Supreme Court Rejects Analysis of Duration of Retiree Benefits As Contrary to Contract Law

On January 26, 2015, the Supreme Court of the United States resolved a long-standing dispute between the Sixth Circuit Court of Appeals and the remainder of the federal judiciary in a case concerning the extent to which retiree health care benefits provided for in a collective bargaining agreement become vested where the agreement is silent on their duration. Justice Thomas, delivering the opinion of a unanimous Court, disagreed with the judgment of the Sixth Circuit, which had ruled in a number of prior instances that silence in a collective bargaining agreement regarding the duration of bargained-for retiree health care benefits should be construed as evidence of the parties’ intention that those benefits vest and continue indefinitely. Despite the Sixth Circuit’s claims to the contrary, the Court concluded that the “Sixth Circuit’s decision rested on principles that are incompatible with ordinary principles of contract law.” M&G Polymers USA, LLC v. Tackett, No. 13-1010, Supreme Court of the United States (January 26, 2015).

Background

Hobert Freel Tackett, Woodrow K. Pyles, and Harlan B. Conley were employees at the Point Pleasant Polyester Plant who retired between 1996 and 1998. Subsequently, M&G Polymers USA, LLC purchased the plant and entered into a collective bargaining agreement and a Pension, Insurance, and Service Award Agreement (the “P & I” agreement) with the union representing the employees. According to the P & I agreement, certain employees who retired after 1996 would be entitled to “receive a full Company contribution towards the cost of [health care] benefits.”

The documents describing the health care benefits included the following durational clause: “Effective January 1, 1998, and for the duration of this Agreement thereafter, the Employer will provide” certain health benefits to eligible employees and their dependents. The P & I agreement provided for renegotiation of its terms in three years. The P&I agreement did not expressly provide for the health benefits to vest or become non-forfeitable.

In 2006, M&G announced that it would begin requiring retirees to contribute to the cost of their health care benefits. Tackett, Pyles, and Conley, believing that M&G had promised to provide employer-paid health care benefits at no cost for the remainder of their lives, filed suit against M&G, on behalf of themselves and others similarly situated. They alleged that M&G’s decision to require retiree contributions breached their collective bargaining agreement and the P & I agreement, in violation of §301 of the Labor Management Relations Act (LMRA) and §502(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (ERISA).

The federal trial court, concluding that the P & I agreement’s language did not create a vested right to retiree benefits, dismissed the retirees’ complaint. However, based on a prior case involving retiree benefits provided in a collective bargaining agreement—International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America v. Yard-Man, Incorporated—the Sixth Circuit reversed and concluded that the retirees had stated a plausible claim.

On remand the district court issued a permanent injunction ordering M&G to reinstate contribution-free health care benefits. The court declined to consider the issue of whether the P & I agreement created a vested right to retiree benefits, believing that the Sixth Circuit had resolved that issue. The Sixth Circuit found that the district court erred in considering the meaning of the P & I agreement to have been resolved by the Sixth Circuit’s decision. However, the Sixth Circuit also found that the district court did not err in presuming that “in the absence of extrinsic evidence to the contrary, the agreements indicated an intent to vest lifetime contribution-free benefits.” The case eventually reached the Supreme Court.

The Supreme Court’s Decision

The Court’s analysis focused on the tenet that collective bargaining agreements, including those establishing ERISA plans, should be interpreted according to ordinary principles of contract law. According to the Court, the Sixth Circuit applied the so-called “Yard-Man presumption” to conclude that “in the absence of extrinsic evidence to the contrary, the provisions of the contract indicated an intent to vest retirees with lifetime benefits.” The Court disagreed with this conclusion and found that the inferences applied in Yard-Man and its progeny conflict with ordinary principles of contract law.

The Supreme Court noted that the Yard-Man case found the contract language at issue to be ambiguous, “purported to apply the rule that contracts should be interpreted to avoid illusory promises,” and turned to “the context” of labor negotiations to conclude that retiree benefits are not mandatory subjects of collective bargaining. According to the court, however, the Yard-Man analysis places “a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements,” and it “distorts the attempt ‘to ascertain the intention of the parties.’” Moreover, the inferences in Yard-Man, the Court found, “rest on a shaky factual foundation” in that they wrongly presume that retiree health care benefits are not subjects of mandatory collective bargaining and classify retiree benefits as a form of “deferred compensation.” The Court noted that retiree health care benefits are often the subject of mandatory bargaining and that ERISA quite clearly distinguished between these benefits and pension and similar benefits, which are forms of deferred compensation. The Court also noted its prior holdings concluding that welfare benefits—including retiree health care benefits—are explicitly exempted from ERISA’s vesting requirements and that employers have wide latitude to structure, amend, or terminate these plans as they deem appropriate.

Finding that the Yard-Man presumption and subsequent Sixth Circuit cases improperly affected the outcome of Tackett, the Court vacated the Sixth Circuit’s judgment and remanded the case with directions to the lower court “to apply ordinary principles of contract law” when assessing the parties’ claims.

Although the Court’s decision in Tackett was unanimous, Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, wrote a separate concurring opinion that appears to question M&G’s assertion that the retiree health care obligation was truly unvested as a matter of contract. Rather than fully embracing the majority’s relatively bright-line rule, the concurrence suggests that, although the Yard-Man presumption may not be an appropriate standard for judging whether retiree health care benefits can vest without an express statement of intent, the entirety of the bargaining agreement and, perhaps, extrinsic evidence such as the parties’ bargaining history may nevertheless be indicative of such an intention.

Practical Impact

According to Timothy G. Verrall, a shareholder in the Houston office of Ogletree Deakins, “By expressly discarding the Yard-Man presumption, the Court has made it significantly easier for employers to restructure retiree health obligations for their unionized employees without challenge. Even so, Justice Ginsburg and the three justices who joined her concurrence might not be so quick to dismiss claims that retiree health care benefits can vest through less-than-explicit agreements between employers and unions. As a result, employers should remain aware of ‘informal’ evidence of intent regarding the vested status of retiree and other employee benefits throughout the bargaining process and be sure to clearly reserve appropriate amounts of discretion to modify or terminate these benefits.”