Companies that want to improve gloomy economic prospects by cutting back on pension promises already made to workers may find they have a tougher time getting approval for the benefit reductions.

The U.S. Court of Appeals here last month told the Internal Revenue Service to stop taking short cuts in approving such retroactive revisions. When Congress passed the Employee Retirement Income Security Act {ERISA} to try to ensure that pension promises would be kept, it acknowledged that there would be times when companies would have to be less generous than they had intended. Some retirees would face cuts in the amount of their monthly checks. The statute tries to make clear that such situations should be rare, and it mandates that federal overseers have to review such proposals. IRS can approve retroactive benefit reductions only if it finds "a substantial business hardship" would result from keeping the promises.

The case at the local court, Nichols v. Asbestos Workers Pension Plan, centered on just how the bureaucrats are to decide when the burden of paying pensions becomes such a substantial hardship. The IRS looked at the decline in employment and in the average work week in the asbestos industry -- and at the large unfunded liability of the plan -- and saw the potential for an "assessment spiral." If a large payout would have to be covered by larger and larger contributions from employers for each hour an employee worked, companies would opt to pull out of the plan and join one with fewer retirees and older workers. That, in turn, would raise the assessment rate even higher for the remaining companies, which would encourage more to pull out, intensifying the funding problem. To the IRS, that added up to a "substantial business hardship."

Good reasoning but bad law, the appellate judges said. In their Dec. 11 decision, they pointed out that ERISA specifically requires the IRS to look at four factors before approving a retroactive benefit reduction. They are: the profitability of the individual companies involved; the sales and profit trend in the industry as a whole; the employment level in the industry, and the likelihood that without a change the entire plan would fold.

The law allows the IRS to consider other factors as well. But as the court majority reads it, there's no way to omit analysis of those four factors. In the asbestos workers situation, the IRS did not even collect from the industry data on its economic health and that of the plan members, so the judges said the approval of the pension reductions was invalid.

In other cases, courts ruled that:

It's all right to gang up on an antitrust defendant. A trial court judge had thrown out a suit contending that Western Louisiana fuel companies retaliated against distributors who refused to go along with a price-fixing scheme.

The defendants had won an earlier case with identical claims, brought by the same lawyer, in which the plaintiff in the second case had been a witness for the company filing the litigation. Officers of the two plaintiff companies had attended meetings at which the issues were discussed. With such a close alliance, the second case was simply an attempt to try the matter a second time, the judge felt.

But the U.S. Court of Appeals in New Orleans reinstated the action. With no legal tie between the two suits -- and every indication that they were being controlled by different companies -- the second plaintiff has a right to be heard, the judges said. The opinion notes that had the defendants wanted to avoid two trials, they could have asked the judge to consolidate the cases. (Benson & Ford v. Wanda Petroleum, Dec. 16)

A company in bankruptcy still has to litigate suits by the Equal Employment Opportunity Commission. In general, filing for protection under the bankruptcy laws freezes all pending suits against a firm, and prevents other suits from being filed. But Congress wrote an exception to that rule for actions "by a governmental unit to enforce such governmental unit's police or regulatory power."

A truck line in the midst of liquidation insisted that two EEOC suits -- one alleging age discrimination against 21 employees and the other alleging a race-based firing -- were really claims on behalf of private individuals, which did not fit the exception for governmental action. The U.S. Court of Appeals in Richmond, however, let the suits progress, saying that fighting discrimination is done to promote the public interest. (EEOC v. McLean Trucking, Dec. 2)

"Property has to be special to win a zoning waiver. The D.C. Court of Appeals overturned a vote by the Board of Zoning Adjustment to let a Capitol Hill restoration project produce a larger structure than would normally be allowed on the lot.

The situation was unique because the house was already so large and because it was in a historic district, the board explained. But the appellate judges said that unique means virtually one-of-a-kind, not just a variation from the norm. There are many houses in the historic district and a lot of them are large; the judges said these were insufficient reasons for waiving zoning laws.

(Capitol Hill Restoration Society v. BZA, Dec. 22).

Moskowitz covers legal affairs for McGraw-Hill World News.