H. LEE SAROKIN, UNITED STATES DISTRICT JUDGE
This is an action brought pursuant to Section 510 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1140 (1982). Section 510 provides, in pertinent part:
It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan. . . .
Plaintiffs claim that defendants, through the implementation of a nation-wide scheme to avoid pension liabilities, prevented them from obtaining benefits under the pension plan in violation of § 510.
in this case found themselves in a declining market because of substantial changes in the can making industry. They further recognized that they faced substantial layoffs and huge potential unfunded pension liabilities as a result. They concluded that continued employment would permit large numbers of employees to qualify for those benefits unless action was taken to prevent them from doing so.
Accordingly, defendants developed a sophisticated computer program which enabled them to identify those employees who had not yet qualified and who therefore, should be and were targeted for dismissal. The same computer system kept track of the employees so laid off in order to prevent the resurrection of their rights through inadvertent recall.
The plan was shrouded in secrecy and executed company-wide at the specific direction of the highest levels of corporate management. It was intended to save hundreds of millions of dollars in unfunded pension liabilities. The evidence of the plan, its secrecy, and its execution comes from the files of the defendants themselves. The documents are more than a smoking gun; they are a fusillade.
The issues to be decided in this portion of the case arise from Continental's claim "that the illicit objective of the Liability Avoidance Program was not a determinative factor or that, if it arguably was, other factors clearly predominated and would have resulted in the same layoffs in any event". (Defendant's Trial Brief, p. 4). The Gavalik case, which this court has utilized to establish the guidelines for this matter, provides as follows:
Continental must then be afforded the opportunity to present evidence that as to any particular individual class member's request for relief, that individual is not so entitled because in the absence of Continental's illegal plan that individual would have been without work at the same time in any event. We do not foreclose an opportunity for Continental to submit its proofs collectively as to all of the plaintiffs. That is, if the proof as to each individual is the same, there is no requirement that Continental repeat the same evidence for each claimant. Continental must establish either collectively or individually that class members would have suffered the same loss of work even in the absence of the illegal plan. Continental's burden on this issue will be one of persuasion.
Gavalik v. Continental Can. Co., 812 F.2d 834, 866 (3d Cir. 1987).
In view of the foregoing, this court concluded that it would be appropriate in the interests of efficiency and economy to determine the issues outlined above at a test trial involving one of the plants, since such determinations would dispose of other issues or render them moot. In addressing the factual matters presented, the court at the outset wishes to outline its view of the respective burdens upon the parties. Plaintiffs, of course, have the ultimate burden of proving that Continental acted with the specific intent to interfere with the attainment of Magic Number pension benefits in connection with layoff decisions. Plaintiffs must establish by a preponderance of the evidence that the avoidance of such pension benefits was a determinative factor in the layoffs by Continental. Defendants concede that they have the burden of both production and persuasion as to the alleged "same loss defense". If Continental were to prove that plaintiffs would have sustained the same loss in any event, plaintiffs would be unable to succeed, and thus the focus on this issue initially. The court proceeds on the basis that the respective burdens are subject to a preponderance of the evidence standard.
The court's factual findings are as follows:
Before the 1960's, almost all cans were three-piece tin-plated steel. A typical three-piece line for the making of such cans cost between $ 750,000 to $ 1,000,000. Additional equipment for end-making and lithography substantially increased that cost. Two-piece lines were much more expensive but required no separate lithography equipment, and because they needed only one end, certain expenses involved in three-piece equipment could be avoided. It was essential, because of the large capital investment, to maintain high levels of line utilization. It is undisputed that two-piece lines, while more expensive initially, were less labor intensive in actual operation.
There were three primary markets for can makers: food, general packaging and beverage. In the 1950's food cans were the largest segment of the domestic can business, but the beverage demand grew significantly because of beer and soft drinks. In the 1960's, the beverage market was the largest of the three and continued to be so through the relevant time period of this litigation.
One of the reasons that the food can business declined was because food canners began to self-manufacture their own cans. The Campbell's Soup Company, which was one of the nation's largest users of food cans, became one of the market's largest self-manufacturing companies. Other major consumers also began to meet their needs by self-manufacturing, and, indeed, they began to sell cans on the open market and competed with companies such as Continental and American Can Company. In addition, overall sales of canned food declined because consumers viewed it to be not as fresh as other types of food. Cheaper forms of packaging also replaced steel in the food market. Many of the small manufacturers which utilized cans went out of business. Therefore, there was a substantial reduction in the food can business for Continental as well as others in the industry.
General packaging was always the smallest part of the can industry, and this segment of the market was serviced by numerous manufacturers, including many smaller companies. Here again, substitute forms of packaging such as plastic reduced this market. Except for aerosol cans which briefly flourished and then diminished because of environmental considerations, most general line business declined for Continental.
The market for beer and soft drinks, however, sold in cans, substantially increased after World War II. Metal cans replaced glass as the package of choice in the beverage market. Can companies, including Continental, built a number of factories in response to that demand. Continental continued to concentrate on its proprietary three-piece steel cans during the early period and built many factories, particularly near customer locations in order to meet this demand. Continental opened 27 such plants between 1969 and 1971, and by 1974, 60 percent of Continental's beverage cans were produced at such plants. The growth of the beverage can business was attributed to increased consumption, consumer preference for convenient packaging, and the increasing reluctance on the part of retailers to utilize returnable bottles.
Tin-plated beer cans had a problem with iron pick-up which affected the look and taste of beer. In 1965, tin free steel was developed to avoid this problem. In addition, the ring-pull beverage can top appeared in 1963, and accounted for 40 percent of all beer cans sold in that year. Indeed, the convenience increased the demand. The ring-pull tops, however, were aluminum and thus forecast the entry of aluminum into this business. The number of breweries substantially decreased, however, and of the original 700 which existed in the country, by 1977 only 47 remained.
As a result of the foregoing, companies such as Continental and American Can, which were the major producers of steel cans, had obsolete factories and required capital for two-piece line investments. Employment growth in the industry declined and many workers were underutilized. Particularly due to the self-manufacturing by major past consumers, and the predominance of the aluminum technology, companies such as Continental and American were faced with aging equipment, outdated facilities and excessive labor. Changes to two-piece beverage production required a reduction in the labor force because the two-piece lines were less labor intensive than their three-piece counterparts. Therefore, the court concludes, and specifically finds, that economic conditions warranted restructuring and layoffs by Continental during the relevant time period.
In the late 1960's Continental had become the leading producer of metal cans in the United States, and was responsible for the manufacture of approximately one-half of all the beer cans consumed in this country. As a result of the foregoing conditions in the marketplace, Continental's predominance in the industry was substantially reduced.
American Can, which had always been Continental's primary competitor, faced identical problems. As Continental turned to Conoweld as its technology, American invested in a Miraseam technology. Neither was able to stave off the competition of aluminum cans. Even in the metal can industry, competitors emerged which also affected the market share for Continental and American. Likewise, major competitors entered into the aluminum can business, such as Jeffco, which was assisted by Coors in its development. The greatest loss of business came from the self-manufacturing of the major consumers, and, in particular, such companies as Anheuser-Busch and Schlitz.
To some extent Continental places blame upon the United Steel Workers Union for its predicament, asserting that the labor contracts were such that it further exacerbated Continental's competitive disadvantage, a contention which this court need not resolve. The effects of such contracts are, of course, relevant, but how or by whom they were initiated is not.
Continental's Response to the Declining Market
Reading the writing on the wall, Continental determined to hire the Boston Consulting Group (BCG) to conduct a study to determine what strategic approach Continental should take in respect to its metal can business. BCG initially did a study for Continental's beverage division in 1971, and in December of 1972 recommended that a study be conducted of the entire domestic metals division. Such a study was conducted and a presentation made in 1973. In essence, BCG recommended that Continental diversify its investments away from metal can making and towards businesses more likely to grow. It recommended an increase in its cash flow and that strategy was implemented. BCG also recommended that there continue to be investment in the soft drink and aerosol business, but generally recommended that Continental attempt to generate as much cash as possible to use for more productive investments. Pursuant to that overall strategy, attempts were made to increase productivity while at the same time reduce costs. Some of those efforts were directed at the elimination of the hiring of seasonal workers, spreading vacations and production schedules, and utilizing overtime in lieu of recalling workers. Although not necessarily relevant to this action, the court notes and finds that other recommendations of BCG were followed in that Continental acquired a number of new businesses unrelated to metal cans.
The court accepts without question the opinion of Dean Blaydon of the Amos Tuck Business School that industry conditions required that strategic changes be made; that diversification and cash generation were appropriate goals; that realignment and reduction of the work force were necessary; and that better utilization of the work force and assets was necessary and proper. In pursuing the foregoing, calculation of all costs including pension liabilities was consistent with good and accepted business practice. The issue, of course, is what use was made of that information not whether it was appropriate to gather it.
Thus, the court finds that Continental was entirely justified in seeking ways to reduce its costs and improve its productivity and generate cash. The question remains, however, for the court to determine whether or not in pursuing those goals Continental illegally sought to avoid liability for pensions, and whether such purpose was a determinative factor (a motivating consideration) in its decisions and the actions taken pursuant thereto in violation of § 510 of ERISA.
One of the ways in which Continental responded to the foregoing conditions was to create its Management Services Program (MSP). This program allowed Continental to use an extended lease agreement with a customer to obtain financing. In essence, it permitted Continental to recapture the capital cost and interest for the equipment necessary to establish a new two-piece production line. Continental utilized MSP beginning in the 1970's primarily for two-piece aluminum can contracts. By leasing the equipment Continental was able to recoup its capital investment and interest and assure purchase of its services over a fixed term.
In further response to the economic climate in which it found itself, Continental also engaged in strategic planning intended to make projections over a five-year period. The details of said strategic plans will be discussed more fully hereafter.
Continental generated numerous reports to track its costs and profits, and initiated a number of cost reduction measures. Included in these were programs to reduce the weight of the metal used in can bodies and ends, the construction of service centers and the use of larger sheet sizes. Lithography costs were also reduced. Job combinations were implemented, and certain jobs were eliminated as a result. In addition, throughout the relevant period Continental was concerned with pension liability arising out of an agreement with the United Steel Workers. Two major provisions, known as "Magic Number" pensions, provided the basis for this concern.
An employee who qualified for a 70/75 pension could elect to retire before age 62 and receive a lump sum retirement allowance covering the first three months of retirement, and after those three months a 70/75 pension. A 70/75 pension was equal to the normal pension. In addition, the employee received a monthly supplement of $ 300 until eligible for social security, normally until age 62. In order to qualify for a 70/75 pension an employee had to meet the following requirements:
a. The employee's regular continuous service was broken by his or her absence for at least two years as a result of a permanent plant shutdown, involuntary layoff or physical disability; and
b. The employee completed at least 15 years of regular continuous service and was 50 years of age or older with combined years of age and regular continuous service equal to 70 or more; or
c. The employee completed at least 15 years of regular continuous service with combined years of age and regular continuous service equal to 75 or more.
a. The employee's regular continuous service was broken by absence for at least two years as a result of a plant shutdown, involuntary layoff or physical disability, or Continental decided prior to that time that it was unlikely that the employee would return to work;
b. The employee completed 20 years of regular continuous service as of the last day worked;
c. The employee had not attained age 50 and his/her combined years of age and regular continuous service equaled 65 or more but less than 75; and
d. The Company had not provided the employee with suitable long-term employment.
had been a long term USW employee and was very active in the negotiations on behalf of the Union. He testified in deposition testimony that the purpose of the Magic Number pensions was either to prevent the can companies from shutting down or to provide benefits in the event of such shutdowns. It was recognized that the benefits would make plant closures expensive and, therefore, deter them. Ralph Biggs testified to the same effect as to the purpose of the Magic Number pensions.
In 1971, Continental did not attain its budgeted sales and income and, as a result, reevaluated its position. An extensive realignment program was considered and a reserve was established in 1972, called the Extraordinary Charge Authorization (ECA), in the sum of $ 231,000,000. The expectation at the time was that the realignment would result in business growth rather than decline. Primarily, the ECA was utilized to write off liabilities which included labor costs incurred through work force reductions, charges for removing excess and obsolete equipment, and for transportation expenses for machinery moved from one factory to another in order to consolidate production. The need for this program arose from most of the conditions outlined above.
ECA was succeeded by the Plant Utilization Program (PUP), and once again a reserve was established in the approximate sum of $ 100,000,000, but the source of this reserve was the income of the can company. PUP reserves were created so as not to charge local managers with certain costs over which they had no control. Whereas ECA was intended to position Continental for a growing market, PUP anticipated a declining market. PUP contemplated closures or reductions in plants. Continental claims that PUP's purpose was to size the company to available business so that Continental could fully utilize its facilities and reduce its capital investment.
In the mid-1970's, Stephen Rexford, Continental's Manager of Employee Relations and Strategy Planning, devised a computer system known as the Bell System. Bell I was followed by Bell II. The Bell systems employed scattergraphs, which were computer printouts depicting a plant's work force at a particular point in time. The scattergraphs assigned codes to each employee. Continental admits that it often referred to the goals of the Bell Systems as "the Liability Avoidance Program", which had two aspects:
(a) sheltering or keeping employed 70/75 qualified employees so that their employment was assured throughout their normal careers; and (b) preventing further employees from qualifying for 70/75 pensions.
(Defendant's Proposed Findings of Fact #368, page 118.)
In essence, Continental contends that its main objective was in maintaining antiquated, marginally profitable plants to keep senior workers employed, concluding that it cost less money to operate an inefficient plant with a dwindling customer base than it did to absorb the expense of shutting it.
Liability Avoidance Program
As set forth above, the original 70/75 Magic Number pension came into existence in 1971, and the Rule of 65 pension came into existence in the 1977 contract with the Steel Workers Union. Soon after these pensions became part of the collective bargaining agreement, Continental became concerned with them, particularly due to the fact that they were in large part unfunded. The more apparent it became that the business was in a declining mode, the more likely it became that Continental would have to concern itself with this potential liability. Continental realized that as additional employees gained the requisite age and service requirements, its liability would increase, and that one of the ways to avoid this occurrence would be to prevent those employees from meeting the necessary requirements.
The documents which come from Continental's own files are replete with evidence not only of the creation and existence of Liability Avoidance Program but of its implementation throughout the company. The court in rendering its opinion in this matter will make no effort to review the testimony of each and every witness or set forth each and every document which clearly supports the existence and operation of this program designed to deprive Continental employees of attaining the requirements necessary to entitle them to Magic Number pensions. Where the testimony of defendants' witnesses
has purported to contradict the clear documentary evidence, the court specifically finds that the documents created at the time accurately reflect what transpired and clearly are more credible than the testimony of the witnesses many years after the events.
No contemporaneous document has been produced by defendants which directly challenges either the existence, propriety, or implementation of the Liability Avoidance Program.
Liability avoidance was calculated by reference to the Bell System referred to above, which provided Continental with information as to who should be laid off and who should be kept on layoff in order to avoid the vesting of such liabilities. From the outset, this plan was devised and operated in secrecy. Indeed, the name Bell is a reverse acronym standing for "Lowest Level of Employee Benefits" or "Let's Limit Employee Benefits".
The fundamental principles of liability avoidance are set forth in the Bell User Manual (PX 754 at 185271) as follows:
There are two fundamental principles contained in the concept referred to as avoidance. First, we must be very careful that our plans make every attempt to avoid, insofar as practicable, triggering liabilities already vested in 70-75 qualified employees. Secondly, we must, wherever appropriate, shrink and cap our work forces in order to prevent currently inexpensive D.V.B.'s (Deferred Vested Benefit) from migrating into the very expensive 70-75 category. (PX 754 at 185271)
Pursuant to the plan, the goal of avoiding these unfunded liabilities was a determinative factor, and usually the prime factor, in deciding what plants to close or continue open, what work to accept or reject, where that work was to be performed, what jobs should or should not be combined, and who should and who should not be retained or laid off. The proof in support of the plan and its implementation is so overwhelming that if plaintiffs were required to meet a beyond a reasonable doubt standard, they could have done so. Indeed, the court questions the good faith of Continental throughout this litigation in denying even the existence of the plan, in view of the clear documentary evidence to the contrary, all of which comes from its own files. The plan existed, it was implemented nationwide, and it directly affected thousands of Continental's employees.
The plan began approximately in 1971. At the suggestion of Mr. Walter Klint, the company began making estimates to determine what the shutdown liability would be and whether action should be initiated to avoid having additional employees become eligible for Magic Number benefits.
As stated above, the Liability Avoidance Program had two prime goals: 1) continuing employment of those who had qualified and 2) permanently laying off those who had not yet qualified. The second goal was a constant and vital factor in the major decisions by management as is demonstrated by the following document produced by Continental:
In order to develop a 1977 liability avoidance for each plant it is necessary to standardize our approach to the recording of liability avoidance. The total liability avoidance number should appear on Exhibit G in column number 10 under "People Cost Avoidance".
B. Liability avoidance is also confirmed when employees with a D.V.B. (Deferred Vested Benefit) or less are permanently denied the 70/75 benefit. Identifying this type of avoidance will be done in the following manner.
1. Process the employees declared on permanent layoff (line 1.A of Exhibit II) through the Bell system with an effective date of 12/31/87. In our example, the 480 people cost 9.6 in 1987.
2. Subtract the cost of capping (3.2MM) from the above. This net number is avoidance future liability by capping on the date displayed in the Strategic Plan.
9.6 Cap Cost 1987
3.2 Liability triggered 1978 by capping.
6.4 (PX 326 at 017141).
It can be fairly argued that no company in a declining market should be required to make decisions regarding shutdowns and layoffs without calculating or considering the economic costs. However, it is also axiomatic that avoiding pension liability costs will always result in a savings in the event layoffs occur of those who have not yet qualified. The mere fact that profits are increased or losses reduced cannot justify every instance of intentional liability avoidance. If economic benefits were sufficient justification, then there could never be a violation of the pertinent statutory provision. 29 U.S.C. § 1140; cf. Gavalik, 812 F.2d at 857, n. 39 ("§ 510's essential purpose is to prevent employers from intentionally interfering with impending pension eligibility whether motivated by malice toward the particular employee(s) or by a general concern for the economic stability of the company").
The court wishes to emphasize, at the outset, that it finds nothing either illegal or improper in a company estimating its potential pension liabilities in the event of a plant shutdown. No competent management would consider such action without doing so. However, the issue presented in this matter is whether avoidance of pension liability was the motivating force in the company's decisions or merely a result of the decisions so made. For the reasons hereinafter set forth, the court finds that avoidance of pension liability was the prime catalyst for such decisions and so pervaded the thinking and goals of the company that it affected all of the decisions regarding the retention or layoff of employees.
The definitions of "cap and shrink" are clearly set forth in company documents:
Cap, shrink, or close action should be briefly explained -- or reason for no action should be rationalized under "comments". A cap is defined as a workforce reduction in order to reduce unfunded people liabilities. A shrink is defined as a workforce reduction due primarily to market or manufacturing considerations. (PX 351A at 048505)
The documents are not casual interoffice memos but rather are highly formal and were widely circulated. They are incorporated into the strategic plans for the company. (PX 6072A at 0155352)
Some of Continental's witnesses suggested that "capping" meant only protecting senior workers. Certainly persons engaged in the can making industry understood what the word "cap" meant. It meant putting a lid on, affixing a top -- just what the ordinary person would understand. If it meant only to shelter persons above a designated line, certainly a more descriptive word could have been found than "cap." Attempts now to assert that it meant something else are not credible.
The concern with Magic Number pensions was so great that the company considered shutting down certain plants and constructing others or even surrendering business in order to avoid the liabilities, as is apparent from a letter dated February 22, 1974, which considers the following:
(a) Retaining the business formerly serviced by the [representative] plant that was either shut down or having a 50% reduction in the work force by constructing another plant and manning
this plant with a like number of employees equal to the number laid off at the old plant, and
(b) merely giving up the business manufactured by the people who were either laid off or victims of a plant shutdown. (PX 11845)
Also germinating at this time was consideration for eliminating the United Steel Workers entirely from the Continental plants in order to totally avoid and end these pension benefits, as well as to rid itself of what it deemed to be high labor costs as a ...