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Equitable remedy of reformation appropriate to recalculate rehired Xerox employees’ benefits

By Kathleen Kapusta, J.D.

In the latest installment of this long-running case involving a dispute over how to account for past distributions when calculating current benefits of Xerox employees who left the company in the 1980s, received lump-sum distributions of retirement benefits they had earned up to that point, and then were later rehired, the Second Circuit found the court properly awarded an adequate equitable remedy for ERISA violations related to Xerox’s pension plan. Nor did the lower court err in awarding prejudgment interest at the federal prime rate (Frommert v. Cronkright, January 14, 2019, Lohier, R.).

The dispute giving rise to this case concerned how to account for the employees’ past distributions when calculating their current benefits, or in other words how to avoid paying them the same benefits twice, noted the Second Circuit. In its most recent decision (Frommert III), it determined that the Plan Administrator’s method of calculating their current benefits violated ERISA’s notice requirements. Thus, it remanded to the district court to fashion an equitable remedy providing appropriate retirement benefits (new benefits) to the employees.

Reformation. In response, the district court selected the equitable remedy of reformation, holding that the employees’ new benefits should be calculated as if they were newly hired on their return to Xerox. In a separate order, it determined that they were entitled to prejudgment interest at the federal prime rate.

Background. Throughout the litigation, the employees had argued that the plan administrator violated ERISA in calculating their new benefits. Although the district court initially granted summary judgment in favor of the plan administrator, the Second Circuit found its method of accounting for distributions of prior benefits and its resulting calculation of new benefits violated the employees’ ERISA rights.

In a subsequent decision (Frommert II), the Second Circuit reviewed the district court’s method of calculating the new benefits as a matter of plan interpretation and concluded that it was proper under the plan.

The Supreme Court, however, reversed, finding the Second Circuit erred in holding that the district court could refuse to defer to the plan administrator’s interpretation of the plan simply because it had found a previous related interpretation of the plan to be invalid. On remand, the district court held that the plan administrator’s proposed method of calculating new benefits by offsetting the lump sum distributions made to the employees when they initially left Xerox reflected a reasonable interpretation of the plan. Further, it found that the plan adequately notified participants of the offset.

New hire remedy. In Frommert III, the Second Circuit found that the plan administrator’s proposed offset approach was based on an unreasonable interpretation of the plan and that the plan and its related documents, as interpreted and applied by the plan administrator, violated ERISA’s notice provisions. In response, the district court decided to reform the plan as an appropriate equitable remedy. After surveying several possible remedies, it selected the “new hire” remedy, treating the employee’s return to Xerox as the start of a period of new employment, without any reduction of their retirement benefits to account for any prior benefit distributions—or any credit for earlier years of service.

District court’s reasoning. In selecting this remedy, it rejected the “Layaou” and “actual annuity” approaches, which would have entailed subtracting the unadjusted value of the employees’ original retirement benefits from their new benefits. It also cited four principal reasons for adopting the new hire remedy: at different stages of the litigation, the employees had agreed it was appropriate; it properly accounts for the time value of money and avoids the Supreme Court’s main criticism of the Layaou approach; the Second Circuit had stated in Frommert III that at a minimum, rehired employees should not end up with lower benefits than similarly situated, newly hired employees; and it strikes a balance between penalizing the employees by subtracting the value of the prior distributions without proper notice and overpaying them by allowing double benefits for the same period of service.

Significant advantages. On appeal, the Second Circuit noted as an initial matter that rather than challenging the lower court’s finding that contract reformation was an appropriate equitable remedy, the employees instead argued that having decided to reform the plan, it should have chosen a calculation of new benefits that was more favorable to them. Disagreeing, the appeals court noted that each of the considered equitable approaches for calculating their benefits, including the new hire approach, had proven to be imperfect. The new hire approach, however, accounts for the value of money but avoids the problems associated with the expected value methods, which to the court was a significant advantage over other potential remedies.

Alternative theories. While the employees argued that the lower court improperly refused to consider two alternative theories of equitable remedy—surcharge and estoppel—which might have justified a higher benefits award, the appeals court pointed out that having determined that the district court did not abuse its discretion when it reformed the plan to grant the new hire remedy as adequate equitable relief, “we need not address whether relief would alternatively have been proper pursuant to different equitable remedies such as surcharge or estoppel.”

Plan interpretation not required. Also rejected was their assertion that the lower court was affirmatively required to interpret the plan, which may have yielded a higher benefits award. This argument, said the court, “runs headlong into Frommert III,” in which it stated that the lower court did not need to engage in plan interpretation if it determined that an appropriate equitable remedy existed. Noting that the lower court found there was no reasonable plan interpretation as to which notice had been provided by Xerox, the appeals court found it was therefore entitled to reform the plan and employ the new hire approach as an equitable remedy in compliance with its mandate in Frommert III. Thus, the court affirmed the district court’s decision to use the new hire approach as an equitable remedy to redress the plan administrator’s notice violations.