The Seventh Circuit Had “Good Cause” To Affirm An ERISA Plan Sponsor Win In Decade-Long Class Action

Quick Facts of Carlson (District Court):

The plain language of the severance plan granted Northrop’s human resources (HR) department discretion to determine who qualified for benefits. Northrop determined that for an employee to qualify they needed to be (1) regularly scheduled to work at least 20 hours a week, and (2) a recipient of an individually-issued “memo” by HR.

After two ex-employees did not receive cash severance benefits, they filed suit. They argued that their eligibility was established because they regularly worked more than 20 hours a week and characterized the “memo,” which neither received, as a document that merely verified eligibility under the 20-hour standard. Northrop argued that the plan treated the “memo” as more than a ministerial document—it was the means by which eligibility for severance benefits was determined. The District Court granted summary judgment in Northrop’s favor, ruling that the plan’s language conferred discretion to choose who, if anyone, is eligible to receive the disputed severance benefits post-termination.

In the District Court, the parties consented to a magistrate judge presiding over the case under 28 U.S.C. § 636(c). However, once the class was certified (on behalf of all ex-employees who did not receive the “memo”) and the stakes multiplied, Northrop requested that the district court judge resume control. The District Court agreed.

On appeal (Seventh Circuit):

• The Seventh Circuit affirmed that the language in the plan made clear that severance benefits were contingent on the receipt of the “memo,” which plaintiffs and other class members plainly did not receive.
• Plaintiffs argued that until October 2011, Northrop provided the “memo” to every terminated employee who had worked a threshold number of hours—they contended that the plan’s change in course supported an estoppel theory. The Seventh Circuit rejected this argument, finding that it tended to “show[] only that the firm may have made a mistake; it does not create a legal entitlement to have the mistake extended to other kinds of benefits.”
• The Seventh Circuit rejected plaintiffs’ argument that Northrop’s conduct could be characterized as “interference” with their rights, in violation of 29 U.S.C. § 1140. The Seventh Circuit explained that plaintiffs’ argument effectively asked the Court to treat the HR department as their fiduciary, when it is not.
• The Seventh Circuit agreed that the District Court was entitled to rescind the assignment made to a magistrate, as the assignment was contingent on a district judge’s consent. Under 28 U.S.C. § 636(c)(4), “[t]he [district judge] may, for good cause shown on its own motion, or under extraordinary circumstances shown by any party, vacate a reference of a civil matter to a magistrate judge under this subsection.” The Seventh Circuit also viewed the increased stakes of the matter following class certification as “good cause” for withdrawing the referral.

Key takeaways:

• Carlson considers how an estoppel theory may apply in situations where a sponsor acts in a non-uniform manner.
• Carlson addresses the operation of a discretionary grant of authority. Carlson makes clear that plan sponsors do not have unlimited authority—they must follow the terms of the plan. If a plan does not grant a sponsor discretion in the execution of the plan, then no discretion may be exercised. However, if discretion is granted, then it must be exercised within the limits of the grant and carefully.
• Carlson noted the “good cause” standard for withdrawal of a case referral from a magistrate judge back to a district court judge (particularly in the context of class certification).

Carlson, et al. v. Northrop Grumman Severance Plan, et al., 67 F.4th 871, 2023 WL 3299703 (7th Cir. May 8, 2023)