A case decided this week by the U.S. Court of Appeals for the Second Circuit demonstrates the high states of stock plan miscommunications. In Bell v. Pfizer Inc. (Aug. 30, 2010), a 2-1 majority of the Court held that Pfizer did not breach its fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by making potentially misleading statements, albeit unintentional, to an employee about her ability to exercise millions of dollars in stock options.
The misunderstanding began when communications between the parties as to pension plan eligibility and benefits became mixed in with communications as to the duration of the exercise period for stock option after a termination of employment. An employee who "retired" under certain provisions of the Pfizer pension plan would be entitled to exercise vested stock options for the remainder of the options' term. (The Court observed, and any reader of the facts of the case can see, that the potentially misleading communications were unintentional and, in fact not incorrect.)
For some reason [perhaps because ERISA allows the recovery of attorneys' fees in some cases], the employee/plaintiff dropped all of her state law claims and pursued only the claim that the alleged miscommunication was a breach of ERISA fiduciary duties. Given this claim, and the fact that ERISA plainly applies only to retirement and welfare benefit plans, not to stock compensation plans, the court made the only decision it could: the company did not breach its fiduciary duties because the miscommunications relied upon by the plaintiff relate solely to the pension plan.
In essence, Bell seeks to extend the ERISA fiduciary duty to unintentional misstatements regarding collateral, non-ERISA plan consequences of a retirement decision. The language of the statute weighs against such an extension. . . .
Even where non-ERISA benefits (or exclusion therefrom) turn on a person's status under an ERISA plan, the ERISA fiduciary duty cannot extend to more than the person's qualification for that status. If it did, Plan administrators would be forced to search out and master all collateral programs relevant to employment termination, e.g. private medical plans administered by insurance companies and long-term care plans, determine whether they are in any way related to the ERISA plan, and monitor their administration, while often having no power over them.
Although saying it was "not dispositive," the Court could not help noting in its decision that "throughout her planning for leaving Pfizer, Bell was assisted by her lawyer husband who prepared detail financial analyses of the consequences of her proposed leaving of Pfizer's employ."
We made our presentation "(More Than) 25 Ways to Improve Stock Plan Documents" at last year's NASPP conference and will not be repeating it again until next year. However, it might not hurt to review plan documents and award agreements in conjunction with Dodd-Frank compliance efforts. Avoiding the costs of litigation or a payout of $327 million seems worth it.
Speaking of ERISA, on September 2, 1974, President Gerald Ford signed into law PL 93-406 - ERISA.