United States Court of Appeals
For the First Circuit
No. 09-1069
CHERYL WALLACE,
Plaintiff, Appellant,
v.
JOHNSON & JOHNSON; BROADSPIRE SERVICES, INC.;
JOHNSON & JOHNSON LONG TERM DISABILITY INCOME PLAN FOR
CHOICES ELIGIBLE EMPLOYEES OF JOHNSON & JOHNSON AND AFFILIATED
COMPANIES; JOHNSON & JOHNSON PENSION COMMITTEE,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Torruella, Boudin and Dyk,*
Circuit Judges.
Inga S. Bernstein with whom Ruth O'Meara-Costello and Zalkind,
Rodriguez, Lunt & Duncan LLP were on brief for appellant.
David C. Henderson with whom Alexa H. O'Keefe and Nutter
McClennen & Fish, LLP were on brief for appellees.
October 14, 2009
*
Of the Federal Circuit, sitting by designation.
BOUDIN, Circuit Judge. Starting in July 1989, Cheryl
Wallace worked for nearly fourteen years for Ortho Biotech, Inc.
("Ortho Biotech"), an operating company in the Johnson & Johnson
family of companies. She was covered by Johnson & Johnson's Long
Term Disability Income Plan for Choices Eligible Employees of
Johnson & Johnson and Affiliated Companies ("the Plan"). On this
appeal, Wallace--now on disability leave and relying upon the
Employee Retirement Income Security Act of 1974 ("ERISA")--contests
a determination of the amount of benefits due to her under the
Plan.
The background facts are undisputed. In August 1999,
after holding other positions, Wallace began working as a district
manager--a management position compensated by salary plus sales
commissions. In 2001, she requested and was approved for a short-
term disability leave due to a manic/mixed bipolar episode.
Thereafter, she returned to the position but, at some later point,
she agreed with her supervisor to be transferred to a non-
management sales position, called "territory manager," to reduce
employment-related stress and travel that otherwise might worsen
her condition.
The territory manager position was compensated by salary
and sales commissions. Ortho Biotech agreed that, for the time
being, Wallace's salary would not change. The company completed
various job change formalities in September 2002, including a "Job
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Change, Employee Type or Title Change" form on September 12, and a
"Territory Change Notification" form on September 13; and Wallace's
position transfer was made effective as of September 16.
Wallace was never able to work a day in the new position,
because she again became ill. Her doctor sent a letter dated
September 13, 2002, stating that for medical reasons Wallace was
unable to work in the week of September 16. Wallace was
hospitalized in serious condition on September 17 and was
discharged on October 4; she used sick time and vacation time at
the start and began short-term disability leave on October 7.
Without returning to work, she commenced long-term disability leave
on April 7, 2003, and remained on leave during the case.
Wallace began receiving benefits under the Plan in 2003.
At that time, the Plan's claims administrator was Broadspire
Services, Inc. ("Broadspire"); although that company had a
different name during part of the relevant period, we refer to it
as Broadspire throughout. At Broadspire's behest, the Plan
initially paid Wallace $8,809.14 per month in long-term disability
benefits, a figure it reached by summing Wallace's annual salary
and her commissions earned in 2001, multiplying by 60 percent as
prescribed by Wallace's Plan option, and dividing by 12.1
1
The Plan requires that the participant be disabled for 26
continuous weeks before beginning to receive long-term disability
benefits. In determining benefits, the Plan looks to the salary at
the start of that 26-week period--here, such period for Wallace
began in 2002--and, to the extent that commissions are included in
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In or around May 2005, an audit led Broadspire to
conclude that Wallace had been overpaid and that her benefits
should not have included her 2001 commissions because they were
earned while she was in a management position; it determined that
her benefits should be reduced to $5,489.98 per month based on
salary alone and that benefits should be withheld until the
overpayment was recaptured. Wallace contested Broadspire's
decision, arguing that she entered her leave as a territory
manager--a non-management sales position--and benefits for non-
management salespersons under the Plan are based on salary and
commissions.
Wallace pursued her claim through administrative review
and her final internal appeal was ultimately decided by Johnson &
Johnson's Corporate Benefits Department ("Corporate Benefits"), to
whom the Plan's named fiduciary, the Johnson & Johnson Pension
Committee ("Pension Committee"), has delegated authority to render
final benefits decisions. On June 24, 2006, Corporate Benefits
upheld Broadspire's position, offering an explanation of its
reading of the Plan. To contest the denial, Wallace filed a
denial-of-benefits suit in federal district court on June 22, 2007,
and, following her withdrawal of state claims, her suit is solely
one under ERISA, 29 U.S.C. § 1132(a)(1)(B) (2000).
the calculation, looks to average monthly commissions earned in the
full calendar year prior to the year in which the 26-week period
began (in this case, the relevant commissions year is 2001).
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After a discovery period, the parties filed a joint
stipulation of facts, and each moved for summary judgment. The
district court decided in Johnson & Johnson's favor, giving
deference to the company's own reading of its Plan. The court
denied as moot a motion by Wallace to strike two defense affidavits
in support of the company's summary judgment motion, saying that it
had not found it necessary to rely upon the affidavits. Wallace
now appeals from the adverse judgment and from the denial of the
motion to strike the affidavits.
Our review of the district court's decision interpreting the
plan is de novo because the case was decided on summary judgment,
Desrosiers v. Hartford Life & Accident Ins. Co., 515 F.3d 87, 92
(1st Cir. 2008), and any judicial review of the ERISA entity's own
reading is also de novo "unless the benefit plan gives the
administrator or fiduciary discretionary authority to determine
eligibility for benefits or to construe the terms of the plan,"
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989).
Where a fiduciary properly delegates its discretionary authority
under the plan to another entity, we review that entity's exercise
of the authority under a more deferential standard. See Terry v.
Bayer Corp., 145 F.3d 28, 36-38 (1st Cir. 1998); Rodriguez-Abreu v.
Chase Manhattan Bank, N.A., 986 F.2d 580, 584 (1st Cir. 1993).
In this case, the Plan gives its named fiduciary--the Pension
Committee--express power to "exercise its discretion" to decide on
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benefits, construe the Plan and render binding decisions.
Unquestionably, the Pension Committee purported to delegate to
Corporate Benefits this authority by a 1998 written instrument.
Wallace, however, argues that the delegation is invalid because
allegedly the Plan did not comply with statutory preconditions for
delegation and therefore--Wallace argues--no deference is due to
Corporate Benefits' reading of the Plan. We agree with the company
that the delegation was valid.
ERISA provides that among other things a plan "shall . . .
describe any procedure under the plan for the allocation of
responsibilities for the operation and administration of the plan
(including any procedure described in [section 1105(c)(1)])," 29
U.S.C. § 1102(b)(2); section 1105(c)(1) pertinently provides that
"[t]he instrument under which a plan is maintained may expressly
provide for procedures" for delegating fiduciary responsibilities
to other entities, id. § 1105(c)(1). Wallace admits that the Plan
allowed delegation, but says that it failed adequately to "describe
any procedure" for such delegation.
That the Plan purports to allow delegation is clear: it says
that the Pension Committee may "[d]elegate its authority
established" by the Plan, "designate persons to assist in carrying
out fiduciary duties," "allocate responsibility for the operation
and administration" of the Plan, and "[a]ppoint persons or
committees to assist it to perform its duties" under the Plan.
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Wallace says this is not enough to comprise "procedures" for
delegation. Johnson & Johnson says that--in addition to a Plan
provision permitting delegation--it was required by the statute
only to describe "any procedure under the plan" that it chose to
establish. 29 U.S.C. § 1102(b)(2). We think both sides may be
reading the term "procedure" more rigidly than is appropriate.
Congress seemingly attached no talismanic significance to the
term "procedure" nor required some special level of detail. In
naming "[r]equisite features" of a plan, section 1102(b) uses the
term "procedure" in three instances, each relating to a quite
different function (funding, delegation and amendment of the plan),
29 U.S.C. § 1102(b)(1)-(3), which suggests that "procedure" should
be treated as a practical concept adapted to the function in
question. Our own cases treat delegation "authority" and
delegation "procedures" as more or less the same thing, using the
latter phrase simply because that is the phrase that Congress used
in the statute. See Terry, 145 F.3d at 37-38; Rodriguez-Abreu, 986
F.2d at 584.
For delegation, it is hard to divine what Congress could have
wanted any plan to contain beyond a grant of authority to delegate,
together with any limitations that might exist on any such grant or
the method of making it. Beyond that, we do not see why more would
be expected than that the delegating fiduciary comply with any
general formalities provided in the plan or under corporate or
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trust law. Here, the delegation did specify what authority was
being delegated and to whom, and Wallace does not claim that the
delegation instrument in this case was deficient in generally
apposite formalities.
Consonantly, the 1974 House and Senate Conference Reports on
ERISA suggest only that if delegation authority were limited, that
limitation should be spelled out. The Reports explain, "[f]or
example, the plan may provide that delegation may occur only with
respect to specified duties, and only on the approval of the plan
sponsor or on the approval of the joint board of trustees of a
Taft-Hartley plan." H.R. Rep. No. 93-1280, at 43 (1974); S. Rep.
No. 93-1090, at 301 (1974). Here, the Plan permitted delegation of
benefit decisions and plan interpretation without limitation.
This means that Corporate Benefits' decision must be upheld
"unless it is arbitrary, capricious, or an abuse of discretion,"
Morales-Alejandro v. Med. Card Sys., Inc., 486 F.3d 693, 698 (1st
Cir. 2007). The standard is generous--"the decision 'must be
upheld if there is any reasonable basis for it,'" id. (quoting
Madera v. Marsh USA, Inc., 426 F.3d 56, 64 (1st Cir. 2005))--but it
is not a rubber stamp, Lopes v. Metro. Life Ins. Co., 332 F.3d 1,
5 (1st Cir. 2003).2 In this instance, we think that Wallace's
2
The deference may be less generous where the deciding entity
has a financial stake in the outcome, Metro Life Ins. Co. v. Glenn,
128 S. Ct. 2343, 2348 (2008); but in the present case the Plan is
funded by employee contributions--not those of Johnson & Johnson--
and no argument has been made for such an adjustment to the
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arguments are not frivolous but that Corporate Benefits' position
is by no means unreasonable and so must prevail.
Wallace's argument on the merits is this: the Plan says that
disability benefits are based on "Regular Monthly Earnings" and
that, for a regular full-time employee, this means "monthly
earnings excluding bonuses, overtime, or any other form of extra
compensation in effect at the date of the beginning of" the
disability period; she was a non-management sales employee at the
time her disability leave began; and she is therefore entitled to
the benefit of the following further provision in the definition of
"Regular Monthly Earnings":
For non-management salespersons, Regular Monthly Earnings
also include paid commissions for the calendar year
immediately prior to the calendar year in which beginning
of the [disability period] occurs, divided by the number
of whole (and partial) calendar months in such year
during which such commissions were earned.
Read literally, the language is consistent with Wallace's
position; but it is not the only possible reading and one may doubt
that the Plan's drafters had in mind the unusual situation in which
an employee switches "in the middle" from management to non-
management sales status. Because of how benefits and contributions
are calculated, Wallace's reading appears likely--or so Corporate
Benefits could reasonably conclude--to create a mismatch providing
an unintended windfall for Wallace and a shortfall in her
standard of review.
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contributions to the Plan to the detriment of other Plan
participants. This, in turn, led Corporate Benefits to read
includable commissions as only those earned while in a non-
management sales position.
Both the windfall and the detriment depend on the way the Plan
operates. As the Plan is structured, salary is the sole basis both
for calculating a manager's disability benefits and required
employee contributions to the disability plan; but for non-
management salespersons--whose compensation ordinarily depends less
on salary and more on sales commissions--both salary and
commissions are included in the base for benefits and the required
employee contributions.3 The Plan is funded by employee
contributions and not by the company and, in the nature of things,
the aim is to make contributions cover expected benefits.
If Wallace's benefits were enhanced by counting her
commissions earned in a prior year in which she was a management
employee, then her disability benefits would reflect commissions
for which Wallace paid no contributions to the Plan--a windfall for
her. On the detriment side, the Plan would suffer a shortfall in
contributions that were not required of her because she was a
manager when the commissions were earned; since the Plan is funded
3
The Corporate Benefits letter of June 24, 2006, so explained
the salary and benefits structure, so we need not rely on an
affidavit filed by the company on this or any other issue.
Accordingly, like the district court, we choose not to rely on the
affidavits and so regard the motion to strike them as moot.
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solely by employees this shortfall is in reality a burden on them
and would, from an actuarial standpoint, require an increase in
Plan contributions from others or a decrease in benefits paid to
them.
The failure to collect contributions based on commissions from
Wallace was not some error of the company: the Plan does not
require contributions on manager commissions because those
commissions are not intended to support disability benefits. Nor
is Wallace's offer to pay the extra contributions now meaningful.
In a disability scheme like this one, contributions are small in
relation to benefits because most of the contributors never become
disabled. To give participants an option to increase (modestly)
their past contributions for a given year, in exchange for (much
larger) benefits indefinitely after a participant becomes disabled
is a recipe for long-term plan insolvency.
Thus, we do not think it unreasonable for Corporate Benefits
to have read the Plan as excluding from the benefit calculation
commissions earned as a manager. The Plan's key sentence (quoted
in context above) reads, "For non-management salespersons, Regular
Monthly Earnings also include paid commissions for the calendar
year immediately prior to the calendar year in which beginning of
the [disability period] occurs . . . ." Corporate Benefits read
"paid commissions" to mean those "earned as a non-management
salesperson," relying upon the prudential concerns and internal
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consistency as the basis for doing so. Such considerations are
permissible in interpreting an ERISA plan.4
The premises on which Corporate Benefits operated may or may
not be perfect, and the rationale it employed involves judgment
calls as to prudence and internal consistency, but neither the
premises nor the reasoning seems to us arbitrary or capricious.
Given the use of different years for determining salary and
commissions under the Plan and the range of possible scenarios as
to employees' changes of position, probably nothing would prevent
odd results in some cases under the current Plan language. But, on
the facts before us, we think the result is defensible under the
deferential standard that applies.
Wallace complains that the given reasons for the denial were
altered or enlarged as the review process proceeded, that she is
being prejudiced by post-hoc rationalizations and that the
evolution of the explanation frustrated her ability to get
discovery. In a related but broader argument, she also says only
the stipulation of facts and no other evidence can be considered
4
See Liston v. Unum Corp. Officer Severance Plan, 330 F.3d 19,
23 (1st Cir. 2003) (finding that a plan administrator's
interpretation of a plan was reasonable although it differed from
the literal reading advanced by the plaintiff, because the
plaintiff's interpretation would have imprudent implications); cf.
Clair v. Harris Trust & Sav. Bank, 190 F.3d 495, 499 (7th Cir.
1999), cert. denied, 528 U.S. 1157 (2000) (rejecting a plaintiff's
literal reading of an ERISA plan because it would be impractical).
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because it was her understanding that the district court would
decide the case on that basis alone.
Substantial shifts in rationale by the administrator may well
cause prejudice in certain cases, e.g., Bard v. Boston Shipping
Ass'n, 471 F.3d 229, 237 (1st Cir. 2006), but it is also true that
explanations develop through stages in which one side's argument
counters a more developed position. In this instance, the most
complete explanation was provided in Corporate Benefits' final
ruling but, while more elaborate, it is not inconsistent with what
was said earlier. When the case reached the district court, this
was the explanation to which argument and discovery could be
addressed.
As for the defense's reliance on evidence other than the
stipulation, ordinarily a stipulation establishes facts that
neither side can controvert but does not prevent one side from
establishing other facts by relying on anything else in the
administrative or judicial record. Corporate Benefits' final
letter was part of the administrative record, included as an
exhibit to the joint stipulation of facts and available from the
outset of the litigation in the district court.
The district court's judgment is affirmed. Each party will
bear its own costs on this appeal.
It is so ordered.
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