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HURD v. ILLINOIS BELL TELEPHONE COMPANY

September 27, 1955

FREEMAN S. HURD
v.
ILLINOIS BELL TELEPHONE COMPANY ET AL. HARLEY A. SEYBOLD ET AL. V. WESTERN ELECTRIC COMPANY ET AL.



The opinion of the court was delivered by: Hoffman, District Judge.

    In these consolidated causes the court is asked to determine the validity of the practice of certain Bell System companies in offsetting federal old-age insurance benefits,*fn1 (referred to hereafter as OASI or Social Security benefits) against the amount of the service pensions paid to retired employees of the Bell System companies. The case has been fully tried to the court without a jury and the parties have filed exhaustive briefs. The facts, for the most part, are undisputed, and the issues are largely legal.

In case No. 51 C 577 the plaintiff, Freeman S. Hurd, is a retired employee of Illinois Bell Telephone Company (Illinois Bell), a defendant together with American Telephone and Telegraph Company (AT & T) and The Bankers Trust Company of New York (Bankers Trust), the trustee of the several pension funds established by AT & T and the other associated and allied companies of the Bell System. The second action, No. 52 C 777, which was subsequently consolidated with the prior suit, was brought by the plaintiffs Harley A. Seybold and Charles E. Kluegel, retired employees of Western Electric Company, Incorporated (Western Electric), and by the plaintiffs Walter S. Young, Milo S. Buck, W. E. Oliver and Archie B. Callender, retired employees of AT & T, against Western Electric, AT & T and Bankers Trust.*fn2

The pension plans of the three Bell System defendants were inaugurated at the same time, have been amended at approximately the same times and are in all material respects identical. They will be referred to collectively as the Bell Plan. While each of the plans — entitled "Plan for Employees' Pensions, Disability Benefits and Death Benefits" — contains, as the title indicates, provisions for other types of benefits, only the retirement pension is involved in this case.

On January 1, 1913, the Bell System defendants first established a Plan for Employees' Pensions, Disability Benefits and Death Benefits. The Plan provides for the payment of a service pension to employees who retire upon reaching one of several combinations of age and years of service — e.g., 60 years of age and 20 years of service for male employees. The formula for determining the amount of the pension (Section 4) is 1 per cent of the average annual pay for 10 consecutive years multiplied by the number of years of employment. The formula has been the same throughout the history of the Plan. In addition, provision is made for a minimum pension which has been increased over the years and was, from 1949 to 1952, $100 per month after age 65 and $75 per month before 65, both including the amount of Social Security benefits received by the retired employee.*fn3 From its inception the defendants have provided all the funds required by the pension agreement, and the employees have at no time contributed to the financing of the program. Since 1927 the amounts required to meet the defendants' obligations under the Plan have been determined by what is called an "actuarial accrual method" (Tr. 221-22). The amount so determined each year is set aside from operating expenses and placed in the trust funds maintained separately by Bankers Trust for each of the defendants.*fn4 The sums placed in the Pension Fund may not, according to the terms of the trust agreements, be used for any purpose other than the discharge of the companies' pension obligations.

Administration of the Plan within each company is vested in the Employees' Benefit Committee, which is composed of five members appointed by the Board of Directors (Section 3). Representatives of the employees do not serve on the Committee.

Section 10 of the Plan*fn5 provides that the Benefit Committee, with the consent of the President and subject to the approval of the Board of Directors, may make changes in the Plan, and the Company may terminate the Plan,

  "but such changes or termination shall not affect
  the rights of any employee, without his consent,
  to any benefit or pension to which he may have
  previously become entitled hereunder."

It is this section which the defendants rely on as authority for the amendments of the Plan to which the plaintiffs object.

The provisions of the Plan which are at the heart of this controversy are those dealing with the adjustment of company pensions to reflect the receipt of government benefits. Since its inception the Plan has provided for such an adjustment. As amended in 1914,*fn6 the provision read as follows (Section 9 (29) in the 1914 version; hereafter referred to as Section 8(27), the present designation):

    "In case any benefit or pension shall be
  payable under the laws now in force or hereafter
  enacted of any State or Country to any employee
  of the Company or his beneficiaries under such
  laws, the excess only, if any, of the amount
  prescribed in these Regulations above the amount
  of such benefit or pension prescribed by law
  shall be the benefit or pension payable under
  these Regulations. * * * The amounts payable by
  the Company under any law as aforesaid, whether
  paid directly to the employee or his
  beneficiaries, or to any other persons, or to any
  company, commission or State, to provide for the
  payment of such benefits or pensions shall, on
  approval of the Committee, be chargeable to the
  Fund."

The term "Fund" as used in this provision referred to the reserve funds maintained by the defendants themselves and not to the trust funds. When the defendants entered into the agreements with Bankers Trust in 1927, establishing separate trust funds, the last sentence of this section was eliminated.

In November 1936, after the passage of the Social Security Act but before it became fully effective, the president of each of the defendant companies sent a written announcement to all employees of that company explaining the effect of the Social Security Act on the Bell Plan. The announcement read as follows:

    "No change is contemplated in the Plan on
  account of the Federal Social Security Act of
  1935 except that if the Act shall remain in
  effect unchanged until 1942, when payment of
  Government Pensions begins under the Act, it is
  expected that the provision now in the Plan that
  all of the pension paid by the Government shall
  be deducted from pension otherwise payable under
  the Plan will be changed to provide that only
  one-half the pension paid by the Government under
  the Act shall be deducted. In other words, if the
  Act remains unchanged, the employee retiring on
  pension after 1941 will receive from the
  Government and the Company together the
  equivalent of his or her full pension from the
  Company plus one-half of the Government pension,
  which half represents, in effect, what the
  employee has contributed toward the Government
  pension through the tax on his or her salary or
  wages." (Def.Ex. 1, 6, 9).

The Social Security Act Amendments of 1939 advanced the effective date of OASI benefit payments to 1940, and the defendants then amended the Plan in accordance with the announcement of 1936. These were the amendments of January 1, 1940. Section 8(27) was revised only to the extent of adding a phrase at the end of the first sentence so that it read:

    "In case any benefit or pension shall be
  payable under the laws now in force or hereafter
  enacted of any State or Country to any employee
  of the Company or his beneficiaries under such
  laws, the excess only, if any, of the amount
  prescribed in these Regulations above the amount
  of such benefit or pension prescribed by law
  shall be the benefit or pension payable under
  these Regulations, except as provided in Paragraph
  28 of this Section." (Emphasis has been added by
  the court throughout unless otherwise indicated.)

A new Paragraph 28 was added, which had the effect of limiting the offset to one-half, instead of the full amount, of the Social Security payments to which the employee was entitled under the 1939 Act.

    "From the time when a person retired on a
  service pension under this Plan is entitled to a
  `primary insurance benefit' under the `Social
  Security Act Amendments of 1939' the amount of
  his monthly service pension otherwise payable
  under this

  Plan shall be reduced by one-half of said
  `primary insurance benefit' subject to the
  following conditions:
    "a) Such adjustment shall begin as soon as such
  person would become entitled to receive, upon
  application, said `primary insurance benefit'
  solely on the basis of employment included in his
  `term of employment' as defined in this Plan.
    "* * * This Paragraph 28 shall be effective
  only while the Act entitled `Social Security Act
  Amendments of 1939' shall remain in effect
  unchanged."

In 1946 Section 8(27) was again amended to make it applicable to "any benefit or pension, which the Committee shall determine to be of the same general character as a payment provided by the Plan". This is substantially the approach that the defendants had followed from the beginning, and the plaintiffs raise no particular issue about this amendment. In addition, a sentence was added that service pensions under the Plan were not to be reduced by reason of governmental pensions payable on account of military service.

In 1939 it became apparent that Congress would again amend the Social Security laws, among other things increasing the amount of OASI benefits. The defendants, believing that further Social Security revisions would nullify the operation of Section 8(28) of their Plan — which was specifically limited to the duration of the 1939 Social Security Act Amendments — and that full offset of OASI benefits would come into play under Section 8(27), again revised their Plan. As it was thus modified effective November 16, 1949, Section 8(28) read as follows:

    "A benefit or pension payment under this Plan
  shall be reduced by one-half the amount of any
  related benefit which the recipient would be
  entitled to receive under the Federal Social
  Security Act, as in effect at the time the payment
  is made * *, subject to the following conditions:
    "a) No pension shall be adjusted to an extent
  which brings it below the minimum specified under
  Paragraph 2(a) of Section 4 in any case to which
  that minimum applies.
    "c) In the event the Social Security Act is
  amended to provide for tax contributions which
  are different in rate as between employer and
  employees, the adjustment provided for in this
  Paragraph 28 shall be changed with respect to a
  benfit or pension granted thereafter by
  substituting for `one-half' in the computation of
  such adjustment the ratio which the Company's
  rate of tax contribution bears to the combined
  rate of tax imposed upon employer and employees."

It will be seen that by this amendment the one-half offset was no longer tied to a particular Social Security Act but rather to the Act in effect at the time the pension payment is made.

One final amendment to Section 8(28), which is relevant here only for several limited purposes, was made by the defendants in 1952 after Congress again increased Social Security benefits. Under this revision employees who retired prior to August 31, 1952, were to have their pensions adjusted by one-half of the OASI benefits to which they would be entitled under the Social Security Act as amended in 1950, while those retiring after August 31, 1952, would have their pensions adjusted on the basis of the Act in effect on the date of retirement.

The effect of these various provisions may be illustrated by showing the adjustments made in the service pension of one of the plaintiffs, Freeman S. Hurd.*fn7

  Date of Retirement —
    January 1, 1941.*fn8
  Basic Pension (computed
    according to Section 4 of
    Plan)                         $178.47
  OASI Benefits to which
    entitled, beginning March
    1, 1944                         30.46
  One-half of OASI Benefits         15.23
  Adjusted Service Pension,
    March 1, 1944, to
    September 1, 1950              163.24
  Combined Service Pension
    and OASI Benefits,
    March 1, 1944, to
    September 1, 1950              193.70
  OASI Benefits, September
    1, 1950, to August 31,
    1952                            54.60
  One-half of OASI Benefits         27.30
  Adjusted Service Pension,
    September 1, 1950, to
    August 31, 1952                151.17
  Combined Service Pension
    and OASI Benefits,
    September 1, 1950, to
    August 31, 1952                205.77
  All of the plaintiffs were retired on various
  dates between December 1940 and June 1950.

From this table it can be seen that each increase in Social Security benefits resulted in a decrease in Hurd's Illinois Bell service pension, although his total income was greater with each such increase.

Against the background of these provisions in the Bell Plan, the plaintiffs object to four practices of the defendants which may be summarized as follows:

    I (A) Neither Section 8(27) of the Plan, nor
  any other provision, authorized the defendants to
  deduct any part of Social Security benefits from
  the plaintiffs' Bell pensions; and the amendment
  of 1940 providing for one-half offset is void.
  (B) If such offset was authorized by the Plan, it
  is unlawful because it amounts to a transfer of
  the economic benefits of Social Security payments
  to the defendants in violation of Section 207 of
  the Social Security Act, 42 U.S.C.A. § 407.
    II (A) Even if the defendants had the authority
  to make the original Social Security offsets in
  1940, the 1949 amendment to the Plan, which
  further increased the amount of the offset, was
  void. There is no authority in the Plan to
  redetermine the amount of a service pension after
  an employee is retired. (B) This additional
  adjustment is also contrary to the policy of the
  Social Security Act.
    III The 1952 amendment to the Plan — by which
  the defendants adopted the principle that the
  amount of a pension may not be redetermined after
  retirement, but which they applied only to those
  retiring after 1952 — discriminated against the
  plaintiffs and others in their position and
  violated the defendants' fiduciary duty to retired
  employees.
    IV There is no authority in the Plan to justify
  the defendants' practice of continuing to offset
  Social Security when the employee takes covered
  employment and thereby loses his Social Security
  benefits.

The plaintiffs asked for injunctive relief and for the restoration of all amounts unlawfully deducted from their service pensions by the defendants.

The defendants' answer to the plaintiffs' chief contentions (numbers I and II) is that Section 10 of the Plan authorizes the revision of its provisions so long as the amendment does not affect the rights of any employee, without his consent, to any benefit or pension to which he may have previously become entitled. Neither the 1940 nor the 1949 amendment reduced employees' rights under the Plan, and, in fact, both amounted to a liberalization of the Plan in the employees' favor. The defendants also contend that the decision of the Benefit Committee on "all questions" arising in the administration of the Plan is by its terms conclusive if the decision is made in good faith; that this applies to questions of law as well as fact; and that such a provision is held valid and binding. With respect to the Social Security Act the defendants say that this law was not intended to have any effect on private pension plans. On the contrary, Congress anticipated some form of integration with private pensions and in several ways since the advent of Social Security has demonstrated its approval of the offset practice.

Before proceeding to a discussion of the specific issues raised, some comment will be made on what the plaintiffs call "preliminary considerations", certain basic premises which the court must recognize and accept in order to decide this case in the proper framework. By way of background the plaintiffs have described what they deem to be the historical development of the law relating to industrial pensions. They say that while private pensions were once treated as an unenforceable gratuity on the part of the employer, they are now universally regarded as deferred wages which form a part of the employee's contract of employment and are fully enforceable as any other contractual obligation. This new status of pensions has particular significance here, it is said, for it means that this is essentially a wage case, and the reduction of the plaintiffs' pensions by reference to Social Security is a reduction of wages. In interpreting wage contracts courts have always resolved any doubts and ambiguities in favor of the employee, strictly construing the terms of the contract against the employer.

It is by no means clear that the change in the legal status of private pensions has been as complete or universally accepted as the plaintiffs insist. As recently as 1954 an Illinois court held that a "noncontributory pension plan did not give rise to an enforceable unilateral contract". Hughes v. Encyclopaedia Britannica, Inc., 1954, 1 Ill.App.2d 514, 117 N.E.2d 880, 881, 42 A.L.R.2d 456. A similar holding is found in Umshler v. Umshler, 1947, 332 Ill.App. 494, 76 N.E.2d 231; Dolan v. Heller Bros. Co., 1954, 30 N.J. Super. 440, 104 A.2d 860; Menke v. Thompson, 8 Cir., 1944, 140 F.2d 786; McCabe v. Consolidated Edison Co. of New York, City Ct.N.Y. 1941, 30 N YS. 2d 445; Webster v. Southwestern Bell Telephone Co., Tex.Civ.App. 1941, 153 S.W.2d 498. The two most clear-cut decisions upholding the enforceability of private pension plans are Schofield v. Zion's Co-op. Mercantile Institution, 1934, 85 Utah 281, 39 P.2d 342, 96 A.L. R. 1083, and Psutka v. Michigan Alkali Co., 1936, 274 Mich. 318, 264 N.W. 385. Neither by the timing of the cases nor by the nature of the particular plan involved (in all it was a noncontributory "voluntary" plan) is it possible satisfactorily to reconcile all of these cases. Apparently the same diversity of view prevails with respect to public pension plans established for governmental employees. See Note, 99 U. of Penn. L. Rev. 701 (1951). A careful reading of the decisions indicates, however, that even the states following a strict view of pension plans would enforce employees' rights in a separately established trust fund; and many other cases can be found in which the court and the parties have assumed that the pension plan creates an enforceable contract obligation. The defendants have conceded as much, for they have not questioned the right of the plaintiffs to enforce the terms of the Bell Plan.

Again, it is not as clear as the plaintiffs contend that a suit to enforce a pension right is in effect a suit to obtain a deferred wage and thus a "wage case". The plaintiffs point to Inland Steel Co. v. N. L. R. B., 7 Cir., 1948, 170 F.2d 247, 12 A.L.R.2d 240, certiorari denied, 1949, 336 U.S. 960, 69 S.Ct. 887, 93 L.Ed. 1112, as the "decisive clarification for the whole field of pension law in holding that the contract was one for the payment of a deferred wage." The Inland Steel case clearly held that pensions are a subject of compulsory collective bargaining under the Labor Management Relations Act. The court concluded that the "better" view was that the benefits of pension plans are included in the term wages, but that in any event they are one of the conditions of employment and thus covered by the Act. See also, Ledwith v. Bankers Life Insurance Co., 1952, 156 Neb. 107, 54 N.W.2d 409, describing retirement benefits as "a form of contingent deferred compensation" for purposes of a state statute regulating the compensation of insurance company employees.

Accepting the view that pensions are deferred wages, however, the court is unable to see in what way that determines the outcome of this case. The instrument upon which the litigation turns is, as both parties admit, a unilateral contract to pay a pension; and the court's duty is to establish the meaning and effect of that contract, guided by applicable principles of interpretation and whatever relevant evidence the parties have introduced that will aid in finding the meaning. Apparently the plaintiffs' concern in labeling this as a "wage" case is the belief that the doctrine of contra proferentem will then resolve the issues in their favor. This is one of the guides to the interpretation of a contract, the effect of which is that when there is doubt as to which of several possible meanings is to be given to the words of a contract, the words should be construed most strongly against the party who chose them. The court is not aware of a separate and distinct rule that wage contracts are always strictly construed against the employer. Judicial expressions to this effect can readily be traced to the contra proferentem rule. This appears clearly in Western Union Telegraph Co. v. Hughes, 4 Cir., 1915, 228 F. 885, 887-888 a case cited by the plaintiffs. The Western Union case was an action arising under a benefit plan in which the court explicitly adopted "the rule that the words of an insurance policy, being those of the insurance company itself, should be taken most strongly against it".*fn9 See also, Forrish v. Kennedy, 1954, 377 Pa. 370, 105 A.2d 67; National Symphony Orchestra Ass'n v. Konevsky, Mun.Ct.App.D.C. 1945, 44 A.2d 694. The plaintiffs have relied on this rule as a command to adopt each interpretation of the Bell Plan which they put forward. But it can have no such effect. At best it is a secondary rule of interpretation, a "last resort" which may be invoked after all of the ordinary interpretative guides have been exhausted and there remain two or more reasonable interpretations of the language in question. 3 Corbin, Contracts, § 559 (1951); and see the cases cited in 17 C.J.S., Contracts, § 324.*fn10 The defect in the plaintiffs' case is that they have applied none of the other principles of interpretation. Rather, they have isolated certain words or phrases and assigned to them a precise meaning which was designed to create ambiguity and then resolved the resulting ambiguity in their own favor. Such a course would not lead to a proper interpretation of the contract. The court has at all times been guided by what it finds to have been the principal purpose of the Bell Plan and particularly of the provisions in issue here and by what the language was intended to mean and known by the plaintiffs to mean. See United States Trust Co. of New York v. Jones, 1953, 414 Ill. 265, 111 N.E.2d 144.

The plaintiffs alleged in their complaint that these were class suits and that they were brought on behalf of themselves and all other past and prospective pensioners of Bell System companies whose service pensions have been or would be reduced by reason of OASI benefits. On the record the court believes that the plaintiffs have met the requirements of Rule 23(a)(3) of the Federal Rules of Civil Procedure, 28 U.S.C. and that they were entitled to bring these suits as "spurious" class actions — although the class which the plaintiffs claim to represent is not as broad as the several groups listed in the final amended complaints. The necessary identity of interest would extend only to those employees of AT & T, Illinois Bell and Western Electric who retired prior to September 1, 1950, and whose service pensions had been adjusted upon the receipt of Social Security benefits. No other members of the class, however, intervened in these proceedings;*fn11 and since Rule 23(a)(3) is a permissive joinder device and only the original parties and intervenors are bound by a judgment in a spurious class action,*fn12 the court cannot think of any advantage to be gained by the plaintiffs, or the defendants, in calling this a class action under the circumstances. Clearly the determination has no relevance to the merits of the action.

I (A)

The first of the plaintiffs' principal contentions is that the Bell Plan never contained the authority which the defendants attributed to it to deduct OASI benefits from the companies' service pensions. This argument is made, and will be discussed, in terms of the following specific points:

    1. It is said that the phrase "the excess only,
  if any, of the amount prescribed in the Plan above
  the amount of such payment prescribed

  by law ...

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