U.S. Pension Law Violations Alleged in Abbott Spin-Off: Lawsuit accuses health care company of trying to dump large pension costs by shedding older workers

The May 2004 spin-off of Hospira Inc. by Abbott Laboratories received high marks from strategists and investment analysts. The divorce of a mature, low-margin, commodity-oriented hospital supplies business from Abbott’s higher-profit, growth-centered, and higher-tech portfolio – pharmaceuticals, nutrition products, baby care, diagnostics, etc. – was applauded as a separation of divergent health care operations and a spur to shareholder value. These characteristics also helped meet the long and complex menu of IRS rules for a tax-free deal. But a group of former Abbott employees claim that there was a darker motivation for the split – to dump expensive pension and benefit costs. A complaint filed in U.S. District Court in Chicago in early November alleged that Abbott and Hospira interfered with the employees’ rights to receive benefits and violated the Employment Retirement Income Security Act (ERISA). Lawyers for the plaintiffs are seeking class-action status on behalf of about 10,000 employees who moved from Abbott to Hospira, which froze an existing defined benefit plan and ended post-retirement medical benefits. Abbott defends its actions Abbott, based in Abbott Park, Ill., and Hospira, headquartered in Lake Forest, Ill., said that all of their actions complied with ERISA and that they intended to fight the suit. Hospira also claimed that its benefits package was “competitive” with other companies in both its industry and geographic region. The outcome of the case could have considerable ramifications on the crafting of future spin-offs in the way they affect pensions and benefits and other issues subject to federal regulation. Attorneys for the plaintiffs and authorities on spin-offs said they knew of no other cases in which pension and benefits controversies erupted following a corporate split. The complaint seeking reinstatement and restoration of lost benefits was filed by the law firms of Spengler & Lang and Meites, Mulder, Burger & Mollica, two veterans of employee law legal battles. The complaint notes that 70% of the workers in Abbott’s former hospital supply division were 40 or older, making the unit the most senior division in the company. A statement by the law firms maintains that they had earned “substantial benefits” and Abbott “terminated” them “to prevent them from earning these benefits.” According to the statement, Hospira informed employees they would not earn additional benefits in their defined benefit plan after 2004. In the typical defined benefit plan, the company pays all or most of the contributions into the pension fund and the employees collect stated benefits on retirement. Hospira has installed a 401(K) plan, which is funded by both employee and employer contributions, in place of the defined benefit plan. Ploy to scrap costly benefits? Steven Spengler of Spengler & Lang maintained that Abbott “looked into its employee benefits crystal ball, didn’t like what it saw” and “terminated the plaintiffs to reduce its future financial liability.” Abbott took issue with the use of the word “terminated” and said that the employees had been transitioned smoothly to Hospira. Jonathon Hamilton, Abbott’s manager for external communications, said that the company complied with ERISA and reiterated that the spin-off was to “provide shareholders with equity investments in two separate companies” focused on “maximizing opportunities in their distinct markets.” “Allegations that Hospira was created for any other purpose are unfounded.” Compliance with ERISA claimed Stacey T. Eisen, Hospira’s Vice President of public affairs, said that the company is “confident” it acted in compliance with ERISA. The 2005 benefits package, she noted, “offers a wide range of health, retirement, and other benefits.” Based on an independent, third-party analysis, she added, the package “is not only competitive with other companies in our industry and geographic regions, but also intended to be affordable for both Hospira and our employees. We also will be enhancing our 401(K) match and, starting Jan.1, 2005, will offer immediate vesting.” The lawsuit also attacked an Abbott “no-hire” policy that allows Hospira employees to return to Abbott for two years only if they are willing to experience a break in service that cuts into benefits. Hospira also was targeted for not allowing employees to work for it and take Abbott pension benefits at the same time. Experts on spin-offs said they did not know if there was any retroactive threat to the tax shield should the two companies lose the case. They said that the issue of whether the deal could lose its tax-free status if one or both were found in violation of federal laws had never arisen. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com