Opinion
No. C 02-1630 SI
July 15, 2002
ORDER GRANTING PLAINTIFFS' MOTION TO REMAND AND REMANDING ACTION TO ALAMEDA COUNTY SUPERIOR COURT
On July 12, 2002, the Court heard argument on plaintiff's motion for remand. Having considered the arguments of counsel and the papers submitted, the Court hereby GRANTS plaintiff's motion to remand.
BACKGROUND
On January 25, 2002, plaintiffs Allan Wright, Kathy Cullen, Paula Lapham, and Jay Bothelho (collectively, "plaintiffs") brought this action in Alameda County Superior Court against ObjectStream, Inc. ("ObjectStream"), Anthony Blake ("Blake"), Elias Blawie ("Blawie"), Mani Chandy ("Chandy"), Andy DeMari ("DeMari"), John R. Harrington ("Harrington), Mark Frost ("Frost"), Jos Henkens ("Henkens"), Brian Jacobs ("Jacobs), Brad Jones ("Jones"), Sanjay Khare ("Khare"), Jean-Michel Marbier ("Marbier"), Robert Miller ("Miller"), and George Still ("Still") (collectively, "defendants"). This is a class action pursuant to California Code of Civil Procedure § 382, alleging state law claims for breach of contract and misrepresentation, and seeking damages under California law. On April 4, 2002, defendants ObjectStream, Harrington, and Blawie, joined by defendant Blake, removed the suit to this Court pursuant to 28 U.S.C. § 1331 and 1441. In the notice of removal, defendants assert that this Court has jurisdiction over plaintiffs' claims pursuant to 28 U.S.C. § 1331 and the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § et seq.
Plaintiffs are former employees of ObjectStream, a telecommunications software company that ceased operations and terminated all of its employees on January 26, 2001. Def.'s Oppo. at 1:25-27. Plaintiff employees allege that they were promised but did not receive pay for accrued salary, vacation pay, and severance. Pl.'s Mot. to Remand at 1:17-19. Plaintiffs argue that their claims arise out of the oral promises made by defendants in order to induce plaintiffs to stay on with the company. Pl.'s Reply at 3:11-15. On March 8, 2001, ObjectStream's Board of Directors conducted a conference phone call in which they reviewed the status of the company's shutdown of operations and adopted the "ObjectStream March 2001 Employee Severance Plan" ("Severance Plan"). Def.'s Oppo. at 2:1-9. Terms of the plan included a statement that the Severance Plan expressly superseded "any and all separation, severance, and salary continuation arrangements, programs, and plans which were previously offered by ObjectStream to employees eligible to participate under this Plan." Id. at 2:10-12. The Severance Plan provided that employees were entitled to receive a lump sum payment equal to six days of the employee's base salary prior to termination in exchange for the employee's execution of a "General Release of All Claims." Id. at 2:11-13. Employees were eligible for the plan if they had been terminated in connection with the January 26, 2001 shutdown, they executed the release forms, returned Company property prior to January 26, 2001, and were not in any of four excluded categories: those who voluntarily terminated employment, were dismissed for cause, had worked only as independent contractors or consultants, or were officers of ObjectStream. Id. at 2:19 — 3:6. of fifty-six eligible employees, twenty-three executed the general release and participated in the Severance Plan. Id. at 3:7-11. None of the plaintiffs executed the general release or received benefits under the Severance Plan. Id. at 3:12-14.
In their complaint, plaintiffs allege that they were damaged by the failure of ObjectStream to pay certain accrued salary, vacation pay, and severance which they claim they were promised. Pl.'s Mot. to Remand at 1:14-21. Additionally, plaintiffs claim improper financial dealings by certain defendant officers and directors of the company. Id. at 1:19-20. Defendants contend that plaintiffs were eligible to receive benefits under the Severance Plan but did not receive them due to their failure to sign the general release form. Def.'s Oppo. at 3.
In their motion to remand, plaintiffs assert that their claims are brought exclusively under state law, and therefore there is no federal jurisdiction. Pl.'s Mot. to Remand at 1:10-12. Defendants contend that plaintiffs state law claims are completely preempted by ERISA. Def.'s Oppo. at 4: 26-27. Additionally, plaintiffs request attorney's fees and costs in connection with what they characterize as an improper removal. Currently before the Court are the plaintiffs' motion to remand and request for attorney's fees and costs.
LEGAL STANDARD
28 U.S.C. § 1441 provides that "any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant . . . to the district court of the United States for the district and division embracing the place where the action is pending."
For a defendant to remove an action, the federal claims must usually appear on the face of the plaintiff's well-pleaded complaint. However, where the basis of removal is defendant's claim of ERISA preemption, the federal court may have jurisdiction under the theory of complete preemption. See Lyons v. Alaska Teamsters Employer Service Corp., 188 F.3d 1170, 1171-72 (9th Cir. 1999). Thus, even where federal claims do not appear on the face of the complaint, in order to determine if federal jurisdiction is present and removal appropriate, the district court must consider whether ERISA completely preempts the claim. If the district court determines that ERISA preemption does not apply, jurisdiction is lacking, removal is improper, and the case should be remanded. Id. at 1172. The burden of establishing grounds for federal jurisdiction rests on the removing party. Emrich v. Touche Ross Co., 846 F.2d 1190, 1195 (9th Cir. 1988).
DISCUSSION
A. Motion to Remand
Plaintiffs argue that this case was improperly removed because the claims against ObjectStream do not relate to an ERISA plan, and therefore cannot be preempted under ERISA. Plaintiffs also argue that their claims against ObjectStream do not arise out of the Severance Plan, but rather out of oral promises defendants made to plaintiffs prior to ObjectStream's shutdown. Defendants contend that the Severance Plan was an ERISA plan and therefore all of plaintiffs' claims are completely preempted and are subject to federal jurisdiction.
Plaintiffs argue that their claims arise out of defendants' oral promises of three month severance pay rather than out of the Severance Plan, and that these promises cannot relate to ERISA claims since they were not established and maintained pursuant to a written instrument. Pl.'s Reply at 3:11-15, 4:16-18. Specifically, plaintiffs allege that ObjectStream told its employees that the company was actively on the market, that a final sale or merger of the company was imminent, that employees should take advantage of the valuable opportunity to purchase stock in the corporation, and that each employee who remained an employee until the corporation ceased operations or was sold would receive a severance package equal to three months salary. Compl. at ¶ 52. Defendants contend that the Severance Plan adopted in March 2001 superseded all prior plans and promises, and included provisions for employees who believed they were entitled to greater benefits than those offered by the Severance Plan. Def.'s Oppo. at 9:9-21.
Plaintiffs are correct that, to serve as the basis for ERISA preemption, a plan must be "established and maintained pursuant to a written instrument." Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 82-83 (1985). Thus, any oral promises made to plaintiffs with no written component would not qualify for ERISA preemption. However, defendants assert that the Severance Plan is the basis for federal jurisdiction under ERISA. As discussed herein, defendants have failed to show that the Severance Plan qualifies as an "employee benefit plan." Therefore, the Court need not determine on which plan plaintiffs' claims are based.
Complete preemption can be invoked only if two conditions are met: (1) ERISA expressly preempts the state law cause of action under 29 U.S.C. § 1144 (a) and (2) the state law cause of action is encompassed by the scope of ERISA's civil enforcement provision, 29 U.S.C. § 1132 (a). Metropolitan Life Ins. Co. v. Taylor, 381 U.S. 58, 60 (1987); Abraham v. Norcal Waste Systems. Inc., 265 F.3d 811, 819 (9th Cir. 2001). Generally, state laws are preempted by ERISA (1) where there is an "employee benefit plan" as defined by ERISA and (2) the state law "relates to" the ERISA plan. See Toumajian v. Frailey, 135 F.3d 648, 654 (9th Cir. 1998).
The Court first turns to whether the Severance Plan was an "employee benefit plan" as judicially defined. Plaintiffs allege that the Severance Plan did not provide an "employee benefit" because the beneficiaries were not "employees" at the time the plan was adopted, more than one month after all employees had been terminated. Pl's Mot. to Remand at 10:13-22. In support of this argument, plaintiffs cite Whitt v. Sherman Int'l Corp., 147 F.3d 1325 (11th Cir. 1998), in which a retroactive plan adopted after employees were terminated did not create ERISA preemption. Defendants attempt to distinguish Whitt by arguing that the operative fact in that case was the date of removal, not the timing of the plan's adoption. Defendants argue that for this reason, no federal jurisdiction existed. Def.'s Oppo. at 16:8-15.
At oral argument, the parties disagreed over the meaning of "removal" in Whitt. Plaintiffs contended that the word refers to the plaintiff employee's termination from his employment. Plaintiffs point to a passage which states, "[U]pon examining the so-called `plan,' an employee could not hope to `determine exactly what his rights and obligations [were] under the plan, as they were subject to change upon adoption of the final version. Consequently, no ERISA `plan' existed at the time of Whitt's removal." Whitt at 1331 (emphasis added). In contrast, defendants argued "removal" applies to the removal of the case to federal court. Defendants cite to a passage which states that:
Substantial problems with Sherman's analysis exist. First, the right to remove is generally tested at the time of the filing for removal. [internal citation omitted]. Sherman filed its notice of removal on July 30, 1996, notably, some six weeks before it adopted the 1992 LTIP on September 17, 1996. Because the 1992 LTIP had not been enacted as of the time of removal, for purposes of determining federal jurisdiction, no ERISA "plan" existed when Sherman removed the case, and, consequently, no federal question jurisdiction existed, either.
Id. at 1332 (emphasis added). The Court finds that "removal" has both meanings in Whitt. Ultimately, the Eleventh Circuit denied preemption on both grounds. The court concluded,
Because we conclude that no ERISA plan existed at the time of removal [i.e., removal to federal court], and further, that retroactive application [after plaintiff was terminated from his employment] of the subsequently adopted ERISA plan would be inappropriate in this case, and the preemption doctrine does not apply. . . ."
Id. at 1333 (emphasis added). This is in accordance with the Court's interpretation of Whitt, discussed below.
In Whitt, the Eleventh Circuit held that an executive incentive plan, adopted subsequent to the employee's termination but with an effective date prior to the employee's termination, was not a proper basis for ERISA preemption where no ERISA plan existed at the time of removal and the plan was an entirely new plan (as opposed to a modification of an existing plan). Whitt at 1331-32. The Eleventh Circuit emphasized that under Schoonejongen, employees must be able to determine "what [their] rights and obligations are under the plan." Because the employee had "no plan to examine" during his employment, an entirely new plan was inadequate to form a basis for preemption because it did not serve the purpose of keeping the employee informed about his status. Whitt at 1332, citing Schoonejongen, 514 U.S. at 82-83. The court noted, "Our research has revealed no case where an entirely new plan, as opposed to an amendment to an existing plan, has been retroactively applied, and under the facts of this case, we decline to adopt such an approach here." Whitt at 1332. Thus, the logic employed by the court in Whitt suggests that the employee's ability to examine the plan during employment is determinative. In the case at bar, the Severance Plan was not created until more than a month after the plaintiffs were terminated. For this reason, plaintiffs could not use the Severance Plan to determine their rights and obligations during their employment. Thus, no "employee benefit" was conferred.
Plaintiffs further argue that the fact that a severance plan may "benefit" employees does not conclusively determine that there is an ERISA "plan" involved. Pl.'s Mot. to Remand at 11:1-10. Defendants argue that under Crespo v. Candela Laser Corp., 780 F. Supp. 866, 872 (D. Mass. 1992), "the presence of an employee benefit plan can be established if from the surrounding circumstances a reasonable person can establish the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits." Crespo is not controlling here, and the Court finds that this test ignores other factors which are requisite under Ninth Circuit law, including the extent to which the plan involves an "ongoing administrative scheme." This is discussed in more detail below.
Plaintiffs also argue that the Severance Plan itself is not a "plan" as judicially defined because it involved the administration of a one-time lump sum payment. Plaintiffs argue that the Severance Plan "merely requires a one-time payment of a fixed sum — i.e., six days pay." Pl.'s Reply at 7:1-3. Plaintiffs state that under the plan, the amount of payment did not vary and employees were not paid more than once. Id. Plaintiffs argue that after employees receive a single lump-sum check, no further ongoing administration is needed. Id. at 8:23-26. In contrast, defendants contend that the Severance Plan was a "plan" within the meaning of ERISA since it includes a "plan summary" and because the Severance Plan clearly defines procedures, beneficiaries, benefits, and sources of financing for plan administration. Id. at 15:6-12. Defendants argue that, "Under the Plan, the Plan Administrator was given discretion to make determinations, on a case-by-case basis, regarding eligibility for benefits. In addition, the Plan Administrator was given the discretion to resolve any and all claims alleging an improper denial of benefits under the Plan. . . ." Def.'s Oppo. at 18:18-26. Defendants further argue that ongoing administration was necessary to determine whether employees were eligible to receive benefits. Id. at 20:16-27. In order to determine eligibility, defendants argue, the administrator had to evaluate whether the individual was terminated in the January 26, 2001 shutdown, had executed the General Release, had returned company property, and did not fall into any exempted categories such as dismissal for cause. Id.
"Employee benefit plan" is defined by ERISA as any plan established or maintained by an employer for employees for the purpose of providing medical, unemployment, vacation, educational, legal, day care, apprenticeship, severance, retirement, or similar benefits or services. See 29 U.S.C. § 1002 (1). The definition of "employee benefit plan" can include severance benefits. 29 U.S.C. § 1002 (1); 29 C.F.R. § 2510.3-1 (a)(3); Delaye v. Agripac. Inc., 39 F.3d 235 (9th Cir. 1994) (severance pay may constitute plan within the meaning of ERISA); Bogue v. Ampex Corp., 976 F.2d 1319 (9th Cir. 1992) (severance pay considered "employee welfare benefit plan" under ERISA). If the benefit package implicates an ongoing administrative scheme, it will be construed as being covered by ERISA. Delaye, 39 F.3d at 237 (citing Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 12 (1987)). However, where the benefits consist only of a one-time payment with no ongoing administration, courts have consistently held that such benefits do not constitute a "plan" under ERISA. See Fort Halifax, 482 U.S. at 12; Delaye, 39 F.3d at 237; Velarde v. PACE Membership Warehouse. Inc., 105 F.3d 1313 (9th Cir. 1997).
The Court finds that the Severance Plan is not a "plan" for the purposes of ERISA. In Delaye, the 9th Circuit rejected an employee's argument that a severance benefits package was a "plan" for purposes of ERISA where "there [was] nothing discretionary about the timing, amount or form of the payment." 39 F.3d at 237. The Court finds Delaye analogous to the case at bar, and rejects defendants' assertion that the Plan Administrator's discretionary power was so great that the Severance Plan should qualify for ERISA preemption. Even assuming that a benefits administrator made discretionary decisions about whether employees were eligible to participate in the plan (i.e., whether the employee was laid off in the January shutdown, had returned property, and was not exempted by virtue of being dismissed for cause, voluntary dismissal, being a contract employee, or being an executive), this decision amounts only to a one-time evaluation of eligibility. The administrator did not have any discretion in deciding when to issue the payment, whether it should be administered in one check or installments, or in awarding more or less money on the basis of employee performance or position. Rather, every eligible employee would receive a single lump-sum payment for the amount equivalent to six days of his or her base salary. As a result, the Severance Plan is not an ERISA "plan" as judicially defined.
Additionally, in order to qualify for complete preemption under ERISA, defendants must show that the state laws under which plaintiffs are bringing suit "relate to" the ERISA plan. Since defendants have failed to show that an ERISA "employee benefit plan" existed as judicially defined, the Court need not reach this issue.
B. Request for Attorney's Fees and Costs
Plaintiff requests an award under 28 U.S.C. § 1447 (c) to recover fees and costs incurred as a result of removal. The authority to award attorneys fees is derived from 28 U.S.C. § 1447 (c), which, in 1988, was amended to allow courts to award attorneys' fees when a case is remanded due to any defects in the removal procedure. The commentary on that amendment advises that the court should consider "the nature of the removal and the nature of the remand" in deciding whether to award such fees. Commentary on 1988 Revision by David D. Siegel at 28 U.S.C.A. § 1147, p. 58 (West Supp. 1992). The court has discretion to award attorneys' fees incurred as a result of the removal when the award is "fair and equitable under all the circumstances." Morris v. Bridgestone Firestone, Inc., 985 F.2d 238, 240 (6th Cir. 1993) (quoting Morgan Guar. Trust Co. v. Republic of Palau, 971 F.2d 917, 923-24 (2d Cir. 1992)). Therefore, some evaluation of the merits of the remand order is necessary. See Moore v. Permanente Medical Group. Inc., 981 F.2d 443, 447 (9th Cir. 1992).
Here, given that defendants' decision to remove was arguable, and that the law surrounding ERISA preemption has changed substantially over the past two decades, this Court will decline to award attorneys' fees and costs. See Morris, 985 F.2d at 240; Moore, 981 F.2d at 448.
CONCLUSION
For the foregoing reasons, the Court GRANTS plaintiffs' motion to remand. Plaintiffs' request for attorneys' fees and costs is DENIED. This action is REMANDED to the Alameda County Superior Court. [docket #8]