Hughes Aircraft Company v. Jacobson

PETITIONER: Hughes Aircraft Company
LOCATION: Elizabeth Township, Allegheny County

DOCKET NO.: 97-1287
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 525 US 432 (1999)
ARGUED: Nov 02, 1998
DECIDED: Jan 25, 1999

Lisa Schiavo Blatt -
Lisa S. Blatt - On behalf of the United States, as amicus curiae, supporting the petitioners
Paul T. Cappuccio - Argued the cause for the petitioners
Seth Kupferberg - Argued the cause for the respondents

Facts of the case

Stanley I. Jacobson and other retired employees of Hughes Aircraft Company were beneficiaries of Hughes Non-Bargaining Retirement Plan. Jacobson and the others claimed in their class-action lawsuit that Hughes violated the Employee Retirement Income Security Act of 1974 (ERISA), the federal pension protection law, when it amended the plan twice in response to a $1.2 billion dollar surplus. ERISA requires that some of the surplus be distributed to cover employees when a pension plan is terminated. Hughes' first amendment to the plan established an early retirement program that provided significant additional retirement benefits to certain eligible active employees. The second amendment disallowed new participants from contributing to the plan. Jacobson and others argued that Hughes had terminated one plan and started another by stopping its pension plan contributions. Thus, the company had used the plan's surplus to benefit new employees at the expense of the retirees. The District Court dismissed the complaint for failure to state a claim. The Court of Appeals reversed the District Court by finding that the early retirement program and noncontributory benefit structure were prohibited by the ERISA.


Did an employer violate federal pension protection law when it amended its retirement plan by establishing an early retirement program and creating a noncontributory benefit structure for new participants?

Media for Hughes Aircraft Company v. Jacobson

Audio Transcription for Oral Argument - November 02, 1998 in Hughes Aircraft Company v. Jacobson

William H. Rehnquist:

We'll hear argument first this morning in Number 97 1287, Hughes Aircraft Company v. Stanley Jacobson.

Mr. Cappuccio.

Paul T. Cappuccio:

Thank you, Mr. Chief Justice, and may it please the Court--

The nub of this case, I believe, is that the post termination surplus asset allocation rules buried in section 1344(d) of ERISA cannot become the tail that wags the rest of the statute.

Those rules do not create an entitlement that restricts the legitimate uses to which surplus plan assets, or any plan assets, can be put, but that is how the respondents would have it in this case.

The respondents do not contend that they have not received every benefit that they were ever promised under the Hughes pension plan.

Sandra Day O'Connor:

This is a defined benefit plan, Mr. Cappuccio?

Paul T. Cappuccio:

Yes, Your Honor.

Sandra Day O'Connor:

And your point is that they have received the benefits defined under the plan?

Paul T. Cappuccio:

That's correct, Your Honor.

In a defined benefit plan, the employee takes no risk that the plan will not perform well.

Rather, the employee is guaranteed from day 1, Justice O'Connor, that he or she will receive fixed benefits that are at least equal to all of his or her contributions.

Sandra Day O'Connor:

And I suppose under that plan there might be a deficit instead of a surplus.

Paul T. Cappuccio:

There certainly may well be, Your Honor.

That's absolutely right.

Sandra Day O'Connor:

And the theory of the court below, if there were a deficit, would be what?

Paul T. Cappuccio:

I think the theory of the court below would be that the employer would have to make up the difference, which is, in fact, how a defined benefits plan works, so I think what your question points out, Your Honor, is the theory of the court below in a sense creates a defined contribution plan with a defined benefits floor, which as Judge Easterbrook--

Sandra Day O'Connor:

Are these defined benefit plans becoming used less often in today's world?

Is this... are they almost extinct as a species, or still exist?

Paul T. Cappuccio:

--I think they're still very much around, Your Honor.

I think the general trend is to move towards defined contribution plans, and also to move away from contributions to defined benefit plans, and I think the reason for that is as a general sense today that employees want to invest their own money.

For example, in this case Hughes has a 401k plan, so if they're not contributing they can take that extra money and put it into the 401k plan, and--

Anthony M. Kennedy:

If this were a voluntary plan, then would the employees be entitled to all the benefits?

Paul T. Cappuccio:

--There is a provision in section 1054 of ERISA that provides if you are allowed to make voluntary contributions over and above the mandatory contributions, that you vest in those also, but here the contributions are mandatory.

The mere fact that at--

Anthony M. Kennedy:

They're man... after the amendment they were not mandatory because you could go to the other side.

You could go to the other side of the plan.

Paul T. Cappuccio:

--I would disagree, Justice Kennedy.

The mere fact that on one day you have a choice whether or not... which plan to be in doesn't then make the contributions voluntary once you select that plan.

I mean, it's voluntary only in the distant sense that you could decide to be an employee or not an employee.