Fourth Circuit Joins Sixth, Eighth, and Ninth Circuits in Holding Punitive Damages Are Not Recoverable Under LRMA § 301 for Late Contribution Payments

In Plumbers & Pipefitters Loc. 625 v. Nitro Constr. Servs., Inc., No. 20-2080, __F.4th__, 2022 WL 532946 (4th Cir. Feb. 23, 2022), the Fourth Circuit considered whether LMRA § 301 authorized punitive liquidated damages by an ERISA health fund against a contributing employer for tardy contribution payments. Here, Defendant Nitro Construction made at least 17 late contributions to the West Virginia Pipe Trades Health and Welfare Fund over a 15-month period. However, Nitro paid the contributions before the plaintiff labor unions, with whom Nitro had collective bargaining agreements, and the Fund filed suit to enforce their “Delinquent Employer Procedure” to recover liquidated damages of 10% for the first month of delinquency plus interest and attorneys’ fees. The district court granted summary judgment to Nitro on the basis that the liquidated damages provisions are unenforceable as a matter of federal common law which prohibits punitive damages for breach of contract. The Fund appealed and argued that the decision should be guided by ERISA, which allows punitive liquidated damages. The Fourth Circuit affirmed the judgment of the district court, and in so doing, joined the Sixth, Eighth, and Ninth Circuits in holding that punitive damages are not recoverable in LMRA § 301 cases for late contribution payments. Judge Wynn dissented.

The majority reasoned as follows. The Fund brought suit for breach of contract under LMRA § 301 and the federal common law applied in these cases is ordinarily the general law of contracts. The Restatement of Contracts is clear that the purpose of contract damages is to compensate the injured party and liquidated damages that are penal in nature are disfavored. The district court found, and the Fund agrees, that the liquidated damages that the Fund seeks to enforce are punitive in nature. The court rejected the Fund’s argument that the penal liquidated damages provisions should be enforceable because ERISA § 502(g)(2) provides for liquidated damages up to 20% in cases of companies with unpaid obligations. ERISA § 502(g)(2) only applies to unpaid contributions, not late contributions. The court declined the invitation to apply a federal labor policy favoring punitive damages against companies in labor disputes over the traditional common law rule. The court noted that the Seventh Circuit takes this approach, reasoning that the law of contracts is “antiquated and should not be extended into ERISA-land.” The court disagreed with the Seventh Circuit and found that the traditional rules of contract construction should apply to CBAs unless they conflict with federal labor law. Here, ERISA does not speak to tardy contributions. Congress chose not to include them within ERISA § 502(g)(2)’s gambit.

The court also reasoned that there’s a difference between a tardy contribution and an unpaid one. ERISA does provide incentives for companies to meet their obligations. “To impose a more draconian sanction at the very outset might not only dull that incentive but push struggling companies in the direction of insolvency. The resulting loss of jobs and possible benefits would be to no one’s profit.” Here, the Fund seeks almost $80,000 in liquidated damages but the Fund’s actual damages in the form of lost interest is a mere fraction of that amount. Also, the company never agreed to the liquidated damages provisions; it was unilaterally created by the Fund using authority granted it by the governing documents and incorporated into the contract. The Fund could have sued for lost interest but withdrew the claim for interest. The court affirmed the judgment upon concluding that the court is not at liberty to broaden the scope of ERISA’s liquidated damages remedy.