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Ninth Circuit Announces Test for Evaluating ERISA Releases
Opinion Says Courts Must Consider Alleged Improper Conduct by Employer as Part of Totality of Circumstances Concerning Voluntariness of Waiver of Claims for Plan Benefits, Finding ‘Special Scrutiny’ Appropriate
By a MetNews Staff Writer
Releases purportedly surrendering a party’s right to benefits under a plan established under the Employee Retirement Income Security Act of 1974 must withstand “special scrutiny” such that, in addition to the considerations generally applicable to determine voluntariness, court must consider any allegations of misconduct by the administrator in obtaining the waiver, the Ninth U.S. Circuit Court of Appeals held yesterday.
In the opinion, authored by Senior Circuit Judge Sidney R. Thomas and joined in by Circuit Judge Milan D. Smith Jr. and Senior Circuit Judge William A. Fletcher, the court pointed out that ERISA imposes fiduciary obligations on plan sponsors to act in the best interest of participants and said:
“In accord with ERISA’s purposes and guided by other circuits’ approaches, we conclude that, when a breach of fiduciary duties is alleged, courts must evaluate releases and waivers of ERISA claims with ‘special scrutiny designed to prevent potential employer or fiduciary abuse.’…
“Requiring courts to consider evidence of a breach of fiduciary duty related to a release of claims under ERISA aligns with the statute’s purpose, structure, and underlying trust-law principles.”
Other Circuits
Thomas noted that “[f]our other circuits have adopted ERISA-specific tests for the enforceability of releases” such as the one at issue. Noting that the Seventh and Eighth Circuits explicitly require consideration of any improper conduct by the fiduciary, he said “we join their approach,” reasoning that the analysis “provides the right balance between a strictly traditional voluntariness examination and an ERISA-based analysis.”
Combining elements from tests announced by those circuits, he wrote:
“[C]ourts should consider the following non-exhaustive factors: (1) the employee’s education and business experience; (2) the employee’s input in negotiating the terms…; (3) the clarity of the release language; (4) the amount of time the employee had for deliberation…; (5) whether the employee actually read the release and considered its terms before signing it; (6) whether the employee knew of his rights under the plan and the relevant facts when he signed…; (7) whether the employee had an opportunity to consult with an attorney…; (8) whether the consideration given in exchange for the release exceeded the benefits to which the employee was already entitled by contract or law; and (9) whether the employee’s release was induced by improper conduct on the fiduciary’s part.”
Fired Without Cause
The question of the appropriate test arose after two employees, Peter Schuman and William Coplin, were fired without cause following the acquisition of their former employer, Atmel Corporation, by Microchip Technology Inc. Before the sale, Atmel created a benefits plan, governed by ERISA, under which employees would receive severance if an acquiring company terminated staff.
Benefits would be paid out if a qualifying sale occurred before Nov. 1, 2015, and the employees were terminated without cause within 18 months of the acquisition. In September 2015, Dialog Semiconductor agreed to purchase Atmel, but, before the deal closed, Microchip submitted a competing offer,
After Microchip emerged as the successful bidder in January, Atmel human resources circulated a document, which Schuman and Coplin contend was reviewed by Microchip, saying that the acquiring company would honor the benefits promised under the plan.
Within days of closing the deal in April 2016, Microchip terminated Schuman, Coplin, and other employees, announcing that the plan had expired and that the company would not be paying severance benefits.
On April 6, the company sent letters to the terminated employees offering to pay each of them between four to six weeks of salary if they would sign a release, including a waiver of all claims relating to the plan. Schuman and Coplin signed the agreement despite claims that they were entitled to four to six months of salary under the plan.
Complaint Filed
They filed a putative class action complaint in September, on behalf of themselves and 200 other employees who signed the agreements, challenging the enforceability of the releases and alleging that Microchip and Atmel breached their fiduciary duties under ERISA. Following class certification, Microchip moved for summary judgment, arguing that the plaintiffs knowingly and voluntarily waived their right to pursue claims under the plan.
Schuman and Coplin responded by arguing that “Microchip violated its fiduciary duties by the very act of obtaining releases in exchange for sharply reduced severance payments” than what they were entitled to under the plan.
District Court Judge Haywood S. Gilliam Jr. granted summary judgment against Schuman and Coplin, analyzing the release under a six-part test applied by other circuits—which considers factors such as the employee’s sophistication and the clarity of the agreement—and found that the plaintiffs understood the terms and signed it willingly. Gilliam did not consider any evidence of Microchip’s alleged breach of fiduciary duties.
Non-Named Plaintiffs
As to the non-named plaintiffs, he found that the test was too individualized to support any class-wide relief and ordered the parties to show cause as to why the court should not decertify. He then separately considered the non-named plaintiffs’ claim that Microchip breached its fiduciary duties under ERISA because it should have known that the plan had not expired.
He denied summary judgment as to these plaintiffs because he found that there was “at least one material dispute of fact regarding Defendants’ knowledge of the Plan and its intended interpretation.”
Gilliam entered final judgment as against Schuman and Coplin only under Federal Rule of Civil Procedure 54(b), which provides that “when multiple parties are involved, the court may direct entry of a final judgment as to one or more, but fewer than all, claims or parties only if the court expressly determines that there is no just reason for delay.”
In the order, he wrote:
“One of the threshold disputes in this case is what legal test the Court should apply in determining the enforceability of the releases….The Court finds that all parties, and the Court, will benefit from a prompt interlocutory review of the Court’s summary judgment order to enable the Ninth Circuit to provide a definitive resolution of that issue, which could materially affect how the remainder of this case will proceed.”
Rule 54(b)
Rejecting Microchip’s assertion that Gilliam’s order under Rule 54(b) was improper, Thomas said that Gilliam properly weighed the need to answer the threshold legal question and the equitable concerns over prejudice and delay.
He declared:
“In sum, we hold that releases and waivers under ERISA must ‘withstand special scrutiny designed to prevent potential employer or fiduciary abuse.’…This scrutiny requires courts to consider whether the plaintiff entered into the release knowingly and voluntarily, and will be of particular importance where, as here, there is evidence that the defendant potentially breached its fiduciary duty by or in the course of obtaining a release of ERISA claims. Summary judgment against Schuman and Coplin is reversed, and we remand to the district court for further proceedings consistent with this opinion.”
The case is Schuman v. Microchip Technology Incorporated, 24-2624.
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