Affirming a lower court decision, the U.S. Court of Appeals for the Fifth Circuit held that a former executive of a pharmaceutical company will not receive benefits under the company’s supplemental executive retirement plan (SERP) because a determination by the SERP administrative committee that the executive violated a non-compete provision was not arbitrary and capricious. The executive worked for the company from 1988 until he resigned in 2010 to take a position as vice president of product development with a clinical stage bio-pharma company. On accepting the new job offer in November 2010, the executive notified his employer that he intended to retire from the company and followed up with a written request for his benefits under the SERP.

To determine whether the executive’s new employment would violate a non-compete covenant in the SERP, the company asked for additional information about the executive’s new employer and the nature of his duties. Under the terms of the SERP, a participant’s right to a benefit is conditioned on the participant’s compliance with a covenant not to compete. For a period of five years following termination, a SERP participant may not “carry on any business of, or be engaged in, consult or advise . . . or permit his name . . . to be used by any person or entity engaged in or concerned with or interested in any business . . . which competes with the products manufactured or sold” by the company. A participant who violates the non-compete covenant forfeits all SERP benefits. Despite several requests, the executive refused to provide the required information about his new job, eventually responding only that the new company was not a competitor because it was a start-up company. Relying on press releases and the new company’s website, the administrative committee determined that the new company was developing products that would compete with the company’s products. The committee denied the executive his SERP benefits for violating the non-compete provision.

The executive sued the company under the Employee Retirement Income Security Act (ERISA), claiming that the committee arbitrarily and capriciously denied him the benefits he was owed. The district court granted summary judgment to the company on the ERISA claim, concluding that the company’s decision was not arbitrary and capricious even if other people “might have made a different decision.” On appeal, the Fifth Circuit agreed, finding that the committee “sensibly interpreted the non-compete clause as prohibiting a participant from engaging in the development of products that would conflict with [the company’s] business when brought to market.” Pointing to other “hair-splitting” arguments and failed reasoning by the executive, the court held that it must defer to the ERISA administrator in this case. The court was also swayed by the executive’s reluctance to respond to the committee’s inquiries about his new employer, and by a provision the executive negotiated in his new employment contract that promised him $50,000 in legal fees should the company dispute whether he had violated the non-compete clause. Finding that the promise likely “reveals at least the reasonableness of the committee’s non-compete determination,” the court affirmed the lower court decision, concluding that the committee’s decision must be upheld and the benefits denied. A related contractual dispute over vesting of restricted stock units was also decided in favor of the Company. (Wall v. Alcon Labs, Inc., 5th Cir., 2014)