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Wehrenberg v. Federal Signal Corp.

April 23, 2007


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge


Kim Wehrenberg, the former general counsel of Federal Signal Corporation (FSC), has sued FSC and the Federal Signal Corporation Supplemental Savings and Investment Plan (Plan) under the Employee Retirement Income Security Act, 29 U.S.C. § 1132(a)(1)(B). The Plan's assets consisted of FSC stock. Wehrenberg asked that the benefits due to him be distributed in cash, which would have required the Plan administrators to liquidate shares of FSC stock. The Plan administrators stated that they could not honor this request due to the amount of stock that it would have to liquidate (165,000 shares) and due to "timing considerations . . ., including considerations related to the Federal securities laws." Pl's Resp. to Defs' Mot. for Protective Order, Ex. D at 1.

Wehrenberg says that the administrators acted contrary to the terms of the Plan and that they denied his request for a cash distribution because they were aware that an upcoming report of FSC's quarterly earnings would show worse than expected results and feared that if they sold the stock as Wehrenberg asked, they and FSC would risk liability for violating the securities laws. Wehrenberg contends (as the Court will explain later in this ruling) that this fear was unfounded and that in any event, the administrators were putting their own interests ahead of his interest as a Plan beneficiary. Part of the reason for FSC and the trustees' heightened concern about the securities laws, Wehrenberg contends, is that FSC recently had terminated its chief executive officer for alleged insider trading after Wehrenberg had reported his suspicions about the executive.

Wehrenberg thereafter received a distribution in the form of FSC stock. He says that the Plan administrators' reference to the securities laws had put him on notice of adverse inside information and that as a result, he could not sell the stock until after the quarterly earnings report was publicly released. In the interim, he says, the stock's price dropped significantly; by the time he was able to sell it, it was worth $400,000 less than its market value on the day it was distributed to him. Wehrenberg has sued under ERISA to recover for his losses. He also makes other claims, but they are not at issue in the motion addressed in this decision.

FSC and the Plan have moved for a protective order precluding discovery relating to Wehrenberg's ERISA claim beyond what they characterize as the "administrative record" that the Plan administrators considered in denying his request to be paid in cash rather than in stock. For the reasons stated below, the Court denies the defendants' motion, albeit with some limitations.


Defendants argue that discovery on the ERISA claim is inappropriate because the Court's decision will be limited to determining whether, based on the materials considered by the Plan administrators, the challenged decision was arbitrary and capricious. As a general rule, when an ERISA claim is governed by the "arbitrary and capricious" standard, discovery is inappropriate. See, e.g., Perlman v. Swiss Bank Corp. Comprehensive Disability Protection Plan, 195 F.3d 975, 982 (7th Cir. 1999). If, on the other hand, the claim is subject to de novo review by a court, discovery beyond the materials considered by the Plan administrator is appropriate. See, e.g., id. The first issue for the Court's determination is thus the appropriate standard of review.

The standard of review depends upon the discretion granted to the plan administrator in the plan documents. See, e.g., Semien v. Life Ins. Co. of N. Amer., 436 F.3d 805, 810 (7th Cir. 2006). A denial of benefits is reviewed de novo unless the plan gives the administrator "discretionary authority to determine eligibility for benefits or to construe the terms of the plan." Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). To rebut the presumption of plenary review, the plan documents must clearly and unequivocally state that discretionary authority is given to the administrator. See, e.g., Semien, 436 F.3d at 810.

The plan documents in this case meet the standard established in Firestone Tire for rebutting the presumption of de novo review. The Plan at issue in this case incorporates the terms of FSC's 401(k) plan, which provides that the administrator has the authority "[t]o determine all questions of interpretation of policy in a manner consistent with the Plan's documents and the Plan Administrator's construction or determination in good faith shall be conclusive and binding on all persons except as otherwise provided herein or by law." Defs' Mot. for Protective Order, Ex. B § 7.03(C)(1). The Seventh Circuit has twice held language virtually identical to this to confer discretionary authority within the meaning of Firestone Tire. See Lister v. Stark, 942 F.2d 1183, 1185-87 (7th Cir. 1991) (plan provision stating that administrator's determinations "shall be final and binding upon all persons hereunder" was sufficient to confer discretionary authority under Firestone Tire); Exbom v. Central States, Southeast and Southwest Areas Health and Welfare Fund, 900 F.2d 1138, 1141 (7th Cir. 1990) (plan provisions stating that good faith construction by trustees is final and binding and that trustees' decisions on disputed matters are binding were sufficient to confer discretionary authority under Firestone Tire). The court sees nothing in the Seventh Circuit's more recent decisions to suggest that Lister and Exbom are no longer good law.

The Seventh Circuit stated in Perlman, and reaffirmed in Semien, that "when there can be no doubt that the application [for benefits] was given a genuine evaluation, judicial review is limited to the evidence that was submitted in support of the application for benefits, and the mental processes of the plan's administrator are not legitimate grounds of inquiry any more than they would be if the decisionmaker were an administrative agency." Perlman, 195 F.3d at 982; Semien, 436 F.3d at 813. Wehrenberg appears to argue that there was no "genuine evaluation" of his request for a cash distribution, but the Court disagrees, at least based on the present record. The Plan administrators consulted outside counsel; their initial decision was explained, albeit briefly, in writing; and there was further review at Wehrenberg's request, resulting in a reaffirmation of the initial decision that was extensively justified in writing.

Wehrenberg argues that even if the Court's review is limited to the materials that were considered by the Plan administrators, the Court still will have to know what materials the administrators considered. That, of course, goes without saying. The Court also agrees with Wehrenberg's contention that it is unclear at this point in the litigation exactly what the administrators considered. Throughout this case, defendants have consistently referred to the "administrative record" as though there was a defined "record" of the type that would exist, for example, in a review of the Social Security Administration's denial of a claim for disability benefits. To the contrary, the Court agrees with Wehrenberg that at the present time, it is less than clear exactly what was considered in connection with either the initial denial of cash distribution or the reaffirmation of that decision upon internal review.

For this reason, Wehrenberg is entitled to conduct appropriate discovery to determine exactly what materials and evidence the Plan administrator considered. In this regard, Wehrenberg is entitled to the decision makers' sworn verification of what documents and other evidence or input they considered. It is conceivable that such discovery has been completed or nearly completed. The Court leaves for later determination what, if anything, Wehrenberg is entitled to beyond the sworn verification that the Court has said is required.

The Seventh Circuit also stated in Semien that even if the plan documents confer discretionary authority on the plan administrator, discovery beyond the materials the administrator considered is appropriate if the claimant "identif[ies] a specific conflict of interest or instance of misconduct" by the administrator and makes "a prima facie showing that there is good cause to believe limited discovery will reveal a procedural defect in the plan administrator's determination." Semien, 436 F.3d at 815.

Wehrenberg contends that he has made the showing needed under Semien to entitle him to additional discovery. He argues, as discussed earlier, that the Plan administrators were looking out for their own interests, not his, when they rejected his request for a cash distribution. Defendants argue that the terms of the Plan made it clear that distributions to beneficiaries were to be made only in stock, not ...

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