WASHINGTON - A group of employees at AT&T Co. and Lucent Technologies Inc. are asking a federal appeals court to overturn a judge's decision denying their request to cancel AT&T's proposed division of almost $50 billion in employee benefit assets.
The group wanted an independent fiduciary to review the way AT&T divided the plan assets between it and Lucent. The division resulted from AT&T's divestiture of Lucent in late 1995.
According to calculations made by AT&T prior to the divestiture, as of Dec. 31, 1995, Murray Hill, N.J.-based Lucent's liabilities ranged between $20.6 and $28 billion while assets stood at $28.7 billion. New York-based AT&T's liabilities ranged between $9.7 billion and $12.7 billion, while assets stood at $15.2 billion.
A question of accountability
A cornerstone of the case is whether a corporation has the right to divide the assets of a plan under its control into two pieces without being accountable to a court or plan participants, said Kent Cprek, a lead attorney for the plaintiffs.
"The second key issue is whether the plaintiffs have a right to review in court what rules apply in dividing the plan assets," he said.
"AT&T management had a conflict of interests when it was allocating the assets and liabilities of the plan because it was concerned about its own shareholders."
The class-action suit was filed May 17, 1996, by the Systems Council EM-3, an umbrella organization of Lucent's local unions, the International Brotherhood of Electrical Workers. The suit covers nearly 300,000 active and retired management employees at the two companies.
"Whichever plan ends up with more money will impact on AT&T liabilities. ERISA prohibits a fiduciary from dealing with the assets of a plan in its own interest or for its own account, nor may a fiduciary represent a party whose interests are adverse to the interests of the plan or its participants," Mr. Cprek said.
"AT&T had the authority to assign existing retirees to Lucent," Mr. Cprek explained. "As a result, the bulk of the retirees ended up at Lucent, leaving AT&T with a 1-1 ratio between retirees and active employees, while Lucent drew a ratio of two retirees for every active employee."
AT&T argued that the unions aren't allowed to bring a civil action under ERISA.
AT&T lawyers also said the alleged violations of ERISA were necessitated by the spinoff resulting from AT&T's restructuring. In addition, it claimed ERISA doesn't impose fiduciary duties on an employer that amends a plan and allocates the assets of that plan pursuant to a spinoff.
AT&T backed its claim by pointing out that in June, the Supreme Court extended this principle to employer amendments of pension plans in Lockheed Corp. vs. Spink, holding that such an act does not trigger ERISA's fiduciary provisions.
AT&T's attorneys also noted the restructuring of AT&T's lines of business, which resulted in spinning off employee benefit plans, was a business decision, and not subject to the fiduciary laws of ERISA. It claimed any allocation and transfer of assets between the plans were "ministerial acts" intended to implement that transfer.
Judge Gladys Kessler of the U.S. District Court for the District of Columbia backed AT&T's arguments and dismissed the complaint.
The employees have appealed that decision.
Judge rules in AT&T's favor
In her Aug. 12 decision, she wrote: "Under ERISA, a person is a fiduciary with respect to a plan and therefore subject to ERISA fiduciary duties, to the extent he exercises any discretionary authority or discretionary control representing management of such plan . . . or he has any discretionary authority or responsibility in the administration of such a plan. . . . AT&T acts as both an employer and a plan administrator, as permitted under ERISA.
"When employers wear 'two hats' as employers and administrators, they assume fiduciary status only when and to the extent that they function in their capacity as plan administrators, not when they conduct business that is not regulated by ERISA.
"Under ERISA, a plan sponsor is free for any reason at any time to adopt, modify or terminate welfare plans and does not act in a fiduciary capacity when it does so . . . because under trust law principles, there is a distinction between those actions creating, altering or terminating a trust - which are deemed settler functions - and those actions managing and administering the investment and use of the trust assets -which are deemed fiduciary functions.
"Under prevailing ERISA case law, AT&T's decision to restructure and spin off its pension and welfare plans are settler functions because they involve the amendment of a plan. Those decisions and the actions necessary to implement them are not subject to ERISA's fiduciary standards," the judge wrote.
Officials at both AT&T and Lucent said they were pleased with the judge's decision.
William Hanrahan, a Washington attorney, said because of the Lockheed-Spink decision, he expects the appeals court will uphold Judge Kessler's view that an employer overseeing a plan is not necessarily a fiduciary.
A second issue, which does not have any precedent, is whether an overfunded plan divided into two must give any of the surplus to the spun-off company. AT&T had allocated the surplus equally between Lucent and AT&T.
The judge "said it was not required to transfer any more than what's required to pay off the contracts, but that conclusion is questionable," he said.