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OVITZ v. JEFFERIES & CO.

October 28, 1983

BRUCE D. OVITZ, PLAINTIFF,
v.
JEFFERIES & COMPANY, INC., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Bruce D. Ovitz ("Ovitz") has filed a three-count Complaint against his former employer Jefferies & Company, Inc. ("Jefferies"), Jefferies' Employees' Profit Sharing Plan (the "Plan") and the Plan's administrators (the "Administrators"), challenging their refusal to pay Ovitz (1) "earnings" of his Profit Sharing Account (the "Account") under the Plan from January 1, 1981 to the date the Account was paid him*fn1 plus a pro rata share of Jefferies' 1981 profit sharing contributions to the Plan or (2) alternatively a share of Jefferies' profits in some manner other than through the Plan. This controversy stems from Ovitz having left his job with Jefferies shortly before the end of the Plan's accounting year (December 31, 1981). Had Ovitz remained with the company through the end of the year, it is undisputed he would have been entitled to participate in both the Plan asset revaluation and the 1981 contributions to the Plan. Because he left the Company in December rather than the following January, Jefferies and Administrators, allegedly pursuant to the terms of the Plan, have declined to award Ovitz any of that amount.

Complaint Count I alleges Jefferies' and Administrators' failure to pay the contested funds to Ovitz constitutes a violation of the Plan and thus is contrary to both the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1101-45, and the common law. Complaint Count II alleges Administrators' behavior is a breach of fiduciary duty, again contrary to both ERISA and the common law. Complaint Count III alleges a contract between Ovitz and Jefferies apart from the terms of the Plan, entitling Ovitz to profits of Jefferies whether or not they would be distributed pursuant to the Plan. Counts I and II are therefore based on the terms of the Plan, while Count III is not.

Defendants now move for summary judgment under Fed.R.Civ.P. ("Rule") 56. Whatever the relative plausibility of the positions respectively advanced by the parties as to the Plan's meaning, summary disposition of Ovitz' claims is not available to defendants.

Counts I and II — Common-Law Theories

Defendants' motion for summary judgment attacks the common-law theories of Counts I and II on the ground ERISA has preempted them. Defendants contend ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), provides a cause of action for breach of a contractual pension plan agreement while ERISA §§ 401-14, 29 U.S.C. § 1101-14, provide a remedy for breach of fiduciary duty pursuant to a pension plan. As a result defendants assert there is no longer any state cause of action for those claims. Because that argument is sound, this Court dismisses Ovitz' claims the Plan has been violated to the extent such claims rest on state common law.

When Congress passed ERISA its intent (with certain exceptions not relevant here) was to sweep aside all related state law, whether consistent or inconsistent. ERISA § 514, 29 U.S.C. § 1144, expresses that congressional intent to displace state law, including common law as well as legislation. Hewlett-Packard Co. v. Barnes, 425 F. Supp. 1294, 1298-1300 (N.D.Cal. 1977), aff'd per curiam on the District Court's opinion, 571 F.2d 502, 504 (9th Cir. 1978), exhaustively reviewed the legislative history of Section 514 and concluded (id. at 1300) "that Congress carefully considered the question of preemption, including the feasibility of enacting a more limited preemption provision, and that Congress ultimately enacted Section 514(a) with the express purpose of summarily preempting state regulation of ERISA-covered employee benefit plans." Thus in enacting ERISA Congress "meant to establish pension plan regulation as exclusively a federal concern." Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523, 101 S.Ct. 1895, 1906, 68 L.Ed.2d 402 (1981) (footnote omitted).

Ovitz poses two counter-arguments. Neither is persuasive here.

First, Ovitz claims there is no preemption if the cause of action at issue only indirectly affects the legislative scheme embodied in ERISA. In our Circuit, state law that purports to govern the "terms and conditions" of pension plans generally is preempted by ERISA unless it "relates to such plans `only in the most remote and peripheral manner.'" Bucyrus-Erie Co. v. Department of Industry, Labor & Human Relations, 599 F.2d 205, 209-10 (7th Cir. 1979), quoting AT & T v. Merry, 592 F.2d 118, 121 (2d Cir. 1979). But Illinois common law, to the extent it would attempt to remedy breaches of pension plan agreements or breaches of duty by pension plan administrators, would govern the terms and conditions of pension plans in more than a remote and peripheral manner. See Dependahl v. Falstaff Brewing Corp., 653 F.2d 1208, 1214-16 (8th Cir. 1981).

Second, Ovitz argues there is no preemption if state law promotes the goals of ERISA rather than hinders them. That view however has long been discredited. See id. at 1215, finding that such an argument "misses the point." Congress can choose to regulate a field by limiting the number of remedies as well as by expanding them, and that is precisely what it has done here.

Thus it is clear Complaint Counts I and II must be based entirely on federal law. This opinion turns then to that inquiry.

Counts I and II — ERISA Theory

In the federal law context, a preliminary question is the standard of conduct to which ERISA holds Administrators. Although Ovitz properly points out ERISA requires plan administrators to act with prudence and care, 29 U.S.C. § 1104(a)(1)(B), federal courts repeatedly have held they will not reverse a decision of pension plan administrators acting in good faith unless their decision is "arbitrary and capricious in light of the language of the Plan." Wardle v. Central States, Southeast & Southwest Areas Pension Fund, 627 F.2d 820, 824 (7th Cir. 1980).*fn2

Ovitz' principal contention as to the behavior of the Administrators is that in failing to award him a share of the Plan asset revaluation and the 1981 contribution, they have acted contrary to the clear provisions of the Plan. Ovitz must prove such behavior was "arbitrary and capricious" to be entitled to relief. Ovitz apparently concedes that had his departure from Jefferies before year-end been coupled with segregation of his profit sharing account, he would not be entitled to a share of either the revaluation or the current year's contribution. However he contends that because ...


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