McCutcheon v. Colgate-Palmolive Co.

Background

Rebecca McCutcheon brought this Employee Retirement Income Security Act (ERISA) action for herself and others similarly situated against Colgate-Palmolive Co., the Colgate-Palmolive Co. Employees’ Retirement Income Plan, Laura Flavin, Daniel Marsili, and the Employee Relations Committee. Paul Caufield was also a plaintiff, but only McCutcheon was the class representative. The case proceeded on Count I, concerning the production of documents and information during McCutcheon’s benefits claim and appeal, and Count II, concerning the denial of residual annuity benefits under the Plan’s Residual Annuity Amendment (RAA).

The Plan changed from a traditional defined-benefit plan to a cash-balance plan effective July 1, 1989. Certain employees could continue accruing benefits under a prior “Grandfathered Formula” by making contributions. The RAA, adopted in 2005 and effective retroactively to July 1, 1989, provided an additional annuity when the benefit under the applicable Plan appendix exceeded the actuarial equivalent of the participant’s lump-sum payment.

McCutcheon worked for Colgate from 1979 to 1994, made contributions to continue the Grandfathered Formula after the 1989 conversion, and received a lump-sum pension payment of $22,425.64 when she left the company. She did not receive an RAA benefit. After the Committee denied her claim and appeal, she sued. The court certified a class covering people who were entitled under Appendices B, C, or D to a benefit greater than their defined “Accrued Benefit,” received a lump-sum payment, and the beneficiaries and estates of those people.

In an earlier summary-judgment ruling, the court granted defendants summary judgment on Count I, Count II, Error 2, and the class’s Error 4 claim, while denying defendants summary judgment on Count II, Errors 1 and 3. The plaintiffs then sought summary judgment on Errors 1 and 3 and requested final judgment under Federal Rule of Civil Procedure 54(b). Counts III through V had already been voluntarily dismissed with prejudice.

Error 1: Calculation of the RAA benefit

The plaintiffs argued that eligibility for, and the amount of, an RAA annuity had to be determined by considering both the Grandfathered Benefit and the benefit under Appendix C § 2(b)(ii), which included the actuarial equivalent of the participant’s Accrued Benefit plus certain employee contributions and interest. Defendants argued that the calculation should compare the lump-sum value only with the Grandfathered Benefit.

The court held that the Plan’s language was unambiguous and required considering both amounts. Appendix C stated that the participant would receive the “larger of” the Grandfathered Benefit or the benefit under the cash-balance provisions. The court rejected defendants’ argument that the Appendix C § 2(b)(ii) benefit was the same as the annuitized lump-sum payment. The court explained that the two amounts were different, including because they used different interest-rate assumptions: the lump-sum calculation used applicable Pension Benefit Guaranty Corporation rates, while the Appendix C benefit used the Plan’s 20-plus-1-percent projection rate for the relevant period.

Because defendants’ interpretation conflicted with the Plan’s plain language, the court granted plaintiffs summary judgment on Error 1. The court also rejected defendants’ request to reform the Plan. It concluded that the proposed reformation would violate Internal Revenue Code § 417(e), and it further stated that defendants had not properly asserted reformation as a counterclaim. The court also found that defendants had not identified the required objective evidence supporting reformation of the unambiguous Plan language.

Error 3: Pre-retirement mortality discount

Plaintiffs argued that defendants improperly used a pre-retirement mortality discount when calculating the age-65 actuarial equivalent of the lump-sum payment. Plaintiffs did not dispute that the Plan mentioned the discount, but argued that using it violated ERISA and the actuarial-equivalence requirements of Internal Revenue Code § 417(e) because the relevant benefit did not decrease if the participant died before age 65.

Defendants did not oppose plaintiffs’ arguments on Error 3 in their opposition brief. The court therefore stated that summary judgment was warranted on that basis alone. The court also reached the merits and held that the discount could not be used. Because the benefit was required to be paid in all events and did not decrease if the participant died before age 65, applying the discount would produce a present value below the corresponding normal-retirement benefit. The court concluded that this violated the applicable regulation and granted plaintiffs summary judgment on Error 3.

The court rejected defendants’ reliance on proposed Internal Revenue Service regulations and on claimed agency approval of the Plan’s use of the discount. The proposed regulations were not binding, and the court stated that they appeared to support plaintiffs’ position regarding employee-contributed benefits.

Relief ordered and final judgment

After granting plaintiffs summary judgment on Errors 1 and 3, while noting that defendants had obtained judgment on Errors 2 and 4, the court ordered defendants to calculate or recalculate all class members’ residual annuities consistently with the opinion and pay the corrected benefits. For payments made before March 1, 2002, the court specified that the 20-plus-1-percent rate was to be used as the projection rate, while the applicable Internal Revenue Code § 417(e) rates—identified as the Pension Benefit Guaranty Corporation rates in effect on the original payment date—were to be used for the age-65 actuarial equivalent of the lump-sum payment.

The court granted entry of final judgment under Rule 54(b), which permits final judgment on fewer than all claims or parties when there is no just reason for delay. The court stated that McCutcheon’s individual Error 4 claim had effectively merged into the class’s claim because she waived de novo review based on the handling of her administrative claim and appeal and agreed to pursue the same legal position as the class. The court concluded that the case was practically at an end and ready for appellate review.

Disposition

Judge Schofield granted plaintiffs’ motion for summary judgment and entry of final judgment under Rule 54(b). The relief in the Opinion, Order, and Final Judgment was stayed to allow the parties to pursue an appeal. Defendants’ request for oral argument was denied as moot, and the clerk was directed to close the motion.