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.

Sixth Circuit Revives Retiree Healthcare Litigation Despite Prior Final Judgment Against Unions Over Same 2001 Modifications

Earlier this month, the Sixth Circuit reversed summary judgment for an employer in a class action lawsuit brought by retirees over changes in their healthcare.   Amos v. PPG Industries, Inc., No. 10-3319 (6^th Cir. 11-1-12).   The employer had modified the insurance coverage in 2001 by requiring the retirees to contribute to a portion of the cost.   Unions which had negotiated collective bargaining agreements governing the terms of the retirees’ health coverage brought suit in federal court in Pittsburgh alleging that the employer’s modifications breached those bargaining agreements.  That lawsuit was dismissed on the grounds that the insurance benefits had not vested and was affirmed on appeal in 2007.  While that lawsuit was still pending in Pittsburgh, the plaintiffs then filed a class action suit in federal court in Columbus under ERISA and the LMRA alleging that the insurance benefits had vested and were not subject to change.  Following the dismissal of the Pittsburgh suit, the employer moved for summary judgment on the grounds of collateral estoppel: that the lawsuit had already been litigated and final judgment entered in favor of the employer in Pennsylvania.  The district court here agreed and entered judgment for the employer.  The Sixth Circuit reversed on the grounds that the Unions did not represent the plaintiff retirees and, thus, the retirees had not been given an opportunity to litigate the issue for themselves.

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.

Sixth Circuit: Union’s Waiver of 30-Year Retired Employee’s Benefits Without Notice or Consent Protected Assets of Bankrupt Employer.

Today, the Sixth Circuit issued a decision in which it held that the statutory and severance claims of a 30-year retired employee of bankrupt LTV Steel had been waived by the employee’s former union even though he received no notice of the waiver, never consented to it, and had been explicitly excluded from receiving compensation under the waiver agreement. McMillan v. LTV Steel, Inc., No. 07-4370. Although federal law is pretty clear that unions no longer represent retired employees in negotiations, the employee was deemed to have waived that compelling legal argument when he failed to raise it in support of his claims before the bankruptcy or district courts. The Sixth Circuit also refused to disturb the district court’s conclusion that the employee’s actual claim for pension and 401(k) benefits was with the Pension Benefit Guaranty Corporation (PBGC) since it had assumed control of the employer’s retirement benefits when it filed for bankruptcy.

According to the court’s opinion, the plaintiff retiree worked for 30 years in a UWSA unit for LTV Steel. The UWSA and LTV had negotiated both a defined contribution plan (i.e., a 401(k) plan to which both the employee and employer contributed) and a defined benefit plan (i.e., pension). In 1999, the UWSA and LTV reorganized the retirement benefits to eliminate future pension contributions (and limit future payouts to a $10,000 lump sum), and to transfer employer contributions from the 401(k) plan to the pension plan. About a year later, LTV filed for bankruptcy protection, issued a WARN notice a few months later and eventually permanently closed the retiree’s plant. The plaintiff retiree worked at reduced pay at other LTV plants, but remained out of work beginning in August 2001. Under a USWA negotiated agreement, he had the option to transfer (without seniority) to another plant, to remain on layoff status, to accept retirement or to take severance. The plaintiff elected to retire in December 2001 and take his $10,000 pension lump sum. While the opinion is ambiguous on this point, this amount was apparently never paid.

In the meantime, LTV eventually sold all of its assets in December 2001, but the sale proceeds were only sufficient to pay secured creditors and not to pay administrative claims or unsecured creditors, such as the plaintiff and other retirees. Accordingly, PBGC assumed LTV’s pension obligations. The UWSA then renegotiated the CBA with LTV and eliminated, among other things, the previously promised severance pay. Nonetheless, six months later, the USWA filed an administrative claim with the bankruptcy court for LTV’s failure to pay severance pay, WARN Act liability, retiree benefits, etc. The UWSA settled its claim with LTV in December 2003 for $15M, but the settlement expressly did not benefit retirees such as the plaintiff who worked at his original plant or were laid off prior to November 2001. In the 2003 settlement, UWSA waived any and all other claims it could make arising out of any bargaining agreement. The plaintiff received no notice of the USWA administrative claim and did not receive notice of, or consent to, the 2003 settlement.

Nonetheless, the plaintiff filed his own administrative claim against LTV in 2002 for over $300,000 (for unpaid wages, pension benefits and 401(k) payment) and it was denied by the bankruptcy court. The plaintiff eventually reached an unsecured settlement with Copperweld -- one of LTV’s subsidiaries -- for the full amount, but retained his right to pursue his claim against LTV. In 2004, he filed another administrative claim for over $40,000 for his unpaid 401(k) contributions, severance pay and other benefits.

The bankruptcy court found that the 401(k) contributions were transferred to the pension fund in 1999 and were now being administered by PBGC and not LTV. The Sixth Circuit agreed that the plaintiff should be limited to asserting a claim against the PBGC. In addition, the bankruptcy court found that collateral estoppel from the Copperweld settlement estopped the plaintiff from pursuing the same amount from LTV, despite his reservation of rights to pursue claims against LTV. The Sixth Circuit found that the plaintiff’s claims were not entitled to administrative priority status because the liability arose before LTV filed for bankruptcy and did not relate to retiree healthcare benefits.

Finally, his claim for severance benefits and WARN Act payments were deemed waived by the USWA in 2003 even though he received no proceeds from that $15M settlement, received no notice of the claim or settlement, and never consented to the settlement. Indeed, the law is clear that unions cannot negotiate on behalf of retirees because they are no longer union members. However, even though the bankruptcy court erroneously concluded that the USWA was acting as his agent, the plaintiff never raised the issue of agency to the bankruptcy or district courts, but rather, focused on his lack of notice and consent to the settlement. Therefore, the Sixth Circuit determined that he could not belatedly raise the agency argument even if the lower courts had erred. Moreover, if the UWSA had been his agent, it had authority to waive his WARN Act and severance pay claims on his behalf – even without notice or consent. Therefore, those claims were also dismissed.

Insomniacs can read the full court decision at http://www.ca6.uscourts.gov/opinions.pdf/09a0040p-06.pdf.

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.