On Jan. 26, U.S. Supreme Court handed a victory to employers struggling to get retiree health care costs under control.
A unanimous ruling in M&G Polymers USA v. Tackett, No. 13-1010 (Sup.Ct., Jan. 26, 2015), vacated the 6th U.S. Circuit Court of Appeals decision in Tackett. In doing so, the High Court criticized 6th Circuit precedent holding that the vesting of retiree health benefits could be inferred even in the absence of collective bargaining provisions specifically addressing that issue.
The reasoning of the 6th Circuit cases was contrary to ordinary principles of contract law by adding erroneous inferences and suppositions to legal inquiries, the High Court said. It sent the case back to the 6th Circuit for further proceedings based upon a narrower reading of contract law.
Various circuits were requiring various degrees of specificity in collective bargaining agreements about whether health benefits vested beyond the expiration of the latest CBA.
In the M&G Polymers case, the employer made retirees from the M&G Polymer plant in Apple Grove, W.Va., pay toward their own health care expenses, which retirees said clashed with earlier CBA provisions promising a “full company” contribution to health premiums. They sued in 2006, contending that the agreement guaranteed them lifetime health benefits without requiring them to contribute.
In M&G Polymers, the retirees backed by a union won in the U.S. District Court for the Eastern District of Ohio. In an August 2013 ruling, the 6th Circuit upheld the district court decision. Those courts reinstated benefits and ordered the company to pay the full cost of retiree health benefits even though the CBA lacked words on how long retirees would be entitled to free health benefits. The 6th Circuit said a CBA provision linking eligibility for retirement benefits to eligibility for health benefits was one of several expressions of intent to vest health benefits for life.
The High Court accepted the case in May 2014.
The 6th Circuit based its decision on UAW v. Yard-Man, 716 F. 2d 1476 (1983), that context and extrinsic factors could commit an employer to paying retiree health benefits and override general termination clauses in the CBA. Since Yard-Man, that circuit had ruled similarly in a series of cases. Meanwhile every other circuit in the country required either explicit language, or language that could be interpreted as, requiring vesting.
Circuit Didn’t Apply Ordinary Principles
Justice Clarence Thomas, writing on behalf of the Supreme Court, said that when a contract is silent as to the duration of retiree benefits, courts should not infer that the parties intended those benefits to vest for life.
“Yard-Man and its progeny do not represent ordinary principles of contract law. Yard-Man distorts the attempt to ascertain the intention of the parties by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements,” Thomas wrote.
In Yard-Man, the 6th Circuit was imposing its own suppositions about the parties’ intentions, when the evidence at hand was not sufficient to support those conclusions, he added, making such reasoning was incompatible with ordinary principles of contract law. For example, the circuit inferred that the parties would not leave so important a matter as retiree benefits to future negotiations.
That was an unacceptable assumption to make, because it was not backed by any showing that this was a common belief or practice in the industry. It was also a mistake because the circuit was allowing that assumption to outweigh contrary implications from the CBA’s duration clause terminating the agreement generally.
Thomas reiterated that when Congress wrote ERISA, it did not intend for health benefits to vest, in contrast to pension plans, which vest automatically because they are a form of deferred compensation. Retiree health benefits are not a form of deferred compensation, he said.
Further, the appeals court erred when it refused to apply general durational clauses (which mean that contracts expire at a set time) to retiree benefits, Thomas wrote. In doing so, it “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 parties,” Thomas wrote. In some decisions after Yard-Man, the circuit even required explicit prohibition language to prevent vesting.
Finally, it failed to consider the longstanding principle of contract law that courts should not construe ambiguous words to create lifetime promises. The circuit itself in an opinion involving a contract that was not collectively bargained, said as much:
“Because vesting of welfare plan benefits is not required by law, an employer’s commitment to vest such benefits is not to be inferred lightly; the intent to vest must be found in the plan documents and must be stated in clear and express language. … The different treatment of these two types of employment contracts only underscores Yard-Man’s deviation from ordinary principles of contract law.”
Having rejected the Yard-Man inferences of vesting, the Supreme Court also rejected the similar inferences made in Tackett, vacated that ruling and sent it back to the circuit court for it to apply ordinary principles of contract law.
Concurring Opinion
In a concurring opinion, Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan said Justice Thomas’ vision was consistent with rules of contract interpretation, and they backed the majority opinion.
They objected to the circuit’s history of applying the Yard-Man inference of vesting, which they agreed was too broad.
On the other hand, they said nothing requires a clear and express statement of intent in order for health benefits to vest. When language is ambiguous, courts still may find that benefits vest. On remand, the circuit needed to reconsider whether the evidence, such as the connection between health and retirement benefits, the survivor benefits language and industry practices, warranted such a conclusion. But those determinations would have to be made “without Yard-Man’s ‘thumb on the scale in favor of vested retiree benefits.'”