Last Monday I posted this blog item about how St. John’s Law Review had published a new article by me and Alan Kaye entitled Revisiting the Ambiguity of “And” and “Or” in Legal Drafting. So when I discovered, courtesy of Howard Bashman via the (new) legal writer, that the Eighth Circuit Court of Appeals had considered the meaning of or in a decision filed on February 2nd, I didn’t know whether to be disappointed or pleased—disappointed because the case had come too late to include in my article, or pleased that hot on the heels of publication of my article a case had appeared that demonstrates that the meaning of or is a real issue.
The case in question is Smith v. United Television, Inc. Special Severance Plan, No. 06-1660 (8th Cir., Feb. 2, 2007). It doesn’t in fact concern ambiguity, but rather a related issue, namely in what contexts one can read or as meaning and, and vice-versa. Here’s my take on it:
The Facts
Smith was an account executive for a television station owned by United Television, Inc. (UTI). In 1999, in anticipation of sale of UTI’s television stations to Fox, UTI created a severance plan that entitled participants to severance benefits in the event of a “Qualifying Termination,” which the plan defined as “a termination of an Employee’s employment, following a Change in Control … by the Employee for Good Reason.” As defined in the plan, “Good Reason” included a “reduction in the Employee’s salary or bonus opportunity.”
In August 2001, UTI sold the station to Fox. Before the sale, Smith’s compensation consisted of an annual guaranteed salary, commissions, and discretionary bonuses. Her total compensation was $149,375.92 in 2000 and $173,972.71 in 2001. After the sale, Smith was no longer paid a guaranteed annual salary, but her commission percentage was higher than it had been before the sale. Her total 2002 compensation was $149,682.17.
Smith resigned in May 2003 and claimed severance benefits on the grounds that she had terminated for “Good Reason,” in that she had experienced a “reduction in salary or bonus opportunity.” The committee responsible for administering the plan, which had sole discretion to interpret the plan and determine who was entitled to severance benefits, denied Smith’s claim on the grounds that her total earnings opportunity had been enhanced rather than decreased.
Smith sued the plan, and the district court awarded Smith $189,686.06. The Eighth Circuit reversed.
The Eighth Circuit’s Decision
The Eighth Circuit considered five factors, but acknowledged that “[t]his case centers on the Committee’s interpretation of the phrase ‘reduction in salary or bonus opportunity.’” Smith argued that the meaning of “reduction in salary and bonus” is clear—“‘or’ operates disjunctively so that the phrase means either: (1) a reduction in salary or (2) a reduction in bonus opportunity.” As for the plan, it argued “that the Committee’s ‘holistic’ interpretation of ‘opportunity,’ which it defines as an employee’s ‘potential’ earnings opportunity, is reasonable.”
The court concluded that the committee’s interpretation was reasonable and wasn’t contrary to the plan’s clear language, and noted that “[t]he Committee’s interpretation turns on defining ‘opportunity’ prospectively.” It went on as follows:
Defining the phrase “salary or bonus opportunity” as the potential combination of compensation components, such as salary and bonuses, does not conflict with the Plan’s language.
This conclusion may be somewhat counterintuitive, as the Plan’s language appears to be disjunctive rather than conjunctive. The competing conclusion—that the phrase must be read in the disjunctive—is reasonably debatable, however, as courts have recognized the principle of contract interpretation that the terms “and” and “or” may be interchanged, in context, to carry out the parties’ intent and the agreement’s purpose. … Stated another way, “courts need not mechanically interpret every ‘or’ as disjunctive, but rather … courts should interpret the word ‘or’ according to context.” Fin. Sec. Assurance, Inc. v. Stephens, Inc., 450 F.3d 1257, 1265 (11th Cir. 2006) (citations omitted). This principle of interpretation supports the conclusion that the Plan’s interpretation was reasonable. Although it may be reasonable to disagree with the Plan’s interpretation, our task as a reviewing court is not to substitute our interpretation for the Committee’s, but rather to ask if the Committee’s interpretation was reasonable. … Although a reasonable person could conclude that Smith’s interpretation is correct, a reasonable person could also conclude that the Committee’s interpretation is correct. Accordingly, the Committee’s interpretation of the Plan’s language did not constitute an abuse of discretion.
The Dissent
One judge dissented. After citing dictionary definitions of or, this judge stated as follows:
Contrary to the reasoning of the majority, none of these definitions suggest that the word “or” is synonymous with the word “and.” Indeed, each of these definitions clearly defines “or” as a disjunctive, a choice between two alternatives. To hold otherwise, would “tax[] ordinary English syntax to the point of uncertainty.” Chevron Oil Co. v. Barlow, 406 F.2d 687, 692 (10th Cir. 1969) (holding “or” should not be substituted for “and”).
Therefore, a reasonable person would not interpret “salary or bonus opportunity” as “salary and bonus opportunity.” Thus, the Committee’s decision to use this “holistic” approach is contrary to the Plan’s clear language.
What I Think
I can’t make sense of what the court says the plan is arguing—“holistic” indeed!—so I’ll limit myself to considering the court’s reasoning. I find it unpersuasive.
The word or is disjunctive, regardless of literature on legal drafting that suggests otherwise. As the Eighth Circuit says, courts have nevertheless proved willing to read and as meaning or and or as meaning and, but that interpretive tool developed as a way to address the fact that drafters sometimes mistakenly use and when they really mean or, and or when they really mean and. It’s best used only when there’s some reason to think that the contract, when taken at face value, doesn’t in fact say what the parties had in mind.
Even though the court referred to the need to carry out the parties’ intent, it didn’t in fact inquire whether there was any basis for concluding that the contract language didn’t reflect the intent of the parties. Instead, the court noted that the committee’s interpretation was entitled to deference and that the court’s task was to ask whether the committee’s interpretation was reasonable. The court concluded that it was.
The problem with this is that the court permitted the committee, rather than the court, to determine that it was appropriate to replace or with and, and then the court rubber-stamped the committee’s decision without inquiring as to the intent of the parties.
Severance plans are hardly my specialty, but I can imagine that in the language at issue, the intent was that or really mean or. An employee may well place greater value on a guaranteed annual salary than on the possibility of earning a greater amount through commissions and bonuses. Consequently, it’s entirely conceivable that UTI intended for the plan to treat a reduction in salary as grounds for termination, no matter what might be offered by way of commissions and bonuses. After all, UTI adopted the plan, pre-acquisition, in order to protect its employees after the acquisition. But the Eighth Circuit felt no need to consider such issues.
The dissent doesn’t get to the heart of the matter. It states that or is disjunctive, but it doesn’t address why it was inappropriate of the court to allow the plan to wield, in an unfettered manner, an interpretive tool that should have been the court’s prerogative.
The decision is driven by the requirement that, if the ERISA plan language confers discretion upon the plan administrator, courts defer to those interpretations unless such interpretations are “arbitrary and capricious” (or an “abuse of discretion” or “downright unreasonable”). The only way the court may overturn the plan administrator’s decision is if no reasonable person could reach that conclusion. For that reason, this case is not the best example of the “and” vs. “or” dispute, precisely because the court is granting wide latitude to the plan administrator’s decision, as it must under ERISA case law. The question before the court was not whether the plan administrator was correct, but merely whether it had abused its discretion. According to the court, reasonable minds can disagree, so the plan administraor’s interpretation prevails.
Was this change in compensation overall significant enough to entitle the person to severance benefits? The purpose of the plan is to provide some protection to employees when new management changes things. Hopefully the law is not such that whatever management does (absent extreme abuse of discretion ) is okay. Where in these opinions do the judges meaningfully consider what this woman’s situation was and how significant was the change in her compensation arrangement? I feel the case includes inadequate discussion and analysis of these issues.
A new Canadian insurance law case finds or means or not and, see http://www.cavanaghwilliams.com/blawg/?p=284
Cheers.
What is interesting in this case is that “or” was NOT read to mean “and” — it was read to mean “plus.” If the plan had to prove that there had been a “reduction in the Employee’s salary AND bonus opportunity,” surely that would mean that both salary AND bonus opportunity would have to decrease. If the document meant total compensation, or the sum of salary and bonus opportunity, it should have said so.