Free Reply to Response to Motion - District Court of Arizona - Arizona

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David B. Rosenbaum, Atty. No. 009819 Dawn L. Dauphine, Atty. No. 010833 OSBORN MALEDON, P.A. 2929 North Central Avenue, Suite 2100 Phoenix, AZ 85012-2794 [email protected] [email protected] Telephone: (602) 640-9000 Michael L. Banks, Pro Hac Vice John Ferreira, Pro Hac Vice William J. Delany, Pro Hac Vice Amy Covert, Pro Hac Vice Azeez Hayne, Pro Hac Vice MORGAN, LEWIS & BOCKIUS LLP 1701 Market Street Philadelphia, PA 19103 [email protected] [email protected] [email protected] [email protected] [email protected] Telephone: (215) 963-5000 Attorneys for Defendants IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Barbara Allen, Richard Dippold, Melvin Jones, Donald McCarty, Richard Scates and Walter G. West, individually and on behalf of all others similarly situated, Plaintiffs, vs. Honeywell Retirement Earnings Plan, Honeywell Secured Benefit Plan, Plan Administrator of Honeywell Retirement Earnings Plan, and Plan Administrator of Honeywell Secured Benefit Plan, Defendants.

No. CIV 04-0424 PHX ROS

DEFENDANTS' REPLY BRIEF REGARDING THE SECRETARY OF THE TREASURY'S FINAL REGULATIONS CONCERNING SECTION 411(d)(6) PROTECTED BENEFITS

1-PH/2266451.3

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I.

INTRODUCTION The Treasury Regulations interpreting ERISA's anti-cutback rule (the

"Regulations"), Treas. Reg. § 1.411(d)-3 (2005), 70 Fed. Reg. 47109, confirm that an amendment does not run afoul of Section 204(g) of ERISA simply because it reduces one component of a benefit formula. Rather, an amendment impermissibly cuts back a participant's accrued benefits only if that participant's net retirement annuity calculated under the plan immediately after the amendment is lower than such annuity calculated under the plan immediately before the amendment. Plaintiffs argue that the Court should ignore the Regulations because reliance on the agency's statutory interpretation would somehow violate rules against retroactive rulemaking. Incredibly, Plaintiffs also claim that the Regulations should not alter this Court's summary judgment ruling even if they were applied in this case, and that the Regulations are not entitled to Chevron deference because they conflict with ERISA Section 204(g)'s unambiguous terms. Plaintiffs are wrong on both points. This Court may defer to the agency's authoritative statutory interpretation without violating retroactivity principles, and the Secretary's interpretation of ERISA compels the conclusion that Plaintiffs failed to allege, much less prove, the essential element of their anti-cutback claim. Plaintiffs effectively concede that an agency interpretation of an existing statute "is no more retroactive . . . than is a judicial interpretation construing and applying a statute to a case in hand." Manhattan Gen. Equip. Co. v. Comm'r of Internal Revenue, 297 U.S. 129 (1936). Nevertheless, they fail to acknowledge the difference between agency interpretation of a statute, which typically has retroactive implications, and agency rulemaking, which is often prospective only. Here, the Regulations contain both (a) new legal rules that were adopted by the IRS pursuant to a mandate contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"); and (b) the Treasury Secretary's clarifications of existing law pursuant to the agency's "interpretive jurisdiction" over ERISA. 70 Fed. Reg. 47110. The portions of the Regulations that
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implement new rules pursuant to EGTRRA are not to be applied retroactively. The interpretations of ERISA, however, are another matter. Applying the Secretary's interpretations of the anti-cutback rule to this dispute is no more "retroactive" than relying on the Ninth Circuit's decisions in Michael v. Riverside Cement, 266 F.3d 1023 (9th Cir. 2001), and Shaw v. Int'l Assoc. of Mach. and Aerospace Workers Pension Plan, 750 F.2d 1458 (9th Cir. 1985), to decide Plaintiffs' Motion for Partial Summary Judgment. Furthermore, the Regulations present a reasonable interpretation of otherwise ambiguous statutory language. Indeed, they adopt the very interpretation of the statute that this Court stated it would have chosen had it been writing on a blank slate. (July 19 Order at 13-18.) The Secretary's interpretation of ERISA's anti-cutback rule, therefore, is entitled to deference notwithstanding contrary circuit court precedent. Nat'l Cable & Telecomm. Assoc. v. Brand X, 125 S. Ct. 2688 (2005); AARP v. Equal Employment Opportunity Commission, No. 05-CV-509, __ F. Supp. 2d __, 2005 WL 2373863 (E.D. Pa. Sept. 27, 2005) (granting motion for reconsideration and deferring to agency regulations despite contrary circuit court precedent). When given due weight, the Regulations control the outcome of this dispute. Plaintiffs moved for summary judgment arguing that Defendants had reduced their accrued benefits. Plaintiffs neither alleged nor offered any proof that their actual accrued benefits, i.e., the amounts payable to Plaintiffs, were reduced by the challenged amendments. Instead, Plaintiffs argued that Defendants had effectively cut back their benefits by increasing an offset component of the applicable benefit formula, even though Defendants had increased other components of the formula and implemented a savings clause that would have prevented the amendments from decreasing any participant's accrued benefits. The Regulations confirm that such allegations are insufficient to establish an impermissible cutback. Defendants, therefore, respectfully request that this Court reconsider its July 19 Order in light of the Regulations, deny Plaintiffs' Motion for Partial Summary Judgment,
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and grant Defendants' Motion to Dismiss Plaintiffs' anti-cutback claims. II. ARGUMENT A. The Secretary's Interpretations of ERISA Section 204(g) Govern This Dispute.

Plaintiffs ask the Court to reject the Treasury Department's interpretation of the statute that it is charged to enforce. They argue that to defer to the agency's interpretation 6 would constitute an improper "retroactive" application of the Regulations because (1) the 7 effective date language in the Regulations precludes a retroactive application, and (2) the 8 Regulations constitute new legal rules that cannot be applied retroactively. Plaintiffs' first 9 argument misunderstands the difference between the retroactive application of new legal 10 rules and interpretations of existing law. Plaintiffs' second argument rests on nothing 11 more than erroneous and unsupported assertions. Contrary to Plaintiffs' arguments, this 12 Court must defer to the Secretary's authoritative interpretation of the statute as embodied 13 in the Regulations. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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1.

The Treasury Secretary's interpretive guidance on ERISA Section 204(g) does not present a retroactivity problem.

Plaintiffs argue that a court may not apply a regulation "retroactively" when the agency has expressed its intention that the regulation apply only prospectively. (Pls.' Resp. at 3-4 (citing Pauly v. United States Department of Agriculture, 348 F.3d 1143 (9th Cir. 2003)).) Plaintiffs argue, therefore, that the Regulations cannot apply to this case because "the agency made a conscious decision not to give retroactive effect to any portion of the regulations." (Id. at 3 (emphasis in original).) The relevant portions of the Regulations, however, merely clarify longstanding legal rules and do not present retroactivity concerns. As such, the Secretary's interpretation of the anti-cutback rule should be applied to this case. Indeed, an interpretation of an existing rule cannot sensibly be applied in any other fashion. Regulations do not operate "retroactively" simply because they are applied to conduct that occurred before they were promulgated. Cf. Landgraf v. USI Film Products,

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511 U.S. 244, 269 (1994) (a statute "does not operate `retrospectively' merely because it is applied in a case arising from conduct antedating the statute's enactment."). Rather, the proper question is whether regulations "impose new obligations or duties with respect to past transactions," or whether they interpret existing legal rules. U.S. West Communications, Inc. v. Jennings, 304 F.3d 950, 957-58 (9th Cir. 2002) (finding that the FCC's interpretation governed decisions made before its adoption). If they simply interpret existing law, regulations do "not present retroactivity concerns." AT&T Communications Systems v. Pacific Bell, 203 F.3d 1183, 1187 (9th Cir. 2000) (applying newly promulgated FCC interpretation to previous conduct). This is so because an agency interpretation of the law expressed in a regulation "is no more retroactive in its operation than is a judicial determination construing and applying a statute." Manhattan Gen. Equip., 297 U.S. at 135. The effective date language in the Treasury Regulations does not preclude the Court from applying the relevant portions of the Regulations, which interpret existing law, to this dispute. The Regulations consist of two distinct pieces: (1) new legal rules that never existed before, and (2) clarifications and interpretations of existing law. Significantly, the two sources of the Secretary's authority to adopt the Regulations clearly distinguish the new legal rules from the Secretary's interpretations of existing law. The Secretary promulgated the new legal rules (contained in Section 1.411(d)-3(c) through (e) of the Regulations) pursuant to EGTRRA's detailed requirements. 70 Fed. Reg. 47110. To clarify that these new legal rules operate prospectively only and would not be used, for example, to retroactively disqualify previously tax-qualified plans, the Secretary made these new legal rules prospective only. Treas. Reg. § 1.411(d)-3(j), 70 Fed. Reg. 47126 ("[T]he rules of this section apply to amendments adopted on or after August 12, 2005."). On the other hand, the Secretary's authoritative interpretations of existing law are not so limited. Unlike the EGTRRA rules, the Secretary adopted the clarifying portions of the Regulations that are relevant in this case solely pursuant to the agency's "interpretive
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jurisdiction" over ERISA Section 204(g). 70 Fed. Reg. 47110. These interpretations, therefore, do not and cannot create new legal rules. Rather, they operate as authoritative constructions of ERISA Section 204(g) in all cases currently pending, just as would a similarly authoritative judicial interpretation. See, e.g., Manhattan Gen. Equip., 297 U.S. at 135 (finding that new regulation was "no more retroactive . . . than is a judicial [interpretation]"); see also Rivers v. Roadway Express, Inc., 511 U.S. 298, 311-12 (1994) ("When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.") In addition, because the portions of the Regulations interpreting ERISA are consistent with the Secretary's previous regulations, the Ninth Circuit's decision in Pauly does not control this case. In Pauly, the Ninth Circuit found that a regulation adopted in 2000 did not control a dispute over a loan restructuring agreement executed in 1989 because the new regulation represented an "explicit break" with the agency's past practice. Pauly, 348 F.3d at 1152. The 2000 regulation was not a clarification, interpretation, or even an extension of the agency's previous rule. Rather, the new rule mandated a valuation methodology that was the exact opposite of the agency's previous practice and, therefore, would have dramatically altered the parties' rights in more than 5,000 farm loan restructuring agreements that had been executed under the agency's previous practice. Id. By contrast, the Regulations at issue here do not represent a break with the Secretary's previous practice. On the contrary, the interpretive portions of the Treasury Regulations retain the operative language of the old regulations virtually word for word, and simply explain how those regulations are intended to operate. Compare Treas. Reg. § 1.411(d)-3(b) (1977), 42 Fed. Reg. 4230, with Treas. Reg. § 1.411(d)-3(a)(2). Thus, because the relevant portions of the Regulations retain and amplify existing interpretations
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of the law, they "do not present retroactivity concerns," Pacific Bell, 203 F.3d at 1187, and "it would be absurd to ignore the agency's current authoritative pronouncement of what the statute means" in deciding this case. Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735, 744 n.3 (1996); see also Esden v. Bank of Boston, 229 F.3d 154, 171-72 (2d Cir. 2000) (deferring to prospective 1996 regulation in deciding 1991 lump sum distribution because the regulation merely interpreted existing law). 2. The "net effect" test is not a new legal rule, but rather a clarification of the Secretary's long-standing interpretation of ERISA § 204(g).

Plaintiffs essentially concede that applying an agency interpretation of an existing statute or regulation to preceding facts "is no more retroactive . . . than is a judicial interpretation construing and applying a statute to a case in hand." Manhattan Gen. Equip., 297 U.S. at 135. Nonetheless, Plaintiffs argue that the "net effect" test, which clarifies the simultaneous amendment rule that has existed since the Secretary's 1977 regulations, cannot govern this case because it is a new legal rule. To the contrary, the net effect test is merely a clarification of the long-standing simultaneous amendment rule, rather than a new legal rule that presents retroactivity concerns. Plaintiffs base their argument solely on the unfounded assertion that the "net effect" test represents a break from the Secretary's previous regulations, and on the demonstrably false claim that Defendants have not argued that these previous regulations controlled this case. (Pls.' Resp. at 5-6.) Plaintiffs claim that the fact that "the rule is indeed new cannot seriously be disputed and is best demonstrated by Defendant's litigation of this case. . . . [A]t no time . . . did Defendants ever argue that this case was governed by the old regulations." (Id. at 5.) Defendants did, however, argue that the old regulations were dispositive of Plaintiffs' claims. (Defs.' Opp. to Pls.' Mot. for Part. Summ. J. at 7-8 (quoting Treas. Reg. § 1.411(d)-3(b) (1977).) More importantly, no reasonable person could conclude that the net effect test represents a break from the simultaneous amendment rule.
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The 1977 regulations specified: For purposes of determining whether or not any participant's accrued benefit is decreased, all the provisions of a plan affecting directly or indirectly the computation of accrued benefits which are amended with the same adoption and effective dates shall be treated as one plan amendment. Treas. Reg. § 1.411(d)-3(b) (1977). The new Regulations incorporate this rule almost identically: For purposes of determining whether a participant's accrued benefit is decreased, all of the amendments to the provisions of a plan affecting, directly or indirectly, the computation of accrued benefits are taken into account. . . . In determining whether a reduction in a participant's accrued benefits has occurred, all plan amendments with the same applicable amendment date are treated as one amendment. Treas. Reg. § 1.411(d)-3(a)(2)(i)-(ii) (2005), 70 Fed. Reg. 47116. The very next sentence then explains the net effect test ­ i.e., that two amendments, one of which decreases a participant's benefits, while the other increases them, violate the anti-cutback rule only if their "net effect" is to decrease a participant's accrued benefit. Treas. Reg. § 1.411(d)3(a)(2)(ii) (2005), 70 Fed. Reg. at 47116. This simple clarification cannot reasonably be viewed as a new legal rule that upsets settled expectations. It is hard to imagine what else the simultaneous amendment rule could mean by "all the provisions of a plan . . . amended with the same adoption and effective dates shall be treated as one plan amendment" if not that the effect of amendments to these provisions should be netted against each other. Treas. Reg. § 1.411(d)-3(b) (1977), 42 Fed. Reg. 42340. Otherwise, there would be no need to treat them as one amendment, for an amendment reducing a single component of the benefit formula would constitute a cutback notwithstanding any simultaneous offsetting increase in another component of the formula. Despite Plaintiffs' unfounded assertion to the contrary, the net effect test is simply a clarification of the 1977 regulations' simultaneous amendment rule.
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1 2 3 4 5 6 7 8 9 10 11 12 Treas. Reg. § 1.411(d)-3(g)(15) (2005), 70 Fed. Reg. 47123 (emphasis in original). The 13 Section 204(g)(2) analysis, of course, has no bearing on this case. Despite Plaintiffs' 14 repeated and tortured attempts to argue otherwise, Plaintiffs cannot prove, nor did they 15 adequately plead, that the challenged amendments reduced benefits protected under 16 ERISA Section 204(g)(2). 17 In support of their purported Section 204(g)(2) claim, Plaintiffs assert that: 18 19 20 21 22 23 24 25 26 27 28 Commencing on and after January 1, 1984, the Plan Administrators calculated offsets of the benefits accrued under the Garrett Severance Plan, the SBA Offsets, using interest rates and formulas different from the interest rates and formulas promised under the Garrett Severance and Retirement Plans and the January 1984 Signal Retirement Plan Document and that had the effect of enlarging the offset of benefits under the Garrett Plans, including early retirement benefits and/or retirement-type subsidies benefits that Plaintiffs had accrued and earned under the Garrett Plans through December 31, 1983 and under the January 1, 1984 Signal Retirement Plan document. (Am. Compl. at ¶ 48.) Essentially, Plaintiffs claim that because the challenged amendment purportedly reduced accrued benefits under (g)(1), early retirement benefits
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3.

The Regulations do not promulgate a new legal rule defining accrued benefits.

Plaintiffs also base their argument on the misleading assertion that the Regulations "for the first time" define "accrued benefit" for purposes of applying the anti-cutback rule. (Pls.' Resp. at 6-7.) Thus, they attempt to characterize the Regulations as imposing a new rule. In fact, the Regulations do not define the term "accrued benefit." Rather, the Regulations define which benefits constitute "protected benefits" under ERISA Section 204(g)(2): The term section [204(g)(2)] protected benefit means the portion of an early retirement benefit, a retirement-type subsidy, or an optional form of benefit attributable to benefits accrued before the applicable amendment date.

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and retirement-type subsidies protected under (g)(2), must, by definition, have been similarly reduced. In other words, if there is a lesser benefit available at normal retirement, there must be a lesser early retirement benefit. This argument reflects a complete misunderstanding of the statutory scheme and what Congress intended to protect when it added Section 204(g)(2). Indeed, if (g)(2) were meant to apply to this situation, it would have been unnecessary to add it to ERISA in the first place because one would only reach this argument after a (g)(1) violation is established. Congress added Section 204(g)(2) to provide separate protection for three distinct benefit rights: early retirement benefits, retirement-type subsidies and optional forms of benefits, none of which have been reduced in this case. The Regulations define the term "early retirement benefit" as "the right, under the terms of a plan, to commence distribution of a retirement-type benefit at a particular date after severance from employment with the employer and before normal retirement age." Treas. Reg. § 1.411(d)-3(g)(6)(i) (2005), 70 Fed. Reg. 47122. Thus, with respect to early retirement benefits, Section 204(g)(2) protects the "right" to commence receiving benefits at an age earlier than normal retirement age (e.g., the right to commence benefit distributions at age 55 after 10 years of service even though normal retirement age is 65). Plaintiffs do not claim, nor do they demonstrate with record evidence, that the challenged amendments have reduced, modified or eliminated their "right" to receive an "early retirement benefit" under Section 204(g)(2). Likewise, Plaintiffs do not allege, nor do they prove, that they sustained a reduction to a "retirement-type subsidy" by virtue of the amendments. The Regulations define "retirement-type subsidy" as "the excess, if any, of the actuarial present value of a retirement-type benefit over the actuarial present value of the accrued benefit commencing at normal retirement age or at actual commencement date, if later." Treas. Reg. § 1.411(d)-3(g)(6)(iv) (2005), 70 Fed. Reg. 47123. In other words, a "retirementtype subsidy" is any early retirement benefit that is greater, on a present value basis, than
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the normal retirement benefit reduced on a pure actuarial basis.1 Plaintiffs do not provide any evidence, nor do they even allege, that the challenged amendment reduced a retirement-type subsidy protected by Section 204(g)(2). Moreover, as previously noted, Section 204(g)(2) cannot apply to Plaintiffs' claims as a matter of law. (Defs.' Opp. to Pls.' Mot. for Part. Summ. J. at 9-11.) Congress added Section 204(g)(2) to ERISA in the Retirement Equity Act of 1984. Pub. Law 98-397, § 301(a)(1). By its express terms, Section 204(g)(2) applies only to amendments adopted after July 30, 1984. It is undisputed that the December 31, 1983 amendment predates the effective date of Section 204(g)(2). Plaintiffs' attempt to recast their Section 204(g)(1) claims as Section 204(g)(2) claims must be rejected and Plaintiffs' assertion that the Regulations express new legal rules with respect to Section 204(g) has no import to this case. 4. The Regulations are entitled to Chevron deference and control this dispute.

Plaintiffs contend that this Court should not defer to the Regulations because they conflict with ERISA Section 204(g)'s unambiguous terms. (Pls.' Resp. at 11-12.) Plaintiffs contend that: By grouping multiple amendments together and permitting one amendment to offset the violation effected through another amendment, the regulation conflicts with the unambiguous language of the statute stating that the benefits may not be decreased by "an amendment of the plan." (Id. at 12.) ERISA, however, does not define the term "amendment." Moreover,
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For example, assume a participant had accrued a benefit of $1,000 per month beginning at age 65. Assume further that the pure actuarial equivalent of that $1,000 per month benefit commencing at age 65 is $340 per month at age 55. If the actual early retirement benefit beginning at age 55 is $500 per month (based on favorable early retirement reduction factors contained in the plan), the excess ($160 per month) is the "retirement-type subsidy." Thus, if a plan continues to provide a benefit of $1,000 per month to a participant at normal retirement, but by amendment reduces the excess retirement-type subsidy such that at age 55 the participant only received $340 (as opposed to the $500 he received before the amendment), it would run afoul of Section 204(g)(2). 11

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Plaintiffs' argument is circular and depends on their definition of "amendment." Plaintiffs' argument assumes that a single change to a single provision of a plan is an "amendment" regardless of whether it is adopted in conjunction with other changes. However, the statutory language does not compel this result. Two or more plan changes effected in a single document can easily be considered "an amendment." Similarly, several changes made at the same time but adopted in several documents can also be considered "an amendment." The statute is ambiguous, therefore, because each of these constructions is plausible. The Regulations resolve this ambiguity and interpret the statutory language to mean that all changes to a plan made at the same time, with the same effective date, are treated as one amendment. Treas. Reg. § 1.411(d)-(a)(2)(ii) (2005), 70 Fed. Reg. 47116. The Secretary further stated that such changes cause a cutback only if they reduce a participant's accrued benefits when taken together. Because the statutory language is ambiguous and the Secretary's interpretation is a permissible reading of the statute, it is entitled to deference notwithstanding contrary circuit court precedent. Brand X, 125 S. Ct. at 2702; AARP, 2005 WL 2373863 (granting motion for reconsideration and deferring to agency regulations despite contrary circuit court precedent).2 B. The Regulations Clarify That Plaintiffs Failed to Establish Any Actionable Cutback to Their Accrued Benefits.

Plaintiffs claim that the Regulations should not alter this Court's July 19 ruling
2

Plaintiffs also claim that the Regulations conflict with Central Laborer's Pension Fund v. Heinz, 124 S. Ct. 2230 (2004). (Pls.' Resp. at 12.) As this Court explained, however, Heinz is not so broad as Plaintiffs suggest. (July 19 Order at 26-27.) Heinz did not dictate that "a court may never look to the nominal dollar amount of the plaintiffs' monthly benefit when determining whether an amendment violates the anti-cutback rule. . . . Heinz merely held that it does not matter whether the formula for calculating the monthly benefits remains the same if benefits themselves are suspended or if new conditions are imposed that make it much harder to receive those benefits." (Id.) The Regulations' requirement that "all of the amendments to the provisions of a plan affecting, directly or indirectly, the computation of accrued benefits" be taken into account when deciding if a cutback has occurred is entirely consistent with Heinz. Treas. Reg. § 1.411(d)-3(a)(2) (2005), 70 Fed. Reg. 47116. 12

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even if those Regulations are entitled to deference. Specifically, Plaintiffs argue that the net effect test has no bearing here because: Defendants have pointed to no feature of the February 4, 1984 plan amendments that provided a simultaneous upward adjustment of benefits that offset the benefit reduction. In other words, Defendants offered no evidence that the "net effect" rule, if applied to the February 4, 1984 amendments, would shield the amendments from violation of §204(g). (Pls.' Resp. at 8.)3 This argument is misplaced. Apparently, Plaintiffs forget that they were required to demonstrate by admissible and competent evidence that their accrued benefits were reduced. In fact, not a single plaintiff in this case made such a showing.4 Absent any such factual showing, Plaintiffs argue that the portion of the pre3

Plaintiffs' reference to the "February 4, 1984 plan amendments" is curious, at best. The Signal Retirement Plan document explicitly states on the front cover that it "Include[es] all amendments adopted through January 1, 1984." (Promislo Decl. Ex. E, HW0000310.) Similarly, on page one, the Plan document states "This Plan contains the entire plan as hereby amended, restated and continued as of January 1, 1984." (Id. at HW0000315.) Thus, the Signal Retirement Plan document includes only those amendments made on or before January 1, 1984. Moreover, neither the Amended Complaint, nor any of Plaintiffs' prior briefs rely on or even refer to a "February 4, 1984 plan amendment" in support of their claims. The relevant amendments occurred on December 31, 1983. Plaintiffs' transparent attempt to defeat the simultaneous amendment/net effect rule by now relying (erroneously) on a "February 4, 1984 plan amendment" is disingenuous. Plaintiffs argue that, in all events, this Court should deny Defendants' petition for an interlocutory appeal because the Court would still be required to decide Plaintiffs' claim that the challenged amendments violated the terms of the plan in addition to ERISA's anti-cutback rule. Specifically, Plaintiffs' claim that the challenged amendments violated Garrett Retirement Plan § 8.1(b), (Promislo Decl. Ex. A, HW0000066-67), which promised that "No amendment shall have any retroactive effect so as to deprive any Participant of any benefit already vested . . . ." (Am. Compl. ¶¶ 27, 34.) Plaintiffs' argument is flawed for two reasons. Plaintiffs may not bring a claim for benefits based on the terms of a plan that no longer exists. Rather, they may only bring a claim based on the terms of the current Honeywell Retirement Plan. Even if Plaintiffs could bring a claim for benefits under the Garrett Retirement Plan, however, such a claim must fail. Nothing in the Garrett Retirement Plan even remotely suggests that the interest rate used to calculate the SBA Offset was a "vested" benefit. A participant with a vested benefit under the Garrett Retirement Plan was entitled to receive "Normal or Early Retirement Benefits. . . ." (Promislo Decl. Ex. A, HW0000047.) In other words, it was the final retirement benefit, not the individual formula components used to calculate this benefit, which vested. 13

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amendment formula providing for the calculation of the SBA Offset using a 3.5% interest rate was an "accrued benefit" that could not be altered. The Regulations, however, establish that this is not a permissible reading of ERISA's anti-cutback rule. Examples from the Regulations clarify that an amendment that "reduces" a component of a plan's benefit formula from 2% of career average pay to 1.3% of final average pay does not cause an impermissible cutback unless the amended formula produces a net retirement annuity that is lower than the participant's net retirement annuity computed under the old formula. Treas. Reg. § 1.411(d)-3(a)(4), 70 Fed. Reg. 47116; see also Treas. Reg. § 1.411(d)-3(b)(1)(iii) & (b)(4), 70 Fed. Reg. 47116. Thus, evidence demonstrating that an amendment made a single component of a benefit formula less favorable, whether by reducing a multiplier or increasing an offset, cannot by itself demonstrate a cutback in an accrued benefit.5 Plaintiffs bear the burden of producing record evidence demonstrating that they suffered a cutback. Godinez v. CBS Corp., SA CV 01-28-GLT (ANX), 2002 WL 32155542, *3 (C.D. Cal. may 20, 2002) (granting summary judgment in defendants' favor on an anti-cutback claim where plaintiffs failed to provide substantive evidence to show a decrease in their benefit accruals), aff'd 81 Fed. Appx. 949 (9th Cir. 2003). See also High Tech Gays v. Defense Indus. Security Clearance Office, 895 F.2d 563, 575 (9th Cir. 1990) (overturning district court's grant of summary judgment in plaintiffs' favor where plaintiffs failed to offer "any significant probative evidence tending to support [their]
5

This is consistent with the Central District of California court's post-Michael decision to grant the defendant's motion for summary judgment because the plaintiffs had failed to present record evidence that they had "lost accrued benefits" when the company converted from a traditional defined benefit plan to a cash balance plan. Godinez v. CBS Corp., No. CV 01-28-GLT(ANX), 2002 WL 32155542, at *3 (C.D. Cal. May 20, 2002), aff'd 81 Fed. Appx. 949 (9th Cir. 2003) (unpublished opinion). Significantly, the court granted defendant's motion in part because the plaintiffs failed to address the new plan's savings clause, which ensured that "all accrued benefits were carried over to the Cash Balance Plan." Id. at *3 n.4. This decision demonstrates that Plaintiffs' interpretation of the anticutback rule is not correct, for otherwise no employer could ever convert from a traditional defined benefit plan to a cash balance plan, much less a defined contribution plan. (Defs.' Opp. to Pls.' Mot. for Part. Summ. J. at 9 n.10). 14

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complaint") (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986)). To sustain their claims, therefore, Plaintiffs had to allege and prove that their net retirement annuities would in the future be lower immediately following the amendment than they were just before it took effect. Plaintiffs did not even attempt to shoulder this burden.6 As discussed above, however, evidence that the amended plan would have produced a larger SBA Offset, without proof that this would have translated into a lower net retirement annuity, cannot establish an impermissible cutback. Treas. Reg. §§ 1.411(d)3(a)(2) & (4), 1.411(d)-3(b)(1)(iii) & (4). In fact, Plaintiffs cannot produce evidence that their net retirement annuities calculated under the amended terms of the plan were smaller than their annuities calculated under the plan's pre-amendment terms. As discussed in prior briefs, the Signal Retirement Plan contained a "savings clause" which prevented any participant's postamendment annuity from being less than the benefit he had accrued as of the amendment. (Promislo Decl. Ex. E § 4.10(c)(ii), HW0000351-52.) Such a savings clause will prevent a participant from suffering a cutback, even if an amendment otherwise would have reduced that participant's accrued benefits. Treas. Reg. § 1.411(d)-3(a)(4) & (b)(4) (2005), 70 Fed. Reg. 47116-117. Plaintiffs claim that the Signal Retirement Plan's savings clause did not preclude a cutback in this case. Plaintiffs argue that the savings clause was deficient "on its face" because it only protected benefits accrued as of December 31, 1983, whereas the challenged amendment was adopted in February 1984. As noted above, Plaintiffs' argument regarding the "February 4, 1984 plan amendment" mischaracterizes the facts in this case. As demonstrated on the face of the Signal Retirement Plan document, the February 4, 1984 restatement recites only plan provisions and amendments "adopted
6

Indeed, Plaintiffs concede that they did not demonstrate a reduction to their accrued benefits by explaining that whether "some of the Plaintiffs' benefits declined after the amendments" is a "question of fact which for purposes of the motion to dismiss should be accepted as true. It is not, in Plaintiffs' view, material to a resolution of the partial summary judgment motion." (Pls.' Mot. for Part. Summ. J. at 15 n.16.) 15

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through January 1, 1984." (Promislo Decl. Ex. E, HW0000310.) Moreover, Plaintiffs' argument assumes, erroneously, that Plaintiffs continued to accrue benefits under the Garrett Retirement Plan after December 31, 1983. Amendment IX merged the Garrett Retirement Plan into the Signal Retirement Plan on December 31, 1983. (Promislo Decl. Ex. C, HW0000304.) At that time, Plaintiffs ceased accruing benefits under the Garrett Retirement Plan and, effective January 1, 1984, began participating in the Signal Retirement Plan. (Id. ("Upon such merger, no Participant in this Plan or any former Participant shall be entitled to any rights or benefits under this Plan . . . ."); Promislo Decl. Ex. E, HW0000310.) The Signal Retirement Plan's savings clause, therefore, adequately protected Plaintiffs' accrued benefits by preventing Plaintiffs from receiving less after January 1, 1984 than they would have been entitled to receive on December 31, 1983. (Promislo Decl. Ex. E § 4.10(c)(ii), HW0000351-52.) Plaintiffs also argue that the savings clause could not prevent a cutback because it protected only participants' normal retirement benefits, and not their early, disability, or optional forms of benefits. Plaintiffs do not allege that any plan amendment cut back their disability or optional forms of benefits and their arguments directed at these benefits are irrelevant. Plaintiffs' remaining argument, moreover, ignores that early retirement benefits are calculated by multiplying a participant's normal retirement benefit by an actuarial or subsidized actuarial factor. The Signal Retirement Plan not only preserved participants' normal retirement benefits accrued under the Garrett Retirement Plan, (Promislo Decl. Ex. E § 4.10(c)(ii), HW0000351-52.), but also specified that participants' early retirement benefits would not be less than their normal retirement benefits accrued under the Garrett Retirement Plan multiplied by the appropriate factors. (Promislo Decl. Ex. E § 4.4(a), HW0000341-42.)7 Plaintiffs did not allege, much less prove, that any amendment reduced any factor used to calculate early retirement benefits. (Am. Compl.
7

Though Plaintiffs do not challenge that any amendment reduced their disability retirement benefits, the Signal Retirement Plan also specifically preserved these benefits. (Promislo Decl. Ex. E § 4.5(a), HW0000342-43.) 16

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at ¶ 48; see also id. at ¶ 27 (seeking remedies for violations based only on changes to the SBA Offset, Social Security offset, and administrative fees).) Thus, Plaintiffs not only failed to, but also cannot prove that their post-amendment net retirement annuities were lower than they would have been under the pre-amendment terms of the plan. Plaintiffs failed to allege, and certainly failed to prove, the essential element of their anti-cutback claim. Defendants, therefore, respectfully request that the Court reconsider its July 19 Order in light of the Regulations, deny Plaintiffs' Motion for Partial Summary Judgment, and grant Defendants' Motion to Dismiss Plaintiffs' anti-cutback claims. C. Plaintiffs Continue to Mischaracterize the Holding in Shaw.

Plaintiffs continue to mischaracterize the holding in Shaw. The amendment in Shaw phased out a living pension feature, causing participants to receive lower payments than what they would have received if the plan had not been amended. In Shaw, the "promise" of the living pension feature pertained to already accrued benefits. Indeed, the living pension feature did not even apply until after a participant retired and was no longer accruing benefits. Specifically, the living pension feature promised participants that the "monthly salary" component of the benefit formula would always be the current monthly salary for the retiree's position (as opposed to the monthly salary for that position at the time the participant retired). Thus, the plan promised participants that after they retired their accrued benefits would increase as the salaries for their positions increased. By phasing out the living pension feature and taking away the promised increase, the Court held that the amendment reduced a retiree's already accrued benefit. Shaw, 750 F.2d at 1465.8

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Significantly, the Court in Shaw did not hold that the living pension feature could not be eliminated with respect to benefits attributable to service after the amendment date. In other words, the Court did not hold that the plan had to maintain the living pension feature in perpetuity, as Plaintiffs suggest. 17

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Moreover, as previously noted, the amendment in Shaw reduced one component of the benefit formula with no offsetting increase in any other component of the formula. By reducing one component of the formula without changing any other component, the Shaw amendment reduced the total accrued benefit under the formula. The decision in Shaw does not address the situation presented in this case. Here, Plaintiffs have not shown that their benefits calculated under the post-amendment formula would be lower than their benefits calculated under the pre-amendment formula as the plaintiffs in Shaw demonstrated. See Treas. Reg. § 1.411(d)-3(a)(2) & (4). Therefore, Plaintiffs' assertion that "there is no distinction between the right to receive periodic increases in retirement benefits as in Shaw and the right to receive benefits calculated on the basis of a promised offset formula, or a no-offset rule or a promised reduction in the offset" (Pls.' Resp. to Defs.' Mot. for Reconsid. at 7) is inconsistent with the Court's holding in Shaw. D. Defendants Adequately Preserved Their Affirmative Defenses.

Plaintiffs argue that Defendants waived their statute of limitations and other affirmative defenses by failing to raise them in response to Plaintiffs' Motion for Partial Summary Judgment, even though Defendants had not yet answered the Complaint. Even if Defendants had failed to raise an affirmative defense in pre-answer motions, however, this would not have constituted a waiver of those defenses. Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 216 F.3d 764, 788 (9th Cir. 2000) (holding that defendant did not waive statute of limitations defense in pre-answer motions because it subsequently raised the defense in its answer). Defendants, therefore, adequately preserved their affirmative defenses by raising them in their Answer. (Answer at 22-23.) Indeed, Defendants went much further here than awaiting an opportunity to raise the defense in their Answer to the Amended Complaint. In the opposition to Plaintiffs' Motion for Partial Summary Judgment, Defendants explicitly pointed to the statute of
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limitations as one of several affirmative defenses. (Defs.' Opp. to Pls.' Mot. for Part. Summ. J. at 38.) This reference to the defense was plainly sufficient as a matter of law. Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 992 F. Supp. 1218, 1228 (D. Nev. 1998) aff'd in relevant part 216 F.3d 764 (holding that defendant did not waive statute of limitations defense, even assuming the defense could be waived before defendant answered, because "simply asserting that `the plaintiff's claim is barred by the applicable statute of limitations' is sufficient to raise any and all statutes of limitations that might be applicable"); Zotos v. Lindbergh High Sch. Dist., 121 F.3d 356, 361 (8th Cir. 1997) (statute of limitations defense is sufficiently raised "by its bare assertion") (emphasis in original) (cited with approval in Tahoe, 216 F.3d at 788).9 Respectfully submitted this 25th day of October, 2005. OSBORN MALEDON, P.A. By: s/ David B. Rosenbaum_____________ David B. Rosenbaum Dawn L. Dauphine Osborn Maledon, P.A. 2929 North Central Avenue, Suite 2100 Phoenix, AZ 85012-2794 Michael L. Banks (Pro Hac Vice) William J. Delany (Pro Hac Vice) John G. Ferreira (Pro Hac Vice) Amy Covert (Pro Hac Vice) Azeez Hayne (Pro Hac Vice) MORGAN, LEWIS & BOCKIUS LLP 1701 Market Street Philadelphia, PA 19103 Attorneys for Defendants

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Moreover, even if Defendants had waived any affirmative defenses through their briefs filed in response to a pre-answer and pre-class certification motion filed by the six named Plaintiffs, no defenses could have been waived that may be available to the individual claims of each of the thousands of putative class members. 19

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CERTIFICATE OF SERVICE I do certify that on October 25, 2005, I electronically transmitted the attached

3 document to the Clerk's Office using the CM/ECF System for filing and transmittal of a 4 Notice of Electronic Filing to the following CM/ECF registrants: 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
20 Case 2:04-cv-00424-ROS Document 116 Filed 10/25/2005 Page 20 of 20

Susan J. Martin Jennifer Lynn Kroll Martin & Bonnett P.L.L.C. 3300 N. Central Avenue, Suite 1720 Phoenix, AZ 85012-2517 Attorneys for Plaintiff s/ David B. Rosenbaum David B. Rosenbaum