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Affirming multiple district court rulings, the U.S. Court of Appeals for the D.C. Circuit Dec. 14 agreed with a certified class of participants in Hilton Hotels' pension plan on their claims that Hilton engaged in “backloading” plan benefits and failed to credit certain years of service when calculating pension benefits (Kifafi v. Hilton Hotels Retirement Plan, D.C. Cir., No. 11-7113, 12/14/12).
The court affirmed several district court decisions holding that the participants' backloading claim was not mooted by Hilton's amendments to the plan's benefit formula. The court also agreed with the district court's order giving specific instructions on how Hilton was to remedy the backloading error.
Judge Janice R. Brown, writing for the court, also affirmed the lower court's rulings in favor of Hilton, including its conclusion that certain plan participants could “outgrow” Hilton's backloading violation by participating in the plan for a sufficient length of time.
Jamal J. Kifafi worked for Hilton Hotels intermittently from 1975 to 1993 and participated in its pension plan. After repeated requests, Kifafi received a benefit statement from Hilton that calculated his benefits without prorating his Social Security offset, resulting in a total benefit of only $75 per month.
Kifafi filed a six-count complaint in federal court alleging multiple violations of the Employee Retirement Income Security Act. Specifically, he alleged that Hilton's method of calculating benefits failed to prorate the requisite Social Security offset, causing benefit accruals to be impermissibly backloaded to later years of service. He also alleged that Hilton failed to credit all years of service, including union service, when calculating plan participants' eligibility for early retirement benefits.
The U.S. District Court for the District of Columbia certified Kifafi's lawsuit as a class action with respect to the backloading claim in 1999 (26 BPR 1391, 5/17/99; 23 EBC 1170). Following several years of discovery, the district court certified another subclass for the claim that Hilton failed to credit employees with years of union service for vesting purposes (77 PBD, 4/22/05; 32 BPR 975, 4/26/05; 35 EBC 1119).
In 2009, the district court found that amendments to the Hilton plan's benefit accrual formula did not absolve Hilton of its ERISA violations in allowing plan benefits to be backloaded (94 PBD, 5/19/09; 36 BPR 1304, 6/2/09; 47 EBC 1735). Three years later, the district court ruled that three of the plaintiffs challenging Hilton's plan administration were not vested because there was insufficient evidence that the participants worked enough hours under the plan (160 PBD, 8/20/12; 39 BPR 1605, 8/21/12).
On appeal, the D.C. Circuit considered the district court's 2009 ruling that Hilton could not simply amend its plan to remedy the anti-backloading violation by changing the benefit accrual formula. The appeals court began by noting that ERISA requires defined benefit pension plans to satisfy one of three rules in order to prevent backloading of benefits--which, according to the court, “occurs when a plan awards benefits to employees in later years of service at a rate disproportionately higher than the rate for employees in earlier years of service.”
Hilton first claimed that its 1999 plan amendment “mooted” the backloading claim, but the D.C. Circuit did not agree, finding that “no matter how contritely it apologizes for the conduct giving rise to the litigation,” a litigant cannot “deprive a court of jurisdiction with a wave of its hand.” According to the court, Hilton's argument that the impermissible backloading will not recur “boils down to its promise not to violate the anti-backloading provision,” which the court called “insufficient” to demonstrate mootness.
Hilton also challenged the district court's order requiring it to comply with one of the three specific anti-backloading rules--called the 133 1/3 percent rule--rather than with the anti-backloading requirement generally. Reasoning that, “[o]nce the [district] court determined the Plan violated ERISA, it entered the world of equity,” the D.C. Circuit said it saw “no reason why the court's remedy need be a perfect reflection of the legal violations supporting the remedy.” The D.C. Circuit further noted that Hilton previously represented its compliance with the 133 1/3 percent rule to Kifafi, the Internal Revenue Service, and the district court and that the district court's imposition of the 133 1/3 percent rule was “an attempt to pin Hilton down, denying it the opportunity to avoid the consequences of its ERISA violation.” The appeals court affirmed the remedial order, saying “the district court did not abuse its discretion by requiring Hilton to provide a remedy it considered meaningful.”
The appeals court also rejected Hilton's argument that the district court should have dismissed the claims of plan participants who received benefits more than three years before Kifafi filed suit. Hilton maintained that, given its payment of backloaded benefits to plan participants, “the participants should have discovered from these payments that their benefits were backloaded.”
According to Hilton's theory, this constituted a repudiation of the right to additional benefits and triggered the applicable statute of limitations. The court disagreed and said that “[w]hether repudiation may trigger the limitations period depends on what the prospective plaintiff should have understood from the miscalculated benefit payments.” Because the Hilton plan participants “would have needed to apply complex law to complex facts” in order to catch the miscalculation, the D.C. Circuit declined to adopt Hilton's repudiation argument.
For his part, Kifafi challenged the district court's acceptance of Hilton's theory that participants could “outgrow” the plan's backloading “merely by participating in the Plan for a sufficiently long period of time.” Kifafi maintained that the district court should have increased the early-year accrual rates without touching the later-year rates, but the D.C. Circuit disagreed. It found that backloading is “nothing more than the improper allocation of benefit accrual rates” and that fixing a backloaded plan “might entail increased benefits, but it need not.” The D.C. Circuit concluded that the district court did not abuse its discretion in fashioning relief for the backloading violation.
Finally, the appeals court affirmed the district court's approach to Kifafi's union service vesting claim. Kifafi argued that the district court erred by failing to address Hilton's failure to count years of nonunion, nonparticipating service in calculating vesting credit, but the D.C. Circuit found no abuse of discretion in the remedy fashioned by the district court, noting that the remedy “effected the court's determination about how best to manage the shape-shifter shackled to the parties' dispute.”
Chief Judge David B. Sentelle and Judge Brett M. Kavanaugh joined in the decision.
Kifafi and the participants were represented by Stephen R. Bruce and Allison C. Pienta of Stephen R. Bruce Law Offices, Washington. Hilton was represented by Andrew M. Lacy, Thomas C. Rice, and Jonathan K. Youngwood of Simpson Thacher & Bartlett, Washington and New York.
The full text of the opinion is at http://op.bna.com/pen.nsf/r?Open=jwie-92ypd7.
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