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CCH® PENSION — 03/12/12

Elimination of benefits following spin-off did not violate ERISA absent intent to interfere with benefits

A company's decision to spin-off a division and implement a no-hire policy, that effectively ended the right of transferred employees to pension and retiree medical benefits, did not violate ERISA §510 because it was not specifically intended to interfere with the employees' benefit rights, the U.S. Court of Appeals (CA-7) has ruled.

Spin-off transaction

Abbott Laboratories spun off its Hospital Products Division (HPD) into a separate company, Hospira, in 2003. Prior to the spin-off, HPD employees had access to the pension plan sponsored by Abbott. As employees of Hospira, the former HPD employees no longer had access to the pension plan or retiree medical benefits, but were eligible for an enhanced 401(k) plan that provided for employer matching contributions.

The terms of the spin-off transaction included reciprocal "no-hire" policies, pursuant to which Abbot and Hospira were prohibited for two years from hiring employees or retirees from the other company. Accordingly, when HPD employees ceased employment with Abbott and became employees of Hospira, they lost their nonvested rights in the Abbott plan. In addition, retirement-eligible employees of HPD were prevented from retiring from Abbott before the spin-off and collecting an Abbott pension before joining Hospira.

Hospira employees who had previously worked for HPD brought a class action suit, asserting violations of ERISA §510. Specifically, it was alleged that: (1) Abbott implemented the spin-off transaction in order to interfere with the benefits of HPD employees, and (2) Abbott and Hospira designed the no-hire policy in order to interfere with the benefits of HPD-turned-Hospira employees. A federal trial court dismissed the claims, ruling that the spin-off transaction and the no-hire policy did not reflect an intention to interfere with the employees' benefits.

Interference with protected benefits

ERISA §510 prohibits employers from retaliating against employees for exercising benefit rights and from interfering with employees' attainment of rights to which they may become entitled under an ERISA-governed plan. However, the Seventh Circuit explained, in order to establish a claim under ERISA §510, employees must demonstrate that an employer acted with the "specific intent" to prevent the attainment of benefit rights or retaliate for the use or exercise of benefits.

The employees alleged that Abbott's plan to spin-off HPD reflected an intention to reduce its pension liability, as it knew Hospira would not offer a plan with similar benefits. The trial court dismissed the charge, finding that concerns about employee benefits were not part of the spin-off decision. Employee benefits, the court stressed, did not appear as a factor in the numerous documents that set forth the rationale for the spin-off The trial court similarly found that the no-hire policy was not motivated by the specific intent to interfere with employee benefits. The no-hire policy, the court emphasized, was devised to promote stability and productivity at both companies following the spin-off. The employees did not challenge the trial court's findings, which the appeals court found to be well supported by evidence. However, the employees, on appeal, further charged that the companies discriminated against Abbott retirees by colluding to prevent their employment at Hospira.

The court interpreted the employees' claim as charging that the companies used the threat of discrimination, as embodied in the no-hire policy, to deter HPD employees from retiring. However, relying on the trial court's findings of fact, the appeal court found no specific intent underlying the no-hire policy to interfere with the employees' benefits.

Breach of fiduciary duty

The employees also claimed that Abbott breached fiduciary duties under ERISA by failing to disclose material information about the Hospira benefit plan and how it differed from the Abbott plan. The trial court concluded that Abbot had no duty to the employees with respect to the Hospira plan as it was not involved in drafting or implementing the plan. Moreover, even if Abbott had a fiduciary obligation to the employees, its communications about the projected terms of the new plan were entirely truthful.

Restricting itself to a review of the factual findings of the trial court, the Seventh Circuit found no clear error. Accordingly, the court affirmed the dismissal of the employees' claims.

Source: Nauman v. Abbott Laboratories and Hospira, Inc. (CA-7).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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