First Rock to the West, Straight on 'til Morning: Westrock Draws Potential Roadmap to Substantive Challenges of Erisa Rehabilitation Plans Under Section 1132

• Jurisdiction: United States,Federal
• Publication year: 2018
• Citation: Vol. 69 No. 4

First Rock to the West, Straight on 'Til Morning: WestRock Draws Potential Roadmap to Substantive Challenges of ERISA Rehabilitation Plans Under Section 1132

Michael Berthiaume

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First Rock to the West, Straight on 'Til Morning: WestRock Draws Potential Roadmap to Substantive Challenges of ERISA Rehabilitation Plans Under Section 1132^*

I. Introduction

Since its enactment, the Employee Retirement Income Security Act (ERISA)¹ has confused and frustrated practitioners, businesspeople, and citizens alike.² This convoluted statute encompassing over 1,000 pages³ has become increasingly more difficult through several amendments as new Congresses continue to patch the statute and "kick the can" of retirement benefits to later sessions.⁴

In WestRock RKT Co. v. Pace Industry Union Management Fund,⁵WestRock RKT Company (WestRock), a contributing employer, brought

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an action against Pace Industry Union Management Fund (The Fund) arguing a violation under ERISA, which sets minimum standards for pension plans in private industries.⁶ WestRock pursued this action under a newer amendment of ERISA that, while not yet litigated, may allow employers to challenge the substance of certain management decisions of a fund's sponsors or directors. While the United States Court of Appeals for the Eleventh Circuit ultimately dismissed the case on procedural grounds, its opinion may provide a roadmap for future employers to challenge the actions of their common pension funds on substantive grounds, specifically, to challenge the "reasonableness" of measures adopted by the fund.⁷

This avenue would contribute to an already growing field of ERISA litigation.⁸ Given the trillions of dollars at stake,⁹ a long history filled with scandal,¹⁰ and the third-rail political connotation associated with retirement benefits,¹¹ this robust source of litigation could have drastic implications on the management and oversight of one of our nation's most controversial institutions.¹²

II. Factual Background

The Fund is a multiemployer pension plan¹³ to which WestRock had been a longtime contributor. The Fund was in dire financial condition,

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and under the ERISA statute, was in "critical status."¹⁴ Therefore, ERISA required that its sponsors and directors adopt a "rehabilitation plan" to improve its financial well-being.¹⁵ To achieve financial stability, these rehabilitation plans often, among other things, require a fund to reduce expenditures, reduce future benefit accruals, and increase employer contribution rates.¹⁶ In this case, The Fund's sponsors adopted a rehabilitation plan in 2010, and a subsequent amendment in 2012, requiring WestRock and any other contributing employers seeking to withdraw from it to pay a share of the fund's "accumulated funding deficiency" in order to do so.¹⁷

WestRock challenged this amendment in the United States District Court for the Northern District of Georgia "based on both the invalid substance of the Amendment and the faulty procedure through which the Amendment"¹⁸ sought to require additional contribution requirements from WestRock and other employers.¹⁹ Relying on a newly amended cause of action,²⁰ WestRock argued the rehabilitation plan was invalid because it violated ERISA's collective-bargaining requirement and levied an automatic payment prohibited under ERISA. However, the district court instead agreed with the Fund's contention that the amendment was valid and WestRock could not challenge its actions in this instance.²¹

In a case of first impression, the United States Court of Appeals for the Eleventh Circuit ultimately affirmed the district court's dismissal of WestRock's complaint.²² Since WestRock failed to sufficiently allege the Fund's amendment violated ERISA in any manner, the Eleventh Circuit based its decision on procedural grounds and did not need to resolve the issue of whether ERISA authorized WestRock's challenge of the substance of the rehabilitation plan's amendment. However, in the process, the Eleventh Circuit's opinion may have provided a roadmap for

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future substantive challenges to be brought under the ERISA statute in this way.²³

III. Legal Background

To properly examine the facts and implications of this case, it is necessary to begin with an overview of the history and statutory framework of relevant sections of the ERISA statute.

A. ERISA

Originally enacted in 1974, ERISA was Congress's answer to the large-scale failure of defined-benefit plans²⁴ that had become popular with the rise of labor unions after World War II. During the post-war boom, "old world industries" such as automobile, steel, textile, and coal, made up the lion's share of the corporate landscape, and most of these industries sponsored defined-benefit plans as mandated by their collective-bargaining agreements (CBA).²⁵ However, by the 1970s, these old world industries had fallen on hard times, leaving their employees to question the stability of their financial future,²⁶ particularly the soundness of their pension plans, sparking public outcry for pension reform.²⁷ In enacting ERISA, Congress guaranteed that "if a worker has been promised a defined pension benefit upon retirement—and if he has fulfilled whatever

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conditions are required to obtain a vested benefit—he will actually receive it."²⁸

As enacted, this "comprehensive and reticulated" statute aimed to ensure employees and other beneficiaries were not deprived of their retirement benefits by a premature dissolution of their pension plans.²⁹ To achieve this goal of protecting anticipated retirement benefits, ERISA proscribed standards for the funding, management, and benefit provisions of these plans. Also, ERISA established the Pension Benefit Guaranty Corporation (PBGC).³⁰ The PBGC is a wholly owned government corporation organized within the Department of Labor and designed to administer an insurance system for these employer-sponsored defined-benefit plans. Contributing employers were required to pay premiums to the PBGC which, in turn, guaranteed benefit payments to employees and beneficiaries in the event a pension fund failed.³¹

Within its broad scope, one class of pension plan created by ERISA is the multiemployer pension plan, which allows several employers to contribute to a common fund that, in turn, provides benefits to covered retirees.³² These plans proved advantageous for employers and employees alike: employees could change jobs without losing pension coverage, and employers could share the cost and risk of the plan with one another.³³ However, multiemployer pension plans presented a problem in the original ERISA statute. If an employer withdrew from the plan, it significantly threatened the financial stability of the fund.³⁴

[A] key problem of ongoing multiemployer plans, especially in declining industries, is the problem of employer withdrawal. Employer withdrawals reduce a plan's contribution base. This pushes the contribution rate for remaining employers to higher and higher levels in order to fund past service liabilities, including liabilities generated by employers no longer participating in the plan, so-called inherited liabilities. The rising costs may encourage—or force—further withdrawals, thereby increasing the inherited liabilities to be funded by an ever-decreasing contribution base. This vicious downward spiral

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may continue until it is no longer reasonable or possible for the pension plan to continue.³⁵

To say that ERISA did not adequately address this issue would be an understatement. In fact, certain provisions actually had the effect of encouraging employer withdrawal since the employers could often do so without compensating the plans for their inherited liabilities.³⁶ The original withdrawal rules designed to protect the PBGC did not protect multiemployer pension funds or their contributing employers from the burden of withdrawal.³⁷ Congress became concerned that the potential of "cascading withdrawals" threatened to "impose too heavy a burden on the PBGC" and would "collapse . . . the plan termination insurance program."³⁸ Fearing this potential collapse, Congress delayed the multiemployer plan's mandatory insurance coverage under the PBGC until July 1, 1979, to avoid heavy withdrawals.³⁹ Then, in 1980, Congress responded to the issue by enacting the Multiemployer Pension Plan Amendments Act (MPPAA).⁴⁰

B. The Multiemployer Pension Plan Amendments Act

To alleviate the issue of employer withdrawal, the MPPAA enacted new rules which required employers to pay a "fixed and certain debt to the pension plan" in the event of their withdrawal.⁴¹ The PBGC's suggestions, which were principally adopted in the final statute, aimed to ensure that an "employer withdrawing from a multiemployer plan would be required to complete funding its fair share of the plan's unfunded liabilities," as such "withdrawal liability" would discourage withdrawal and "cushion the financial impact" on the plan.⁴² Under the final amendment, a withdrawing employer incurred a withdrawal liability equal to their proportional share of the multiemployer plan's unfunded vested benefits, which was to be "calculated as the difference between the present value of the vested benefits and the current value of

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the plan's assets."⁴³ Essentially, the withdrawing employer would be required to compensate the fund to continue payment of the employer's own retired employees' benefit packages. Unfortunately, the value of a fund's assets and benefits are influenced by several factors largely out of the control of the fund,⁴⁴ and this patch on ERISA did not stand the test of time.⁴⁵

By 2005, many outside economic circumstances,⁴⁶ along with the actual or imminent dissolution of several large pension plans, again threatened ERISA and the PBGC's system of federally insured pension plans.⁴⁷ Corporate bankruptcies and scandals like those of Enron and WorldCom,⁴⁸ coupled with numerous...