A federal district court has held that an amendment to a senior executive's employment agreement that provided severance benefits upon a change in control was not subject to ERISA (Grey v. Forescout Techs., Inc., (N.D. Cal., Mar. 16, 2022)). As a result, the executive's claims for benefits owed under the amendment were not ERISA-preempted and the federal court—lacking federal subject matter jurisdiction over the case—remanded it to state court.

The plaintiff in this case was the senior vice president of finance for her employer, which was working toward an initial public offering. Prior to the employer's anticipated acquisition by another company, the employer offered to amend the executive's employment agreement to provide her change of control severance benefits triggered by certain events. Under the amendment, if a change in the employer's ownership occurred, the executive was entitled to:

The amendment defined good reason to include material reductions in the executive's:

Under the amendment, termination for good reason did not occur unless the executive provided the employer written notice of a condition within 90 days and timely terminated employment with the employer after a cure period. The executive alleged that the change in ownership resulted in a material reduction of her duties, which:

The executive timely provided written notice of these conditions, as required under the amendment. However, the employer disagreed that the conditions cited by the executive were a change in employment. When the executive later resigned, the employer refused to make cash severance payments or accelerate vesting of her equity awards under the amendment.

The executive sued the employer in California state court to recover benefits under the change of control amendment. The executive asserted various state-law claims, including for wages wrongfully withheld, unlawful wage forfeiture, and breach of contract. The employer removed the case to federal district court arguing that the amendment was an ERISA severance plan and that ERISA preempted the executive's state-law claims (see Practice Note, ERISA Litigation: Preemption of State Laws: Overview).

Applying ERISA preemption analysis, the district court concluded that the change of control amendment was not an employee benefit plan subject to ERISA. Citing the Supreme Court's Fort Halifax ruling, the executive argued that the amendment was exempt from ERISA preemption (Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). (In Fort Halifax, the Supreme Court held that a one-time, lump-sum severance payment triggered by a plant closing did not create an ERISA plan because the arrangement did not require an ongoing administrative scheme (see Practice Note, Severance Benefits, Plans, and Agreements: Severance Arrangements Subject to ERISA).) The executive asserted that the disputed amendment applied:

The district court rejected the employer's argument that its amendment required the kind of discretionary decisionmaking that characterizes ERISA plans. The court concluded that the employment contract arrangement was governed by state law (and not ERISA-preempted) because:

The court also observed that because the change of control amendment defined what constituted good reason, the level of employer discretion in implementing the amendment:

Moreover, the court noted, the agreement's triggering events were easily ascertainable.

Because ERISA was the sole basis for federal jurisdiction but did not govern the change of control amendment, the court concluded that:

Although ERISA's preemption provision is broad, it is not unlimited. In recent years, the federal courts have seemed more willing to find exceptions to ERISA's preemptive reach in various contexts (for example, see Legal Update, Fifth Circuit: Incentive Plan Was Not an ERISA Plan). As a result, ERISA preemption may be less of a shield against state-law claims such as the ones at issue here, which are based on California law and all involve the disputed change of control amendment. For more information, see Severance Benefits, Plans, and Agreements Toolkit and ERISA Litigation Toolkit.