Brief Fact Summary.
The company at issue challenged the Private Pension Benefits Protection Act that required it to provide a pension funding charge to its discharged employees, claiming that the Act unconstitutionally impaired its contractual obligations to its employees under its pension agreement.
Synopsis of Rule of Law.
Although the absolute language of the Contract Clause must leave room for the essential attributes of sovereign power, necessarily reserved by the States to safeguard the welfare of their citizens, that power has limits when its exercise effects substantial modifications of private contracts.
Impairments of a state's own contracts face more stringent examination under the Contract Clause than would laws regulating contractual relationships between private parties.View Full Point of Law
In 1974, Minnesota enacted the law at question, the Private Pension Benefits Protection Act. Under the Act, a private employer of 100 employees or more who provided pension benefits under a plan meeting the qualifications of the Internal Revenue Code, was subject to a pension funding charge if he either terminated the plan or closed a Minnesota office. The Act required the employer to satisfy the deficiency by purchasing deferred annuities, payable to the employees at their normal retirement age. During 1974, the company began closing its Minnesota office and discharged 11 of its 30 Minnesota employees. However, at least nine of the discharged employees did not have any pension rights under the company’s plan but worked for it for more than 10 years. The State notified the company that it owed a pension funding charge. The company challenged.
Does the application of Minnesota’s Private Pension Benefits Protection Act to the appellant violate the Contract Clause of the U.S. Constitution?
Yes, the Minnesota law simply does not possess the attributes of state laws that in the past have survived challenge under the Contract Clause of the Constitution. The law was not even enacted to deal with a broad, generalized economic or social problem. It did not operate in an area already subject to state regulation at the time the company’s contractual obligations were originally undertaken, but invaded an area never before subject to regulation by the State. It did not effect a temporary alteration of the contractual relationships of those within its coverage, but worked a severe, permanent, and immediate change in those relationships irrevocably. Its narrow aim was leveled, not at every Minnesota employer, not even at every Minnesota employer who left the State, but only at those who had in the past been sufficiently enlightened as voluntarily to agree to establish pension plans for their employees. Thus, Minnesota could not constitutionally do what it tried to do to the company in this case.
The Act does not relieve either the employer or his employees of any existing contractual obligation. Rather, the Act simply creates an additional, supplemental duty of the employer, no different in kind from may duties created by a wide variety of legislative measures which defeat settled expectations but which have nonetheless been sustained by the Court. Thus, the Minnesota Act does not implicate the Contract Clause in any way.
Here, the company had no reason to anticipate that its employees’ pension rights could become vested except in accordance with the terms of the plan. It relied heavily, and reasonably, on the legitimate contractual expectation in calculating its annual contributions to the pension fund. The effect of Minnesota’s Private Pension Benefits Protection Act on this contractual obligation was severe. Moreover, not only did the state law retroactively modify the compensation that the company had agreed to pay its employees but it did so by changing the company’s obligations in an area where the element of reliance was vital. The statute here nullifies express terms of the company’s contractual obligations and imposes a completely unexpected liability in potentially disabling amounts. Moreover, there is not even any provision for gradual applicability for grace periods. The legislation was not enacted to deal with a situation remotely approaching the broad and desperate emergency economic conditions.