PITTSBURGH - Northrop Grumman Corp. could be on the hook for millions of dollars in subsidized early retirement benefits for an electronic sensors and systems division it acquired from Westinghouse Corp. in 1996.
A dispute over whether Northrop owes subsidized early retirement benefits, known as "permanent job separation pensions," to thousands of workers could have enormous implications for hundreds of "old economy" manufacturing companies such as steel and auto makers, which routinely included such plant shutdown benefit provisions in their pension plans. The fallout from Stanley Pieseski v. Northrop Grumman Corp. and the Northrop Grumman Electronic Sensors & Systems Division Pension Plan also could affect companies that assume pension assets and liabilities for businesses they have acquired.
At the time of the acquisition, the Los Angeles-based defense contractor agreed to maintain all benefits, including pension plans in effect at the time, for at least two years. The company assumed approximately $500 million in unfunded pension and other retiree liabilities for the unit's approximately 12,000 workers, located mostly in the United States. At the end of December 1996, Northrop Grumman had $9.2 billion in total pension assets.
Because Westinghouse in 1994 had amended its pension plan to eliminate in 1998 subsidized early retirement benefits triggered by plant shutdowns, Northrop Grumman automatically adopted the same provision in the pension plan it set up for the workers of the acquired division.
In August 1998, employees laid off by Westinghouse brought suit against the company, claiming the 1994 plan amendment was illegal because it violated Section 204(g) of federal pension law, which prohibits employers from cutting back benefits already earned.
In August 2000, the 3rd U.S. Circuit Court of Appeals agreed with the employees' claim (Pensions & Investments, Sept. 4, 2000). After the Supreme Court refused to hear its appeal of the decision, Westinghouse, now part of Viacom Inc., agreed to pay $10 million in subsidized early retirement benefits to more than 200 workers.
In late April 2002, a federal magistrate judge for the Western District of Pennsylvania in Pittsburgh ruled that Northrop Grumman, by extension, also violated federal pension law because its plan similarly eliminated that provision for workers who were laid off after Sept. 1, 1998.
Awaiting a decision
The 10 days that Northrop Grumman had for filing objections to the magistrate judge's opinion expired May 7, increasing the likelihood that the full District Court would adopt the magistrate judge's opinion. A Northrop Grumman spokesman said the company is awaiting a final decision by the U.S. District Court before taking any action.
"The new company stepped into the shoes of the old one" and has to protect the accrued benefits of participants, said William T. Payne, of counsel to the Pittsburgh law firm of Schwartz, Steinsapir, Dohrman & Sommers, which is representing the plaintiffs.
That could mean acquiring companies have to reinstate benefits promised and subsequently eliminated by selling companies, according to another pension lawyer who did not wish to be identified.
Lawyers for the plaintiffs have yet to determine how many Northrop Grumman workers would be entitled to claim the subsidized early retirement benefits; nor do they know the value of those benefits.
The implication of the ruling, sources said, is that acquirers could become reluctant to pick up pension assets and liabilities when they buy businesses, preferring to set up their own pension and retirement plans from scratch, in order to avoid potential lawsuits over accrued benefits eliminated by selling companies.
"It's one more thing for a buying company to worry about," said a pension lawyer, who did not wish to be identified.
And for those that assume the pension assets and liabilities when they buy businesses, the ruling might make it more difficult for them to assess the true value of pension liabilities for which they could be responsible.
"The biggest lesson for (acquirers) is what you see is not what you get," said Sherwin S. Kaplan, of counsel to the Washington law firm of Thelen Reid & Priest LLP and a former deputy associate solicitor in the Labor Department's plan benefits security division. "It makes it very hard for a company to know what liabilities they are buying when they acquire a company."
No statute of limitations
That's not the only thing acquirers have to worry about. In a stunning decision, the federal magistrate judge also ruled the six-year statue of limitations does not apply to the class-action lawsuit against Northrop Grumman, even though the dispute is drawn from an amendment made to the original Westinghouse plan in 1994. The court reasoned that, under federal pension law, the statue of limitations does not apply to amendments that cut back accrued benefits. Moreover, the court accepted the plaintiffs' argument that even though the illegal amendment resulting in the cutback of early retirement benefits was adopted in 1994, the operative date in this case is the adoption of the illegal provision by Northrop Grumman when it acquired the electronic sensors division in 1996.
Under the District Court's reasoning, acquiring companies could be held liable for amendments made to pension plans by the sellers years, if not decades, earlier, sources said.
"The line of reasoning the court used can basically leave these issues open forever," Mr. Kaplan said.