Seventh Circuit Affirms Northrop Grumman Win in Class Action Dispute over ERISA Severance Benefits

In Carlson v. Northrop Grumman Severance Plan & Northrop Grumman Corporation, No. 22-1764, __F.4th__, 2023 WL 3299703 (7th Cir. May 8, 2023) (Before: Easterbrook, Hamilton, and Lee, Circuit Judges), the Seventh Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of Northrop Grumman in this certified class action challenging Northrop Grumman’s refusal to pay severance benefits under the company’s Severance Plan to certain laid-off employees. The Severance Plan provides that a laid-off employee who was regularly scheduled to work at least 20 hours a week would receive severance benefits if the employee received a memo signed by a VP of HR, or their designee, notifying the employee of their eligibility for this benefit (“HR Memo”). The named plaintiffs did not receive the HR Memo, though they were regularly scheduled to work more than 20 hours a week. Plaintiffs allege that Northrop had a longstanding practice of automatically sending the HR Memo to eligible employees but then began withholding HR Memos from certain individuals. They further argued that the HR Memo was simply a ministerial document that verified eligibility under the 20-hour standard. Northrop took the position that the HR Memo was “the means by which management decides which employees deserve severance pay—or perhaps which employees the firm can afford to pay.” Plaintiffs brought three claims under ERISA, including a claim for benefits under Section 502(a)(1)(B), a retaliation claim under Section 510, and a fiduciary breach claim under Section 502(a)(3). The district court granted summary judgment in favor of Northrop, finding that the Severance Plan’s language gives HR discretion to choose who gets severance.

In resolving the parties’ dispute, the Seventh Circuit first considered whether the district court erred in rescinding the case’s assignment to the Magistrate Judge, to which both parties initially consented under 28 U.S.C. § 636(c). Northrop asked the district court to resume control of the case after it was certified as a class action, since the stakes multiplied. The district court agreed on the basis that there was “good cause” for withdrawing the reference to a Magistrate Judge. The Seventh Circuit found that the district court did not abuse its discretion in revoking Magistrate Judge consent since class certification complicated and prolonged the litigation.

The Seventh Circuit also reasoned that it did not make a difference who decided the suit since the meaning of an ERISA plan is a question of law and a Court of Appeals makes an independent decision about a pure question of law. It boils down to this: the Severance Plan makes the receipt of severance benefits contingent on receipt of the HR Memo. Severance benefits do not vest like retirement benefits and employers may design these plans in their own interests. The Severance Plan gives the HR department discretion to decide who gets the HR Memo. The HR department is a non-fiduciary who can act in Northrop Grumman’s interest. The Plan Administrator is a fiduciary, but it did not make the decision as to who received the HR Memo. Even if Northrop used to give the HR Memo to every laid-off employee, they are allowed to change their approach. Even if Northrop awarded some benefits to some laid-off employees who did not get the HR Memo, that “mistake” does not obligate Northrop to pay them severance benefits. The court rejected Plaintiffs’ argument that Northrop interfered with their rights in violation of ERISA § 510 because the Severance Plan gives discretion to the VP of HR and the exercise of that discretion cannot constitute interference with any rights under ERISA or the Severance Plan.