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Dowling v. Pension Plan for Salaried Employees of Union Pacific Corporation and Affiliates

United States Court of Appeals, Third Circuit

September 15, 2017

JOHN E. DOWLING, Appellant

          Argued January 18, 2017

         On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 5-14-cv-03926) District Judge: Hon. John William Ditter, Jr.

          Oldrich Foucek, III Kelly S. Watkins [ARGUED] Norris McLaughlin & Marcus Counsel for Appellant

          Christopher T. Cognato David S. Fryman [ARGUED] Ballard Spahr Counsel for Appellees

          Before: AMBRO, HARDIMAN, and VANASKIE, Circuit Judges


          VANASKIE, Circuit Judge.

         Retirement plans can be complex documents that span hundreds of pages with numerous peculiarities. But when do a plan's terms move from merely complex to ambiguous? That is the question in this pension plan dispute. Former Union Pacific employee John Dowling is covered by a 277-page retirement plan composed of introductory material, 19 articles of content, and various appendices-none of which explicitly address Dowling's precise situation. When Dowling retired, the plan administrator interpreted the plan to provide Dowling with a lower monthly payment than he expected. Dowling challenged the administrator's decision as contradicting the plan's plain language, but the District Court found the plan ambiguous and the administrator's interpretation reasonable. Dowling appealed, and the dispute now centers on three issues: the text of the plan, our standard of review, and whether a conflict of interest alters the outcome. Because the plan's terminology, silence, and structure render it ambiguous, the plan accords the plan administrator discretion to interpret ambiguous plan terms, and the mere existence of a conflict of interest is alone insufficient to raise skepticism of the plan administrator's decision, we will grant deference to the plan administrator and affirm.


         Dowling was hired at age 41 by Appellee Union Pacific Corporation in 1988, where he served in the high-ranking position of Vice President for Corporate Development. Just seven years later, Dowling's life was dealt a severe blow when he was diagnosed with multiple sclerosis.

         By 1997, Union Pacific had determined that Dowling possessed a "Total Disability, " because he was "unable to work at any job." (App. 153, 520.) That decision made Dowling eligible for long-term disability benefits that he could receive for the duration of his disability or until he reached age 65 in 2012, whichever came first.

         When Dowling turned 65 in 2012, the long-term disability benefits stopped, and he began to draw on his Union Pacific retirement. His credited years of service for purposes of calculating his pension benefit included the 15 years he received disability benefits. Union Pacific's plan administrator interpreted the plan to require that Dowling's pension be calculated in accordance with what the administrator saw as applicable to disabled plan participants: Instead of calculating Dowling's pension based on Dowling's last ten years of actual work-ending in 1997-the administrator operated as if Dowling had worked and been paid his final base salary- $208, 000 per year- for his credited years of service, up until his retirement in 2012, even though Dowling had not in reality worked during that period. Under the administrator's interpretation, Dowling was entitled to a monthly pension payment of $7, 006.96.

         Dowling objected to the calculation and filed a claim via the plan's administrative procedures, asking for a benefit increase. He argued the plan required his pension payment to be based on his ten years of income prior to 1997, when he became disabled and stopped working, and not a hypothetical income stream for the ten years prior to his 2012 formal retirement date. If Dowling's theory about the 1987 to 1997 window were correct, then Union Pacific would owe Dowling a much higher monthly payment because during that earlier period Dowling received significant performance bonuses on top of his base salary.

         Dowling lost his administrative claim, exhausted his administrative remedies, and filed this action against Union Pacific and the other Appellees in the Eastern District of Pennsylvania. Dowling sought a declaratory judgment stating his rights and liabilities, pursuant to ERISA. 29 U.S.C. § 1132(a)(1)(B). The District Court granted summary judgment to Union Pacific, holding that the plan administrator's interpretation of the plan was not unreasonable, and Dowling appealed.


         Dowling's retirement is governed by Union Pacific's "Pension Plan for Salaried Employees." The plan is a substantial legal document: it opens with seven pages of preliminary information, then continues across 133 pages of content divided into 19 articles. At the back are 137 pages of appendices, schedules, exhibits, and tables.

         Out of all this material, two key factors largely determine the amount of a plan participant's pension payment: compensation and service. The compensation factor is called "Final Average Compensation" and is defined as a plan participant's average monthly salary during his or her three highest-earning years-the "high-three"-during the ten years "immediately preceding . . . the last date on which [the plan participant] is a Covered Employee." (Plan § 2.35, App. 144.[1]) The service factor is the participant's "Credited Service, " which refers to the amount of time a plan participant spent as a "Covered Employee." Thus, for the run-of-the-mill plan participant, pension calculation is easy: it is based on the years the individual spent at work, and his average paycheck during his three highest-earning years of his final ten years of employment.

         But the plan treats a disabled participant differently. For Credited Service, instead of stopping the accumulation of service when the disabled participant stops work, as is the case with the typical participant, the plan permits disabled participants to accumulate service during their pre-retirement, post-disability years, "as if" they remained Covered Employees until their date of retirement-even though they may have stopped working years earlier. (Plan §§ 4.02(c)(2), 6.05, App. 157, 178; see also Plan § 2.40(a)(5), App. 148 (noting the "Hours of Service" credited to not-working disabled participants).[2])

         For Final Average Compensation, the plan's application to disabled participants is less clear, with the confusion largely centering on the plan's use of the term "absence." During an "absence" from work, a plan participant is "deemed to have received" for the duration of their absence "Compensation at the base pay rate in effect" prior to the absence. (Plan § 2.18(a)(3)(C), App. 139.[3]) Thus, for purposes of pension calculation, the rate of pay during an employee's unpaid absence is deemed to be their pay prior to the absence. But does the definition of "absence" extend to time away from work due to disability? The plan is not clear. The lengthy definitions section does not define "absence." (See Plan § 2.01-2.76, App. 131-54 (defining 76 terms, over 23 pages, but providing no definition for "absence").) The plan does define two particular types of absences-absences for temporary family medical leave, and temporary approved absences, (Plan § 2.10, App. 134-35 (defining "Approved Absence"); Plan § 2.10B, App. 135 (defining "Approved Non-HCE Absence")[4])-and it references two more types of "absences" in the "Hours of Service" section, which details how much time should be credited in various scenarios. (Plan § 2.40(a)(4), App. 147-48 (listing as examples Approved Absences, temporary lay-offs, military leave, and Approved Non-HCE Absences) [5]). A departure from work due to disability is not one of the four examples of "absence" listed. Additionally, a different subsection in the "Hours of Service" section addresses the hours credited during "Total Disability"; that subsection is directly below the "absences" subsection, and does not mention "absences." (Plan § 2.40(a)(5), App. 148.)

         More generally, the plan grants the plan administrator the authority "to determine all questions of . . . eligibility, . . . to make factual determinations, . . . to construe and interpret the provisions of the Plan, to correct defects and resolve ambiguities therein, and to supply omissions thereto." (Plan § 13.02(f), App. 242.[6]) The plan is funded entirely by Union Pacific; contributions are neither required nor accepted from plan participants. (Plan § 12.01-03, App. 232.[7])

         During the times relevant here, the plan's designated administrators, including Barbara Schaefer [Schaefer isn't listed as an Appellee], Roy Schroer, and Edwin A. Willis, were also Union Pacific employees or officers. Schaefer and Schroer each held the title of Vice President for Human Resources, and Willis was Assistant Vice President for Compensation and Benefits.


         The District Court had jurisdiction under 28 U.S.C. § 1331 and 29 U.S.C. § 1132(e). We have jurisdiction under 28 U.S.C. § 1291.


         Federal courts review the decisions of ERISA plan administrators under standards derived from "principles of trust law, " in that the plan document itself determines the appropriate level of review. Conkright v. Frommert, 559 U.S. 506, 512 (2010) (quoting Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989)). In the default scenario, a plan administrator's "denial of benefits . . . is to be reviewed under a de novo standard." Id. (quoting Firestone, 489 U.S. at 115). But if the plan document "gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan, " then the Court reviews the administrator's decision on a more deferential basis. Id. (quoting Firestone, 489 U.S. at 115).

         This case falls in the latter scenario, because the Union Pacific plan explicitly grants the administrator the ability to determine benefit eligibility and to "construe and interpret" the plan's provisions. (Plan § 13.02(f), App. 242.) In such circumstances, we will not set aside the administrator's interpretations of "unambiguous plan language" as long as those interpretations are "reasonably consistent" with the plan's text, Fleisher v. Standard Ins. Co., 679 F.3d 116, 121 (3d Cir. 2012) (quoting Bill Gray Enters. v. Gourley, 248 F.3d 206, 218 (3d Cir. 2001)), and we will only disturb the administrator's interpretations of ambiguous plan language when those interpretations are "arbitrary and capricious, " id. (quoting McElroy v. SmithKline Beecham Health & Welfare Benefits Tr. Plan, 340 F.3d 139, 143 (3d Cir. 2003)). Whether plan language is ambiguous or unambiguous is itself a question of law subject to our de novo review, with the definition of ambiguity being language that is "subject to reasonable alternative interpretations." Id. (quoting Taylor v. Cont'l Grp. Change in Control Severance Pay Plan, 933 F.2d 1227, 1233 (3d Cir. 1991)). Many cases will therefore turn, as this one does, on whether a proffered interpretation of plan language is "reasonable."

         Courts apply this deferential standard for at least two good reasons. First, courts have an obligation to give effect to the plan-drafter's intentions, because "ERISA abounds with the language and terminology of trust law, " Firestone, 489 U.S. at 110, and the hallmark purpose of trust law is "to accomplish the settlor's intentions, " Restatement (Third) of Trusts, Foreword (Am. Law Inst. 2003). Here, since the plan-drafter explicitly specified that the plan administrator should possess the ability to interpret terms, we must be deferential because the de novo alternative-examining each of the plan administrator's legal decisions anew-would undermine rather than give effect to the drafter's wishes.

         Second, giving deference pays heed to Congress's concern for not discouraging employers in their adoption of ERISA plans. Existing federal statutes do not require employers to offer employee-retirement plans, and when Congress passed ERISA to make retirement programs fairer, it also worked to reduce the burdens of its new regulations and to keep in check disincentives that might discourage an employer from offering a retirement plan at all-disincentives such as high "administrative costs" and "litigation expenses." Conkright, 559 U.S. at 517 (quoting Varity Corp. v. Howe, 516 U.S. 489, 497 (1996)). To that end, the Supreme Court has recognized that employers often commit the power of interpretation to a plan administrator because doing so serves the employer's interests of efficiency, predictability, and uniformity-interests ERISA seeks to protect. Id. Thus, when a court pays deference to the administrator at the request of the plan-drafter, the court acts in congruence with Congress's wishes.


         We now turn to the debate over the meaning of the plan's terms. Union Pacific argues the plan requires the administrator, in light of Dowling's status as a disabled participant, to "deem" Dowling to have been paid his final base salary from the moment he became totally disabled in 1997 until he retired in 2012, and then calculate his Final Average Compensation from those deemed earnings based on the ten-year window from 2002 to 2012. That is the approach the plan administrator took and the District Court found reasonable. Dowling, on the other hand, argues Union Pacific's interpretation involves too many interpretive gymnastics: Dowling stopped working and earning a salary in 1997 and his ten-year window must accordingly look backward from 1997, even though he continued to accrue credited service until 2012.

         We pass no judgment as to which proffered interpretation is best, because at least three aspects of the plan combine to make it ambiguous and each party's interpretation reasonable. The first aspect is the plan's use of the word "absence." Is a person who is not at work due to a disability "absent"? Union Pacific says yes; Dowling says no. If yes, then Plan § 2.18(a)(3)(C)-which "deems" a participant to have been paid during an "absence"-can reasonably be read as requiring the administrator to deem disabled persons to be paid their base salaries for the duration of their disability, up until their retirement date, for purposes of calculating Final Average Compensation. That would mean that Dowling should be counted as earning his base salary up until 2012, as the administrator found. But on the other hand, if time spent not working due to disability is not an "absence, " then the plan's language favors Dowling and disabled participants are not "deemed" to receive any pay at all after they leave work, and the only reasonable approach would be to calculate Final Average Compensation by looking backward from the date the person became totally disabled and stopped working-1997 in Dowling's case.

         The plan administrator adopted the former approach, that missing work due to disability does in fact constitute an "absence." Dowling argues that the administrator went too far in extending the definition of "absence" to cover indefinite departures from work, and that only more limited short-term departures should count.

         Because "absence" is given no specialized meaning in the plan's definitions section, the word must be interpreted in accordance with its generally prevailing meaning, Restatement (Second) of Contracts § 202(3)(a) (Am. Law Inst. 1981) ("Rules in Aid of Interpretation"), [8] and its generally prevailing meaning is broad-it means nothing more specific than the state of being "[n]ot present, " Absent, Oxford English Dictionary (3d ed. 2009). While a person who misses one day of work can surely be said to be "not present, " and thereby "absent, " so can a person who endures an indefinite departure from work, whether due to disability or some other reason. Michael Jordan's three-year hiatus from basketball was an "absence, " according to the New York Times.[9] Rick Moranis's 18-year disappearance from film was an "absence" in the eyes of the Hollywood Reporter.[10] And Miles Davis's five-year departure from music in the 1970's was an "absence" as well, as told by National Public Radio.[11] Thus, given that the generally prevailing meaning of "absence" permits the word to be used to refer to indefinite departures from the workplace, we find the administrator's use of the same word in the same manner to be reasonable.

         Dowling argues we must reject the administrator's interpretation of the word "absence, " because the plan requires a specialized, narrower interpretation that applies only to shorter departures from work. For authority, Dowling points to Plan § 2.40. That section has separate subsections for time spent in "Total Disability" and time spent in four specific types of "absences." (Plan § 2.40(4), (5), App. 148.) Dowling suggests this separate treatment indicates the two terms are mutually exclusive-time spent in "Total Disability" is not an "absence, " and vice versa. But the plan's text does not go so far. Section 2.40 does not purport to define "absence"; it just lays out four nonexclusive scenarios that fit the definition of "absence." Dowling's argument is not without persuasive force-to the contrary, it is a reasonable one. But it would be a stretch to say his interpretation is the only reasonable approach, to the exclusion of the plan administrator's.

         The second aspect that contributes to the plan's ambiguity is its silence on how to calculate Final Average Compensation specifically for disabled participants. The plan has a default method of pension-plan calculation and an exception to that default for disabled participants, in two relevant respects: (1) the availability of a pension, and (2) the calculation of credited service. Compare Plan § 4.02(a), App. 155 (laying out the "General Rule" for "Credited Service"), and Plan § 6.01-03, App. 173-74 (laying out general rules for retirement benefits), with Plan § 4.02(c)(2), App. 157 (providing special rules for disabled participants' credited service), and Plan ยง 6.05, App. 178 (providing special rules for disability retirement benefits). The plan, however, leaves a gaping hole as to whether the default-and-exception pattern continues for calculation of the Final Average Compensation for disabled participants. Given this gap, the plan administrator faced a choice: (a) calculate Dowling's Final Average Compensation in line with the default scheme, even though disabled participants are explicitly treated as sui generis with respect to pension-availability and credited ...

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