The U.S. Ninth Circuit Court of Appeals has clarified two forms of equitable relief — reformation and surcharge — that may be available under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In Skinner v. Northrop Grumman Retirement Plan B, a Ninth Circuit panel held that participants in a pension plan were not entitled to reformation of the plan to be consistent with a 2003 summary plan description (“SPD”), and that the plan administrative committee could not be held liable for surcharge — disgorgement of any benefits it received by allegedly failing to ensure that participants received an accurate SPD.

The court in Skinner considered the availability of reformation and surcharge in light of the Supreme Court’s recent decision in CIGNA Corp. v. Amara. In Amara, covered in our May 19, 2011 Special Alert, the Supreme Court suggested that reformation and surcharge might be appropriate forms of equitable relief under ERISA section 502(a)(3) in a lawsuit by a participant against a plan fiduciary about the terms of a plan. This suggestion, made in dicta, sparked much debate about the possible broadening of the kinds of relief that are available as “other appropriate equitable relief” under ERISA section 502(a)(3). Skinner begins to clarify this discussion by describing the boundaries of relief under reformation and surcharge in the Ninth Circuit.

Plaintiffs Challenge the SPDs for Allegedly Failing to Disclose an Offset Used in the Benefit Calculation.
The plaintiffs in Skinner were Northrop Grumman retirees who had worked at Litton Industries, Inc. and later Northrop Grumman, after Litton was acquired. When Litton was acquired by Northrop Grumman, Litton’s pension plan was consolidated with other plans from acquired companies into the Northrop plan and transitioned to a cash balance formula. The Northrop plan was amended to provide for a “transition benefit” for those participants who had been participants in the Litton pension plan. The transition benefit was meant to provide, for a five-year period starting July 1, 2003, benefit accruals constituting the greater of an approximation of what participants would have received under the Litton pension plan or what they would earn under the new cash balance formula.

The Litton Pension Plan
Under the Litton pension plan, the pension amount was based on two components: an employee-funded portion and an employer-provided portion. The calculation of the employer-provided pension portion under the Litton pension plan was a two-part formula that included an annuity equivalent offset. The 1988 and 1998 summary plan descriptions (“SPDs”) for the Litton pension plan explained this two-part formula and the offset.

The Northrop Grumman Plan
The Northrop plan’s five-year “transition benefit” was comprised of (A) + [the greater of (B) or (C)] + (D). In this formula, Part B approximated the benefits the participant would have earned under the Litton pension plan from July 1, 2003 to June 30, 2008, and Part C was the amount the participant earned under the cash balance formula from July 1, 2003 to June 30, 2008. The calculation of Part B was the portion of the formula the Skinner plaintiffs challenged.

The Northrop plan document provided that Part B of the transition benefit would be calculated as the greater of two benefit formulas under the Litton pension plan, and reduced by an annuity equivalent offset.

Summary Plan Descriptions and Summary of Material Modifications
While the plan document applied an annuity offset to the transition benefit, the corresponding 2003 and 2005 SPDs did not explicitly specify that the offset would apply. The SPDs explained that under Part B, benefits would be calculated as if the participant had contributed 4% of their compensation annually to the Litton 401(k) plan and those deemed contributions had earned annual 5% interest, but did not explicitly explain that such calculation would be reduced by the offset. For all other terms regarding Part B, the SPDs directed participants back to the historical SPD (the Litton Plan SPD) for the “specific rules and provisions.” It was not until December 2005 that a summary of material modifications (“SMM”) was issued that explicitly stated that the offset would apply.

Plaintiffs Charles Skinner and Gregory Stratton had received preliminary pension calculations and final calculations before they retired that explained that the Part B transition benefit included an offset. They had received the Litton pension plan SPDs which the Northrop SPDs incorporated by reference. Both also met with the Northrop Benefits Center before they retired to discuss their claim that the application of the offset in the Part B transition benefit was improper.

First District Court Grants Summary Judgment for the Plan
Plaintiffs Skinner and Stratton filed a complaint in the U.S. District Court for the Central District of California seeking claims for relief for benefits under ERISA section 502(a)(1)(B), retroactive reduction of benefits under ERISA section 204(g), failure to provide a timely SPD or SMM announcing changes to the plan, breach of fiduciary duty, and reduction of the rate of future benefit accrual without providing an ERISA section 204(h) notice. All claims were premised on the theory that the 2003 and 2005 Northrop SPDs serve as the governing plan documents because they allegedly conflicted with the plan document.

In March 2008, the district court granted the defendants’ motion for summary judgment, holding that there was no conflict between the SPDs and the plan document. It reasoned that the historical Litton SPDs from 1988 and 1998 explained the offset and those prior SPDs were properly incorporated into the 2003 Northrop plan SPD.

Prior Appeal and Remand
The plaintiffs appealed to the Ninth Circuit and in May 2009, the Ninth Circuit reversed and remanded. The Ninth Circuit held that although the earlier 1988 Litton pension plan SPD was clear, Litton’s later 1998 SPD did not notify appellants that the offset would apply to their transition benefits because the 1998 SPD described the offset as applying only to a subset of participants. The Ninth Circuit remanded the case to the district court because the Ninth Circuit concluded that an ambiguity existed between the 1998 SPD and the plan document. It instructed the district court to reconsider plaintiffs’ claims in light of the conclusions that the 2003 SPD’s incorporation of the 1998 Litton SPD did not notify the plaintiffs that the offset would apply and that in terms of the plaintiffs’ expectations, the 1998 Litton SPD’s description of the offset’s limited applicability controls over the plan’s description of the offset as universally applicable. On remand, the district court in January 2010 granted summary judgment again in favor of the plan and its administrative committee.

Amara Impacts the Second Appeal.
While on its second appeal to the Ninth Circuit, the Skinner case was stayed pending the Supreme Court’s determination of Amara. Amara held that SPDs provide communications with participants and beneficiaries “about the plan” but do not constitute the terms of the plan that are enforceable under ERISA section 502(a)(1)(B). Amara, thus, foreclosed relief on the Skinner plaintiffs’ principal theory: that the terms of the SPD could be enforced as part of the plan. Following Amara, the plaintiffs focused on the equitable remedies under ERISA section 502(a)(3).

Of the three possible equitable remedies discussed in Amara as potentially available under ERISA section 502(a)(3) as “other appropriate equitable relief” (estoppel, reformation, and surcharge), the Skinner appellants only argued their claims under reformation and surcharge, conceding that they did not claim estoppel, as they presented no evidence of reliance on the allegedly inaccurate SPD.

Plaintiffs Not Entitled to Reformation of the Plan
Under reformation, the Skinner appellants argued that the Ninth Circuit should reform the plan document to be consistent with the terms of the 2003 SPD. The court analyzed the reformation claim under both contract law and trust law, analogizing plan documents to contracts and trust instruments. The Ninth Circuit stated that under both contract and trust theories, reformation was available only in cases of mistake or fraud.

Mistake
The Ninth Circuit held that the appellants could not prevail on the grounds of mistake because they did not present any evidence that the plan contained terms that failed to reflect the drafter’s true intent. In the absence of evidence of authorship of the 2003 SPD or that the SPD reflected any intent other than to create an accurate and comprehensive summary of the plan, the court held that it could not reasonably hold that the plan document contained a mistake.

Fraud
The Ninth Circuit held that appellants could not obtain reformation on the grounds of fraud because they did not present any evidence that the plan contained terms that were induced by fraud, duress, or undue influence. The court distinguished Amara, where the Supreme Court suggested that reformation may be available on remand where the district court had already found that the plan sponsor-employer had intentionally misled its employees. In contrast with the Amara plaintiffs, Skinner and Stratton provided no evidence that Northrop Grumman materially misled its employees, and appellants had conceded that they did not rely on any misleading information.

Plaintiffs Not Entitled to Surcharge
The Ninth Circuit also held that surcharge was not available for any alleged breach of duty by the administrative committee. In Amara, the Supreme Court recognized that, upon proof of actual harm and causation, courts sitting in equity could award surcharge as monetary compensation for a loss resulting from a trustee’s breach of duty or to prevent the trustee’s unjust enrichment. The Ninth Circuit in Skinner considered two surcharge theories:

• that the administrative committee allegedly breached its fiduciary duty by failing to enforce the terms of the 2003 SPD instead of the terms of the plan; and
• that the administrative committee allegedly breached its statutory duty to provide participants with an SPD that was sufficiently accurate and comprehensive to apprise participants of their rights and obligations under the plan in accordance with ERISA section 102.

The court rejected the first alleged breach, finding no duty to enforce the terms of an SPD because, under Amara, the terms of an SPD are not the terms of the plan. On the second alleged breach, the Ninth Circuit held that surcharge would be proper if the committee gained benefits through unjust enrichment or caused actual harm.

Looking to the Restatement of Trusts, the Ninth Circuit stated that a fiduciary that gains a benefit (i.e., who is unjustly enriched) by breaching its duty must return the benefit to the beneficiary. However, the appellants failed to present evidence that the administrative committee gained any benefit by failing to ensure that the participants received an accurate SPD. No unjust enrichment supported an award of surcharge.

On the actual harm basis for surcharge, the court again looked to the Restatement of Trusts for the tenet that a fiduciary that breaches its duty can be liable for loss of value to the trust or any profits the trust would have received but for the breach. Noting that the appellants did not rely on the inaccurate SPD, the court held that there was no actual harm to Skinner and Stratton to justify surcharge. The Ninth Circuit stated that if they agreed with appellants that the harm of being deprived of an accurate SPD was a compensable harm, they would be “render[ing] the advisory committee strictly liable for every mistake in summary documents.” No actual harm supported surcharge. The court affirmed the district court’s judgment in favor of the plan and administrative committee.

Skinner Lessons
Skinner is an important decision in the Ninth Circuit and among the federal courts, as it is one of the early post-Amara decisions directly commenting on the elements of reformation and surcharge as relief under ERISA section 502(a)(3). It confirms that, after Amara, claims alleging an inaccurate SPD or failure to provide an accurate SPD are difficult claims for participants and beneficiaries to win. According to the Ninth Circuit in Skinner, reformation requires evidence that the plan contains terms that fail to reflect the drafter’s true intent or that were induced by fraud, duress, or undue influence. Mere inconsistency between an SPD and a plan document are not enough for a court to reform a plan to be consistent with an SPD. As for surcharge, plaintiffs must establish that there was a breach of a duty for which the breaching fiduciary either gained a benefit or caused a resulting, compensable harm to the participants. If there is no breach of duty, or no benefit gained and no compensable harm resulting from a breach of duty, surcharge is not a proper remedy. While Amara suggested a broadening of available equitable remedies under ERISA section 502(a)(3), Skinner clarifies that the remedies, while possible, still require plaintiffs to prove certain legal elements that may not be satisfied in every case. If some saw Amara as opening the door to other forms of equitable relief not previously recognized under ERISA section 502(a)(3), Skinner cautions that the door might not be open as wide as some might like to think.