SUPREME COURT RULES NO “THUMB ON THE SCALE” FAVORING LIFETIME RETIREE HEALTH BENEFITS
The Supreme Court of the United States recently vacated a decision that made an employer responsible for the lifetime costs of its retirees’ health benefits, despite there being no language in the labor agreement with the union stating that the employer had this responsibility. The Court sent the case back to the appellate court to determine whether the parties intended for the employer to pay for all of the retiree health care costs in perpetuity.
This case originated in the collective bargaining agreements between the United Steelworkers and M&G Polymers USA, LLC at M&G’s plant in Apple Grove, West Virginia. The parties negotiated a labor agreement in 2000. When M&G purchased the plant a year earlier from Shell Chemical, there was also a Pension and Insurance Agreement (the “P&I Agreement”) that did not expire until 2003. The P&I Agreement was not re-negotiated in 2000. The P&I Agreement stated that eligible retirees would receive “a full Company contribution” towards the cost of their health care benefits.
After efforts to reach an agreement between the parties on the future cost of retiree medical benefits, and retiree contributions to those benefits, in 2006, M&G informed its retirees that it would require them to contribute to the costs of their health care benefits. The retirees launched a class action lawsuit, alleging that M&G breached the collective bargaining agreement and the P&I Agreement in violation of the Labor Management Relations Act (“LMRA”) and the Employee Retirement Income Security Act (“ERISA”). The retirees claimed that the P&I Agreement created a vested right to free health care benefits that continued beyond the expiration of the agreement. M&G, on the other hand, argued that the absence of a clause in the P&I Agreement limiting the duration of the “full Company contribution” did not constitute a promise to pay the full cost of those benefits without contribution from the retirees, or that it was a vested benefit that continued beyond the duration of the agreement. After initially winning at the trial court, M&G lost on appeal at the Sixth Circuit Court of Appeals, which encompasses Michigan, Ohio, Kentucky, and Tennessee. The Sixth Circuit, relying on one of its previous cases from 1983 (known as Yard-Man), reversed, stating that in the context of collective bargaining agreements, there is an inference that the parties to an agreement intend retiree benefits to vest for life unless the agreement expressly states otherwise. The appeals court found that there was no evidence to the contrary to rebut this inference of lifetime vesting.
On January 26, 2015, the Supreme Court issued a unanimous opinion that reversed the Sixth Circuit. The Court found that the Yard-Man inferences were contrary to ordinary principles of contract law by unfairly “placing a thumb on the scale in favor of vested retiree benefits.” The Court rejected these inferences and held that “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.” Consequently, the Court vacated the decision and remanded the case for the Sixth Circuit to apply ordinary principles of contract law to determine whether M&G and the union intended for the company’s full contribution towards retiree health benefits to continue beyond the term of the P&I Agreement.
Although this case arose in the context of a collective bargaining arrangement, it is very important to all employers who offer retiree health benefits. Employers that provide benefits to employees typically use a reservation of rights clause in their plan descriptions that reserves the employer’s right to change or end the benefits at any time for any reason. Along with as much precision as possible in the labor agreement language, it is also important to include a clear reservation of rights clause in any retiree benefit plan. While no reservation of rights language was the focus in the M&G case, it is doubly important for all employers to utilize such language.
Union employers are also held subject to the terms of the collective bargaining agreement with the union. Typically, the collective bargaining agreement is limited by an expiration clause to only a few years. In light of the M&G Polymers decision, union employers can expect unions to attempt to introduce language that provides for lifetime vesting of retiree benefits. Employers, however, will want to be vigilant to not include any language that could be interpreted to show an intention to provide for lifetime benefits, unless that actually is their intent.
This case reemphasizes how important it is that you clearly state your intentions in any written document involving employee benefits, whether it is a collective bargaining agreement, a pension and insurance agreement, an employee handbook, a Summary Plan Description, or a benefits policy document. It is therefore always a good idea to consult your legal counsel when preparing or revising these documents.