                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


11-1-1995

Dade v North American Philips
Precedential or Non-Precedential:

Docket 94-5546




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Recommended Citation
"Dade v North American Philips" (1995). 1995 Decisions. Paper 283.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/283


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1
              UNITED STATES COURT OF APPEALS
                  FOR THE THIRD CIRCUIT


                       N0. 94-5546


           JAMES F. DADE; JEROME A. BUDDE, JR.,
      Individually and as the Class Representatives
            of all Persons Similarly Situated

                        Appellants

                              v.

 NORTH AMERICAN PHILIPS CORPORATION, as a Corporate Entity
and as Plan Administrator of the Co-Defendant Pension Plan;
      PHILIPS ELECTRONICS NORTH AMERICAN CORPORATION;
  THE NORTH AMERICAN PHILIPS CORPORATION PENSION PLAN FOR
                    SALARIED EMPLOYEES



     On Appeal From the United States District Court
              For the District of New Jersey
           (D.C. Civil Action No. 93-cv-05016)


                   Argued June 13, 1995

   BEFORE:   STAPLETON, McKEE and SEITZ, Circuit Judges

             (Opinion Filed   November 1, 1995)




                      David Tykulsker
                      Ball, Livingston & Tykulsker
                      108 Washington Street
                      Newark, NJ 07102
                             and
                      John C. Theisen (Argued)
                      John T. Menzie
                      Gallucci, Hopkins & Theisen
                      229 West Berry Street, Suite 400
                      P.O. Box 12663
                      Fort Wayne, IN 46864-2663
                             Attorneys for Appellants


                              2
2
                        Michael J. Dell (Argued)
                        Kramer, Levin, Naftalis,
                         Nessen, Kamin & Frankel
                        919 Third Avenue
                        New York, NY 10022
                               Attorneys for Appellees

                        Fredric S. Singerman
                        Christopher A. Weals
                        Seyfarth, Shaw, Fairweather &
                         Geraldson
                        815 Connecticut Avenue, N.W.
                        Suite 500
                        Washington, D.C. 20006-4004
                               and
                        Of Counsel:
                        Stephen A. Bokat
                        Robin S. Conrad
                        Mona C. Zeiberg
                        National Chamber Litigation
                         Center, Inc.
                        1615 H. Street, N.W.
                        Washington, D.C. 20062
                               Attorneys for Amicus Curiae
                               Chamber of Commerce of the
                               United States of America

                        John M. Vine
                        Jay T. Smith
                        Covington & Burling
                        1201 Pennsylvania Avenue, N.W.
                        P.O. Box 7566
                        Washington, D.C. 20044
                               Attorneys for Amicus Curiae
                               The ERISA Industry Committee




                      OPINION OF THE COURT




STAPLETON, Circuit Judge:


          The issue presented is whether § 204(g) of the Employee

Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1054(g),


                               3
requires an employer that sells a business but retains the

pension plan covering the employees of that business to credit

service with the purchaser when determining the eligibility of

those employees for an early retirement benefit subsidy.

Plaintiffs James Dade, Jerome Budde, Jr., and the class they

purport to represent sued to force the North American Philips

Corporation ("Philips"), their former employer, to comply with

this alleged requirement.      The district court held that ERISA

does not impose such a requirement and dismissed the claims of

plaintiffs for failure to state a claim under Fed. R. Civ. P.

12(b)(6).    We will affirm.



                                   I.

            This dispute arises in connection with Philips' sale of

the assets of its Magnavox Electronic Systems Company

("Magnavox") division to MESC Electronics Systems, Inc.

("MESCESI").    The relevant facts are not in dispute.   Plaintiffs

were employed by Magnavox on October 22, 1993, when the sale

closed.   Until the sale, plaintiffs participated in the Philips

Electronics North America Corporation Pension Plan for Salaried

Employees (the "Philips Plan" or the "Plan").

            Under the terms of the Plan, sixty-five is the normal

retirement age.    However, participants who are at least fifty-

five years old can elect to retire earlier.      Such early retirees

receive benefits reduced by 0.3% for each month their retirement

precedes the normal retirement age.     Under the Plan's "Rule of

85," early retirement benefits will not be reduced if the sum of


                                   4
the participant's age and years of eligible service at retirement

is at least eighty-five.    The Plan defines eligible service as

service with Philips, an affiliate of Philips, or any other

company that has adopted the Plan.

            Philips notified the plaintiffs of the impending sale

of Magnavox and of the sale's effects on their retirement

benefits.   After the sale, Philips would remain the sponsor of

the Plan and there would be no transfer of Plan assets or

liabilities.    While the plaintiffs would cease to be Philips'

employees at the time of the closing, they would retain their

rights under the Plan.    Moreover, the Plan would be amended in

two respects.    All participants' accrued retirement benefits

would become 100% vested when the sale closed and Magnavox

employees continuing with MESCESI would be entitled to credit for

up to one year of additional service with MESCESI towards the

Philips Plan's Rule of 85 requirements.    No credit would be given

for any subsequent service with MESCESI.

            After the sale, the plaintiffs continued to work for

MESCESI in the same jobs they held with Magnavox.    They did not

satisfy the Rule of 85 requirements when the sale closed, nor

could they do so even with credit for an additional year of

service with MESCESI.    Plaintiff Budde's age and eligible service

summed to eighty-five, but he was not yet fifty-five years old,

and would not turn fifty-five by October 1994.    Plaintiff Dade

did not have sufficient eligible service.



                                II.


                                 5
          The district court had jurisdiction under 28 U.S.C.

§ 1331 and 29 U.S.C. § 1132.      Our jurisdiction over this appeal

rests on 28 U.S.C. § 1291.    We exercise plenary review over the

district court's order dismissing plaintiffs' complaint under

Fed. R. Civ. P. 12(b)(6).    Moore v. Tartler, 986 F.2d 682, 685

(3d Cir. 1993).



                                  III.

          Plaintiffs' complaint asserts that both ERISA and the

terms of the Plan require Philips to give plaintiffs credit for

all of their service with MESCESI for the purpose of satisfying

the Rule of 85.   The district court was correct in holding that

neither ERISA nor the terms of the Plan require that Philips give

this credit.



                             A.   The Plan

          While plaintiffs insist that Philips breached the Plan,

their supporting argument before us rests squarely on two

provisions of the Plan that incorporate the "applicable law":

Section 4.2.3, which requires the Plan to give credit for service

with a successor employer "to the extent required by law," and

Section 13.4, which authorizes amendments to the Plan in order to

"comply with any other provision of applicable law."     Since the

"applicable law" to which plaintiffs point is § 204(g) of ERISA,

it necessarily follows that the sole issue presented in this

appeal is whether § 204(g) requires credit for the plaintiffs'




                                   6
service with MESCESI.   It is nevertheless important to view the

statutory issue in the context of the provisions of the Plan.

           The unambiguous terms of the Plan do not require Rule

of 85 credit for service with MESCESI.     Section 5.7 of the Plan

sets out the terms for early retirement subsidies.    A

participant's right to an early retirement subsidy is based on

the participant's age and years of "Eligibility Service."

"Eligibility Service" is defined as the "number of years and

months of employees' Periods of Service."    "Period of Service" is

in turn defined as the period running from an employee's

"Employment Commencement Date" (defined in Section 1.2.25 as the

day on which he performs his first hour of paid work for an

Employer or Affiliate) through an applicable "Severance Date."

Finally, "Severance Date" is defined for relevant purposes as the

"earliest of:   the date on which an employee quits, retires, is

discharged or dies; or the first anniversary of the first date of

a period in which an employee remains absent from service (with

or without pay) with an Employer or Affiliate for any [other]

reason."   Plan § 1.2.53 (A. 57).    The Plan defines "Employer" as

Philips or any other entity that has adopted the Plan with the

approval of the Pension Committee, § 1.2.24 (A. 45), and

"Affiliate" as an entity owned by or part of the controlled group

of an Employer.   § 1.2.3 (A. 38).   MESCESI has not adopted the

Plan and is not an affiliate of Philips.

           Section 4.2.3 expressly excludes from the definition of

"Period of Service" time spent working for any entity that is not

yet or is no longer an Employer or Affiliate:


                                7
           In no event shall a Period of Service include
           any period of service with a corporation or
           other entity (a) prior to the date it became
           an Employer (or the date it became an
           Affiliate, if earlier) or (b) after it ceases
           to be an Employer or Affiliate except to the
           extent required by law, or to the extent
           determined by the Pension Committee in its
           discretion exercised in a manner that does
           not discriminate in favor of highly paid
           employees.

(A. 73.)   Since the parties agree that the Pension Committee did

not exercise its discretion to credit service with MESCESI after

the first year, we turn to the effect of § 204(g) of ERISA.



                   B.    The Requirements of ERISA

           ERISA does not mandate the creation of pension plans.

Nor, with exceptions not here relevant, does it dictate the

benefits to be afforded once a decision is made to create one.

Hlinka v. Bethlehem Steel Corp., 863 F.2d 279, 283 (3d Cir.

1988); see also H.R. Rep. No. 807, 93d Cong., 2d Sess., reprinted

in 1974 U.S.C.C.A.N. 4670, 4677.      "ERISA is not a direction to

employers as to what benefits to grant their employees."       Hlinka,

863 F.2d at 283.   Philips was thus at liberty to define the early

retirement benefit in any way it chose, including a stipulation

that only service to Philips or an affiliate would be credited

towards the Rule of 85 requirement.      Plaintiffs do not contend

otherwise.   Accordingly, we are required to enforce the Plan as

written unless we can find a provision of ERISA that contains a

contrary directive.     The only candidate identified by the

plaintiffs is § 204(g).




                                  8
            Section 204(g) of ERISA prohibits an employer from

decreasing a participant's accrued benefits by plan amendment.

Prior to 1984, no protection was given to early retirement

benefits because they were not considered to be accrued benefits.

Bencivenga v. Western Pa. Teamsters and Employers Pension Fund,

763 F.2d 574, 577 (3d Cir. 1985).     In 1984, however, Congress

amended ERISA § 204(g) to provide protection for early retirement

benefits.   Retirement Equity Act of 1984 ("REA"), Pub. L. No. 98-

397, § 301(a)(2), 98 Stat. 1450-51.    Section 204(g) as amended

provides in relevant part:
               (1) The accrued benefit of a participant
          under a plan may not be decreased by an
          amendment of the plan . . . .
               (2) For purposes of paragraph (1), a
          plan amendment which has the effect of--
                         (A) eliminating or
               reducing an early retirement
               benefit or a retirement-type
               subsidy (as defined in regulations)
               . . .
          with respect to benefits attributable to
          service before the amendment shall be treated
          as reducing accrued benefits. In the case of
          a retirement-type subsidy, the preceding
          sentence shall apply only with respect to a
          participant who satisfies (either before or
          after the amendment) the preamendment
          conditions for the subsidy. . . .1
After 1984, a plan sponsor could prospectively eliminate an early

retirement benefit by amendment, but under § 204(g) the amendment

could not adversely affect the early retirement benefit of a plan


1
  Rule of 85 benefits are considered early retirement subsidies
because "more is provided . . . than any reasonable actuarial
equivalent of the plan's normal retirement benefit." Stephen R.
Bruce, Pension Claims Rights and Obligations, 285 (1993); see
Ashenbaugh v. Crucible, Inc., 854 F.2d 1516, 1521 n.6, 1528 n.12
(3d Cir. 1988), cert. denied, 490 U.S. 1105 (1989).


                                 9
participant who satisfied the pre-amendment conditions for the

benefit either before or after the amendment.     Thus, if Philips

had adopted such an amendment, it would have had to allow those

employees who remained in its employ after the amendment to "grow

into" the benefit by providing post-amendment service to Philips

or an affiliate of Philips.

          Section 204(g) is not applicable under the facts of

this case because there has been no amendment of the Plan that

reduced a benefit, accrued or otherwise.     The only amendment to

the Plan was one increasing the early retirement benefit by

expanding the universe of participants who could qualify for it.

While plaintiffs insist that Philips' stated position, denying

early retirement benefits to Dade, Budde and the others is

"tantamount to an amendment of the plan,"     Appellants' brief at

19, that is simply not the case.     Philips' stated position was

nothing more than an accurate recounting of the Plan's terms. The

denial resulted from the fact that plaintiffs could not satisfy

the preamendment, pre-sale conditions for the Rule of 85

retirement-type subsidy as originally written.

          In arguing that § 204(g) requires Philips to credit

plaintiffs for service with MESCESI, plaintiffs ignore the fact

that the REA does not override the conditions originally imposed

by the Plan which defined the early retirement benefits when they

were created.   As this court has explained, "the fact that

[amendments reducing early retirement benefits] will now be

'treated as reducing accrued benefits' does not mean that

Congress intends to foreclose employers from circumscribing the


                                10
availability of such optional benefits when they are being

created."   Ashenbaugh, 854 F.2d at 1527.    "Congress's chief

purpose in enacting [ERISA] was to ensure that workers receive

promised pension benefits upon retirement," Hoover, 756 F.2d at

985 (emphasis added).    Thus, Congress sought "to protect

contractually defined benefits."      Firestone Tire & Rubber Co.,

489 U.S. at 113 (emphasis added).     The early retirement benefits

plaintiffs seek were neither promised nor contractually defined.

            This case is not controlled by Gillis v. Hoechst

Celanese Corp., 4 F.3d 1137 (3d Cir. 1993), cert. denied, 114 S.

Ct. 1540 (1994), the principal authority relied upon by

plaintiffs.    In Gillis, we held that §§ 208 and 204(g) required a

greater transfer of plan assets in a plan spin-off accompanying a

sale of a business than the selling sponsor had agreed to make.

Neither of those sections is applicable here.

            The facts of Gillis were similar to those of the

present case in some respects:    both cases involved the sale of a

business by the plan sponsor, both plans offered similar Rule of

85 early retirement benefits, the plaintiffs in both cases had

not satisfied the Rule of 85 at the time of the sales, and both

plans only credited service with the plan sponsor.     Id. at 1140,
1143.   Gillis, however, differs materially from the present case.

In Gillis, the original plan sponsor transferred all of the

plan's liabilities and assets to the purchaser.      In the

vernacular of the trade, there was a plan spin-off.     Moreover,

the purchaser agreed to provide all of the same early retirement

benefits as the previous plan.     There was no dispute about


                                 11
whether the plaintiffs, following the spin-off, would be entitled

to credit for service with the new employer.    They would be.    Id.

at 1149 (Alito, J., concurring).

            The issue in Gillis was whether the original plan

sponsor had transferred sufficient assets to satisfy the

requirements of § 208.    Gillis, 4 F.3d at 1143.   Section 208

provides:
                 A pension plan may not merge or
            consolidate with, or transfer its assets or
            liabilities to, any other plan . . . , unless
            each participant in the plan would (if the
            plan then terminated) receive a benefit
            immediately after the merger, consolidation,
            or transfer which is equal to or greater than
            the benefit he would have been entitled to
            receive immediately before the merger,
            consolidation, or transfer (if the plan had
            then terminated) . . . .


29 U.S.C. § 1058.    Thus, a plan spin-off is permissible only if

the participants would receive no less on a hypothetical

termination of the plan just after the spin-off than they would

have received on a hypothetical termination just before the spin-

off.
            Accordingly, application of § 208 to the facts in

Gillis required the court to determine what benefits the

participants would have received in a termination at two points

in time.    This necessarily implicated § 204(g) since a

termination of the plan would have had the same effect as an

amendment eliminating all benefits.2   The court held that the

2
  Not surprisingly, the legislative history of the 1984
amendments indicates that Congress intended early retirement
benefits to have the same protection in a plan termination that

                                 12
combined effect of §§ 208 and 204(g) in the context of a plan

spin-off like that before it was to require the transfer of an

amount of assets that would include sufficient funding for the

early retirement benefits for those who would qualify after the

transfer by service to the new employer.

          Section 208 is not relevant here because this case does

not involve a plan spin-off.   Section 204(g) is not applicable

here because this case does not involve anything that can fairly

be considered a plan amendment eliminating or reducing an early

retirement benefit.   With the exception of the amendment

enhancing the early retirement benefit, the Philips Plan was

precisely the same before and after the sale.   The holding in

Gillis is, accordingly, inapposite here.

          While we acknowledge that portions of the opinion of

the court in Gillis can plausibly be read as inconsistent with

the conclusion that we here reach, we do not so read them.   In

any case, we are required to harmonize the holding of Gillis with

the holdings of our prior opinions that a sponsoring employer,

with exceptions not here relevant, is free to define the benefits


they would have in an amendment. See, e.g., S. Rep. 575, 98th
Cong. 2d Sess., reprinted in 1984 U.S.C.C.A.N. 2547, 2575
("Terminated Plans: The bill does not provide an exception to
the prohibition against reduction of benefits or elimination of
benefit options in the case of a terminated plan. Accordingly, a
plan is not to be considered to have satisfied all of its
liabilities to participants and beneficiaries until it has
provided for the payment of contingent liabilities with respect
to a participant who, after the date of the termination of a
plan, meets the requirements for a subsidized benefit."). As
Judge Alito noted in his concurring opinion in Gillis, the
Internal Revenue Service has taken the position that the
protection of § 204(g) applies in a plan termination.


                                13
in its ERISA plan and that those definitions must be enforced as

written in the absence of a contrary statutory mandate.   As we

have explained, the result in Gillis is attributable to the

requirements of §§ 208 and 204(g).   Neither those sections nor

any other provision of ERISA authorizes us to depart from the

terms of Philips' Plan in the circumstances of this case.

          The result that we here reach is consistent with that

reached in Hunger v. AB, et al., 12 F.3d 118 (8th Cir. 1993), on

virtually identical facts.



                              IV.

          The judgment of the district court will be affirmed.




                               14
