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Bandak v. Elililly and Co. Retirement Plan

November 18, 2009


Appeals from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:06-CV-01622-LJM-JMS-Larry J. McKinney, Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.


Before POSNER, ROVNER, and WILLIAMS, Circuit Judges.

Bandak, a retired employee of Eli Lilly, sued the company's retirement plan under ERISA and received a judgment for $100,222.86 in dam-ages and an injunction against the plan's offsetting any of his future benefits by amounts paid to him under a plan in which he was enrolled when he worked in the United Kingdom. The district court also awarded him attorneys' fees and costs, amounting to $89,612, on the ground that Lilly's position in the litigation had not been substantially justified.

Bandak, who is English, began work for the Lilly group of companies in 1978 in England, and was enrolled in the pension plan of the English member of the group. In 1995, he was shifted to the United States. Lilly informed him in writing that he was now enrolled in the U.S. affiliate's retirement plan and that his benefits under the plan would be based on his years of service retroactive to his initial employment by the Lilly group, which is to say back to 1978. Thus he would be treated as if he had worked for U.S. Lilly from 1978 to 1995 rather than for the English affiliate. He retired in 2004.

The plan in effect in 1995 said that an employee's retirement benefits "shall be reduced by the Actuarial Equivalent of any benefit payable to such a person under a qualified defined benefit plan maintained by" a Lilly employer (emphasis added). On the basis of this provision, the plan administrator decided that Bandak was not entitled to benefits under the English affiliate's retirement plan because it was a "qualified defined benefit plan" and thus within the exclusion. If this is correct, Bandak's pension entitlement would fall from $18,000 a month to $14,000.

The term "qualified defined benefit plan" is an American legal term that means a plan approved by the Internal Revenue Service for favorable federal tax treatment. See, e.g., 26 U.S.C. §§ 401(a)(5)(D)(i), 1060(e)(2)(A)(ii) ("a defined benefit plan . . . which qualifies"); 26 C.F.R. § 1.401- 4(c)(7)(ii); Powell v. Commissioner, 129 F.3d 321, 323 (4th Cir. 1997); Arnold v. Arrow Transportation Co., 926 F.2d 782, 783 (9th Cir. 1991); Wilson v. Bluefield Supply Co., 819 F.2d 457, 464 (4th Cir. 1987); Jesse D. Taran & Pamela C. Scott, "Qualified Defined Benefit Plans: The Essentials," 875 PLI/Tax 149, 155 (2009). It has no reference to foreign taxation. The presumption in interpreting a contract is that the meaning of a technical term is its technical meaning, Reed v. Hobbs, 3 Ill. 297 (1840); Minges Creek, LLC v. Royal Ins. Co., 442 F.3d 953, 956 (6th Cir. 2006); Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1013 (3d Cir. 1980); Superior Business Assistance Corp. v. United States, 461 F.2d 1036, 1039 (10th Cir. 1972); Restatement (Second) of Contracts § 202(3)(b) (1981), and thus, if it is a technical legal term, its technical legal meaning. Sunstar, Inc. v. Alberto-Culver Co., No. 07-3288, 2009 WL 3447450, at *3 (7th Cir. Oct. 28, 2009); Mellon Bank, N.A. v. Aetna Business Credit, Inc., supra; Superior Business Assistance Corp. v. United States, supra. Elsewhere in the plan document, moreover, "qualified" plan unmistakably means a U.S. plan because it makes specific references to the Internal Revenue Code.

Lilly argues that it would be "unfair" for Bandak to get greater benefits than if he had begun work for Lilly's U.S. affiliate rather than its English affiliate in 1978. Whether and in what sense it is "unfair" would require a deeper investigation than attempted by the plan administrator-would require for example investigating whether it really is "unfair" to give an employee relocated to a foreign country (remember that Bandak is English, not American) a 30 percent increase in retirement benefits ($4,000/$14,000). Lilly is a sophisticated enterprise, the plan document was undoubtedly drafted by lawyers specializing in ERISA, and those lawyers would, unless it were otherwise stated in the document, use technical legal terms in their technical legal senses.

While conceding that "qualified defined benefit plan" is not an English legal term, Lilly says that the plan in which Bandak was enrolled when he worked in England was a "broad-based retirement plan" entitled to favorable tax treatment under English law. The district judge rejected the argument on the grounds that the administrative record contains no English plan document and that Lilly cites no English law. Lilly thus laid no foundation for comparing the English plan to a U.S. "qualified defined benefit plan."

The U.S. plan does state that "in no event shall an Employee receive credit more than once for the same period of Service." But the plan restricts "Employees" to citizens or residents of the U.S., and Bandak was neither when he was working for the English affiliate.

Two years after he was relocated to the United States the retirement plan of the U.S. affiliate was amended to provide that the plan benefits "of an individual who becomes an Employee on or after April 1, 1997" would be reduced by the amount of benefits to which he was entitled "by a plan or program maintained by a non-United States [Lilly company] . . . that provides retirement-type benefits," or by the retirement plan of a foreign government. The amendment did not apply to Bandak, whose employment by the domestic affiliate had begun before 1997; its only significance in the litigation is in undermining Lilly's position.

Rather than trying to define a "qualified" retirement plan, the amendment eliminated double counting for anyone who had received "retirement-type benefits" under a plan maintained by a foreign Lilly affiliate for whom the employee had worked. Lilly argues that the amendment does not apply to foreign retirement plans that are "like" a U.S. qualified defined benefit plan; those plans, it argues, had always been usable to reduce benefits. On this interpretation the plan administrator when dealing with a benefits claim by someone like Bandak who is not subject to the amendment has to decide how much "like" a "qualified defined benefit plan" in its U.S. sense the foreign affiliate's plan had been. The administrator would have to familiarize himself with the retirement laws of the 52 other countries in which one or more of Lilly's 142 affiliates operate. He would have to decide whether the Chinese affiliate, for example, has a retirement plan that is sufficiently "like" a qualified defined benefit plan under U.S. law to satisfy the plan administrator's understanding of "qualified defined benefit plan."

Notice the strangeness of an interpretation that allows an employee to get double service credit (as Lilly's lawyer acknowledged at argument) if the foreign affiliate's retirement plan is not given favorable tax treatment by the foreign government.

It seems the amendment was intended to close what Lilly belatedly had decided was a loophole through which Bandak has sailed. This interpretation is supported by the minutes of the Lilly board meeting at which the amendment was adopted. The chairman of the board explained that the "amendment is necessary to prevent the Company from paying benefits for years of service that are already ...

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