Free Motion for Leave - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 03-CV-0267 RPM JOHNNY WELLS, DONALD J. BROOKINS, and RILEY ANDREW SCHAEFFER, on behalf of themselves and all others similarly situated, Plaintiffs, v. GANNETT RETIREMENT PLAN and GANNETT CO., INC., Defendants. ______________________________________________________________________________ DEFENDANTS' SUR-REPLY IN SUPPORT OF THEIR MOTION FOR SUMMARY JUDGMENT AND IN OPPOSITION TO PLAINTIFFS' CROSS-MOTION ______________________________________________________________________________ NIXON PEABODY LLP Margaret A. Clemens, Esq. Robert Bernius, Esq. Clinton Square, P.O. Box 31051 1300 Clinton Square Rochester, NY 14603-1051 Telephone: (585) 263-1000 [email protected] [email protected] HOLLAND & HART LLP Michael S. Beaver, Esq. 8390 E. Crescent Parkway #400 Greenwood Village, CO 80111 Telephone: (303) 290-1600 hollandhart.com Attorneys for Gannett Retirement Plan and Gannett Co., Inc.

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES ........................................................................................................(ii) PRELIMINARY STATEMENT .....................................................................................................1 SUPPLEMENTAL AUTHORITY ..................................................................................................1 ARGUMENT PLAINTIFFS' AGE DISCRIMINATION CLAIMS UNDER ERISA § 204(b)(1)(H) FAIL BECAUSE THEIR RATE OF BENEFIT ACCRUAL IS NOT REDUCED ON ACCOUNT OF THEIR AGE.........................3 CONCLUSION................................................................................................................................7

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TABLE OF AUTHORITIES CASES Page

Buus v. WAMU Pension Plan, 2007 U.S. Dist. LEXIS 95729 (W.D. Wash. 2007)..................1,2,3 Custer v. Southern New England Telephone Co., 2008 U.S. Dist. LEXIS 5067 (D. Conn. 2008) .................................................................................................................................1, 2, 3 Cooper v. IBM, 457 F.3d 636 (7th Cir. 2006)............................................................................4,6,7 Drutis v. Quebecor World (USA), Inc., 499 F.3d 608 (6th Cir. 2007) .............................................3 Register v. PNC Fin. Servs. Group, Inc., 477 F.3d 56 (3d Cir. 2007)..........................................4,7

STATUTES AND MISCELLANEOUS

ERISA § 204(b)(1)(H), 29 U.S.C. § 1054(b)(1)(H) .............................................................. passim

"What is a Pension Equity Plan," published on the U.S. Dept. of Labor, Bureau of Statistics website, available at http://stats.bls.gov/opub/cwc/cm20031016ar01p1.htm............................5

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PRELIMINARY STATEMENT Defendants Gannett Retirement Plan (the "Retirement Plan" or "Plan") and Gannett Co., Inc. ("Gannett") respectfully submit this Sur-Reply in opposition to plaintiffs' cross-motion for summary judgment: (1) to bring supplemental legal authority to the Court's attention; and (2) to address briefly the application of that authority to this case, particularly in light of plaintiffs' recent contention that authority cited by defendants should not be relied upon because the pension plan at issue in this case contains a pension equity formula, as opposed to a cash balance formula. As discussed in detail below, any difference between these two types of hybrid plans is insignificant for purposes of determining whether or not a hybrid plan complies with the anti-age discrimination provisions contained in § 204(b)(1)(H) of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1054(b)(1)(H). SUPPLEMENTAL AUTHORITY Following the submission of motion and cross-motion papers by the parties, two district courts have issued decisions which bear on the critical issue in this case as to whether or not hybrid pension plans violate ERISA § 204(b)(1)(H): (1) the District Court for the District of Connecticut issued a Memorandum of Decision, dated January 24, 2008 in Custer v. Southern New England Telephone Co., 2008 U.S. Dist. LEXIS 5067 (D. Conn. 2008); and (2) the District Court for the Western District of Washington issued an Decision and Order, dated December 18, 2007, in Buus v. WAMU Pension Plan, 2007 U.S. Dist. LEXIS 95729 (W.D. Wash. 2007). In both cases, as in this one, the plaintiffs alleged that the retirement plan at issue discriminated against them based upon their age in violation of ERISA § 204(b)(1)(H), 29 U.S.C. § 1054(b)(1)(H). In both case, the defendants moved to dismiss the Complaint, pursuant to

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either (or both) Rule 12(b)(6) or Rule 56 of the Federal Rules of Civil Procedure. Both courts held that the hybrid plans at issue in their respective cases did not violate § 204(b)(1)(H). As the District Court in Buus properly recognized, "[t]he crux of the dispute is the definition of `rate of benefit accrual' in the defined benefit plan anti-age discrimination" provision of ERISA. As correctly recognized by the Court, while ERISA does define the term "accrued benefit" in other sections to mean the amount of the benefit expressed in the form of an annuity commencing at normal retirement age, neither ERISA nor its regulation define the term "benefit accrual," the term actually used in § 204(b)(1)(H), 29 U.S.C. § 1054(b)(1)(H). Thus, like other courts before it, the District Court looked to the dictionary definition of "accrual," to determine that it means: (1) the process or act of accumulating; an increase; or (2) something that accumulates or increases. The District Court reasoned that when viewed in light of this definition, the hybrid plan at issue did not violate ERISA § 204(b)(1)(H) because it did not reduce a participant's rate of benefit accrual on the basis of age. The District Court in Custer also had to interpret the phrase "rate of an employee's benefit accrual" as contained in § 204(b)(1)(H) of ERISA. In doing so, the Court reasoned that it was not writing on a clean slate and that several other courts had already resolved this same legal issue. The Court recognized that the majority of the courts and the only circuit courts of appeals that have considered the issue have held that the rate of an employee's benefit accrual refers to the change in the participant's hypothetical account balance from year to year, rather than the annual benefit commencing at normal retirement age. Custer, 2008 U.S. Dist. LEXIS 5067 *23. The Court then applied the well-established canons of statutory construction to find that because Congress used and defined the term "accrued benefit" in one section of the statute, and

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used the term "rate of benefit accrual" (undefined) in another part of the statute, the two terms represent different concepts. Id. at 2008 U.S. Dist. LEXIS 5067 *24-25. When properly interpreting "rate of benefit accrual" in this manner, the Custer Court correctly reasoned that the plaintiffs' claims rested largely upon a "technicality" because hybrid plans are not actually age discriminatory and they are functionally equivalent to defined contribution plans. In holding that the hybrid plan at issue in that case did not violate ERISA § 204(b)(1)(H), the Court explained that the employee's benefits under the plan were not calculated based upon whether or not the employee was older or younger, but rather were calculated based upon whether he was a newer or more senior employee. Thus, according to the Court, "the critical determinant of the employee's benefit was his years to retirement, not age." Id. at 5067 * 26. The Court also held that it would make little sense to hold that the plan at issue in that case ran afoul of ERISA § 204(b)(1)(H) when a functionally identical plan would not run afoul of ERISA § 204(b)2)(A). As discussed below, the same rationale used by the Buus and Custer courts applies to this case and warrants the grant of summary judgment to defendants. ARGUMENT PLAINTIFFS' RATE OF BENEFIT ACCRUAL IS NOT REDUCED ON ACCOUNT OF THEIR AGE In this case, the parties agree that the critical task for this Court is to apply the phrase "rate of benefit accrual" as contained in ERISA § 204(b)(1)(H). This phrase has properly been interpreted most recently by the district courts in Buus and in Custer, and by vast majority of courts addressing the issue, to mean the additions to the participant's hypothetical account or balance for the plan year. See e.g., Drutis v. Quebecor World (USA), Inc., 499 F.3d 608 (6th Cir.

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2007); Register v. PNC Fin. Servs. Group, Inc., 477 F.3d 56, 69 (3d Cir. 2007) (the phrase `benefit accrual' reads most naturally as a reference to what the employer puts in . . ., while the defined phrase `accrued benefit' refers to outputs"); Cooper v. IBM 457 F.3d 636, 639 (7th Cir. 2006). Interpreting this phrase "rate of benefit accrual" in the same manner here results in the same answer: the rate at which plaintiffs' accrue pension benefits is not reduced because of their ages; in fact, if plaintiffs were younger, their balances would not have grown any more than they actually did. Under the Plan's pension equity formula, an employee's benefit continues to accrue in the same manner before and after the attainment of any given age. Plaintiffs have been credited basic percentages of 5% of their final average pay for each of the first 10 years of service, 7% for each of the next 10 years of service and 9% for all years of service in excess of 20, regardless of their ages. As the employee's number of years of service progresses, benefit credit rates continue to apply at the same or at a higher level. None of the percentages that comprise the Basic Retirement Amount are reduced because of the attainment of any age. See cases and discussion contained in Defendants' initial and reply papers. Plaintiffs nevertheless claim in their Reply Memorandum submitted in support of their cross-motion for summary judgment that this Court should not follow Cooper v. IBM Personal Pension Plan, 457 F.3d at 636 and its progeny because the Gannett Retirement Plan contains a pension equity formula instead of a cash balance formula. The distinction between these two types of hybrid plans is not significant for purposes of determining whether the plan complies with ERISA § 204(b)(1)(H), and plaintiffs have offered no evidence to the contrary. To begin with, it is undisputed that cash balance and pension equity plans have many similar features: (1) both are types of hybrid plans that contain attributes of both defined

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contribution and defined benefit plans; (2) both types of hybrid plans differ from more traditional defined benefit plans because, unlike traditional plans which define an employee's benefit as a monthly annuity to begin at retirement (e.g., $1,000 a month for life commencing at age 65), both types of hybrid plans define their benefit in terms of a hypothetical lump sum balance (e.g., a lump sum amount paid at termination of employment); and (3) cash balance plans and pension equity plans provide that a participant's lump sum benefit grows as the result of annual credits or percentages earned by the participant. For a detailed discussion of pension equity plans and, among other things, their comparison to cash balance plans, see "What is a Pension Equity Plan," published on the U.S. Dept. of Labor, Bureau of Statistics website, available at http://stats.bls.gov/opub/cwc/cm20031016ar01p1.htm (attached as Appendix A to defendants' initial Memorandum of Law submitted in support of their motion for summary judgment). The principal difference between a cash balance plan and a pension equity plan upon which plaintiffs now seek to rely is that, under a cash balance plan, a participant's hypothetical account is credited with interest credits while, under a pension equity formula, a participant does not earn interest. It is undisputed that, under Gannett's pension equity formula, participants earn additional benefits based upon increases in their final average earnings, which earnings typically increase based upon a variety of factors including the increased costs of living. For pension equity plan participants, such increases are the functional equivalent of earning interest credits. More importantly, plaintiffs concede, as they must, that it is not interest credits that purportedly causes the problem; rather it is "the existence of the interest credits and the need to project them to a participant's normal retirement age to determine the amount of their accrued benefit at any point in time which gives rise to the claims that cash balance plans violate § 204(b)(1)(H) of ERISA. (Pl. Reply at 7) (emphasis added).

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One example of this concept cited by plaintiffs is from the Cooper decision. In that case, the Court rejected the plaintiff's claim that the plan violated ERISA because their argument rested "on the idea that the account of a 25­year-old does not get 5% plus periodic interest, but instead is immediately credited with 40 years of interest. That makes the plan look discriminatory: the 25-year-old worker's account receives 40 times as much interest credit in the year the contributions accrue as [compared to the account of] a 65 year old worker." Cooper, 457 F.3d at 640. In the case of Gannett's pension equity formula, the value credited to the participant's hypothetical account balance over time is driven by two variables: (1) the employee's length of service; and (2) the employee's final average earnings. There is nothing inherently age discriminatory about these two variables. Instead, plaintiffs' age discrimination claim is premised on their mistaken belief that ERISA § 204(b)(1)(H) requires projecting the participant's benefit to his or her normal retirement age. In making such a projection, the hypothetical account of a 25-year-old Gannett worker is credited not only with the amount of service he or she has at the time the calculation is being made, but takes into account the 40 more years of potential service the participant would be credited with before reaching age 65. It is this calculation that forms the basis for the argument that the allocations to the employees' hypothetical accounts appear age discriminatory when in fact there is no discrimination. That such calculation uses the projected 40 years of potential service an age 25-year-old employee would have if he or she worked to age 65, instead of 40 years of hypothetical interest that would be accumulated, is irrelevant for purposes of determining whether the hybrid plan at issue discriminates based upon the age of the worker. In both situations, the purported difference in the value of the "accrued benefit" for the older and younger worker is because younger

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workers necessarily have a longer period of time before they reach age 65, and hence their projected credit (whether it be based upon interest or years of service) is larger than the credit that would accrue to an older worker. In both cases, it is the value of these projected credits that can lead to the mistaken belief that the hybrid plan at issue discriminates based upon age. See Cooper, 457 F.3d at 640; Register, 499 F.3d at 613. Every circuit court of appeals and most district courts that have considered plaintiffs' argument have rejected it and concluded that age discrimination for hybrid plans should be determined based upon the yearly increases in the participants' lump sum benefit, not by projecting the participants' benefit to age 65. Accordingly, this Court should reject plaintiffs' interpretation of ERISA § 204(b)(1)(H), and grant defendants' motion for summary judgment dismissing the First and Second Claims in the Amended Complaint as a matter of law. CONCLUSION For the reasons stated herein, defendants respectfully request the Court grant their motion for summary judgment and dismiss this action in its entirety.

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Dated: January 29, 2008 s/ Margaret A. Clemens Margaret A. Clemens Nixon Peabody LLP Clinton Square, P.O. Box 31051 1300 Clinton Square Rochester, NY 14603-1051 Telephone: (585) 263-1000 Fax: (585) 263-1600 [email protected] s/ Michael S. Beaver Michael S. Beaver Holland & Hart LLP 8390 E. Crescent Parkway #400 Greenwood Village, CO 80111 Telephone: (303) 290-1600 Fax: (303) 290-1606 [email protected] ATTORNEYS FOR DEFENDANTS
3823618_1.DOC

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