On Monday, a unanimous United States Supreme Court, in a harshly critical opinion, overruled a decision of the Sixth Circuit Court of Appeals that had in essence created a presumption that retiree medical benefits provided for in a collective bargaining agreement are per se vested, unless it can be proven by extrinsic evidence otherwise.  In M&G Polymers USA v. Tackett, the Supreme Court rejected this presumption and in a line of cases upon which the Sixth Circuit erroneously relied.

The story begins with Hobert Tackett who worked at the Point Pleasant Polyester Plant in West Virginia for many years until he retired in 1996.  During the term of his employment he, and other employees, were represented by various labor unions and subject to collective bargaining agreements.

In 2000, the plant was purchased by M&G Polymers USA.  M&G entered into a master collective bargaining agreement with the labor unions and a Pension, Insurance and Service Award Agreement (“P&I Agreement”), similar to previous agreements entered into by the predecessor employer and the unions during the term of Tackett’s employment.  The 2000 P&I Agreement provided that for employees who retired on or after January 1, 1996, and who were eligible for and receiving a monthly pension under the company’s pension plan, whose age and years of service equaled 95 or more points would receive a full company contribution towards the cost of the company’s health care benefits.  The agreement had a term of three years after which it was renegotiated and a similar agreement was adopted in 2003.

In 2006, once the term of the current P&I Agreement was at an end, M&G announced that it would require retirees to contribute toward the cost of their health insurance.  Tackett, with other retirees, sued M&G claiming the language in the 2000 P&I agreement providing that employees with a certain level of seniority “will receive a full Company contribution towards the cost of [healthcare] benefits” created a vested right to such benefits that continued beyond the expiration of the agreement.  They alleged the company had breached the prior collective bargaining and P&I agreements, both in violation of federal labor law and the Employee Retirement Security Income Act (“ERISA”).

The federal district court ruled in favor of M&G, but the Sixth Circuit Court of Appeals reversed. The Court of Appeals erroneously relied upon its earlier decision in the case of International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F. 2d 1476, 1479 (1983) (“Yard-Man”) and its progeny to hold that in the absence of extrinsic evidence to the contrary, the provisions of the contract indicated an intent to vest retirees with lifetime benefits.

On January 26, 2015, a unanimous United States Supreme Court reversed the Sixth Circuit Court of Appeals and, in no uncertain terms, disapproved the rationale behind the decision in Yard-Man and its progeny.

The Court explained, that “[a]s an initial matter, Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements. That rule has no basis in ordinary principles of contract law.”  The Supreme Court went on to dissect the fallacies encountered by the Court of Appeals both in the instant matter and in Yard-Man as follows:

1. The Court of Appeals presumed that when parties agree to benefits which accrue upon achievement of retiree status, there is an inference that the parties likely intended those benefits to continue as long as the beneficiary remains a retiree.  The Supreme Court rejected such a wholesale presumption to be read into every collective bargaining agreement.   “Although a court may look to known customs or usages in a particular industry to determine the meaning of a contract, the parties must prove those customs or usages using affirmative evidentiary support in a given case.”
2. The Court of Appeals reasoned that benefits for retirees are not mandatory subjects of collective bargaining and therefore, the presumption is that they are not subject to renegotiation.   The Supreme Court disagreed finding that parties can and do make retiree medical benefits subject to collective bargaining, as did M&G Polymers and the labor unions did in this case.
3. The Yard-Man decision likened retiree medical benefits to “deferred compensation” and therefore treated the benefits the same as vested pensions. The Supreme Court disagreed pointing out that under ERISA, plans that result in a deferral of income by employees are pension plans, whereas medical benefits are “welfare plans.” Thus, as far as ERISA is concerned, retiree medical benefits are not deferred compensation.
4. The Yard-Man decision discounted the presence of durational clauses in collective bargaining agreements providing for the expiration of the agreement at the end of its term. It inferred that parties would not leave retiree benefits to the contingencies of future negotiations and that it is presumed retiree medical benefits continue so long as the beneficiary remains retired.  Yard-Man concluded this inference “outweigh[ed] any contrary implications derived from a routine duration clause terminating the agreement generally.”  A subsequent Court of Appeals decision went a step further requiring a contract to include a specific durational clause for retiree health care benefits to prevent vesting.  The Supreme Court wholly rejected such reasoning stating these decisions “distort[ed] the text of the agreement and conflict with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties.”
5. The Court of Appeals reasoned that because some employees would not attain the prerequisites to attaining the retiree medical benefits during the three-year term of the agreement (e.g. age and years of service), the company’s promise of paid retiree medical benefits was “illusory.”  Generally, the “illusory contract doctrine” instructs courts to avoid constructions of contracts that would render promises a sham because such promises cannot serve as consideration for a contract.  However, the Supreme Court found that if the agreement benefits some class of retirees, then it may serve as consideration for all of the union’s promises. “And the [Court of Appeals’] interpretation is particularly inappropriate in the context of collective-bargaining agreements, which are negotiated on behalf of a broad category of individuals and consequently will often include provisions inapplicable to some category of employees.”
6. The Court of Appeals reasoned that because the receipt of paid retiree medical insurance was tied to the retiree’s receipt of pension benefits, the intent was to vest the retiree health care benefits.  The Supreme Court rejected this inference as inconsistent with ordinary principles of contract law.
7. The Supreme Court also noted that the Court of Appeals “failed to even consider the traditional principle that courts should never construe ambiguous writings to create lifetime promises” and “failed to consider the traditional principal that ‘contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement,’” quoting its earlier decision in Litton Financial Printing Div. v. NLRB.

Most importantly, the Supreme Court reaffirmed that employers can and do create vested rights to retiree medical benefits where the collective bargaining agreement provides “‘in explicit terms that certain benefits continue after the agreement’s expiration.’”  However,

“when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.”

The Supreme Court remanded the case back to the Sixth Circuit Court of Appeal to interpret the P&I Agreement according to ordinary contract principles.

In a concurring opinion, Justice Ginsburg further pointed out that no rule requires “clear and express” language in order to show that parties intended health-care benefits to vest.  Those promises may also arise from implied terms of the agreement. Justice Ginsburg instructed the Court of Appeals to examine the agreement as a whole to ascertain the intent of the parties. If the agreement is ambiguous, the court may look to extrinsic evidence, such as the parties’ bargaining history.

While this decision arises out of the private sector, it has application and force to public employers. The California Supreme Court in Retired Employees’ Association of Orange County v. County of Orange has similarly held that retiree medical benefits contained in a collective bargaining agreement are to be interpreted according to ordinary contract principles. While public employers are guided by other legal strictures not otherwise found in the private sector (e.g. the Contracts Clause of the United States and California Constitutions), and overriding public policy considerations (e.g. legislation is not presumed to create private contractual rights), at the end of the day, we are guided by ordinary contract principles in deciphering the intent of employers and labor unions in creating employment, and post-employment, benefits.