On June 5, 2025, the United States Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment against two employees who had signed fiduciary liability releases in order to receive reduced severance benefits but later sued in a class action alleging the plan fiduciaries breached their duties in obtaining the releases. The case is Schuman v. Microchip Technology Inc., No. 24-2624, 24-2978, __ F. 4th __, 2025 WL 1584981 (9th Cir. Jun. 5, 2025).
Background. The case resulted from a merger of Atmel Corp. and Microchip Technology. Following the merger, the surviving corporation, Microchip, announced that it would no longer honor a severance plan, that Atmel had adopted prior to the merger, for employees who were fired without cause. Two such former employees, Peter Schuman and William Coplin, filed an ERISA class action lawsuit challenging this decision and also asserting that that Microchip further violated its fiduciary duties under ERISA by encouraging employees to sign the release of claims in exchange for significantly lower benefits than they were allegedly entitled to under the severance plan.
The lower court sided with the defendants and held that Schuman and Coplin were precluded by the releases from suing and representing others who had signed releases as a class. The district court applied a six-factor test from the First and Second Circuits, in concluding that the releases were “knowing and voluntary” and therefore enforceable. The district court did not consider any evidence concerning whether Microchip had violated its fiduciary duties under ERISA in obtaining the releases. However, the district court certified a question to be answered by the appellate court. Specifically, the court asked, “whether it properly adopted and applied the First and Second Circuit’s six-part test or whether it should have considered Microchip’s alleged breach of fiduciary duties as part of its evaluation.”
Special Scrutiny Required. The Ninth Circuit answered the breach of fiduciary duty part of the question by stating, “In accord with ERISA’s purposes and guided by other circuits’ approaches, we conclude that, when a breach of fiduciary duties is alleged, courts must evaluate releases and waivers of ERISA claims with ‘special scrutiny designed to prevent potential employer or fiduciary abuse.’” The court further stated that “[r]equiring courts to consider evidence of a breach of fiduciary duty related to a release of claims under ERISA aligns with the statute’s purpose, structure, and underlying trust-law principles.”
The Ninth Circuit then examined the six-part test from cases in the First and Second Circuit but also “more comprehensive but still non-exhaustive eight- and nine-part tests.” of cases in the Seventh and Eighth Circuits. Since the Seventh and Eighth Circuit “explicitly require consideration of any improper conduct by the fiduciary,” the Ninth Circuit concluded that their approach provided the right balance between a strictly knowing and voluntary analysis and one based on ERISA fiduciary duties.
The Ninth Circuit Test. The court then held in evaluating the totality of the circumstances to determine whether the individual entered into the release or waiver knowingly and voluntarily, courts should consider the following non-exhaustive factors: (1) the employee’s education and business experience; (2) the employee’s input in negotiating the terms of the settlement; (3) the clarity of the release language; (4) the amount of time the employee had for deliberation before signing the release; (5) whether the employee actually read the release and considered its terms before signing it; (6) whether the employee knew of his rights under the plan and the relevant facts when he signed the release; (7) whether the employee had an opportunity to consult with an attorney before signing the release; (8) whether the consideration given in exchange for the release exceeded the benefits to which the employee was already entitled by contract or law; and (9) whether the employee’s release was induced by improper conduct on the fiduciary’s part.
Case Remanded. The court then reversed the grant of summary judgment against Schuman and Coplin and remanded the case back to the district court to consider the factors in the test it adopted. The court noted that “because “where, as here, the district court found a genuine issue of fact material to the issue of a breach of fiduciary duty in obtaining the release of claims, the final factor warrants serious consideration and may weigh particularly heavily against finding that the release was ‘knowing’ or ‘voluntary’ or both.”
Conclusion. This case is a reminder that employers that administer ERISA-covered severance plans are fiduciaries when administering those plans. Attempting to provide lower benefits than offered under the severance plan in exchange for a release could potentially lead to the release not being enforceable due to a breach of fiduciary duty.