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Donaldson v. Pharmacia Pension Plan

June 14, 2006

FRED DONALDSON, ALBERT WALTER, III, AND MARY CLAWSON, INDIVIDUALLY AND ON BEHALF OF ALL THOSE SIMILARLY SITUATED, PLAINTIFFS,
v.
PHARMACIA PENSION PLAN, PHARMACIA CASH BALANCE PENSION PLAN, PHARMACIA CORPORATION, PHARMACIA & UPJOHN COMPANY, AND PFIZER, INC., DEFENDANTS.



The opinion of the court was delivered by: Murphy, Chief District Judge

MEMORANDUM AND ORDER

This action is before the Court on the Motion to Dismiss Plaintiffs' Complaint brought by Defendants Pharmacia Cash Balance Pension Plan, Pharmacia Corporation, Pharmacia & Upjohn Company, and Pfizer, Inc. (Doc. 25).*fn1 For the following reasons, Defendants' motion to dismiss is DENIED.

INTRODUCTION

Plaintiffs Fred Donaldson, Albert Walter, III, and Mary Clawson bring this action under the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 ("ERISA") on behalf of themselves and a proposed class of participants in the Pharmacia Cash Balance Pension Plan ("the Plan"), Defendant herein. Defendants Pharmacia Corporation ("Pharmacia"), Pharmacia & Upjohn Company, and Pfizer, Inc., are the administrators and sponsors of the Plan.

To set out Plaintiffs' claims properly, some discussion of the substantive law of ERISA is necessary. A "defined benefit plan" under ERISA is a pension plan other than an individual account plan. See 29 U.S.C. § 1002(35). In a typical defined benefit plan, benefits are furnished based on a formula established by a plan document, independent of the level of funding. See In re Defoe Shipbuilding Co., 639 F.2d 311, 313 (6th Cir. 1981). "A defined benefit plan . . . consists of a general pool of assets rather than individual dedicated accounts. Such a plan, 'as its name implies, is one where the employee, upon retirement, is entitled to a fixed periodic payment.'" Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 439 (1999) (quoting Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 154 (1993)). This is in contrast, of course, to a "defined contribution plan," in which an employer allocates an amount to an account created for an employee, so that the employee's pension entitlement is the value of his or her account, consisting of the employer's annual contributions and any earnings derived from the employee's investment of those deposits. See 29 U.S.C. § 1002(34); Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d 755, 758 (7th Cir. 2003).

In a defined benefit plan, an employer provides employees with a guaranteed benefit at "normal retirement age," which the plan selects but which cannot be later than age 65. See 29 U.S.C. § 1002(24); Berger, 338 F.3d at 758. This benefit is typically calculated as a percentage of an employee's compensation multiplied by his or her years of service. See Berger, 338 F.3d at 757-58. The pension entitlement provided by the plan is an employee's "accrued benefit" at normal retirement age. ERISA explains, "The term 'accrued benefit' means . . . in the case of a defined benefit plan, the individual's accrued benefit determined under the plan and . . . expressed in the form of an annual benefit commencing at normal retirement age." 29 U.S.C. § 1002(23)(A). See also Berger, 338 F.3d at 759. The statute requires that the accrued benefit be provided in the form of an annuity at normal retirement age. See 29 U.S.C. § 1054(c)(3). A plan may offer optional benefit forms, such as a lump sum, but they cannot be less than the actuarial equivalent of the annuity at normal retirement age. See Berger, 338 F.3d at 759; Esden v. Bank of Boston, 229 F.3d 154, 162-64 (2d Cir. 2000).

A typical cash balance pension plan purports to compute an employee's accrued benefit as a hypothetical account balance, to which putative "pay credits" and "interest credits" are added each year. In truth, "the employee has no actual account, the employer makes no contributions to an employee account, and so there is no account balance to which interest might be added." Berger, 338 F.3d at 758. Instead, the employee's pension entitlement under such a plan remains the accrued benefit earned each year, which equals the amount of both that year's pay credit and the value of the future "interest credits" on that amount through the date of the employee's normal retirement age, divided by an annuity factor specified in the plan. See id. at 758-59; Esden, 229 F.3d at 158-59. Importantly, although a cash balance plan has superficial similarities to an individual account plan or defined contribution plan, legally it is a defined benefit plan for ERISA purposes. See Berger, 338 F.3d at 757-58; Esden, 229 F.3d at 158; Lyons v. Georgia-Pacific Corp., 221 F.3d 1235, 1237-38 (11th Cir. 2000).

Plaintiffs allege that, under the terms of the Plan, a Cash Balance Account ("CBA") is established on behalf of each Plan participant. See Complaint ¶ 30. Each participant's CBA is credited with an annual "contribution credit" equal to a specified percentage of that participant's eligible pay for each year of employment ranging from 3% to 7% depending upon the participant's age. See id. ¶ 31. Also, each participant's CBA is credited with a monthly "interest credit" based on the average interest rate on thirty-year Treasury bonds for October of the prior calendar year, with a minimum rate of interest credit of 5% and a maximum rate of interest credit of 10%. See id. Finally, each participant's CBA is credited with an annual "transition credit" equal to a specified percentage of the participant's eligible pay ranging from 2% to 6% depending upon the participant's age and limited to the ten years between January 1, 1997, and December 31, 2006. See id. Additionally, the Plan establishes on behalf of participants in predecessor plans a Prior Plan Account ("PPA"), which begins with a balance representing the lump-sum value of the participant's accrued benefit under predecessor plans as of December 31, 1996. See id. ¶¶ 32-33. Such a PPA is credited with monthly "pay credits" at an annual rate of 4% while the participant maintains employment with Pharmacia, and with monthly "interest credits" at an annual rate of 8.5% until the participant attains age 55. See id. ¶ 34.

Plaintiffs' complaint asserts five counts. Count I alleges that, because under the Plan any participant who reaches the age of 55 no longer receives monthly interest credits at a rate of 8.5% on his or her PPA and instead the rate of benefit accrual on the PPA is reduced to zero, the Plan violates ERISA age-discrimination rules applicable to defined benefit plans prohibiting any cessation or reduction in the rate at which an employee accrues benefits on account of age. See 29 U.S.C. § 1054(b)(1)(H)(i); Wells v. Gannett Ret. Plan, 385 F. Supp. 2d 1101, 1102 (D. Colo. 2005); Cooper v. IBM Personal Pension Plan, 274 F. Supp. 2d 1010, 1015-17 (S.D. Ill. 2003). Count II alleges that the Plan violates ERISA by failing to pay lump sum benefits that are the actuarial equivalent of a participant's accrued benefit projected to normal retirement age, then reduced to present value. See Berger, 338 F.3d at 759; Esden, 229 F.3d at 162-64; West v. AK Steel Corp Ret. Accumulation Pension Plan, 318 F. Supp. 2d 579, 583 (S.D. Ohio 2004); I.R.S. Notice 96-8, 1996-1 C.B. 359. Count III alleges that the Plan violates ERISA's anti-backloading provisions, which prohibit defined benefit plans from establishing minimum accrual rates that cause a participant's benefits to accrue very slowly until the participant is near retirement age. See 26 U.S.C. § 411(a), (b)(1); 29 U.S.C. § 1054(b)(1)(B); 26 C.F.R. § 1.411(b)-1(b); Jones v. UOP, 16 F.3d 141, 143 (7th Cir. 1994). Count IV alleges that, because under the Plan participants experience a reduction in the actuarial value of annual credits to their CBAs based upon their age, the Plan violates ERISA age-discrimination rules applicable to defined benefit plans. Finally, Count V asserts a demand to recover benefits due Plan participants under the terms of the Plan, to enforce their rights under the terms of the Plan, and to clarify their rights to future benefits under the terms of the Plan. Count I through Count IV of Plaintiffs' complaint are brought pursuant to ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3); Count V of the complaint is brought pursuant to ERISA § 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B).

Defendants have moved to dismiss Plaintiffs' claims on two grounds. First, Defendants assert that Plaintiffs have failed to exhaust their administrative remedies. Second, Defendants argue that Count I through Count IV of Plaintiffs' complaint assert claims for legal relief, not equitable relief, and therefore cannot be brought pursuant to ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3). Having reviewed carefully the parties' submissions regarding these issues, together with all exhibits thereto, and having conducted a hearing on Defendants' motion to dismiss, the Court now addresses Defendants' arguments in support of dismissal.

DISCUSSION

A. Legal Standard

A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure challenges the legal sufficiency of a plaintiff's complaint to state a claim upon which relief may be granted. See FED. R. CIV. P. 12(b)(6); Antonelli v. Sheahan, 81 F.3d 1422, 1427 (7th Cir. 1996). "The essence of a defendant's Rule 12(b)(6) motion is not that the plaintiff has pleaded insufficient facts, it is that even assuming all of his facts are accurate, he has no legal claim." Payton v. Rush-Presbyterian-St. Luke's Med. Ctr., 184 F.3d 623, 627 (7th Cir. 1999) (citing Johnson v. Revenue Mgmt. Corp., 169 F.3d 1057, 1059 (7th Cir. 1999)). In evaluating a Rule 12(b)(6) motion, a court must take a plaintiff's factual allegations as true and draw all reasonable inferences in the plaintiff's favor. See Swierkiewicz v. Sorema N. A ., 534 U.S. 506, 508 n.1 (2002); Strasburger v. Board of Educ., Hardin County Cmty. Unit Sch. Dist. No. 1, 143 F.3d 351, 359 (7th Cir. 1998). A complaint should be dismissed for failure to state a claim for relief only if "no relief could be ...


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