ERISA-Third Circuit Upholds Lower Court Decision Granting Benefits Under A Program Providing Separation Benefits

In Howley v. Mellon Financial Corporation, No., 08-1748 (3rd Circuit 2010), the plaintiff had been employed for many years by a subsidiary of Mellon Financial Corporation (“MFC”) known as “Buck Consultants.” He was therefore eligible for, and participated in, MFC’s Displacement Program, a welfare benefit plan subject to ERISA. The Displacement Program provides benefits to an employee of MFC or its subsidiaries whose “employment ceases due to technological change or another business reason not related to individual performance.” These benefits include, among others, continued eligibility, after employment has “ceased”, to participate in and receive benefits under other MFC benefit plans, including MFC’s pension plans. However, under the terms of the Displacement Program, generally, an employee cannot participant in the program if her/his employment with an MFC subsidiary is terminated due to MFC’s sale of that subsidiary to a company that provides comparable employment, as defined in the program (the “Business Exception”).

Effective 11:59:59 p.m. on May 25, 2005, MFC sold Buck to Affiliated Computer Systems, Inc. (“ACS”). The contract of sale provided that ACS would continue the employment of approximately 3,700 Buck employees, including the plaintiff. However, the next morning, May 26, 2005, at approximately 10:00 a.m., ACS informed the plaintiff and certain others that it was terminating their employment effective June 2, 2005. The plaintiff filed a claim for benefits under the Displacement Program. However, his claim was denied by the Program Manager, and then on appeal by the Program Administrator, due to the Business Exception The plaintiff then brought suit in federal court under ERISA and state law, asserting, among others, claims for benefits under the Displacement Program. The District Court granted summary judgment in plaintiff’s favor, and the defendants appealed.

The Third Circuit Court found that MFC-through the Program Manager and Program Administrator- abused its discretion in denying the Plaintiff’s claim for benefits under the Displacement Program. The Business Exception to coverage under the Displacement Program has two primary requirements: (1) the contract of sale must provide for employment of the employee by another employer, and (2) MFC must determine that the position to be provided to the affected employee is comparable to the position the employee held before the sale, and in particular, that it “initially” provides base salary and incentive compensation opportunities which, in the aggregate, are reasonably similar to those that were provided by the MFC subsidiary. The Court found that the word “initially” means that the employee’s new employment must continue for some amount of time in order for the Business Exception to apply. If as this case, there is only a de minimis amount of new employment (here about one week), the exception is not applicable. MFC’s interpretation that the Business Exception applies is not reasonable. Accordingly, the Fifth Circuit Court affirmed the District Court’s summary judgment in the plaintiff’s favor.

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