Publications

The U.S. Supreme Court, in Varity Corp. v. Howe, recently expanded employers’ potential ERISA exposure by permitting breach of fiduciary duty claims based on employees’ subjective perceptions as to when an employer is acting in its capacity as plan administrator. In another context, however, the Second Circuit Court of Appeals, which covers Connecticut, New York and Vermont, recently clarified and narrowed the scope of an employer’s fiduciary duty to disclose contemplated changes to benefit plans in Pocchia v. NYNEX Corp.

The Varity Case
In 1986, Varity Corporation established a new subsidiary and transferred to it a variety of the company’s debts and other obligations, including the company’s obligations to retirees under medical and other, non-pension benefit plans. In statements to employees, Varity deliberately misled them, expressing optimism about the new subsidiary and urging employees to transfer to the subsidiary. Unbeknownst to the employees, however, the new subsidiary actually started out with a negative net worth of $46 million. Within two years, the subsidiary was in receivership and all employee and retiree non-pension benefits that were transferred there were lost.

The Supreme Court validated the employees’ perception that Varity made misrepresentations in its fiduciary role as plan administrator, noting that statements about the future of plan benefits were an “appropriate” activity of a plan administrator, and that the information came from company officers who had authority to communicate as fiduciaries with plan beneficiaries. Under the circumstances, the court concluded, “reasonable employees… could have thought that Varity was communicating to them both in its capacity as employer and in its capacity as plan administrator.” The Supreme Court affirmed the lower court ruling that Varity had to reinstate the affected employees and retirees to its own benefit plans and pay hundreds of thousands of dollars in back benefits. The Court also ruled that ERISA authorizes plan participants to bring lawsuits on their own behalf for individualized (rather than Plan-wide) equitable relief in breach of fiduciary duty cases.

It remains to be seen whether Varity will open up a floodgate of new ERISA claims based on an expanded view of the employer as plan fiduciary, or whether courts will limit the case’s holding to similarly egregious facts. In the meantime, Varity stands as a stark reminder that (1) misleading statements to employees carry with them a high risk of liability, and (2) employers must keep careful control over all communications to employees concerning employee benefits. Ironically, one unintended effect of the Varity case may be that employers will say nothing about employee benefits other than the information strictly mandated by law, rather than risk the possibility that plan participants and beneficiaries may misinterpret information or the authority of the speaker to provide the information.

The NYNEX Case
Duplicating a scenario repeated countless times across the country, the plaintiff in NYNEX retired about seven months before an enhanced early retirement package was announced for which he would have been eligible had he remained an active employee. The plaintiff claimed that NYNEX breached ERISA fiduciary duties by failing to inform him at the time he retired that it was considering implementing the new plan.

The claim was flatly rejected by the Second Circuit, which said that while an employer, as plan fiduciary, may not deliberately mislead participants about changes being considered, there is no duty to voluntarily disclose changes to a plan before they are adopted. Where, as in NYNEX, the employee makes no formal inquiry about contemplated changes, the employer has no duty to disclose any changes being considered.

The Second Circuit’s commonsense approach is a welcome clarification of employers’ fiduciary duties and, unlike the Supreme Court’s Varity decision, helps to preserve the important distinction between decisions made by an employer as an employer and those made in its role as a plan fiduciary.