IN THE SUPREME COURT OF IOWA
No. 07–0861
Filed March 27, 2009
ROBERT M. LINDSAY,
Appellant,
vs.
COTTINGHAM & BUTLER INSURANCE
SERVICES, INC.,
Appellee.
Appeal from the Iowa District Court for Scott County, Mark J.
Smith, Judge (trial), and John A. Nahra, Senior Judge (summary
judgment).
Employee appeals a district court decision declaring an employee’s
deferred compensation rights forfeitable due to ERISA preemption.
AFFIRMED.
Ted Breckenfelder, Davenport, for appellant.
Michael J. Shubatt and William N. Toomey of Fuerste, Carew,
Coyle, Juergens & Sudmeier, P.C., Dubuque, for appellee.
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WIGGINS, Justice.
An insurance brokerage firm provided its employee with a deferred
compensation plan. The employee left his employment and began to
work for another insurance brokerage firm. About fifteen months later,
he began working at a third insurance brokerage firm, where he serviced
clients of his original employer. When his original employer learned he
was servicing its clients, it stopped paying his deferred compensation
pursuant to the noncompete provisions of the deferred compensation
plan. The employee then brought a declaratory judgment action to
require payment of his deferred compensation under the plan. The
district court found that the deferred compensation plan is a top hat plan
and subject to the Employee Retirement Income Security Act (ERISA).
The court further found ERISA allows the employer to enforce the
noncompete forfeiture provisions of the deferred compensation plan even
if state law does not allow a forfeiture of benefits. Because we agree with
the decision of the district court, we affirm its judgment.
I. Background Facts and Proceedings.
Cottingham & Butler (C&B) is an insurance brokerage firm that
had employed Robert Lindsay to sell insurance. The firm’s principal
office is located in Dubuque, although Lindsay worked primarily out of
Davenport.
Lindsay served as an account executive, also known as a producer,
since he began working for the company on April 16, 1987. During his
employment, C&B provided Lindsay with a deferred compensation plan.
The plan states that deferred compensation is “in consideration of the
Executive’s past and future services.”
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Article I of the plan differentiates between the deferred
compensation plan and the employment agreement.1 Article II of the
plan provided for one hundred and twenty months of deferred
compensation. An employee’s years of service determined the amount of
benefits paid under the plan.
Article III of the plan allows for the forfeiture of benefits. This
article relates to consulting services. The article states that for ten years
after the executive’s retirement from active service, the executive must be
available to advise the company and must represent the company well to
the clients and the community. The article also states the employee is
not to compete with the company during the retirement period in any
manner. The final provision of the article states, “[t]he Executive must
comply with the provisions of this Article in order to be and remain
eligible to receive the benefits provided under Article II.” If the executive
does not comply with the noncompete provisions, the board of the
company can decide to suspend or terminate payments under the plan.
The executive or the executive’s beneficiary is allowed to request
reconsideration, but the board’s decision is final.
In 2000, during Lindsay’s last annual review before he left the
company, C&B deemed his work substandard. C&B reduced Lindsay’s
salary and benefits based on that evaluation. On June 4, 2001, Lindsay
met with his employer for another review. After this meeting, Lindsay
and C&B agreed to end the employment relationship. During that
meeting, Lindsay and C&B discussed the severance package, the
company car, the deferred compensation plan, and the use of his
vacation time.
1Lindsay also had an employment contract containing noncompete provisions.
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C&B also asked Lindsay whether he wanted the deferred
compensation to start right away. If he accepted the payments
immediately, his payments would be discounted under the plan because
he had not yet turned fifty-five years of age. Lindsay declined to accept
the payments immediately. Instead, he told C&B he would wait until he
turned fifty-five to begin receiving his payments to avoid the discount
that would occur had he taken the payments early. During the meeting,
C&B explained that the company expected Lindsay to comply with the
noncompete provisions of the deferred compensation plan. Lindsay
acknowledges this discussion.
Lindsay and C&B signed a severance agreement on June 18. In
the severance agreement, C&B stated Lindsay was entitled to the
deferred compensation “pursuant to the terms and provisions of such
Plan.” Lindsay officially ended his employment with C&B on July 4.
After Lindsay left C&B, he worked in insurance sales at Anderson
Wilkins Lowe from September 6, 2001, through October 10, 2002. On
September 28, 2001, C&B advised him via a letter that he could be in
violation of the deferred compensation agreement when he started
working for the new insurance firm.
On May 1, 2002, Lindsay received a letter from C&B stating that
he was due $233,333 over a ten-year span which worked out to a
monthly payment of $1,944.45. Lindsay’s deferred compensation
payments were to begin on May 1, 2002. Lindsay received full deferred
compensation payments from May 2002 through June 2005.
Lindsay began working for Trissel Graham & Toole Group Benefits
Inc. as vice president and partner on October 11, 2002. Trissel is an
insurance brokerage firm in competition with C&B. While working with
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Trissel, Lindsay worked directly with two of his former clients that had
been with C&B, the City of Monmouth and East Moline Metals.
On June 9, 2005, when C&B learned of Lindsay’s relationship with
the City of Monmouth, C&B sent Lindsay a letter. In that letter, C&B
stated it may choose to suspend or terminate the deferred compensation
payments because of Lindsay’s business relationship with the city. C&B
also stated its intention to deduct $19,674 from the deferred
compensation payments to account for the violation, but hoped to resolve
the issue. It reduced its payments to Lindsay from $1,944.45 per month
to $1,632.23.
In August 2005, C&B found out about Lindsay’s East Moline
Metals relationship. In a letter to Lindsay, C&B stated its intent to
deduct more from the deferred compensation to account for losing East
Moline Metals as a client. C&B then dropped the amount of its
payments to Lindsay from $1,632.23 per month to $859.57. After
February 2006, C&B stopped making any payments under the deferred
compensation plan.
Lindsay filed a petition for declaratory judgment. The petition
asked for a judgment establishing his deferred compensation benefits
were nonforfeitable and requesting an order requiring C&B to pay the full
amount of his benefits. C&B’s answer asked for declaratory judgment in
its favor establishing that it paid the deferred compensation benefits as
required by the deferred compensation plan.
Lindsay filed a motion for summary judgment, which the court
overruled. The matter proceeded to trial. The court found Lindsay
violated the deferred compensation plan by soliciting and accepting
clients of C&B. Despite this seemingly positive result for C&B, the court
then concluded the noncompete provisions contained in the plan are
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unconscionable and unenforceable under Iowa law because the
noncompete provisions do not contain any limits as to time and area.
Lindsay then filed a petition for supplemental relief asking for
damages. C&B filed a rule 1.904(2) motion requesting the court to rule
on the doctrine of preemption under ERISA, an argument the court failed
to address in its original ruling.
The district court filed its ruling on C&B’s 1.904(2) motion. In the
ruling, the judge stated he did not have C&B’s trial brief before filing the
initial ruling on the matter because the clerk of court did not forward it
to him. The court noted C&B made the ERISA preemption argument in
the trial brief. The court decided ERISA preempts the state common law
the court used to determine the noncompete forfeiture provisions were
unenforceable. The court further found under ERISA, the noncompete
forfeiture provisions of the deferred compensation plan are enforceable.
Therefore, the district court reversed its earlier decision and found in
favor of C&B.
Lindsay appeals.
II. Issues.
Lindsay raises two issues on appeal: first, whether the district
court erred in failing to grant Lindsay’s motion for summary judgment;
and second, whether the court erred in holding ERISA preempts state
common law regarding the enforceability of the noncompete forfeiture
provisions.
III. Whether the District Court Erred in Failing to Grant
Lindsay’s Motion for Summary Judgment.
Lindsay appeals the district court’s denial of its motion for
summary judgment. The denial of a motion for summary judgment is no
longer appealable once the matter proceeds to a trial on the merits.
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Kiesau v. Bantz, 686 N.W.2d 164, 174 (Iowa 2004). After a trial on the
merits, the denial of the motion for summary judgment merges with the
trial on the merits. Id. Accordingly, we cannot consider the assignments
of error relating to the denial of the motion for summary judgment.
Therefore, the only issue we will consider in this appeal is whether the
court erred in holding ERISA preempts state common law regarding the
enforceability of the noncompete forfeiture provisions.
IV. Whether the Court Erred in Holding ERISA Preempts
State Common Law.
A. Error Preservation. In his brief on appeal, Lindsay claims
C&B failed to properly raise the ERISA issue in the district court;
therefore, the district court should not have decided the issue. Lindsay’s
claim must fail. C&B raised the issue in the district court. In its
resistance to Lindsay’s motion for summary judgment, C&B raised the
ERISA preemption issue. At trial, C&B introduced evidence that the
deferred compensation plan was the type of plan governed by ERISA.
Again, in its trial brief, filed prior to the court’s initial ruling, C&B not
only raised the preemption issue, but also briefed it. Finally, when the
court did not rule on the ERISA issue, C&B filed a rule 1.904(2) motion
requesting the court to rule on the ERISA issue. In his resistance to
C&B’s 1.904(2) motion, Lindsay did not claim that C&B did not raise the
issue of preemption in the district court. For these reasons, the ERISA
preemption issue was properly before the court.
B. Standard of Review. The parties disagree on the standard of
review. Lindsay filed the case as a declaratory judgment action. To
determine the standard of review of a declaratory judgment action, we
have said:
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Our review of actions for declaratory judgment depends upon
how the action was tried to the district court. To determine
the proper standard of review, we consider the “pleadings,
relief sought, and nature of the case [to] determine whether a
declaratory judgment action is legal or equitable.” We also
consider “whether the court ruled on evidentiary objections”
as an important, although not dispositive, test of whether
the case was tried in law or equity.
Passehl Estate v. Passehl, 712 N.W.2d 408, 414 (Iowa 2006).
The relief requested in Lindsay’s petition was for the court to
declare that his benefits under the deferred compensation plan were
nonforfeitable and determine an amount certain C&B had to pay him for
those benefits. Counsel and the court discussed how this matter was
being tried during the trial with the judge specifically inquiring as to
whether this was an equity case. At trial, Lindsay’s attorney declared
this case to be “primarily a legal issue” to obtain a “ruling on legal
construction of the contract.” Lindsay’s attorney wanted the court to
make its decision as a matter of law. During the trial, the judge did
entertain and rule on the evidentiary objections.
In a similar case, the plaintiff filed a petition for declaratory
judgment seeking declaration of his contractual rights, monetary
damages, and injunctive relief. Harrington v. Univ. of N. Iowa, 726
N.W.2d 363, 365 (Iowa 2007). In Harrington, even though the plaintiff
requested injunctive relief, we found the plaintiff’s request for injunctive
relief was not dispositive on how the court tried the case. Our court
determined the district court tried the case at law. Id. Our review of the
pleadings, the colloquy between counsel and the court on how this case
was to be tried, the rulings the court made on evidentiary objections, and
the relevant case law demonstrate this matter was tried at law. We
review cases tried at law for correction of errors at law. Id.
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C. Analysis on the Merits. Congress passed ERISA intending to
develop a body of federal substantive law regarding the rights and
obligations of employee benefit plans. Amato v. Bernard, 618 F.2d 559,
567 (9th Cir. 1980). Congress’s purpose in doing so was to replace
diverse state laws with a nationally uniform federal common law
regulating employee benefit plans to encourage the growth of private
employee benefit plans. Wolf v. Reliance Standard Life Ins. Co., 71 F.3d
444, 447 (1st Cir. 1995). To ensure uniformity in employment benefit
plans, Congress declared the ERISA statutes “supersede any and all
State laws insofar as they may now or hereafter relate to any employee
benefit plan” covered by ERISA. 29 U.S.C. § 1144(a) (1999). Accordingly,
if the deferred compensation plan is covered by ERISA, we must apply
federal law rather than state law to determine if the plan’s noncompete
forfeiture provisions are enforceable.
The ERISA statutes apply to any employment benefit plan if “any
employer engaged in commerce” establishes or maintains the plan. 29
U.S.C. § 1003(a)(1). An employee benefit plan includes an employee
pension benefit plan. Id. § 1002(3). ERISA defines an “employee pension
benefit plan” as “any plan . . . maintained by an employer . . . that . . .
results in a deferral of income by employees for periods extending to the
termination of covered employment or beyond . . . .” Id. § 1002(2)(A).
The undisputed evidence shows that C&B is “an employer engaged
in commerce” and that it established and maintained the deferred
compensation plan at issue in this case. Because the plan “result[ed] in
a deferral of income” to Lindsay “to the termination of covered
employment or beyond,” the deferred compensation plan is covered by
ERISA. Accordingly, ERISA preempts state common law regarding the
enforceability of the noncompete forfeiture provisions of the plan. Clark
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v. Lauren Young Tire Ctr. Profit Sharing Trust, 816 F.2d 480, 481 (9th Cir.
1987); Noell v. Am. Design, Inc., Profit Sharing Plan, 764 F.2d 827, 831
(11th Cir. 1985); Hepple v. Roberts & Dybdahl, Inc., 622 F.2d 962, 965
(8th Cir. 1980); Bigda v. Fischbach Corp., 898 F. Supp. 1004, 1014–16
(S.D.N.Y. 1995).
To determine the effect of ERISA on the forfeiture provisions in the
plan, we must define the type of deferred benefit plan entered into
between C&B and Lindsay. The district court found this plan to be a
“top hat” plan. A top hat plan is “unfunded” and exists primarily to
provide “deferred compensation” to a “select group of management or
highly compensated employees.” 29 U.S.C. § 1051(2); see Healy v. Rich
Prods. Corp., 981 F.2d 68, 72 (2d Cir. 1992). Substantial evidence
supports the district court’s finding.
ERISA’s participation and vesting rules govern the nonforfeitability
requirements of plans covered by ERISA. 29 U.S.C. § 1053. ERISA
exempts top hat plans from its nonforfeitability protection. Id. § 1051(2).
ERISA’s failure to protect top hat plans from the forfeiture provisions
contained in those plans allows a top hat plan to include enforceable
noncompete forfeiture provisions even if these provisions are not
enforceable under state law.2 See Bigda, 898 F. Supp. at 1016 (holding
New York law may prohibit noncompete forfeiture provisions, but ERISA
statutes allow forfeiture of all deferred compensation benefits under
noncompete forfeiture provisions in a top hat plan); see also Lojek v.
Thomas, 716 F.2d 675, 678–79 (9th Cir. 1983) (holding even though
Idaho law does not permit the enforcement of noncompete clauses in
employment contracts, ERISA statutes allow forfeiture of pension
benefits in excess of ERISA’s minimum vesting requirements in
2We are not deciding in this opinion whether Iowa law would find the
noncompete forfeiture provisions of the deferred compensation plan unenforceable.
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noncompete clauses), Clark, 816 F.2d at 481–82 (holding state law may
prohibit noncompete forfeiture provisions, but ERISA preempts state law
with regard to those clauses in an ERISA plan as to pension benefits).
Consequently under ERISA, C&B’s deferred compensation plan’s
noncompete forfeiture provisions are enforceable. Therefore, C&B is
entitled to discontinue paying Lindsay his deferred compensation
benefits if Lindsay violates the terms of the plan by competing with C&B.
The holding in Bigda, appears to be consistent with the federal
common law prior to the enactment of ERISA. As one federal court
noted, at common law
(t)he authorities . . . generally draw a clear and
obvious distinction between restraints on competitive
employment in employment contracts and in pension plans.
The strong weight of authority holds that forfeitures for
engaging in subsequent competitive employment, included in
pension retirement plans, are valid, even though
unrestricted in time or geography. The reasoning behind
this conclusion is that the forfeiture, unlike the restraint
included in the employment contract, is not a prohibition on
the employee’s engaging in competitive work but is merely a
denial of the right to participate in the retirement plan if he
does so engage.
Golden v. Kentile Floors, Inc., 512 F.2d 838, 844 (5th Cir. 1975) (citations
omitted).
Therefore, the district court was correct in holding ERISA does not
prohibit C&B’s reduction of deferred compensation benefits to Lindsay.
V. Disposition.
We affirm the judgment of the district court holding Lindsay’s
benefit under the deferred compensation plan was forfeitable because
ERISA allows such forfeiture and preempts any state law to the contrary.
AFFIRMED.