Opinion ID: 568008
Heading Depth: 2
Heading Rank: 2

Heading: Structural Defect Analysis

Text: 28 Courts are extremely reluctant to substitute their judgments for the judgments of trustees and will do so only if the actions of the trustees are not grounded on any reasonable basis. Ponce v. Construction Laborers Pension Trust, 628 F.2d 537, 542 (9th Cir.1980) (Ponce I ). Short of plainly unjust standards, trustees have wide latitude in formulating pension eligibility rules. Id. at 544. A court should interfere only when the rule is unreasonable or its enforcement arbitrary. Giler v. Board of Trustees, 509 F.2d 848, 849 (9th Cir.1974). 29 The questions whether the trustees have acted arbitrarily and capriciously or whether the plan contains a structural defect are mixed ones of law and fact. When reviewing the ultimate questions of arbitrary and capricious conduct and structural defect, this court has not accorded any special deference to the district court's determinations. See, e.g., Elser v. I.A.M. Nat'l Pension Fund, 684 F.2d 648, 654 (9th Cir.1982). We review de novo these ultimate conclusions. Underlying findings of fact are reviewed for clear error. See Miranda v. Audia, 681 F.2d 1124, 1127 (9th Cir.1982), cert. denied, 464 U.S. 813, 104 S.Ct. 67, 78 L.Ed.2d 82 (1983).
30 A pension plan is structurally deficient when it arbitrarily and unreasonably excludes a large number of participants from receiving benefits, thus failing to satisfy the § 302(c)(5) requirement that it be for the sole and exclusive benefit of all employees. Ponce I, 628 F.2d at 543. The plaintiff carries the initial burden of showing that the plan excludes an unusually high number of participants. Id. If the plaintiff does so, the burden shifts to the trustees to show the reasonableness of the plan's eligibility requirements. Id. The district court's finding that the exclusion rate was excessively high is a finding of fact reviewed for clear error. Ponce v. Construction Laborers Pension Trust, 774 F.2d 1401, 1402 (9th Cir.1985) (per curiam) (Ponce III ), cert. denied, 479 U.S. 890, 107 S.Ct. 289, 93 L.Ed.2d 263 (1986). 31 Ultimately, we must decide whether the Fund's vesting standards were so arbitrary and capricious that they amounted to a structural deficiency. The district court's reasoning and remedy require us to consider the combined effects of the Fund's 10-year/15,000-hour vesting standard, break-in-service rule, lack of reciprocity and self-pay provisions and its decisions to increase benefits.
32 The Fund's exclusion rate serves as evidence of the combined effect of its eligibility rules. The Fund argues that the district court misapplied the exclusion rate test by failing to take into account the high turnover in the hotel and restaurant industry. Although the Fund's work force was highly transient, this fact has little bearing on the threshold determination of whether the exclusion rate is unusually high. The trustees' fiduciary duties run to all participants regardless of their length of employment. The Fund's statistics relating to employee transience become relevant only after the burden has shifted to the Fund to justify its eligibility standards. 33 The district court found that an exclusion rate above 97 percent was unusually high. This finding was not clearly erroneous. The burden properly shifted to the Fund to show the reasonableness of its eligibility rules. See Ponce III, 774 F.2d at 1403. 34
35 In evaluating the Fund's justifications for the high exclusion rate, three of our decisions are on point: Ponce I, Ponce III and Miranda v. Audia. Both Ponce decisions and Miranda involved challenges to pre-ERISA, 15-year vesting rules that excluded 94 to 96 percent of all participants. In no case did we engage in statistical line-drawing. Instead, we carefully considered the plan's justifications in light of the facts. 36 In Miranda, we found no structural defect, grounding our conclusion on these facts: 37 (1) a high exclusion rate was due at least in part to the highly transient nature of construction laborers; 38 (2) the average age of employees qualifying for benefits had steadily decreased; 39 (3) the plan had adopted rules to relax eligibility requirements, including lowering the vesting age from 65 to 62 for those with 15 years of service, eliminating the retirement age requirement entirely for those with 25 years of service, relaxing its break-in-service rule, and establishing national reciprocity agreements with other plans; 40 (4) a reduction in the vesting requirement from 15 to 10 years would result in the vesting of an additional 445 employees out of a total of over 30,000 participants; this would not materially reduce the number excluded. 41 Miranda, 681 F.2d at 1125-26. 42 In Ponce III, we confronted a number of very similar facts. Distinguishing the plan in Miranda on the basis of the redeeming steps [it] had taken to relax eligibility conditions, we found a structural defect. Ponce III, 774 F.2d at 1403. The plan in Ponce III, however, had adopted two of the very rules (the reciprocity agreement and the lowering of the retirement age) that we found so salutary in Miranda. See Ponce v. Construction Laborers Pension Trust of S. Cal., 582 F.Supp. 1310, 1312-13 (C.D.Cal.1984) (Ponce II ), aff'd, 774 F.2d 1401 (9th Cir.1985). In addition, while both cases involved a highly transient work force of construction laborers, we interpreted that fact differently in Ponce III than in Miranda. In Miranda, we suggested that the transience was a reasonable explanation for the high exclusion rate. 681 F.2d at 1125-26. In Ponce III, however, we viewed it as evidence that the plan's 15-year vesting requirement was not accomplishing its asserted goal of retaining employees. 774 F.2d at 1405. 43 The divergent results and sometimes divergent reasoning of these decisions suggests that our inquiry must be highly sensitive to the facts and circumstances confronting the Fund's trustees. 44 Before examining the justifications offered by the Fund, we turn to a statement in Ponce I that is hotly disputed by the parties and critical to our interpretation of the LMRA: [T]he primary purpose of section 302(c)(5) is to insure that pension benefits are awarded to as many employees as is economically possible. Ponce I, 628 F.2d at 544; see Elser, 684 F.2d at 656. 45 The plaintiffs interpret this statement as meaning that nothing short of economic necessity can justify excluding large numbers of plan participants. Because the Fund does not attempt to justify its high exclusion rate on financial or actuarial grounds, plaintiffs argue that the numbers simply end the discussion. 46 The Fund and amici NCCMP and the Alaska Teamster-Employer Pension Trust argue that the Ponce I statement must be read narrowly. If the statement means that providing benefits to the greatest number of participants is the compass guiding the court, they argue, then it conflicts with the underlying assumptions and goals of a defined benefit plan. 47 The Ponce I statement conceals a fundamental tension that affects the administration of any pension plan. Under one view, contributions to a pension plan are seen as deferred compensation, money that comes directly from employees' pockets. The employee's right to these deferred benefits is the same as his or her right to current wages. In a plan operating under a pure deferred compensation theory, employees would enjoy full and immediate vesting from the first day of employment. See Comment, Judicial Review of Fiduciary Claim Denials Under ERISA: An Alternative to the Arbitrary and Capricious Test, 71 Cornell L.Rev. 986, 1003-07 (1986). 48 Several courts have endorsed variants of the deferred compensation theory, pointing to statements in the legislative history of both the LMRA and ERISA. See Demisay v. Local 144 Nursing Home Pension Fund, 935 F.2d 528, 533 (2d Cir.1991) (employer contributions to a § 302(c)(5) plan are in exchange for employees' labor, just as wages are); Knauss v. Gorman, 583 F.2d 82, 89 (3d Cir.1978) (concluding that drafters of § 302(c)(5) viewed contributions as deferred compensation); Mosley v. National Maritime Union Pension & Welfare Plan, 438 F.Supp. 413, 424 (E.D.N.Y.1977) (citing ERISA legislative history supporting deferred compensation theory). 49 Others see a pension plan as an incentive system that enables employers to retain and reward long-term employees. Several courts, including this one, have recognized this rationale. See Ponce I, 628 F.2d at 542 (break-in-service rule is intended to promote an employer's legitimate interest in the continuous employment of his employees); Mestas v. Huge, 585 F.2d 450, 453 (10th Cir.1978); Roark v. Boyle, 439 F.2d 497, 504 (D.C.Cir.1970). ERISA's legislative history contains some support for the incentive/reward rationale. See 1 Legislative History of ERISA, supra note 5, at 1796-97. But if a pure incentive/reward system were implemented, trustees would have unfettered discretion to devise standards facilitating employee retention. This they do not have. 50 A modern defined benefit pension plan pools contributions for all workers, using the income generated by their combined financial clout, to provide reasonable pensions for workers who satisfy reasonable eligibility standards. The formula necessarily assumes that the pensions of a significant number of employees may never vest. See Central States, S.E. & S.W. Areas Pension Fund v. Gerber Truck Serv., Inc., 870 F.2d 1148, 1154-55 (7th Cir.1989) (en banc). 51 A defined benefit plan is neither pure deferred compensation nor pure incentive and reward. It draws on both concepts. To apply properly the statement in Ponce I, we must recognize and balance these competing views. If our admonition that a plan award benefits to as many employees as is economically possible were taken literally, the deferred compensation view would triumph. Eligibility standards would be set at the lowest possible threshold and benefits would be minuscule, diminishing rewards and incentives to the point of insignificance. 52 We proceed cautiously then to determine whether the plan suffered from a structural defect. The Fund begins by offering four explanations for its high exclusion rate: (1) its eligibility standards were the result of discretionary policy decisions designed to retain and reward workers by reallocating contributions from short-term workers to long-term workers; (2) the minimal effect that the district court's remedy would have on the exclusion rate demonstrates that the rate was attributable to high turnover in the hotel and restaurant industry and not to a structural defect; (3) it complied with ERISA vesting standards and implemented eligibility standards that, when adopted, were similar to or more liberal than comparable plans; and (4) it took steps to liberalize its vesting rules. 53 The first justification essentially relies on the incentive/reward rationale. Although this rationale may be reasonable in the abstract, our decision in Ponce III indicates that a plan must provide some evidence that vesting standards have operated to retain career workers. See Ponce III, 774 F.2d at 1405. The evidence before us does not show that the 10-year/15,000-hour rule significantly improved employee retention. 54 Although the Fund's high turnover rate weakens its argument that the 10-year/15,000-hour requirement was rationally related to its goal of retaining career employees, the high rate gives credence to its argument that even if it had adopted five-year vesting, the exclusion rate would have been lowered only slightly. The Fund's evidence showed that more than 50 percent of its participants left the plan with less than one year of service. Eighty-six percent of participants departed with two years or less. Employee transience was a permanent feature of the Fund; even before pipeline construction began, the exclusion rate exceeded 95 percent. 55 The district court's remedy of ordering five-year vesting retroactive to 1973 reduces the Fund's exclusion rate by a mere two percent, from 97 percent to 95 percent. If every person in the four-year category chose the self-pay option, another two percent would vest, reducing the rate to 93 percent. 6 The district court found that a rate of 85 to 90 percent was typical for most multiemployer plans. 56 In Miranda, the 10-year standard proposed by the plaintiffs would have reduced the rate from 96 percent to approximately 94.5 percent. We endorsed the district court's finding that this would not materially reduce the rate and, therefore, did not warrant finding a structural defect. Miranda, 681 F.2d at 1126; cf. Ponce II, 582 F.Supp. at 1314 (adopting a ten-year standard rather than a 15-year standard would have significantly increased the number of participants who would have vested) (emphasis added). We can scarcely conclude that the Fund is structurally deficient when the district court's remedy continues to exclude over 93 percent of plan participants. 57 The cautionary words of Judge Anderson, concurring in Ponce I, are apt here: The trustees are dealing with a unique laboring force and are entitled to consider the many factors which render it unique when making their judgments in carrying out the trust. 628 F.2d at 545. 58 Employee turnover was unusually high in the Alaska hotel and restaurant industry. Yet, the district court discounted the transient nature of the work force, concluding that those factors are present to some extent in every industry. In light of the minimal impact that court's remedy has on the exclusion rate, it would be clearly erroneous to conclude that the overriding cause of the 97 percent exclusion rate was the Fund's restrictive vesting standards. By itself, this undermines the district court's finding of a structural defect. 59 Other factors also convince us that the plan was not structurally defective. The Fund argues that its compliance with ERISA vesting standards militates in favor of finding no structural defect. Although ERISA minimum vesting standards do not displace § 302(c)(5), we must understand the nature of the legislative compromise that produced the 10-year standard. Implicit in that compromise is the notion that trustees have wide discretion to adopt or not adopt eligibility standards that are more liberal than the ERISA minimums. 60 While such discretion is not limitless, a court may not intrude into the province of trustee decision-making unless a strong connection exists between arbitrary and capricious eligibility standards and the exclusion of unusually high numbers of employees. A comparison of the Ponce and Miranda decisions demonstrates that a fine line separates permissible discretionary action from arbitrary and capricious conduct. Where there is substantial doubt whether that line has been crossed, we are reminded of our institutional limitations. Altering a pension plan's long-range actuarial assumptions can be risky business with repercussions extending to participants and times far beyond the case at hand. Judicial intervention in this complex area should be reserved for violations of the arbitrary and capricious standard which clearly cause excessive exclusion. 61 This is a close case. The Fund received substantial contributions on behalf of the non-vested plaintiff class, yet it repeatedly increased benefits for vested participants. Perhaps the Fund could have operated more equitably had it adopted a graded vesting schedule where participants with less than 10 years of service obtained a partial benefit. Alternatively, a savings plan might have distributed funds to more participants. 62 We cannot say, however, that the Fund's failure to amend its standards so that another two to four percent of its participants could vest warrants judicial intervention. During the years immediately after passage of ERISA, few plans, if any, provided for more liberal provisions than the minimum standards set forth in ERISA. See Rehon, The Pension Expectation as Constitutional Property, 8 Hastings Const.L.Q. 153, 195 (1980). Moreover, the Fund's actuary testified that he cautioned against expanding benefit coverage during the pipeline construction era. Trustee conduct that is consistent with reliance on the advice of an expert actuary supports a finding of no violation under § 302(c)(5). Souza v. Trustees of W. Conference of Teamsters Pension Trust, 663 F.2d 942, 947 (9th Cir.1981). 63 In finding arbitrary and capricious conduct, the district court relied partially on its finding that a significant number of the Fund's vested retirees had income replacement ratios exceeding 100 percent. This finding appears to be based on evidence introduced by the Fund of projected pensions for two hypothetical retirees. What the court meant by a significant number is not entirely clear, 7 but the evidence of excessive income-replacement ratios does not appear to be as strong here as it was in Ponce II. In that case, the district court found that benefit levels of vested retirees far exceeded recognized standards and that the ratio was usually in excess of 100 percent. 8 Ponce II, 582 F.Supp. at 1316, 1318. 64 The district court also relied on its finding that the Fund's break-in-service rule contributed to the high exclusion rate by causing involuntary forfeitures of hours when employees were unable to find work that was covered under the Fund. There is no showing, however, that elimination or modification of the break-in-service rule would so substantially reduce the exclusion rate that it was arbitrary of the Fund to retain the rule. 9 65 No additional role played by the rule in discouraging some workers from pursuing covered employment appears to have been critical. We think the district court's reliance on the effects of the rule was secondary to its real concern--the operation of the 10-year/15,000-hour rule. 66 The trustees' failure to adopt reciprocity or self-pay provisions was not arbitrary and capricious. As the district court noted, reciprocity agreements did not exist in the hotel and restaurant industry. As for a self-pay provision, the plaintiffs' own expert could identify only two pension plans that had this option. 67 We conclude that the trustees acted within their discretion in maintaining the Fund's eligibility standards, perhaps near the limits of that discretion. The district court did not consider adequately the Fund's evidence that the highly transient work patterns of employees in the hotel and restaurant industry skewed the exclusion rate. Judicial intervention in pension plan decision-making is inappropriate without a stronger nexus between trustee conduct and the exclusion of unusually high numbers of participants. 10 III. Statute of Limitation 68 Although the foregoing disposes of the appeal on the merits, to avoid any inference that we approve of the district court's disposition of the statute of limitation issue, we address it briefly. 69 This case is controlled by the ERISA statute of limitation, 29 U.S.C. § 1113. 11 See Kwak v. Joyce, 683 F.Supp. 1546, 1549 (N.D.Ill.1988). The Fund argued that the named plaintiffs did not satisfy the statute because each had actual knowledge of the trustees' alleged breach of fiduciary duty more than three years before this suit was filed. In rejecting the Fund's argument, the district court characterized the trustees' failure to relax eligibility rules as a continuing breach of fiduciary duty and statutory violation. It concluded: 70 If past unpaid benefits were sought in this case, the period of their availability, if any, would be limited by the ERISA statute of limitations. However, only prospective relief is sought--i.e., the vesting now of the pension rights of those unlawfully excluded so that they will have benefits from this point forward. That being so, and the violation having continued to and after the date the suit was filed, the statute of limitations does not bar any part of the claim. 71 The court's reasoning is based on a variation of the continuing violation theory employed most often in employment discrimination and antitrust cases. See, e.g., Sosa v. Hiraoka, 920 F.2d 1451, 1455-56 (9th Cir.1990) (employment discrimination); Eichman v. Fotomat Corp., 871 F.2d 784, 793-94 (9th Cir.) (antitrust), amended on other grounds and superseded, 880 F.2d 149 (9th Cir.1989). Its application of that theory hinged on this concept of the alleged breach: the trustees were faced with numerous decisions where they could have relaxed vesting rules; they chose instead to maintain the status quo or to increase benefits for vested participants. The result was a series of discrete but related breaches. As each new breach occurred, the three-year limitation period of § 1113(2) began anew. Because the alleged breaches continued up to and after the filing of the suit, the three-year period was no bar. 72 This application of the continuing violation theory founders on the plain language of § 1113(a)(2). This section requires the plaintiff's knowledge to be measured from the earliest date on which he or she knew of the breach. While the trustees' conduct may be viewed as a series of breaches, all were of the same character: a failure to amend vesting rules. Once a plaintiff knew of one breach, an awareness of later breaches would impart nothing materially new. Cf. Pace Indus., Inc. v. Three Phoenix Co., 813 F.2d 234, 237-38 (9th Cir.1987) (in antitrust cases, the continuing violation theory requires an overt act that is new and independent, not merely a reaffirmation of a previous act; it must inflict new and accumulating injury on plaintiff). The earliest date on which a plaintiff became aware of any breach would thus start the limitation period of § 1113(a)(2) running. The district court's application of the continuing violation theory essentially reads the actual knowledge standard out of the statute. 73 Our analysis of § 1113 in Ziegler v. Connecticut Gen. Life Ins. Co., 916 F.2d 548 (9th Cir.1990), is not to the contrary. In Ziegler, we analyzed separately the issues of when a cause of action accrues under § 1113 and when the limitation period begins to run. See id. at 550. The latter determination requires the court to apply the three- or six-year standard in the statute. Id. at 552. A continuous series of breaches may allow a plaintiff to argue that a new cause of action accrues with each new breach. But if the breaches are of the same kind and nature and the plaintiff had actual knowledge of one of them more than three years before commencing suit, § 1113(a)(2) bars the action. 74 The record here indicates that, as of the late 1970s and early 1980s, at least one, and perhaps all, of the named plaintiffs may have had actual knowledge that the trustees had failed to relax vesting provisions so that more workers would benefit. The district court's erroneous application of the continuing violation theory prevented it from deciding this factual question. Our disposition of the merits makes its resolution unnecessary.