Opinion ID: 1870125
Heading Depth: 1
Heading Rank: 4

Heading: Whether the Court Erred in Holding ERISA Preempts State Common Law.

Text: A. Error Preservation. In his brief on appeal, Lindsay claims C & B failed to properly raise the ERISA issue in the district court; therefore, the district court should not have decided the issue. Lindsay's claim must fail. C & B raised the issue in the district court. In its resistance to Lindsay's motion for summary judgment, C & B raised the ERISA preemption issue. At trial, C & B introduced evidence that the deferred compensation plan was the type of plan governed by ERISA. Again, in its trial brief, filed prior to the court's initial ruling, C & B not only raised the preemption issue, but also briefed it. Finally, when the court did not rule on the ERISA issue, C & B filed a rule 1.904(2) motion requesting the court to rule on the ERISA issue. In his resistance to C & B's 1.904(2) motion, Lindsay did not claim that C & B did not raise the issue of preemption in the district court. For these reasons, the ERISA preemption issue was properly before the court. B. Standard of Review. The parties disagree on the standard of review. Lindsay filed the case as a declaratory judgment action. To determine the standard of review of a declaratory judgment action, we have said: Our review of actions for declaratory judgment depends upon how the action was tried to the district court. To determine the proper standard of review, we consider the pleadings, relief sought, and nature of the case [to] determine whether a declaratory judgment action is legal or equitable. We also consider whether the court ruled on evidentiary objections as an important, although not dispositive, test of whether the case was tried in law or equity. Passehl Estate v. Passehl, 712 N.W.2d 408, 414 (Iowa 2006). The relief requested in Lindsay's petition was for the court to declare that his benefits under the deferred compensation plan were nonforfeitable and determine an amount certain C & B had to pay him for those benefits. Counsel and the court discussed how this matter was being tried during the trial with the judge specifically inquiring as to whether this was an equity case. At trial, Lindsay's attorney declared this case to be primarily a legal issue to obtain a ruling on legal construction of the contract. Lindsay's attorney wanted the court to make its decision as a matter of law. During the trial, the judge did entertain and rule on the evidentiary objections. In a similar case, the plaintiff filed a petition for declaratory judgment seeking declaration of his contractual rights, monetary damages, and injunctive relief. Harrington v. Univ. of N. Iowa, 726 N.W.2d 363, 365 (Iowa 2007). In Harrington, even though the plaintiff requested injunctive relief, we found the plaintiff's request for injunctive relief was not dispositive on how the court tried the case. Our court determined the district court tried the case at law. Id. Our review of the pleadings, the colloquy between counsel and the court on how this case was to be tried, the rulings the court made on evidentiary objections, and the relevant case law demonstrate this matter was tried at law. We review cases tried at law for correction of errors at law. Id. C. Analysis on the Merits. Congress passed ERISA intending to develop a body of federal substantive law regarding the rights and obligations of employee benefit plans. Amato v. Bernard, 618 F.2d 559, 567 (9th Cir.1980). Congress's purpose in doing so was to replace diverse state laws with a nationally uniform federal common law regulating employee benefit plans to encourage the growth of private employee benefit plans. Wolf v. Reliance Standard Life Ins. Co., 71 F.3d 444, 447 (1st Cir. 1995). To ensure uniformity in employment benefit plans, Congress declared the ERISA statutes supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan covered by ERISA. 29 U.S.C. § 1144(a) (1999). Accordingly, if the deferred compensation plan is covered by ERISA, we must apply federal law rather than state law to determine if the plan's noncompete forfeiture provisions are enforceable. The ERISA statutes apply to any employment benefit plan if any employer engaged in commerce establishes or maintains the plan. 29 U.S.C. § 1003(a)(1). An employee benefit plan includes an employee pension benefit plan. Id. § 1002(3). ERISA defines an employee pension benefit plan as any plan ... maintained by an employer ... that ... results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.... Id. § 1002(2)(A). The undisputed evidence shows that C & B is an employer engaged in commerce and that it established and maintained the deferred compensation plan at issue in this case. Because the plan result[ed] in a deferral of income to Lindsay to the termination of covered employment or beyond, the deferred compensation plan is covered by ERISA. Accordingly, ERISA preempts state common law regarding the enforceability of the noncompete forfeiture provisions of the plan. Clark v. Lauren Young Tire Ctr. Profit Sharing Trust, 816 F.2d 480, 481 (9th Cir.1987); Noell v. Am. Design, Inc., Profit Sharing Plan, 764 F.2d 827, 831 (11th Cir.1985); Hepple v. Roberts & Dybdahl, Inc., 622 F.2d 962, 965 (8th Cir.1980); Bigda v. Fischbach Corp., 898 F.Supp. 1004, 1014-16 (S.D.N.Y.1995). To determine the effect of ERISA on the forfeiture provisions in the plan, we must define the type of deferred benefit plan entered into between C & B and Lindsay. The district court found this plan to be a top hat plan. A top hat plan is unfunded and exists primarily to provide deferred compensation to a select group of management or highly compensated employees. 29 U.S.C. § 1051(2); see Healy v. Rich Prods. Corp., 981 F.2d 68, 72 (2d Cir.1992). Substantial evidence supports the district court's finding. ERISA's participation and vesting rules govern the nonforfeitability requirements of plans covered by ERISA. 29 U.S.C. § 1053. ERISA exempts top hat plans from its nonforfeitability protection. Id. § 1051(2). ERISA's failure to protect top hat plans from the forfeiture provisions contained in those plans allows a top hat plan to include enforceable noncompete forfeiture provisions even if these provisions are not enforceable under state law. [2] See Bigda, 898 F.Supp. at 1016 (holding New York law may prohibit noncompete forfeiture provisions, but ERISA statutes allow forfeiture of all deferred compensation benefits under noncompete forfeiture provisions in a top hat plan); see also Lojek v. Thomas, 716 F.2d 675, 678-79 (9th Cir.1983) (holding even though Idaho law does not permit the enforcement of noncompete clauses in employment contracts, ERISA statutes allow forfeiture of pension benefits in excess of ERISA's minimum vesting requirements in noncompete clauses), Clark, 816 F.2d at 481-82 (holding state law may prohibit noncompete forfeiture provisions, but ERISA preempts state law with regard to those clauses in an ERISA plan as to pension benefits). Consequently under ERISA, C & B's deferred compensation plan's noncompete forfeiture provisions are enforceable. Therefore, C & B is entitled to discontinue paying Lindsay his deferred compensation benefits if Lindsay violates the terms of the plan by competing with C & B. The holding in Bigda, appears to be consistent with the federal common law prior to the enactment of ERISA. As one federal court noted, at common law (t)he authorities ... generally draw a clear and obvious distinction between restraints on competitive employment in employment contracts and in pension plans. The strong weight of authority holds that forfeitures for engaging in subsequent competitive employment, included in pension retirement plans, are valid, even though unrestricted in time or geography. The reasoning behind this conclusion is that the forfeiture, unlike the restraint included in the employment contract, is not a prohibition on the employee's engaging in competitive work but is merely a denial of the right to participate in the retirement plan if he does so engage. Golden v. Kentile Floors, Inc., 512 F.2d 838, 844 (5th Cir.1975) (citations omitted). Therefore, the district court was correct in holding ERISA does not prohibit C & B's reduction of deferred compensation benefits to Lindsay.