Whole 5th Circuit Revives Conversion Blackout Suit

March 3, 2006 (PLANSPONSOR.com) - A full panel of federal appellate judges has breathed new life into a legal battle by American Airlines employees over the length of a conversion blackout period, by ruling the plaintiffs deserved more time in which to prove their case.

That was the upshot of an unusual decision rendered this week by all 16 jurists assigned to the 5 th US Circuit Court of Appeals in overturning an earlier order in the case by a federal judge in Texas. Federal appellate cases are typically heard by three-member panels.

In the two-page ruling, the full court asserted that one of its own panels and the lower court judge were wrong in claiming that pilots Michael Milofsky and Robert Walsh didn’t have legal standing to sue over their fiduciary breach claims about the blackout period under the federal Employee Retirement Income Security Act (ERISA). Both earlier rulings overturned Thursday by the full court claimed that Milofsky and Walsh were after legal relief just for them and not for the plan as a whole as ERISA requires for those using it as legal authority to sue

Plantiffs were entitled “to further development” of their allegations, the new ruling said.

The matter was also unusual because the full 5 th Circuit killed the earlier decision by one of its three-judge panels, announcing that the entire court would rehear the issues together in what is called an “en banc” proceeding. Last year, a three-judge panel of the Fifth Circuit in a 2-1 decision upheld the district court’s dismissal of the lawsuit (See Appeals Court Upholds Suit Dismissal in Conversion/Blackout Case).

Case History

According to court documents, Milofsky and Walsh were pilots for Business Express Inc. (BEX) before it was acquired by a subsidiary of American Airlines. When BEX pilots were transferred to the American Airlines subsidiary, their account with BEX’s 401(k) plan was transferred to American Airlines’s 401(k) plan.

Towers Perrin, as the third-party administrator of American Airlines’s 401(k) plan, notified Milofsky, Walsh, and other BEX pilots that when their accounts were transferred from the BEX plan to the American Airlines plan there would be certain blackout periods during which they would not have access to their accounts.

Milofsky and Walsh later sued American Airlines and Towers Perrin, alleging they breached their fiduciary duties by misrepresenting the length of the blackout period. As a remedy, Milofsky and Walsh asked that the defendants pay to the plan the amount each participant lost as a result of the blackout period.

 The full text of Thursday’s ruling in Milofsky v. American Airlines Inc., 5th Cir., No. 03-11087, 3/2/06 is here .