Teamsters v. DanielAnnotate this Case
439 U.S. 551 (1979)
U.S. Supreme Court
Teamsters v. Daniel, 439 U.S. 551 (1979)
International Brotherhood of Teamsters, Chauffeurs,
Warehousemen & Helpers of America v. Daniel
Argued October 31, 1978
Decided January 16, 1979
439 U.S. 551
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
A pension plan entered into under a collective bargaining agreement between petitioner local labor union and employer trucking firms required all employees to participate in the plan, but not to pay anything into it. All contributions to the plan were to be made by the employers at a specified amount per week for each man-week of covered employment. To be eligible for a pension, an employee was required to have 20 years of continuous service. Respondent employee, who had over 20 years' service, was denied a pension upon retirement because of a break in service. He then brought suit in Federal District Court, alleging, inter alia, that the union and petitioner trustee of the pension fund had misrepresented and omitted to state material facts with respect to the value of a covered employee's interest in the pension plan, and that such misstatements and omissions constituted a fraud in connection with the sale of a security in violation of § 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5, and also violated § 17(a) of the Securities Act of 1933. Denying petitioners' motion to dismiss, the District Court held that respondent's interest in the pension fund constituted a "security" within the meaning of § 2(1) of the Securities Act and § 3(a)(10) of the Securities Exchange Act because the plan created an "investment contract," and also that there had been a "sale" of this interest to respondent within the meaning of § 2(3) of the Securities Act and § 3(a)(14) of the Securities Exchange Act. The Court of Appeals affirmed.
Held: The Securities Act and the Securities Exchange Act do not apply to a noncontributory, compulsory pension plan. Pp. 439 U. S. 558-570.
(a) To determine whether a particular financial relationship constitutes an investment contract, "[t]he test is whether the scheme involves
an investment of money in a common enterprise with profits to come solely from the efforts of others." SEC v. W. J. Howey Co.,328 U. S. 293, 328 U. S. 301. Looking separately at each element of this test, it is apparent that an employee's participation in a noncontributory, compulsory pension plan such as the one in question here does not comport with the commonly held understanding of an investment contract. With respect to the "investment of money" element, in such a pension plan, the purported investment is a relatively insignificant part of the total and indivisible compensation package of an employee, who, from the standpoint of the economic realities, is selling his labor to obtain a livelihood, not making an investment for the future. And with respect to the "expectation of profits" element, while the pension fund depends to some extent on earnings from its assets, the possibility of participating in asset earnings is too insubstantial to bring the entire transaction within the Securities Acts. Pp. 439 U. S. 558-562.
(b) There is no evidence that Congress at any time thought noncontributory plans were subject to federal regulation as securities. Nor until the instant litigation arose is there any evidence that the SEC had ever considered the Securities Act and Securities Exchange Act to be applicable to such plans. Accordingly, there is no justification for deference to the SEC's present interpretation. Pp. 439 U. S. 563-569.
(c) The Employee Retirement Income Security Act of 1974, which comprehensively governs the use and terms of employee pension plans, severely undercuts all argument for extending the Securities Act and Securities Exchange Act to noncontributory, compulsory pension plans, and whatever benefits employees might derive from the effect of these latter Acts are now provided in more definite form through ERISA. Pp. 439 U. S. 569-570.
561 F.2d 1223, reversed.
POWELL, J., delivered the opinion of the Court, in which BRENNAN, STEWART, WHITE, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined, and in all but the last paragraph of Part III-A of which, BURGER, C.J., joined. BURGER, C.J., filed a concurring opinion, post, p. 439 U. S. 570. STEVENS, J., took no part in the consideration or decision of the cases.
MR. JUSTICE POWELL delivered the opinion of the Court.
This case presents the question whether a noncontributory, compulsory pension plan constitutes a "security" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 (Securities Acts).
In 1954, multiemployer collective bargaining between Local 705 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America and Chicago trucking firms produced a pension plan for employees represented by the Local. The plan was compulsory and noncontributory. Employees had no choice as to participation in the plan, and did not have the option of demanding that the employer's contribution be paid directly to them as a substitute for pension eligibility. The employees paid nothing to the plan themselves. [Footnote 1]
The collective bargaining agreement initially set employer contributions to the Pension Trust Fund at $2 a week for each man-week of covered employment. [Footnote 2] The Board of Trustees of the Fund, a body composed of an equal number of employer and union representatives, was given sole authority to set the level of benefits, but had no control over the amount of required employer contributions. Initially, eligible employees received $75 a month in benefits upon retirement. Subsequent collective bargaining agreements called for greater employer contributions, which, in turn, led to higher benefit payments for retirees. At the time respondent brought suit, employers contributed $21.50 per employee man-week and pension payments ranged from $425 to $525 a month, depending on age at retirement. [Footnote 3] In order to receive a pension, an employee was required to have 20 years of continuous service, including time worked before the start of the plan.
The meaning of "continuous service" is at the center of this dispute. Respondent began working as a truckdriver in the Chicago area in 1950, and joined Local 705 the following year. When the plan first went into effect, respondent automatically received 5 years' credit toward the 20-year service requirement because of his earlier work experience.
He retired in 1973, and applied to the plan's administrator for a pension. The administrator determined that respondent was ineligible because of a break in service between December, 1960, and July, 1961. [Footnote 4] Respondent appealed the decision to the trustees, who affirmed. Respondent then asked the trustees to waive the continuous service rule as it applied to him. After the trustees refused to waive the rule, respondent brought suit in federal court against the International Union (Teamsters), Local 705 (Local), and Louis Peick, a trustee of the Fund.
Respondent's complaint alleged that the Teamsters, the Local, and Peick misrepresented and omitted to state material facts with respect to the value of a covered employee's interest in the pension plan. Count I of the complaint charged that these misstatements and omissions constituted a fraud in connection with the sale of a security in violation of § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240.10b-5 (1978). Count II charged that the same conduct amounted to a violation of § 17(a) of the Securities Act of 1933, 48 Stat. 84, as amended, 15 U.S.C. § 77q. Other counts alleged violations of various labor law and common law duties. [Footnote 5] Respondent sought to proceed on
behalf of all prospective beneficiaries of Teamsters pension plans and against all Teamsters pension funds. [Footnote 6]
The petitioners moved to dismiss the first two counts of the complaint on the ground that respondent had no cause of action under the Securities Acts. The District Court denied the motion. 410 F.Supp. 541 (ND Ill.1976). It held that respondent's interest in the Pension Fund constituted a security within the meaning of § 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and § 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10), [Footnote 7] because the plan created an "investment contract" as that term had been interpreted in SEC v. W. J. Howey Co.,328 U. S. 293 (1946). It also determined that there had been "sale" of this interest to respondent within the meaning of § 2(3) of the Securities Act, as amended, 15 U.S.C. § 77b(3), and § 3(a)(14) of the Securities Exchange Act, 15 U.S.C. § 7&(a)(14). [Footnote 8] It
believed respondent voluntarily gave value for his interest in the plan, because he had voted on collective bargaining agreements that chose employer contributions to the Fund instead of other wages or benefits.
The order denying the motion to dismiss was certified for appeal pursuant to 28 U.S.C. § 1292(b), and the Court of Appeals for the Seventh Circuit affirmed. 561 F.2d 1223 (1977). Relying on its perception of the economic realities of pension plans and various actions of Congress and the SEC with respect to such plans, the court ruled that respondent's interest in the Pension Fund was a "security." According to the court, a "sale" took place either when respondent ratified a collective bargaining agreement embodying the Fund or when he accepted or retained covered employment instead of seeking other work. [Footnote 9] The court did not believe the subsequent enactment of the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, 29 U.S.C. § 1001 et seq., affected the application of the Securities Acts to pension plans, as the requirements and purposes of ERISA were perceived to be different from those of the Securities Acts. [Footnote 10] We granted certiorari, 434 U.S. 1061 (1978), and now reverse.
"The starting point in every case involving construction of a statute is the language itself." Blue Chip Stamps v. Manor Drug Stores,421 U. S. 723, 421 U. S. 756 (1975) (POWELL, J., concurring); see Ernst Ernst v. Hochfelder,425 U. S. 185, 425 U. S. 197, 425 U. S. 199, and n.19 (1976). In spite of the substantial use of employee pension plans at the time they were enacted, neither § 2(1) of the Securities Act nor § 3(a)(10) of the Securities Exchange Act, which define the term "security" in considerable detail and with numerous examples, refers to pension plans of any type. Acknowledging this omission in the statutes, respondent contends that an employee's interest in a pension plan is an "investment contract," an instrument which is included in the statutory definitions of a security. [Footnote 11]
To determine whether a particular financial relationship constitutes an investment contract, "[t]he test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Howey, 328 U.S. at 328 U. S. 301. This test is to be applied in light of "the substance -- the economic realities of the transaction -- rather than the names that may have been employed by the parties." United Housing Foundation, Inc. v. Forman.421 U. S. 837, 421 U. S. 851-852 (1975). Accord, Tcherepnin v. Knight,389 U. S. 332, 389 U. S. 336 (1967); Howey, supra, at 328 U. S. 298. Cf. 359 U. S.
Variable Annuity Life Ins. Co.,359 U. S. 65, 359 U. S. 80 (1959) (BRENNAN, J., concurring) ("[O]ne must apply a test in terms of the purposes of the Federal Acts . . ."). Looking separately at each element of the Howey test, it is apparent that an employee's participation in a noncontributory, compulsory pension plan such as the Teamsters' does not comport with the commonly held understanding of an investment contract.
A. Investment of Money
An employee who participates in a noncontributory, compulsory pension plan, by definition, makes no payment into the pension fund. He only accepts employment, one of the conditions of which is eligibility for a possible benefit on retirement. Respondent contends, however, that he has "invested" in the Pension Fund by permitting part of his compensation from his employer to take the form of a deferred pension benefit. By allowing his employer to pay money into the Fund, and by contributing his labor to his employer in return for these payments, respondent asserts he has made the kind of investment which the Securities Acts were intended to regulate.
In order to determine whether respondent invested in the Fund by accepting and remaining in covered employment, it is necessary to look at the entire transaction through which he obtained a chance to receive pension benefits. In every decision of this Court recognizing the presence of a "security" under the Securities Acts, the person found to have been an investor chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security. See Tcherepnin, supra, (money paid for bank capital stock); SEC v. United Benefit Life Ins. Co.,387 U. S. 202 (1967) (portion of premium paid for variable component of mixed variable- and fixed-annuity contract); Variable Annuity life Ins. Co., supra, (premium paid for variable-annuity contract); Howey, supra, (money paid for purchase, maintenance,
and harvesting of orange grove); SEC v. C. M. Joiner Leasing Corp.,320 U. S. 344 (1943) (money paid for land and oil exploration). Even in those cases where the interest acquired had intermingled security and nonsecurity aspects, the interest obtained had "to a very substantial degree elements of investment contracts. . . ." Variable Annuity Life Ins. Co., supra at 359 U. S. 91 (BRENNAN, J., concurring). In every case, the purchaser gave up some tangible and definable consideration in return for an interest that had substantially the characteristics of a security.
In a pension plan such as this one, by contrast, the purported investment is a relatively insignificant part of an employee's total and indivisible compensation package. No portion of an employee's compensation other than the potential pension benefits has any of the characteristics of a security, yet these noninvestment interests cannot be segregated from the possible pension benefits. Only in the most abstract sense may it be said that an employee "exchanges" some portion of his labor in return for these possible benefits. [Footnote 12] He surrenders his labor as a whole, and, in return, receives a compensation package that is substantially devoid of aspects resembling a security. His decision to accept and retain covered employment may have only an attenuated relationship, if any, to perceived investment possibilities of a future pension. Looking at the economic realities, it seems clear that an employee is selling his labor primarily to obtain a livelihood, not making an investment.
Respondent also argues that employer contributions on his behalf constituted his investment into the Fund. But it is inaccurate to describe these payments as having been "on behalf" of any employee. The trust agreement used employee man-weeks as a convenient way to measure an employer's
overall obligation to the Fund, not as a means of measuring the employer's obligation to any particular employee. Indeed, there was no fixed relationship between contributions to the Fund and an employee's potential benefits. A pension plan with "defined benefits," such as the Local's, does not tie a qualifying employee's benefits to the time he has worked. Seen 3, supra. One who has engaged in covered employment for 20 years will receive the same benefits as a person who has worked for 40, even though the latter has worked twice as long and induced a substantially larger employer contribution. [Footnote 13] Again, it ignores the economic realities to equate employer contributions with an investment by the employee.
B. Expectation of Profits From a Common Enterprise
As we observed in Forman, the "touchstone" of the Howey test
"is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others."
421 U.S. at 421 U. S. 852. The Court of Appeals believed that Daniel's expectation of profit derived from the Fund's successful management and investment of its assets. To the extent pension benefits exceeded employer contributions and depended on earnings from the assets, it was thought they contained a profit element. The Fund's trustees provided the managerial efforts which produced this profit element.
As in other parts of its analysis, the court below found an expectation of profit in the pension plan only by focusing on one of its less important aspects to the exclusion of its more significant elements. It is true that the Fund, like other holders of large assets, depends to some extent on earnings
from its assets. In the case of a pension fund, however, a far larger portion of its income comes from employer contributions, a source in no way dependent on the efforts of the Fund's managers. The Local 705 Fund, for example, earned a total of $31 million through investment of its assets between February, 1955, and January, 1977. During this same period, employer contributions totaled $153 million. [Footnote 14] Not only does the greater share of a pension plan's income ordinarily come from new contributions, but, unlike most entrepreneurs who manage other people's money, a plan usually can count on increased employer contributions, over which the plan itself has no control, to cover shortfalls in earnings. [Footnote 15]
The importance of asset earnings in relation to the other benefits received from employment is diminished further by the fact that, where a plan has substantial preconditions to vesting, the principal barrier to an individual employee's realization of pension benefits is not the financial health of the fund. Rather, it is his own ability to meet the fund's eligibility requirements. Thus, even if it were proper to describe the benefits as a "profit" returned on some hypothetical investment by the employee, this profit would depend primarily on the employee's efforts to meet the vesting requirements, rather than the fund's investment success. [Footnote 16] When viewed in light of the total compensation package an employee must receive in order to be eligible for pension benefits, it becomes clear that the possibility of participating in a plan's asset earnings "is far too speculative and insubstantial to bring the entire transaction within the Securities Acts," Forman, 421 U.S. at 421 U. S. 856.
The court below believed that its construction of the term "security" was compelled not only by the perceived resemblance of a pension plan to an investment contract, but also by various actions of Congress and the SEC with regard to the Securities Acts. In reaching this conclusion, the court gave great weight to the SEC's explanation of these events, an explanation which, for the most part, the SEC repeats here. Our own review of the record leads us to believe that this reliance on the SEC's interpretation of these legislative and administrative actions was not justified.
A. Actions of Congress
The SEC, in its amicus curiae brief, refers to several actions of Congress said to evidence an understanding that pension plans are securities. A close look at each instance, however, reveals only that Congress might have believed certain kinds of pension plans, radically different from the one at issue here, came within the coverage of the Securities Acts. There is no evidence that Congress at any time thought noncontributory plans similar to the one before us were subject to federal regulation as securities.
The first action cited was the rejection by Congress in 1934 of an amendment to the Securities Act that would have exempted employee stock investment and stock option plans from the Act's registration requirements. [Footnote 17] The amendment passed the Senate, but was eliminated in conference. The legislative history of the defeated proposal indicates it was
intended to cover plans under which employees contributed their own funds to a segregated investment account on which a return was realized. See H.R.Conf.Rep. No. 1838, 73d Cong., 2d Sess., 41 (1934); Hearings before the House Committee on Interstate and Foreign Commerce on Proposed Amendments to the Securities Act of 1933 and to the Securities Exchange Act of 1934, 77th Cong., 1st Sess., pt. 1, pp. 895-896 (1941). In rejecting the amendment, Congress revealed a concern that certain interests having the characteristics of a security not be excluded from Securities Act protection simply because investors realized their return in the form of retirement benefits. At no time, however, did Congress indicate that pension benefits, in and of themselves, gave a transaction the characteristics of a security.
The SEC also relies on a 1970 amendment of the Securities Act which extended § 3's exemption from registration to include
"any interest or participation in a single or collective trust fund maintained by a bank . . . which interest or participation is issued in connection with . . . a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of title 26. . . ."
§ 3(a)(2) of the Securities Act, as amended, 84 Stat. 1434, 1498, 15 U.S.C. § 77c(a)(2). It argues that, in creating a registration exemption, the amendment manifested Congress' understanding that the interests covered by the amendment otherwise were subject to the Securities Acts. [Footnote 18] It interprets "interest or participation in a single . . . trust fund . . . issued in connection with . . . a stock bonus, pension, or profit-sharing plan" as referring to a prospective beneficiary's interest in a pension fund. But this construction of the 1970
amendment ignores that measure's central purpose, which was to relieve banks and insurance companies of certain registration obligations. The amendment recognized only that a pension plan had "an interest or participation" in the fund in which its assets were held, not that prospective beneficiaries of a plan had any interest in either the plan's bank-maintained assets or the plan itself. [Footnote 19]
B. SEC Interpretation
The court below believed, and it now is argued to us, that, almost from its inception, the SEC has regarded pension plans as falling within the scope of the Securities Acts. We are asked to defer to what is seen as a longstanding interpretation of these statutes by the agency responsible for their
administration. But there are limits, grounded in the language, purpose, and history of the particular statute, on how far an agency properly may go in its interpretative role. Although these limits are not always easy to discern, it is clear here that the SEC's position is neither longstanding nor even arguably within the outer limits of its authority to interpret these Acts. [Footnote 20]
As we have demonstrated above, the type of pension plan at issue in this case bears no resemblance to the kind of financial interests the Securities Acts were designed to regulate. Further, the SEC's present position is flatly contradicted by its past actions. Until the instant litigation arose, the public record reveals no evidence that the SEC had ever considered the Securities Acts to be applicable to noncontributory pension plans. In 1941, the SEC first articulated the position that voluntary, contributory plans had investment characteristics that rendered them "securities" under the Acts. At the same time, however, the SEC recognized that noncontributory
plans were not covered by the Securities Acts because such plans did not involve a "sale" within the meaning of the statutes. Opinions of Assistant General Counsel, [1941-1944 Transfer Binder] CCH Fed.Sec.L.Serv.