of Halliburton N.C., granting Dresser all associated rights and obligations. Halliburton chose not to adopt the original plan through this agreement, necessitating a July 1999 agreement to substitute Halliburton as the plan sponsor and transfer Dresser's rights and obligations under the plan. Halliburton subsequently amended Subplans 501, 901, and 902, which were benefits for Dresser retirees. Although the agreement to assume Dresser's employee benefit plans is dated July 16, 1999, it is effective retroactively from January 1, 1999, shortly after the merger's effective date.
Halliburton contends that "parol evidence" should not be considered to determine if section 7.09(g)(i) amended the Dresser Retiree Medical Program, asserting that unambiguous plan documents control and extrinsic evidence cannot alter these terms. However, evidence showing subsequent ratification of a plan amendment is permissible, especially if a corporate officer's act was unauthorized or irregular. Halliburton cites two cases, including In re Fairchild Indus. Inc., to argue against informal amendments; however, the circumstances here differ as section 7.09(g)(i) was executed per the amendment procedures of the Dresser Plan 750. Additionally, the Supreme Court in Curtiss-Wright Corp. rejected formalities imposed on ERISA plan amendments, undermining Halliburton's reliance on its cited cases, including Lafata v. Raytheon Co., which is deemed irrelevant to ERISA plan amendments.
Halliburton initially asserted that section 7.09(g)(i) of the merger agreement modified the Dresser Retiree Program for a three-year period, as outlined in the merger agreement, which restricted Halliburton's ability to change or terminate benefits during that time. Halliburton was obligated to maintain the Dresser Retiree Program, except for modifications aligned with benefits provided to similarly situated active employees. However, in subsequent arguments before the court, Halliburton contended that the merger agreement did not amend the retiree program or, if it did, such amendments were only valid for three years in accordance with section 10.07. Furthermore, Halliburton referenced sections 4.130 and 5.130, clarifying that the merger agreement does not establish any additional vested rights. Under sections 3786.02(a)(i) and (b)(i), both Dresser and Halliburton agreed not to amend employee benefit plans to create vested rights. The amendment under section 7.09(g)(i) was deemed consistent with these provisions since it did not confer vested rights but rather restricted Halliburton’s ability to amend or terminate the retiree program.
