BulletProofBlog the blog on crisis communications

In this regular feature, Bulletproof interviews top plaintiffs' attorneys for their perspective on the crises likely to affect businesses in the near future. Today we talk to a businessman, C. William Jones, who heads the Association of BellTel Retirees Inc., (www.belltelretirees.org) a retiree activist organization. The group is spearheading a class action against Verizon charging that, in November 2006, 3,000 fully vested company retirees were involuntarily switched to pension plans sponsored by an under-nourished spin-off named Idearc Inc.

Idearc filed for Chapter 11 bankruptcy in March 2009. The lawsuit, which charges numerous ERISA violations, was filed on November 25, 2009 in the U.S. District Court for the Northern District of Texas.

How common are such cases? To what extent will they become more common?

C. William Jones: These cases are becoming more and more common but with big differences across the landscape. Verizon and the other former Bell companies, for example, are relatively new at this game.

It’s important to remember that after the AT&T divestiture – and throughout the mergers and retrenchments in the years since – retirees were always (save for the Lucent situation) taken in by the merging or acquiring entities that were financially solid.

During these years and up to the present moment, two significant forces were at work. One was fiber-optics, which is cost-effective only in the more densely populated areas. As a result, many entities in rural areas have been sold to existing smaller telecommunications companies. In those cases, retirees in the territories that were sold stayed with Verizon. 

Then, of course, came the economic downturn. Many pension funds took major hits. Verizon went from being $10 billion overfunded to $2.6 billion underfunded. That was the first time in Verizon’s history that the pension trust was underfunded. Of course, Idearc’s pension trust is probably underfunded as well but their prospects for recovery are not as good as Verizon’s. The situation is improving but the impact of that crisis was immense.

The Idearc matter is unprecedented. Idearc was not a going concern; it was a new creation, a paper contrivance. We believed from the get-go that Idearc was under-nourished, which the bankruptcy proves. Not just retirees are at risk, but pension funding for current employees is also affected.

At the heart of the matter is disclosure. On the one hand, the retirees were transferred to Idearc without consent. It was unauthorized and we believe illegal. On the other hand, Verizon now claims that sufficient funds were transferred, but we cannot confirm that because Verizon offers no proof. They are stonewalling. Further, other benefits, like healthcare, are unfunded so retirees and active employees must rely on earnings from Idearc. 

Meanwhile, because health and other benefits for existing employees and retirees were reduced after the creation of Idearc, we look most skeptically on the company’s claim that the retirement plans at issue are unaffected. Those retirees have already suffered reductions and cancellations of other benefits.

How would you assess the exposure in this case, in terms of both penalties and reputational damage?

C. William Jones: The number I have heard is $750 million of total pension benefits for both current employees and retirees. Beyond that, it’s hard to be specific on exposure because there is no good information available.

While damage to Verizon’s reputation is hard to measure, pension guarantees in this industry were once sacrosanct, almost rivaling U.S. government retirement plans for rock-solid dependability. That’s all changed, of course, but how much does the industry now want to be thought of in the same category with the airlines or other industries where employees must simply keep their fingers crossed?

The Association of BellTel Retirees Inc., which I helped found some years back in response to a number of potentially threatening trends, is now over 100,000 members. We are not gadflies and we do not file frivolous lawsuits. We are simply asking that all retirees transferred to Idearc against their will be restored to Verizon's plan, and that plan administrators pay a daily penalty for failing to provide requested records.   Unfortunately, there is no legal precedent for what we are doing.

The last thing we want is to hurt Verizon as it is simply not in our interest to do so. But fair is fair. 

Do you think this lawsuit will have a deterrent effect?

C. William Jones: What if we didn’t file a lawsuit? Wouldn’t Verizon and other companies be emboldened to continue to test the limits of ERISA with practices that disserve lifetime employees?

I’m hoping Verizon will simply call in their lawyers and say, ‘This isn’t worth it.’ What a PR coup it would be for Verizon to admit error and fully restore the status of those retirees before their transfer to Idearc. But I don’t really expect that to happen.

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Larry Smith is Senior Vice President of Levick Strategic Communications, the nation's top crisis communications firm, and a contributing author to Bulletproof Blog. Connect with Levick on Twitter: @Levick.