Supreme Court Overrules Yard-Man and Presumption of Vested Lifetime Retiree Healthcare Benefits

In what is likely the most significant employment law decision to be issued in decades by the Supreme Court, today the Court unanimously repudiated the long-time Sixth Circuit rule from Yard-Man that a collective bargaining agreement which provides for retiree medical benefits is presumed to last for the retiree’s lifetime unless the agreement also specifies a duration specifically for retiree benefits or reserves the employer’s right to modify retiree benefits in the future.  Under this rule, employers have been bound to promises made in the 1960’s and 1970’s when employers routinely provided full indemnity healthcare coverage without co-payments, deductibles or employee premiums and before healthcare costs began to rise 20% each year and life expectancies extended into the 90's and beyond.   The only way to avoid such catastrophic healthcare costs was for the company to file for bankruptcy and have the agreement voided or modified by the court.   Of course, after Yard-Man, many employers began inserting clauses into summary plan descriptions reserving their rights to modify the retiree healthcare plans in the future and attempted to negotiate such clauses for bargaining agreements.  Nonetheless, in today’s case, M&G Polymers USA LLC v. Tackett,  No.  13-1010 (1-25-15), the Sixth Circuit had rejected the employer’s attempt to modify retiree healthcare benefits after the bargaining agreement expired. The Supreme Court reversed on the grounds that the Yard-Man presumption is inconsistent with numerous basic principles of contract law.  Instead, the Court directed that the bargaining agreement should be interpreted as any other contract, which requires the parties’ actual intent (rather than imputed intent) to be considered.

According to the Court’s opinion, the bargaining agreement at issue provided in relevant part that:

“Employees who retire on or after January 1, 1996 and who are eligible for and receiving a monthly pen­sion under the 1993 Pension Plan . . . whose full years of attained age and full years of attained continuous service . . . at the time of retirement equals 95 or more points will receive a full Company contribution to­wards the cost of [health care] benefits described in this Exhibit B–1 . . . . Employees who have less than 95 points at the time of retirement will receive a re­duced Company contribution. The Company contribu­tion will be reduced by 2% for every point less than 95.

Exhibit B-1, which was incorporated by reference into this clause, specifically provided: “Effec­tive January 1, 1998, and for the duration of this Agree­ment thereafter, the Employer will provide the following program of hospital benefits, hospital-medical benefits, surgical benefits and prescription drug benefits for eligible employees and their dependents . . . . ”  Exhibit B-1 did not specifically refer to retirees and was, therefore, ambiguous.  

Several years after the bargaining agreement (and Exhibit B-1) expired, the defendant employer announced that retirees would need to begin contributing to the cost of their healthcare.  The plaintiffs filed suit, which was dismissed by the federal court for the Southern District of Ohio.  On appeal, the Sixth Circuit reversed on the grounds that retiree healthcare benefits are presumed under Yard-Man to vest for life and, therefore, the employer could not modify the benefits by requiring a contribution.

On appeal, the unanimous Supreme Court found that the Sixth Circuit's decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F. 2d 1476, 1479 (1983) and the subsequent cases applying its logic were inconsistent with many ordinary and basic principles of contract law, which the Court has always utilized to interpret collective bargaining agreements and ERISA welfare plans:

·        “As 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.”

·        Yard-Man imputed the intention of the parties without consideration of any evidence of the parties’ actual intent. “Yard­-Man’s assessment of likely behavior in collective bargain­ing is too speculative and too far removed from the context of any particular contract to be useful in discerning the parties’ intention.”

·        Yard-Man applied its inference “indiscriminately across industries” without consideration of each specific industry’s custom or usage. “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.”

·        Yard-Man relied too heavily on the fact that retiree benefits are a permissible subject of bargaining when it often becomes a mandatory subject once the parties include it in their bargaining agreement.

·        “Yard-Man also relied on the premise that retiree benefits are a form of deferred compensation, but that characterization is contrary to Congress’ determi­nation otherwise” in ERISA, where retiree health benefits are welfare benefits, not pension benefits.

·        Yard-Man “distort[s] the text of the agreement and conflict[s] with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties” because it refused to apply the agreement’s general durational clause unless it specifically referred to retiree health benefits. It also “failed to consider the traditional principle that “contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.”

That principle does not preclude the conclusion that the parties intended to vest lifetime benefits for retirees. Indeed, we have already recognized that “a collective-bargaining agreement [may] provid[e] in explicit terms that certain benefits continue after the agreement’s expiration.” Ibid. But 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.

·        Yard-Man violated the principle that “courts should not construe am­biguous writings to create lifetime promises.”  Instead, “contracts that are silent as to their duration will ordinarily be treated not as ‘operative in perpetuity’ but as ‘operative for a reasonable time.’”

·        Yard-Man misapplied the illusory promise doctrine by requiring a promise of retiree healthcare to benefit all retirees equally.  Bargaining agreements often benefit employees differently.  It does not render a promise to a union as illusory merely become some employees benefit while others do not. 

That interpretation is a contradiction in terms—a promise that is “partly” illusory is by definition not illusory.  If it benefits some class of retirees, then it may serve as consideration for the union’s promises. And the court’s 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.

In a concurring opinion, four of the justices noted that extrinsic evidence and the entire agreement may be considered to divine the intent of the parties when drafting the particular clause about healthcare benefits.  In such a case, the plaintiffs do not need to show “clear and express” language before retiree healthcare benefits will vest.  “Because the retirees have a vested, life­time right to a monthly pension, App. 366, a provision stating that retirees “will receive” health-care benefits if they are “receiving a monthly pension” is relevant to this examination.”

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Despite Union Conflict of Interest Supreme Court Enforces Arbitration of Employees’ ADEA Claims Based on CBA’s Reference to ADEA in Arbitration Clause

Today, the United States Supreme Court (in a 5-4 decision) reversed the Second Circuit Court of Appeals’ refusal to enforce the arbitration clause and held that a “a provision in a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate claims arising under the Age Discrimination in Employment Act of 1967 (ADEA) . . . is enforceable.” 14 Penn Plaza LLC v. Pyett, No. 07-581. The plaintiffs were members of the SEIU and their collective bargaining agreement provided, among other things that age, race, sex discrimination was prohibited and that “[a]ll such claims shall be subject to the grievance and arbitration procedures (Articles V and VI) as the sole and exclusive remedy for violations. Arbitrators shall apply appropriate law in rendering decisions based upon claims of discrimination." The Court held that this “clear and unmistakable” waiver of their statutory ADEA right to a jury trial was enforceable because the union was the authorized bargaining representative for the plaintiff employees and “the collective-bargaining agreement's arbitration provision expressly covers both statutory and contractual discrimination claims.” The Court brushed off the inherent conflict of interest between the union and its members’ discriminate claims, finding that those issues could be better resolved through the political process, and through breach of fair representation and discrimination claims brought against the union by the employees.

According to the Court’s opinion, one of the joint-employers owed an office building which engaged the other joint employer (a maintenance and cleaning service). The plaintiffs were employed as night watchmen. With the union’s consent, the building management replaced the other joint employer with a unionized security firm (affiliated with the joint employer) which could supply licensed security guards. Thus replaced, the plaintiffs were then reassigned to positions as night porters and light duty cleaners. They objected and filed a grievance under the CBA that the reassignments constituted, among other things, age discrimination and that they were denied seniority benefits and overtime.

The grievances proceeded to arbitration. However,

“[a]fter the initial arbitration hearing, the Union withdrew the first set of . . . grievances--the age-discrimination claims--from arbitration. Because it had consented to the contract for new security personnel [at the office building], the Union believed that it could not legitimately object to respondents' reassignments as discriminatory.”

The plaintiffs then filed Charges with the EEOC alleging that their transfers had violated ADEA, but the EEOC dismissed the Charges as lacking substantiating evidence. With their right-to-sue letters in hand, the plaintiffs then filed suit in federal court and the employers moved to compel arbitration of their claims under the Federal Arbitration Act. The District Court refused to compel arbitration on the grounds that a union cannot waive the individual statutory rights of employees to pursue ADEA claims in a collective bargaining agreement. The Second Circuit Court of Appeals affirmed, stating that “it could not compel arbitration of the dispute because Gardner-Denver, which ‘remains good law,’ held ‘that a collective bargaining agreement could not waive covered workers' rights to a judicial forum for causes of action created by Congress.’”

The Court’s majority found that the union and employers

“collectively bargained in good faith and agreed that employment-related discrimination claims, including claims brought under the ADEA, would be resolved in arbitration. This freely negotiated term between the Union and the RAB easily qualifies as a ‘conditio[n] of employment’ that is subject to mandatory bargaining. . . . The decision to fashion a CBA to require arbitration of employment-discrimination claims is no different from the many other decisions made by parties in designing grievance machinery.”

Rejecting the argument that the union is not authorized to bargain away the employees’ statutory rights,

“[a]s in any contractual negotiation, a union may agree to the inclusion of an arbitration provision in a collective-bargaining agreement in return for other concessions from the employer. Courts generally may not interfere in this bargained-for exchange. ‘Judicial nullification of contractual concessions ... is contrary to what the Court has recognized as one of the fundamental policies of the National Labor Relations Act--freedom of contract.’"

In that the ADEA does not preclude the arbitration of ADEA claims, there is nothing in the NLRA which precludes unions from negotiating that the employees’ future ADEA claims are subject to the grievance and arbitration provisions of the CBA.

“Examination of the two federal statutes at issue in this case, therefore, yields a straightforward answer to the question presented: The NLRA provided the Union and the [employers] with statutory authority to collectively bargain for arbitration of workplace discrimination claims, and Congress did not terminate that authority with respect to federal age-discrimination claims in the ADEA. Accordingly, there is no legal basis for the Court to strike down the arbitration clause in this CBA, which was freely negotiated by the Union and the [employers], and which clearly and unmistakably requires [plaintiffs] to arbitrate the age-discrimination claims at issue in this appeal. Congress has chosen to allow arbitration of ADEA claims. The Judiciary must respect that choice.”

In reaching this decision, the Court brushed off contrary language from Gardner-Denver, which indicated that union arbitrations – while suitable for contractual claims -- were not an appropriate forum for resolving discrimination claims and questioned the competence of arbitrators to decide federal statutory claims.

The Court also dismissed its earlier concerns in Gardner-Denver about the inherent conflict of interest between a union and its individual members.

“[I]n arbitration, as in the collective-bargaining process, a union may subordinate the interests of an individual employee to the collective interests of all employees in the bargaining unit. . . . ‘The union's interests and those of the individual employee are not always identical or even compatible. As a result, the union may present the employee's grievance less vigorously, or make different strategic choices, than would the employee.’”

Nonetheless, the Court found that “there is ‘no reason to color the lens through which the arbitration clause is read’ simply because of an alleged conflict of interest between a union and its members.. . . . . This is a ‘battl[e] that should be fought among the political branches and the industry. Those parties should not seek to amend the statute by appeal to the Judicial Branch.’”

Moreover,

"‘[t]he conflict-of-interest argument also proves too much. Labor unions certainly balance the economic interests of some employees against the needs of the larger work force as they negotiate collective-bargain agreements and implement them on a daily basis. But this attribute of organized labor does not justify singling out an arbitration provision for disfavored treatment. This ‘principle of majority rule’ to which [the plaintiffs now] object is in fact the central premise of the NLRA. . . . In establishing a regime of majority rule, Congress sought to secure to all members of the unit the benefits of their collective strength and bargaining power, in full awareness that the superior strength of some individuals or groups might be subordinated to the interest of the majority." . . . It was Congress' verdict that the benefits of organized labor outweigh the sacrifice of individual liberty that this system necessarily demands. [The plaintiffs’] argument that they were deprived of the right to pursue their ADEA claims in federal court by a labor union with a conflict of interest is therefore unsustainable; it amounts to a collateral attack on the NLRA.”

In any event, the union members may sue the union directly for failing in their duty of fair representation or for its own age discrimination.

The ”NLRA has been interpreted to impose a "duty of fair representation" on labor unions, which a union breaches "when its conduct toward a member of the bargaining unit is arbitrary, discriminatory, or in bad faith. . . . This duty extends to "challenges leveled not only at a union's contract administration and enforcement efforts but at its negotiation activities as well. . . . Thus, a union is subject to liability under the NLRA if it illegally discriminates against older workers in either the formation or governance of the collective-bargaining agreement, such as by deciding not to pursue a grievance on behalf of one of its members for discriminatory reasons. In this case, the plaintiffs also had “brought a fair representation suit against the Union based on its withdrawal of support for their age-discrimination claims. . . . Given this avenue that Congress has made available to redress a union's violation of its duty to its members, it is particularly inappropriate to ask this Court to impose an artificial limitation on the collective-bargaining process.”

Insomniacs can read the full court opinion at http://