Free Brief (Non Appeal) - 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 William J. Delany, Pro Hac Vice John Ferreira, Pro Hac Vice Amy Promislo 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] 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' SUPPLEMENTAL BRIEF REGARDING THE SECRETARY OF THE TREASURY'S FINAL REGULATIONS CONCERNING SECTION 411(d)(6) PROTECTED BENEFITS

Case 2:04-cv-00424-ROS

Document 95

Filed 09/06/2005

Page 1 of 18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. INTRODUCTION On August 12, 2005, the Secretary of the Treasury (the "Secretary") adopted final regulations regarding the scope of Code Section 411(d)(6)/ERISA Section 204(g) protected benefits (the "Regulations"). See Treas. Reg. § 1.411(d)-3 (2005), 70 Fed. Reg. 47109. The Secretary adopted the Regulations in part to comply with a statutory mandate to promulgate rules pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), and also to provide "general guidance" regarding the scope of the anti-cutback rule pursuant to the Secretary's "interpretive jurisdiction" over ERISA Section 204(g). See 70 Fed. Reg. at 47110. While the new legal rules adopted pursuant to EGTRRA are prospective in application, the Secretary's authoritative interpretation of ERISA applies to this case. This interpretive guidance clarifies that: (1) ERISA's anticutback rule does not protect individual components of a benefit formula, as opposed to the benefit itself; (2) plan amendments that alter a benefit formula in a pension plan do not violate the anti-cutback rule unless they reduce the "net dollar amount" of a participant's early or normal retirement annuity; and (3) a "savings clause" ­ like the one contained in the Honeywell Retirement Plan, which prohibits reductions of accrued benefits ­ protects participants from impermissible cutbacks and precludes a claim under ERISA Section 204(g). See Treas. Reg. § 1.411(d)-3(a),(b) (2005), 70 Fed. Reg. at 47116-117. The Secretary's interpretation of ERISA's anti-cutback rule conflicts with the Court's broad reading of Michael v. Riverside Cement, 266 F.3d 1023 (9th Cir. 2001), and also provides a basis for deciding this case without following a pre-regulation decision that is no longer good law. The Supreme Court's recent decision in National Cable & Telecommunications Association v. Brand X Internet Services, 125 S.Ct. 2688 (2005), instructs that an interpretation of a statute by an agency charged with enforcing that law supersedes inconsistent prior judicial precedents. Thus, the Court is not bound by Michael, and should defer instead to the Secretary's authoritative interpretation of ERISA's anti-cutback rule. The Court should now dismiss Plaintiffs' anti-cutback claims
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because the Regulations clarify that the challenged amendments did not violate ERISA. Even if the Court does not to give controlling weight to the Secretary's interpretation of ERISA, the Regulations nonetheless provide strong support for Defendants' contention that Michael is distinguishable from the instant case. The Regulations demonstrate that ERISA Sections 204(g)(1) and (g)(2) protect different benefits. The Regulations also clarify that an amendment does not cause an impermissible cutback unless it reduces a participant's net benefit. Although Michael rejected this test in the context of Section 204(g)(2) protected benefits, that holding does not extend to benefits protected under Section 204(g)(1). Since this case implicates only Section 204(g)(1) protected benefits, Plaintiffs' admission that the challenged amendments increased their net benefit dooms their anti-cutback claims. Thus, Defendants respectfully submit that the Court should reconsider its July 19 decision and dismiss Plaintiffs' anti-cutback claims. Alternatively, the Regulations provide yet another reason for the Court to grant Defendants' motion to certify this matter for interlocutory appeal to the Ninth Circuit. This Court's broad interpretation of the holding in Michael is directly contrary to the Secretary's construction of the statute. Rather than binding the parties and others looking for guidance to a result which this Court and the Secretary have declared to be illogical and inconsistent with ERISA, the Court should offer the Ninth Circuit the immediate opportunity to overrule, clarify, or limit its holding. Any other approach would be unfair to Defendants, who would have to shoulder the burdens of litigating class action, statute of limitations, and other issues extensively and, perhaps, even face an expensive and unwarranted judgment before obtaining an answer on the fundamental and critical legal issue in this case. The Supreme Court's decision in Brand X, moreover, renders this conclusion virtually inescapable. Should the Court conclude that it is unable to defer to the Regulations, Defendants submit that the Court should certify this matter for interlocutory appeal to the Ninth Circuit for a determination of whether Michael must be revisited in light of the Regulations.
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II.

THE COURT SHOULD DEFER TO THE SECRETARY'S REGULATIONS AND DISMISS PLAINTIFFS' ANTI-CUTBACK CLAIMS. A. The Regulations Clarify That ERISA's Anti-Cutback Rule Does Not Protect Individual Components Of The Benefit Formula.

Plaintiffs argue, based on their erroneous interpretation of Michael and Shaw v. International Association of Machinists and Aerospace Workers Pension Plan, 750 F.2d 1458 (9th Cir. 1985), that ERISA Section 204(g) protects not just the dollar value of a participant's annuity, but also each of the individual components of the plan's benefit formula. Thus, Plaintiffs moved for summary judgment claiming that the December 31, 1983 amendments violated the anti-cutback rule by increasing the interest rate used to calculate the Retirement Plan's SBA Offset, even though the amendments: (1) increased participants' benefits; and (2) implemented a savings clause that prevented the amendments from decreasing any participant's accrued benefits under any circumstances. Although this Court disagreed with Plaintiffs' interpretation of Section 204(g), it felt compelled by the Ninth Circuit's decisions in Michael and Shaw to adopt their interpretation of the anti-cutback rule. (July 19 Opinion at 13-25.) The Secretary's Regulations, however, directly refute this interpretation of the statute and require dismissal of Plaintiffs' claims.1 The Regulations clarify that if "one amendment . . . increases participants' accrued benefits and the other amendment . . . decreases participant's accrued benefits, the amendments are treated as one amendment and will only violate section [204(g)] if, for any participant, the net effect is to decrease participants' accrued benefit as of that applicable amendment date." Treas. Reg. § 1.411(d)-3(a)(ii) (2005), 70 Fed. Reg. at 47116 (emphasis added). Likewise, a series of amendments violate Section 204(g)(2) only if, "after the two amendments, the net dollar amount of any early retirement annuity . . . is lower than it would have been without the two amendments." Treas. Reg. §
1

Indeed, the Regulations specifically respond and are contrary to the decision in Michael. 70 Fed. Reg. at 47111 at n.3.

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1.411(d)-3(b)(iii), 70 Fed. Reg. at 47116-117 (emphasis added). Thus, the Regulations plainly bar Plaintiffs' anti-cutback claims for, as this Court noted, there is no dispute that the challenged amendments increased Plaintiffs' net retirement annuity. (July 19 Opinion at 13.) Furthermore, the Regulations dispel the notion that the anti-cutback rule protects discrete components of a plan's benefit formula from reduction if the overall benefit is not reduced. The Regulations give the following example: Plan A provides an annual benefit of 2% of career average pay times years of service commencing at normal retirement age (age 65). Plan A is amended . . . to provide for an annual benefit of 1.3% of final pay times years of service . . . . * * * Participant M's accrued benefit as of the applicable amendment date is increased from $12,000 per year at normal retirement age (2% times $37,500 times 16 years of service) to $14,000 per year at normal retirement age (1.3% times $67,308 times 16 years of service). * * * Conclusion. The amendment does not violate the requirements of section [204(g)(1)] with respect to Participant M (whose accrued benefit has been increased) . . . . Treas. Reg. § 1.411(d)-3(a)(4) (2005), 70 Fed. Reg. at 47116 (emphasis added). Under this hypothetical example, the amendment did not violate the anti-cutback rule, even though it reduced the multiplier from 2% to 1.3%, because the amendment increased Participant M's net annuity. In other words, the mere reduction of a component of a benefit formula does not violate ERISA Section 204(g). Likewise, the Regulations also demonstrate that, even if an amendment to a pension formula would otherwise violate ERISA Section 204(g) because the new formula would decrease the benefit payable, there is no violation if a "savings clause" limits the operation of the amendment by protecting against an actual reduction of the accrued benefit. An example in the Regulations makes this clear:
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Participant N's accrued benefit as of the applicable amendment date is decreased from $6,000 per year at normal retirement age (2% times $50,000 times 6 years of service) to $4,000 per year at normal retirement age (1.3% times $51,282 times 6 years of service). * * * Plan A includes a provision under which Participant N's accrued benefit cannot be less than what it was immediately before the applicable amendment date (so that Participant N's accrued benefit could not be less than $6,000 per year at normal retirement age). * * * Conclusion. The amendment does not violate the requirements of section [204(g)(1)] . . . with respect to Participant N (although Participant N would not accrue any benefits until the point in time at which the new formula amount would exceed the amount payable under the minimum provision, approximately 3 years after the amendment becomes effective). Id. Moreover, the Regulations contain another example which clarifies that this same analysis applies equally under Section 204(g)(2). See Treas. Reg. § 1.411(d)-3(b)(4), 70 Fed. Reg. at 47117. In other words, even if Plaintiffs were correct in suggesting that the December 31, 1983 amendment of the benefit formula theoretically could have reduced their accrued benefits, the Retirement Plan's savings clause in § 4.10(c) would have prevented the amendment from actually cutting back their accrued benefits. Thus, there was no violation of Section 204(g). B. The Supreme Court's Decision In Brand X Establishes That The Regulations, Rather Than Michael, Control This Case.

In its July 19 Opinion, this Court noted that it was constrained to reach an illogical conclusion by Shaw and Michael. The Court also noted that "it would overrule Shaw and Michael if it had the power, and urges the Ninth Circuit to do so if the Treasury Department's proposed regulation does not become law before this case is appealed." (July 19 Opinion at 25.) Since then, the Secretary finalized the proposed regulations, and the Regulations are controlling in this case. Pursuant to the Supreme Court's recent
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decision in Brand X, this Court must defer to a newly promulgated agency interpretation of a statute even in the face of contrary Circuit court precedent. Even assuming Michael applies to this case,2 therefore, this Court should defer to the Regulations and dismiss Plaintiffs' claims. In Brand X, the Federal Communications Commission ("FCC") adopted regulations establishing that "broadband Internet service provided by cable companies is an `information service' but not a `telecommunications service' under the [Telecommunications] Act." 125 S.Ct. at 2697. Many parties petitioned for judicial review of the regulations, challenging the FCC's conclusion that cable internet providers did not provide a "telecommunications service." By lottery, the Ninth Circuit decided these challenges in the first instance. The Ninth Circuit, however, did not analyze the regulations under the deferential Chevron framework. Id. at 2698. Instead, the appellate court held that its own previous interpretation of the statute in AT&T Corp. v. Portland, 216 F.3d 871 (9th Cir. 2000), precluded the FCC's interpretation, and remanded the case to the FCC for further proceedings. Id. The Supreme Court reversed, holding that deference to the FCC's regulations was required notwithstanding the Ninth Circuit's prior contrary precedent. The Supreme Court stated: A court's prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion. * * * Only a judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a
2

As discussed in Defendants' Motion for Reconsideration, Michael is distinguishable from the instant case and does not control this Court's decision in any event. (Defs.' Motn. for Recons. at 4-11). If the Court agrees, then there is no need to consider the Regulations' impact on Michael's precedential value.

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conflicting agency construction. Brand X, 125 S.Ct. at 2700 (emphasis added). Thus, a court must follow an agency interpretation entitled to Chevron deference even in the face of contrary Circuit precedent.3 Brand X, 125 S.Ct. 2700-701. See also, e.g., Heimmermann v. First Union Mortg. Corp., 305 F.3d 1257, 1263 (11th Cir. 2002) ("Courts generally must defer to an agency statutory interpretation that is at odds with circuit precedent, so long as the agency's answer is based on a permissible construction of the statute"); Schisler v. Sullivan, 3 F.3d 563, 564-65 (2d Cir. 1993) (holding that the district court should have deferred to new agency regulations rather than prior Circuit precedent). Here, the Ninth Circuit did not hold in Michael that ERISA Section 204(g) is unambiguous. Indeed, Section 204(g) cannot be read as unambiguously precluding a plan amendment that reduces an element of the benefit formula even if that amendment increases participants' net benefits. (July 19 Opinion at 14-18) (discussing the interpretation of Section 204(g)). The Ninth Circuit's holding in Michael is simply one reading of a statutory provision that has been interpreted in many different ways by the courts (and now by the agency charged with interpreting the statute). Since Michael did not hold that Section 204(g) was unambiguous, and because the Regulations are plainly entitled to Chevron deference, this Court should apply the Regulations and dismiss Plaintiffs' anti-cutback claims. 1. The Relevant Portions Of The Regulations, Which Interpret The Statute, Apply To This Case.

Plaintiffs, no doubt, will argue that this Court should not apply these Regulations "retroactively" to this case. Indeed, Plaintiffs will likely trot out the well-hewn, but ultimately inapplicable, maxim that regulations are presumed not to have retroactive effect
3

Prior Ninth Circuit precedent required and allowed courts to defer to new agency regulations only in certain, narrower, circumstances. See, e.g., Mesa Verde Construction Co. v. Northern California District Counsel of Laborers, 861 F.2d 1124 (9th Cir. 1988). See also, e.g., Mashiri v. Ashcroft, 283 F.3d 1112 (9th Cir. 2004); Landha v. Immigration & Naturalization Serv., 215 F.3d 889 (9th Cir. 2000). Because these decisions conflict with the Supreme Court's holding in Brand X, they are no longer good law.

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unless they contain a clear expression of intent that they do so. See, e.g., Bowen v. Georgetown Univ. Hosp., 488 U.S. 203, 208 (1988) ("administrative rules will not be construed to have retroactive effect unless their language requires this result."); Landgraf v. USI Film Prods., 511 U.S. 244, 264 (1994) (discussing the "axiom that `[r]etroactivity is not favored in the law.'"); Kankamalage v. Immigration & Naturalization Serv., 335 F.3d 858, 862 (9th Cir. 2003) (a regulation can be applied retroactively only when its language is "so clear that it could sustain only one interpretation."). Although these principles are undoubtedly correct, they do not apply to the relevant portions of the Regulations. It is true that regulations that create new legal rules, i.e. that "impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed," are presumed not to apply retroactively. Landgraf, 511 U.S. at 280. On the other hand, regulations that simply interpret or clarify existing statutes or legal rules, like judicial interpretations,4 generally apply to disputes which occurred before the regulation was adopted or became effective. See Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735, 744 n.3 (1996) (applying and deferring to regulation promulgated with an effective date after the relevant events because "it would be absurd to ignore the agency's current authoritative pronouncement

4

See, e.g., Rivers v. Roadway Express, Inc., 511 U.S. 298, 311-12 (1994) ("The principle that statutes operate only prospectively, while judicial decisions operate retrospectively, is familiar to every law student . . .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.") (internal quotation marks omitted).

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of what the statute means.");5 Manhattan Gen. Equip. Co. v. Commissioner of Internal Revenue, 297 U.S. 129, 135 (1936) (applying to antecedent facts a regulation which "pointed the way, for the first time, for correctly applying the . . . statute" because "[i]t is no more retroactive in its operation than is a judicial determination construing and applying a statute to a case in hand."); U.S. West Comm., Inc. v. Jennings, 304 F.3d 950, 957-58 (9th Cir. 2002) ("Because the regulation promulgated by the FCC merely interprets the substantive provisions of the Act, it does not present retroactivity concerns.") (emphasis in original); AT&T Comm. Sys. v. Pacific Bell, 203 F.3d 1183, 1187 (9th Cir. 2000) (same).6 In this case, the relevant portions of the Regulations are clarifying interpretations of ERISA's long standing anti-cutback rule, not statements of new legal rules. As such, they can and should be treated as authoritative interpretations of the statutory language that is central to the current dispute. The prospective rulemaking aspects of the Regulations, however, are quite different in scope and effect. Congress mandated in
5

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6

But cf. Pauly v. U.S. Dep't of Agriculture, 348 F.3d 1143, 1152 (9th Cir. 2003) (holding that Smiley "does not apply to a situation . . . where an agency's new regulation represents an explicit break with prior practice" and stating that a regulation ought not be applied retroactively "when the agency has expressly decided against retroactive application"). Pauly is distinguishable from the instant case, however, because the regulations at issue in Pauly created new legal rules that conflicted directly with the old rules. In the instant case, the Regulations not only do not represent an "an explicit break" with prior law, but actually reaffirm and expound upon existing interpretations of the statute. See Treas. Reg. § 1.411(d)-3(b) (1977), 42 Fed. Reg. 42340. Pauly is also distinguishable because the regulation at issue specified in no uncertain terms, "no retroactive effect will be given to this rule." 65 Fed. Reg. 50401. See also, e.g., Heimmermann, 305 F.3d at 1260 ("because we accept that . . . the 2001 SOP . . . [is a] clarification[] of existing law and not [a] new rule[] or regulation[], no problem with the retroactive application of the statement[] exists."); 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 the law which always applied); Piamba Cortes v. American Airlines, Inc., 177 F.3d 1272, 1283 (11th Cir. 1999) ("concerns about retroactive application are not implicated when an amendment that takes effect after the initiation of a lawsuit is deemed to clarify relevant law rather than effect a substantive change in the law."); Farmers Tel. Co., Inc. v. Federal Communications Comm., 184 F.3d 1241, 1250 (10th Cir. 1999) (finding no problem in applying regulation retroactively because it merely clarified or explained existing law); Orr v. Hawk, 156 F.3d 651, 654 (6th Cir. 1998) ("So long as a change in a regulation does not announce a new rule, but rather merely clarifies or codifies an existing policy, that regulation can apply retroactively.").

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EGTRRA that the Secretary promulgate rules that would establish binding legal principles beyond merely interpreting the statute. EGTRRA required the Secretary to adopt rules: providing that the requirements of section [204(g)(2)] do not apply to any amendment that reduces or eliminates early retirement benefits or retirement-type subsidies that create significant burdens or complexities for the plan . . . unless such amendment adversely affects the rights of any participant in a more than de minimis manner. 70 Fed. Reg. at 47110. The Secretary incorporated these new rules into Sections 1.411(d)-3(c) through (e) of the Regulations. Treas. Reg. § 1.411(d)-(3)(c)-(e), 70 Fed. Reg. at 47118-121. These sections of the Regulations create new legal rules that never existed before EGTRRA, and are, therefore, subject to the general prohibition on retroactive application of new legal duties or obligations. To clarify that the Secretary will not seek retroactive enforcement of these sections (e.g. by disqualifying a plan retroactively), the Secretary made these sections prospective in operation. 70 Fed. Reg. at 47115 ("Plan amendments adopted before August 12, 2005 are to be evaluated in light of the applicable authorities without regard to these regulations. No implication is intended concerning whether or not a rule adopted prospectively in these regulations is applicable law before the effective date in these regulations.") (emphasis added.)7 By contrast, no statute provided the Secretary with rule making authority over the portions of the Regulations that are relevant to this matter, 1.411(d)-3(a) and (b). Thus, the Secretary adopted these sections, by necessity, pursuant to his "interpretive jurisdiction" over ERISA Section 204(g). 70 Fed. Reg. at 47110. These portions of the Regulations, therefore, do not (and, in fact, cannot) create new legal rules or obligations. Rather, they offer:
7

The proposed version of the Regulations also supports this construction of the Regulations' Effective Date language. The proposed regulations stated, "When these regulations are finalized, the IRS . . . will not treat a plan as failing to satisfy the requirements of sections 401 and 411 merely because of a plan amendment [which violates the new rules]. . . if the amendment is adopted and effective prior to the . . . finalization of these proposed regulations." 69 Fed. Reg. at 13775. In other words, the Regulations' Effective Date language specifies that the IRS will not seek to enforce the new rules retroactively against qualified plans.

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9

general guidance on section [204(g)], including the meaning of the terms used therein, the scope of the section [204(g)(1)] protection against plan amendments decreasing a participant's accrued benefit, and the scope of section [204(g)(2)] protection for early retirement benefits, retirement-type subsidies, and optional forms of benefits. Id. The Secretary also specifically noted that: the rules in former § 1.411(d)-3 [which explained § 204(g)] generally have been carried over to this Treasury Decision, except to the extent needed to reflect statutory changes (such as the elimination of class year vesting and the enactment of section [204(g)(2)]). Id. at 47110-11. Thus, "[t]he regulations generally retain the rules from former § 1.411(d)-3 . . . [and] also provide that these rules apply to section [204(g)(2)] protected benefits." Id. at 47111 (emphasis added). The regulations contained in Section 1.411(d)-3(a), therefore, restate and explain the simultaneous amendment rule that has existed in former Section 1.411(d)-3(b) since 1977. Compare Treas. Reg. § 1.411(d)-3(b) (1977), 42 Fed. Reg. 42340 with Treas. Reg. § 1.411(d)-3(a) (2005), 70 Fed. Reg. at 47116. Likewise, new Section 1.411(d)-3(b) clarifies that this pre-existing rule applies to ERISA Section 204(g)(2) protected benefits.8 The Secretary's current authoritative interpretation of this long standing rule does not create any new legal obligations and should be applied to this case. See, e.g., Smiley, 517 U.S. at 739-40, 744 n.3.9
8

The Regulations note that this application of the "simultaneous amendment" rule to ERISA 204(g)(2) protected benefits is inconsistent with Michael. 70 Fed. Reg. 47111, n.3. As discussed in Section III below, and in Defendants' Motion for Reconsideration, however, this case involves only Section 204(g)(1) protected benefits. Thus, even if the Court finds that the Effective Date language bars the retroactive application of the Regulations' extension of the simultaneous amendment rule to ERISA Section 204(g)(2) protected benefits, the longstanding "simultaneous amendment" rule still controls this Section 204(g)(1) case. See also Regions Hosp. v. Shalala, 522 U.S. 448, 456 (1998) (applying new regulation to "antecedent facts" because the "rule calls for application of the . . . principles in effect at the time the costs were incurred. A correct application of those principles, not the application of any new reimbursement principles, is the rule's objective."); Anderson Bros. Ford v. Valencia, 452 U.S. 204 (1981) (applying 1980 Federal Reserve Board interpretation to acts that occurred in 1977).

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10

In Smiley, the Supreme Court addressed the definition of the term "interest" in the National Bank Act. 517 U.S. at 737-739. After the lower courts had disposed of the petitioner's claims, but during the pendency of her appeal, the Comptroller of the Currency adopted a regulation regarding the term "interest." Id. at 739-40. The regulation became effective approximately 4 years after the petitioner first sued. 61 Fed. Reg. at 4849. Nevertheless, the unanimous Supreme Court deferred to the regulation and rejected the petitioner's contention that it should not be applied retroactively stating, "[w]here . . . a court is addressing transactions that occurred at a time when there was no clear agency guidance, it would be absurd to ignore the agency's current authoritative pronouncement of what the statute means." Smiley, 517 U.S. at 744 n.3. In this case, the Secretary had not promulgated any clear guidance regarding whether ERISA Section 204(g) protected the components of a benefit formula, separate and apart from a participant's "accrued benefit," when Defendants amended the Retirement Plan in 1983. See Treas. Reg. § 1.411(d)-3(b) (1977). Likewise, the Secretary had not provided such definitive guidance when the Ninth Circuit handed down its Shaw and Michael decisions. Id. Fortunately, the Secretary has now adopted a comprehensive interpretation of ERISA's anti-cutback rule which directly answers the question at hand. Thus, "it would be absurd to ignore the agency's current authoritative pronouncement of what the statute means" in deciding this case. Smiley, 517 U.S. at 744 n.3. This Court should defer to the Secretary's Regulations and dismiss Plaintiffs' anti-cutback claims.10

Esden also provides strong support for this conclusion. In Esden, the Second Circuit was asked to decide if a 1991 lump sum distribution from a cash balance plan violated ERISA. In deciding this question, the Second Circuit deferred to a 1996 IRS proposed rule, Notice 96-8, over the defendant's objection that it should not be applied retroactively. Esden, 229 F.3d at 171-72. In fact, the unanimous panel did so even though Notice 96-8 stated that "the anticipated regulations will be effective prospectively." Notice 96-8 at 26.

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III.

THE REGULATIONS CONFIRM THAT ERISA SECTIONS 204(g)(1) AND 204(g)(2) PROTECT DIFFERENT BENEFITS AND THAT MICHAEL ADDRESSES ONLY SECTION 204(g)(2) PROTECTED BENEFITS Even if the Court does not defer to the Regulations, the newly promulgated

interpretations of Section 204(g) nonetheless support Defendants' contention that ERISA sections 204(g)(1) and 204(g)(2) protect different benefits. As explained in Defendants' Motion for Reconsideration, Michael and Central Laborers' Pension Fund v. Heinz, 541 U.S. 739 (2004), which both address violations of section 204(g)(2), are not dispositive of this action. (See Defs.' Mot. for Recons. at 2-8.) The Regulations unequivocally confirm that ERISA Sections 204(g)(1) and 204(g)(2) protect different benefits. For example, the Secretary notes that ERISA Section 204(g)(1), protects "accrued benefits," which, in the case of a defined benefit plan, is a participant's "annual benefit commencing at normal retirement age." Treas. Reg. § 1.411(d)-3(a)(1), 70 Fed. Reg. at 47116; 70 Fed. Reg. at 47110. The Secretary explains further that the Retirement Equity Act of 198411 added ERISA section 204(g)(2), which "provides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy, or eliminating an optional form of benefit . . . is treated as impermissibly reducing accrued benefits." Id. (emphasis added). See also, Treas. Reg. § 1.411(d)-3(b)(1)(i), 70 Fed. Reg. at 47116 (noting that an amendment that reduces or eliminates section 204(g)(2) benefits is "treated as decreasing an accrued benefit" even though such an amendment does not in fact reduce an "accrued benefit") (emphasis added). In other words, and as explained in Defendants' Motion for Reconsideration, an amendment that eliminates or reduces a section 204(g)(2) benefit is deemed to reduce accrued benefits under section 204(g)(1), even if it did not in fact reduce an "accrued benefit." (See Defs.' Mot. for Recons. at 3.) Moreover, the Secretary specifically distinguishes between "the scope of the [ERISA Section 204(g)(1)] protection against plan amendments decreasing a participant's
11

28

Public Law 98-397 (98 Stat. 1426).

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accrued benefit, and the scope of [ERISA Section 204(g)(2)] protection for early retirement benefits, retirement-type subsidies, and optional forms of benefit."12 70 Fed. Reg. at 47110.13 The Secretary's explicit acknowledgment of the distinction between ERISA sections 204(g)(1) and 204(g)(2) is neither surprising nor novel, as the distinction is readily apparent from the face of the statute and the legislative history. (See Defs.' Mot. for Recons. at 4.) Yet, the distinction between (g)(1) and (g)(2) is critical to understanding why Michael is not dispositive in this case. In the preamble, the Secretary explains that the Regulations retain the former rule that, in determining whether a participant's "accrued benefit" is decreased in violation of ERISA section 204(g)(1), "all of the amendments to the provisions of a plan affecting, directly or indirectly, the computation of accrued benefits are taken into account and, in determining whether a reduction has occurred, all plan amendments with the same applicable amendment date . . . are treated as one amendment." 70 Fed. Reg. at 47111. See also Treas. Reg. § 1.411(d)-3(a)(2)(i) and (ii) (same).14 The Regulations explain further that with respect to ERISA section 204(g)(1), if "one amendment, standing alone, increases participants' accrued benefits and the other amendment, standing alone, decreases participants' accrued benefits, the amendments are treated as one amendment and will only violate [ERISA Section 204(g)] if, for any participant, the net effect is to decrease participants' accrued benefits as of that applicable amendment date." Treas.
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The structure of the Regulations further evidence the distinction between section 204(g)(1) accrued benefits and section 204(g)(2) protected benefits. Compare Treas. Reg. § 1.411(d)-3(a) "Protection of accrued benefits" with Treas. Reg. § 1.411(d)-3(b) "Protection of [ERISA section 204(g)(2)] protected benefits." Indeed, the Regulations identify circumstances under which ERISA Section 204(g)(2) protected benefits may be reduced or eliminated if the protected benefits pose significant burdens and complexities for a plan. See Treas. Reg. § 1.411(d)-3(b)(2)(i), 70 Fed. Reg. at 47117. Notably, no similar provisions are included for ERISA section 204(g)(1) benefits. See former Treas. Reg. § 1.411(d)-3(b) (1977), 42 Fed. Reg. 42340 ("all the provisions of a plan affecting directly or indirectly the computation of accrued benefits which are amended with the same adoption and effective date shall be treated as one amendment.").

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Reg. § 1.411(d)-3(a)(2)(ii), 70 Fed. Reg. at 47116 (emphasis added). See also Treas. Reg. § 1.411(d)-3(a)(4), 70 Fed. Reg. at 47116 (providing examples). Notably, the Regulations address separately the impact of amendments affecting section 204(g)(2) benefits, and specifically extend the "net effect" rules "to [ERISA Section 204(g)(2)] protected benefits in the same manner as they apply to accrued benefits described in [ERISA Section 204(g)(1)]." Treas. Reg. § 1.411(d)-3(b)(1)(iii), 70 Fed. Reg. at 47116. Moreover, the Secretary expressly acknowledges that it is this extension of ERISA section 204(g)(1)'s "net effect" rule to ERISA section 204(g)(2) protected benefits that is "contrary to the analysis in Michael v. Riverside Cement." 70 Fed. Reg. at 47111, n.3. Thus, as explained in Defendants' Motion for Reconsideration, and as the Secretary confirms, Michael rejected only the application of the "net effect" rule to Section 204(g)(2) benefits. (See Defs.' Mot. for Recons. at 4-7); 70 Fed. Reg. at 47111, n.3. Michael did not address the applicability of the "net effect" rule to accrued benefits under section 204(g)(1). Michael, therefore, is inapposite to the instant action. IV. IF THE COURT DOES NOT DEFER TO THE SECRETARY'S CONSIDERED INTERPRETATION OF ERISA'S ANTI-CUTBACK RULE, THE COURT SHOULD CERTIFY THIS MATTER FOR AN INTERLOCUTORY APPEAL SO THAT THE NINTH CIRCUIT CAN CLARIFY ITS HOLDING IN MICHAEL. As discussed above, Defendants submit that the Regulations apply to and control the disposition of this case. If this Court does not defer to the Secretary, however, and decides that Michael controls this case, then the Court should certify this matter for interlocutory appeal to the Ninth Circuit. The Secretary's interpretation of ERISA is directly contrary to Plaintiffs' and the Court's broad interpretation of Michael. Before the Court and the parties engage in protracted, costly, and potentially unnecessary litigation, this Court should give the Ninth Circuit an opportunity to clarify or narrow its holding in Michael in light of the authoritative interpretation of ERISA the Secretary adopted after notice and extensive public comment. Indeed, the Supreme Court's instructions in Brand X virtually compel this conclusion. Defendants, therefore, respectfully request that this
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Court reconsider its decision and dismiss Plaintiffs' anti-cutback claims, or in the alternative, certify this question for interlocutory appeal to the Ninth Circuit. Respectfully submitted this 6th day of September, 2005. OSBORN MALEDON, P.A. By: s/ Azeez Hayne_______________________ 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 Promislo 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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CERTIFICATE OF SERVICE I do certify that on September 6, 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
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Susan J. Martin Jennifer Lynn Kroll Martin & Bonnett P.L.L.C. 3300 N. Central Avenue, Suite 1720 Phoenix, Arizona 85012-2517 Attorney for Plaintiff s/ Azeez Hayne