By Pension and Benefits Editorial Staff
ESOP participants who, following a plan amendment, were denied their vested right to hold company stock through age 68 and forced to sell their stock at below market price, were entitled to pursue their fiduciary breach and other ERISA claims as a class action, according to a federal trial court in Pennsylvania. Individual class members were not required to show detrimental reliance on the alleged misrepresentations that may have precluded satisfaction of the commonality and typicality conditions required under Rule 23 of the Federal Rules of Civil Procedure for class certification.
ESOP amendments eliminate stock rights. Wawa, Inc., the owner of chain of convenience stores and gas stations, maintained an ESOP for its employees. The ESOP initially permitted all retired and terminated employees to hold Wawa stock through the ESOP after their employment ended. A summary plan description (SPD) of the plan further stated that no amendment to the plan would reduce benefits that had been earned or divest a participant of any entitlement to a benefit. In addition, the SPD stated that participants with a benefit over $5,000 could elect to delay payment until April 1 of the year following the year they attained age 68.
In 2014, Wawa amended the ESOP to remove former employees from the plan. The amendment further required the plan trustee to liquidate the ESOP stock of any participant who terminated employment after January 1, 2015. All liquidated proceeds would be transferred to the participants’ 401(k) accounts.
In August 2015, Wawa again amended the ESOP, requiring the liquidation of the ESOP stock of any participant who terminated employment before January 1, 2015. Terminated participants received $6,940 per share of Wawa stock and were required to pay a $50 distribution fee.
Terminated ESOP participants who were divested of their Wawa stock because of the plan amendments filed suit on behalf of a proposed class of terminated employees, asserting multiple ERISA claims. Among the claims was that Wawa and plan fiduciaries breached their ERISA duties by authorizing the ESOP’s sale of Wawa stock in the participants’ ESOP accounts at below fair market value and misrepresenting that terminated employees could hold Wawa stock in their ESOP accounts until age 68. In addition, the participants charged that Wawa: breached ERISA’s anti-cutback rule by eliminating the right of terminated employees to hold Wawa stock through age 68; violated ERISA by furnishing materially misleading SPDs; and failed to properly monitor plan trustees. Finally, the participants averred that the 2015 amendments should be invalidated under unilateral contract principles because they violated the terms of the plan then in effect.
The participants sought the equitable remedies of reformation and surcharge under ERISA Sec. 502(a)(3). Specifically, the participants requested a declaration of their right under the ESOP to hold Wawa stock through age 68 and an injunction requiring the company to conform the text of the plan to that declaration.
The participants moved to certify a class and two subclasses, covering employees who were all affected by the plan amendments, but who had terminated employment at different times. Wawa did not contest class certification for the majority of the claims. However, it argued that the participants’ fiduciary duty misrepresentation and SPD misrepresentation claims could not be certified because the claims lacked commonality and typicality. In addition, Wawa maintained that the claim seeking to invalidate the plan amendments could not be certified because it was without merit and also lacked commonality and typicality.
Rule 23 class certification. Parties seeking class action status must comply with the numerosity, commonality, typicality, and adequacy of class representative requirements of Rule 23 of the Federal Rules of Civil Procedure. The court had, in an earlier settlement action (Pfeifer v. Wawa, Inc., No. 16-497 (2018)) certified a similar class. However, the court did not rely on its analysis in the settlement case as controlling in the instant case.
Fiduciary misrepresentation claim does not require detrimental reliance. Wawa argued that the participants’ fiduciary misrepresentation claim did not satisfy the Rule 23 commonality and typicality requirements because each putative subclass member would need to show individual detrimental reliance on the alleged misrepresentations. The participants countered that the United States Supreme Court in Cigna Corp. v. Amara (563 U.S. 421 (2011) eliminated the detrimental reliance requirement for ERISA Sec. 404 misrepresentation claims in which reformation and surcharge are sought.
Wawa attempted to distinguish Cigna as inapplicable because the case did not involve an ERISA Sec. 404 claim and because the Supreme Court’s discussion of equitable remedies was dicta. The trial court, however, found Cigna to be “highly persuasive” and dismissed precedents cited by Wawa for failing to address class certification or to consider the ERISA Sec. 404 detrimental reliance requirement in light of Cigna. In addition, the court found rulings from the Second Circuit (Osberg v. Foot Locker, 862 F. 3d 198 (2017)) and the Eighth Circuit (Silva v. Metro. Life Ins., 762 F.3d 711 (2014)), in which detrimental reliance was rejected as a condition for reformation and surcharge, to be similarly “persuasive.” As a result, the court concluded that the participants did not need to show ERISA Sec. 404(a) detrimental reliance to seek reformation and surcharge under ERISA Sec. 502(a)(3).
Presumption of class-wide reliance. Wawa maintained that even if the detrimental reliance requirement did not apply, the participants could not satisfy the commonality requirement because individual members of the putative subclass would still need to show detrimental reliance in order to obtain reformation or surcharge. The court disagreed, stressing that, even if detrimental reliance was necessary to establish an ERISA Sec. 404 violation or to seek equitable relief, such reliance could be “presumed” on a class-wide basis because of class-wide communications (e.g. SPDs) that indicated to participants that they would be able to hold their stock until age 68.
Wawa countered that class-wide reliance could not be presumed because an individual class representative conceded that he had relied only on oral representations, thereby raising individualized issues of proof. The court, however, dismissed the argument, explaining that there was no evidence suggesting that the oral statements differed from the written, class-wide statements that gave rise to the participants’ claims.
Materially misleading SPDs. The participants also sought reformation and surcharge to redress Wawa’s alleged furnishing of materially misleading SPDs to the Retired Employee Subclass and to the Terminated Pe-2014 Employee Subclass. Wawa, again, maintained that the participants could not pursue the claim as a class because they could not establish that they detrimentally relied on the SPDs, negating commonality and typicality.
The court first noted that the Third Circuit has never conditioned ERISA Sec. 102 and ERISA §104 SPD misrepresentation claims on detrimental reliance. Moreover, Cigna’s holding that detrimental reliance was not required to redress a claim for additional benefits stemming from a material misleading SPD, was directly applicable to the Wawa plan participants’ action.
SOURCE: Cunningham v. Wawa, Inc. (DC PA).
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