After 14 years of litigation, several dozen Xerox retirees have taken a significant step forward in securing final benefits as a federal appellate decision Monday described the company’s interpretation of the pension plan as “unreasonable” and contrary to the notice provisions of the Employee Retirement Income Security Act.

The matter decided by the U.S. Court of Appeals for the Second Circuit, Frommert v. Conkright, 12-67-cv, centered on the calculation of benefits owed to employees who retired with a pension and then were rehired. At issue was how to determine the final retirement benefit, taking into account the amount paid the first time the employee retired.

Since 1999, the case has navigated through the courts, with three trips to Foley Square and one to Washington, D.C., where the U.S. Supreme Court in 2010 ruled on a matter involving the deference owed to the plan administrator’s interpretation of the pension program. And it’s not over yet: The Second Circuit sent it back to the trial court to determine the remedy.

The plaintiffs are Xerox retirees who left the company in the 1980s, accepting lump-sum distributions for the benefits they had earned to that point, and were then later rehired. To take into account the prior distributions, the plan administrator initially utilized the so-called “phantom account” method, basing the calculation on a hypothetical investment.

But the Second Circuit shot that down since phantom offset was not included in the plan when it was created and was never added in as an amendment. The matter eventually returned to Western District Judge David Larimer (See Profile) for consideration of an appropriate offset.

Larimer deferred to the plan administrator, but on Monday the Second Circuit said that would yield “an absurd and contradictory result” where the rehired employees would be worse off than newly hired employees.

“To be sure, ERISA plans may be constructed to change the risk borne by rehired employees or reduce such employees’ benefits in a manner that treats them worse than newly hired employees, provided that such terms exist in the plan,” the circuit said in an opinion by Judge Rosemary Pooler (See Profile) and joined by judges Amalya Kearse (See Profile) and Chester Straub (See Profile). “No provision in the Xerox Plan defines the offset in accordance with the method the Plan Administrator advocates.”

Additionally, the court said the plan violates ERISA’s notice provisions because the summary plan description states only that a lump sum distribution “may” reduce benefits under one of the three components of the pension program, the retirement income guarantee plan, which is used to calculate an annuity.

“We do not see how a beneficiary would know, given the [summary plan description's] use of the word ‘may,’ that a prior distribution from an account would reduce his benefit under a formula unless the [summary] made clear the interaction between the two,” Pooler wrote. “Thus, any interpretation of the plan that necessarily reduces the [retirement income guarantee plan] benefit would violate ERISA’s notice requirements.”

Peter Stris of Stris & Maher in Gardena, Calif., representing the retirees, said the ruling represents “a tremendous victory for us.”

Stris said the dispute had two main tentacles, one involving what is essentially a contractual question on how to interpret the plan, and the other focusing on the notice issue. He said his clients shared a total of about $10 million to date, but the amount could nearly triple under the Second Circuit’s holding.

“What the court here has said on the contract argument, the do-over interpretation Xerox advanced in the second round and that Judge Larimer accepted was arbitrary and capricious, as we have been saying all along,” Stris said. “At the simplest level, the court said Xerox’s interpretation results in people getting paid less than if they were newly hired, which just doesn’t make sense.”

Margaret Clemens of Littler Mendelson in Rochester appeared for Xerox. Clemens declined comment.

The appeal was argued Nov. 15, 2012.