Big Blue Scores Big Win

November 6, 2002 (PLANSPONSOR.com) - A Court of Appeals judge has ruled that a jury should decide in an IBM non-compete case, according to the New York Law Journal.

Second District US Court of Appeals judge Colleen McMahon issued a summary judgment reinstating IBM’s case against former executive Edward Lucente and the dispute over millions of dollars of stock options in Lucente v International Business Machines.

The summary judgment says a jury should be allowed to investigate the issue of dismissal or voluntary departure and ultimately decide the case.

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The Court of Appeals judgment is a reversal of a lower court’s summary judgment, which ruled in favor of Lucente, finding no legal grounds to uphold IBM’s non-compete challenge.

Big Blues

Lucente had been employed with IBM for 31 years, having worked his way up to the head of their Asian-Pacific division.   In 1991 he was informed that he would be losing some of his responsibilities.   He left to sign with Northern Telecom, Ltd. and IBM informed Lucente that such a move would not violate his non-compete clause.

However, two years later Lucente moved to Digital Equipment Corp, a company IBM viewed as a direct competitor.   IBM invoked a “forfeiture-for-competition” clause that revoked Lucente’s stock options.

Lucente filed suit in the Southern District of New York, where Judge Joseph McLaughlin ruled New York law frowns on “restrictive employment covenants with ‘one salient exception'” in which the employee must decide between not competing and preserving benefits or competing and risking forfeiture.

The District Court issued a summary judgment in Lucente’s favor.   IBM appealed.

Too Many Unanswered Questions

Judge McMahon found the lower court has resolved too many factual discrepancies in Lucente’s favor, “usurping the jury’s province as a fact-finder”.   

The Appeals Court referenced two disputes in particular:   Claims that Lucente had consulted with IBM before taking the Digital Equipment post, where he was told that such a move would cause forfeiture of his stock options and IBM’s CEO offering the possibility of Lucente moving to another position within the company before his initial departure.

McMahon found that a jury should be given the chance to decide the “bedrock question” of Lucente’s dismissal being voluntary or otherwise.

IRS Says Ignore Sunset on 415 Limit Calculations

October 18, 2001 (PLANSPONSOR.com) ? Defined benefit plan administrators should assume that the liberalized dollar limit under Section 415 remains in effect for plan years after December 31, 2010, Internal Revenue Service officials said this week.

As a result, when figuring projected defined benefit amounts, plan sponsors should ignore a sunset provision enacted this summer as part of tax-cut legislation that calls for a return to earlier laws as of 2011, the IRS said in Revenue Ruling 2001-51.

Tax code Section 404(j) provides that benefits or contributions in excess of Section 415 limitations are not taken into account in computing allowable deductions under Section 404(a).

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“Until further guidance is provided, a participant’s benefit will be tested for the satisfaction of the Section 415 limitations using the limits currently in effect and applicable to the participant,” IRS said.

The sunset provision has caused controversy in the employee benefits industry because many defined benefit plan calculations have a scope of several years and professionals have been uncertain how to treat the sudden law change in 2011.

The Economic Growth and Tax Relief Recovery Act of 2001 increased under tax code Section 415 the maximum defined benefit from $90,000 to $160,000, indexed for inflation.

It also upped annual contributions to a defined benefit plan from $35,000 or 25 percent of compensation in 2001 to $40,000 or 100 percent of compensation beginning in 2002.

For purposes of nondiscrimination testing, increased benefits provided to an employee under a defined benefit plan as a result of Section 415 increase must be included as increases in the employee’s accrued benefit and most valuable optional form of payment, and in the computation of both the normal and most valuable accrual rates for any measurement period that includes the year of the increase.

Increased contributions to defined contribution plans must be taken into account for the plan year for which the increased allocations are made or purposes of nondiscrimination testing, IRS said.

 

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