1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

11-1-1995

Dade v North American Philips

Precedential or Non-Precedential:

Docket 94-5546

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"Dade v North American Philips" (1995). 1995 Decisions. Paper 283.

http://digitalcommons.law.villanova.edu/thirdcircuit_1995/283
1 
2 

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 
3 

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), 
4 

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 fiftyfive 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 
5 

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. 
6 

 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' 
7 

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: 
8 

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). 
9 

 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). 
10 

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 
11 

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 
12 

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 spinoff. 

 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 
13 

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. 
14 

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.