ALLIED STRUCTURAL STEEL CO. v. SPANNAUS
In 1974, Minnesota adopted legislation which required private employers to pay a fee if they terminated employee pension plans or if they moved their offices from the state, leaving insufficient funds to cover pensions for ten-year employees. This law affected Allied Structural Steel as the company began closing offices in Minnesota. Even though the employees affected by the closing were not entitled to pensions under the terms of their employment with the company, according to the Minnesota law, they were. The company was ordered to pay approximately $185,000 to comply with the statute's provisions.
Did Minnesota's Private Pension Benefits Protection Act violate the Contract Clause of the Constitution?
Legal provision: Article 1, Section 10, Paragraph 1: Contract Clause
The Court found that the Minnesota law did violate the Constitution as it "substantially altered" the provisions of pension agreements which Allied Steel had with its employees. Citing the importance that the Framers placed on private contracts in the conduct of business, Justice Stewart found that the act's effect was "severe" as it nullified terms of t he company's obligations to its employees and imposed an "unexpected liability in potentially disabling amounts." Furthermore, the law was narrowly targeted at employers who had decided to establish employee pension plans, and it did not seek to deal with broad economic and social problems.
Argument of George B. Christensen
Chief Justice Warren E. Burger: We will hear arguments next in Fleck against Spannaus.
Mr. Christensen, I think you may now proceed whenever you are ready.
Mr. Christensen: Mr Chief Justice and May it please the Court.
I had hoped that someday I would have the pleasure of arguing an appeal and not have to confess an inadvertent typographical error in a brief.
In our reply brief, we refer to the New Jersey case, Raybestos-Manhattan vs. Glasser as being in 156 Atlantic Second.
It should be 165 instead of 156.
We have it correct in our main brief, but it may give your clerks a little annoyance since they work for an hour.
Chief Justice Warren E. Burger: What is the name of the case again?
Mr. Christensen: Raybestos Manhattan.
Chief Justice Warren E. Burger: And we should change that to, what is the correction again?
Mr. Christensen: It appears in your brief as 156 Atlantic Second.
It should be 165.
Chief Justice Warren E. Burger: Well, in mine, it appears as 365.
It should be 365.
Mr. Christensen: I still have not got it right, now I have I hope.
Chief Justice Warren E. Burger: Well, between us, we will get it straightened out.
Mr. Christensen: The Court may recall that this is sort of a companion case to the White Motor case you decided recently involving the Minnesota Pension Protection Act.
You there decided that to the ERISA of the subject of patent regulation was not preempted by the Federal Labor Laws and you did not touch any Constitutional issues.
Justice William H. Rehnquist: You said patent regulation, you mean pension?
Mr. Christensen: Pension.
I have been listening too much this morning, I am afraid.
The same pension statute is before you in this case that you had before you in the White Motor case.
In substance, what Minnesota did, anticipating that ERISA was coming which eventually would preempt the field, it passed this 10-year vesting provision that added to the substantive obligations of Allied Structural Steel’s pension plans thereby conferring an unexpected windfall on employees.
It did this retroactively, in effect gave a retroactive wage increase because contributions to a pension plan are a form of compensation for the employee and as we try to demonstrate, and think we do in our reply brief in the face of no important or vital public need that would authorize such an intrusion into private contracts.
We take the position that if it is what was done here is not impermissible, if it is upheld, then the impairment of contract clause is virtually gone from the Constitution and there would be no limit upon what states could do in important business contracts whether they be leases, insurance policies, deeds, pension plans or whatnot, they could play havoc with them and destroy the stability in private arrangements that the Constitution is designed to procure.
You will find as you go through the briefs Your Honors that New Jersey had a somewhat similar notion a little before Minnesota and that is this Raybestos-Manhattan case that we refer to.
There, they made a statute somewhat similar to this imposing, in effect vesting requirements long or much earlier than the plan provided for and they limited it to employers of 500 persons or more.
New Jersey has a statute that is not, I do not know whether it is common to many states that provides special legislation.
The New Jersey Superior Court struck the statute down as unconstitutional, as special legislation under their New Jersey Statute and as denying equal protection of the laws under both the State and the Federal Constitution and that has been affirmed by an opinion that came out in late March or early April, I forget which is, yet unpublished, but is attached as an appendix to our reply brief.
The State of Minnesota before Your Honor does not deny as I read their brief that this is a vital impairment of the contract and you cannot imagine a much greater one in our case because we represent a smaller employer.
There appears to be about $150,000.00 of additional burden imposed.
You cannot tell precisely the amount until actuarial computations are made and in the White Motor case where far more people were involved, there was a difference of some $8 to $10 million beyond the funds that White had committed itself or had reserved to pay its terminated employees.
Justice William H. Rehnquist: Mr. Christensen, I suppose in the strictly technical sense, there is not an impairment of contract in so far as Allied is concerned here in the sense that a contractual expectation that it had was taken away from it.
Very likely, the sense of the provision is involved, but do you not ordinary think of impairment of the obligation or contract as thinking you had a right to receive something under a contract and then the state says no, you do not have a right to receive it?
Mr. Christensen: Well, I think the term has been expanded over the years by the Courts, but there is a very definite impairment Mr. Justice Rehnquist in the sense I believe you were talking about because Allied had a right to terminate this pension plan with no penalty and Minnesota said in effect, you cannot terminate this plan even though the contract gives you an unlimited right so to do.
You cannot terminate it unless you pay this ransom money into this state fund to buy annuities for these people.
Chief Justice Warren E. Burger: Well, it had imposed the new obligations, is that your argument?
Mr. Christensen: Well, you can call it a new obligation.
You can say depriving us of our right to terminate.
It is pretty much Mr. Chief Justice a matter of semantics, but here was a plan which prescribed how it should be funded.
It was funded according to actuarial principles and of course it assumed that not all of the employees would be present to receive pensions.
They would either die, be discharged, quipped any number of --
Justice Byron R. White: You think the state could if a company had no bargained for plan or no voluntary plan, you think a state statute could require the company to adopt a statutory type plan?
Suppose in the statute they had a formula, a pattern and they just required all companies to start putting their money into these funds?
Mr. Christensen: Well, that Your Honor, I do not think would involve the obligation of contracts clause.
It involves questions of due process.
Chief Justice Warren E. Burger: Is that very far away from what the Social Security Act as Mr. Justice White’s suggestion?
Mr. Christensen: Well, it is not too far away from it, but Your Honor, your point now is addressed to the powers of the Federal Government and it is not directed to destroying or altering or changing a private contract.
Justice William H. Rehnquist: What you are suggesting is that the Federal Government is not bound by the retirement clause the way the states are?
Mr. Christensen: That is correct and that there is no doubt about that Your Honor.
Chief Justice Warren E. Burger: Are you also suggesting that a state could not have adopted what is essentially the social security statute, independent of federal action?
Mr. Christensen: I do not know if I am prepared to answer that question.
It would depend now when the Federal Government got to ERISA, its second regulation of pension plans, it moved quite carefully.
It brought the plan in under a five-year implementation plan.
It gave various options for vesting or it permitted you to abandon the pension plan entirely with no penalty.
It is a very complicated statute and I do not mean to speak with great authority upon it.
Now, if you go to whether a state could have as you first put it, have adopted a social security plan, I do not think I am prepared to answer that.
Justice Byron R. White: Mr. Christensen, in your argument, it would make a difference whether it was for the future of the payouts, would it not?
Mr. Christensen: Yes certainly, but you are now talking about a thing unconnected with service just at a certain age or they put in a tax.
If you follow social security, a state would tax individuals and employers in some prescribed amount to build retirement payments at age 65 or with the permission of this Court now 70 whatever it may be.
Now, that is quite a different problem, Mr. Justice. That retroactively is saying to employees who have worked and have received ever dime they were entitled to, either in direct wages or in the written promises or fringe benefits such as this pension plan.
You would go back and pay more money to those people by a sort of a retroactive vesting.
Justice Byron R. White: Mr. Christensen, are there not really two parts to the retroactive aspect of this case, Mr. Justice Rehnquist’s question brought this to mind.
On the one hand you have to put more money into the fund, you come up with more and secondly, you are prevented from getting back that which you would have been able to recover over and above the vested rights of those who are entitled to some money that I take it were in the surplus that under the contract, you would have had the right to return?
Mr. Christensen: No.
On the second assumption, I beg to differ with you.
What went in there was there for all times and purposes.
Now of course, contributions made five years ago on behalf of employee 'A' who died in the interim, stay in the fund and help fund or provide money for employee C, D and so forth, but it does not revert back to the employer.
Justice Byron R. White: But if you terminate the plan --
Mr. Christensen: No sir --
Justice Byron R. White: That you are asserting that in answer to Mr. Justice Rehnquist, you pointed out that the contractual right to terminate the plan had been impaired.
Mr. Christensen: That is correct.
Justice Byron R. White: But how did that hurt you then if all the money was in there to stay anyway?
Mr. Christensen: Because Minnesota has imposed this pension funding charge --
Justice Byron R. White: I understand the requirement that you put more money into the pot that hurts you?
Mr. Christensen: Yes.
Justice Byron R. White: But that is not an impairment of an existing obligation.
That is a creation of a new obligation?
Mr. Christensen: Well, or it is a condition.
Justice Byron R. White: And your answer to Mr. Justice Rehnquist was that, well, they have impaired our right to cancel the plan, now how did that hurt you, the no longer being able to cancel the plan?
I thought that meant that you would have gotten some money back.
Mr. Christensen: I do not think a conditional right to cancel it.
I think they have destroyed the right to cancel.
You say they have created an additional obligation.
I phrase it and again, you and I may be engaging in semantics, when I have an unqualified right to terminate a plan without further liability and Minnesota says, you can terminate that plan only if you will pay more money.
I think they have destroyed my unlimited right of termination.
Justice Thurgood Marshall: You mean what you want is the right to terminate without paying additional money?
Mr. Christensen: Yes, sir.
Justice Byron R. White: Did the state prevent you from terminating the plan with respect to any newly hired employees?
Mr. Christensen: No.
That would not arise Mr. Justice because this Act goes into effect only when you are closing a plan, so the question of new employees coming in cannot arise in Minnesota.
Justice Byron R. White: What about the employees transferred to another plan?
They have to go on paying for them if you do not want to?
Mr. Christensen: I will have to go off the record.
My colleagues --
Justice Byron R. White: Well, that is alright.
You carry on the way you want.
Mr. Christensen: They had such a thing here.
One of these cases that they thought applied, employees were transferred and Minnesota did not levy its tax.
Justice Byron R. White: You go ahead, I am sorry to interrupt.
Chief Justice Warren E. Burger: But it is clear that this Act requires the employer to pay some money for an earlier period.
It is retroactive in that sense, is it not?
Mr. Christensen: Yes sir, it is very retroactive.
Chief Justice Warren E. Burger: So that it is not just altering an existing contract with respect to the future, you say?
It requires a deposit, a payment covering a period that is already lapsed before the statute was passed.
Mr. Christensen: Yes.
This plan had an elaborate vesting scheduled that was a combination of years of service plus age and the Minnesota statute says you have got to fund your plan so that all contributions made at 10 years are vested.
They put in a 10-year vesting period and it is stringently retroactive.
It is the equivalent of giving these employees a retroactive wage increase.
Now, Minnesota or the District Court make some point which we have endeavored to answer in our brief that the employees anticipated they would get their pension.
Now, that with all due respect to the Court below and my brethren here is fanciful.
Everyone goes on thinking he is going to live forever, but every man knows in his heart that he may not and he buys an insurance policy.
Employees anticipate and have a right to anticipate pensions only in accordance with the terms of their plans.
The doctrine created by the District Court here which it permitted to stand that people you can invade and change contracts to make them work as someone may have anticipated they would work would destroy contracts completely.
I expect near lunchtime and with your permission, I will reserve, you go at 12:30.
Chief Justice Warren E. Burger: 12 o' clock.
Mr. Christensen: 12 o' clock, I would prefer to reserve the balance of my time if I may?
Chief Justice Warren E. Burger: Very well.
Mr. Christensen: I will answer any questions right now if there are any more at the moment.
Chief Justice Warren E. Burger: Mr. Starns.
Argument of Byron E. Starns
Mr. Starns: Mr. Chief Justice and May it please the Court.
First of all, the Minnesota Act applies in two situations, a planned termination by an employer and a plant closing.
This case involves the closing of a plant, not a plan termination.
I think that point should be clarified.
Chief Justice Warren E. Burger: Well, is the plan being terminated because the plant is closing?
Mr. Starns: No Your Honor, the plan is still in effect as of this date.
It has been amended twice by the company to freeze the benefit levels and to freeze the ability of anyone to get into the plan in the future and the amounts have been vested with respect to the people covered by the plan prior to those amendments.
Our position, Your Honors is, the heart of appellant’s argument is that the situation addressed by the Pension Act was a subject of a preenactment contract and that as applied Allied, the Act has changed those established contractual rights.
To the contrary, our position is that there is no established contract between Allied and its Minnesota workers with respect to their earned interest in the pension benefits based upon the circumstance of a plant shutdown and further that the act is not retroactive in effect since no preenactment established contractual rights are affected.
Now, I think this can be illustrated by examining the nature of the contractual relationships we are dealing with here.
The creation of a pension plan constitutes an unilateral offer by the employer which is subject to the acceptance by the employee and that acceptance is only complete when he has satisfied both the length of service requirements and the attainment of the minimum age requirement.
So that we have no fully completed contract in the context of this case since we are dealing with people who have --
Justice William H. Rehnquist: Mr. Starns, are you saying there has been no impairment?
Mr. Starns: I think that is the sense of our argument.
Justice William H. Rehnquist: I have read that the District Court’s opinion that say you in effect conceded there was impairment, but that was justifiable?
Mr. Starns: Your Honor, I think I could clarify that point.
I think the District Court has said that the state seems to concede that there has been no impairment.
The only statement in the record below was a statement in our pretrial brief on the summery judgment aspects of the case where we stated that if to the extent --
Chief Justice Warren E. Burger: We will resume there at 1:00[Recess]
Mr. Starns, you may continue.
Mr. Starns: Mr. Chief Justice and May it please the Court.
At the recess, the state was arguing about the contractual relationship involved in this particular case.
I thought that a brief recitation of the procedural history relating to this point might be in order to help clarify the position before the Court.
The challenge was brought by Allied Steel in District Court to the application of the state statute here in question.
As a result of that action, the state ultimately filed a motion for the Federal District Court to abstain in order that the State Courts could construe the null and void provision of the Act which is the final section of the Act.
At the same time, there was a cross motion for summary judgment brought by Allied Steel.
In the context of that motion, we filed a brief in June of 1976 which stated that to the extent that the pension plan allowed Allied to cause a forfeiture of the accrued benefits for those not qualified under the plan, there might be impairment.
Of course, subsequent to that brief, there was an argument before the District Court.
The District Court denied both motions, certified instead of abstaining on the question of interpretation of state law, certified that to the Minnesota State Supreme Court appoint a Special Master to find fact.
The Special Master found as a finding of fact that the pension plan as originally adopted does not take into account a plant shutdown as one of the conditions for the actuarial calculations associated with those findings of fact were stipulated to by all the parties and in constitute findings of fact in this case.
So in any event, we think that there is before the Court, the issue of whether or not there is impairment to this contract.
Now, the relevance of the impairment issue of course goes to the reasonableness test under the United States Trust and extent of impairment.
Our point is that it is established that a pension plan constitutes a unilateral offer by the employer to the employee of the form of the differed compensation.
The law is and the appellants have admitted that employer contributions constitute a form of compensation.
However, the cases have held that an employee is not entitled to receive that form of differed compensation or any part thereof unless he has satisfied the eligibility requirements to the plan and those eligibility requirements are typically the attainment of a minimum age and the service for a minimum period of time whatever it might be under the particular plan.
Consequently in such a situation, we submit that if there is no contract for the employees benefit to have enforced in this situation, there can be none to be impaired.
Unknown Speaker: Was this a bargained for plan?
Mr. Starns: No your Honor, it was not.
Justice Byron R. White: You might not be able to make this argument in the bargained for plan?
Mr. Starns: I think that argument might not be made in that context.
The Act does not affect the subject of preenactment bargaining, much less agreement in our opinion also and that takes it out of the scope of retroactivity in our opinion.
Unknown Speaker: Mr. Starns, when you say it does not affect the subject of preenactment, it maybe not in this case, but does not the statute apply to bargained contracts?
Mr. Starns: Yes, I am only taking about this case Your Honor.
Unknown Speaker: What is your view as to its constitutionality as to bargained contracts then?
Mr. Starns: I think it is constitutional.
Unknown Speaker: But you just said it is not even an impairment of contract here?
Mr. Starns: Right, I think that of course whether or not there is an impairment, whether or not the statute is retroactive on the decisions of this Court, a valid police power enactment is constitutional.
I think that for all the reasons set forth in our brief, this law would be constitutional whether or not it applied to a collectively bargained or noncollectively bargained plan.
I think that the distinction between the plans would relate to what the expectations of the parties are and of course that is one of the factors that this Court has identified to be analyzed in terms of determining the extent of impairment and of course, I think that in examining expectations to parties, the nature of the contractual relationship is an important factor.
It may impact upon the breadth with which the Court can go outside the document itself.
Justice William H. Rehnquist: Mr. Starns, do you have any off hand top of the head knowledge as to how many bargained for employees would be covered by this and how many nonbargained for employees?
Mr. Starns: Well, because of the enactment of the Employee Retirement Income Security Act of 1974, the number of Minnesota people is limited.
The vast majority are the subjects of collectively bargained contracts.
The White case is 1,200 people I believe.
Justice William H. Rehnquist: So if we were to decide it just on the basis of this, this was a nonbargained for pension plan, we would leave undecided, I take it, if our decision applied only to those facts, the vast majority of the people to whom the plan applied?
Mr. Starns: Your Honor, I think that the answer to that is that might be the result of your decision and it would depend upon the basis for indecision.
If it was solely on the basis of the contractual nature of the relationship, yes.
If it was based upon the police power analysis and the complete analysis --
Unknown Speaker: (Inaudible) contractual argument so I guess you will get to the other one?
Mr. Starns: Yes, I will, Your Honor.
Unknown Speaker: But also it is limited in the sense that there have not been too many, I do not suppose too many instances for you to apply the plan?
Between the time it went into effect into the Act, and between the time it went into effect and the time that I has been preempted by ERISA?
Mr. Starns: That is correct.
Minnesota Supreme Court held that the Act was preempted by ERISA effective January 1975 and the plan years to which the ERISA language applies.
However, I think that there may be applications in the future depending upon what the fact situation is.
I admit that they are limited and it may be nonexistent, but there conceivably could be some application of the Act in the future.
Unknown Speaker: To a bargained for plan?
Mr. Starns: To a bargained for and a nonbargained for plan.
Now, the state’s position is also that the statute is not retroactive in effect.
The express language of the pension plan itself indicates that there was no meaning in the minds on the plant shutdown situation.
For example, the length of service for vesting under the pension plan is a lengthy period of time, 20 years.
Secondly, there is an expressed covenant not to compete in the plan.
It seems to use that this implies that the person reading that document could anticipate that the plan would continue in existence and the plan would continue in operation for at least the minimum period of vesting, 20 years plus the lengthy period of time thereafter since retirees would forfeit their benefits if they engaged in competition with the company.
That presumes a continuing enterprise.
We note the Court below took special notice of the fact that the companies actuaries did not take into account the plant shutdown and Judge Haney noted that the argument on the merits that in light of that fact, there is a question as to whether you really have an impairment of contract.
Now, the Act is also not retroactive in our opinion because it applies to transactions which are completed after its day of enactment.
Generally a law is retroactive or considered retroactive for constitutional purposes if it reaches back to alter already completed transactions.
Here, the triggering event of the statute occurs after its effective date.
Justice William H. Rehnquist: To what point of constitution or your retroactivity argument directed?
Mr. Starns: That would be essentially a due process argument I think Your Honor.
Justice William H. Rehnquist: There is no specific prohibition in the Constitution against the enactment of retroactive laws, is there?
Mr. Starns: No, and I think I am trying to address the points raised by appellants in their brief.
Unknown Speaker: Well, Mr. Starns may I ask the only question that is presented in jurisdictional statement, even as rephrased in your brief is contract close question.
Do we have anything else to decide here?
Mr. Starns: No Your Honor.
Unknown Speaker: Well, this discussion of due process police powers of that rather relevant to the question presented?
Mr. Starns: I think it is if you construe it in that way Your Honor.
The only relevance of the question of whether or not there is impairment would go to the degree of impairment analysis under the contract clause.
Now, we do not quarrel that the results of the statute has been to change the overall employment agreements involving these employees.
The Court below in a footnote I think at page 890 of the appendix noted that employment agreement includes the wage agreement, the pension plan, and any other fringed benefits.
Now, our understanding is that the contract clause issue raised by the appellants relate solely to the pension plan and in the context of that argument I think our point that there is really no contract there is relevant.
However, if the Court is going to view the entire employment agreement as a contract then I think these arguments are relevant to the matter before the Court as are the retroactivity arguments.
Our position is also that the Act is not retroactive because there is no change in the benefit levels provided by the plan, and therefore, it does not impair the contract itself.
As a general matter, the Act is tied to the specific benefit levels that are provided by the plan to which it applies. It should be noted that the allied plan itself would provide more liberal benefits in a plan termination situation than our Act requires.
If you look at the termination article of that pension plan, it states that if when the plan is terminated all covered employees have a right to their earned interest in their pension plan.
Unknown Speaker: In this case, in the facts of this case it is going to cost the company more money to close down its plant then it would have it if they act and then pass, for that moment?
Mr. Starns: Yes, it will cost them some more money and our position is that the money that it cost them is in the form of the wages that they have owing to the employees for the work rendered up to this point because they admit that the pension benefits are wages and so from that point of view the statute really becomes a form of waging our protection really.
It is not a retroactive wage increase.
Unknown Speaker: But Mr. Starns, if that argument is valid you did not need the Statute, they already owe the money?
Mr. Starns: No Your Honor, I think that is good point in terms of logical consistency, but unfortunately the decisions hold otherwise.
Unknown Speaker: So they did not owe the money then?
Mr. Starns: They hold that the employees cannot enforce any quasi contractual obligation.
Unknown Speaker: Well, then do you not have to acknowledge that the statute is the source of the company’s obligation to pay higher wages?
Mr. Starns: Yes, but our point is it does not --
Unknown Speaker: But does it not imposed in a new obligation, a new and different wage obligation than existed before?
Mr. Starns: Our point Your Honor is that it is not a new obligation.
It maybe somewhat different.
Unknown Speaker: It is with everyone…
Mr. Starns: Well, I am not so sure.
I think that --
Unknown Speaker: Well, the difference between 0 and (Inaudible)?
Mr. Starns: Yes, there is the difference between what maybe left in the balance of the plan upon termination.
Chief Justice Warren E. Burger: When did the obligation come into being?
Mr. Starns: The obligation to pay came into being I think with the passage of the law.
Chief Justice Warren E. Burger: Well, then have you not just contradicted yourself.
You said it was not new.
If it came into being with the passage of the law then it is new, is it not?
Mr. Starns: I think the point I am trying to make Your Honor is that the obligation is not new in terms of the expectations to the parties.
It maybe new in terms of the expressed language of the agreements, but that under the decisions of this Court relating to the contract laws one of the things to be analyzed in terms of studying the reasonableness of the legislation that is being challenged is the extent to which it promotes rather than under cuts the original expectations of the guardians.
Unknown Speaker: But you have to decide which party’s expectation you are going to look at?
It is the same expectation from the employees, but different from the employer and if you are looking at it that way, supposing there had not been enough money in the company and the legislature decided the only way to satisfy the expectations of the junior employees would be to take some of the vested compensation away from the senior employees on the ground that they have been overpaid over the years and they are going to get social security anyway and so forth and their expectations will be frustrated, but the juniors would be fulfilled, could you do that?
Mr. Starns: I think there might be a problem with that and of course of our act --
Justice William H. Rehnquist: What is the difference?
Mr. Starns: Well, our Act does not have any effect upon the vested, the funds and the trust.
Unknown Speaker: There is a difference as far as the impairment contract clause is concerned whether it is an employer or a group of old employees that is affected by, what is the distinction?
Mr. Starns: Well, I think Your Honor in the context of this case, if we analyze what the expectation of the parties are, the employer has in effect created an impossibility situation for performance by the employee.
In other words, he has reneged on his expectation that he would achieve as a result of this plan, continuity of employment.
He has voluntarily reneged on that and the person that suffers is the employee who is denied the continuing opportunity to qualify for a pension.
Chief Justice Warren E. Burger: Say he is voluntary renamed, what specific do you rely on?
Mr. Starns: He is reneged by removing the workplace as a place to work and he has made that decision consciously for business reasons or whatever, but it seems to be in terms of its original underlying bargain, it was that the employer expected to get out his pension plan, continuity of employment, it would help his situation in terms of the competition for labor.
He expected presumably to get some decrease in wage demands because it is a form of compensation.
Chief Justice Warren E. Burger: What is the basis for any expectation that this company was going to stay in Minnesota forever?
Mr. Starns: I think the basis would be Your Honor the express language to plan which I noted earlier that contains a covenant not to compete for example which would seem to make no sense.
Chief Justice Warren E. Burger: Do you mean you would read that as a contract to continue to do business in Minnesota in perpetuity?
Mr. Starns: No Your Honor.
I would read it as an indication of what are the reasonable expectations of the parties to this original agreement and I think as I understand the decisions of the Court, the expectations of the parties are an important factor in determining the degree of infringement, and therefore, whether a statute has violated a contract clause.
Now, that is assuming we have a contract, we are already beyond the initial --
Chief Justice Warren E. Burger: Why would the employer have any expectation other than his contract was to be executed exactly as it was originally drafted until it was changed with his consent?
Mr. Starns: Well, I think that is true and our point is that the original contract is at best ambiguous on this point.
It does not address the point --
Unknown Speaker: What if he has been paying into a pension plan for 10 years and there were 100 employees that have come at different terms.
At the end of the ten years, let's assume there is vesting in ten years, some have vested and some have not.
Can he terminate, if he terminates the plan then under this particular contract, can he get all the money back out of the fund that he has been paying in or any?
Mr. Starns: Under the Allied Pension Plan every employee could get a share if the plan were fully funded.
Unknown Speaker: Alright.
I know, but he has been paying for 10 years and he just wants to quit and so he quits, he terminates the plan?
Mr. Starns: No, he cannot get anything out because I think the original expectations of the party --
Unknown Speaker: Under this plan then there is a contract with the employees to the extent that he has paid into a fund?
Mr. Starns: Only if he meets the two conditions for vesting and that those are --
Unknown Speaker: Yes, but he cannot get his money back if he terminates the plan?
Mr. Starns: This does not involve an employee contribution.
Justice Byron R. White: I understand, the employer cannot get his money back.
Mr. Starns: That is correct.
Unknown Speaker: So what he pays into the fund it is gone as far as he is concerned, whether he terminates the plan or not?
Mr. Starns: Except that I would point out Your Honor that there is one provision in the plan that if there is an excess after the money has been distributed, it does go back to the employee, it is a minor point, but there is the possibility to receive money back.
Unknown Speaker: Do you think the State of Minnesota could say that is to say that the employer may terminate and get his money back?
Mr. Starns: No.
Unknown Speaker: Because that would be an impairment?
Mr. Starns: Yes sir.
I think that in the context of the facts of this case though Your Honor that the way this would work is a windfall to the employer.
Justice William H. Rehnquist: What you are saying in effect is you can impair so far as the employer is concerned, but not so far as the employee is concerned?
Mr. Starns: Well, that maybe the case Your Honor.
I think we are talking about what the public purpose of this statute is the first benchmark of analysis, what is the public purpose?
Justice William H. Rehnquist: What if the Minnesota legislature had decided that most Minnesota manufacturing companies had put much too much money into pension funding for their financial stability, and therefore, it was of great importance to the State to enable them to reduce these commitments, and therefore, it adopted the provision that Justice White proposed to you.
Do you think that would be impairment?
Mr. Starns: I think it may not, if the Court were to accept those situations as constituting a sufficient fact for public purpose.
Justice Byron R. White: You mean you deny the employee with vested rights for a good reason?
Mr. Starns: Well, I think that is what the doctrine and the teaching of these Courts decisions are is that you can impair contracts, you can enact retroactive laws.
Justice Byron R. White: Would not there be a difference between the situation that I gave you in the law which instead of doing what I suggested, it said to the employer you must now double your contributions to the pension fund despite what your bargain for contract was or your voluntary contract with your own employees, you must now fully fund your plans and you must double, Allied you must double your payments to the plan?
Mr. Starns: Well, of course full funding of plans is what ERISA is all about.
Justice Byron R. White: Yes, but what if that certainly would not be inconsistent with his contract with his employees.
He has promised them only to put in X and now it is 2x?
Mr. Starns: Correct.
Well, I think that if you judge --
Justice Byron R. White: That is not an impairment, is it?
Mr. Starns: No, I do not believe it is.
It is an added benefit and I think that if you treat this retirement --
Justice Byron R. White: For that do you need even to go through any impairment analysis?
Mr. Starns: I do not believe so Your Honor because it is in the nature of a minimum wage type protection if you accept the fact that the pension benefits are form of compensation.
Justice William H. Rehnquist: What if a State passed a minimum wage statute and said it is to be effective as of two years ago, any problem?
Mr. Starns: I think that would be a problem and it would be unconstitutional.
I think that the distinction is that we have recognized by our decisions that deferred pension rights are a form of compensation so to that extent the employee has an accrued or in coed right to the amount that he has earned in those pension benefits.
That is not the same as changing a $5.00 an hour contract or a $6.00 an hour contract and relating it back.
Justice Byron R. White: But in your answer to brother Rehnquist, do you mean it would be an impairment or would it be a due process violation?
Mr. Starns: I assume if there was a specific contract --
Justice Byron R. White: Well, the employer has just promised to pay him and he had paid him when had promised to pay him, $10.00 an hour and now the legislature comes along and says we think you should have been paying him $15.00 an hour and further more you should have been paying him that for the last two years so pay it to him, is that an impairment?
Mr. Starns: Well, it would probably be as well a due process point Your Honor like the Assary case which involved the black loan benefits and the retroactive requirement of payment of those benefits for employees who were terminated prior the effective date of the Act.
I think that it is very similar example you pose is very similar to that one.
As we stated even if it is found that there is contract impairment here the Act is not unconstitutional.
Public purpose to protect the employees' accrued interest and the pension rights to establish full funding of pension plans is clear.
ERISA is a monument to that fact.
It is reasonable, judged by the extent of impairment and is necessary judged under this Court’s decisions in the US Trust Case.
That completes my argument, I have nothing further Your Honor.
Chief Justice Warren E. Burger: Do you have anything further Mr. Christensen?
Rebuttal of George B. Christensen
Mr. Christensen: Briefly if I may your Honor?
I am not sure that I understand this case anymore.
I have just heard counsel I think say that a minimum wage made two years retroactive would be unconstitutional.
Well, I think I heard him say earlier that they did not think this statute was retroactive.
I do not see how the two were together.
He certainly, the one thing we appear to be in agreement on is that contributions to a pension plan are a form of compensation, a form of wage, and there can be no doubt whatsoever that retroactive wages are required by the statute.
Now, I could go on and argue, but I do not think I could make the matter any clearer than I have with that blunt assertion.
I would like if I might to talk about the line of distinction that counsel would draw between bargain plans and unbargained plans.
These contracts, it seems to us are as binding upon the employer as a one bargained out with a labor union and so long as that plan was in effect and about this there can be no doubt, if the company failed to make the required contributions to it each year, the employer could be sued by all or any of these employees, they were a condition of this contract of labor or employment.
Unknown Speaker: So there would a suit in a subset under a contract?
Mr. Christensen: Yes sir.
Unknown Speaker: Illinois subset.
Mr. Christensen: Yes, it would be a contract suit, a suit on the contract.
It is a long time since I dealt with a subset and I am not sure that I am speaking …
Unknown Speaker: Oh! Good, it has been a while since I have too.
Mr. Christensen: There was a question at noon what was impaired here, specifically there was the right to terminate the plan without penalty and upon termination of the plan whatever rights any employee had were fully vested.
Now, under the plan they would not all get money, if there was not money there, but if this had been an enormously successful plan, if we assume that the funds had been invested by trustees in some wildly successful speculated venture, it very well might be that everyone would have been paid in full and if in the unlikely circumstance, there would be a surplus then the company would get it, but there would have been no forfeiture of any kind.
The plan further provided that benefits are payable only out of the trust.
Now, Minnesota converted that, although we declared this trust, a corporate employer declared the trust, the party did the trust of course, they made that a direct corporate obligation.
I cannot imagine anymore direct increasing of the burdens and that has been held in over noon hour I have been informed Mr. Justice Rehnquist that in the Detroit Railway Case which was sometime in the teens or 20s, this Court has held that adding to the burdens of a contract impairs the contract.
I have seen other cases in my research in this thing, but I cannot recite them to the Court right now I am sorry to say.
The presentation that has been made orally is so different from the presentation made in the brief.
Justice Byron R. White: What if an employer and a union have effective bargaining contract that will last the next three years that the legislature cannot require the payment of a higher wage than specified in the contract?
Mr. Christensen: Well, I think yes they can, assuming that meets due process as you do with minimum wages.
They cut right through the fair labor standards.
Justice Byron R. White: That is adding to the burden of a contract making the employer pay more than he ever promised to pay?
Mr. Christensen: Yes.
Justice Byron R. White: Well, is that an impairment?
Mr. Christensen: You said form the State view.
I beg your pardon, I thought you were talking about the Federal government.
No sir, a State could not do it.
Justice William H. Rehnquist: Could a State do it perspectively?
Justice Byron R. White: For the balance that contract term, you said that the contract has got three years to run and the State Legislature says for the next two years you must double the pay into the contract?
Mr. Christensen: I do not think so.
Justice William H. Rehnquist: What about if a state were to say for every employee you hire from now on, you will have to pay him $4.00 per hour?
Mr. Christensen: And what becomes the $4.00 Your Honor?
Justice William H. Rehnquist: Whatever the employee wants I suppose?
Mr. Christensen: So you increase the wage?
I think the answer is the same.
I would answer that question No, the statement --
Unknown Speaker: Would it make a difference if there were or were not a collective bargaining agreement between the employer and the representative of his employees?
Mr. Christensen: In my judgment, no.
I think the individually made contract is just as sacred and immune to State impairment as a collective bargained type.
Unknown Speaker: Well, in my brother Rehnquist's case you would not have individual contracts with future employees, you would hire them only after the state had enacted the statute requiring a minimum per hour pay of $4.00?
Mr. Christensen: Well, if you had no contract then --
Unknown Speaker: Well, you would not because by definition he is a new employee.
Unknown Speaker: Suppose you have the contract of the Union that says we will pay $3 and the Union says fine and it is a Union shop so --
Unknown Speaker: That is my question.
Unknown Speaker: And you would say there is that a promise to pay only $3.00 and the State says sorry, but you must pay $4.
Mr. Christensen: I think that would violate the obligation of contract.
Unknown Speaker: How about if there were no collective bargain agreement and the statute applied only to future employees, employess subsequently hired after the enactment of the statute?
Mr. Christensen: Then I think you have a different question.
Unknown Speaker: You certainly do, do you not?
Mr. Christensen: Then you have a different question.
That is all I have, thank you for your attention.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.
Argument of Speaker
Mr. Speaker: The judgment and opinion of the Court in No. 77-747, Allied Structural Steel Company against Spannaus, the Attorney General of Minnesota will be announced by Mr. Justice Stewart.
Argument of Justice Stewart
Mr. Stewart: This case is here on direct appeal for the United States District Court for the District of Minnesota.
This is an important case both as a matter of abstract constitutional law and as a matter of practical impact.
But I shall make only a very brief oral announcement this morning.
The question presented is whether the application of Minnesota’s Private Pension Benefits Protection Act to the appellant company violates the Contract Clause of the Constitution.
This is the constitutional provision that was at issue in the famous Dartmouth College case argued here by Daniel Webster more than 150 years ago.
But it is a constitutional provision that has been largely by essence in this century.
For the reasons set out in detail in the written opinion of the Court, we conclude that the Minnesota law does violate this provision of the Constitution.
Accordingly, the judgment is reversed.
Mr. Justice Blackmun took no part in the consideration or decision of this case, and Mr. Justice Brennan has filed the dissenting opinion in which Mr. Justice White and Mr. Justice Marshall have joined.
Rebuttal of Speaker
Mr. Speaker: Thank you Mr. Justice Stewart.