Hurlic v. Southern California Gas, No. 06-55599 (9th Cir. Aug. 20, 2008)

By Paul Mollica

The latest ERISA “cash balance” case comes to grief in the Ninth Circuit, with the panel holding, among other things, that plaintiff counsel’s attempt to extend the California Fair Employment and Housing Act (FEHA) to the same claim was preempted by federal law. On the other hand, the plaintiffs eke out a victory over the employer’s failure to give notice of an amendment to the plan.

Hurlic v. Southern California Gas, No. 06-55599 (9th Cir. Aug. 20, 2008):  Over the last decade, AARP and the plaintiffs’ bar have put up a tough fight against the widespread conversion of corporate retirement benefits from traditional defined benefit plans (which paid a fixed amount to retirees who reached eligibility age and service) to “cash balance” plans, which allot individual accounts to employees and which allow them the option of taking the benefit upon retirement in a lump sum. 

Such plans are challenged as age-discriminatory because they often have the effect of freezing the buildup of benefits for older workers, at a stage in their careers when they had supposed their benefits would have grown the fastest. At the same time, they allow younger employees to accrue benefits at the same rate as older employees, but then to accumulate interest on them as well, making the benefit relatively more valuable to progressively younger employees.

Nevertheless, no U.S. court of appeals to date has accepted the argument that these plans violate ERISA, which expressly proscribes age discrimination in defined benefit plans (i.e. a plan may not suspend an employee’s benefit accrual or reduce “the rate of an employee’s benefit accrual . . . because of the attainment of any age,” 29 U.S.C. § 1054(b)(1)(H)(i)).  And the Ninth Circuit, like four other circuits before it (the Second, Third, Sixth, and Seventh), joined here in holding lawful the conversion of retirement funds to a cash balance account.  The court also batted back a challenge under 29 U.S.C. § 1054(b)(1)(B), which prescribes the rate at which benefits are allowed to accrue in a defined benefit plan.  As to these claims, the panel affirmed dismissal at the pleading stage for failure to state a claim.

Here the employees played yet another card, arguing that the California FEHA separately prohibited age discrimination in benefits.  Yet the Ninth Circuit likewise affirmed dismissal here, finding that the state anti-discrimination law was preempted by ERISA.  The panel acknowledged that state anti-discrimination law is not readily preempted by ERISA, because of the joint state/federal enforcement mechanism envisioned under the ADEA (Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 101-06 (1983)).  But the state act sweeps more broadly than the ADEA, the panel held, because Congress amended the ADEA expressly to render it consistent with ERISA’s substantive provisions:

“Plaintiffs thus seek to invalidate the wear-away provision under a broad, general anti-age discrimination provision – something they would not be allowed to do under the ADEA. With regard to ERISA plans then, FEHA does not provide a means of enforcing the ADEA’s commands such that preemption would ‘impair’ the joint state/federal enforcement scheme of the ADEA. See Shaw, 463, U.S. at 102. Because FEHA prohibits practices which would be lawful under the ADEA, Plaintiffs’ FEHA claim is preempted. See 29 U.S.C. § 1144(a); Shaw, 463 U.S. at 103. Thus, the district court correctly dismissed this claim.”

Plaintiffs nevertheless carried away a win on their final claim — that Pacific Gas’s failure timely to notify the employees of the switchover to a cash balance plan violated a procedural provision of ERISA, 29 U.S.C. § 1054(h)(1)(A), and that they were harmed because they had no opportunity to pursue alternative retirement strategies.  The case was remanded for further adjudication of this claim.