Court Report

Overfunded pension plan withstands ERISA challenge; excessive scope did not defeat noncompete enforcement; more.

Jan 1, 2010
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January Cover Overfunded Pension Plan Withstands ERISA Challenge
McCullough v. AEGON USA Inc., 8th Cir., No. 08-1952, unpublished (Nov. 3, 2009).

​The 8th U.S. Circuit Court of Appeals considered a claim by a participant in a defined benefit pension plan alleging that plan fiduciaries breached their fiduciary duties where the pension plan was "substantially overfunded." The district court had granted summary judgment against the participant, finding that he lacked constitutional standing to assert his claim without suffering an actual injury. The 8th Circuit affirmed the district court’s decision, incorporating an alternative statutory ground.

As a result of his former employment with AEGON USA Inc., Randal McCullough was a participant in a pension plan sponsored and administered by AEGON and covered by the Employee Retirement Income Security Act (ERISA). Under the defined benefit plan, participants were provided fixed periodic payments from a general pool of plan assets upon retirement.

Professional PointerA fiduciary that invests assets of an overfunded defined benefit plan is not insulated from liability to the plan for a breach of the duty to invest prudently. Although a participant may not have standing to sue, both the U.S. secretary of labor and any party with an interest in the surplus can sue under ERISA.


McCullough asserted that the plan’s fiduciaries breached their fiduciary duties by investing in funds offered by AEGON subsidiaries and affiliates and purchasing products and services from AEGON subsidiaries and affiliates, resulting in the payment of fees "higher than the norm." McCullough contended that this conduct violated ERISA prohibitions against certain transactions with parties in interest. He sought a refund to the plan of all such fees as well as an injunction against the plan fiduciaries prohibiting further violation of their ERISA fiduciary duties.

ERISA imposes certain duties on plan fiduciaries, including the duty to act "solely in the interest of the participants and beneficiaries" of the plan and to act "with the care, skill, prudence and diligence" of "a prudent man acting in a like capacity and familiar with such matters." Fiduciaries are prohibited under ERISA from causing the plan to engage in certain transactions with a "party in interest."

The 8th Circuit had previously held in Harley v. Minnesota Mining & Manufacturing Co., 284 F.3d 901 (8th Cir. 2002), that ERISA does not permit a participant in a defined benefit plan to bring suit for alleged breaches of fiduciary duties when the plan is overfunded. In Harley, participants alleged that plan fiduciaries breached their fiduciary duties by failing to monitor properly a $20 million investment, resulting in complete loss of the investment. The 8th Circuit determined in Harley that because the plan’s surplus was sufficiently large, the "investment loss did not cause actual injury" to the participants’ interests in the plan.

Article III of the U.S. Constitution provides that a plaintiff must suffer an "injury in fact" that is "concrete and particularized" to sue in federal court. Therefore, to permit such an action by participants to enforce ERISA fiduciary duties on behalf of the plan would raise serious Article III concerns.

AEGON’s plan was a defined benefit plan as in Harley,and McCullough did not dispute that the plan was "substantially overfunded," that it had never failed to pay benefits owed to participants or beneficiaries, and that AEGON had no intention to terminate the plan. Since the higher fees paid by AEGON did not cause McCullough actual injury, the 8th Circuit found no basis to disregard the Harley precedent.

Notwithstanding the Article III issue, the 8th Circuit further reasoned that allowing participants in an overfunded plan to bring an action under ERISA would not advance ERISA’s primary purpose of protecting individual pension rights because the pension rights of such participants are "fully protected" and "would if anything be adversely affected by subjecting the plan and its fiduciaries to costly litigation." The 8th Circuit found that this logic applies whether a participant’s claim alleges a single violation of ERISA or seeks to enjoin ongoing and future violations of ERISA.

By Roger S. Achille, an attorney and associate professor at Johnson & Wales University, Graduate School of Business, in Providence, R.I.

Excessive Scope Did Not Defeat Noncompete Enforcement

Astro-Med Inc. v. Nihon Kohden America Inc., 1st Cir., No. 08-2335 (Oct. 22, 2009).

The 1st U.S. Circuit Court of Appeals upheld a district court jury award of $375,000 for breach of a noncompete agreement. The court found the noncompete agreement enforceable, despite a change in the employee’s position and the fact that the noncompete as originally drafted was overbroad. The court also found against the defendant’s arguments contesting the Rhode Island court’s jurisdiction.

In 2002, Kevin Plant was hired by Rhode Island-based Astro-Med Inc. as a product specialist responsible for the demonstration and training of its Grass Technologies product line. As part of this hiring, Plant executed a noncompete agreement that prevented his competing with Astro-Med for one year throughout North America and Europe. Plant was restricted from the use of trade secrets, company practices or other information gained during his employment.

Professional PointerWhen hiring, find out whether applicants have noncompete agreements. Neither overbroad terms nor geographic distance from the place of execution necessarily will prevent enforcement.


In 2004, Plant was promoted to district sales manager, relocated to Florida and gained access to Astro-Med’s trade secrets, including customer information, pricing and marketing programs. Approximately two years after this relocation, Plant sought employment with Astro-Med’s California-based competitor, Nihon Kohden.

Nihon engaged Plant in discussions and, after learning about the existing noncompete agreement with Astro-Med, hired Plant as a salesperson. Astro-Med filed suit.

Nihon argued that the noncompete agreement was not enforceable. Because it included all of North America and Europe, it was overbroad.

The district court agreed that the original agreement’s reach was too broad and partially enforced the agreement, limiting its scope to Florida and to a subset of Astro-Med’s customers. Nihon appealed, arguing that because the scope of the original document was overbroad, Plant could not have breached the agreement until it had been modified by the court. The 1st Circuit held that such a rule would allow any defendant one free breach, a conclusion that would "eviscerate all but the most narrowly tailored" noncompete agreements.

Nihon also argued that a California company should not be forced into a Rhode Island court for hiring a salesperson in Florida. But the 1st Circuit found a sufficient level of contact between Nihon and Rhode Island. In addition to its business contacts, the court pointed to Nihon’s knowledge of the noncompete agreement executed in Rhode Island.

By Daniel F. Carey, director of human resources and employment counsel of O&G Industries Inc. in Torrington, Conn., and a member of the SHRM Ethics Special Expertise Panel.

Laid-Off Executive Failed to State Claim

Barabe v. Apax Partners Europe Managers Ltd., 11th Cir., No. 09-12284, unpublished (Oct. 26, 2009).

An executive’s employment was terminated after his employer was acquired by another corporation and the new employer found his position redundant.

Professional PointerU.S. courts will generally enforce forum selection clauses even when they require a U.S. citizen to bring suit in a foreign country.


Regent Medical Americas LLC was acquired by Mölnlycke Healthcare US LLC, a subsidiary whose parent was Apax Partners Europe Managers Ltd. At the time of the acquisition, Timothy Barabe, an executive at Regent, was required to sign a subscription agreement setting forth terms to purchase stock and how he would be paid for those shares if he left the company. In the agreement, the parties agreed to submit to the jurisdiction of the English courts. This agreement replaced Barabe’s former service contract invoking the jurisdiction and laws of Georgia. When Barabe was terminated and forced to sell his shares back to the company at a price below market value, he brought suit, alleging eight causes of action.

The 11th Circuit affirmed the dismissal of all counts. Barabe’s breach of contract claim relating to the initial service agreement was predicated on a breach of the subscription agreement not in existence at the time the service agreement was executed. Any counts relating to the subscription agreement were dismissed because they were not brought in England as required by the contract.

By John J. Coleman III, an attorney with the Birmingham, Ala., office of Burr & Forman.​

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