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DICIOCCIO v. DUQUESNE LIGHT CO.

June 29, 1995

AMERICO DiCIOCCIO, STANLEY A. BIKULEGE, WALTER E. BODNAR, ALBERT J. BARTOSH, RALPH H. STIDHAM, JOHN J. McCLOSKEY, individually, and on behalf of all others similarly situated, Plaintiffs,
v.
DUQUESNE LIGHT COMPANY, RETIREMENT PLAN FOR EMPLOYEES OF DUQUESNE LIGHT COMPANY, SUPPLEMENTAL RETIREMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF DUQUESNE LIGHT COMPANY, AND DIANNA L. GREEN, Defendants.



The opinion of the court was delivered by: DIAMOND

 DIAMOND, D.J.

 Plaintiffs, a class of retirees at Duquesne Light Company ("Duquesne Light"), commenced this action pursuant to the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., seeking a declaration that the defendants are required to include in the calculation of pension benefits under two retirement plans income from the plaintiffs' exercise of stock option and appreciation rights acquired pursuant to an incentive plan. Plaintiffs contend that they are entitled to a recalculation of their benefits consistent with the formulas contained in the retirement plans. A subclass of plaintiffs also contend that their accrued pension benefits were reduced improperly due to a change in the social security wage base prior to their retirement date. In addition to the substantive relief request, plaintiffs seek costs, expenses and reasonable attorney's fees associated with this action. Presently before the court are cross-motions for summary judgment. Both parties mainly rely on the same documentary evidence and deposition testimony to support their positions and contend that the factual record demonstrates that they are entitled to judgment as a matter of law. For the reasons noted below, the parties' cross-motions for summary judgment will be granted in part and denied in part.

 Standard of Review

 Fed.R.Civ.P. 56(c) provides that summary judgment may be granted if, drawing all inferences in favor of the non-moving party, "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law." Summary judgment may be granted against a party who fails to adduce facts sufficient to establish the existence of any element essential to that party's claim, and upon which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). The moving party bears the initial burden of identifying evidence which demonstrates the absence of a genuine issue of material fact. Once that burden has been met, the non-moving party must set forth "specific facts showing that there is a genuine issue for trial, " or the factual record will be taken as presented by the moving party and judgment will be entered as a matter of law. Matsushita Electric Industrial Corp. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986) (quoting Fed.R.Civ.P. 56(a), (e)) (emphasis in Matsushita). An issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 The recent Supreme Court cases discussing the standards for granting summary judgment have established that the motion "is no longer a disfavored procedural shortcut ...." Big Apple BMW, Inc. v. BMW of North America, 974 F.2d 1358, 1362 (3d Cir. 1992), cert. denied, 507 U.S. 912, 122 L. Ed. 2d 659, 113 S. Ct. 1262 (1993). While the court is not permitted to weigh the facts or the competing inferences therefrom, the court is no longer required to "turn a blind eye" to the weight of the evidence. Id. In meeting its burden of proof, the "opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). In establishing a genuine issue of material fact, the opponent "cannot merely rely upon conclusory allegations in [its] pleadings or in memoranda and briefs." Harter v. GAF Corp., 967 F.2d 846 (3d Cir. 1992). Likewise, mere conjecture or speculation by the party resisting summary judgment will not provide a basis upon which to deny the motion. Robertson v. Allied Signal, Inc., 914 F.2d 360, 382-83 n.12 (3d Cir. 1990).

 Background

 The named plaintiffs are representatives of the following class which the court certified on October 28, 1993:

 
All participants or former participants in the Duquesne bight Long-Term Incentive Plan [Incentive Plan] who have retired or will retire after March 1, 1990 under the retirement plan for employees of Duquesne Light Company [Retirement Plan] and/or the Supplemental Retirement Plan for Non-represented Employees of Duquesne Light [Supplemental Plan].

 Document 17 at p. 5. On February 1, 1994, the Chairman of the Board and Chief Executive Officer of Duquesne Light issued a notice which indicated that the Board of Directors had amended the Retirement Plan and the Supplemental Plan ("Plans") to exclude from the Plans' definitions of compensation the type of compensation at issue. On February 3, 1994, the Plans' Administrator notified the participants under both Plans about the upcoming change. The notice indicated that the amendment was to operate prospectively. The plaintiffs do not explicitly challenge the propriety of the Board's amendments to the Plans nor seek relief beyond the amendment's effective date of March 1, 1994. Defendants are the Plans' sponsor, the Plans and the administrator of the Plans.

 The Retirement Plan is an ERISA defined benefit pension plan designed to cover management employees who are represented by collective bargaining units. The Supplemental Plan is an ERISA defined benefit pension plan which provides benefits to employees of Duquesne Light who are not in collective bargaining units. The Retirement Plan and the Supplemental Plan were both amended on or about January 1, 1985, and modified on March 10, 1987. Both plans are qualified plans and pursuant to the defined benefit formulas set forth therein contain the following definition of compensation:

 
"Compensation" means, with respect to a calendar year, the amounts reported by the employer to the Internal Revenue Service on Form W-2 as the participant's compensation for the year; but excluding any amounts attributable to relocation expenses, transportation mileage, imputed income derived from insurance premiums and such other extraordinary items of renumeration as the plan administrator shall determine from time to time pursuant to such uniform and nondiscretionary rules as he shall adopt.

 The relevant summary plan description ("SPD") for the Retirement Plan, which became effective as of January 1, 1989, provides:

 Compensation:

 
The renumeration paid to an eligible employee for the performance of job duties, including wages or salary, overtime and/or shift premiums, gratuities and other payments which were reported as income for federal income tax purposes on that employee's W-2. Also included are all amounts contributed by the employer on behalf of that employee under a wage-salary reduction agreement (e.g., under a 401(k) retirement savings plan). Compensation does not include amounts attributable to transportation, mileage, relocation expenses, meal allowances, imputed income from insurance premium payments or other similar extraordinary payments or amounts in excess of allowable limits under the law.

 The SPD for the Supplemental Plan was last published in 1981. After November 1989, an employee requesting information on the Supplemental Plan received the SPD for the Retirement Plan with an explanation which indicated that the SPD generally covered both the Retirement Plan and the Supplemental Plan and that a new SPD for the Supplemental Plan would be published after finalization of the new Internal Revenue Service regulations applicable to that plan. The 1981 SPD for the Supplemental Plan remained available to participants upon request.

 In 1987, Duquesne Light initiated a Long-Term Incentive Plan ("LTIP"). The LTIP was first discussed by the Board of Directors at a meeting of the Compensation Committee on January 15, 1987. Duquesne Light had experienced financial difficulties in 1986 and 1987. There were no merit increases for Duquesne Light employees in 1985. There were no merit increases for employees in salary grades 18 and above in 1986. There were no merit increases for employees in 1987. The company had experienced lost sales, a reduction in dividends, a decrease in the price of its stock and the closing of plants and layoffs. In light of this background, the LTIP was presented to the Compensation Committee in order to provide it "with an independent indication of the reasonableness of the effect of the plan on total salaries." The chairman of the committee indicated that "with the company's recent cuts in personnel, company employees had assumed additional work responsibilities and should, if possible, receive some reward and recognition for their efforts." Senior management formally presented the LTIP to the Board of Directors on January 20, 1987, and described it as the "1987 Proposed Salary Program."

 After the Board formally adopted the LTIP, the LTIP was presented to the employees in a letter dated February 11, 1987, from Wesley von Schack, Duquesne Light's CEO, which stated: "We plan to use Duquesne Light common stock options as a means of compensation in 1987." *fn1" Management employees were then given a presentation regarding the LTIP and therein it was described as "a performance driven compensation program." Thereafter, numerous documents were distributed to employees regarding the LTIP, the operation of it and the fact that it represented a new compensation program. Duquesne Light also distributed to management employees a questionnaire on the LTIP. One question read as follows:

 
Will the program replace pay for performance?
 
No. This is a one-time allocation and there is no intent to keep it available to all employees. We anticipate a return to a more traditional approach to employee salaries in the future. Like merit increases the LTIP was funded from normal salary expenses.

 The employees were further informed that the exercise of their stock option and appreciation rights under the LTIP would specifically result in recognized taxable income for federal tax purposes on the employees' W-2 forms.

 The LTIP was structured so that the employees did not recognize any taxable income until they exercised their stock option and appreciation rights. After exercising their stock option and appreciation rights, the employees received statements which indicated that the LTIP income and the dividends accredited to the participants' accounts were a percentage of their current annualized salary.

 All management and professional employees who were active on the date the stock option was granted and who had received on a scale of 1 to 5 a performance rating of "3" or better in 1986 were eligible to receive the LTIP stock option and appreciation rights. Management and professional employees with a performance rating of 2 1/2 were eligible with a recommendation from their immediate supervisor.

 The Compensation Committee of Duquesne Light's Board administered the LTIP. The committee was given discretion to determine which eligible employees should receive the options and how many options a particular employee should receive based upon the following criteria:

 
... the Committee shall consider the position and the responsibilities of the employee being considered, the nature and value to the Company or a Subsidiary of his or her services, his or her present and/or potential contribution to the successes of the Company or a Subsidiary and such other factors as the Committee may deem relevant.

 As a merit-based form of compensation, the LTIP is not subject to Internal Revenue Code rules forbidding discrimination in favor of highly paid employees under tax-favored benefit plans.

 The LTIP permitted the salaried employees who were given stock option and appreciation rights to exercise their options up to ten years from 1987, however the first exercise could not take place until 1989. Under the LTIP, an employee's options vested as follows: 50% in 1989; 25% in 1990; and 25% in 1991. At no time during the introduction and implementation of the LTIP was there ever any indication that the LTIP was a program designed to provide supplemental retirement income. All affirmative evidence indicates that it was designed as a merit-based program offered as a substitute for salary increases in 1987. At the time the LTIP was adopted, Duquesne Light's common stock was selling at $ 12.00 per share. The value of the stock increased to $ 39.00 per share by January of 1994.

 When an employee exercised his/her LTIP options, the exercise resulted in taxable income to the employee which was reflected on the employee's W-2 statement. Prior to June 5, 1990, this taxable income was included in an employee's pension calculations under the Plans. The practice which had developed prior to June 5, 1990, treated the recognized income from the LTIP program as ordinary compensation for the calculation of pension benefits under the definition of compensation in the Plans. The income from the exercise of the LTIP rights was included in the pension benefit calculations of the employees who retired prior to June 5, 1990.

 In December of 1989 it came to the attention of Gary Schwass, chief financial officer of Duquesne Light, that participants in the LTIP were having the amounts received upon the exercise of their stock option and appreciation rights included in their "compensation" in calculating their pension benefits. Thereafter the corporate secretary of Duquesne Light issued a memorandum which stated in pertinent part:

 
Gary Schwass has been raising questions concerning the use of LTIP exercises as part of "compensation" used in pension calculations. Human Resources has been including it. I understand legal believes that is correct ...
 
Gary discussed his opposition with [von Schack] at the last Board rehearsal and [von Schack] agreed based on Gary's limited explanation ....

 After Schwass brought the matter to the attention of von Schack, von Schack spoke to Dianna Green, the Plans' administrator, and indicated that it was his recollection that it was never the company's intention to include the LTIP compensation in employees' pension calculations.

 Schwass subsequently opined to George Bentz, Duquesne Light's general manager for human resources, that the amounts should not be included in such calculations. Schwass then brought the matter to the attention of Jim Wilson, Duquesne Light's director of benefits. Wilson had been involved in drafting the language of the Retirement Plan and the SPD which was provided to employees upon request. Wilson indicated to Bentz that the reason the amounts realized upon the exercise of the stock option and appreciation rights pursuant to the LTIP were included in a participant's "compensation" in calculating pension benefits was that the language of the Plans required that result. Wilson further indicated that if something was defined as "compensation" that definition could not be changed without Board approval.

 Wilson discussed the matter with Laura Lane Amelio, a senior attorney at Duquesne Light. Amelio then wrote a memorandum dated September 18, 1989, stating that in order to exclude from "compensation" the exercise of the LTIP stock option and appreciation rights, the definition of compensation in the Plans would have to be amended and that such a result could not be accomplished through discretionary action taken by the plan administrator. After setting forth the definition of compensation in the Plans, Amelio wrote:

 
To somewhat oversimplify, the amount of an individual's pension under the Retirement Plans is based on a calculation of the five highest consecutive years' salary. George said that Gary was insistent that to include the LTIP payments would unfairly discriminate in favor of those employees who exercise and receive benefits under the LTIP and then retire, as opposed to those who receive benefits but then do not retire until after expiration of the Plan in 1997.
 
I advised George and Jim that, in my opinion, the practice of including the amounts payable under the LTIP in a retiring employees' compensation calculation of retirement benefits was proper under the Retirement Plans. All amounts paid pursuant to an exercise are reportable to the IRS on Form W-2 and are taxed and treated for all respects as compensation to the employee. George confirmed my recollection that when the LTIP was adopted it was specifically done so as a compensation mechanism in lieu of the annual salary increase to employees because of the two year salary freeze in 1986-87. The fact that the awards under the LTIP, and the administration of the LTIP itself, is within the exclusive jurisdiction of the Board's Compensation Committee further buttresses the characterization of the awards as compensation. In any event, the amounts payable under the LTIP certainly are within the definition of "Compensation" under the Retirement Plans.
 
George then asked whether it would be possible for the Plan Administrator to declare such amounts not to be Compensation. He indicated that about 40 or 50 people have already retired and received the benefit of the higher calculation. I believe that such a change could only be made prospectively and would only be permissible if it does not result in a disproportionate impact on lower paid employees (because of ERISA non-discrimination requirements). I do not believe that such a change would have a discriminatory impact in favor of highly compensation individuals but I would recommend that Human Resources consult Mercer Meidinger to verify that fact. If amounts received under the LTIP are to be excluded from "Compensation" for purposes of the Retirement Plans, the change may only be accomplished by amending the Retirement Plans' definition of "Compensation" to specifically list "amounts received pursuant to the Long Term Incentive Plan" as an item excludable under Section 1.7 or 1.8 of the Plans. Amendment of the Plans would require Board approval.
 
It appears that making any such change by action of the Plan Administrator would not be appropriate under the regulations to Internal Revenue Code Section 411(d)(6). Those regulations prohibit pension plans from containing any discretionary provisions which affect the definite determination of benefits under a plan. The purpose of this requirement was to enable a plan beneficiary to know on the basis of the plan document itself what factors his or her benefits will be calculated upon, with nothing left to the sole discretion of the Plan ....
 
... Should it be desired to eliminate those amounts from the definition of "Compensation," I would recommend that it be done by amendment to the Plan rather than by Plan Administrator action because of the legal restrictions which arise under the regulations to I.R.C. Section 411(d)(6).

 Plaintiffs' Exhibit 11.

 Green received the copy of Amelio's memorandum and thereafter provided a copy of it to Schwass with a note asking Schwass to advise Green how Schwass wanted Green to proceed. *fn2" Green also sent a carbon copy of the memorandum to von Schack.

 In a memorandum dated January 17, 1990, Bentz informed Green of the effects of including the LTIP compensation in the pension calculations of the participants who already had retired or were about to retire. Bentz estimated that "the total monthly cost for 10 employees" who had retired in 1989 or were going to retire in 1990 was $ 65.85 and "the total present value of the promised benefit using the estimated life expectancy of each of the retirees is $ 6,942." Bentz further noted: "We will pursue this matter with legal and financial to determine what actions must be taken to exclude these earnings at the earliest possible date."

 At a meeting in the spring of 1990 among various Duquesne Light executives, Terry Moten, an in-house lawyer at Duquesne Light, "discussed various approaches to excluding LTIP payouts from the definition of compensation" with the other officials present. Moten subsequently testified that he understood his assignment to encompass a determination of whether a plan amendment was the only way to exclude the taxable compensation recognized from the exercise of stock option and appreciation rights under the LTIP from the definition of "compensation." Moten suggested that outside counsel be retained because he did not understand the inner-workings between the Plans and § 411(b)(6) of the Internal Revenue Code. Thereafter, Duquesne Light retained outside counsel and requested an opinion as to whether the exclusion of the LTIP compensation could be done by the plan administrator or only by plan amendment.

 Duquesne Light hired William Powderly III of Jones, Day, Reavis & Pogue. Powderly was paid by Duquesne Light for the services rendered. Powderly was asked to analyze the Plans and to make certain factual assumptions which generally corresponded to the background of the instant litigation, but he was not asked to nor did he provide an opinion which was based upon the instant evidentiary record.

 Powderly noted in a memorandum letter that the plan administrator "has the power to 'determine from time to time pursuant to ... uniform and non-discriminatory rules,' whether extraordinary items of renumeration included in a W-2 should be excluded for the purpose of determining benefits under the plan." Powderly opined that the authority of the plan administrator and the plan sponsor were co-extensive. It was his opinion that if the plan sponsor could amend the plan without running afoul of § 411(b)(6) of the Internal Revenue Code, the plan administrator could act without violating that provision. Powderly further opined that with respect to taxable compensation from the LTIP exercises which were reported on any particular participant's W-2 for the 1989 year, such amounts were accrued benefits once the calendar year closed and could not be eliminated by either the plan administrator or the plan sponsor because of § 204(g) of ERISA and § 411(d)(6) of the Internal Revenue Code.

 With regard to eliminating the LTIP income for the 1990 calendar year and beyond, Powderly warned:

 
From the standpoint of having to establish justification, the action of the plan administrator has the more tortious path. On the other hand, the actions of the sponsor will be subject to closer review concerning reduction in accrued benefits due to section 204(g) of ERISA (Sec. 411(d)(6) of the Code).

 Powderly indicated that the "exposure" of eliminating the compensation earned pursuant to the exercise of the LTIP stock option and appreciation rights would be less if the action was taken by the Plans' administrator. He opined that the participants who received taxable income from the LTIP in 1990 prior to the announcement of a rule excluding such amounts by the plan administrator might be able to sue and win.

 
You should be aware that there is a significant legal difference between the actions of the Plan Administrator in exercising its discretion as granted under the terms of the Plan and the Sponsor's discretion in exercising its retained power to amend or modify the terms of the Plan. In the first instance, the Plan Administrator is acting as a fiduciary and as such must exercise the discretion it has been specifically granted in matters such as the inclusion or exclusion of a particular item in compensation in conformity with law. Thus, exercise of such discretion should be in the sole interest of the participants and their beneficiaries and in accordance with the terms of the Plan, if such terms are not inconsistent with law. Based upon this principal, the Plan Administrator would be required to look closely at the type of income the Plan sponsor has indicated that is to be excluded, i.e., relocation expenses, travel pay and moving expenses. The Plan Administrator then must discern if the Sponsor would have considered the Incentive Plan Benefits in the same class as those which have been specifically excluded. The Plan Administrator should look at the time the Plan was established in determining the Sponsor's intent. If the answer to this is yes, ...

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