Here’s a quiz to test your preemption mojo.

Scenario 1: Employee transfers to an affiliate of employer, intending to return in the future. Employer orally agrees that it will maintain the benefits of its retirement plan for employee as if he was still an employee. Employee never returns, and later sues employer for the promised benefit.

Scenario 2: Employee leaves employer (and retirement plan) and later returns. Upon his return, he signs a written agreement with employer that, because of a recent amendment to the retirement plan, employee will be able to retire with full benefits in eight years. Before those eight years are up, employer amends the plan again, such that employee receives less than a full benefit when he retires. Employee sues to obtain the full benefit promised in the separate agreement.

Does ERISA preempt both? Neither? One (which one)? Extra credit: why?

If you guessed that there’s no preemption in Scenario 1, but preemption in Scenario 2, you’re a winner!

Both scenarios come from recent Second Circuit cases that seem pretty similar on the surface (and even below the surface). Scenario 1 is Stevenson v. Bank of New York Co., Inc., 609 F.3d 56 (2d Cir. 2010). Scenario 2 is Arditi v. Lighthouse Int’l, — F.3d –, 2012 WL 400706 (2d Cir. Feb. 9, 2012), as amended (Mar. 9, 2012)

Stevenson accepted a transfer to a European affiliate of his employer, and said his employer promised to “maintain” his retirement benefit while he was on assignment. Stevenson never returned to the employer, and sued for the retirement benefits he said he was promised. The fact that turns out to be decisive was that Stevenson was no longer covered by the plan in question, and was not entitled to any benefits under it. The Court explained that ERISA did not preempt Stevenson’s claim, because he was seeking to enforce “a separate promise that references various benefit plans, none of which directly applies to Stevenson by its terms, as a means of establishing the value of that promise.” Stevenson, 609 F.3d at 60-61.  The court continued: “[b]ecause Stevenson’s state law claims derive from this promise rather than from an ERISA benefits plan, their resolution does not require a court to review the propriety of an administrator’s or employer’s determination of benefits under such a plan. The BNY benefits plans may provide a benchmark for determining claimed damages, but such damages would be payable from BNY’s own assets, not from the plans themselves.” Id.

Makes sense. If the employer promised something to employee, employer can be sued to enforce the promise. But now comes Arditi. The facts are worth explaining in a little detail.

From 1982 to 2000, Arditi was employed by Lighthouse, and accrued 18+ years of service credit under Lighthouse’s pension plan. After he left, Lighthouse amended the Plan to add a “Rule of 85,” which entitled an employee to retire with full benefits once the sum of his age and years of service equaled 85.

In 2002, Arditi returned to Lighthouse, in part to take advantage of the Rule of 85. Arditi and Lighthouse entered into a formal agreement confirming that Arditi would be reinstated in the Plan, and that the Rule of 85 allowed him to retire in 2010 with a full benefit.  In 2007, Lighthouse amended the plan again to stop accrual of service time for all participants.  When Arditi retired in 2010, he was 3 years short of a full benefit. Arditi sued to enforce the agreement that Lighthouse had signed when he returned.

A divided Second Circuit held that Arditi’s  claim was preempted by ERISA, because he was covered by the retirement plan, and was getting a (lesser) benefit under that plan. The majority asserted that Stevenson is “easily distinguishable” because “there is nothing in [Arditi’s] Agreement that is comparable to the promises made in Stevenson.” 2012 WL 400706 at 5.  It’s hard to see how there is nothing comparable, but the court continued:

In Stevenson, an agreement separate and independent from the pension plan governed the plaintiff’s benefits because the plaintiff was no longer in the bank’s employ and was no longer a participant in the bank’s plan. Id. at 60–61. Whatever rights the plaintiff had arose not from the bank’s plan, but from the independent agreement that gave him benefits even though he had no right to them under the plan. Here, the Agreement expressly referred to Arditi’s “reinstatement” into the Plan as a Lighthouse employee and described Arditi’s benefits under the Plan upon his return to Lighthouse. The Agreement merely described the benefits Arditi would receive as a Plan member; it made no promises of benefits separate and independent from the benefits under the Plan.

Id. The court held that Lighthouse had the right to amend the plan to freeze accrual of service time. Arditi’s agreement did not give him any greater rights than any other participant. Not only was Arditi’s contract claim preempted, but he could not maintain a claim under ERISA because Lighthouse was following the plan in paying Arditi a reduced benefit.

The dissent strongly disagreed with the majority’s take on Stevenson:

In rejecting Arditi’s arguments, the majority states that they must fail because he was a participant in the Plan and his right to a pension arose solely under the Plan. …This goes too far. Although Arditi was a participant in the Plan and entitled to receive a reduced benefit under it, he raises at least a colorable claim that his right in general to receive “an unreduced pension benefit” upon retirement—that is, a different benefit from that payable under the Plan—arises under the express terms of his employment agreement. This is precisely the species of claim this Court has already stated is not preempted by ERISA

2012 WL 400706 at 8 (citing Stevenson).

The dissent continued that, like Stevenson, “Arditi’s Complaint alleges an independent contractual duty to pay an unreduced pension benefit as a condition of his employment with Lighthouse ‘separate and apart from any obligation [Lighthouse] might have had under the Pension Plan.’” Id. Thus, the dissent reasoned, “Arditi is not merely seeking a claim of right under the Plan but damages for breach of an independent contractual obligation, not necessarily payable from the Plan itself but from Lighthouse’s own assets. This claim for relief is entirely consistent with this Court’s holding in Stevenson and is not preempted by ERISA.” Id.

On one hand, it is easy to see that the majority in Arditi was concerned about the harmful effects on ERISA plan administration that would flow from allowing a plan participant to enforce a side agreement for an increased benefit, no matter how formal the agreement was. An administrator could not be protected if it merely followed the plan. On the other hand, there seems to be something bizarre about allowing a non-participant to sue for a promised benefit while precluding a participant from doing the same thing.