Seventh Circuit Affirms That ERISA Plan Sponsors Do Not Act As Participants’ Fiduciaries And Must Follow The Terms Of The Plan As Written

By Gerald L. Maatman, Jr. and Jeffrey R. Zohn

Duane Morris Takeaways: More than 10 years after Plaintiffs filed suit in Carlson et al. v. Northrop Grumman Severance Plan et al., No. 22-1764, 2023 WL 3299703 (7th Cir. May 8, 2023), the Seventh Circuit put to rest the idea that a sponsor of an ERISA welfare-benefit plan is a fiduciary of the plan’s participants.  Instead, per the ruling in Carlson, the sponsor is obligated to follow the terms of the plan as written.  When the plan grants the sponsor discretion to determine who qualifies, the sponsor may exercise that discretion and may even change the way it exercises that discretion over time.  If the plan does not grant the sponsor any such discretion, the sponsor must abide by the precise terms of the plan. The Seventh Circuit’s decision is well worth a read by corporate counsel, as it provides some bright-line tests for defense of class action claims brought under the ERISA.

Background And Context

Enacted in 1974, the Employee Retirement Income Security Act (“ERISA”) is the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans.  In light of the often rapidly evolving retirement and health care needs of employees and their families, the ERISA has been subject to numerous amendments since its enactment nearly 50 years ago.  Nonetheless, its primary aim has always been to protect the interests of participants and their beneficiaries in employee benefit plans.

The ERISA sets minimum standards for most voluntarily established retirement plans (such as 401(k) plans) and welfare benefit plans (such as medical benefits).  These plans must also meet certain ERISA-based standards in order to qualify for favorable tax treatment.

Importantly, the ERISA explicitly empowers a participant of an employee benefit plan – including former employees in certain circumstances – to bring a civil action to recover benefits due or to clarify rights under the terms of the plan. More often than not, such litigation takes the form of a class action.

Case Background

On April 9, 2013, Plaintiffs filed a class action lawsuit against their former employer – Northrop Grumman (“Northrop”) – seeking payment of severance benefits Plaintiffs alleged Northrop owed them when they were laid off in 2012.

The plain language of Northrop’s Severance Plan (the “Plan”) grants the HR Department discretion to determine who qualifies for benefits under the Plan and may notify recipients of their benefits via an HR Memo.  Plaintiffs and the other class members did not receive the HR Memo upon being laid off and, therefore, did not receive benefits under the Plan.

After class certification, the U.S. District Court for the Northern District of Illinois granted Northrop’s motion for summary judgment. It held that the Plan’s language gives the HR Department discretion to choose who, if anyone, gets severance pay on being laid off.  Carlson et al. v. Northrop Grumman Severance Plan et al., No. 13-CV-02635, 2022 WL 971873 (N.D. Ill. Mar. 31, 2022).  The district court further opined that the ERISA does not prevent an ERISA severance plan from possessing and exercising discretion to determine recipients.  Plaintiffs appealed to the Seventh Circuit.

The Seventh Circuit’s Ruling

On May 8, 2023, the U.S. Court of Appeals for the Seventh Circuit affirmed the grant of summary judgment in favor of Northrop.

The Seventh Circuit explained that the terms of ERISA welfare-benefit plans always control.  While plan administrators must act in a fiduciary capacity when exercising discretion, the entities that establish the plans do not have the same obligation.  Instead, those entities are entitled to act in their own interests and need not provide participants any vesting interests.

“A person possessing discretion may change the way that discretion is exercised,” according to the Seventh Circuit.  Id. at 2. As such, if a sponsor is granted discretion in determining who qualifies for plan benefits, it is not required to treat all participants equally, even if “deliberate past practice, [] mistaken past practice, and [] mistaken efforts to describe the benefits in writing” suggest otherwise. Id. at 3.

However, that is only true when the sponsor does possess such discretion.  An ERISA sponsor still must apply a pension or welfare plan as written.  The terms of the plan itself always control.  No administrators or clerical employees can vary its terms.

In Carlson, the terms of the Plan granted Northrop’s HR Department the discretion to provide severance benefits to laid off employees, including Plaintiffs, by delivering them an HR Memo.  Plaintiffs did not receive severance benefits or an HR Memo.  The Seventh Circuit did not find any relevance in Plaintiffs’ position that, prior to October 2011, every laid-off employee who qualified for severance benefits received the HR Memo.  Even if Plaintiffs’ position was factually accurate, which Northrop denied, the Seventh Circuit reasoned that Northrop was still entitled to change its approach and select which, if any, laid off employees would receive severance benefits.

The Seventh Circuit was also unpersuaded by Plaintiffs’ argument that Northrop interfered with Plaintiffs’ rights (a position which effectively argues that Northrop’s HR Department is a fiduciary of the Plan’s participants).  The Seventh Circuit concluded that it is not.  Instead, Northrop’s HR Department was properly exercising the discretion given to it under the plain terms of the Plan.

Implications For Employers

The Carlson decision indicates that courts will continue to honor the terms of an ERISA welfare-benefit plan based on the plain terms of the plan (and not based on past practices or even written plan summaries).

Nonetheless, Carlson is not an invitation for plan sponsors to blindly exercise discretion in determining qualification of ERISA welfare-benefit plans.  Instead, it serves as a reminder that sponsors do not have unlimited authority in the execution of the plan.  Sponsors must follow the terms of the plan as written.  If the plan does not grant discretion in the execution of the plan, then no discretion may be exercised.  If discretion is granted, then it must be exercised carefully and within the bounds of the grant.

Therefore, in deciding whether a plan applies to certain employees, employers should carefully review the terms of the plan rather than merely rely on past practices or plan summaries.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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