A few days ago, I posted an entry here about Ken Adams's new law-review article, Revisiting the Ambiguity of “And” and “Or” in Legal Drafting. Coincidentally, the U.S. 8th Circuit issued a decision yesterday that turned on the ambiguity of “or.” Smith v. United Television, Inc. Special Severance Plan, No. 06-1660 (8th Cir. Feb. 2, 2007). The result: an ERISA plan administrator was allowed to construe “or” to mean “and.”
Here are the case’s facts: Smith was an account executive for a TV station owned by UTI. UTI created an ERISA severance plan, provides each employee participant with severance benefits in the event of a “Qualifying Termination,” which is defined as “a termination of an Employee’s employment, following a Change in Control ... by the Employee for Good Reason.” A “Good Reason” includes a “reduction in the Employee’s salary or bonus opportunity.”
In August 2001, the TV station was sold by UTI to Fox. Before the sale, Smith received an annual guaranteed salary of $51,000. She also received commissions and was eligible for discretionary quarterly bonuses. After the sale, Fox eliminated Smith’s guaranteed salary but boosted her commission percentage. Smith’s total earnings in 2002 were roughly the same as in 2000 (around $149,000) and a bit less than the $173,000 she earned in 2001.
Smith resigned in May 2003 and claimed severance benefits. Her position was that to be eligible, she need only suffer a reduction in either salary or bonus opportunity. The administrator denied her claim because Smith’s total compensation was “enhanced, not decreased,” under the new compensation scheme.
Smith sued the Plan for severance benefits, and the district court awarded her $189,686. But the Eighth Circuit reversed.
The case turned on the phrase “reduction in the Employee’s salary or bonus opportunity.” Smith argued that the word “or” in that phrase is unambiguous, and that it operates disjunctively. Thus, if she suffered a reduction in either salary or bonus opportunity, she was entitled to severance benefits. The Plan argued that the administrator acted reasonably by interpreting the phrase “holistic[ally],” in effect converting the “or” into “and.”
Smith lost because the Plan gave the administrator “sole discretion ... to determine who shall be eligible for Severance Benefits [and] to interpret the Plan.” This provision, the Eighth Circuit held, required the courts to defer to the administrator’s decision as long as it is reasonable. The Eighth Circuit found the administrator’s interpretation of “or” to be reasonable:
... 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. [Emphasis by the court.]
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. [Smith at 7-8. ]
Contract drafters, note this: The Eighth Circuit found the phrase “salary or bonus opportunity” ambiguous, that is, subject to more than one reasonable interpretation. In this case, Smith lost because the Plan gave the administrator discretionary authority to interpret ambiguous provisions. Without that grant of discretionary authority, the result might have been different.
(Hat tip to Howard Bashman.)