No ERISA Coverage for Stock Rights Plan

By Lorne O. Dauenhauer

A former Booz Allen Hamilton Inc. executive did not have a viable Employee Retirement Income Security Act (ERISA) claim under Booz Allen's employee stock purchase plan (ESPP) because the plan's primary intended purpose was not to provide retirement or deferred income, the 9th U.S. Circuit Court of Appeals ruled.

Foster Rich worked for Booz Allen from 1987 until his retirement in 2005. Throughout his employment, Rich participated in Booz Allen's ESPP​, which gave eligible employees the ability to purchase Booz Allen stock. In 2005, facing a choice between retirement and involuntary termination, he chose retirement.

By the time he retired, Rich had accumulated 30,500 shares of Booz Allen stock under the stock plan. Under the terms of the plan, because Rich left Booz Allen due to retirement, Booz Allen had the right to repurchase Rich's stock plan shares within two years of his departure. Booz Allen exercised this right in early 2007, repurchasing all 30,500 of Rich's stock plan shares for about $4.5 million, or $147.80 per share.

In 2008, Booz Allen sold a portion of its business to the Carlyle Group. As a result of this sale, then-existing Booz Allen shareholders sold their Booz Allen stock at a price of $763 per share. Had Rich's shares not been repurchased in 2007 following his 2005 retirement, and had all 30,500 of his shares remained unsold as of the sale date, his stock plan shares would have been worth about $23.3 million—roughly $18.8 million more than he had received for his shares under the stock plan back in 2007.

Not happy with having missed out on the windfall, Rich sued Booz Allen and its top executives, alleging various breach of contract and ERISA claims, seeking to recover the additional $18.8 million he claimed he would have received if his stock plan shares had not been repurchased from him following his retirement.

The district court dismissed both of Rich's breach of contract and ERISA claims, finding that the breach of contract claims were time-barred and that the stock plan was not a pension plan governed by, or subject to, ERISA. The 9th Circuit affirmed.

The 9th Circuit quickly disposed of Rich's breach of contract claims, noting that the alleged breach occurred in 2003 when Booz Allen recommended that Rich begin the voluntary retirement process, yet Rich did not file a lawsuit against Booz Allen until 2009—six years later; under applicable California law, a breach of contract claim must be brought within four years of the date of the alleged breach.

With respect to the ERISA claims, joining the 3rd, 5th and 8th circuits, the 9th Circuit concluded that for any plan to qualify as an employee pension benefit plan subject to ERISA, "the paramount consideration is whether the primary purpose of the plan is to provide deferred compensation or other retirement benefits."

In reaching its conclusion that the stock plan was not subject to ERISA, the 9th Circuit found that the plan's main purpose "was not to provide retirement or systematically deferred income."

The stock plan itself stated that its purpose was "to provide incentives for Booz Allen officers to continue to serve as employees of the company and its subsidiaries."

A memorandum to Booz Allen partners regarding the stock plan stated that its "purpose is to provide for the firm's capital needs. Stock is not intended to be … an alternate form of compensation" and that the stock plan "should not be viewed principally as an estate-building vehicle since equity returns will be modest. Liquidation of stock at retirement is a return of capital rather than a source of retirement income."

The 9th Circuit rejected Rich's argument that the stock plan was subject to ERISA because it allowed employees to retain their plan shares until the end of their employment. Rich pointed to a 5th Circuit opinion (Tolbert v. RBC Capital Mkts. Corp.) in which that court concluded that a stock plan was governed by ERISA where the plan provided employees with the "option to defer receipt of a portion of their compensation to be earned." The 9th Circuit distinguished the Booz Allen stock plan from the plan in Tolbert, noting that the plan in Tolbert "was referred to by the defendant company as a 'deferred compensation plan' and its main purpose was to allow for the deferral of compensation." Furthermore, citing the 8th Circuit case Emmenegger v. Bull Moose Tube Co., the 9th Circuit pointed out that the "mere possibility that income can be deferred does not mandate ERISA coverage."

Rich v. Shrader, 9th Cir., No. 14-55484 (May 24, 2016).

Professional Pointer: How a plan sponsor characterizes its plans and arrangements can influence whether courts conclude that they are governed by ERISA. Accordingly, adding a carefully drafted clause articulating the plan's intended purpose can be a factor in determining whether an equity compensation plan (or other compensation arrangement) is subject to ERISA. Moreover, plan sponsors should ensure that all information about the plan, whether issued by the sponsor's board or otherwise communicated to employees, is consistent with the plan's intended purpose.

Lorne O. Dauenhauer is an attorney with Ogletree Deakins in Portland, Ore.



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